The Finance Act, 2023 brought significant amendments to Section 142(2A) of the Income Tax Act, 1961. These amendments aim to enhance the transparency and accuracy of inventory valuation, prevent tax evasion through undervaluation, and ensure fair assessment of taxes. The changes introduce the role of cost accountants in inventory valuation and provide guidelines for expenses, opportunity of being heard, and time limits for assessment. This article provides an overview and analysis of the amendments.
Overview of amendments in Section 142 (2A) of Income Tax Act, 1961 through Finance Act, 2023
The summary of amendments are as follows:
|
Description |
Old Provision | Amended Provision |
| Inquiry before assessment
section 142, |
If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require:
Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard. |
If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get either or both of the following, namely: ––
(i) to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require; (ii) to get the inventory valued by a cost accountant, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such inventory valuation in the prescribed form duly signed and verified by such cost accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require: Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited or inventory so valued unless the assessee has been given a reasonable opportunity of being heard.” |
| Inquiry before assessment section 142, sub-section (2D) |
The expenses of, and incidental to, any audit under sub-section (2A) (including the remuneration of the accountant) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner] (which determination shall be final) and paid by the assessee and in default of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVIID for the recovery of arrears of tax:
Provided that where any direction for audit under sub-section (2A) is issued by the Assessing Officer on or after the 1st day of June, 2007, the expenses of, and incidental to, such audit (including the remuneration of the Accountant) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with such guidelines as may be prescribed and the expenses so determined shall be paid by the Central Government. |
The expenses of, and incidental to, any audit or inventory valuation under sub-section (2A) (including the remuneration of the accountant or the cost accountant, as the case may be) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner] (which determination shall be final) and paid by the assessee and in default of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVIID for the recovery of arrears of tax:
Provided that where any direction for audit or inventory valuation under sub-section (2A) is issued by the Assessing Officer on or after the 1st day of June, 2007, the expenses of, and incidental to, such audit or inventory valuation (including the remuneration of the Accountant or the cost accountant, as the case may be) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with such guidelines as may be prescribed and the expenses so determined shall be paid by the Central Government. |
| Inquiry before assessment
section 142, |
The assessee shall, except where the assessment is made under section 144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) or any audit under sub-section (2A) and proposed to be utilised for the purposes of the assessment. | The assessee shall, except where the assessment is made under section 144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) or any audit or inventory valuation under sub-section (2A) and proposed to be utilised for the purposes of the assessment. |
| Inquiry before assessment
section 142, |
No such Explanation. | Explanation.––For the purposes of this section, “cost accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 and who holds a valid certificate of practice under sub-section (1) of section 6 of the said Act.’. |
| Time limit for completion of assessment, reassessment and recomputation
section 153, Explanation 1 of clause (iv) |
the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited under sub-section (2A) of section 142 and— | the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited or inventory valued under sub-section (2A) of section 142 and— |
| Time limit for completion of assessment, reassessment and recomputation
section 153, Explanation 1 of clause (iv)(a) |
ending with the last date on which the assessee is required to furnish a report of such audit under that sub-section; or | ending with the last date on which the assessee is required to furnish a report of such audit or inventory valuation under that sub-section; or |
| Power to make rules
section 295, sub-section (2), clause (eec) |
the form of the report of audit and the particulars which such report shall contain under sub-section (2A) of section 142;] |
the form of the report of audit or inventory valuation and the particulars which such report shall contain under sub-section (2A) of section 142;] |
Valuation of inventories in current perspective as per Income Tax Act, 1961
Section 145(1) of the Income Tax Act (herein after referred as “the Act”) provides that the Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
Section 145(2) of the Act provides that The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards (herein after referred as “ICDS”) to be followed by any class of assessees or in respect of any class of income. Currently applicable to all assessees other than individual and HUF who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the said Act.
Section 145A of the Act provides that Notwithstanding anything to the contrary contained in section 145,
(a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head ―Profits and gains of business or profession‖ shall be—
(i) in accordance with the method of accounting regularly employed by the assessee; and
(ii) further 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 to the place of its location and condition as on the date of valuation.
Explanation. —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;
The Central Government vide a notification No 87/2016 dated 29th September, 2016 has notified Ten (10) ICDS, effective financial year 2016-17 to be followed by all assessees as above referred. One such standard, ICDS-II, relates to method to be adopted for determining the value of stock in trade of any business (‘inventories’).
Central Board of Direct Taxes (CBDT) clarified that ICDS applicable to all assesses irrespective the method of accounting / accounting policies followed by them vide circular no.10/2017 dated 23rd March 2017.
