TaxTMI 
TaxTMI 
1988 (1) TMI 84
X X X X Extracts X X X X
X X X X Extracts X X X X
....me of Rs. 67,983. Alongwith this return, copies of profit and loss account and balance-sheet were not filed. The estimated income was arrived at by making the following computations: Property income . Rs. 2,723 Business income . Rs. 1,25,000 . . Rs. 1,27,723 Less Deductions: . . Interest payments (Net) 49,986 . Deduction under s. 80C 9,414 . Deduction under s. 80VV 330 Rs. 59,740 Net assessable income: . Rs. 67,983 The ITO issued statutory notices to the assessee and had also issued certain letters asking for the P & L. account and Balance Sheet. When the case was fixed for hearing on3rd June, 1983, a letter was filed before the ITO stating that a revised return was being filed. According to the ITO, the revised return was not filed but copies of the trading and profit and loss account and balance-sheet were filed on that date. According to the ITO, the seized books of account, "have been examined and case discussed with the assessee's Chief Accountant, Shri T.N. Singh and authorised representative". The ITO noticed that when the assessee filed the return showing net assessable income at Rs. 67,983 business ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rk out to Rs. 9,26,946 (Rs. 15,15,299 minus Rs. 5,88,353). Thus, the ITO worked out gross profit on gold jewellery at 14.47 per cent which, according to him, was, "ridiculously low." According to the ITO, "no possible explanation could be given by the assessee for fall in gross profit rate". 5. The books of account relating to the asst. yr. 1979-80 were lying seized with the Department. According to the ITO even these books were incomplete and unadjusted. The books of account for the year under appeal, were unclosed and unadjusted, in as much as, balances of earlier year had not been brought forward in these books of account. The ITO, therefore, concluded that it "clearly follows from above that little credence can be given to the assessee's account books and trading and profit and loss account filed by the assessee." After making these observations with regard to the nature and character of the books of account of the assessee, which were lying seized with the Department, the ITO proceeded to examine various facts, which, according to him, affected the computation of the total income of the assessee for the year under appeal. 6. He first took up what is described as "suppres....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the business premises of the assessee on27th Nov., 1980, the jewellery found had been inventorised. The official valuer had determined the weight of the diamond jewellery so inventorised at 1358-12 carats. The Department had also seized diamond register for the period 1980-81 and this register as on21st Nov., 1980showed the weight of diamonds at 1447-47 carats. According to the ITO, "no purchases and sales have been shown after21st Nov., 1980." The ITO worked out the stock of diamond jewellery as on26th Nov., 1980at 1762-87 carats. The basis on which this has been worked out is stated to be stock information slips maintained by the salesmen. Since the official valuer had determined the weight of diamonds on 26th Nov., 1980 at 1358-12 carats and the figure determined by the ITO was 1762-87 carats he has observed that, "though the official valuers had estimated the weight of diamond studded in the jewellery at 1358-12 carats little reliance can be placed on the weight of diamonds determined by the valuer in the jewellery. They have just gone by estimate and could not have determined the correct weight of the diamonds in the jewellery, without disintegrating the diamonds out of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d been received. According to him, "it is also seen that addresses of parties whose orders are booked are not given by the assessee". The assessee was recording the advances received from customers in the books of account under the head "Advances from Customers Account." During the year, this account showed outstanding amount of Rs. 17,13,468. According to ITO, no brought forward balance in this account was given in the ledger for the year under appeal. He asked the assessee to show the adjustment of this sum of Rs. 17,13,468 against the sale price of jewellery in the cash memos. It appears the assessee was in a position to substantiate the return of money or adjustment thereof. Nevertheless, the ITO has observed that, "however, on scrutiny of the assessee's account books, it has been seen that at least about 1,00,000 out of the above receipts of Rs. 17,13,468 are shown to have been returned to customers." The ITO did not believe the assessee that this amount was returned. There is no dispute that similar method of accounting followed by the assessee had been accepted earlier. However, the ITO rejected the explanation of the assessee for this year. 11. The ITO then summed up the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hese ornaments which they did then and there in the presence of the assessee. They then handed over stones to the assessee and took the ornaments to their workshops for making certain modifications after the removal of the stones". But according to the ITO, these statements of the witnesses were in contradiction with the assessee's contention that the ornaments were given for polishing. 