Income Tax 2025

Appearance

Method of accounting in certain cases. ​

277(1) ​

For the purposes of determining the income chargeable under the head “Profits and gains of business or profession”,— (i) 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); (ii) the valuation of purchase and sale of goods or services and valuation of inventory shall be adjusted to include any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) 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 as per the income computation and disclosure standards notified under section 276(2); (iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value as per the income computation and disclosure standards notified under section 276(2).

277(2) ​

For the purposes of sub-section (1), the inventory being securities held by a scheduled bank or public financial institution shall be valued as per the income computation and disclosure standards notified under section 276(2) after taking into account the extant guidelines issued by the Reserve Bank of India in this regard.

277(3) ​

For the purposes of sub-sections (1) and (2), the comparison of actual cost and net realisable value of securities shall be made category-wise.

277(4) ​

For the purposes of this section, 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.

277(5) ​

In this section, “public financial institution” shall have the same meaning as assigned to it in section 2(72) of the Companies Act, 2013.

Explanation

Section Summary: ​

Section 277 of the new income tax law outlines the method of accounting for inventory valuation, specifically for determining income under the head "Profits and gains of business or profession." It provides detailed rules for valuing inventory, including goods, services, and securities, and specifies how taxes, duties, cess, or fees should be included in the valuation. The section also addresses the valuation of securities held by scheduled banks and public financial institutions, ensuring alignment with Reserve Bank of India (RBI) guidelines.

Key Changes: ​

  1. Inventory Valuation: The section mandates that inventory must be valued at the lower of actual cost or net realizable value, as per the Income Computation and Disclosure Standards (ICDS) notified under Section 276(2).
  2. Inclusion of Taxes and Duties: Taxes, duties, cess, or fees incurred to bring goods or services to their current location and condition must now be included in the valuation of inventory.
  3. Securities Valuation:
    • Unlisted securities or listed but irregularly traded securities must be valued at actual cost.
    • Other securities must be valued at the lower of actual cost or net realizable value.
  4. Category-wise Comparison: For securities, the comparison of actual cost and net realizable value must be done category-wise.
  5. Special Rules for Banks and Financial Institutions: Scheduled banks and public financial institutions must value securities as per ICDS, considering RBI guidelines.

Practical Implications: ​

  • Businesses: Businesses must ensure their inventory valuation methods comply with the new rules, particularly the inclusion of taxes and duties in inventory costs.
  • Banks and Financial Institutions: These entities must align their securities valuation with both ICDS and RBI guidelines, which may require adjustments to their accounting practices.
  • Taxpayers: Taxpayers must be meticulous in categorizing securities and applying the correct valuation method to avoid discrepancies during tax assessments.

Critical Concepts: ​

  • Actual Cost: The original cost incurred to acquire or produce the inventory.
  • Net Realizable Value: The estimated selling price minus any costs required to make the sale.
  • Income Computation and Disclosure Standards (ICDS): Standards notified under Section 276(2) that govern how income is computed and disclosed for tax purposes.
  • Public Financial Institution: Defined under Section 2(72) of the Companies Act, 2013, this includes institutions like the Industrial Finance Corporation of India (IFCI) and similar entities.

Compliance Steps: ​

  1. Inventory Valuation: Ensure inventory is valued at the lower of actual cost or net realizable value as per ICDS.
  2. Include Taxes and Duties: Add any taxes, duties, cess, or fees incurred to bring inventory to its current location and condition.
  3. Securities Valuation:
    • For unlisted or irregularly traded securities, use actual cost.
    • For other securities, use the lower of actual cost or net realizable value.
  4. Category-wise Comparison: Compare actual cost and net realizable value for securities on a category-wise basis.
  5. Banks and Financial Institutions: Follow ICDS and RBI guidelines for valuing securities.

Examples: ​

  • Example 1: A manufacturing company purchases raw materials for ₹1,00,000 and incurs ₹10,000 in duties. The net realizable value of the materials is ₹1,05,000. The inventory must be valued at ₹1,05,000 (lower of ₹1,10,000 [actual cost + duties] and ₹1,05,000 [net realizable value]).
  • Example 2: A bank holds unlisted securities purchased for ₹50,000. Since these are unlisted, they must be valued at the actual cost of ₹50,000, regardless of their market value.

This section ensures uniformity and clarity in inventory valuation, particularly for businesses and financial institutions, while aligning with broader tax and regulatory frameworks.