INDIAN TERRAIN FASHIONS LTD.,KANCHIPURAM vs. ITO, CORP. WARD-2(1), CHENNAI

Since the identical facts and common issues are involved in both these appeals of the Assessee-company, we proceed to dispose of the same by this common order.

For the sake of convenience and clarity, the facts relevant to the appeal of the Assessee-company in ITA No.2630/CHNY/2026 are stated herein.

The NFAC, Delhi erred in sustaining the addition of Rs.16,40,31,902/- being the outstanding lease rent liability reported in the Balance Sheet prepared in accordance with the IND-AS 116 as mandated by the Companies Act, 2013 as bogus liabilities based on the results of proceedings initiated u/s 133(6) of the Act without assigning proper reasons and justification.

The NFAC failed to appreciate that the presumption of outstanding lease rent liabilities reported as bogus liabilities on the facts of the present case was wrong, incorrect, erroneous, invalid, unjustified and not sustainable both on facts and in law and further ought to have appreciated that the disputed sum being notional figure computed in accordance with the mandatory IND-AS by passing appropriate entries for the purpose of quantifying the outstanding liabilities by debiting the related asset account, thereby vitiating the theory of reporting of bogus lease rent liabilities.

The NFAC failed to appreciate that the notional entries passed in the books of accounts prepared under the Companies Act, 2013 would have no tax implication under the Income Tax Act, 1961 and further ought to have appreciated that the nullifying impact made in the statement of income would vitiate the addition made by the Assessing Officer along with the relevant findings.

The NFAC failed to appreciate that the presumption of reporting of bogus lease rent liabilities without understanding the accounting entries passed and the explanation offered by the Appellant in relation thereto would defy the principles of fairness in taxation.

The NFAC failed to appreciate that the proceedings initiated u/s 133(6) of the Act had no relevance to the present case and further ought to have appreciated that the attempt of the Assessing Officer to compare the notional figured determined as per IND-AS as against the confirmations obtained from the respective parties based on the actual transactions would defy the common sense approach thereby vitiating the addition made based on the irrelevant results of such cross-verification.

The NFAC failed to appreciate that in any event the quantification of the disputed addition on various facets was wrong, incorrect, erroneous, invalid, unjustified and not sustainable both on facts and in law and further ought to have appreciated that the explanation offered by the Appellant were completely overlooked and brushed aside thereby vitiating the related findings in the impugned order.

The NFAC, Delhi erred in sustaining the addition of Rs.10,93,36,704/- being the sums reported as Outstanding Trade Payable of Micro and Small Enterprises and other than Micro and Small Enterprises as income on the presumption of bogus liabilities in the computation of taxable total income without assigning proper reasons and justification.

The NFAC, Delhi failed to appreciate that the reporting of such sum as liability of the appellant in the financials for the assessment year under consideration was correct on various facets and further ought to have appreciated that the action of the Assessing Officer to treat the same bogus liabilities was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

The NFAC, Delhi failed to appreciate that having placed on record the details of documentary evidence establishing the reporting of outstanding liabilities including the bills discounted with Aditya Birla Finance Limited, the action of the Assessing Officer to treat the outstanding liabilities as bogus by overlooking the explanation offered along with the documentary evidence was wholly unjustified and not sustainable both on facts and in law.

The NFAC, Delhi failed to appreciate that in any event, having not independently examined the nature of reporting of the liabilities for the assessment year under consideration, the assessment of the entire value of liabilities as income of the appellant was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

The NFAC, Delhi failed to appreciate that the scrutiny assessment order was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.

The NFAC, Delhi failed to appreciate that the entire re-computation of taxable total income was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

The NFAC, Delhi failed to appreciate that having not adhered to the prescription of faceless regime, the consequential scrutiny assessment and appellate order passed should be reckoned as bad in law.

The NFAC, Delhi failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.

The Appellant craves leave to file additional grounds/arguments at the time of hearing.”

Briefly, the facts of the case are that the appellant is a Company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of branded apparel through show rooms taken on lease. The Return of Income for the Assessment Year 2022-23 was filed on 07.11.2022 declaring loss of Rs.6,90,77,274/-. Against the said Return of Income, the assessment was completed by the Assessment Unit of the Department(hereinafter called ‘AO’) vide order dated 29.03.20224 passed u/s.143(3) r.w.s 144B of the Act at a total income of rs.20,42,91,332/-. While doing so, the Assessing Officer made the following additions : Outstanding lease liability - Rs.16,40,31,902/- Outstanding trade payables - Rs.10,93,36,704/-

The factual background leading to the above addition is as under :

During the course of assessment proceedings, the Assessing Officer found that there were huge outstanding lease liabilities of Rs.16,40,31,902/-. The Assessing Officer in order to verify the genuineness of the outstanding liabilities, had issued notices u/s.133(6) of the Act to the parties in whose name the lease rent was shown as outstanding. There were total 79 parties in whose name lease rent was shown payable. Out of 79 parties, the Assessing Officer issued notices u/s.133(6) of the Act, to only 9 parties on sample basis. Out of 9 parties, 4 parties had not responded to the notices. In respect of 2 parties, there was no variation in the amount of outstanding lease rent shown by the assessee-company and confirmed by those parties. However, in respect of 3 parties, there was minor variation. The Assessing Officer also analyzed the transaction of lease, the appellant had entered into with one party namely Mr.Chitra Shivaji. Based on this information, the Assessing Officer concluded that the outstanding lease liability was not genuine. Accordingly, a show cause notice dated 26.03.2024 was issued to the appellant- company calling upon to explain as to why the outstanding lease liability cannot be treated as non-genuine. In response to show cause notice, the appellant filed detailed explanation explaining the nature of the transaction and the treatment given in the books of accounts, narrated the applicable standard issued by the ICAI and also given the illustrations explaining the nature of the transaction and the treatment given in the books of accounts. The gist of submissions of the appellant were as under :