13. According to the ITO, the receipt of repaired jewellery from the "Karigars" is shown in G.S.12 register on the very next day in each case. According to him, "it was not comprehensible as to how the jewellery could be remodelled by them without stones in a period of overnight." According to the ITO all the "Karigars" had stated that goods were given to them for removal of stones. However, according to the ITO, "no sane person would resort to such an act to destroy all his stone studded jewellery." The ITO, therefore, concluded that it was obvious that this scheme had been devised by the assessee for taking the goods out of stock for dealing outside the account books. According to him, the assessee had given 19936-730 grams to the "Karigars" and ornaments received from the "Karigars" weighed (g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....after month. According to him, when there was no stock of old ornament in G.S. 11, the assessee in his anxiety to claim losses in refining through the Mint sent lots of new ornaments. The ornaments were despatched by insured parcels of Rs. 5,000 each. Goods were delivered atBombayto M/s Gian Chand Prabh Ram, who handed over the goods to the Mint for refining. The refined gold of 24 carats purity received from the Mint, according to the ITO, was 18320 grams. As recorded by him the total quantity of gold of 22 carats purity sent to the Mint was 26620.850 grams. According to him the equivalent of this gold in 24 carats purity comes to 24491 grams. The assessee had received 18,320 grams. Thus there was a shortage of 6131 grams in the refining process. He asked the assessee to explain this. 16. The assessee stated that what was sent to the Mint was dead stock of old ornaments, which had become out of vogue, that these ornaments contained too much of impurities in the form of alloys and 'tankas', etc., that it was not possible to get these ornaments locally refined in view of high quantity of other metallic impurities, that the sales of such ornaments had been declining and, therefore....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the assessee." According to the ITO, these payments were manipulated with a view to suppress income and for the purpose of diversion of income to family members and close relations of the assessee. He held that these payments were disallowable for the following reasons: (a) Loans to the extent of Rs. 16,34,000 raised by the assessee were not utilized for the purpose of business of the assessee but for accommodation to relatives. (b) Interest at 30 to 33 per cent has been claimed which is much above the market rate. (c) According to the ITO, there were interpolations in pencil in the account books of the assessee in respect of the following members for making a false claim of interest payment to them: Name Rs Kum. Anuradha Mehra 46,000 Mast.Bharat Mehra 3,00,000 Mast. Chand Mehra 2,35,000 Mast. Deepak Mehra 2,45,000 Mast.Navin Mehra 48,000 Kum.Neena Mehra 1,85,000 Mast.Vinay Mehra 37,000 Total 10,96,000 He records that in the ledger while all other entries in the above accounts are in ink and properly dated, these transfer entries are interpolated and inserted in between the lines without any narration. These entr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shell contended that issuing of ornaments to "Karigars" and receipts thereof back was for internal control on the movement of the ornaments. There was statutory control of inward and outward movement of the ornaments of gold from the shop which had to be recorded in the registers maintained for this purpose in the form of G.S.11 and G.S.12. The reference drawn by the ITO that ornaments weighing 25296 grams were sold outside the books of account was merely in the nature of a conjecture and surmise. It was pointed out further that it was important to note that despite the action taken under s. 132 of the Act, twice, there was no corroboratory evidence on this issue with the assessing authority. The increase in the rate of g.p., therefore, by considering this as one of the defects is not justified. In report of the diamond jewellery also submissions were made and the CIT (A) has recorded the same in his impugned order, albeit, briefly. The learned CIT(A) after recording in detail the defects pointed out by the ITO in the books of account maintained by the assessee as per the assessment order has observed that sales for the asst. yr. 1980-81 had been shown at about 78.72 lakhs of which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d assessment order and arguments of the assessee held that the ITO was justified in disallowing interest paid on loans from family members to the extent of Rs. 2,93,680. With regard to the interest Rs. 3,11,130 the matter was set aside to the ITO with the directions to make the assessment de novo after making enquiries as directed. Regarding disallowance of interest of Rs. 21 lakhs under s. 40 A (2), the ITO was directed to adopt the same basis for allowing interest as had been adopted by him for asst. yr. 1981-82. 26. With regard to other minor additions, the learned Commissioner made brief observations. He confirmed the addition of Rs. 10,000 on account of packing expenses; justified disallowance of Rs. 27,315 out of rent but directed the ITO to get necessary details and add back only correct verified amount, and also dealt with and determined other points raised in grounds of appeal taken before him. His order has left the assessee aggrieved but it has been accepted by the Revenue. 27. In the beginning of this order in para 3 supra. we have observed that the total income determined by the ITO in the draft assessment order was different from the total income actually assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion. He pointed out that there was no evidence of a "stock information slips" having been maintained by the assessee for the year under appeal. In fact the stock information slips from their serial numbers indicate that the assessee started maintaining them in Aug., 1980 but their maintenance was terminated from Nov., 1980. The ITO has not given any finding in the assessment order with supporting evidence that the assessee, in fact maintained stock information slips in any of the previous years much less for previous year relevant to the assessment year under appeal. The ITO submitted the learned counsel, had seized the entire record of the assessee but was not able to find any evidence regarding the maintenance of stock information slips for the year under appeal. 