TaxTMI 
TaxTMI 
2016 (5) TMI 1312
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....g the trading addition made by AO after rejecting books of accounts. Precise grounds taken by revenue reads as under :- (i) Whether on the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing the set off of loss incurred on sale of polished diamond goods against deemed income assessed u/ s. 69A. (ii) Whether on facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the sales on account of undisclosed stock of diamond goods added u/ s. 69A was business sales. (iii) Whether on the facts and circumstances of the case and in law, the learned CIT(A) erred in treating the loss on sale of the diamonds as genuine without appreciating the fact that the assessee has sold the stock at much lower rate than that arrived at by the Government Valuer. " (iv) Whether on the facts and circumstances of the case and in law, the learned CIT(A) was right in deleting the addition of Gross Profit at the rate of 3.30% made by the AO rejecting the books of accounts, relying on the various discrepancies pointed out by the AO in his account.". 4. Rival contentions have been heard and record perused. ....
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....ssee company, in the course of search proceedings. Sh. Vipul Shah confirmed that these loose papers were containing stock details of M/s. A' Star Exports, M/s. Asian Star Diamond International Pvt. Ltd. and M/s. Rahil Agencies. Shri Vipul P Shah further stated that the stock mentioned in seized papers was procured out of unaccounted income. He gave the details of stock as follows: Sr.No. Name of the entity Amount (Rs.) 1. M/s Rahil Agencies 8,01,81,720/- 2. M/s Asian Star Diamonds International Pvt. Ltd. 9,95,74,250/- 3. M/s A'Star Exports 11,79,15,875/- Total 29,76,71,845/- 4.2.3. Further he stated that he did not have any document to prove that they were accounted for in the books of accounts of above entities and made a declaration of Rs. 29,76,71,845/- as unaccounted investment in stock, which included Rs. 11,79,15,875/- belonging to M/s. A-Star Exports (i.e., the appellant in this case). The stock mentioned in above referred seized papers was stated to be kept in one safe located at the office premises. During the course of the search action a prohibitory order u/s. 132(3) of the Act was placed on the s....
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....income of Rs. 13,47,63,640/- in the form of stock of polished diamonds under the head profit and gains of the business, a loss was shown as incurred on the subsequent sales of these diamonds. This loss claimed at Rs. 6,59,80,534/- was adjusted against the undisclosed income of Rs. 13,4 7,63,640/-. It was thus noted by the AO that in effect the appellant whittled down the undisclosed income in the return of income filed. The AO held that the unaccounted undisclosed polished diamonds found was unexplained investment of the appellant which was covered u/s. 69/69A of the IT.Act. Accordingly the AO held that the loss under the head profit and gains of the business cannot be set off against the deemed income u/s. 69/69A of the I.T.Act. AO held that both the sections 70 and 71 as applicable to the facts of the case did not allow the business loss to be adjusted against the deemed income u/s. 69A which is not falling under any of the heads of income. After recording the statement of Shri Vipul P.Shah, Director of the assessee company, the AO concluded that Shri Vipul.P.Shah could not furnish evidence in support of his claim that there was unrecorded trading in diamonds. The AO then went on....
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....- clarified that this Act may provide certain situations in which the income (chargeable to tax) may not be classified under any head. He concluded that the deemed income u/s. 68 to 69A may not be classified under any heads of the income but may be charged to tax separately without referring to any head of income. He also noted that the amounts deemed to be income u/s.68/69A can be deemed to be income under certain circumstances. He concluded that there cannot be any source for such deemed income and that such income are often in the nature of application of income. The AO finally concluded that if the source of investment as explained are known then the income from the said source can be brought to tax under the relevant head and not as deemed income u/s. 68 to 690. He thereafter relied on the Hon'ble Gujarat High Court decision in the case of Fakir Mohamed Hazi Hasan (247 ITR 290). Relying on the paragraph quoted from the decision by the Gujarat High Court, the AO drew support for his contention that the deemed income u/s. 69 to 69A is not income from salary, house property, profit and gains from business or capital gains nor income from other sources. Since the source is not....
