Why Waiting Means Taxing: Section 145B’s Income Recognition Rule

Back in the day, the Income Tax Act relied heavily on accounting methods — either cash or mercantile — to decide when income was taxable. But not everything fits neatly into those two boxes. For example, say a farmer wins compensation after years of litigation for government-acquired land. Or a business gets its export incentive sanctioned years after filing the claim. Should those amounts be taxed when earned, when approved, or when received? Before 2018, there wasn’t a clear answer. Different taxpayers followed different interpretations, leading to confusion & litigation.
So, in the Finance Act of 2018, lawmakers introduced Section 145B, effective from 1 April 2019. Its goal was simple: draw a line on when income should be recognized for tax purposes — independent of accounting treatment.

Breaking Down Section 145B

Section 145B doesn’t change how you calculate income; it changes when you must bring certain incomes to tax. In short, it overrides Section 145 and applies to specific situations where the government wanted uniformity.

It covers three major buckets of income, & each tells a story of timing clarity.

1. Section 145B(1): Interest on Compensation or Enhanced Compensation

This one’s common in cases like land acquisition. People often receive compensation years after property has been taken, along with interest for the delay. Earlier, taxpayers tried spreading that interest over multiple years. Now, the law says — no spreading.

Under Section 145B(1):

“Interest received by an assessee on compensation or on enhanced compensation shall be deemed to be income of the year in which it is received.”

So, the entire amount becomes taxable in the year of receipt. Period."

Example:
If you get ₹3 lakh interest on enhanced compensation in 2023-24, the whole ₹3 lakh is taxed that year — even if the dispute started a decade ago.

You can, however, claim a 50% deduction under Section 57(iv) to soften the tax impact.

Also Read: Understanding Inventory Valuation and Tax Implications

2. Section 145B(2): Claims, Price Escalations, and Export Incentives

Many industries — construction, EPC, or exporters — raise claims for extra payments due to delays, price rises, or policy changes. These claims often take months or years to get approved. Before Section 145B(2), taxpayers used to record such income when the claim was raised. But what if the claim was rejected or reduced? It distorted profits.

Now, the law says:

“Any claim for escalation of price in a contract or export incentives shall be deemed to be income of the previous year in which such claim is accepted by the competent authority.”

That means, tax it only when the claim is actually approved, not when you first ask for it.

Example:
An exporter raises a ₹10 lakh incentive claim in 2022-23, but DGFT approves it in 2023-24. It’ll be taxable only in 2023-24 — the year of approval."

This makes sure profits are matched with real realizations, not just expectations.

3. Section 145B(3): Subsidies, Grants, and Government Assistance

This clause covers government benefits that boost business income — subsidies, cash incentives, duty drawbacks, or loan waivers.

According to the provision:

“Any subsidy, grant, cash incentive, duty drawback, or waiver of loan or debt shall be deemed to be the income of the previous year in which it is received, if it has not been charged to income in any earlier year.”

In plain words, you pay tax when the money hits your account or becomes certain to be received.

Example:
Your factory gets a ₹15 lakh state subsidy for adopting green energy. Even if the scheme was announced last year but funds released this year, taxation happens this year — when the benefit is received.

How Section 145B Interacts with Section 145

Section 145 allows you to choose how you maintain your books — cash basis or mercantile basis. But Section 145B says — for certain items, the choice doesn’t matter. Whether you record it on accrual or not, the law decides when it becomes taxable. That’s why it’s called an “overriding provision.”

It ensures uniformity across businesses & prevents timing mismatches — especially where income is irregular or government-dependent.

Why This Section Matters So Much

For taxpayers, Section 145B removes ambiguity. For the department, it ensures consistency. Earlier, one company might recognize subsidy income upfront, while another waited years. The tax department saw chaos in assessments & comparisons. Now, everyone follows one timing rule. It makes assessments smoother, less prone to disputes, and more aligned with accounting realities.
It also syncs with Ind AS 18 and 20, where “reasonable certainty” is the basis for recognizing income.

Also Read: When Can the Assessing Officer Reject Books of Accounts? Section 145(3) of Income Tax Act

Real-Life Scenarios Where Section 145B Applies

It’s clean, practical, and dispute-free.

Judicial View: Courts Back the “Receipt or Certainty” Rule

The courts have supported this clear-cut approach.
In CIT v. Reliance Industries Ltd., the Delhi High Court confirmed that interest on compensation is taxable only in the year of receipt, not when the award is passed.

Likewise, in various tribunal cases involving exporters & contractors, income was held taxable only when claims were accepted — reinforcing Section 145B’s principle of certainty over assumption.

Impact on Businesses and Professionals

For tax professionals and CFOs, this section has two big effects:

1. It changes when income is offered for tax.
2. It impacts audit disclosures & tax computation under Form 3CD.

Chartered accountants must clearly state whether the company has recognized incomes as per Section 145B — especially export incentives, claims, and subsidies.

Failing to do so could trigger mismatches between accounting profits & taxable profits — often leading to scrutiny notices.

Also Read: Income Computation & Disclosure Standards (ICDS)

Accounting vs Tax Timing: A Delicate Balance

Under Ind AS or AS-9, a company may spread subsidy income over several years.
But under Section 145B(3), the entire subsidy could become taxable in one shot — in the year of receipt.

That’s why deferred tax adjustments arise under MAT (Section 115JB), balancing out these timing differences. It’s a subtle but critical reconciliation item during audits.

Example: Applying Section 145B in Practice

Suppose MNV Agro Ltd. had these items in FY 2023-24:

• ₹4 lakh interest on land compensation (received in March 2024)
• ₹6 lakh export incentive approved in April 2023 for 2021-22 exports
• ₹10 lakh government subsidy for cold storage installation (received in June 2023)

Under Section 145B:

• The ₹4 lakh is taxable in 2023-24 (145B(1))
• The ₹6 lakh incentive is taxable in 2023-24 (145B(2))
• The ₹10 lakh subsidy is taxable in 2023-24 (145B(3))

So all three get included in one year’s taxable income, ensuring clarity & compliance.

Practical Compliance Tips

1. Track income approvals carefully: note the date of acceptance or sanction."
2. Avoid early recognition in books — wait until the right to receive is confirmed."
3. Match with Form 26AS or AIS — interest or subsidies may appear even before recorded.
4. Disclose clearly in Form 3CD: under Clause 13, mention compliance with Section 145B.
5. Consult a CA for timing mismatches: especially for industries like infrastructure, manufacturing, or agriculture subsidies.

Also Read: The Core of International Taxation and Transfer Pricing

Conclusion

Section 145B of the Income Tax Act, 1961 might look technical, but it plays a vital role in ensuring income is taxed fairly — neither too early nor too late. By overriding accounting methods, it eliminates ambiguity & ensures the taxability of certain income like compensation, incentives, and subsidies follows a uniform rule: recognize it when it’s real, not theoretical. For businesses juggling claims, reimbursements, or government grants, this section is a guardrail — it keeps both reporting & tax compliance aligned.

If your business deals with subsidies, incentives, or compensation cases, our expert team at CallMyCA.com can help you interpret Section 145B correctly, align your records, and avoid timing errors that invite tax notices.