ITAT Remands Rs. 4.77 Crore Inventory Addition for Verification of Opening Stock:

Voracious Enterprises Private Limited is engaged in the retail business of textiles, apparel, footwear and leather goods, filed its return of income for AY 2021-22 declaring Nil income. The case was selected for scrutiny under CASS due to a low ratio of profit before depreciation, interest and tax to turnover. The assessment was completed under Section 143(3) read with Section 144B of the Income Tax Act, 1961.

During assessment, the AO noticed that the assessee's opening finished goods inventory stood at Rs. 5,01,44,921, whereas the closing inventory was only Rs. 24,44,290, resulting in a difference of Rs. 4,77,00,631. The assessee explained that it had discontinued its business due to continuous losses and disposed of the remaining finished goods at heavily discounted prices on an "as-is-where-is" basis.

However, the AO considered the inventory difference unexplained and added Rs. 4,77,00,631 to the assessee's business income. The CIT(A) upheld the addition. 

The Tribunal observed that the disputed amount of Rs. 4,77,00,631 represented the difference between opening and closing inventory and was disclosed under "Change in Inventories of Work in Progress and Finished Goods". It was not an independent expenditure claimed separately from the inventory movement. The Tribunal held that its separate disclosure in the expense section did not establish any double deduction.

However, the Tribunal noticed that the preceding year's financial statements contained negative revenue entries, including Rs. 1,87,19,330 under interstate sales under GST and Rs. 47,52,726 under stock transfer to branch. The nature and corresponding inventory treatment of these entries were not sufficiently clear. Since the opening inventory of Rs. 5,01,44,921 for the relevant year represented the preceding year's closing inventory, any error in the earlier year's stock valuation could affect the inventory adjustment claimed during the current year.

Accordingly, the Tribunal held that the entire inventory reduction could not be disallowed merely because it was debited to the Profit and Loss Account or because the goods were sold below their carrying value. However, unconditional deletion of the addition without verifying the correctness of the opening inventory would also be premature. The Tribunal therefore set aside the CIT(A)'s order and restored the matter to the AO for the limited purpose of verifying the correctness of closing inventory as on March 31, 2020, and its carry-forward as opening inventory on April 1, 2020.