Section 277 — Method of accounting in certain cases. Successor to s.145A of the 1961 Act.
Section 277 is in Chapter XVI — Procedure for Assessment, which runs from section 268 to section 301.
Sub-section (1) fixes four rules for determining business or professional income. Inventory is valued at the lower of actual cost or net realisable value, computed as per the income computation and disclosure standards notified under section 276(2) (clause (i)). The valuation of purchases and sales of goods or services, and of inventory, is adjusted to include any tax, duty, cess or fee, by whatever name called, actually paid or incurred to bring the goods or services to the place of their location and condition as on the date of valuation (clause (ii)). Inventory being securities not listed on a recognised stock exchange, or listed but not quoted with regularity from time to time, is valued at actual cost initially recognised as per those standards (clause (iii)). Inventory being other securities is valued at the lower of actual cost or net realisable value as per those standards (clause (iv)).
Sub-section (2) requires securities held as inventory by a scheduled bank or public financial institution to be valued as per the notified standards after taking into account the extant guidelines issued by the Reserve Bank of India. Sub-section (3) requires the comparison of actual cost and net realisable value of securities to be made category-wise. Sub-section (4) provides that a tax, duty, cess or fee under any law in force includes all such payment irrespective of any right arising as a consequence of it. Sub-section (5) gives "public financial institution" the meaning in section 2(72) of the Companies Act, 2013.
Inventory valuation determines the year in which profit appears, so the Act fixes the method and points to the notified standards for the mechanics. Clause (ii) exists because a business that keeps taxes and duties out of purchases, sales and closing stock understates its stock and defers profit; sub-section (4) forecloses the argument that a levy is not a real cost because a credit or refund right arises on paying it.
There are two valuation rules for securities held as stock, and the dividing line is marketability, not listing alone: a security listed but not quoted with regularity is treated like an unlisted one and stays at actual cost under clause (iii), so an unrealised fall is not recognised. Where clause (iv) does apply, sub-section (3) requires the cost and net realisable value comparison to be made category-wise, so losses on one category cannot be netted against gains on another. Clause (ii) is an inclusive adjustment on both sides of the account, and sub-section (4) makes a levy carrying a right to credit or refund includible all the same. For a bank or public financial institution, sub-section (2) adds the Reserve Bank of India's guidelines to the notified standards rather than replacing them.
A company holds two categories of securities as inventory. Category A, listed and regularly quoted, cost Rs. 5 crore and has a net realisable value of Rs. 4.2 crore; category B, listed but not quoted with regularity, cost Rs. 3 crore and is now worth Rs. 3.6 crore. Category A falls under clause (iv) and is valued at Rs. 4.2 crore; category B falls under clause (iii) and stays at Rs. 3 crore. Under sub-section (3) the comparison is category-wise, so the Rs. 80 lakh write-down is not reduced by category B's appreciation.
You meet this section in the inventory and stock valuation working behind the profit and loss account and in the audit report's reconciliation of valuation methods. It is what an Assessing Officer applies when adding back a write-down or an omitted duty component to closing stock.
the valuation of inventory shall be made at lower of actual cost or net realisable value computed as per the income computation and disclosure standards notified under section 276(2)
the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised
any tax, duty, cess or fee (by whatever name called) under any law in force, shall include all such payment irrespective of any right arising as a consequence to such payment
See the full 1961 to 2025 concordance.
