Choice of Method of Accounting :

Under section 145 of the Income-tax Act, 1961, read with sections 28 and 56 thereof, the determination of the liability to tax in India depends not only upon the receipt of accrual of income but also upon the method of accounting followed by the assessee. The foreign collaborator can choose whether to follow the cash system or the mercantile system of accounting.

Thus, in a case where the foreign collaborator adopts the cash system of accounting, the receipt of income during a particular accounting year would make him chargeable to tax in respect of the moneys received as income. On the other hand, if the accounts of the foreign collaborator are maintained on mercantile basis, the income would be taxable immediately when the right to receive the same has accrued or arisen, the actual receipt being immaterial. Where the income has first accrued or is deemed to have accrued in India and is taxable because of the assessee adopting the mercantile system of accounting for that source, its subsequent receipt would be immaterial because the income having already been taxed on the basis of accrual, it cannot again be taxed on the basis of receipt in view of the express provisions of Explanation 2 to section 5.

However, it must be kept in mind that once a particular method of accounting has been opted for, it cannot be changed without sufficient reason.