SPECIALITY PAPERS LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX -4(3)(1), MUMBAI

IN THE INCOME-TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER & SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER Speciality Papers Limited v/s. Deputy Commissioner of Ground Floor, 93, Dadiseth, बनाम Income Tax– 4(3)(1), Agairy Lane, Mumbai – Aayakar Bhavan, Mumbai – 400002, Maharashtra 400020, Maharashtra स्थायी लेखा सं./जीआइआर सं./ PAN/GIR No: AAECS0861Q Appellant/अपीलार्थी .. Respondent/प्रतिवादी

Assessee by : Shri Hari S. Parekh,AR Revenue by: Shri Harendra Verma, (Sr. DR)

Date of Hearing 08.06.2026 Date of Pronouncement 03.08.2026 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The instant appeal emanating from the order dated 06.06.2025 is preferred by the assessee against the order passed by the Learned Commissioner of Income-tax, Appeal, CIT(A)-48, Mumbai [hereinafter referred to as “CIT(A)”] pertaining to the assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 24.12.2019 for the Assessment Year [A.Y.] 2017-18. P a g e | 2 2. The grounds of appeal are as under: 1. Disallowance of expenditure on account of change in inventories: Rs. 8,53,84,479/- 1.1 On the facts and in circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the learned AO in disallowance of expenditure on account of change in inventories on the alleged ground of lack of satisfactory justification inasmuch all the requisite details pertaining to the inventory valuation was duly submitted and thus, the entire disallowance ought to be deleted: 1.2 The learned CIT(A) failed to appreciate and ought to have that method of inventory valuation was based on settled principles of accounting, i.e. Accounting Standard - 2 (‘AS-2’) issued by the Institute of Chartered Accountants of India (‘ICAI’) and is duly accepted by law and thus, any change in inventory valuation as per AS-2 is allowable as business expenditure. 1.3 Without prejudice to the above, the learned CIT(A) ought to have appreciated that if the disallowance made by the learned AO with respect to closing stock value is upheld then the opening stock of immediate subsequent year, i.e. AY 2018-19 will consequently increase. 2. Addition u/s. 69A rws 115BBE of the Act of cash deposits made out of earlier year sales: Rs. 12,88,221/- 2.1 On the facts and in circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the learned AO in making addition of cash deposited during demonetization period pertaining to the sales made in earlier years inasmuch as appellant has duly discharged its onus to prove that the cash deposited were out of sales made in earlier years and thus, the entire addition of unexplained made on surmises and conjectures ought to be deleted, 2.2 The CIT(A) failed to appreciate and ought to have held that provisions of section 69A of the Act could be invoked in case of violation of cumulative conditions, viz. failure to record money in books of accounts and offer no explanation/ unsatisfactory explanation inasmuch as since the fact that appellant has recorded money in books of accounts, the provisions of section 69A of the Act is not applicable and entire unlawful addition made u/s. 69A of the Act is liable to be deleted; 2.3 The CIT(A) failed to appreciate and ought to have held that once sales are recognized in a particular year as per the audited books of account and offered to tax in respective year then the action of making addition of the said sales again in the year in which cash is received and deposited in bank account amounts to double taxation in the hands of appellant which is legally invalid and liable to be deleted.

P a g e | 3 3. Ground no. 1 pertains to the disallowance of expenditure on account of change in inventories valuation, amounting to Rs. 8,53,84,479/-. Brief facts of the case are that the return of income was filed by the assessee declaring total loss of Rs. 9,35,82,268/- which was subsequently revised showing loss of Rs 12,88,40,709/-. During the assessment proceedings, the AO noted that the assessee had shown total income of Rs. 4.50 lakhs and claimed an expenditure of Rs. 8,53,84,479/- under the head “Changes in Inventories”. The AO disallowed the said expenditure by observing that the assessee had hardly any business activities during the year, with a reported turnover of only Rs. 4.50 lakhs. The AO concluded that it was not engaged in genuine business activities and failed to provide adequate justification or detailed working for the inventory valuation change despite requests made. The AO further linked the assessee company to one Shri Shirish C. Shah, alleging involvement in providing accommodation entries and non-genuine business. The AO noted that the assessee failed to provide satisfactory justification or detailed working for the Net Realizable Value (NRV)adopted. Merely stating compliance with AS-2 was insufficient without substantiating the NRV calculation, especially given the scale of the write-down from Rs 12.11 cr. cost to Rs 3.57 cr.

