DCIT-1(3)(1), MUMBAI, MUMBAI vs. FARMERSFORTUNE (INDIA) PRIVATE LIMITED, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘F’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI ARUN KHODPIA, ACCOUNTANT MEMBER ITA No.943/Mum/2025 (Assessment Year :2018-19) DCIT-1(3)(1), Mumbai Vs. Farmersfortune (India) Private Limited 601-604, A-Wing Bonanza Building Sahar Plaza, J.B. Nagar Andheri (E) Mumbai – 400 059 PAN/GIR No.AABCF9257C (Appellant) .. (Respondent) Assessee by Shri Yogesh Parwal, CA (virtual appearance) Revenue by Shri Nishant Samaiya, CIT DR (virtual appearance) Date of Hearing 05/08/2026 Date of 17/08/2026 Pronouncement आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been preferred by the Revenue against the order dated 09.12.2024 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [“Ld. CIT(A)”], for the Assessment

2 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. Year 2018-19, arising out of the assessment order dated 15.04.2021 passed under section 143(3) read with section 144B of the Income-tax Act, 1961 (“the Act”). Though several additions were made in the assessment proceedings, the solitary controversy arising in the present appeal is with regard to the deletion by the Ld. CIT(A) of an addition of ₹57,96,52,000/- made by the Assessing Officer on account of “changes in inventories of stock-in-trade”. The Revenue has assailed the deletion principally on the ground that the assessee had failed to substantiate the method and working of inventory valuation despite repeated opportunities and, therefore, the Assessing Officer was justified in rejecting the books of account under section 145(3) and making the impugned addition.

3 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. house property vis-à-vis the receipts reflected in Form 26AS. In the assessment ultimately completed, the Assessing Officer made three principal additions, namely, ₹57,96,52,000/- on account of changes in inventories of stock-in-trade, ₹9,28,38,916/- on account of interest/commission/rental receipts and ₹4,00,00,000/- under section 68 in respect of an unsecured loan. In first appeal, the Ld. CIT(A) deleted the first addition of ₹57,96,52,000/- but sustained the other two additions. Thus, insofar as the present Revenue’s appeal is concerned, our adjudication is confined to the addition relating to changes in inventories.

4 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. opening inventory of ₹14,820.52 lakh and reducing therefrom the closing inventory of ₹9,024.00 lakh. The accounting position emerging from the audited accounts can, therefore, be presented succinctly as under:

Particulars ₹ in lakh Opening inventory 14,820.52 Less: Closing inventory 9,024.00 Changes in inventories of 5,796.52 stock-in-trade Purchases of stock-in-trade 36,216.64 Revenue from operations 44,750.68

3.1. The composition of the opening and closing inventories was also separately disclosed in Note 30. The opening inventory of ₹14,820.52 lakh comprised commodities carried at fair value of ₹646.47 lakh and commodities valued at lower of cost and net realisable value of ₹14,174.05 lakh. Correspondingly, the closing inventory of ₹9,024 lakh comprised commodities at fair value of ₹1,299.23 lakh and the remaining inventories reflected at lower of cost and net realisable value. Thus, on the face of the financial statements, the figure of ₹57.96 crore appearing under the caption “changes in inventories of stock-in-trade” represented the arithmetical difference between the opening and closing inventory disclosed in the accounts.

5 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. return under the head “any other amount allowable as deduction”. During the course of scrutiny, the assessee furnished a bifurcation which, inter alia, referred to an “inventory valuation difference ICDS” of ₹45,26,940/- and an “Ind AS inventory valuation difference” of ₹1,36,78,911/-. The Assessing Officer thereafter examined Clause 13 of Form No.3CD and noticed that the assessee had disclosed mercantile system as the method of accounting, had reported that there was no change in the method of accounting vis- à-vis the immediately preceding year and, significantly, had answered in the negative the query under Clause 13(d) as to whether any adjustment was required to the profit or loss for compliance with the Income Computation and Disclosure Standards notified under section 145(2). No corresponding disclosure was made under Clauses 13(e) and 13(f). Proceeding further to examine the audited financial statements, the Assessing Officer noticed the debit of ₹5,796.52 lakh under “changes in inventories of stock-in-trade” and perceived an inconsistency between this figure, the disclosures made in Form No.3CD and the position taken by the assessee regarding ICDS.

