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VALUATION OF STOCK for Profit and Gains of Business or Professions

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.


More Topics .... " Business or Profession"
Definition of the Head ' Business or Profession'-[Sec.-28]
Compensation Received as Business Income(Section-28(ii))]
Income of a Trade or Professional Association [Section 28(iii)]
Income from Export Incentives is chargeable to Income Tax
Any Amount Received Under certain Agreement for not to Carry on Business [Section 28(va)]
Speculation Business [Explanation to Section 28]
Profit Earned from an Illegal Business
Transfer of certain Assets Specified u/s 35AD in certain circumstances [Section 28(vii)]
Certain Incomes relating to business but not taxable under the head ‘Profits Gains of Business or Profession .
Computation of Income of Business or Profession - General Important Points
General Principles - for Deductions Allowed from Gross Income of Business and Professions
Deductions from Gross Income of Business or Profession [ Section 30 to 44DB]
Expressly Admissible Deductions from Gross Income from Business or Profession [Section 30-36]
Expenditure Incurred in the Field of Scientific Research [Section 35]
Expenses on Research Activities carried on by the assessee himself
Contribution to Approved Institutions to carry on Research is Allowed as Weighted Deductions for Calculating Profits and Gains of Business or Professions.
Expenditure incurred on the acquisition of Patents Rights or Copy Rights [Section 35A] [Applicable for expenditure incurred before 1-4-1998]
Expenditure on know-how [Section 35 AB] [Applicable for expenditure incurred before 1-4-1998]
Expenditure for obtaining License to operate Telecommunication Services [Section 35 ABB]
Expenditure on eligible projects or schemes [Section 35 AC]
Deduction in respect of expenditure incurred on setting up of a Specified Business [Sec. 35AD]
Any amount given to an institution or association [Section-35CCA]
Expenditure on Notified Agricultural Extension Project [Section-35 CCC] [w.e.f. A.Y. 2013-14]
Expenditure on Notified Skill development project [Section-35 CCD] [w.e.f. A.Y. 2013-14]
Amortisation of Certain Preliminary Expenses [Section 35D]
Expenditure on demerger or amalgamation [Section 35DD]
Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme [Section 35DDA]
Expenditure on Prospecting etc., for certain Minerals [Section 35E]
Other Deductions Allowed to Compute Income from Business or Profession   [Section-36]
Interest on Borrowed Capital [Sec. 36(1)(iii)].
Deduction of discount on Zero Coupon Bond [Section 36(iiia)]
Contribution to Provident and Superannuation Fund [Sec. 36(1)(iv)].
Employee’s contribution towards staff welfare schemes [Sec. 36(1)(va)]
Bad debts [Sec. 36(1)(vii)]
Bad debts of Banks, financial institution and industrial investment corporation etc. [Section 36(1)(viia)]
Special Reserve Created and Maintained by Financial Corporation [Section 36(1)(viii)].
Expenditure on Family Planning [Section-36(1)(ix)].
General Or Allowable Deductions [Section 37]
Commission earned by the agents of Life Insurance Corporation, Unit Trust of India, Post Office or Mutual Funds
Legal Expenses in the Interest of Business are Allowable Expenses
Losses incidental to Business Allowed to be Debited.
Expenses Expressly Disallowed In the Case of any ‘Assessee’ [ Section-40a]
Expenses Expressly Disallowed In the Case of any Firm [Section 40(b)]
Expenses Expressly Disallowed In General Cases [Section 40(b)]
Disallowing of certain Expenses under certain circumstances like ‘Payments to Relatives’
Payments exceeding ` 20,000 by cash/bearer cheque [Section 40A (3)].
Provision for the Payment of Gratuity – [Section-40A(7)]
DEEMED PROFITS Under Profits and Gains of Business or Professions [Section 41]
VALUATION OF STOCK for Profit and Gains of Business or Professions
Deduction Of Certain Payments Only If Actually Paid [Section 43B]
Maintenance Of Accounts By Certain Persons Carrying On Profession Or Business. [Sec. 44AA]
Compulsory Audit For The Non-Corporate Assessees [Section-44 AB]
Computation of Income on Estimated Basis [Section 44AD]
Profit from the business of carriage of goods for truck owners [Section 44 AE]
Special provision for computation of income from royalties in case of nonresidents [Section 44DA]
Partly Agricultural and Partly Business Income
Adjustment In The Profit And Loss A/C Prepared By The Assessee
Computation of Profits and Gains of a Non-Resident from Shipping Business— [Section 44B]
Computation of Profits and Gains of business of Oil Exploration [Section 44BB]
Computation of Profits and Gains of the Business of operation of Aircrafts by Non-Resident [Section 44 BBA]
Computation of Profits of Foreign Enterprises [Section 44BBB]
Ceiling Limits in respect of Head Office Expenses [Section 440]
Special Provisions in case of Income of Public Financial Institutions etc. [Section 43D]
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