INCOME-TAX ACT, 2025 | CHAPTER XVI | ASSESSMENT PROCEDURE
Section 277 Income Tax Act 2025: How Should Inventory Be Valued?
Section 277 prescribes special valuation rules for inventory, purchases, sales and securities held as stock-in-trade when computing taxable business or professional income. The provision works alongside the notified Income Computation and Disclosure Standards (ICDS) under Section 276(2).
What does Section 277 of the Income-tax Act, 2025 provide?
The section applies for determining income chargeable under the head Profits and gains of business or profession. It contains five subsections and should be read together with the method-of-accounting provisions in Section 276 and the applicable notified ICDS.
Section 277(1)(i): General inventory valuation
Inventory is valued at the lower of actual cost or net realisable value, computed in accordance with the ICDS notified under Section 276(2). The comparison must follow the relevant standard and its valuation methodology.
Section 277(1)(ii): Taxes, duties, cess and fees
Valuation of purchases and sales of goods or services, and valuation of inventory, must be adjusted to include any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to their location and condition as at the valuation date. The statutory treatment applies notwithstanding that a corresponding right may arise from the payment; reconciliation with applicable tax credits and other computation provisions is essential.
Section 277(1)(iii): Unlisted or irregularly quoted securities inventory
Securities held as inventory that are not listed on a recognised stock exchange, or are listed but not quoted regularly, are valued at the actual cost initially recognised under the ICDS notified under Section 276(2).
Section 277(1)(iv): Other securities inventory
Other securities held as inventory are valued at the lower of actual cost or net realisable value in accordance with the notified ICDS.
Section 277(2): Scheduled banks and public financial institutions
Securities held as inventory by a scheduled bank or public financial institution are valued under the applicable ICDS after taking account of current Reserve Bank of India guidelines on the subject.
Section 277(3): Category-wise comparison
For securities covered by subsections (1) and (2), comparison of actual cost and net realisable value is undertaken category-wise, rather than automatically security-by-security. The relevant categories and method must be determined under the applicable ICDS.
Section 277(4): Rights arising from payment of levies
For this section, tax, duty, cess or fee includes such payments irrespective of any right arising as a consequence of payment. The specific computation and adjustment rules must be applied consistently to avoid omission or double counting.
Section 277(5): Public financial institution
The expression public financial institution has the meaning assigned by Section 2(72) of the Companies Act, 2013.
How is inventory valued under Section 277?
| Inventory category | Valuation basis | Legal reference |
|---|---|---|
| Ordinary business inventory | Lower of actual cost or net realisable value under ICDS | Section 277(1)(i) |
| Unlisted or irregularly quoted securities held as inventory | Actual cost initially recognised under ICDS | Section 277(1)(iii) |
| Other securities held as inventory | Lower of actual cost or net realisable value under ICDS | Section 277(1)(iv) |
| Securities inventory of scheduled banks or public financial institutions | ICDS, taking account of applicable RBI guidelines | Section 277(2) |
Important distinction: Section 277 addresses securities held as inventory. Securities held as capital investments may be governed by different tax provisions. Classification must reflect the facts and applicable law.
Relevant statutory and accounting definitions
- Inventory
- Items held for sale in the ordinary course of business, in production for such sale, or consumed in production or rendering services, as relevant under the notified ICDS. Securities may constitute inventory where held as stock-in-trade.
- Actual cost
- The cost determined under the relevant notified ICDS, including applicable components and adjustments.
- Net realisable value (NRV)
- The estimated realisation from sale in the ordinary course of business, after relevant completion and selling costs, as determined under the applicable ICDS.
- ICDS
- Income Computation and Disclosure Standards notified for income-tax computation under Section 276(2).
- Recognised stock exchange
- An exchange satisfying the applicable statutory definition and recognition requirements; whether a security is regularly quoted is relevant to Section 277(1)(iii).
- Scheduled bank
- A bank meeting the applicable statutory definition; special securities-inventory valuation applies under Section 277(2).
- Public financial institution
- As defined by Section 2(72) of the Companies Act, 2013, expressly incorporated by Section 277(5).
Practical examples of Section 277
Example 1: Trading stock valued below cost
A trader holds inventory with actual cost of Rs. 8,00,000 and NRV of Rs. 7,20,000. Subject to the relevant ICDS and consistent computation, the inventory is valued at Rs. 7,20,000 under Section 277(1)(i).
Example 2: Unlisted shares held as stock-in-trade
A securities dealer holds unlisted shares as inventory. Their market-based estimated value falls below initially recognised actual cost. Section 277(1)(iii) prescribes initial actual cost under ICDS for this category, rather than the ordinary lower-of-cost-or-NRV approach.
Example 3: Listed securities inventory
A dealer holds regularly quoted listed securities as stock-in-trade. The lower-of-cost-or-NRV test applies under Section 277(1)(iv), with comparison performed category-wise under Section 277(3), subject to ICDS.
Example 4: Tax or duty included in valuation
A business incurs a duty while bringing stock to its required location and condition. Section 277(1)(ii) requires the relevant purchase, sale or inventory valuation adjustment. The computation should be reconciled with other applicable provisions and credits to avoid duplication.
How does Section 277 compare with the Income-tax Act, 1961?
Section 277 of the Income-tax Act, 2025 broadly corresponds to Section 145A of the Income-tax Act, 1961, which dealt with method of accounting in certain cases. It is not the equivalent of Section 277 of the 1961 Act (false statements in verification). When relying on older case law or compliance materials, compare the precise wording and the tax year to which the law applies.
Frequently asked questions
Is closing stock always valued at the lower of cost or NRV?
For ordinary inventory, Section 277(1)(i) prescribes that basis under ICDS. Specified securities inventory is subject to separate rules in Section 277(1)(iii) and (iv).
Are unlisted securities held as trading stock valued at market value?
Section 277(1)(iii) generally prescribes initially recognised actual cost under ICDS for unlisted or irregularly quoted securities held as inventory.
Can securities inventory be valued individually?
Section 277(3) requires the cost-versus-NRV comparison for securities to be made category-wise. Apply the notified ICDS for category identification and detailed computation.
Does Section 277 apply to capital investments?
Its special securities rules concern securities held as inventory. Investments held as capital assets require separate classification and tax analysis.
What is the corresponding section in the 1961 Act?
Section 145A of the Income-tax Act, 1961.
Statutory references and further reading
- Income Tax Department: Income-tax Act, 2025 and official resources
- Income Tax Department: Income-tax Act, 2025 information
- India Code: Central legislation
- Ministry of Corporate Affairs: Companies Act, 2013
Legal note: This article provides general statutory information. Confirm the latest notified ICDS, RBI guidelines, relevant amendments and the tax-year-specific position before filing or taking a tax position.