CA H. N. Motiwalla

1. Valuation of Inventory

   The Finance Bill, 2023

   The Assessees are required to maintain books of account for the purposes of the Income tax Act, 1961. 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.

   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:-

   1. 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.

   2. 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.

   3. 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.

   4. The “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 (23 of 1959) and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act.

   1. Further, the following consequential amendments are proposed:-

      1. 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.

      2. 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.

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. 

Inventory

There is no proposal to define “inventory”. For this purpose ICDS II defines inventory excluding certain inventories viz 

1. Work-in-progress arising under ‘construction contract’ including directly related service contract which is dealt with by the Income Computation and Disclosure Standard on construction contracts;

2. Work-in-progress which is dealt with by other Income Computation and Disclosure Standard;

3. Shares, debentures and other financial instruments held as stock-in-trade which are dealt with by the Income Computation and Disclosure Standard on securities;

4. Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realisable value;

5. Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed assets.

    

As per ICDS II “Inventories” are assets:

1. held for sale in the ordinary course of business;

2. in the process of production for such sale;

3. n the form of materials or supplies to be consumed in the production process or in the rendering of services.

 Two Kinds of assessee:

As mentioned above section 148 of the Companies Act, 2013 mandates maintenance of cost records. Thus 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.

So, there would be two kinds of assessee”

(a) Companies where section 148 of the Companies Act 2013 is applicable and maintenance of cost records as 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. This amendment is applicable for the assessment year 2023-24 therefore 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 value. 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.

Sum-up

While audit of accounts during an ongoing assessment may not pose much practical difficulties, but valuation of inventory, which is generally an ever-changing item of asset, may pose a lot of practical difficulties especially if the said inventory does not, wholly or partially, exist on the date such an exercise is undertaken or has undergone a change in form, etc. Valuation of inventory of unique items or items involving secret formula, etc. may pose issues of breach of secrecy or IPR, etc.

If inventories of tangible and intangible are valued as per proposed section 142(2A) of the Act,

then there would be very little scope to the Assessing Officer to refer the matter to value the assets by Valuation Officer under section 142A of the Act. 

B. Promoting Timely Payments to MSMEs

Preamble

The objective of promoting timely payments to Micro and Small Enterprises, Finance Minister

Nirmala Sitharaman in her Budget speech has proposed to insert a new clause (h) in section 43B to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of Micro, Small and Medium Enterprises Development Act, 2006, be allowed as deduction under section 43B on payment basis.

As you are aware that MSMEs are the backbones of industrial development in any country. These MSMEs are the main source of generation of employment and act as key supporter to various types of big industrial houses and entities. MSMEs play a key role in economic development. 

Definition of Micro, Small and Medium Enterprises

As per MSMEs Act, the classification of enterprises and limit of investments are as under 

In the case of enterprises engaged in Manufacture or production of goods pertaining to any industry specified in the first schedule to IDRA 1951		In case of enterprise engaged in pertaining or rendering services
	Investment in Plant & Machinery (INR)	Investment in Plant & Machinery (INR)
Micro Enterprises	Not exceeding twenty five lakh	Not exceeding ten lakh
Small Enterprises	More than twenty five lakh but not exceeding five crore	More than ten lakh but not exceeding two crore
Medium Enterprise	More than five crore but does not exceed ten crore	More than two crore but not exceeding five crore

Further it is clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded. 

Section 15 of MSMEs

Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED) provide for liability of the buyer to make payment of MSME supplier, as is agreed in writing, before the appointed day. The credit period shall in no event (irrespective of the written agreement or otherwise) exceed 45 days from the day of acceptance or the day of deemed acceptance. 

Amendment to section 43B of the Act

In order to enforce timely payment to MSME supplier, it is proposed to amend section 43B of the At and insert clause (h) to provide for deduction of payment to MSME beyond the time specified under section 15 of MSMED Act in the year of actual payment.