FERVOUR RETAIL INDIA PVT LTD,BENGALURU vs. ACIT, CIRCLE 3(1)(1), BANGALORE, BANGALORE

The first issue in this appeal is that whether the disallowance of Rs.2,15,61,475 u/s. 37(1) of the Act made by the ld. AO in respect of diminution in the value of inventory is allowable or not.

The brief facts of the case show that assessee is a company engaged in the business of import and selling readymade garments which filed its return of income on 17.10.2016 at a loss of Rs.3,10,04,764. The limited scrutiny was carried out. The assessee has debited a sum of Rs.2,34,61,475 in the Profit & Loss Account towards the diminution in the value of inventories. It was stated that assessee is in the business of importing and selling readymade garments. The import of such garments and business has already been discontinued. In each of the seasons, the purchase of previous season renders itself out of fashion and becomes outdated and therefore same are valued at lower of cost or net realizable value in terms of Accounting Standards as well as Income Computation & Disclosure Standards. Such diminution in the value of goods being the purchase value and compared thereto to the market value being net realizable value of such outdated fashioned products is diminution in the value of inventory which is recorded in the P&L account.

The ld. AO after considering the explanation of the assessee stated that the loss is in respect of revaluation of stock, hence same cannot be allowed u/s. 28 of the Act. Further the accounting policy cannot decide the allowance of the claim. Hence, he disallowed Rs.2,34,61,475.

The second issue is that assessee has shown sundry creditors of Rs.2,46,872, its break-up was asked, wherein it was found that there are 2 parties who could not furnish the confirmation and outstanding is Rs.1,25,905, same was added to the total income of the assessee. Assessment order was passed u/s. 143(3) of the Act.

The assessee preferred appeal before the ld. CIT(A) wherein he was shown the provision of the accounts of revaluation of the inventory. The ld. CIT(A) held that in the previous year the diminution was about 3.2% and therefore he allowed 3.2% of the diminution in the value and confirmed the balance disallowance of Rs. Rs.2,15,61,475. With respect to non-furnishing of the credit confirmation of the supplier, he confirmed the addition. The appellate order was passed partly allowing the appeal of the assessee vide order dated 21.6.2019.

The assessee preferred the appeal before us wherein Ground No.1 is general in nature. Ground No.2 is regarding the confirmation of disallowance of Rs.2,15,61,475 and Ground No.3 is with respect to addition of Rs.1,25,905 on account of creditors.

The order of the ld. CIT(A) was passed on 21.6.2019. The order was stated to be served on the assessee also on 21.6.2019, however the appeal was filed before the ITAT on 20.11.2025 and therefore there is a delay of 2273 days. The assessee has filed a petition for condonation of delay along with the Affidavit. On the merits, the assessee has submitted a paperbook containing 130 pages.

The assessee submits that there is sufficient cause for the delay in filing the appeal. It was submitted that the assessment order clearly shows that income of the assessee is returned at a loss of Rs.3,10,04,764. After making the addition also, the loss of the assessee remains the loss only. However, the assessee was saddled with the penalty u/s.271(1)(c) of the Act. The company suffered heavy losses and ultimately did not function due to the losses. Due to the limited resources the appeal cannot be attended. To explain the facts the assessee submitted a detailed date chart explaining the delay in filing the appeal.

The ld. AR reiterated the facts as stated above.

The ld. DR vehemently objected to the same and stated that the delay is not because of sufficient cause and therefore does not deserve to be admitted.

The date chart explaining the delay is as under: -

We have carefully considered the rival contentions. We find that the returned income was filed on 17.10.2016 at a loss of Rs.3.10 crores wherein the assessment order was passed u/s. 143(3) on 16.12.2018 also at a loss. The appeal was filed before the first appellate authority on 17.1.2019. The assessee did not have the resources as well as the manpower because of the closure of the business and the activity had completely shut down. The first appellate order dated 10.6.2019 was also decided in a rectification proceeding and the same was also dismissed. However, the proceedings resulted into penalty in the month of March 2022 which is also contested before the ld. CIT(A), and which is also pending. Meanwhile the assessee made an attempt to revive its business because of interest shown by the parties. However, pending disputes were one of the reasons where the acquisition of recontinuation of the business was considered as a roadblock. Therefore, the assessee was advised in the month of October 2025 to file an appeal against the appellate order which confirmed the assessment order and therefore despite no economic benefit to the assessee, the assessee contested by filing of the appeal in the month of November 2025.

Hon Supreme court in MOOL CHANDRA Versus UNION OF INDIA & ANR., CIVIL APPEAL Nos. 8435 - 8436 OF 20242024 Live Law (SC) 552 has held that It is not the length of delay that would be required to be considered while examining the plea for condonation of delay, it is the cause for delay which has been propounded will have to be examined. If the cause for delay would fall within the four corners of “sufficient cause”, irrespective of the length of delay same deserves to be condoned. However, if the cause shown is insufficient, irrespective of the period of delay, same would not be condoned. It further held that “If negligence can be attributed to the appellant, then necessarily the delay which has not been condoned by the Tribunal and affirmed by the High Court deserves to be accepted. However, if no fault can be laid at the doors of the appellant and cause shown is sufficient then we are of the considered view that both the Tribunal and the High Court were in error in not adopting a liberal approach or justice oriented approach to condone the delay. In this case as there is no financial liability arising out of the disallowances, the assessee did not file the appeal but when saddled with the penalty, there is definite financial liability arising on the assessee. Further the exploring the new avenues of starting the business, the assessee found pending litigation as a roadblock in it. Thus, assessee was advised to file the appeal and where the issue is covered substantially in favour of the assessee by the jurisdictional high court, no negligence can be attributed to the assessee.

