ITAT reduces jewelry business excess stock addition after accepting old gold purchases explanation under section 69B

ITAT Chennai dismissed the revenue's appeal regarding excess stock found during survey at assessee's jewelry business premises. The tribunal upheld CIT(A)'s decision to tax excess stock as business income rather than under section 69B, noting AO failed to establish income from sources other than jewelry business. Regarding stock computation, ITAT found AO and CIT(A) incorrectly rejected assessee's claim about old gold purchases recorded in separate register without cogent reasons. The tribunal accepted assessee's explanation that 7,806.05 grams from separate ledger should be added to book stock, reducing actual excess from 19,196.265 grams to 11,390.212 grams, supported by GST returns filed for February-March 2018. For valuation, while assessee initially declared rate of Rs. 2,296 per gram and AO/CIT(A) adopted Rs. 2,800 per gram, ITAT adopted Rs. 2,409 per gram as agreed by assessee during proceedings to end litigation. The addition was restricted to excess stock of 11,390.212 grams valued at Rs. 2,409 per gram.

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ISSUES:

Whether the excess stock of gold and silver jewellery found during survey can be treated as unexplained investment under section 69B of the Income Tax Act or as business income.Whether the valuation of excess stock at Rs. 2,800 per gram of gold jewellery by the Assessing Officer is justified, or the lower rate of Rs. 2,296 per gram adopted by the assessee is appropriate.Whether the purchase of old gold jewellery in cash below Rs. 10,000 per item from customers, reflected in the books of account, should be considered in computing the stock and income.Whether the Assessing Officer erred in making additions without verifying books of accounts, records, and without giving physical hearing.Whether the decision of the Commissioner of Income Tax (Appeals) to treat excess stock as business income and not as unexplained investment under section 69B is legally sustainable.

RULINGS / HOLDINGS:

The excess stock found during survey, after considering the old gold purchases duly reflected in the books and GST returns, is to be treated as business income and not as unexplained investment under section 69B of the Act, as there was no cogent evidence of unaccounted purchases or sales generating the stock.The valuation of gold jewellery stock at Rs. 2,800 per gram adopted by the Assessing Officer and upheld by the CIT(A) is not accepted; instead, the rate of Rs. 2,409 per gram, agreed by the assessee in its letter dated 17.06.2021 and reflecting deductions for impurities and other factors, is appropriate for valuation.The purchase of old gold jewellery in cash below Rs. 10,000 per item from customers, recorded in a separate ledger and reflected in tally accounts available at the time of survey, must be considered in computing the book stock, reducing the excess stock from 19,196.262 grams to 11,390.212 grams.The Assessing Officer erred in making additions without verifying the complete books of accounts, records, and without affording physical hearing, leading to a tailor-made order not based on complete facts.The Commissioner of Income Tax (Appeals) correctly distinguished the precedent relied upon by the Revenue and lawfully treated the excess stock as business income, given the absence of evidence for undisclosed sources; hence, the deletion of addition under section 69B is upheld.

RATIONALE:

The legal framework primarily involves section 69B of the Income Tax Act, which deals with unexplained investments, and principles governing assessment of business income versus unexplained investments.The court applied the principle that unexplained investments must be supported by cogent evidence of unaccounted sources; absence thereof mandates treating excess stock as business income.Valuation principles were guided by the Income Tax Ready Reckoner by V G Mehta and accepted accounting practices, including deductions for impurities, soldering, and varying purity levels of gold jewellery.The decision relied on judicial precedents distinguishing cases where stock additions were made without corresponding credits in books of accounts, emphasizing the necessity of documentary evidence for unaccounted income claims.The tribunal noted the procedural impropriety by the Assessing Officer in not verifying complete records or conducting physical hearings, underscoring the requirement of natural justice in assessment proceedings.

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