Disallowance of Stock Write-Down u/s 37(1) without Examining Evidence Unjustified: ITAT Remands Matter for Fresh Adjudication [Read Order]
The Tribunal observed that the appellate authority failed to examine the documentary evidence furnished by the assessee while upholding a disallowance made under Section 37(1) of the Income Tax Act, 1961.
In a recent ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai Bench set aside the order of the CIT(A), and remanded the matter for fresh adjudication as the disallowance of the stock write-down under section 37(1) was made without verification.
The assessee, Ador Welding Limited a listed public limited company engaged in the manufacture of welding consumables and equipment, filed its return of income declaring ₹10.76 crore, later revised to ₹10.62 crore.
The case was selected for scrutiny, the AO noticed that the assessee had claimed a deduction of ₹2.04 crore towards stock written off under Section 37(1) of the Act. The claim included a reduction of ₹1.21 crore in the value of opening stock during the transition to Indian Accounting Standards (Ind AS).
The assessee explained that this adjustment arose from the mandatory application of Ind AS 2, which requires inventories to be valued at cost or net realisable value, whichever is lower. The write-down of obsolete and impaired inventory was reflected in the audited financial statements as a genuine business loss.
However, the AO disallowed the claim, citing inadequate supporting documentation and failure to substantiate the write-off. Consequently, total income was assessed at ₹12.67 crore.
On appeal, the CIT(A), NFAC, upheld the disallowance, stating that the assessee had failed to reconcile and substantiate the write-down with credible documentation. The order did not, however, address the specific evidence or item-wise inventory details furnished by the assessee in support of its claim.
The Tribunal noted that the assessee had provided detailed records, including item-wise reconciliation statements and supporting documentation, to substantiate the claim of obsolete inventory. Despite this, the CIT(A) passed a non-speaking order, merely repeating the AO’s conclusion without analysing the evidence on record.
The Bench emphasised that an appellate authority is duty-bound to give a reasoned finding on the evidence presented before it. Failure to do so, the Tribunal observed, constitutes a breach of procedural fairness and vitiates the decision. The Tribunal remarked that the CIT(A) must specify why the evidence is unacceptable or insufficient if the claim is to be rejected.
Holding that the appellate order lacked judicial reasoning, the two member bench comprising Vikram Singh Yadav(Accountant Member) and KavithaRajagopal (Judicial Member) remanded the matter back to the CIT(A) for fresh adjudication. It directed the authority to re-examine the item-wise details of stock, assess the nature of obsolescence, and determine the allowability of the claim under Section 37(1) after granting the assessee adequate opportunity of hearing.
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