30. It was submitted by him that if the information as contained in the assessment made by the ITO is properly analysed it would be seen that 21311.650 grams of gold represent rotation. He stated that total grams were 36109 out of which 21311 gms. which is in rotation has to be taken out leaving a balance of 14798 grams. Sales have been accepted by the ITO of 8637 grams, which leaves 6161 grams in balance. This is so....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from any of the customers thought it fit to draw adverse inference against the assessee without any justification on the facts of the case. In this regard, it was submitted by him that no addition had been made regarding these advances from the customers in any of the earlier years. In this regard, he emphasised that opening balances of such advances to the tune of Rs. 17,13,468 had been accepted without demur. The method of accounting followed by the assessee was the same as in the earlier years. Therefore, there is no justification whatsoever, to make the impugned addition of Rs. 9,84,700 on the type of objections and defects that have been projected in the impugned order by the ITO. The learned counsel for the assessee submitted that the advances received had, in fact, been returned and were very easily verifiable either by sending an Inspector on the addresses given or by writing to the parities concerned. However, instead of taking up a proper method of enquiry and finding out relevant facts, the ITO has adopted a short cut in making the impugned addition by pointing out defects on unverified facts. The addition has no justification because g.p. declared was normal for the ye....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o him, the claim of non-maintenance of the stock information slips was an after-thought. The addition made by the ITO was fully justified on the basis of human conduct, which has to be seen in the light of CIT vs. D.P. More (1973) CTR (SC) 500 : (1972) 82 ITR 540 pp. 546 (SC). In this regard he submitted that when an estimate of the total income has to be made there would necessarily be some guess work involved but it must have nexus as pointed out in the judgment of the Supreme Court in CST vs. H.M. Esufali H.M. Abdulla (1973) CTR (SC) 317 : (1973) 90 ITR 271 (SC). The learned counsel submitted that the assessee was the beneficiary of a spiral in prices on account of stock of ornaments with the assessee. The ITO has, therefore, rightly taken the rate of g.p. at 25 per cent. According to him, the ITO has pointed out that the addresses of the parties from whom advances were received were not given and, therefore, these could not be verified. It was emphasised by the learned counsel that books being not adjusted and closed, the ITO did the best thing to point out the defects in their maintenance and then made the impugned addition, which cannot be called either arbitrary or excessive....
X X X X Extracts X X X X
X X X X Extracts X X X X
....el, it was submitted. The learned counsel for the assessee submitted that the value of stones had been shown at Rs. 8,39,330. In this, the value of stones for the last year is Rs. 50,260. The balance of Rs. 7,89,070 is the value of stones/gems as on 31st March. 1980. The value has been determined by taking the value per gram at Rs. 92.039 as against the value of per gram of gold taken at Rs. 87,47. This shows that the assessee has, in fact, valued the gems at a rate higher than the gold which the ITO is alleging the assessee sold clandestinely by routing the ornaments through the Karigars and showing receipts thereof at less weight as alleged. He clarified that the same system after this year has been followed consistently for all the subsequent assessment years. He emphasised that this method was adopted for convenience of carrying on the business and the Karigars' statements support the assessee in this regard, in so far as the separation of gold from gems and stones is concerned. The assessee had no intention to defraud the Revenue and the method so adopted was not a device. 39. On the other hand, the learned counsel for the Revenue stated that no "Karigars" have stated that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as to act in accordance with the Gold Control Act. There is a strict watch on the movement of the ornaments. The assessee, therefore, made necessary entries in this register and took out ornaments for sending them to Govt. Mint atBombayfor refining. This was out of old stock substantially and was done to obtain pure gold as the prices of gold were rising and gold so obtained could be used for making new ornaments. There is, no doubt, loss in refining but this is because it is not possible at the time of purchase of ornaments to pin-point the purity or refinement of gold in the ornaments. The assessee took out the ornaments and sent them through the postal authorities toBombayto the agents. The agents in turn handed over the gold ornaments to the Mint for refining. After refining the gold was again taken back by the agent and sent to the assessee. Necessary entries have been made in this regard. It was argued that vouchers from the Mint are available with necessary details and it can be seen therefrom that the ornaments sent varied in purity and were not all of the type alleged by the ITO. 42. On the other hand, the learned Standing Counsel for Revenue argued that there was loss ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Revenue that what was sent to Mint was different than what was taken out of the books, the learned counsel submitted that it was mere guess work but in such matters there could not be a leap in the dark even if some guess work is to be made because the guess work must be based upon some evidence howsoever, small. He submitted that the ITO has no evidence whatsoever, for the various types of surmises on the basis of which he has made the addition. Referring to the certificate from the Mint, it was submitted that the Mint authorities take the ornaments as they come and do not go into the purity of it. As such, the Mint records show that the purity of the ornament tendered is unknown. It is quite normal and it does not in any way support the conjectures of the Revenue. 