Understanding Section 145A: ICDS Guidelines for Taxable Income

The Section 145A of the Income Tax Act provides guidelines as per Income Computation and Disclosure Standards (ICDS), pertaining to the valuation of inventories and securities for taxation. It highlights the accurate method, that is the mercantile method, that the Companies Act recognised. Learn in detail about the valuation and accounting accuracy of inventory and securities for a taxable person here in this detailed guide.

Section 145A of the Income Tax Act Applicability

The Finance Act, 2018 substituted Sections 145A and 145B in April 2017 to ensure certainty pertaining to ICDs application. Section 145A is the determinant of a person's taxable income under 'Profits and Gains from Business and Profession' and 'Income from Other Sources'. This section highlights that irrespective of the provisions of Section 145, purchase and sales inventory and goods valuation needs to be determined based on the following factors:

• A lower cost or net realisable value (NRV) is calculated based on the computation and disclosure of rules under Section 145(2). 
• The valuation of inventory, goods or services needs to include taxes, cess or duty for adjustment. It includes paid fees to bring goods or services to the concerned location on the valuation date.
• Listed or unlisted stock valuation needs to be at the actual cost in accordance with ICDS under Section 145(2). 
• Under Section 145A of the Income Tax Act, all other securities need to be valued at lower actual cost or net realisable value as per ICDS.
• Based on the RBI (Reserve Bank of India) and ICDS guidelines, commercial banks and public financial institutions need to disclose their inventory.

Valuation of Inventories Under Section 145A of the Income Tax Act

In books of accounts, there are two methods of accounting for the valuation of inventories as follows:

• Cash Method: In this method, you need to keep a record of the cash inflow and outflow in your books of accounts. Notably, even though this is a simplified method, the results are less accurate. As a result, the Companies Act does not recognise this method.
• Mercantile Method: This method promotes recording transactions when income or expenses are accrued. It is irrespective of whether you receive cash for the transaction on the same day. Even though it is a method subject to complexities, it ensures high accuracy and thereby is recognised by the Companies Act.

Income Computation Standards of ICDS

Here are the income computation standards based on Income Computation and Disclosure Standards (ICDS):

• Assesses need to follow ICDS standards for inventory or securities valuation.
• The Indian Government under Section 145(2) informs ICDS applicability.
• If you are a taxpayer with income from profession, business or other sources, ICDS applies to you.
• Taxpayers with mercantile accounting systems and audits under Section 44AB need to adhere to ICDS standards.
• Non-corporate taxpayers with income computation under presumptive taxation further need to follow these standards.
• As per ICDS standards, a taxpayer should disclose the accounting policies and the inventory amount in financial statements.
• Taxpayers need to value their inventories at the lower of the two - NRV or actual cost.

Net Realisation Value and Actual Cost of Inventories/Securities

On the realisation of a sale, the selling price that you receive for an asset is the net realisation value (NRV). You acquire the value by deducting the completion cost and expenses.

Section 145A of the Income Tax Act mandates inventory valuation at a lower of NRV or actual cost. Notably, the inventory cost includes purchase expenses, conversion, services and additional costs. 

The actual cost includes purchase price, duties, taxes, freight charges and additional expenses required to acquire it. However, it does not include the interest and borrowing charges. You can acquire the actual cost by deducting trade discounts and rebates that affect the purchase price.

For the actual cost of securities, you need to consider the following factors:

• Purchase price
• Cost of acquisition, tax, duty, brokerage, cess and additional fees
• The fair value price if you exchange a security for another security or another asset.

Final Words

Section 145A of the Income Tax Act highlights that the valuation of inventory needs to be done based on the lower of NRV or the actual cost. Ensure you calculate NRV and the actual cost effectively by incorporating appropriate components. This can help you maintain uniform accounting standards while paying taxes as applicable, at the right time.