P a g e | 4 3.1 Before the AO, the assessee argued that it was engaged in genuine trading activities, explaining the low turnover during the year was due to a slowdown in the paper industry. It submitted that the factory was closed but trading continued. The assessee pointed to increased turnover in subsequent years (FY 2017-18 and FY 2018-19) as evidence of a temporary lull, not cessation of business. It was stated that the expenditure was on account of valuing closing stock at Cost or NRV, whichever is lower, as per Accounting Standard-2 (AS-2), due to inventory becoming old and outdated. Detailed workings and quotations were claimed to be submitted. It cited its own case for AY 2016-17 where the CIT(A) allowed a similar claim, and relied on case laws like United Commercial Bank (240 ITR 355), DCIT v. Concorde Motors (1) Ltd., Alfa Laval India Ltd. v. DCIT, and CIT v. Hughes Communication India Ltd. to support the valuation method. Based on the disallowance of Rs. 8,53,84,479/-, the AO nevertheless determined the total income at Rs. 1,31,549/-. 4. Aggrieved, the assessee filed appeal before the ld.CIT(A) contesting the action of the AO. It claimed that the inventory became old and outdated due to the market slowdown and technology changes. The contentions made before the AO were reiterated.The ld.CIT(A) observed that AO’s primary contention was the lack of genuine business

P a g e | 5 Speciality Papers Limited activity, supported by minimal turnover during the year and the appellant’s alleged link to accommodation entry operations. While it claimed a temporary lull, the drastic drop in sales compared to the significant inventory write-down required robust justification, which the AO found lacking. The assessee claimed that the inventory became old and outdated due to the market slowdown and technology changes. However, the AO noted that it failed to provide satisfactory justification or detailed workings for the NRV adopted. Merely stating compliance with AS-2 was insufficient without substantiating the NRV calculation, especially given the scale of the write-down (from Rs 12.11 Cr cost to Rs 3.57 Cr value).The AO explicitly stated that the assessee failed to submit justification and raised concerns about the genuineness of the business itself in the context of links to accommodation entry providers. Regarding the case laws relied upon, the ld.CIT(A) found them distinguishable. However, the primary objection in the present case remains the lack of satisfactory justification for the NRV itself. Considering the AO’s findings regarding the lack of genuine business activity, the failure to provide adequate justification for the significant inventory write down, and the alleged links to accommodation entry operations, the disallowance was held to be justified. The assessee did not sufficiently discharge the onus of proving the correctness and basis

P a g e | 6 Speciality Papers Limited of the NRV adopted for such a large write-down. Therefore, the AO’s action in disallowing Rs. 8,53,84,479/- was upheld.

P a g e | 7 7. We have carefully considered the factual matrix of the case. The case of the assessee is that there was a temporary lull when the business activities of the assessee were suspended and the same were restarted when the position was favourable to it. Under the circumstances, the position even after the previous year will have to be taken into consideration in order to judge whether there was a temporary suspension of the business or the assessee had its intention to close the business for ever. It is clear from the activities of the assessee that the business was temporarily slowed down due to unfavourable market condition which picked up in the subsequently years. Therefore, we find merit in the contention that there was indeed genuine business activity carried on by the assessee during the year as well.

7.1 Now coming to the disallowance of expenditure of Rs 8.53 cr. on account of revaluation of stock, as stated in the preceding paras that the assessee itself admitted that the said quantification did not take into account certain other factors. Accordingly, detailed and accurate reconciliation including correct quantitative and value wise detail of opening stock and Inventory auctioned by the State Bank of India etc. had been submitted with a request to consider the same and allow the P a g e | 8 Speciality Papers Limited claim of loss of Rs 8.53 cr. We find that no such reconciliation was produced before the lower authorities. Accordingly, in the interest of justice and fairplay, we deem it appropriate to restore the issue in hand to the file of the AO setting aside the appellate order with a direction to the AO to examine the same and decide it de novo. Suffice it to state, he would allow reasonable opportunity of hearing to the assessee in this regard. Thus, the ground is allowed for statistical purposes.

