INVENTORY VALUATION UNDER SECTION 142(2A) OF INCOME TAX ACT, 1961 BY COST ACCOUNTANTS

[Mr. M. GOVINDARAJAN]

Inquiry before assessment

Section 142 of the Income Tax Act, 1961 (‘Act’ for short) provides the procedure for conducting inquiry before assessment by the Assessing Officer.  Section 142(1) gives powers to the Assessing Officer to issue a notice on any person who-

• has made a return under section 115WD or section 139; or
• in whose case the time allowed under sub-section (1) of section 139 for furnishing the return has expired.

In the said notice the Assessing Officer may-

• to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require, or
• to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the Assessing Officer may require.

Section 142(2) provides that  for the purpose of obtaining full information in respect of the income or loss of any person, the Assessing Officers may make such inquiry as he considers necessary.

Auditing of accounts

Section 142(2A) of the Act provides for the auditing of accounts of the assessee as directed by the Assessing Officer.  Section 71 of the Finance Act, 2023 amended Section 142(2A) of the Act by substituting a new provision for the existing one.

The newly inserted Section 142(2A) of the Act 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 specialized 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,-

• to get the accounts audited by a Chartered 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 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;
• 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.

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.

The report by a Chartered Accountant/Cost Accountant as required under Section 142(2A) to the Assessee,  who in turn will submit the same to the Assessing Officer within such period as may be specified by the Assessing] Officer.  The said period may be got extended on an application by the assessee or by the Assessing Officer, suo motu, by such further period or periods as he thinks fit.  However the said period shall not be extended beyond 180 days. 

This is the new area for Cost Accountants under Income Tax Act, 1961.

Expenses

The expenses of, and incidental to, such audit or inventory valuation (including the remuneration of the accountant or the cost accountant, as the case may be) 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.

Form 6C

For the purposes of amended Section 142(2A) of the Act the it is  proposed to amend Rule 14A and Rule 14B to make the above provisions operational.  In addition a new Form 6C is to be introduced for the purpose of inventory valuation to be carried out by a Cost Accountant.  The said draft Form 6C has been published on 16.08.2023 inviting the comments of the Stakeholders and general public on the said Form 6C on or before 31.08.2023.  On getting the comments from the stakeholders and the general public the Form 6C will be finalized for the purpose of inventory valuation.

The said Form has annexure as detailed below-

• Inventory valuation Report of Cost Accountant;
• Details of financial results;
• Details of raw materials for the year under reporting;
• Quantitative details in respect of items manufactured/traded by the assessee;
• Quantitative assessments;
• Details of inventory valuation for the year under reporting by the Cost Accountant (wherever ICDS II is applicable)-

• Valuation of Finished goods/stock-in-trade;
• Valuation of work in progress;
• Valuation of raw materials;
• Valuation of by products;
• Valuation of intermediate products;
• Valuation of other stores;
• Summary inventory valuation for the reporting year;

• Details of inventory valuation for the year under reporting by the Cost Accountant (wherever ICDS II is not applicable)-

• Inventory valuation for Assessees engaged in the Construction Contracts which are dealt with by the Income Computation and Disclosure Standard III

• Valuation of Completed Units Ready for Sale
• Valuation of Construction Work-in-progress
• Valuation of Construction Materials;
• Valuation of Construction Fittings;
• Summary of Inventory Valuation for the Reporting Year for Construction Contracts;

• Inventory valuation for Assessees engaged in the trading of Securities which are dealt with by the Income Computation and Disclosure Standard VIII-

• Valuation of Shares held as Stock-in-trade;
• Valuation of Debt Securities held as Stock-in-trade;
• Valuation of Convertible Securities held as Stock-in-trade;
• Valuation of Any other security held as Stock-in-trade;
• Summary of Inventory Valuation for the Reporting Year for Shares, Debentures and other Financial Instruments held as stock-in-trade;

• Inventory valuation of livestock, agriculture and forest products, mineral oils, ores and gases, except those held by the trader of such inventories-

• Valuation of Inventory of Livestock;
• Valuation of Inventory of Agriculture & Forest Produce;
• Valuation of Inventory of Mineral Oils, Ores and Gases;
• Summary of Comparison-

• Value as per Form 3CD;
• Value as per Cost Accountant;
• Variation, if any- reasons for variation.

Report

The Cost Accountant shall give a report on the inventory valuation undergone by him as detailed below-

• He has examined the inventory of the assessee.
• He has conducted Inventory Valuation in compliance with the requirements under the relevant provisions of Income-tax Act 1961 and Income–tax Rules 1962.
• He has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of the Inventory Valuation.
• In his opinion proper books of account with respect to inventory have been kept by the head office and the branches of the assessee visited by him so far as appears from his examination of books, and proper data adequate for the purposes of inventory valuation have been received from branches not visited by him subject to the comments given by him.
• In his opinion and to the best of his information and according to explanations given to him, the Inventory Valuation presented herein below in his report is appropriate.

Any variations observed in the presented Inventory Valuation Report compared to the disclosures made in Form 3CD (or if no Form 3CD has been filed, then as per audited accounts) have been adequately explained along with the reasons and justifications thereof.