44. The learned counsel for the assessee emphasised that the gold ornaments sent had different grades of purity, some were of 18 carats and others of different carats. It is, therefore, not true to say that the assessee sent such ornaments that had a particular type of purity and that these were different ornaments. The loss in refinement is also varied and not on a fixed percentage. In this regard, he cited th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Rs. 2,93,680 being interest paid by the assessee on loans taken from family members. In ground No. 6 grievance is regarding the confirmation of the addition of Rs. 3,11,130 as interest paid on loans not taken for purpose of business and interest of Rs. 2,00,000 disallowed on estimate basis under s. 40A(2) of the Act. The argument from both the sides were on the lines as taken up before in the orders of the authorities below. The claim of the assessee is that neither there are interpolations nor the payment of interest is such that any part thereof can be disallowed justifiably. On the other hand, the Revenue contended that the orders of the authorities below have been made in such a manner that no interference therein is called for at the instance of the assessee. 48. Ground No. 7 relates to the addition of Rs. 10,000 made by the ITO and sustained by the CIT(A) on account of closing stock of packing material. It was contended on behalf of the assessee that it is the same method that is followed and in this regard for the asst. yr. 1977-78 order of the CIT(A) dt.12th Jan., 1977in the assessee's case was cited accepting this method o the value of the closing stock. This order ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ched and are also controlled by the entries in registers G.S. 11 and G.S. 12. All calculations made by the ITO, therefore, on the basis of stock information slips cannot be taken as sacrosanct taking the addition for the year under appeal. It is also seen that though the ITO has worked out the stocks on the basis of stock information slips as on25th Nov., 1980, he has not controverted or dealt with the figures given by the assessee. No discrepancy has been found in G.S. 11 and G.S. 12 and when in the appellate proceedings, these figures were projected to the learned CIT(A), he has not dealt with them independently of the observations given by the ITO. 52. From the assessment order, it is also seen that the ITO instead of examining the immediate past record of the assessee in this respect relied upon what happened in the search in 1975. He projected that the assessee was doing business outside the books as evidenced by the disclosure at that time and, therefore, there should be a reasonable presumption that even now the business is carried on outside the books. However, for such a presumption, no evidence has been brought on record. Regarding the disclosure made at the time after....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ddition has been made in the earlier year regarding advances from the customers. The method of accounting followed by the assessee was the same for the year under appeal as in the earlier years. The ITO went on the presumption that the addresses of the customers from whom advances were received were not available. However, the addresses of the customers in the record of the assessee were available even in registers like G.S. 11 and G.S. 12 if the addresses were available there was no question of drawing an adverse inference without making an enquiry. 55. This, however, leaves the question, whether the books of account of the assessee for the year under appeal are such that true profits and gains of business carried on by the assessee could be deducted therefrom open. This, itself leads to the proposition propounded by the ITO which we endorse, that in the case of the assessee, "provisions of s. 145(2) are attracted". In case the provisions of s. 145(22) are applied one has to see whether the results declared by the assessee are reasonable and fair. This can be compared either with the results declared by the assessee and accepted earlier or in the absence of such material, a com....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... get the benefit of the rise in prices even if all the stocks are freshly purchased. The assessee, however, had stocks in the opening balance. We also find, however, that the ITO has not been able to find any purchases outside the books of account in order to justify an independent addition on that account. The turnover declared by the assessee, therefore, has to be viewed in this position. The book results, as such, on the facts of the case, cannot be accepted. The act of estimating the turn over on the entirety of the facts of the case, therefore, is justified. But we do not uphold the estimate of turnover in quantum as such. Considering the G.P. that the assessee had been declaring from the earlier years and the various submissions made from both the sides and on entirety of the facts and circumstances of this case, an over all addition of Rs. 2,50,000 in our considered opinion, on this account will meet the ends of justice. The balance is deleted. Assessee gets relief of Rs. 7,34,700 on this ground. 