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....im that "the global prices and the liquidity position forced the appellant to sell the undisclosed diamonds at a loss. The AO observed that the other concerns belonging to same assessee group had shown profit and therefore there was no reason for losses to be incurred on sale of undisclosed polished diamonds found during the search. He also did not accept, for the reasons stated in the order, that the diamonds were sold to meet the tax liability of the appellant. The AO also did not accept the contention of the appellant that the polished diamonds were overvalued by the government valuer at the time of search, on the ground that the appellant had not filed any letter of objection about the alleged over valuation of stock of diamonds during and after the search proceedings. The AO also noted that even in the Page no. 76 of Annex. A-5 the value of diamonds of 1277.25 carats was considered at Rs. 11,79,15,875/- and that this valuation is made by the appellant itself. The AO also did not-accept the valuation report obtained by the appellant in January 2011 wherein the same diamonds were valued by the registered valuer viz. Sharad Jhaveri who valued these diamonds at Rs. 7,94,58,400/-.T....
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....taining to the appellant. The appellant had declared undisclosed income of Rs. 13,47,63,640/- in form of stock of polished diamonds under the heads profits and gains of business and profession and further the same had been set off u/s.70 of the I.T. Act against losses of Rs. 6,59,80,534/- incurred on trading activity during the year. It was argued that the AO was wrong in treating the stock of polished diamond u/s.69/69A of the I.T. Act and also holding that the same was headless deemed income not liable to be adjusted or set off u/s. 70/71 of the I.T. Act. It was claimed that the stock of polished diamond found was declared as stock in trade and this contention of the appellant was accepted by the investigation officer, who therefore did not seize the diamonds. It was submitted that in the statement recorded of Sh. Vipul Shah partner of the firm on 20/11/12, it was stated that this undisclosed income is generated on account of unrecorded trading of diamond. It is argued that since the declaration was related to trading business, the unaccounted polished diamonds found was stock in trade and therefore the same was offered as income of business or profession. It was argued that both....
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....a (P) Ltd vs CIT (ITA No.106 of 2011 (0 & M) is also misplaced. In this case the assessee has adjusted current year undisclosed income with the carried forward business losses and since in current year there is no business income, hence the same has been disallowed. But in case of the appellant the losses claimed for set off pertains to current year which is eligible for set off against any head of income except salary income. Therefore the ratio of above decision is not applicable on the facts of the appellant's case." 6. An appeal was also filed by the revenue in ITA No.4412/Mum/2014 against the order of CIT(A) for the assessment year 2011-2012, wherein same grounds have been raised as have been raised in ITA No.4411/Mum/2014 in case of M/s A' Star Exports Ltd., Mumbai, as discussed above. The CIT(A) has deleted the addition and allowed the set off of stock against the business loss after having the following observations :- 4.5. I have perused the submission filed and the explanation given in the oral hearings in the appellate proceedings carefully. From the submission of AR , it is seen that it was argued that the investigation team released the unaccounted stoc....
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....d that the subsequent decision of Gujarat High Court has noted that the earlier decision did not consider the sec.14 and sec. 56 of the on a conjoint basis. It was argued that the Apex Court decision in the case of D.P.Sandhu Brothers Chembur Pvt. Ltd.(2005) 273 ITR 1 supports the view that all income has to fall in one of the heads of the income provided in the income tax act. Some decisions were cited to support the view that the income reflecting the unaccounted stock of diamond during search cannot be headless income, and it should be considered to be taxable either under the head of income from business or income from other sources. It was then argued that the current year's loss should be set off against the income in terms of sec.70/71 of the I.T.Act. Reliance was placed on the judgment in the case of Chensing Venture Vs. CIT [2007) 163 Taxman 175 (Mad.). In this decision, the case of Fakir Mohamed Hazi Hassan has been considered. It has been noted that the decision in the case of Fakir Mohammed Hazi Hassan was over turned by Hon'ble Gujarat High Court itself in their decision in Radhey Developers Pvt. Ltd. the appellant also submitted that the AO has incorrectly relied upon....
