The accepted commercial basis is cost or market value, whichever is lower, applied consistently and to all components of the inventory. Section 145A, as substituted by the Finance Act 2018, now supplies statutory rules of its own: inventory is valued at the lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under s.145(2); the valuation of purchases, sales and inventory is adjusted to include any tax, duty, cess or fee actually paid or incurred to bring the goods or services to their location and condition; and securities held as inventory have clauses of their own. Valuing at the lower of the two is not the recognition of a loss on unsold goods; it is the refusal to recognise an unrealised profit, and the Supreme Court has said since Chainrup Sampatram that it is a misconception to think profit arises out of valuation at all.
There is no section that prescribes how closing stock is to be valued. What the Act does is take the commercial method and then adjust it. The commercial method is cost or market value, whichever is lower, and the Tribunal in ACIT v. Thiagarajar Mills Ltd. (2020) 78 ITR 8 (SN) / (2021) 186 ITD 279 (Chennai)(Trib) treated a change to that basis as bona fide and in accordance with the mandatory Accounting Standard 2, subject to two conditions worth noting: a genuine change is not applied backwards to opening stock, because that would tax the same thing twice, and the revised basis has to be applied uniformly across all components of inventory rather than to the convenient ones.
Then there is s.145A, and it has to be read from the right page. The department's base page for the section, headed 'Year: 2000', and its archived versions down to the one headed 'Year: 2017', all print the section as inserted by the Finance (No. 2) Act 1998, under which valuation followed the method of accounting regularly employed by the assessee and was "further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation". That is not the section now in force. The archived version headed 'Year: 2019 (No. 2)' carries the section as substituted by the Finance Act 2018, and it is a rule of valuation in its own right: "(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;". The tax, duty, cess and fee adjustment survives as clause (ii); clause (iii) values inventory being securities not listed on a recognised stock exchange, or listed but not quoted with regularity from time to time, at actual cost initially recognised in accordance with those standards; and clause (iv) values other securities at the lower of actual cost or net realisable value. Securities held by a scheduled bank or a public financial institution are valued in accordance with those standards after taking into account the extant guidelines issued by the Reserve Bank of India, and the comparison of actual cost and net realisable value of securities is made category-wise. Nothing in this note should be run on the 1998 text.
The conceptual point that decides most arguments is older than either. Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC) is cited by the Bombay High Court in J.S. & M.F. Builders v. A.K. Chauhan for the proposition that it would be a misconception to think that any profit arose out of valuation of closing stock; the Tribunal in Rasna P. Ltd. v. DCIT (2018) 63 ITR 28 (SN) (Ahd)(Trib) cites the same case for the accountancy principle of conservatism. Once that is grasped, the officer's argument that writing stock down to market creates a deduction the Act does not allow falls away — the write-down is not a claim, it is the absence of a credit.
The banking cases are the sharp edge of this. A bank's balance sheet is drawn in a statutory form, and the department's argument has been that the figure in that form governs the tax computation. On the corpus's evidence that argument fails. In United Bank of India v. CIT (2018) 257 Taxman 306 (Cal)(HC) the assessee kept its books for shares and securities at cost but returned income on the basis of cost or market price, whichever was lower; the High Court allowed the appeal, holding that the changed method of valuation would determine the income or loss correctly, share prices having fallen during the year.
On the Supreme Court authority behind that line, this entry has to be careful, and the reader should be too. Two itatonline pages record it as United Commercial Bank v. CIT (1999) 8 SCC 338 / 106 Taxman 601 / 240 ITR 355 (SC) — the bank is the appellant, not the respondent — and cite it, in the digest of PCIT v. DSP Merill Lynch Capital Ltd. (2023) 456 ITR 768 (SC), as the authority the Tribunal relied on to allow a mark-to-market loss on the valuation of closing stock-in-trade, and, in the digest of Kedaara Capital Fund II LLP v. NFAC (Bom)(HC), for the proposition that book entries are not conclusive for taxability. Both of those point the same way: the taxpayer bank succeeded, and the entry in the statutory balance sheet did not settle the tax treatment. A circulated summary that has the case captioned CIT v. United Commercial Bank and has it deciding that the bank must follow its balance sheet is wrong on both counts. What this entry cannot do is confirm the reasoning, because every page carrying it was on one host and no corroboration on a second host could be obtained; it is recorded as what those pages say, not as a verified holding. There is also an older and easily confused decision, United Commercial Bank Ltd v. CIT (1957) 32 ITR 688 (SC), which is a different case.
On the Income-tax Act, 2025, the department's navigator maps s.145 of the 1961 Act to s.276 and s.145A to s.277, and s.277 carries the substituted rules forward in the same shape — inventory at the lower of actual cost or net realisable value per the notified standards, the tax and duty adjustment, the two clauses on securities, the special rule for securities held by a scheduled bank or public financial institution, and the category-wise comparison.
Closing stock valuation is the single largest lever in most trading and manufacturing assessments, and the officer reaches for it whenever margins fall. Knowing that the write-down is not a claimed deduction but a refusal to book unrealised profit changes how the reply is framed, and knowing that a change of basis is examined for bona fides, for uniformity across the inventory and for its effect on opening stock tells you what to put on record before the question is asked.
My employee embezzled money from the business bank account. Can I write that off for tax?
My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
I am an MES contractor and the department supplies me cement and steel at fixed rates. The Income-tax Officer added the value of that material to my cash receipts before applying a flat rate. Can he?
I sell developed plots and book the whole sale price on the mercantile basis, but I still have to build the roads and drains I promised the buyers. Can I deduct the estimated cost of that work now?
My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
I collected sales tax from buyers and kept it in a separate account because I dispute the liability. Is that collection my income?
I held shares as an investment for years and then started dealing in them. When I sell, is my profit measured from what I originally paid or from the market value on the day I began trading?
My members' club charges for drinks, rooms and subscriptions and ends the year with a surplus. Is that surplus taxable income?
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