Under the Indian Income Tax framework, Form 145 is filed by taxpayers to declare their chosen method of accounting (cash or mercantile basis) under Section 145, while Form 146 is used for inventory valuation disclosures under Section 145A. Both forms affect how business income is computed and assessed. Non-compliance can trigger scrutiny notices or disallowances.

• Form 145 applies to businesses and professionals computing income under "Profits and Gains of Business or Profession" (PGBP).
• Form 146 is relevant when trading stock or work-in-progress is valued at market price or cost, whichever is lower.
• As of July 2026, the Direct Tax Code 2025 retains the essence of these provisions while streamlining the compliance calendar.

What is Form 145 in Income Tax?

Form 145 is the declaration or audit-related statement connected to Section 145 of the Income Tax Act, 1961 (and its successor provisions under the Direct Tax Code 2025 for assessment year 2026-27 onwards). Section 145 mandates that income chargeable under the head "Profits and Gains of Business or Profession" or "Income from Other Sources" must be computed in accordance with either the cash system or the mercantile (accrual) system of accounting.

The Central Government is empowered to notify the Income Computation and Disclosure Standards (ICDS), which all taxpayers following the mercantile system must adhere to. Form 145 captures the taxpayer's declared accounting method and any deviations or adjustments required under ICDS.

Who Needs to File Form 145?

• Individuals and HUFs running a business or professional practice
• Partnership firms and LLPs with business income
• Private limited companies and OPCs computing PGBP income
• Any taxpayer maintaining books of accounts who is switching from one method of accounting to another

Notably, salaried individuals with no business income are not required to file Form 145 since the PGBP provisions do not apply to them.

What is Form 146 in Income Tax?

Form 146 is the disclosure statement linked to Section 145A, which specifically governs the method of valuation of inventory, securities, and purchases. Under Section 145A, all purchase and sales figures, and the inventory closing stock, must include applicable taxes, duties, cess, and other levies paid or incurred. This prevents taxpayers from booking purchases net of GST/TDS while reporting inventory at a different basis.

Form 146 is therefore particularly critical for businesses in manufacturing, trading, and retail sectors where inventory forms a significant part of the balance sheet. The ICDS-II (Valuation of Inventories) governs the detailed methodology, and Form 146 is the formal disclosure document that accompanies the income tax return in those cases.

Who Needs to File Form 146?

• Manufacturers holding raw material, WIP, and finished goods inventory
• Traders whose closing stock includes embedded GST or customs duty
• Companies with securities held as stock-in-trade (distinct from investment portfolios)
• Businesses subject to tax audit under Section 44AB, where inventory valuation is a mandatory audit checkpoint

Key Differences: Form 145 vs Form 146

Parameter	Form 145	Form 146
Governing Section	Section 145 (Method of Accounting)	Section 145A (Method of Valuation)
Primary Purpose	Declare cash or mercantile basis; ICDS compliance	Disclose inventory, securities, and purchase valuation
Who Files	All taxpayers with PGBP or "Other Sources" income	Businesses with inventory; manufacturers; traders
Relevance to Tax Audit	Directly linked to Form 3CD (Clause 11 - Method of Accounting)	Directly linked to Form 3CD (Clause 14 - Inventory Valuation)
Common Adjustment	ICDS-I to ICDS-X adjustments on profit	GST/duty inclusion in purchase and closing stock values
Typical Impact	Changes in timing of income/expense recognition	Changes in gross profit and closing stock valuation
Risk of Non-Compliance	Best judgment assessment; ICDS-based additions	Disallowance of inventory adjustments; scrutiny

When to File: Due Dates for 2026-27

Both Form 145 and Form 146 disclosures are embedded within the Income Tax Return (ITR) filing process and, where applicable, within the Tax Audit Report (Form 3CD). They are not standalone filings with separate due dates but form part of the broader compliance timeline.

Taxpayer Category	ITR Due Date (AY 2026-27)	Tax Audit Report Due Date
Individuals and HUFs (no audit required)	31 July 2026	Not applicable
Businesses requiring tax audit (turnover > ₹1 crore for non-digital / ₹10 crore for digital)	31 October 2026	30 September 2026
Transfer pricing cases	30 November 2026	31 October 2026

Under the Direct Tax Code 2025, the compliance calendar for assessment year 2026-27 is broadly aligned with the above dates. Taxpayers should confirm the exact notified dates as the DTC rolls out its subordinate rules, since certain procedural forms may be re-numbered or consolidated.

How ICDS Affects Form 145 Adjustments

The Income Computation and Disclosure Standards (ICDS), notified under Section 145(2), currently comprise 10 standards covering areas such as accounting policies, valuation of inventories, construction contracts, revenue recognition, tangible fixed assets, and more. Taxpayers following the mercantile system must compute income in accordance with ICDS, even if their books are maintained under Indian Accounting Standards (Ind AS) or ICAI GAAP.

This often creates book-to-tax differences that must be disclosed as ICDS adjustments in the ITR. Common adjustments include:

• ICDS-I: Accounting policies - no prudence principle; provisions for unascertained liabilities are disallowed
• ICDS-II: Inventory valuation - cost or NRV, whichever is lower (aligns with Form 146 disclosures)
• ICDS-IV: Revenue recognition - revenue from service contracts on percentage completion basis even if books use completed contract method
• ICDS-VI: Effects of changes in foreign exchange rates - marked-to-market losses on forward contracts may be deferred

These adjustments can materially increase your taxable income compared to book profit. A professional review by a qualified Chartered Accountant is strongly recommended before filing.

