Section 145A — Method of Accounting in Certain Cases
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Prescribes special rules for (i) the valuation of inventory (at lower of cost or net realisable value in accordance with ICDS, and inclusive of the amount of any tax, duty, cess or fee actually paid or incurred — the 'inclusive method'); (ii) valuation of purchase and sale of goods/services and of inventory; and (iii) valuation of securities, with special rules for those held by a scheduled bank or public financial institution.
FA 2026: No amendment by the Finance Act, 2026.
History: Originally inserted by the Finance (No. 2) Act, 1998 (inclusive method for excise/MODVAT); substituted/expanded by the Finance Act, 2018 to align with ICDS and to deal with securities valuation.
A. SECTION COMMENTARY
Section 145A overrides section 145 for the specific purpose of valuing inventory and securities and of accounting for taxes and duties. Its core rule is the 'inclusive method': the value of purchase, sale and inventory must include the amount of any tax, duty, cess or fee actually paid or incurred to bring the goods/services to their location and condition as on the valuation date — a departure from the 'exclusive method' that many assessees followed for MODVAT/CENVAT/GST credits. The provision is designed to ensure uniformity and to prevent distortion of profit through the chosen treatment of indirect taxes; importantly, properly applied, the inclusive and exclusive methods are tax-neutral over the cycle, because the same amount is added to both the opening and closing sides and to purchases and sales.
The leading authority predates the section's expansion but states the governing economic truth: whether MODVAT/duty is accounted on the inclusive or exclusive basis, the effect on profit is neutral if applied consistently to all elements (opening stock, purchases, sales, closing stock). Section 145A now mandates the inclusive method to standardise the treatment. The securities-valuation rules in the later part of the section codify the position for banks and financial institutions.
B. STATUTORY POSITION (verbatim text)
Reproduced from the local Act (base text to the Finance Act, 2025), as substituted by the Finance Act, 2018.
145A. For the purpose of determining the income chargeable under the head "Profits and gains of business or profession",—
(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;
(ii) the valuation of purchase and sale of goods or services and of inventory shall be 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 or services to the place of its location and condition as on the date of valuation;
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;
(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145:
Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard:
Provided further that the comparison of actual cost and net realisable value of securities shall be made category-wise.
Explanation 1.—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.
Explanation 2.—For the purposes of this section,—
(a) "public financial institution" shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013);
(b) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43;
(c) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36.
C. AUTHORITIES
The principal authority establishes the tax-neutrality of the inclusive/exclusive treatment of duties when consistently applied.
Held: Where an assessee follows the exclusive (net) method of accounting for MODVAT credit, no addition to income is warranted on that account; the mere availability of unutilised MODVAT credit does not give rise to income, and the method of accounting (inclusive or exclusive) does not, if consistently applied, alter the real profit. Income cannot be said to accrue by reason of the accounting treatment of duty credits.
Significance: Establishes the tax-neutrality of the treatment of duties/credits when consistently applied — the economic premise on which section 145A's mandatory inclusive method rests. After section 145A, the inclusive method is statutorily required, but Indo Nippon remains the authority that, applied throughout, it does not distort or inflate real profit.
On securities valuation under section 145A — principle
Position: Securities held as stock-in-trade are to be valued at lower of cost or net realisable value in accordance with ICDS, with special category-wise rules for scheduled banks/public financial institutions per RBI guidelines. The pre-145A jurisprudence (e.g. on valuation of investments/stock by banks at cost or market) is subsumed by the statutory rule; consistency and true-profit principles continue to apply.
Candour note: The securities-valuation limb is recent and largely applied on its own terms read with ICDS-VIII; no major Supreme Court decision construes it post-2018.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the Income-tax Act, 1961 (text as printed in the local Act, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; Finance Act, 2026 changes are flagged in the commentary. Citations are stated as reported; orders of the Tribunal, Authority for Advance Rulings and High Courts are flagged as such. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.