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....me. Further, the loss has occurred on account of the cost price considered viz-a-viz the sales price and not on the basis of the party to whom the goods are sold. Sale to the same party where the cost is less results in profit which is higher than the case where the cost is more. As regards the maintenance of stock register, the appellant has maintained carat wise stock register. Further, details such as cut, clarity, colour is difficult to maintain and is not a practice in the diamond industry. The details as maintained in the stock register of the appellant has been approved by ITAT Mumbai Bench in the case of Dharamchand Paraschand Export vs. ACIT no. 2833/Bom/91 where it has been held that carat wise stock register will be sufficient. Similar observations has been made by the Hon'ble Bombay High Court in the case of CIT -5 vs. M/s. Sundaram Gems Pvt. Ltd. (ITA No.6785 of 2010) In this decision the Bombay High Court did not accept the rejection of books of account by the AO and held that the maintenance of carat wise stock register is a regular practice prevalent in diamond trade. The decision in the case of DCIT vs. Samir Diamond Export was reversed by the Hon'ble ITAT ....
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.... Rs. 73.03 crores. As seen from the copies of audited accounts for AY 2001-02 till AY 2001-02 till AY 2011-12, A-star Exports (earlier named as Vipul Trading Company), with its office at 104/116-C, Mittal Court, Nariman Point ,Mumbai, has business activity of Cutting, polishing of rough diamonds and sale of polished diamonds. The business was of import, export & processing of diamonds. In AY 2010-11, a SEZ unit was set up in Surat. As seen from copies of audited accounts for AY 2002-03 to AY 2012-13, Asian Star Diamonds International Pvt Ltd., with its office at 114-C, Mittal Court, Nariman Point, Mumbai , has business of trading in Cut and Polished Diamonds. It was also a partner in Vipul Trading Company, now A-Star Exports. As seen from copies of audited accounts for AY 2000-01 to AY 2011-12, Rahil Agencies, was also having business of trading of export and import of diamonds. The directors/partners of these firms/company such as Vipul Shah, Dharmesh D Shah, Dinesh Shah and Arvind Shah, are all in diamond trade. The diamonds found during search was from the office premises at 114/116, Mittal Court, C-Wing, 11th floor, Nariman Point, Mumbai-400 021. This is also the head office of....
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....se diamonds found were always referred to as stock in trade. The extracts of the statements are reproduced below. Statement on oath of Shri Vipul Prabodh Shah, aged 43 years, s/o Late Shri Prabodh Shah, recorded on 30-10-2010 u/s. 132(4) of the Income Tax Act, 1961 during the search proceedings u/s. 132 of I.T. Act, 1961, at the office premises of Asian Star Company Ltd at 114, 11th floor, Mittal Court 'C' Wing, Nariman Point, Mumbai 400 021 on 30.10.2010. Q.6 During the course of search u/s. 132 of the I.T. Act in the premises of M/s. Asian Star Cam. Ltd., it was found that there is stock of diamonds both rough and polished as mentioned in the stock inventory taken by the government approved valuer, valued at Rs. 1,06,73,74,569/- as per Annexure 1 to this statement. Please confirm the same and state whether the same is accounted for in your books of accounts. Ans. Yes, I confirm that the stock inventory taken by the government approved valuer, valued at Rs.,1,06,73,74,569/- as per Annexure 1 to this statement pertains to that of our company, M/s, Asian Star Co. Ltd. There may be difference in the value of stock of diamonds as per books and what is physically found. This is....
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....ational Pvt. Ltd. and are accounted for in the books of accounts of the respective entities are kept? Ans. The same are kept in the safe number 2 found in the executive main cabin in this premises. The keys of the same are not available right now. We will produce the same on Tuesday as the same are available with on of our employees who is out of station and is expected to be back in Mumbai on 2/11/2010. Statement u/s. 132(4) on Oath of Shri. Vipul Probodh Shah, Managing Director of Asian Star Co. Ltd. recorded during the course of search action u/s. 132 of the I.T. 1961 (Operation of P.O) in the case of M/s. Asian Star Co. Ltd. at 114, 11th floor, C wing, Mittal Court, Nariman Point, Mumbai-400 021 on 27.12.2010. 0.2 Do you aware of the proceedings that today we have come for operation of prohibitory order placed on Safe No. 2 in Strong Room in Executive Main Cabin at 114C, 11th floor, Mittal Court, Nariman Point, Mumbai-400 021? Ans. Yes. I am aware of the proceedings. 0.3 I am showing your statement recorded on oath u/s. 132(4) on 30.10.2010 to you. While answering to Q. No. 8, 9, 10 % 11, you had stated that there were some unaccounted diamonds worth Rs. 29.76 crores of three e....
