ABDULRAHMAN LIYAKATHALI,ERODE V. ACIT, CIRCLE-1, ERODE

ITA 1617/CHNY/2025

AI Insights

The case involves Abdulrahman Liyakathali, a sole proprietor engaged in the trade of hides/wet blue leather under the name M/s.Lead Leathers, who appealed against the assessment order passed by the Assistant Commissioner of Income Tax, Circle-1, Erode, which was upheld by the Learned Commissioner of Income Tax (Appeals). The primary contention was the rejection of the books of account and estimation of business income by the AO, which the assessee argued was based on a genuine business loss due to the valuation of closing stock at net realizable value following fungal damage, contrary to the AO's view of intentional loss declaration to offset capital gains. The Tribunal found that the lower authorities had not adequately verified the assessee's claims and thus restored the matter for a fresh assessment.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 788203 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: misc
• Appeal Filed On: 02-06-2025
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOUTHAMI MANIVASAGAM; J. C.I.T
• Assessee Lawyers: N. ARJUN RAJ
• Keywords: Set aside; Business income; Capital Gains

Judgement Text

"आयकर अपील य अ धकरण, ‘बी’ \u000eयायपीठ, चे\u000eनई IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI \u0015ी जॉज\u0018 जॉज\u0018 क े, उपा\u001aय\u001b एवं \u0015ी एस.आर.रघुनाथा, लेखा सद%य क े सम\u001b BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.:1617/Chny/2025 'नधा\u0018रण वष\u0018 / Assessment Year: 2015-16 Abdulrahman Liyakathali, No.30/3, Bhavani Main Road, B.P.Agraharam, Erode – 638 005. vs. ACIT, Circle-1, Erode. [PAN: ABAPL-5028-J] (अपीलाथ)/Appellant) (*+यथ)/Respondent) अपीलाथ) क, ओर से/Appellant by : Shri. N. Arjun Raj, Advocate *+यथ) क, ओर से/Respondent by : Ms. Gouthami Manivasagam, J.C.I.T. सुनवाई क, तार ख/Date of Hearing : 01.09.2025 घोषणा क, तार ख/Date of Pronouncement : 25.11.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM : The present appeal of the assessee is directed against the order dated 16.05.2025 of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as the “Ld.CIT(A)”], which in turn arises out of the assessment order dated 27.12.2017 passed u/s.143(3) of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the Assistant Commissioner of Income Tax, Circle-1, Erode [hereinafter referred to as the “AO”], pertaining to the Assessment Year [in short “AY”] 2015-16. 2. The brief facts of the case, as emanating from the record, are that the assessee is an individual carrying on business as a sole proprietor under the Printed from counselvise.com :-2-: ITA. No:1617/Chny/2025 name and style of M/s.Lead Leathers, engaged in the trade of hides/wet blue leather. For the A.Y.2015-16, the assessee filed the return of income on 24.09.2016 declaring a total income of Rs.25,39,504/-. The case was selected for limited scrutiny assessment to verify the following specific issues: - i. Large business loss set off against other heads of income ii. Large amount not credited to Profit and Loss account as per schedule A-OI of return iii. Large deduction claimed under section 54B/54C/54D/54G (schedule CG of ITR) 3. Pursuant thereto, the AO issued notice u/s.143(2) of the Act on 04.07.2017, followed by subsequent notices issued u/s.142(1) of the Act calling for various details. 4. During the assessment proceedings, the AO observed that the assessee had declared a business loss of Rs.1,00,63,869/-. The AO further noted that the opening stock of hides/wet blue as on 01.04.2014 was valued at Rs.1,650/- per unit, whereas the purchases during the relevant previous year were made at a rate higher than the value assigned to the opening stock. However, the closing stock was valued at Rs.300/- per unit. The opening stock and closing stock quantities stood at 25,537 units and 10,464 units, respectively. 5. On verification of sales records, the AO noticed that 2,521 units were sold to M/s.Hope Leather on 29.04.2014 as per the sale invoices. However, the corresponding outflow recorded in the stock register reflected 2,921 units, resulting in a discrepancy of 400 units. In the opinion of the AO, such discrepancy either represents unaccounted sales or undervaluation of closing stock. 6. Further, on examination of transactions with related concerns, the AO observed that sales to such parties were made at a discounted price compared to prevailing rates. Based on the above findings, the AO concluded that the books of account did not present a true and correct picture of the assessee’s Printed from counselvise.com :-3-: ITA. No:1617/Chny/2025 business affairs. Accordingly, the AO proposed to reject the books of account and estimate the business income. 7. The assessee objected to the proposal of the AO and submitted that the loss declared from business operations resulted from valuation of closing stock on the basis of net realizable value. It was contended that the assessee has consistently been following the method of valuation of closing stock at the lower of cost or net realizable value in compliance with the provisions of section 145A(a)(i) of the Act. 8. The assessee further submitted before the AO that the business was in the process of closure and, consequently, the finished leather had lost its marketability on account of fungal deterioration. It was stated that approximately 40% of the opening stock remained unsold and continued as closing stock. The assessee explained that during the period under consideration, saleable stock was disposed of at prevailing market prices, while damaged stock was sold at reduced rates, and the balance was valued at its net realizable value in accordance with accounting principles. 