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Budget 2023 contains some surprises for various assesses and one such surprise is introduction of Inventory Valuation by Cost Accountants under Section 142(2A) of the Income Tax Act.

The budget has not recognized the importance of inventory valuation by the Income Tax authorities but recognition to cost accountants for inventory valuation has been given.

The focus has been shifted to use of costing of the products to be used for the purpose of inventory valuation while applying Cost or Net Realisable Value whichever is less.

Undervaluation of inventories may result in under payment of due Income Tax. Realising the need for proper inventory valuation, the assessing officer and time during assessment proceedings call for inventory valuation with prior approval of senior officials. However, before proceeding further for inventory valuation, opportunity of being heard should be given by the assessing officer to the assesses.

The assesses sometimes resort to permanent deferral of taxes through undervaluation of inventory and the amendment in Section 142(2A) of Income Tax Act has been proposed to overcome this perennial issue. 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.

Inventory Valuation and Budget 2023-24

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.

The assesses should try to implement a robust system of inventory valuation so that in case of specific order by the income tax authorities for inventory valuation by cast accountant under section 142(2A), variance could be minimized. For an effective inventory valuation certainly an effective costing system should be in place.

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