The Assessing Officer also extracted the submissions made before him vide page nos.7 to 23. On due consideration of the explanation of the appellant, the Assessing Officer observed that the appellant-company had only tried to camouflage the facts in the guise of various accounting standard and the reply filed by the Assessee-company was very vague and further observed that if the assessee-company had paid rent to the landlord, the payment of rent would definitely would go to the profit and loss account and the balance payable for the year will be ‘NIL’ or some amount which was outstanding would be appearing in balance sheet as payable. The method of working of lease liabilities was without any base and not acceptable because no prudent businessman or assessee would create future liabilities in the year in which the same was taken on lease in spite of the facts that monthly rent was shown regularly been paid in cash by the assessee-company during the lease period. 9. Based on the above observations, the Assessing Officer concluded that the lease outstanding payable shown were bogus liability created by the appellant-company in the books of accounts, accordingly, made addition of Rs.16,40,31,902/-. The Assessing Officer also made addition of outstanding credit payables of Rs.10,93,36,704/-. The Assessing Officer also extracted the details of outstanding, trade payables, details of the parties and issued notices u/s.133(6) of the Act, on test basis, out of 7 parties, only 3 parties confirmed. Therefore, concluded that these trade payables were bogus and made addition.

Being aggrieved by the above assessment order, an appeal was filed before the Learned CIT(A), contending that the Assessing Officer completely misunderstood the nature of the item of outstanding lease liabilities and failed to appreciate binding nature of the Indian Accounting Standard-116. It was further contended that the Assessing Officer ought not to have made addition of trade payables of Rs.10,93,36,704/- merely because the creditors were not responded to the notices u/s.133(6) of the Act. However, the Learned CIT(A) dismissed the grounds of appeal filed by the assessee.

Being aggrieved by the order of the Learned CIT(A), the appellant-company is in appeal before us in the present appeal. It is contended that the outstanding lease liabilities represents discounted value of rent falling due over the unexpired term notionally calculated in accordance with IND-AS-116. He further submits that the Indian Accounting Standard is mandatorily required to be followed for the preparation of financial statements under Companies Act. He further submits that in terms of the provisions of Accounting Standard AS-116, notional entries were passed in the books of accounts recognizing the Right -of-Use (Debit – Asset side) : “6. The notional entries passed in the books of accounts recognising the Right-of-Use (Debit - Asset side) and Lease Liability (Credit - Liability side) would only impact the Balance Sheet. There is no expenditure being debited to the Profit and Loss Account when the liability is created and the only item charged to the Profit and Loss Account is notional depreciation on the Right-of-Use asset and notional finance cost on the lease liability, and both of these are added back in full under "inadmissible expenses" in the Statement of Income (PB 253) while claiming the actual lease rent payable for the said period as a deduction in the computation of taxable total income. Hence, the impact of such reporting in the form of claim of depreciation / deduction is also disallowed in the computation of total income having no tax implication. Hence, the treatment made in the books of accounts is therefore wholly tax-neutral. This was explained with workings before the Assessing Officer at PB 276, 296, 311 and 533,”

As regards to trade payables, he submits that the Assessing Officer cannot make addition, simply because the sundry creditors had not responded to the notices issued u/s.133(6) of the Act. He further submitted that from the Assessing Officer himself recorded that out of 7 parties, 3 parties have confirmed the outstanding liabilities. In spite of this fact, the Assessing Officer chose to make addition, and the Learned CIT(A) simply confirmed the action of the Assessing Officer without properly appreciating facts of the case.

On the other hand, the Learned CIT-DR submits that the Learned CIT(A) had passed very reasoned order dealing with the submissions made by the appellant and therefore, there is no warrant to interfere with the order of the Learned CIT(A).

Accordingly, grounds of appeal no.7 raised by the assessee are partly allowed for statistical purposes. Grounds of Appeal No.8 to 15 : 17. Ground of Appeal No.8 to 15 challenges the addition of outstanding freight payable of Rs.10,93,36,704/-. On mere perusal of the assessment order, it would reveal that the Assessing Officer made addition on the same disbelieving the existence of trade payables on the ground that the parties had not confirmed the outstanding balances. The appellant had filed an explanation saying that the appellant had discounted the bills of the above parties with Aditya Birla Finance Limited. The outstanding balance was shown under head ‘Bills Payable’. However, the Assessing Officer had made addition by holding that appellant-company had failed to explain the difference between the outstanding trade payables shown by the assessee- company and the concerned party. Even on appeal before the Learned CIT(A), the same was confirmed by the Learned CIT(A)

Accordingly, grounds of appeal no.8 to 15 raised by the assessee are partly allowed for statistical purposes.

In the result, appeal filed by the assessee in ITA No.2630/CHNY/2026 stands partly allowed for statistical purposes.

To sum up, both appeals filed by the Assessee are partly allowed for statistical purposes. Order pronounced in the open Court on 3rd November, 2026.