Chapter XVI - Procedure for Assessment
Section 276
Section 276: method of accounting
Section 276 sets the basic rule for computing income under the heads "Profits and gains of business or profession" and "Income from other sources": it must follow the cash or mercantile system of accounting the assessee regularly employs, subject to any income computation and disclosure standards (ICDS) the Central Government notifies.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed as per either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.
(3) The Assessing Officer may make an assessment in the manner provided in section 271, where––
(a) he is not satisfied about the correctness or completeness of the accounts of the assessee; or
(b) the method of accounting provided in sub-section (1) has not been regularly followed by the assessee; or
(c) income has not been computed as per the standards notified under sub-section (2).
Introduction
This section connects the accounting method used in the books with tax computation for two heads of income. The method must be regularly employed, and applicable income computation and disclosure standards still have to be followed.
Key takeaways
Cash or mercantile system
Business or professional income and income from other sources are computed using the cash or mercantile method regularly employed by the assessee, subject to notified standards.
Standards can apply
The Central Government may notify income computation and disclosure standards for classes of assessees or income.
Three grounds for Section 271 assessment
The Assessing Officer may use the Section 271 method if accounts are incorrect or incomplete, the chosen method is not regularly followed, or notified standards are not followed.
The basic rule
Income chargeable under "Profits and gains of business or profession" or "Income from other sources" must be computed on either the cash system or the mercantile system of accounting, whichever the assessee regularly employs, subject to sub-section (2).
Income computation and disclosure standards (ICDS)
The Central Government may notify income computation and disclosure standards to be followed by any class of assessees, or in respect of any class of income.
When the Assessing Officer can make a best-judgment assessment
The Assessing Officer may make an assessment in the manner provided in section 271 (best-judgment assessment) if:
- he is not satisfied about the correctness or completeness of the assessee's accounts; or
- the method of accounting under sub-section (1) has not been regularly followed by the assessee; or
- income has not been computed as per the standards notified under sub-section (2).
Step-by-step flow for the method of accounting under Section 276
- 1
Is the income chargeable under "Profits and gains of business or profession" or "Income from other sources"?
- No: Section 276(1) does not govern the computation.
- Yes: Go to the next step.
- 2
Which system of accounting does the assessee regularly employ?
Income is computed as per the cash or the mercantile system regularly employed (Section 276(1)).
- 3
Has the Central Government notified income computation and disclosure standards for this class of assessee or income?
Section 276(2) lets it notify such standards. The standards themselves are not set out in this section.
- Yes: Income must also be computed as per those standards. Go to the next step.
- No: Go to the next step.
- 4
Can the AO make the assessment in the manner of section 271?
Yes, if he is not satisfied about the correctness or completeness of the accounts, if the method has not been regularly followed, or if income has not been computed as per the notified standards (Section 276(3)).
Practical checklist
Do
- Use the regularly followed cash or mercantile method consistently when computing business or other-source income.
- Check the applicable notified income-computation and disclosure standards and document any departure.
Avoid
- Assume the accounting method alone permits computation that conflicts with a notified standard.
Illustrative example
Worked example: switching method for a few bills
Hypothetical facts (illustration only, not a real taxpayer): Mr. Pillai, a consultant, has always followed the mercantile system. For tax year 2026-27 he billed fees of ₹24,00,000, of which ₹3,00,000 billed in March 2027 was received in May 2027. In his return he offered only the ₹21,00,000 received during the year. All amounts are assumed for illustration.
Regular method
Under the mercantile system he regularly employs, all fees billed in 2026-27 count: ₹24,00,000 (Section 276(1)).
What he did
By offering ₹24,00,000 − ₹3,00,000 = ₹21,00,000, he applied a cash basis to part of his receipts.
Consequence
The method has not been regularly followed, so Section 276(3)(b) allows the AO to assess in the manner of section 271.
Notified standards
If notified standards apply to his class, the computation must also follow them (Section 276(2)).
Outcome
- On the mercantile basis, fee income for 2026-27 is ₹24,00,000, not ₹21,00,000.
- Mixing methods for selected items risks a best judgment assessment.
Frequently asked questions
What accounting methods are permitted under Section 276?
Either the cash system or the mercantile system of accounting, provided the assessee regularly employs that system - subject to any income computation and disclosure standards notified by the Central Government.
What happens if my accounts are not regularly maintained on a consistent method?
Under Section 276(3), the Assessing Officer may make a best-judgment assessment under section 271 if he is not satisfied about the correctness or completeness of the accounts, if the accounting method has not been regularly followed, or if income has not been computed as per notified ICDS.
Need help applying this provision to your situation?
Talk to our team about a best-judgment assessment under Section 276Last updated 9 October 2026