valuation of closing stock

Amit,
Under section 145A of the Income Tax Act-
Section 145A

[b]METHOD OF ACCOUNTING IN CERTAIN CASES. [/b]

Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be -  (a) In accordance with the method of accounting regularly employed by the assessee; and

(b) Further [b]adjusted to include the amount of any tax, duty, cess or fee [/b][i][/i](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.

Explanation : For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.


Hence, as mentioned in the Act, while calculating the value of closing stock lying at the year end, we should include the VAT amount. Doing this current years profit would increase by VAT amount at the same time next year it would get adjusted as you will take the closing stock value as opening stock in next year. Although you are going to take a credit of VAT in coming month, you are forced to include the same and pay income tax accordingly.

Updated position under GST:

• Accounting (AS 2 / Ind AS 2): cost excludes taxes that are recoverable as ITC. If GST credit is available, value stock net of GST. Include GST only where credit is blocked or not available (e.g. a composition dealer or exempt supplies).

• Income-tax (Sec 145A, from AY 2017-18): stock must be valued on the "inclusive" method, i.e. including taxes actually paid or incurred. The ICDS II illustration shows that applying the inclusive method to purchases, sales and stock gives the same profit as the exclusive method, so there is no tax effect if done consistently.

• Tax audit: Form 3CD clause 14 (and the corresponding clause in the new tax audit form) requires reporting the method and any deviation from Sec 145A, with the adjustment.

• Practical rule: keep books on the exclusive basis (AS 2), and report a nil-effect adjustment under Sec 145A in the tax audit report.