P a g e | 9 9. Before the ld.CIT(A) agitated the addition. In this regard, it submitted a cash flow summary showing cash in hand of Rs. 43.83 lakh as on 08.11.2016, out of which Rs. 37.75 lakhs was deposited. It explained that Rs. 12,88,221/- out of the deposits pertained to cash collections against sales made in FY 2007-08, 2008-09, 2013-14, and 2015-16, which were duly offered to tax in those respective years. The ld.AR argued that comparing this to AY 2016-17 turnover was incorrect. It contended that since the source (sales) was recorded in the books of earlier years and offered to tax, and explanation was provided, the conditions for invoking section 69A (unrecorded money and unsatisfactory explanation) were not met. Reliance was placed on DCIT v. Karthik Construction Co., Smt. Teena Bethala v. ITO, Durga Fire Work vs. ITO, and ITO v. Zee Bangles Pvt. Ltd. to argue that section 69A cannot be invoked when amounts are recorded in books. The appellant also claimed the AO did not reject the books of accounts.

9.1 The ld.CIT(A) observed that the core issue here was the explanation for the source of Rs. 12,88,221/-deposited in cash during demonetization. The assessee claimed this related to cash sales from much earlier years (FY 2007-08, 2008-09, 2013-14, 2015-16).While the it asserted these sales were recorded and taxed previously, the AO

P a g e | 10 Speciality Papers Limited specifically noted the lack of supporting evidence to be submitted during the assessment to establish the genuineness of these specific cash collections pertaining to old receivables. The ld.CIT(A) observed that holding cash from sales made up to 9 years prior (FY 2007-08) and depositing it during demonetization required strong corroborative evidence beyond just pointing to old P&L accounts or acknowledgements. Evidence like debtor ledgers showing these specific outstanding amounts, collection receipts, or confirmation from debtors were not submitted. The AO’s comparison with AY 2016-17 turnover was contextually relevant to highlight the low level of recent activity versus the explanation offered, even if the claim relates to earlier years. The assessee also argued that section 69A requires the money to be unrecorded in the books. While the corresponding sales might have been recorded in prior years’ books, the cash held representing these specific old receivables immediately prior to deposit might was not adequately reflected or proven through the books and explanations provided for the current year, leading the AO to deem the explanation unsatisfactory. Section 69A applies if the explanation for the nature and source of acquisition of money is unsatisfactory in the AO’s opinion. The decision in the case of Karthik Construction and Teena Bethala emphasize that section 69A applies to money not recorded in books. However, the P a g e | 11 Speciality Papers Limited critical point was whether the explanation regarding the source (specific old cash sales collection held for years) was satisfactory and supported by evidence, which the AO found lacking. The decision in the case of Durga Fire Work involved cash received from specific recent invoices before demonetization, which was verifiable. The present case involved unsupported claims of collections from very old sales. The decision in the case of Zee Bangles involved cash sales declared in the return of income for the same year being deposited. This differed from depositing cash allegedly held from sales made many years ago. The ld.CIT(A) observed that the timing of the deposit during demonetization coupled with the explanation involving very old receivables necessitated a higher degree of proof, which the AO found was not furnished. Accordingly,he held that the AO was justified in treating the explanation as unsatisfactory in the absence of corroborative evidence linking the deposited cash specifically to the collection of those particular old debts. Therefore, his action in treating Rs. 12,88,221/- as Unexplained money under section 69A was upheld.

Order pronounced in the open court on 03/08/2026. (PAWAN SINGH) ACCOUNTANT MEMBER

Place: म ुंबई/Mumbai ददनाुंक /Date 03.08.2026 Lubhna Shaikh / Steno

आदेश की प्रतितलति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,

उि/सहायक िंजीकार (Dy./Asstt.