Section 145A of the Income-tax Act: Inventory Valuation and Accounting in Certain Cases
Section 145A of the Income-tax Act, 1961 sets special rules for valuing inventory, accounting for certain taxes and duties, and valuing securities held as stock-in-trade when calculating taxable business income.
What is Section 145A of the Income-tax Act, 1961?
Section 145A is a specific income-computation rule under the head Profits and gains of business or profession. It operates alongside Section 145, which governs regularly employed accounting methods and notified Income Computation and Disclosure Standards (ICDS). Its valuation rules are relevant even where financial statements follow a different presentation convention.
Its operative text was substituted by the Finance Act, 2018, with retrospective effect from 1 April 2017. The following explanation preserves all four clauses, both provisos and both statutory explanations from the supplied provision.
Section 145A explained clause by clause
Clause (i): Ordinary inventory at lower of cost or net realisable value
Inventory is valued at the lower of actual cost and net realisable value (NRV), computed in accordance with ICDS notified under Section 145(2). Actual cost reflects the relevant cost determined under the applicable standard. NRV generally means the estimated realisable selling value after the relevant completion and selling costs.
Clause (ii): Adjustment for tax, duty, cess and fees
The valuation of purchases, sales of goods or services, and inventory must be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred to bring the goods or services to their location and condition on the valuation date. This can affect GST-related computation adjustments. It does not mean a taxpayer should add the same amount twice: the reconciliation must reflect how taxes and available credits were recorded.
Clause (iii): Unlisted or irregularly quoted securities
Securities held as inventory that are not listed on a recognised stock exchange, or are listed but not quoted regularly, are valued at their actual cost initially recognised under the notified ICDS. This is a special rule distinct from ordinary stock valuation.
Clause (iv): Other securities held as inventory
Other securities held as inventory are valued at the lower of actual cost and NRV under the notified ICDS. The comparison is made category-wise, not simply by selecting a loss on each individual security without regard to its category.
First proviso: Scheduled banks and public financial institutions
For securities held as inventory by a scheduled bank or public financial institution, the notified ICDS applies after taking into account the relevant guidelines issued by the Reserve Bank of India (RBI).
Second proviso: Category-wise comparison
When comparing the actual cost and NRV of securities, the comparison must be carried out category-wise.
Statutory explanations and definitions
Explanation 1: The expression tax, duty, cess or fee covers the relevant payments under any law even where making the payment gives rise to a corresponding right, such as a credit or other entitlement. The precise tax computation still requires reconciliation of accounting entries and applicable law.
Explanation 2: For this section, the statutory cross-references are:
- Public financial institution: Section 2(72) of the Companies Act, 2013.
- Recognised stock exchange: Section 43(5), Explanation 1(ii), of the Income-tax Act, 1961.
- Scheduled bank: Section 36(1)(viia), Explanation (ii), of the Income-tax Act, 1961.
ICDS: Income Computation and Disclosure Standards notified for tax computation, including ICDS II for inventories and ICDS VIII for securities. These standards are not interchangeable with financial-reporting accounting standards in every respect.
Practical examples of Section 145A
| Situation | Tax valuation approach |
|---|---|
| Ordinary stock costs Rs. 1,00,000 and NRV is Rs. 92,000 | Generally value at Rs. 92,000 under clause (i), subject to applicable ICDS cost and NRV rules. |
| Goods purchased with applicable GST or other duty | Reconcile the tax component in purchases, sales and closing stock under clause (ii), avoiding duplication in the income computation. |
| Unlisted shares held as trading inventory | Apply the initially recognised actual cost under clause (iii), rather than automatically writing down to market value. |
| Regularly quoted listed securities held as trading inventory | Compare cost and NRV category-wise under clause (iv) and the proviso. |
These are simplified illustrations, not substitutes for the notified ICDS, the facts of the business, or the relevant tax-year law.
Section 145A and related provisions
Section 145 establishes the accounting-method framework. Section 145A adds special valuation rules. Section 145B separately addresses the timing of recognition of certain income. Where accounting records are incorrect, incomplete or the notified computation standards are not followed, the consequences may involve Section 144 (best judgment assessment), subject to statutory requirements.
The treatment of stock-in-trade should also be distinguished from capital investments: Section 145A securities provisions concern securities held as inventory, not every security held by a taxpayer.
Corresponding provision in the Income-tax Act, 2025
Section 277 of the Income-tax Act, 2025 covers the method of accounting in certain cases. It reorganises the inventory, tax-adjustment and securities valuation rules into subsections, with ICDS references linked to Section 276(2). The core subjects include lower-of-cost-or-NRV inventory valuation, inclusion of applicable taxes and duties, special treatment of unlisted securities, category-wise comparison and RBI guidelines for specified institutions.
For tax years beginning on or after 1 April 2026, consult the 2025 Act and its applicable rules. For earlier assessment years and saved proceedings, consult the 1961 Act together with the repeal and savings provisions. Do not assume the two texts are identical in every respect.
Frequently asked questions
What does Section 145A require?
It prescribes inventory and securities valuation rules for computing business or professional income, including specified adjustments for taxes, duties, cess and fees.
How are ordinary inventories valued?
Ordinary inventory is generally valued at the lower of actual cost or net realisable value, applying the notified Income Computation and Disclosure Standards.
Does Section 145A require GST to be considered?
It requires the specified inclusive adjustment for relevant taxes and duties actually paid or incurred. The accounting and tax computation should avoid double counting and reflect applicable credit treatment.
Which law applies from 1 April 2026?
Section 277 of the Income-tax Act, 2025 is the corresponding provision for the new tax-year regime, while saved matters under the 1961 Act remain governed by applicable transitional provisions.
Official legal sources and further reading
This article provides general legal information. Check amendments, notifications and applicable transition rules for the tax year and facts concerned.