9. With regard to the discrepancy arising from excess recording of 400 units in the stock register, the assessee submitted that the same occurred due to a clerical error. In view thereof, the assessee agreed to an addition of Rs.5,20,800/- towards undervaluation of closing stock. 10. It was further contended that, considering the closure of business, valuation of closing stock at net realizable value was justified, as taxation cannot be levied on unrealized income. The assessee, therefore, submitted that the proposed adjustment by the Assessing Officer was not warranted. 11. The AO, however, was not satisfied with the explanation furnished by the assessee. The AO observed that although the assessee claims to maintain regular books of account, such books do not present a true and correct picture Printed from counselvise.com :-4-: ITA. No:1617/Chny/2025 of the financial affairs of the business, particularly in view of the assessee’s own admission of undervaluation of closing stock to the extent of 400 units valued at Rs.5,20,800/-. The AO further noted that the assessee failed to substantiate, with any cogent evidence, the basis for valuation of closing stock at a rate substantially lower than the corresponding purchase price. 12. The AO additionally recorded that sales made to related parties were effected at prices below prevailing market rates without any justification or documentary support. It was further observed that the assessee, unlike in earlier years where profits were declared, returned a substantial business loss in the year under consideration. In the opinion of the AO, the loss declared appeared to be intentional and aimed at setting off capital gains. 13. The AO also held that no prudent businessman would retain perishable goods for an extended duration. According to the AO, since the goods involved undergo processing to enhance durability, the possibility of such goods deteriorating in quality to the extent claimed is negated. 14. On the cumulative strength of the above observations, the AO rejected the books of account of the assessee and concluded that the correct profits could not be deduced therefrom. The AO thereafter proceeded to estimate the income by applying the average net profit rate of 5.48%, based on the preceding three assessment years, thereby determining the business income for the year at Rs.29,60,398/-. Consequently, the AO made an addition of Rs.29,60,398/- to the returned income by disregarding the business loss declared by the assessee. Apart, the AO has also made other additions which are not a subject matter of dispute before us. Thus, the assessment of the assessee was completed u/s.143(3) of the Act vide order dated 27.12.2017, assessing the total income at Rs.1,59,02,862/-. 15. Aggrieved by the assessment order wherein the AO determined the business income of the assessee at Rs.29,60,398/- on the basis of estimation, Printed from counselvise.com :-5-: ITA. No:1617/Chny/2025 the assessee preferred an appeal before the Ld.CIT(A) challenging the said determination. 16. During the course of appellate proceedings before the Ld.CIT(A), the assessee submitted that the AO had erred in determining the business income on an estimated basis, without duly considering the business loss declared by the assessee and without proper appreciation of the documentary evidence furnished during the assessment proceedings. It was contended that the business loss arose on account of revaluation of closing stock, which was adversely affected due to fungal infestation, resulting in deterioration and reduction in the realizable value thereof. The assessee further submitted that such treatment was in conformity with the Accounting Standard–2 relating to valuation of inventories and was also in accordance with the provisions of section 145A(i) of the Act. The assessee therefore argued that the rejection of books of account by the AO and consequent estimation of income was unjustified and contrary to law. 17. The Ld.CIT(A) vide the impugned order dated 16.05.2025, upheld the action of the AO in rejecting the books of account and in estimating the business income, and accordingly dismissed the appeal of the assessee. Being aggrieved by the aforesaid findings, the assessee has preferred the present appeal before this Tribunal. 18. The Ld.AR appearing on behalf of the assessee submitted that the assessee’s books of account were duly audited u/s.44AB of the Act, and no specific discrepancies or defects have been identified by the AO during the assessment proceedings, despite the assessee furnishing complete details as called for. It was contended that the loss declared by the assessee for the relevant assessment year represents a genuine business loss and is not a notional or artificial loss as alleged by the AO. The Ld.AR argued that the AO has erred in concluding that the assessee intentionally created an artificial business loss to set off capital gains. It was further submitted that the closing Printed from counselvise.com :-6-: ITA. No:1617/Chny/2025 stock consisting of hides/wet blues was affected by fungal infection which resulted in deterioration of quality and reduction in market value, and therefore, the assessee valued such stock at its net realizable value in accordance with the regularly followed and accepted method of accounting. The Ld.AR submitted that despite adherence to accounting principles, the AO has rejected the books of account without establishing any defect and estimated the business income arbitrarily, which action has been erroneously upheld by the Ld.CIT(A). 