Existing Method of Valuation of closing stock / Valuation of inventories disclosed in Income Tax Return (ITR) and Reporting in Audit Report FORM 3CD
i) Method of valuation of closing stock employed in the previous year and deviation if any, from the method of valuation specified under section 145A disclosed in S.No. 4 of Part A – OI in ITR-3, ITR – 5 and ITR – 6 as below:
ii) Valuation of Inventories (other than the effect of change in method of valuation u/s 145A disclosed in S.No. II of Schedule ICDS Effect of Income Computation Disclosure Standards on profit in ITR-3, ITR – 5 and ITR – 6 as below:
iii) Any adjustment is required to be made for ICDS Reporting by Tax auditor in Clause 13 of FORM 3CD as below:
a) Clause 13 (d): Whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2)? Yes / No
b) Clause 13 (e): If answer to clause 13 (d) above is in the affirmative, give details of such adjustments Increase / Decrease in profit and Net effect if any for ICDS II – Valuation of Inventories
c) Clause 13 (f): Disclosure as per ICDS if any for ICDS II – Valuation of Inventories
iv) Any adjustment is required to be made for deviation from the method of valuation Reporting by Tax auditor in Clause 14 of FORM 3CD as below:
a) Clause 14 (a): Method of valuation of closing stock employed in the previous year
b) In case of deviation from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss, please furnish: Increase / Decrease in profit
Apart from the above disclosure / reporting given pertaining to inventories, The Central Government has proposed in Budget 2023, significant amendments to the tax provisions related to inventory valuation. The purpose of these amendments is to prevent permanent deferral of taxes through undervaluation of inventory and to ensure that the inventory is valued in accordance with the law. The changes aim to enhance the transparency and accuracy of inventory valuation, which will result in a fair assessment of taxes. Specific mandate has been given by the Central Government to the Cost Accountants, considering their expertise in inventory valuation to ensure that a fair valuation for the inventory is made inorder to prevent evasion of taxes. The Government has amended the provisions keeping in view the importance of inventory valuation in increasing tax revenues to the exchequer.
As per MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2023 for clauses 68, 72 & 122 as given below:
Preventing permanent deferral of taxes through undervaluation of inventory
1. Assessees are required to maintain books of account for the purposes of the Act. The Central Government has notified the Income Computation and Disclosure Standards (ICDS) for the computation of income. ICDS-II relates to valuation of inventory. Section 148 of the Companies Act 2013 also mandates maintenance of cost records and its audit by cost accountant in some cases.
2. In order to ensure that the inventory is valued in accordance with various provisions of law, it is proposed to amend section 142 of the Act relating to Inquiry before assessment to ensure the following:-
(i) To enable the Assessing Officer to direct the assessee to get the inventory valued by a cost accountant, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf. Assessee is then required to furnish the report of inventory valuation in the prescribed form duly signed and verified by such cost accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require.
(ii) To provide that the expenses of, and incidental to, such inventory valuation (including remuneration of the cost accountant) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the prescribed guidelines and that the expenses so determined shall be paid by the Central Government.
(iii) To provide that except where the assessment is made under section 144 of the Act, the assessee will be given an opportunity of being heard in respect of any material gathered on the basis of such inventory valuation which is proposed to be utilized for assessment.
(iv) To define “cost accountant” to mean a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act.
3. Further, the following consequential amendments are proposed:–
(i) To amend section 153 of the Act, so as to exclude the period for inventory valuation through the cost accountant for the purposes of computation of time limitation.
(ii) To amend section 295 of the Act, so as to include in the aforesaid section, the power to make rules for the form of prescription of report of inventory valuation and the particulars which such report shall contain.
4. The amendments in section 142 and 153 of the Act will take effect from 1st April, 2023 and will accordingly apply to the assessment year 2023-2024 and subsequent assessment years. The amendment in section 295 of the Act will take effect from 1st April, 2023.
Currently filing of Audit report in FORM 6B under section 142(2A) of the Income-tax Act, 1961 submitted by accountant through online using DSC.
In the same way, inventory valuation in prescribed form under section 142(2A) (ii) of the Income-tax Act, 1961 has to be submitted by a Cost Accountant. The act gives power to the board U/S 295 to make rules regarding the same.
CBDT will notify the prescribed form for inventory valuation similar to FORM 6B of Audit Report under section 142(2A)(i). In order to provide inventory valuation report, Cost Accountants has to be provided a separate login as a tax professional similar to Chartered Accountants. So far no option is enabled in the Income tax e-filing portal.
Screenshot of existing steps available to Chartered Accountants for registering as a tax professional.
Exsiting steps for an assessee to choose his authorised partner as Chartered Accountant for submission of various forms and reports namely Form 3CA/CD, Form 6B, Form 10B etc..
Conclusion: The amendments to Section 142(2A) of the Income Tax Act, 1961 through the Finance Act, 2023 bring significant changes to the inquiry before assessment, expenses, opportunity of being heard, time limits, and power to make rules. These amendments enhance the transparency and accuracy of inventory valuation, prevent tax evasion, and ensure fair assessment of taxes. The involvement of cost accountants in inventory valuation further strengthens the valuation process. These amendments will be effective from 1st April 2023 and apply to the assessment year 2023-2024 and subsequent years.
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