Valuation of closing stock on "market price"
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
09 April 2012
Dear Experts and Professionals
One of my friend father who is having DAAL MILL manufacturing & processing of DAAL. The stock (F.G.S) of which is valued on "MARKET PRICE" basis.
Is it correct to value the same on Market Price basis? As-2 suggest to value Clo. Stock of F.G.S on Cost or M.P which ever is lower.
When i pointed out about deviation from AS-2, he invite my attention that he is valuing Clo. Stk. on M.P (which is higher then the cost price) and the A.O does not have any objection in accepting higher stock.
Further the auditor also reported in audit report that the valuation at Market Price is in line with Sec.145(A) of I.T Act 1961.
Please suggest me the correct treatment. Also clarify what are the possible outcome is valuation at M.P is adopted.
thanking you
One of my friend father who is having DAAL MILL manufacturing & processing of DAAL. The stock (F.G.S) of which is valued on "MARKET PRICE" basis.
Is it correct to value the same on Market Price basis? As-2 suggest to value Clo. Stock of F.G.S on Cost or M.P which ever is lower.
When i pointed out about deviation from AS-2, he invite my attention that he is valuing Clo. Stk. on M.P (which is higher then the cost price) and the A.O does not have any objection in accepting higher stock.
Further the auditor also reported in audit report that the valuation at Market Price is in line with Sec.145(A) of I.T Act 1961.
Please suggest me the correct treatment. Also clarify what are the possible outcome is valuation at M.P is adopted.
thanking you
11 April 2012
Accounting standards are applicable only to Companies and hence, an individual need not follow ASs.
However, is such method of valuation is permitted under income tax act, it can be followed.
However, is such method of valuation is permitted under income tax act, it can be followed.
Querist : Anonymous
Querist :
Anonymous
(Querist)
11 April 2012
Dear Mr.Kishore
Please do not provide incomplete or guess answere to the query asked.
Please do not provide incomplete or guess answere to the query asked.
02 August 2025
Great question on the **valuation of closing stock at Market Price (MP) instead of Cost** — especially in context of finished goods (F.G.S) like dal (pulses).
Let me clarify the key points and implications for you:
---
### 1. **Accounting Standard (AS) 2 — Valuation of Inventories**
* AS 2 requires closing stock to be valued at the **lower of cost or net realizable value (NRV)**.
* **Net realizable value** is basically the **estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale.**
* Market Price is not necessarily NRV unless it reflects realizable value after expenses.
**Therefore, valuing stock at Market Price when it is higher than cost is a deviation from AS 2.**
---
### 2. **Income Tax Act, Section 145A**
* Section 145A of the Income Tax Act prescribes **valuation of closing stock at cost or market price, whichever is lower**, for the purpose of computing income under the head "Profits and Gains of Business or Profession."
* So **tax law requires lower of cost or market price**, which aligns with AS 2 principles.
---
### 3. **What if stock is valued at Market Price higher than cost?**
* This is a **deviation from both AS 2 and Income Tax Act** guidelines.
* However, if the Assessing Officer (A.O) accepts this valuation without objection and the auditor certifies it, practically it may stand for that year.
* **Possible outcomes/risks:**
* In future assessments, the tax authorities may challenge this valuation and make an addition by reducing stock valuation to lower of cost or market price.
* This may lead to **disallowance of profit inflating stock value**, resulting in **higher taxable income** and penalties.
* For companies, it may also attract adverse audit comments and compliance issues.
---
### 4. **Applicability of Accounting Standards**
* AS are **mandatory for companies** (corporates).
* For individuals, partnerships, or proprietors, AS may not be mandatory but are considered best practice.
* However, Income Tax Act provisions apply to **all assessees**.
---
### **Summary Table**
| Aspect | Correct Approach | Your Friend’s Approach | Possible Consequences |
| ------------------------------------- | ---------------------------------------------- | --------------------------------------- | ---------------------------------- |
| Accounting Standards (AS 2) | Closing stock at lower of cost or NRV | Valued at Market Price higher than cost | Deviation; may attract audit query |
| Income Tax (Sec 145A) | Closing stock at lower of cost or market price | Valued at Market Price higher than cost | May invite tax scrutiny, addition |
| Practical acceptance by A.O & Auditor | Not a norm but possible | Accepted | Risk of future challenge |
---
### **Conclusion:**
* Valuing closing stock at market price **higher than cost is not correct** as per accounting and tax standards.
* For tax and accounting compliance, stock should be valued at **lower of cost or market price** (or NRV).
* Though acceptance by AO and auditor may reduce immediate risk, it’s advisable to follow prescribed valuation methods to avoid complications.
---
If you want, I can help draft a detailed advisory note on this issue with references to AS 2 and Income Tax provisions. Would that be useful?
Let me clarify the key points and implications for you:
---
### 1. **Accounting Standard (AS) 2 — Valuation of Inventories**
* AS 2 requires closing stock to be valued at the **lower of cost or net realizable value (NRV)**.
* **Net realizable value** is basically the **estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale.**
* Market Price is not necessarily NRV unless it reflects realizable value after expenses.
**Therefore, valuing stock at Market Price when it is higher than cost is a deviation from AS 2.**
---
### 2. **Income Tax Act, Section 145A**
* Section 145A of the Income Tax Act prescribes **valuation of closing stock at cost or market price, whichever is lower**, for the purpose of computing income under the head "Profits and Gains of Business or Profession."
* So **tax law requires lower of cost or market price**, which aligns with AS 2 principles.
---
### 3. **What if stock is valued at Market Price higher than cost?**
* This is a **deviation from both AS 2 and Income Tax Act** guidelines.
* However, if the Assessing Officer (A.O) accepts this valuation without objection and the auditor certifies it, practically it may stand for that year.
* **Possible outcomes/risks:**
* In future assessments, the tax authorities may challenge this valuation and make an addition by reducing stock valuation to lower of cost or market price.
* This may lead to **disallowance of profit inflating stock value**, resulting in **higher taxable income** and penalties.
* For companies, it may also attract adverse audit comments and compliance issues.
---
### 4. **Applicability of Accounting Standards**
* AS are **mandatory for companies** (corporates).
* For individuals, partnerships, or proprietors, AS may not be mandatory but are considered best practice.
* However, Income Tax Act provisions apply to **all assessees**.
---
### **Summary Table**
| Aspect | Correct Approach | Your Friend’s Approach | Possible Consequences |
| ------------------------------------- | ---------------------------------------------- | --------------------------------------- | ---------------------------------- |
| Accounting Standards (AS 2) | Closing stock at lower of cost or NRV | Valued at Market Price higher than cost | Deviation; may attract audit query |
| Income Tax (Sec 145A) | Closing stock at lower of cost or market price | Valued at Market Price higher than cost | May invite tax scrutiny, addition |
| Practical acceptance by A.O & Auditor | Not a norm but possible | Accepted | Risk of future challenge |
---
### **Conclusion:**
* Valuing closing stock at market price **higher than cost is not correct** as per accounting and tax standards.
* For tax and accounting compliance, stock should be valued at **lower of cost or market price** (or NRV).
* Though acceptance by AO and auditor may reduce immediate risk, it’s advisable to follow prescribed valuation methods to avoid complications.
---
If you want, I can help draft a detailed advisory note on this issue with references to AS 2 and Income Tax provisions. Would that be useful?
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