6 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. category, fair-value treatment was given in accordance with Ind AS 2. The assessee separately explained that, for income-tax purposes, inventory valuation was undertaken by adopting FIFO and referred to a difference of approximately ₹45.27 lakh arising in the context of ICDS valuation. It also explained the fair-value adjustments arising on transition/application of Ind AS and their impact upon the Statement of Profit and Loss. The Assessing Officer, however, was not satisfied with the explanation and specifically required the assessee to substantiate it by furnishing quantitative particulars, rate-wise valuation and supporting evidence. According to the assessment order, no further reply was furnished to the notices dated 18.03.2021, 23.03.2021 and 31.03.2021.

7 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. results and, thereafter, proceeded to hold that the expenditure of ₹5,796.52 lakh shown under “changes in inventories of stock-in- trade” was not justified and added the entire amount of ₹57,96,52,000/- to the income of the assessee.

8 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. observed that the controversy had substantially arisen because the Assessing Officer had understood the expression “changes in inventories” as representing a valuation difference attributable to a change in the method of valuation. According to the Ld. CIT(A), there had been no change in the method of valuation as assumed by the Assessing Officer and the impugned figure represented the normal accounting presentation of movement in inventory during the relevant financial year. He further observed that no specific defect had been identified by the Assessing Officer in the accounting of inventory and no material had been brought on record demonstrating that the closing inventory had actually been undervalued with a view to suppressing the taxable profit. On this reasoning, coupled with the treatment followed in the earlier years, the Ld. CIT(A) held that rejection of the books under section 145(3) on this count was not justified and consequently deleted the addition of ₹57,96,52,000/-. It is against this deletion that the Revenue is in appeal before us.

9 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. inconsistency between the assessee’s stand during assessment proceedings and the disclosures made by the tax auditor in Clause 13 of Form No.3CD. Despite repeated notices, the assessee did not furnish the complete quantitative details, commodity-wise rates, valuation workings or supporting material called for by the Assessing Officer and, therefore, the satisfaction recorded under section 145(3) could not have been brushed aside merely by observing that the Assessing Officer had misread the financial statements. The Ld. DR further submitted that the orders passed under section 148A(d) for the preceding assessment years could neither validate an otherwise incorrect method of valuation nor operate as an estoppel against examination of the accounts for the year under consideration. Reliance in this regard was placed upon the judgment of the Hon’ble Supreme Court in CIT v. British Paints India Ltd. [(1991) 188 ITR 44 (SC)] for the proposition that it is not merely the right but the duty of the Assessing Officer to examine whether the accounts disclose the true state of affairs and whether the correct taxable profit can be deduced therefrom. Accordingly, the Ld. DR submitted that the order of the Ld. CIT(A) on this issue should be reversed and that of the Assessing Officer restored. The aforesaid contentions substantially correspond with the written submissions placed by the Revenue before us.

10 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. neither an ICDS adjustment nor an Ind AS adjustment claimed independently as an expenditure. It represented nothing more than the difference between the opening inventory of ₹148.2052 crore and closing inventory of ₹90.24 crore and, in accordance with the prescribed presentation of the financial statements, the difference of ₹57.9652 crore appeared under the caption “changes in inventories of stock-in-trade”. The learned counsel emphasised that the separate adjustments arising in the computation on account of Ind AS and ICDS were of altogether different magnitudes and had themselves been separately explained to the Assessing Officer in the reply dated 15.03.2021. Thus, according to him, the Assessing Officer first commenced an enquiry into the relatively small adjustments claimed in Schedule BP but thereafter travelled to the financial statements, picked up the figure of ₹57.96 crore appearing as the movement between opening and closing inventory and treated that entire figure as an unsubstantiated revaluation expenditure. He submitted that this fundamental conflation vitiated the very basis of the addition. It was further submitted that there was no change in the regularly followed method of accounting, the financial statements were duly audited, the accounting policy concerning inventories stood disclosed therein and, more importantly, the Assessing Officer had not identified a single commodity or item of inventory which had actually been undervalued nor determined what, according to him, ought to have been the correct closing stock. The learned counsel, therefore, submitted that the Ld. CIT(A) had rightly deleted the addition.

