Dealers of metals/stones need to streamline their inventory valuation and records, as it may lead to implications under undisclosed income scheme.

[Vivek Jalan]

The Budget 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 assessee’s 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.

For dealers in precious stones/metals this has further implications as revenue may seek to invoke the provisions of section 115BBE which is applicable on the income taxable under section 68, 69, 69A, 69B, 69C or 69D of the Act. However, it is to be noted in this regard that the income declared by a precious metals/stones dealer for unrecorded stock of valuables found during the course of search shall be treated as a part of the business affair of the assessee. Hence, since income declared is in the nature of business income, the same cannot be taxed under any of the Scheme of Taxation of Undisclosed Income and accordingly section 115BBE has no application.

In the case of RAGAVS DIAGNOSTIC & RESEARCH CENTRE PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2 (4) , BANGALORE - 2022 (9) TMI 584 - ITAT BANGALORE, the assessee was in the business of running a diagnostic centre and the only source of income was the receipts from patients which was stated to be the source for unexplained expenditure. The case was that the AO had not brought any contrary material on record to state that the source for the expenditure was other than from business income and had formed the opinion based on conjectures and surmises.  The Court held that while exercising the quasi-judicial functions, the administrative authorities had to reach satisfaction on the basis of material available and not on conjectures and surmises. The test of reasonableness had to be satisfied.

In the same vein, where the assessee had confirmed the identity of investment in the difference of stock which was generated from business income; during the assessment and in appeal, both the revenue authorities had not been able to bring any such contrary findings against the assessee that the source of investment on undisclosed stock which was not from business income; just because the assessee was a dealer of precious stone/metal Section 69B and consequently Section 115BBE cannot be invoked.

However, 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. Dealers in precious stones/metals thus need to streamline their inventory valuation and records.