Budget 2023 proposes valuation of inventory by a cost accountant

Preventing permanent deferral of taxes through undervaluation of inventory  – Budget 2023

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.

[clauses 68, 72 & 122]

Extract of relevant clause of Finance Bill 2023

Clause 68 of the Bill 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.

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.

Clause 72 of the Bill seeks to amend the section 153 of the Income-tax Act relating to time limit for completion of assessment, reassessment and recomputation.

It is proposed to amend the third proviso to sub-section (1) to provide that the period of nine months specified therein to pass an order of assessment shall be applicable only to the assessment year commencing on 1st April, 2021.

It is further proposed to insert a new proviso, so that an order of assessment relating to the assessment year commencing on or after 1st April, 2022 shall be passed within twelve months from the end of the assessment year in which the income was first assessable.

It is also proposed to increase the said time limit to pass an order of assessment from nine months to twelve months from the end of the financial year in which return under sub­section (8A) of section 139 was furnished.

It is also proposed to amend sub-section (3) of the said section to provide that the provisions of the said sub-section shall also be applicable to order under section 263 or section 264, passed by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be.

It is also proposed to insert a new sub-section (3A) in the said section to provide that notwithstanding anything contained in sub-sections (1), (1A), (2) and (3) of the said section, where an assessment or reassessment is pending on the date of initiation of search under section 132 or making of requisition under section 132A, the period available for completion of assessment or reassessment, as the case may be, under the said sub-sections (1), (1A), (2) and (3) of the said section shall be extended by twelve months in a case where such search is initiated under section 132 or such requisition is made under section 132A or in the case of an assessee to whom any money, bullion, jewellery or other valuable article or thing seized or requisitioned belongs to or in the case of an assessee to whom any books of account or documents seized or requisitioned pertains or pertain to, or any information contained therein, relates to.

It is also proposed to amend sub-section (4) of the said section to provide that the provisions thereof shall also be applicable to cases covered by sub-sections (1A) and (3A) of section 153 of the Act.

It is also proposed to amend sub-section (5) of the said section to provide that the provision of the said sub-section shall also be applicable to an order under section 263 or section 264 passed by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be.

It is also proposed to amend sub-section (6) of the said section to provide that nothing contained in sub-section (1A) shall also apply to the classes of assessments, reassessments and recomputation mentioned therein.

Clause (i) of the sub-section (6) of the said section provides that where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 250, section 254, section 260, section 262, section 263, or section 264 or in an order of any court in a proceeding otherwise than by way of appeal or reference under this Act, such assessment, reassessment or recomputation shall be completed on or before the expiry of twelve months from the end of the month in which such order is received or passed by the Principal Commissioner or Commissioner, as the case may be.

It is also proposed to amend the said sub-section to provide that provisions of the said sub-section shall also be applicable to an order under section 263 passed by the Principal Chief Commissioner or Chief Commissioner.

It is also proposed to amend the first proviso to Explanation 1 of the said section so as to also make it available to the period of limitation mentioned in sub-section (1A) of the said section.

These amendments will take effect from 1st April, 2023.

It is also proposed to amend clause (iv) of Explanation 1 to the said section, so as to exclude the period for inventory valuation through the cost accountant for the purposes of computation of time limit.

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

Clause 122 of the Bill seeks to amend section 295 of the Income-tax Act relating to power to make rules.

It is proposed to amend clause (eec) of sub-section (2) of the said section so as to include the words “or inventory valuation” after the word “audit”.

It is further proposed to consequentially amend the clause (mm) of sub-section (2) of said section to substitute the expression “the Commissioner (Appeals)” with “the Joint Commissioner (Appeals) or the Commissioner (Appeals)”.

This amendment will take effect from 1st April, 2023.

Extract of Relevant Amendment Proposed by Finance Bill, 2023

68. Amendment of section 142.

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.”;

(b) in sub-section (2D),–

(i) for the words, brackets, figure and letter “audit under sub-section (2A) (including the remuneration of the accountant)”, the words, brackets, figure and letter “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 substituted;

(ii) in the proviso,–

(I) for the words “audit under”, the words “audit or inventory valuation under” shall be substituted;

(II) for the words and brackets “such audit (including remuneration of the accountant)”, the words and brackets “such audit or inventory valuation (including the remuneration of the accountant or the cost accountant, as the case may be)” shall be substituted;

(c) in sub-section (3), after the word “audit”, the words “or inventory valuation” shall be inserted;

(d) after sub-section (4), the following Explanation shall be inserted, namely:–

‘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.

72. Amendment of section 153.

In section 153 of the Income-tax Act,–

(I) in sub-section (1),–

(a) in the third proviso, the words “or after” shall be omitted;

(b) after the third proviso, the following proviso shall be inserted, namely:–

“Provided also that in respect of an order of assessment relating to the assessment year commencing on or after the 1st day of April, 2022, the provisions of this sub-section shall have effect, as if for the words “twenty-one months”, the words “twelve months” had been substituted.”;

(II) in sub-section (1A), for the words “nine months”, the words “twelve months” shall be substituted;

(III) in sub-section (3),–

(a) for the words, brackets and figures “sub-sections (1) and (2)”, the words, brackets, figures and letter “sub­sections (1), (1A) and (2)” shall be substituted;

(b) for the words “Principal Commissioner or Commissioner” at both the places where they occur, the words “Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be,” shall be substituted;

(IV) after sub-section (3), the following sub-section shall be inserted, namely:–

“(3A) Notwithstanding anything contained in sub­sections (1), (1A), (2) and (3), where an assessment or reassessment is pending on the date of initiation of search under section 132 or making of requisition under section 132A, the period available for completion of assessment or reassessment, as the case may be, under the said sub-sections shall,–

(a) in a case where such search is initiated under section 132 or such requisition is made under section 132A;

(b) in the case of an assessee, to whom any money, bullion, jewellery or other valuable article or thing seized or requisitioned belongs to;

(c) in the case of an assessee, to whom any books of account or documents seized or requisitioned pertains or pertain to, or any information contained therein, relates to,

be extended by twelve months.”;

(V) in sub-section (4), for the words, brackets and figures “sub-sections (1), (2) and (3)” at both the places where they occur, the words, brackets, figures and letters “sub-sections (1), (1A), (2), (3) and (3A)” shall be substituted;

(VI) in sub-section (5), for the words “the Principal Commissioner or Commissioner”, the words “the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be,” shall be substituted;

(VII) in sub-section (6),–

(a) in the opening portion, for the words, brackets and figures “sub-sections (1) and (2)”, the words, brackets, figures and letter “sub-sections (1), (1A) and (2)” shall be substituted;

(b) in clause (i), after the words “passed by the”, the words “Principal Chief Commissioner or Chief Commissioner or” shall be inserted;

(VIII) in Explanation 1,–

(a) in clause (iv),–

(i) in the opening portion, after the word “audited”, the words “or inventory valued” shall be inserted;

(ii) in sub-clause (a), after the words “such audit”, the words “or inventory valuation” shall be inserted;

(b) in the first proviso, for the words, brackets and figures “sub-sections (1), (2)”, the words, brackets, figures and letter “sub-sections (1), (1A), (2)” shall be substituted.

122. Amendment of section 295.

In section 295 of the Income-tax Act, in sub-section (2),–

(i) in clause (eec), after the word “audit”, the words “or inventory valuation” shall be inserted;

(ii) in clause (mm), for the words and brackets “the Commissioner (Appeals)”, the words and brackets “the Joint Commissioner (Appeals) or the Commissioner (Appeals)” shall be substituted.

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Source : Finance Bill 2023 / Union Budget 2023