11 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. 11. We have heard the rival submissions and have carefully perused the material placed on record. Before examining the accounting figures and the precise nature of the impugned addition, it would be useful to delineate the statutory framework because, in our view, three distinct concepts have become intertwined in the assessment order, namely, the accounting treatment of inventory in the financial statements, the adjustments arising on account of Ind AS, and the computation of taxable income in accordance with ICDS. Section 145(1), insofar as relevant, mandates that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) empowers the Central Government to notify Income Computation and Disclosure Standards to be followed by the prescribed class of assessees or in respect of the prescribed class of income. Section 145(3), in turn, enables the Assessing Officer to make an assessment in the manner provided in section 144 where he is not satisfied about the correctness or completeness of the accounts, where the method of accounting prescribed under sub-section (1) has not been regularly followed, or where income has not been computed in accordance with the standards notified under sub-section (2). Thus, the power under section 145(3) is undoubtedly available where any of these statutory conditions is established; however, the existence of such power and the determination of the income consequent upon its exercise are two connected but nevertheless distinct stages of the assessment exercise. The statutory formulation of section 145(3)

12 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. itself requires that, after rejection on the prescribed grounds, the assessment is to be made in the manner provided in section 144.

13 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. 13. This distinction assumes considerable significance in the present case because the assessment record itself contains three materially different figures which cannot be treated as interchangeable. For clarity, they may be juxtaposed as under:

13.1. The first figure emanates directly from Note 30 to the audited financial statements: opening inventory of ₹14,820.52 lakh less closing inventory of ₹9,024 lakh resulting in ₹5,796.52 lakh. The latter two figures, on the other hand, find reference in the Assessing Officer’s discussion concerning the claim under “any other amount allowable as deduction” in Schedule BP and the assessee’s explanation concerning Ind AS/ICDS adjustments. The assessee’s reply dated 15.03.2021 also dealt separately with the fair-value impact under Ind AS and the inventory valuation difference arising for tax purposes under ICDS/FIFO. Therefore, before determining whether any deduction was inadmissible, it was necessary to identify precisely which of these figures represented the alleged distortion of taxable income and why.

14 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. 14. At the same time, we are unable to accept the proposition, if so canvassed on behalf of the assessee, that merely because ₹57.96 crore represents the difference between opening and closing inventory, the Assessing Officer was precluded from examining the correctness of the underlying inventory valuation. The Assessing Officer was certainly entitled to enquire into the quantities comprising the inventory, the rates at which the respective commodities were valued, the cost formula adopted and the reconciliation between the accounting treatment in the financial statements and the computation made for income-tax purposes. Indeed, the assessment record shows that such particulars were specifically sought through notices dated 18.03.2021 and 23.03.2021 and that the Assessing Officer recorded that the assessee did not furnish any further reply after 15.03.2021. The absence of a qualification in the statutory audit report also cannot, by itself, denude the Assessing Officer of his statutory jurisdiction to test whether taxable profits have been correctly computed. To that limited extent, the Revenue’s reliance upon the principle enunciated in British Paints India Ltd. (supra), namely, that the Assessing Officer is entitled and indeed obliged to examine whether the method employed enables the true taxable profits to be deduced, is unexceptionable. Likewise, acceptance of an accounting treatment in another assessment year cannot create an immutable rule disabling scrutiny in the year before us.

