ACCOUNTING STANDARDS AND INCOME TAX ACT 1961

Accounting Standards and Income tax Act, 1961

• Accounting standards intend to reduce diversity in application of accounting principles. They improve comparability of financial statements and promote transparency and fairness in their presentation.
•  Deductions and exemptions allowed in computation of taxable income on the other hand, is a matter of fiscal policy of the government. 
• Thus, an expense required to be charged against revenue by an accounting standard does not imply that the same is always deductible for income tax purposes.
•  For example, depreciation on assets taken on finance lease is charged in the books of lessee as per AS 19 but depreciation for tax purpose is allowed to lessor, being legal owner of the asset, rather than to lessee. 
• Likewise, recognition of revenue in the financial statements cannot be avoided simply because it is exempted under section 10 of the Income Tax Act, 1961.