Clause 14 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause 14(a) reports the method of valuation of closing stock for every category of inventory; 14(b) reports the deviation, if any, from the method prescribed by section 145A and its effect on profit or loss.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961. For tax years under the Income-tax Act, 2025 the particulars move to Form No. 26 under rule 47 of the Income-tax Rules, 2026.
"Closing stock" means all inventories
Paragraph 26.3 resolves a scope question that decides how much work clause 14 involves. Sub-clause (a) refers to "closing stock", and the expression "stock-in-trade" means finished goods and raw materials. But because sub-clause (b) refers to section 145A, where the term "inventory" is used, the term "closing stock" will include all items of inventories.
AS-2 and Ind AS 2 define "inventories" to include finished goods, raw materials, work-in-progress, materials, maintenance supplies, consumables and loose tools. Therefore, the method of valuation of all items of inventories will have to be given under sub-clause (a).
How the method is described
Paragraph 26.1: AS-2 "Valuation of Inventories" and Ind AS 2 "Inventories" require disclosure of significant accounting policies, so a reference may be invited to that disclosure, or the method may be again described in Form No. 3CD.
Paragraph 26.2: the method followed, having regard to the articles or goods dealt in or manufactured, should be clearly indicated. The Guidance Note's own examples:
| Inventory category | Method |
|---|---|
| Raw material | At cost or net realisable value, whichever is lower |
| Finished goods | At cost or net realisable value, whichever is lower |
| Work in progress | At cost or net realisable value, whichever is lower |
| Consumables | At cost |
| Stock in trade — goods held for sale | At cost or net realisable value, whichever is lower |
| Loose tools | At cost or net realisable value, whichever is lower |
In each case where the reference is to "cost", Accounting Standards require a statement as to how cost is determined. A clause 14(a) answer that says only "at cost or net realisable value, whichever is lower" is therefore incomplete — the cost formula has to be stated too.
"Deficiencies were noticed … including non-reporting of inventory valuation methods for individual inventory categories; failure to disclose deviations from the valuation method prescribed under section 145A; incorrect reporting of valuation methods." The first is the direct consequence of treating "closing stock" as finished goods only. Report a method per category — including consumables, loose tools and maintenance supplies.
Consistency, and the limits of consistency
Paragraph 26.5: the method must be consistently followed from year to year and brought out clearly. The tax auditor should examine the basis adopted for ascertaining cost, and that basis should be consistently followed. It is necessary to ensure that the method results in disclosure of correct profits and gains.
The authority given is CIT v. British Paints Ltd. [1991] 188 ITR 44 (SC), which held that valuing stock at the actual cost of raw materials without taking overhead charges into account was not the correct method of valuation, even though that method had been consistently followed.
The accounting position agrees. Under AS-2 (Revised), the cost of inventories also includes a systematic allocation of fixed and variable production overheads incurred in converting materials into finished goods; the allocation of fixed production overheads should be based on the normal level of production; and overheads should be included only to the extent that they clearly relate to bringing the inventories to their present location and condition.
Change of method is not reported here
Paragraph 26.6: it is not necessary to indicate any change in the method of valuation of closing stock under this clause. Such a change amounts to a change in an accounting policy and needs to be disclosed in the financial statements as required by AS-5 or Ind AS 8. It is likewise not reported at clause 13(b), which deals only with a change in the method of accounting — cash or mercantile.
What the auditor does
Paragraph 26.4: the tax auditor should study the procedure followed by the assessee in taking the inventory of closing stock at the end of the year and the valuation thereof, and should obtain the inventory of closing stock indicating the basis of valuation, for verifying the reporting under clause 14.
Sub-clause (b) in outline
Paragraph 26.7: the details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on profit or loss, are stated under clause 14(b), in a table of increase and decrease in profit. Section 145A has been amended to give effect to ICDS and covers not only goods but services and securities also. Its adjustments must be as per the ICDS notified under section 145(2) — ICDS II for inventories and ICDS VIII for securities.
Worked example
| Category | Clause 14(a) answer |
|---|---|
| Raw materials | Lower of cost and net realisable value; cost on weighted average |
| Work in progress | Lower of cost and net realisable value; cost includes materials, labour and a systematic allocation of production overheads at normal capacity |
| Finished goods | Lower of cost and net realisable value; cost as above |
| Stores and consumables | At cost, FIFO |
| Loose tools | Lower of cost and net realisable value |
| Packing materials | At cost, FIFO |
Six categories, six methods, each with its cost formula stated. Reporting a single line for "closing stock" would be the exact TAQRB finding, and would leave the section 145A deviation at 14(b) unsupported.
Audit checklist
- Report a method for every category of inventory, not just finished goods.
- State how cost is determined for each category where "cost" is used.
- Test that production overheads are included on a systematic allocation at normal capacity — the British Paints point.
- Study the physical stock-taking and valuation procedure, and obtain the closing inventory with the basis of valuation.
- Check the method is consistently followed, and that consistency does not conceal an incorrect method.
- Do not report a change of valuation method at clause 14 or clause 13(b); disclose it under AS-5 or Ind AS 8.
- Reconcile the inventory position with the ICDS II figure at clause 13(e).
Common mistakes
- Reporting one method for all inventories.
- Omitting the cost formula behind "at cost".
- Accepting direct-cost-only valuation contrary to British Paints and AS-2.
- Reporting a change of valuation method at clause 14 or 13(b).
- Leaving 14(b) blank where an exclusive method of GST accounting is used.