CHAPTER XIV — PROCEDURE FOR ASSESSMENT
Section 145A — Method of Accounting in Certain Cases
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Prescribes special rules for (i) the valuation of inventory (at lower of cost or net realisable value in accordance with ICDS, and inclusive of the amount of any tax, duty, cess or fee actually paid or incurred — the 'inclusive method'); (ii) valuation of purchase and sale of goods/services and of inventory; and (iii) valuation of securities, with special rules for those held by a scheduled bank or public financial institution.
FA 2026: No amendment by the Finance Act, 2026.
History: Originally inserted by the Finance (No. 2) Act, 1998 (inclusive method for excise/MODVAT); substituted/expanded by the Finance Act, 2018 to align with ICDS and to deal with securities valuation.
A. SECTION COMMENTARY
Section 145A overrides section 145 for the specific purpose of valuing inventory and securities and of accounting for taxes and duties. Its core rule is the 'inclusive method': the value of purchase, sale and inventory must include the amount of any tax, duty, cess or fee actually paid or incurred to bring the goods/services to their location and condition as on the valuation date — a departure from the 'exclusive method' that many assessees followed for MODVAT/CENVAT/GST credits. The provision is designed to ensure uniformity and to prevent distortion of profit through the chosen treatment of indirect taxes; importantly, properly applied, the inclusive and exclusive methods are tax-neutral over the cycle, because the same amount is added to both the opening and closing sides and to purchases and sales.
The leading authority predates the section's expansion but states the governing economic truth: whether MODVAT/duty is accounted on the inclusive or exclusive basis, the effect on profit is neutral if applied consistently to all elements (opening stock, purchases, sales, closing stock). Section 145A now mandates the inclusive method to standardise the treatment. The securities-valuation rules in the later part of the section codify the position for banks and financial institutions.
B. STATUTORY POSITION (verbatim text)
Reproduced from the local Act (base text to the Finance Act, 2025), as substituted by the Finance Act, 2018.
145A. For the purpose of determining the income chargeable under the head "Profits and gains of business or profession",—
(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;
(ii) the valuation of purchase and sale of goods or services and of inventory shall be 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 or services to the place of its location and condition as on the date of valuation;
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;
(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145:
Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard:
Provided further that the comparison of actual cost and net realisable value of securities shall be made category-wise.
Explanation 1.—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.
Explanation 2.—For the purposes of this section,—
(a) "public financial institution" shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013);
(b) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43;
(c) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36.
C. AUTHORITIES
The principal authority establishes the tax-neutrality of the inclusive/exclusive treatment of duties when consistently applied.
1. Inclusive vs exclusive method — tax neutrality
CIT v. Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR 275 (SC)
Court: Supreme Court of India.
Held: Where an assessee follows the exclusive (net) method of accounting for MODVAT credit, no addition to income is warranted on that account; the mere availability of unutilised MODVAT credit does not give rise to income, and the method of accounting (inclusive or exclusive) does not, if consistently applied, alter the real profit. Income cannot be said to accrue by reason of the accounting treatment of duty credits.
Significance: Establishes the tax-neutrality of the treatment of duties/credits when consistently applied — the economic premise on which section 145A's mandatory inclusive method rests. After section 145A, the inclusive method is statutorily required, but Indo Nippon remains the authority that, applied throughout, it does not distort or inflate real profit.
On securities valuation under section 145A — principle
Position: Securities held as stock-in-trade are to be valued at lower of cost or net realisable value in accordance with ICDS, with special category-wise rules for scheduled banks/public financial institutions per RBI guidelines. The pre-145A jurisprudence (e.g. on valuation of investments/stock by banks at cost or market) is subsumed by the statutory rule; consistency and true-profit principles continue to apply.
Candour note: The securities-valuation limb is recent and largely applied on its own terms read with ICDS-VIII; no major Supreme Court decision construes it post-2018.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the Income-tax Act, 1961 (text as printed in the local Act, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; Finance Act, 2026 changes are flagged in the commentary. Citations are stated as reported; orders of the Tribunal, Authority for Advance Rulings and High Courts are flagged as such. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.