15 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. undoubtedly did. Nor is the question whether the assessee could be required to furnish quantitative details and supporting material it certainly could. The issue which requires adjudication is altogether more specific: whether the alleged inadequacy of the evidence furnished in support of the inventory valuation, coupled with the invocation of section 145(3), could justify treating the entire amount of ₹57.96 crore, representing the difference between opening and closing inventory in the audited financial statements, as an independent inadmissible expenditure and adding the whole of that amount to the taxable income. It is this aspect which, in our opinion, requires the accounting entries, the assessee’s explanation and the precise consequence of rejection of the books to be examined in their proper sequence.

16 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. lakh. Thus, the latter figure represents the accounting consequence of the opening inventory available for sale and the inventory remaining unsold at the end of the year. It cannot, merely because it appears on the expenditure side of the Statement of Profit and Loss, be regarded as an independent expenditure of ₹57.96 crore incurred or claimed by the assessee. This distinction, in our opinion, lies at the heart of the matter.

17 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. these distinct figures without first establishing that the ₹57.96 crore itself represented an impermissible valuation adjustment.

18 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. supporting evidence and that, according to the assessment order, there was no compliance with the notices issued after 15.03.2021. We have already observed that the Assessing Officer was well within his jurisdiction in requiring such particulars. The requirements governing valuation of inventory contemplate disclosure of the accounting policies adopted for measuring inventories, including the cost formula used, besides the carrying amount of inventories. Therefore, if the assessee failed to furnish the requisite primary material, the Assessing Officer could certainly draw such inference as was warranted by the facts and, upon satisfying the statutory conditions, could invoke section 145(3). But the crucial distinction is that the inadequacy of substantiation of a valuation and the quantification of the resulting addition are not one and the same thing. The former may furnish a ground for further enquiry or even rejection of book results; the latter must still bear a rational nexus with the defect found.

19 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. ₹90.24 crore disclosed by the assessee, ought to have been; no particular rate adopted by the assessee has been substituted by any rate found to be correct by the Assessing Officer; and, most importantly, there is no exercise quantifying the amount by which the profit of the year stood understated on account of an identified defect in inventory valuation. The assessment order thus travels directly from a perceived deficiency in supporting evidence to disallowance of the entire inventory movement. The necessary intermediate finding, namely, what was wrong in the valuation and what monetary distortion it produced in the taxable profit, is conspicuously absent.

20 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. proved. Once the character of the figure is correctly understood, the fallacy becomes evident. What required verification was the valuation embedded in the opening and closing inventory, and not the deductibility, as an independent expenditure, of their arithmetical difference.

21 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. 23. We also do not consider it necessary to rest our conclusion upon the orders passed under section 148A(d) for Assessment Years 2016-17 and 2017-18. The material on record does show that the assessee had reflected “changes in inventories of stock-in- trade” of ₹69,77,70,898/- in Assessment Year 2016-17 and ₹96,79,17,418/- in Assessment Year 2017-18 and that similar figures appeared in the financial statements of those years. These facts have corroborative relevance in showing that the caption “changes in inventories” formed part of the recurring presentation of the trading results and was not an expression peculiar to the year under consideration. However, acceptance of a treatment in an earlier year cannot foreclose a lawful examination of the accounts for a subsequent year. We, therefore, do not uphold the deletion on any principle of estoppel or merely because proceedings under section 148A for earlier years culminated in favour of the assessee. Our conclusion rests upon the accounts and the manner in which the impugned addition itself has been computed in the year before us.

22 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd. assessee’s failure to furnish complete quantitative and rate-wise supporting material is taken at its highest, it cannot bridge the fundamental gap in the computation made by the Assessing Officer. A deficiency in substantiating inventory valuation may justify its verification and, where the statutory conditions are satisfied, rejection of the book results; but without identifying and quantifying the consequent distortion of taxable profit, it cannot justify adding the entire difference between opening and closing inventory as an independent inadmissible expenditure.

Order pronounced in the open Court on 17th August, 2026.

Sd/- Sd/- (ARUN KHODPIA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 17/08/2026 KARUNA, sr.ps

23 ITA No.943/Mum/2025 Farmersfortune (India) Pvt. Ltd.

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai