Valuation Of Stock for Income Tax Purposes

Stock may be valued as per the accepted accounting norms as Income Tax Act or Income Tax Rules does not provide for any method for valuation of stock. The assessee can adopt cost or market value (whichever is lower) or can also value stock at cost.
Method of valuation of stock can be changed but it should be consistent in subsequent year and such change should give true reflection of profits and should be done with bonafide intension. The change should be prospective in nature.
The assessee cannot change the value of opening stock by following the new method as in that case, it will affect the profits of earlier year and would lead to chain reaction.
Valuation of stock should be inclusive of taxes, whether paid or unpaid. Even Cenvat credit has to be included in valuation of stock .
SPECIAL CASES OF VALUATION OF STOCK

1. If the assessee sells his goods in domestic market then he cannot consider the market price prevailing in the international market.
2. When a firm is dissolved and the business is discontinued by the firm then the closing stock is valued at Market value and not at cost.
3. Where on dissolution of assessee firm , its stock –in- trade is revalued and certain amount is shown as ‘ difference on revaluation ’ in the profit / loss account , such surplus on valuation shall be charged to tax as profits of firm .
4. On the dissolution of firm the business is taken over by a partner without discontinuance, the firm is entitled to adopt cost or market value (whichever is lower). Since the firm has not discontinued the business, adopting the fair market value concept does not arise .
5. Section 43(6) provides that birds being ‘ live stock ’ cannot be taken as plant so birds , poultry farming , chicks are required to be valued as stock-in-trade and thus be valued on cost or market price ( whichever is lower ) .
6. The Government securities held by Bank for the purpose of maintaining SLR are also stock-in-trade of business of banks and any notional loss suffered on account of revaluation of the securities at the close of the year, is an allowable deduction in computation of total income of the bank.
7. If the assessee is consistently following the wrong method of valuation it cannot be adopted and the Assessing Officer has powers to substitute the wrong method by the correct method of valuation of the closing stock.