58. Before we proceed further, we would like to deal with the contentions raised on behalf of the assessee regarding limitation of the assessment. In this regard, we find that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that minor alterations do not affect the weight of the ornaments. He has also replied to the query of the ITO, whether stones were given back to the assessee, in the affirmative. In answer to one of the questions at internal page 3 he has even stated that the labour charges are recorded in each bill and the receipts, as recorded in his looks, are produced in evidence. Similarly, the statements recorded of other Karigars like Ashok Kumar, Ramesh Lal, Tilak Raj, Hira Lal, etc. support the claim of the assessee. We have therefore, to see whether despite the evidence collected by the ITO after an enquiry on the claim made by the assessee, he had any evidence with him to reject the version of the assessee and to make an addition on the ground that when ornaments were given to the Karigars and when they were received back from them, the assessee managed or manipulated to take out, part of the gold for selling outside the books of account. 61. The ITO relied upon the difference between the gross weight of ornaments given and the net weight of ornaments given and the net weight of ornaments received. His inference was that the difference in gold had been taken out of the books for tradi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... find that for the year under, appeal, the value of stones stock has been shown at Rs. 8,39,330. In this the value of stones for the last year is Rs. 50,260. The balance of Rs. 7,89,070 is the value of stones/gems as on31st March, 1980reflected in the final accounts. This value is taken by taking the value of stones per gram at Rs. 92.93. There is no dispute that value of gold per gram of valuing stock has been taken at Rs. 87.47. Thus, the value of the stones have duly been accounted for and on this basis, there is no difference between the gross weight given to the Karigars and received from them, because when the gross weight was taken the ornaments included gems, diamonds and stones, which were taken out before handling them over for either polishing or alterations to the Karigars and as such, only the net weight of ornaments in gold was received back. 64. This method of the assessee, no doubt, can be challenged by the ITO, if the has any doubt of suspicion but in order to establish his doubt or suspicion there must be evidence in support of the action that the ITO takes. However, as we have pointed out supra and it comes out of the arguments of both the sides and from the o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ho recorded in their books the contents thereof and since the Mint does not record the purity of the ornaments tendered at the time of their handing over to the Mint, the proforma provided indicates that the purity of the ornaments is unknown. 67. We further find that the ornaments tendered for purification to I.G. Mint were of varying purity. At pages 110, 121,133 and 143 of the paper book No. 1 filed by the assessee are India Govt. Mint,Bombayvouchers indicating registered number, weight of gold, its fineness, loss in refining, fineness of the gold obtained and weight of such gold. We find that there is no conversion that these vouchers belonged to the Mint and give true and correct position of the ornaments tendered. In fact, the ITO himself observed in the assessment order that it was true that the entries in the registers show the consignments to Bombay Mint vouchers of the Mint are also there. However, according to him, this itself was not conclusive proof the shortages claimed by the assessee. Now, we find that on one hand, the assessee is projecting its case with due evidence and on the other hand, the ITO is rejecting that claim of the assessee without attempting to mak....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts made from Karigars instead of his obtaining pure gold through the Mint atBombaycarries the case of the ITO no further. 69. The ITO used the media of transmission as a doubtful proposition. According to him, the ornaments of substantial value were insured for a paltry sum of Rs. 5,000 only and this indicated that something was wrong in the transmission. Now, if he had really a mind to make the impugned addition of over Rs. 8 lakhs it would have been absolutely within his powers to examine the entire process and find out why the insurance was being put at only Rs. 5,000. The assessee has filed abstract from the postal records and it is provided that insurance fee for Rs. 100 and thereafter upto Rs. 10,000 is Rs. 3. There is no provision for insuring beyond the sum of Rs. 10,000. So, whether the insured parcel which contained ornaments of the value far beyond Rs. 10,000 was insured for Rs. 5,000 or Rs. 10,000 was immaterial for the assessee and since, no mishap had occurred the assessee continued to carry on the business in that manner. Here again there is no enquiry that what was insured was not of the value which the consignment indicated when it reached and was recorded by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to add that there was something else in those packets it is for the ITO to prove and not for the assessee to prove the negative on which the ITO's presumption is based. In our considered opinion, there is an impression of the ITO feeling reluctant to go into the process of examination on this method of transmission of ornaments to IG Mint, Bombay and the reception of the gold therefrom. We have seen supra that when he issued summons under s. 131 of the Act and examined some of the Karigars regarding the handling of ornaments from which diamonds, gems or stones had been taken out he found it that they all made statements which supported the case of the assessee. From the above observations made about this addition, we are of the opinion that the addition was not made which carried conviction with it. We have no hesitation in deleting it from the total income of the assessee. We do so. 73. Ground No. 6 and ground No. 8 have become infructuous in view of order of the ITO. Under. s. 250 of the Act dt.27th March, 1986giving affect to the impugned order of the CIT(A). These grounds are dismissed as infructuous. Ground Nos. 9 and 11 were not pressed. These are treated as dismissed as....