Inventory Valuation by Cost Accountants in Income Tax Act: Budget 2023

In the latest budget for the 2023-24 fiscal year, an appropriate and needed change has been introduced regarding the use of inventory valuations in Tax assessments. Until now, inventory valuations have not been a major focus for assessing officers of Income Tax. However, it is crucial to accurately assess these valuations in order to determine an organization’s true financial position and collect the correct amount of taxes owed.

To address this issue, India has taken a major step forward by introducing the concept of inventory valuations by Cost Accountants in specific cases, as granted by Section 142(2A) of the Income Tax Act. This amendment allows assessing officers to require an inventory valuation in addition to any audit under the same section.

The Income Tax Assessing Officer, If, at any stage of the proceedings before him, 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.

(ii) to get the inventory valued by a Cost Accountant, 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.”;

This amendment to Section 142(2A) of the Income Tax Act divides inventory valuations and audits into two distinct parts, allowing for inventory valuations to be conducted by a Cost Accountant, even when an audit has not been requested.

In line with this amendment, reference has also been made to Section 148 of the Companies Act 2013, which mandates the maintenance of cost records. Beginning on April 1, 2023, companies required to maintain cost records under this section should consider obtaining their inventory valuations from these cost records to minimize any discrepancies in case of an inquiry or audit under Section 142(2A) of the Income Tax Act.

The Finance Bill 2023 aims to amend Section 142 of the Income Tax Act relating to inquiry before assessment. The proposed amendment to Sub-section (2A) will empower Assessing Officers to request a valuation of the assessee’s inventory by a cost accountant. An Explanation will be added to the section to define a “cost accountant” as someone who holds a valid certificate of practice under the Cost and Works Accountants Act, 1959.

These amendments will take effect from April 1, 2023, and will apply to the respective assessment year and all subsequent assessment years.

 For objectivity, entities can be separated into two categories:

1. Companies required to maintain cost records under Section 148 of the Companies Act 2013

2. Persons not mentioned in category 1

It is suggested that Companies in category 1 may first prepare their cost records, value their inventory based on these records, and consider this information in their final financials for the year. As a pilot project, these companies should get their costing done before finalizing their financials for 2023 to identify any issues.

Entities in category 2 may start the process of implementing a comprehensive costing system to ensure that cost data is available for inventory valuation at the end of each year.

By adopting a specific process for inventory valuation through costing or cost records, the potential for discrepancies in inventory valuations in case of a special assignment under Section 142(2A) of the Income Tax Act will be greatly reduced.

This change will provide both industry and government with a clearer picture of the true inventory position, leading to a more accurate assessment of financials and a fairer collection of taxes.