AS2 (Revised) & 145A

1. AS2 (Revised) & 145A Ashok Seth Ashok Seth

2. INTRODUCTION • Revised AS2 Comes into effect for financial years starting from or after 1.4.99 • It has been made mandatory Ashok Seth

3. NOT APPLICABLE ON • work in progress under construction contracts including directly related service contracts • On WIP of business of service providers • Shares, debentures and other financial instruments held as stock in trade Contd. Ashok Seth

4. NOT APPLICABLE ON (CONTD) • Producer’s inventories of livestock, agricultural and forest products and mineral oil, ores and gases to the extent they are measured at net realizable value in accordance with well established practices in those industries. Ashok Seth

5. INVENTORIES DO NOT INCLUDE • Machinery spares, which can be used only in connection with an item of, fixed assets and whose use is expected to be irregular. Such machinery spares are accounted for in accordance with AS-10, Accounting for Fixed Assets. Ashok Seth

6. COST OF INVENTORIES • The cost of inventories should comprise all costs of purchases, cost of conversion and other costs incurred in bringing the inventories to their present location and conditions. Ashok Seth

7. COST OF PURCHASES • The cost of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities) emphasis supplied Ashok Seth

8. ISSUES • This aspect goes against the provisions of section 145A of the Income Tax Act. • Not following AS2 may make the accounts not true and fair depending upon facts of the case. Ashok Seth

9. COST OF CONVERSION • The allocation of fixed production overheads for the purpose of inclusion in the cost of conversion should be based on the normal capacity of the production facilities. • The actual production to be used if actual production approximates normal production or is more than that. Ashok Seth

10. EXCLUSION FROM COST • Abnormal amount of wasted material, labor or production cost • Storage cost unless necessary for production process • Administrative overheads • Selling & Distribution Cost Ashok Seth

11. For determining historical cost Allows “average cost formula” (i.e. simple average, periodic simple average, weighted average, moving average etc.) Allows only “weighted average cost formula.” MAJOR DIFFERENCES ORIGINAL REVISED AS2 Ashok Seth

12. Permits LIFO formula for determining historical cost Permits use of other methods also e.g. FIFO, average cost etc even if specific identification of costs is possible and appropriate Does not permit LIFO Provides that where specific identification of costs is possible and appropriate this basis should be followed and no other. DIFFIRENCES (CONTD.)ORIGINAL REVISED AS2 Ashok Seth

13. Provides that historical cost of manufactured inventories may be arrived at on the basis of either direct costing or absorption costing. Does not permit the use of direct costing method. DIFFIRENCES (CONTD.)ORIGINAL REVISED AS2 Ashok Seth

14. Inventories to be valued at the lower of cost and net realizable value. Detailed discussion provided on determination of net realizable value. DIFFIRENCES (CONTD.)ORIGINAL REVISED AS2 Ashok Seth

15. Permits use of LIFO as an “allowed alternative treatment” provided certain disclosers are made as laid down in para 36 of IAS 2 No allowed MAJOR DIFFERENCESIAS 2 REVISED AS2 Ashok Seth

16. Disclosure requirements are more detailed Also deals with cost of inventories of a service provider Excludes DIFFIRENCES (CONTD.)IAS 2 REVISED AS2 Ashok Seth

17. Deals with aspect of the subsequent recognition of the carrying amount of inventories as an expenses Does not deal with this aspect. DIFFIRENCES (CONTD.)IAS 2 REVISED AS2 Ashok Seth

18. COMMERCIAL BREAK Ashok Seth

19. PROVISIONS OF SECTION 145A OF INCOME TAX ACT Ashok Seth

20. HISTORICL BACKGROUND & COURT DECIESONS • Lakhanpal National Ltd. V Income Tax Officer 162 ITR 240 (Gujarat) • Durametallic (India) Ltd. v I.A.C. 38 ITD 211 (Mad) • I.T.O. v Food Specialties Ltd. 206 ITR 119 (AT) Special Bench Ashok Seth

21. 145A. Notwithstanding any thing to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be -a)in accordance with the method of accounting regularly employed by the assessee; and b)further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.Explanation. – For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any rights arising as a consequence to such payment. Ashok Seth

22. ISSUES • WHETHER OPENING STOCK CAN ALSO BE CHANGED • Chainrup Sampatram v CIT 24 ITR 481 (S.C.) • K.G.Khosla & Co Pvt Ltd. v C.I.T. 99 ITR 574 (Delhi) • Melmould Corporation v The Commissioner of Income Tax 202 ITR 789 Ashok Seth

23. ISSUES (contd.) • Whether this will amount to change in method of accounting followed. • If provisions of section 145A are incorporated in books also what will be scenario for violation of AS 2 Revised. • If CS is valued on realizable value being lower than cost then how compliance of 145A will be done. Ashok Seth