19. In view of the above, the Ld.AR prayed that the impugned order of the Ld.CIT(A) sustaining the rejection of books and estimation of income be set aside and the appeal of the assessee be allowed. 20. Per contra, the ld.DR, appearing on behalf of the Revenue, submitted that the Ld.CIT(A) has correctly affirmed the action of the AO in rejecting the books of account and estimating the business income, as the books maintained by the assessee were found to be incomplete and incorrect. The Ld.DR contended that various discrepancies were noticed in the financial records, including mismatch in stock statements, undervaluation of closing stock, and sales made to related parties at prices lower than market value. It was further submitted that the assessee’s abnormal business loss during the impugned assessment year, when compared to the profit declared in preceding years, clearly indicates manipulation of accounts with the intention to artificially inflate loss and set it off against capital gains. The Ld.DR argued that the AO has reasonably and judiciously adopted the profit rate of 5.48% based on the assessee’s past financial history and business pattern. In view of these submissions, the Ld.DR prayed that the appeal filed by the assessee be dismissed and the order of the Ld.CIT(A) confirming the assessment be upheld. 21. We have heard the rival contentions, perused the material on record and accordingly the impugned issue is adjudicated as under. Printed from counselvise.com :-7-: ITA. No:1617/Chny/2025 22. We observe that the assessee is engaged in the business of trading in hides/wet blues and had filed the return of income for the year under consideration declaring a business loss of Rs.1,01,97,258/-, which was set off against capital gains earned during the relevant assessment year. During the course of assessment proceedings, the AO observed discrepancies in the stock register, inasmuch as 400 units of hides/wet blues sold by the assessee were not invoiced. Upon being confronted, the assessee accepted the discrepancy and agreed to an addition of Rs.5,20,800/- towards undervaluation. The AO also observed that the closing stock was valued at a rate significantly lower than the value adopted for the opening stock and the cost of purchases made during the year. Further, it was noticed that sales made to related parties were affected at prices lower than the prevailing market rates. The AO also noted that in earlier years the assessee had declared positive net profit, whereas in the impugned year a substantial business loss had been reported. According to the AO, the loss was deliberately shown with the sole intent of setting off taxable capital gains, and not due to any genuine business circumstances. In view of the above deficiencies and perceived manipulation, the AO rejected the books of account and proceeded to estimate the business income by applying a net profit rate of 5.48%, being the average net profit rate of the preceding three assessment years. Based on such estimation, the business income was computed at Rs.29,60,398/-. The principal contention of the assessee before the lower authorities as well as before us is that the closing stock had deteriorated due to fungal infestation and accordingly was valued at net realizable value, consistent with the method of accounting regularly followed by the assessee. The Ld.CIT(A) however, upheld the findings of the AO both with respect to rejection of books of account and estimation of income. 23. We observe that AO rejected the books of account primarily on the basis of discrepancies in stock valuation and alleged under pricing to related parties. The assessee, however, contends that the reduction in closing stock value was on account of fungus damage and therefore the stock was valued at net Printed from counselvise.com :-8-: ITA. No:1617/Chny/2025 realizable value in accordance with the consistent accounting policy followed in earlier years. We find that neither the AO nor the Ld.CIT(A) has examined or verified the assessee’s claim regarding deterioration of stock or substantiation of net realizable value by way of independent evidence, technical reports, sale invoices or prevailing market data except stating that these goods were sold to the related parties at lower rates. In view of the above factual matrix and considering that proper verification has not been carried out by the lower authorities on the claim of stock deterioration and valuation method, we deem it appropriate to restore this issue to the file of the AO for fresh examination. The assessee shall produce necessary evidences in support of its claim and the AO shall decide the matter afresh in accordance with law after granting adequate opportunity of hearing. Accordingly, the impugned order is set aside on this issue and the grounds raised by the assessee are treated as allowed for statistical purposes. 24. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the court on 25th November, 2025 at Chennai. Sd/- Sd/- चे\u000eनई/Chennai, 1दनांक/Dated, the 25th November, 2025 SP (जॉज\u0018 जॉज\u0018 क े) (GEORGE GEORGE K) उपा\u001aय\u001b /VICE PRESIDENT (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखा सद%य/ACCOUNTANT MEMBER Printed from counselvise.com :-9-: ITA. No:1617/Chny/2025 आदेश क, *'त3ल4प अ5े4षत/Copy to: 1. अपीलाथ)/Appellant 2. *+यथ)/Respondent 3.आयकर आयु6त/CIT– Chennai/Coimbatore/Madurai/Salem 4. 4वभागीय *'त'न ध/DR 5. गाड\u0018 फाईल/GF Printed from counselvise.com "