Under the Income tax Act, 1961 assessee is required to maintain books of accounts. Assessee can maintain books of accounts under cash basis or mercantile basis of accounting. Assessee should consistently follow the method of accounting. The Central Government had via power given in section 145(2) notified Income Computation and Disclosure Standards. ICDS-II deals with valuation of Inventories.  IF there is deviation from any ICDS notified under section 145(2) then effect should be reported in form 3CD audit report.

SECTION 145A

As per Section 145 A —- 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 adjusted to include the amount of any tax, duty, cess or fee (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.

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;

This is called inclusive method of accounting.

In practice the assessee follows exclusive method of accounting wherein the assessee does not include tax, duty, and cess in value of stock.

The question generally arises that where the assessee follows exclusive method of accounting, whether any adjustment is required to be made to profits quantified on basis of inclusive method.

Let’s understand this with help of an example:

EX 1. M/S XYZ Associates has opening stock finished goods of Rs.3, 00,000/-(Exclusive of GST @ 5%)

During the year 3 items purchased @ Rs.2, 50,000/- per item. GST on purchase @ 5%.

2 are sold @ Rs.4, 00,000/- per item. GST on sales @ 5%

The Trading Account on “EXCLUSIVE METHOD”

The Trading Account on “INCLUSIVE METHOD”

CONCLUSION:

From above example, it can be concluded that there is no impact on profits whatever method is followed.