Who Files Which Form: Practical Scenarios

Scenario 1: Freelancer or Independent Consultant

A software consultant or doctor maintaining accounts on a cash basis files Form 145 to declare the cash system. Since they hold no inventory, Form 146 is not applicable. Their ITR (ITR-3 or ITR-4) includes the ICDS disclosure schedule.

Scenario 2: Manufacturing Private Limited Company

A manufacturing Pvt Ltd company with a turnover above ₹1 crore must get a tax audit done. It files both Form 145 (declaring mercantile basis and ICDS adjustments) and Form 146 (valuing raw material, WIP, and finished goods inclusive of GST and duties paid). Both disclosures appear in Form 3CD clauses 11 and 14 respectively.

Scenario 3: Stock Trader (Securities as Stock-in-Trade)

An individual or company treating listed shares as stock-in-trade (not investment) must disclose the valuation method under Form 146 / ICDS-VIII. The securities are valued at cost or NRV, whichever is lower, on a scrip-by-scrip basis.

Scenario 4: E-commerce Seller (Small Business)

An e-commerce seller operating as a sole proprietorship with turnover below the audit threshold files Form 145 as part of ITR-3/ITR-4. If the seller holds inventory, ICDS-II adjustments apply even without a formal tax audit, and the disclosure is made in the ITR's ICDS schedule.

Common Mistakes When Filing Form 145 or 146

• Switching accounting methods without prior approval: The Assessing Officer can reject a mid-year change in accounting method unless it is bona fide and consistent. Any unexplained change leads to best judgment assessment under Section 144.
• Not including GST in closing stock: After the introduction of GST, many businesses continued to value closing stock net of GST. Section 145A requires GST paid/payable to be included, with a corresponding ITC credit adjustment.
• Ignoring ICDS even when turnover is below audit threshold: ICDS applies to all mercantile-basis taxpayers regardless of turnover or audit requirement. Many small businesses unknowingly omit these disclosures.
• Misclassifying securities: Treating shares as investment vs. stock-in-trade has significant tax consequences, and Form 146 applies only to the latter category.

What Happens If You Don't Comply?

Failure to correctly disclose accounting methods and inventory valuation can result in:

• Best judgment assessment under Section 144 of the Income Tax Act / equivalent DTC provisions, where the AO estimates income without the benefit of the taxpayer's books
• Disallowance of expenses and cost adjustments where valuation is not compliant with ICDS
• Penalty under Section 270A for under-reporting or misreporting of income (penalty is 50% of tax on under-reported income; 200% for misreporting)
• Scrutiny assessment if the AO notices inconsistencies between books, Form 26AS/AIS data, and ITR disclosures

How Taxocity Makes Compliance Easy

Taxocity has been helping Indian businesses stay tax-compliant for over three decades. Whether you are a sole proprietor figuring out your accounting method or a Pvt Ltd company navigating ICDS adjustments and inventory valuation, our team of real human experts handles every step.

• End-to-end support: From choosing the right accounting method at entity formation to annual ITR filing and tax audit assistance
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Key Takeaways

1. Form 145 is about your accounting method (cash vs. mercantile) and ICDS compliance - applicable to all business/professional taxpayers.
2. Form 146 is about inventory and purchase valuation - applicable to businesses holding stock, including GST/duty in valuations.
3. Both disclosures are embedded in the ITR and, for audit cases, in Form 3CD (Clauses 11 and 14).
4. Due dates for AY 2026-27: 31 July 2026 (non-audit) and 31 October 2026 (audit cases).
5. ICDS applies even if you are below the audit threshold and follow mercantile accounting.
6. Non-compliance can result in best judgment assessment, disallowances, and penalties up to 200% under Section 270A.

Frequently Asked Questions

Is Form 145 mandatory for all businesses?

Yes. Every taxpayer computing income under the head "Profits and Gains of Business or Profession" must declare their accounting method under Section 145. The disclosure is made in the ITR schedule and, for audit cases, in Form 3CD Clause 11. There is no exemption based on turnover for this disclosure requirement.

Does closing stock under Form 146 include GST?

Yes. Under Section 145A and ICDS-II, closing inventory must be valued inclusive of taxes, duties, cess, and fees actually paid or incurred to bring goods to their present location and condition. The corresponding input tax credit (ITC) claimed is then shown as a separate asset, ensuring the net impact is neutral if ITC is available.

Can I change my accounting method after filing?

No. Once you have filed your ITR declaring a particular accounting method under Section 145, changing it for the same year requires filing a revised return before the due date. A change for the next year requires a bona fide business reason and consistency going forward. Unexplained changes are treated as an attempt to distort income and attract scrutiny.

Do these forms apply under the Direct Tax Code 2025?

As of July 2026, the Direct Tax Code 2025 retains the core principles of Sections 145 and 145A. The provisions governing method of accounting and inventory valuation are preserved, though form numbers and specific rule references may be updated in subordinate legislation. Taxpayers should verify the latest notifications before filing for AY 2026-27.

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Disclaimer: This article is intended for general informational purposes only and does not constitute tax advice, legal advice, or a professional opinion. Tax laws are subject to change, and individual circumstances vary. Please consult a qualified Chartered Accountant or tax advisor before making any compliance or financial decisions. Taxocity is not liable for any actions taken based on the information provided herein.