Therefore, the non-filing of the appeal and the reasons for now filing of the appeal in the changed environment are sufficient cause for the delay. Therefore, we condone the delay and admit the appeal of the assessee.

On the merits of the case, Ground No.1 is general in nature and hence dismissed.

Ground No.2 is with respect to the disallowance of Rs.2,15,61,475 being the valuation adjustment of the closing stock in terms of Accounting Standards AS-2 consistently followed by the assessee. However, the ld. AO disallowed holding that the same is not allowable u/s. 28 of the Act. The ld. CIT(A) agreed that such losses are required to be allowed to the assessee but restricted it to 3.2% only compared to the earlier years and thus allowed only to the extent of Rs.19 lakhs. The diminution in the value of inventory made on consistent and scientific basis is allowable as deduction to the assessee as held by the Hon’ble jurisdictional High Court in the case of IBM India Pvt. Ltd. v. CIT, 55 taxmann.com 575 (Kar). The facts and circumstances are also identical. It is not the case of the Revenue that the provision made by the assessee is not in terms of AS-2. This AS-2 provides that the valuation of the inventory is to be made at lower of the cost or net realizable value, whichever is less. The provision so made is also in conformity with the same. It is also not the case of the Revenue that the provision made by the assessee is without any basis.

The Ld. CIT (A) agreed that such loss is allowable to the assessee but restricted it to last years percentage without any reason.

Accounting Standards notified under section 145(2) in particular Accounting Standard-I categorically states that the accounting treatment and presentation in financial statements of transactions should be covered by substance and not merely by legal form. Further, section 145(A) provides notwithstanding anything to the contrary contained in section 145 that 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 in accordance with the method of accounting regularly employed by the assessee. Thus, what is to be seen is how the assessee is maintaining the accounts regularly in the course of his business and the accounting treatment and presentation of financial statement of transactions should be covered by the substance and not merely by the legal form. It is the principle which is to be kept in mind by both the appellate authorities. The aforesaid material clearly demonstrates that instead of showing cost price as nil in the profit and loss account, cost price of the items is given in profit and loss account and a provision is made for obsolescence in inventory showing that the market value is nil and that is the mode which the assessee was following even for the previous years. On identical facts the honourable Jurisdictional high court in Commissioner of Income-tax, Bangalore vs. IBM India Ltd. [2015] 55 taxmann.com 515 (Karnataka)/ [2015] 230 Taxman 544 (Karnataka) [28-11-2014] has allowed the claim of such loss of stock on obsolescence. This decision was further followed by honourable Kerala High court in Hindustan Newsprint Ltd. vs. Assistant Commissioner of Income-tax, Circle-1, Kotayam [2019] 104 taxmann.com 57 (Kerala)/[2019] 262 Taxman 334 (Kerala)[25-02-2019] and Commissioner of Income Tax vs. Gigabyte Technology (India) Ltd. [2020] 117 taxmann.com 670 (Bombay)/[2020] 273 Taxman 184 (Bombay)/[2020] 421 ITR 21 (Bombay)[07-01-2020].

Thus, respectfully following the decision of the Hon’ble jurisdictional High Court and also for the reason that the valuation of inventory is in accordance with the consistent accounting policies followed by the assessee which is also in accordance with AS-2 approved by the Board of Directors, is held to be in accordance with the provisions of the Companies Act shows true and fair result by the Auditor, the disallowance of Rs.2,15,61,475 deserves to be deleted. Hence ground No.2 of the appeal is allowed.

Ground No.3 is with respect to the addition on account of outstanding trade creditors. There are 2 creditors who did not submit their confirmation and therefore the ld. AO has made the addition. We find that the amount involved of 2 creditors is Rs.1,25,905. The assessee has submitted the complete details, but those 2 parties did not send their confirmation in response to notice u/s. 133(6) could not have resulted into making the addition. The ld. AO made the addition stating that as, the assessee could not furnish confirmation from Supreme Freight Charges (Rs.74,666/-) and Vmobo Mobile (P) Ltd. (Rs.51,239/-). However, there is no finding that either freight charges are bogus or material purchased from these parties is not genuine transactions. As the assessee has not furnished confirmation from two parties, the amount of Rs.1,25,905/- is added to the total income of the assessee. This is so for the reason that the books of account are audited, the bills and expenses of those creditors are recorded in the books of account, necessary expenditure involved under those invoices are also allowed. Further The Honourable Punjab and Haryana High court in Commissioner of Income- tax, Faridabad vs. GP International Ltd. [2010] 186 Taxman 229 (Punjab & Haryana)/[2010] 325 ITR 25 (Punjab & Haryana)/[2010] 229 CTR 86 (Punjab & Haryana)[02-12-2009] has held that merely because some persons did not respond to notice u/s 133(6) of the Act, addition cannot be made in the hands of the assessee in absence of any other material. Here the addition is only made on the basis of non- submission of reply by the creditors. Therefore, the addition deserves to be deleted. Accordingly ground No.3 of the appeal is allowed.

In the result, appeal filed by the Assessee is PARTLY ALLOWED.