Sections 276-278 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.
Sections 276 to 278 sit at the start of the part of Chapter XVI that deals with how income is computed for assessment. Section 276 lets business and other-sources income be computed on a cash or mercantile basis, section 277 fixes rules on inventory and purchase valuation, and section 278 says in which tax year interest on compensation, price-escalation claims and export incentives are taxed. This article reads them as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
Income under "Profits and gains of business or profession" or "Income from other sources" is computed on the cash or mercantile system regularly employed by the assessee, subject to income computation and disclosure standards notified by the Central Government. Inventory is valued at the lower of actual cost or net realisable value, with special rules for securities. Interest on compensation is income of the tax year in which it is received.
Section 276: method of accounting
Sub-section (1): cash or mercantile
Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" is computed, subject to sub-section (2), as per either the cash or the mercantile system of accounting regularly employed by the assessee. Two things matter here: the choice is between two systems only, and the system must be one that the assessee regularly employs. Switching from year to year to suit the result is not what the sub-section describes.
Sub-section (2): standards
The Central Government may notify income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. What has been notified is not in the text consulted for this article; check the current notifications for the standards that apply to your class of assessee.
Sub-section (3): when the Assessing Officer may estimate
The Assessing Officer may make an assessment in the manner provided in section 271 where:
- (a) he is not satisfied about the correctness or completeness of the accounts of the assessee; or
- (b) the method of accounting in sub-section (1) has not been regularly followed by the assessee; or
- (c) income has not been computed as per the standards notified under sub-section (2).
The Act uses a different heading for the assessment under section 271; in plain words it is an assessment to the extent of the Assessing Officer's judgment. Section 271 sets out that procedure, and the books of account provision in section 62 shows what records are to be kept. If your accounts are being questioned, see our books of accounts compliance service.
Section 277: valuation in certain cases
Section 277 applies "for the purposes of determining the income chargeable under the head Profits and gains of business or profession".
| Sub-section | Rule |
|---|---|
| (1)(i) | Inventory is valued at the lower of actual cost or net realisable value, computed as per the standards notified under section 276(2). |
| (1)(ii) | Purchase and sale of goods or services, and inventory, are adjusted to include 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 on the date of valuation. |
| (1)(iii) | Inventory in securities not listed on a recognised stock exchange, or listed but not quoted with regularity from time to time, is valued at actual cost initially recognised as per the standards notified under section 276(2). |
| (1)(iv) | Inventory in securities other than those in clause (iii) is valued at the lower of actual cost or net realisable value as per the notified standards. |
| (2) | For inventory in securities held by a scheduled bank or public financial institution, valuation is as per the notified standards after taking into account the extant guidelines issued by the Reserve Bank of India. |
| (3) | For sub-sections (1) and (2), the comparison of actual cost and net realisable value of securities is made category-wise. |
| (4) | "Any tax, duty, cess or fee" under any law in force includes all such payment irrespective of any right arising as a consequence of the payment. |
| (5) | "Public financial institution" has the meaning given in section 2(72) of the Companies Act, 2013 (18 of 2013). |
Section 277(5) points to another law. Read that law for the meaning of the term; this article explains nothing from it. Section 277(2) also refers to guidelines of the Reserve Bank of India; their content is not in the Act and is not discussed here.
What the structure means
- Clause (1)(i) is a general rule and clauses (iii) and (iv) split securities into two classes. For the first class (unlisted, or listed but not regularly quoted) the value is the actual cost initially recognised, without a lower-of test. For the second class the lower-of test applies.
- Clause (1)(ii) draws no line between what is claimed as a deduction and what is put into the valuation: any tax, duty, cess or fee actually paid or incurred to bring the goods or services to location and condition is included. Sub-section (4) closes the argument about whether a right (for example to a credit) arising from the payment changes this: it does not.
- Sub-section (3) requires securities to be compared category by category and not as one lot.
Section 278: taxability of certain income
| Sub-section | Item | Tax year of income |
|---|---|---|
| (1) | Interest received by an assessee on any compensation or on enhanced compensation | The tax year in which it is received, irrespective of anything contrary in section 276 |
| (2) | A claim for escalation of price in a contract, or export incentives | The tax year in which reasonable certainty of its realisation is achieved |
| (3) | The income referred to in section 2(49)(w) | The tax year in which it is received, if not charged to income-tax in any earlier tax year |
Sub-section (1) overrides section 276, so even an assessee on the mercantile system takes interest on compensation into account only when it is received. Sub-section (2) is a test of "reasonable certainty of realisation", not of receipt. Sub-section (3) points to section 2(49)(w); see our other articles on the definitions in section 2 for the meaning of that clause.
A worked example
All names and amounts are assumed.
Kaveri Hardware, a trader on the mercantile system, holds stock at the end of the tax year:
- Goods: actual cost Rs. 8,00,000; net realisable value Rs. 7,20,000. Under section 277(1)(i) the inventory is valued at the lower figure, Rs. 7,20,000.
- Duty added to purchase value: Kaveri buys a consignment for Rs. 5,00,000 and actually pays Rs. 50,000 of duty to bring it to its place of location and condition. Under section 277(1)(ii) the purchase is adjusted to include the duty: Rs. 5,00,000 + Rs. 50,000 = Rs. 5,50,000.
- Securities: Kaveri also holds, as stock-in-trade, shares in two categories. Under section 277(3) the cost and net realisable value are compared category by category. For a category of unlisted shares the value is actual cost initially recognised, per clause (iii); for a category of regularly quoted shares the lower of cost and net realisable value applies, per clause (iv).
- Interest on compensation: Kaveri receives Rs. 2,50,000 as interest on enhanced compensation in the tax year. Section 278(1) makes it income of that tax year, the year of receipt, even though the compensation dispute began earlier.
The rule for each item comes from a different section, and the notified standards (not reproduced in the Act) govern how cost and net realisable value are measured.
Need help with your books?
The method you follow, and the way inventory is valued, flow straight into taxable profit and into how safe your accounts are if a return is examined. If you want a second look at your accounting method, valuation policy or computation, our team can review it. See our books of accounts compliance service.
Key takeaways
- Business and other-sources income is computed on the cash or mercantile system regularly employed by the assessee.
- The Central Government may notify income computation and disclosure standards; the notified text is not in the Act.
- The Assessing Officer may assess under section 271 if accounts are doubtful, the method is not regularly followed, or the standards are not followed.
- Inventory is at the lower of actual cost or net realisable value, except unlisted or irregularly quoted securities, which are at actual cost initially recognised.
- Taxes, duties, cesses and fees paid to bring goods or services to location and condition are included in the valuation.
- Interest on compensation is income of the year of receipt; price-escalation claims and export incentives are taxed when realisation is reasonably certain.
Read next
- Section 279: income escaping assessment
- Sections 283 to 285: assessment after appeal orders and sanction for notice
- Section 275: Dispute Resolution Panel
- Chapter XVI: procedure for assessment
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.