IHD INDUSTRIES PVT. LTD.,KANCHIPURAM vs. ITO, CORP. WARD-2(3), CHENNAI

The Assessee raised the following grounds of appeal : “1. The order of the AO/CIT(A) is erroneous, contrary to law, opposed to the facts and circumstances of the case.

Brief facts of the case are that the appellant is a Private Limited Company engaged in the business. The Return of Income for the Assessment Year 2018- 19 was filed by the appellant company on 29.11.2018 disclosing total income at Rs.20,24,35,760/-. Against the said Return of Income, assessment was completed by the e-Assessment Unit of the Department(hereinafter called ‘AO’) vide order dated 29.09.2021 passed u/s.143(3) r.w.s 144B of the Income Tax Act, 1961 accepting the Returned Income.

Subsequently, the Learned Principal Commissioner of Income Tax- 1(ld.Pr.CIT-1), Chennai on verification of the assessment order found that the assessment order is erroneous and prejudicial to the interest of the revenue, accordingly, set-aside assessment in exercise of the power vested with him u/s.263 of the Income Tax Act, 1961 with a direction to Assessing Officer to verify the issue of goods in transit amounting to Rs.2,58,15,900/- shown in the balance sheet under head “Inventories”, but not shown income as part of closing stock in the profit and loss account. Subsequently, pursuant to order passed by the Learned Pr.CIT-1 u/s.263 of the Act, the Assessing Officer passed the consequential assessment order vide order dated 30.03.2025 passed u/s.143 r.w.s 263 of the Income Tax Act, 1961 at a total income of Rs.22,82,51,660/-. While doing so, the Assessing Officer brought to tax the goods in transit of Rs.2,58,15,900/- rejecting the contention of the appellant that the goods in transit is not transferred to the purchase account does not form part of the closing stock till the title of the ownership, risk passes on from the seller to the buyer.

Being aggrieved by the above assessment order, the appellant preferred an appeal before ld.CIT(A) who vide impugned order confirmed the action of the Assessing Officer by holding that the appellant has not contested the order u/s.263 of the Income Tax Act, 1961.

Being aggrieved by the order of ld.CIT(A), the appellant is in appeal before us in the present appeal. It is submitted that the goods in transit of Rs.2,58,15,900/- pertains to import of materials in process, which had been shipped by the supplier but not yet received by the appellant company and the appellant has been following the method of recognizing the purchases when the ownership for the goods passed on to the appellant and the goods in question were received by the appellant only after 31.03.2018. While the goods are in transit, Journal Entry was passed by debiting goods in transit amount crediting the creditors account. Once the appellant takes to possession of goods, the entry is passed debiting purchases amount crediting to creditors account. Since during the previous year relevant to assessment year under consideration, the appellant had not taken to possession of goods, the question of debiting purchases does not arise and consequently showing the goods in transit as part of closing stock does not arise.

On the other hand, Learned Sr.DR opposed the above submissions and submits that the order passed by the Lower Authorities is a reasoned one, non- inclusion of goods in transit in closing stock entails the addition as it amounts to distortion of the income for the year under consideration and the appellant had not challenged the order passed u/s.263 of the Income Tax Act, 1961.

We heard rival submissions and perused the material available on record. The issue that arises for our consideration is whether the stock in transit which was not included as a part of closing stock entails addition or not! Admittedly, the appellant had not taken the possession of goods till such time as Journal Entry is passed debiting the goods in transit and crediting the creditors account. These submissions made by the appellant company remains uncontroverted by the Sr.DR. The question of distortion of financial results will comes into play only when purchases were debited to profit and loss account and does not form part of the closing stock. Admittedly, in the present case, no purchases were debited to profit and loss account, which means no claim for deduction of purchases were made and therefore, the question of including as a part of closing stock does not arise. The fact that the appellant had not contested the order passed u/s.263 had no bearing on the issue as Learned Pr.CIT-1 only set-aside the assessment order in exercise of powers vested with him u/s.263 of the Act to the file of Assessing Officer for due verification of the issue, which clearly means that the it is an open remand before the Assessing Officer. Therefore, we are of the considered opinion that the Lower Authorities had clearly fell in error in making the addition of Rs.2,58,15,900/-, therefore, we direct the Assessing Officer to delete the addition of Rs.2,58,15,900/-.

In the result, appeal filed by the assessee stands allowed. Order pronounced in the open Court on 29TH May, 2026.