Inventory Valuation by Cost Accountants under Income Tax proposed for specific cases

NAVNEET KUMAR JAIN 01 Feb 2023 8,121 Views 1 comment Print Income Tax | Articles

Budget day is a day of expectations for all persons may it be professionals / companies / Individuals / other persons. Everybody gets hooked to the TV/other social media platforms to get a firsthand information on the budget.

The finance minister presents the budget before the parliament and major changes/provisions are announced there. However, the fine print of the bill gives much more insights into the changed provisions which are required to be taken care of by the various stake holders.

In the budget for the year 2023-24, a remarkable departure has been made with regard to inventory valuations being used in the financials to assess the financial position of any organization at the end of any particular period.

The inventory valuation is the area where normally Assessing officers rarely delved into. The inventory valuations which finally increases/decrease profitability figures were required to be looked into for the purpose of correct assessment of the income of the assesses so that the actual due taxes could be collected.

To plug the loophole, for the first time in India, the concept of inventory valuation by Cost Accountants has been introduced though in specific cases, but yes, now assessing officers have been given the powers to get the inventory valuation done under Section 142(2A) of Income Tax Act and it will be in addition to any of the audit under section 142(2A) of Income Tax Act.

The proposed amendment in section 142(2A) of the Income Tax Act segregated the inventory valuation and audit into two parts. It means that only Inventory Valuation can be asked to be done by a Cost Accountant even when audit under section 142(2A) has not been asked for.

It needs mention that in the back up explanations to amendment of section 142(2A) of Income Tax Act a reference to the Section 148 of the Companies Act 2013 with regard to maintenance of cost records has also been made.

From the year 01/04/2023, the companies which are required to maintain cost records under section 148 of the Companies Act, 2013 should try to take the inventory valuation from the cost records maintained, if any, so that in case of any type of enquiry/audit under section 142(2A) of Income Tax Act, the chances of variations in the inventory valuations are minimized.

The Finance Bill 2023 seeks to amend section 142 of the Income-tax Act relating to inquiry before assessment. Sub-section (2A) of the said section provides that 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 in the interests of revenue, is of the opinion that it is necessary, he may with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get his accounts audited by an accountant, and to furnish report as per rules.

Inventory Valuation by Cost Accountants under Income Tax proposed for specific cases

It is proposed to amend the said sub-section (2A) so as to enable the Assessing Officer to get the inventory of the assessee also valued by a cost accountant.

It is also proposed to insert an Explanation in the said section 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 and who holds a valid certificate of practice under subsection (1) of section 6 of the said Act.

These amendments will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.

For the purpose of simplification and as a step towards way forward, we would like to segregate the persons in two categories

a) Companies where section 148 of the Companies Act 2013 is applicable and maintenance of cost records is required

b) Persons other than mentioned in (a) above

The companies which fall in (a) category above must prepare the cost records first, value the inventory as per cost records and consider the same in the financials being finalized for the year. Though the amendment is applicable for the year 2023-24 but as a pilot project the companies which are covered under section 148 of the Companies Act should get the costing prepared first before finalization of the financials for the year 2023 so as to identify the teething troubles.

The persons mentioned in (b) above may start the process of having an exhaustive costing system so that at the end of any year the cost data is available to be used for inventory valuation.

Once the specific process of inventory valuation through costing/cost records is adopted, the chances of variances in inventory valuation in case of any special assignment undertaken under section 142(2A) of Income Tax Act will be minimized.

The details of the proposed amendments are given below;

Clause & Section	Existing Provision	Proposed Amendment
68 142(2A) Of Income Tax Act	Inquiry before assessment. ……. (2A) 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.	68. In section 142 of the Income-tax Act,–– (a) for sub-section (2A), the following sub-section shall be substituted, namely:–– “(2A) 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.”;
	(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 XVII-D 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.	(b) in sub-section (2D),–– “audit or inventory valuation under sub-section (2A) (including the remuneration of the accountant or the cost accountant, as the case may be)” (ii) in the proviso,–– (I) “audit or inventory valuation under” (II) “such audit or inventory valuation (including the remuneration of the accountant or the cost accountant, as the case may be)”
	(3) 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.	“audit or inventory valuation”