The proper and correct valuation of stock is an important factor to arrive at the correct profits of any business undertaking. Correct or actual or real profits cannot be ascertained unless a proper method is adopted for the valuation of closing and opening stocks. The Income-tax Act is silent about this factor and so no method, whatsoever, is recommended by the Income-tax Act. Hence, it is valued according to the general accounting principles. An assessee may adopt any of the following methods for valuation of closing stocks—(i) at cost price, (ii) at market price, (iii) at cost or market price whichever is less. They are based upon the cost or market price of the stock, whichever is less. The businessmen are free to adopt any method, but once one method is adopted, the same is to be continued from year to year and the assessee cannot change the method of valuation to suit his own purposes. [C.I.T. v. A.V. Apuchattair (1962) 45 I.T.R., 152. 155 Madras]. It can only be changed with the prior approval of the Assessing Officer, [Sir-Kikabhai Premchand v. C.I. T. 1953, 24 I. T.R. 596, 507 (S.C.)]. Another point to be noted in this case is that the value of closing stock must be the value of opening stock in the succeeding year.
Under Or Over-Valuation Of Stock. Generally the opening and closing stocks are not valued at cost price. They are either under-valued or over-valued. In such cases the profit of the year is affected by such under-valuation or over-valuation. To remove the effect of such valuation we adopt the following procedure :
(i) Bring the stock to real value in the following manner :
Under-valuation value of stock X .
(100 — rate of under - valuation)
Over-valuation = value of stock X . .
(100 + rate of under - valuation)
(ii) If opening stock is under-valued—calculate the difference between the actual value debited and value calculated above. It means the P & L A/c is under-debited by the amount of such difference. So profit is reduced by the amount of such profit.
(iii) If opening stock is over-valued—it will mean that P & L A/c has been over-debited by such difference. Hence increase the profit by such difference.
(iv) In case closing stock is under-valued—the P & L A/c is under-credited by the amount of such difference. So increase the amount of profit by such difference.
(v) In case closing stock is over-valued—the P & L A/c is over-credited by the amount of profit by such difference. So reduced the amount of profit by such difference.
Value Of Stock-Under Different Systems Of Accounting
While computing the professional income of a doctor the treatment of opening and closing stock is to be done in following manner
(a) When cash system of accounting is adopted:
The value of opening and closing stock is ignored as only net cash outflow is considered.
(b) When mercantile system of accounting is adopted :
In this case value of closing and opening stock has to be taken into consideration and the stock will be treated in this manner. Opening stock + purchases-closing stock shall be the amount which shall be taken as cost of goods consumed during the year.
Value Of Goods Drawn By Proprietor For Personal Use
Such goods should be valued at cost price and not market price. No one can earn profit from himself [Sri Cikabhai Premchand vs. Commissioner of Income-tax (1955) 24 1. T.R. 506 (S.C.)]. As such in case the goods are drawn for personal use at the market price, the net profit must be reduced by the amount of profit earned from self by showing the withdrawal of goods at market price.
Profits of oil mining companies
Section 42 deals with certain allowances which are granted to those assessees, who carry on the business, in association with the Central Government, of prospecting for extracting or producing mineral oils.