Vivek Jalan
The Finance Act 2023 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. 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 assesses inventory by a cost accountant. These amendments will take effect from April 1, 2023, and will apply to the respective assessment year and all subsequent assessment years. The critical provision to be taken note of is the amendment in Section 142(3) which states the "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." Hence, any other incriminating material which has been found during the inventory valuation may be used for the purposes of the assessment.
Now the CBDT has notified Form 6D For Furnishing 'Inventory Valuation Report' U/s 142(2A) of Income Tax Act. A new rule, Rule 14A has been inserted which deals with the Forms for a report of an audit or inventory valuation under section 142(2A). Amendment has also been made in other rules. As expected, the Form at various places has the requirement of the cost accountant to report "Any other relevant comment, observation or qualification of the Cost Accountant". This may be used by the cost accountant to bring out incriminating material which has been found during the inventory valuation may be used for the purposes of the assessment. Some of the other important aspects of the Form 6D are as follows -
A. Table 6 (ii) - Is there any inventory management system software in place? If so, details of the same.
Our Comments - It may be important that an inventory management software is put in place rather than maintaining inventory just in excel, which is seen in some taxpayers. Maintaining inventory in Excel may not instil the requisite confidence in the auditor.
B. Table 7 & 12 - Method of valuation of opening and closing stock of following inventory items used by the Assessee:
a) Finished Goods (manufactured)
b) Stock-in-trade
c) Work-in-progress (WIP)
d) Raw materials
e) By-products
f) Intermediate Products
g) Jigs, Tools, and Dies
h) Stores, Spares and Consumables
i) Scrap
j) Any other item
Our Comments - Many times standard costing is used for inventory valuation and the excesses are debited/ credited to "Normal Loss" Account. The valuation principle may be tested as per ICDS now.
C. Table 8 - The following is also required to be reported
- Average Inventory Holding Period (days)
- Average Raw Material Stock to Consumption (days)
- Average. Stores and Spares Stock to Consumption (days)
Our Comments - The above ratios are required to be computed for 3 years and therefore any deviation in any year needs explanation.
D. Table 9 - In respect of items manufactured/traded, full quantitative details of raw materials and finished products should be maintained and reported. Inventory of all such raw materials that constitute top 80% of the total inventory value of raw materials should be reported item-wise separately. Inventory of all other raw materials constituting balance may be clubbed under Others". Other adjustments include Shortage/ Wastages / Rejects, etc. may be done. Also, WIP also needs to be reported accordingly.
Table 13 - Other valuations covered -
- Inventory valuation for Assesses engaged in the Construction Contracts which are dealt with by the ICDS III.
- Inventory valuation for Assesses engaged in the trading of Securities which are dealt with by the ICDS VIII.
- Inventory valuation of livestock, agriculture and forest products, mineral oils, ores and gases, except those held by the trader of such inventories.
Our Comments - The reporting is very exhaustive. Further Shortage/ Wastages / Rejects, etc. are also reported, hence the proportion needs to be explained if there is any deviation to industry.
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