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....and reconciled all loose papers found. The cash and stock of M/s. Asian Star Co. Ltd. are fully reconciled and excess stock found of three companies namely M/s. Asian Star Diamond International Pvt. Ltd, MI5. Rahil Agencies and M/s. A Star Exports (formerly known as MI5. Vipul Trading Co.) valued by your valuer at Rs. 34,50,OO,516/- is declared as additional income for F.Y. 2010-11 and other Rs. 1 0 crores as additional miscellaneous income in order to take care of any discrepancy if found during the course search proceedings. We shall pay tax there on before 31/10/2011. Since income declared voluntarily u/s. 132(4) we request you not to initiate any penal proceedings against us. In future also we assure you to fully cooperate with the department. 4.8.4 A perusal of the extracts from the above statements show that the appellant had always explained the diamonds found as excess stock in trade. There is nothing to indicate that the appellant was carrying out any other undisclosed activity or had any other undisclosed source of income. There is also merit in the appellant's contention that accepting this explanation of the appellant that the diamonds are stock in trade, the investi....
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.... in the case of Fakir Mohammed on this issue has not been accepted in the subsequent decision of the Gujarat High Court in the case of DCIT vs Radhe Developers India Ltd reported in (2010) 329 ITR 1 (Guj) where it is held that the Act does not envisage taxing any income under any head not specified in section 14 of the Act. This view of the Gujarat High Court has been followed in Chensing Venture vs CIT (2007) 163 Taxman 175 (Mad). 4.9.4. The assessing officer has explained that section 68/690 represent deemed income which is distinct from the normal concept of income. The normal concept of income only can be considered under the five heads of income. The deemed income is a headless income. However, deemed income is not a concept found only under section 68-690. Under income from house property, there is concept of deemed to be let out u/s 23(1 )(a) of the Act. Similarly section 41 deals with remission of liabilities as deemed income. Section 44AD to 44BBB deal with presumptive income as does section 50C and 50D in the Act. No doubt the decision in the case of Fakir Mohamed Hazi Hasan supports the view of assessing officer, but the same has subsequently been overruled, as alread....
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....er in rejecting the loss on sale of the diamonds and estimating gross profit instead. The loss in the case of appellant has arisen primarily on account of cost considered in respect of the same. Admittedly, there is no proof with regard to the cost of acquisition of the diamonds. The cost has been considered based on the valuation made by the Departmental Valuer at the time of search. This is much higher than the asking price mentioned in the loose paper 76,77 and 78. If the valuation is high, it will result in loss. If the valuation is low, it will result in profit. The appellant has claimed that the valuation at the time of search was on the higher side. It has relied upon a subsequent valuation to show that the valuation was on the higher side. At this stage, on examination of the two valuation reports, it is noted that neither of the reports have indicated the number of pieces of diamonds that were found nor has valuation been made based on distinct categories based on cut, colour, carat and clarity. This lends support to the claim of the appellant that such record keeping in stock register is onerous if not impossible. The number of pieces are indicated in the invoices for sal....
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....had valued on14-1-2011. The diamonds valued are a large number of pieces of small carat value. They are not unique or distinguishable for a person to remember after two years. The value of diamonds are best indicated by the price offered by customers. I find that the assessing officer has not commented on the documentation provided by the appellant in respect of price negotiation with the customers. 4.10.7. The negotiations with overseas parties as per contemporaneous records in respect of sale of unaccounted stocks is summarized below. Asian Star Diamonds Intnl. Pvt. Ltd. 4.10.8. The appellant has submitted credible contemporaneous evidence of price negotiations in respect of sales of unaccounted stock of diamonds. It supports the appellant's claim that the customers did not vale the diamonds at the rates considered in the valuation made at the time of search. Some of these parties are regular customers of the appellant group. There is no evidence that the sales are not genuine or under invoiced. The assessing officer has not verified the details from the customers, the details of which have been furnished to him. I hold that the transactions of sale reported are genuine....
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...., the rejection of books of accounts and estimation of gross profits by the assessing officer is held to be unjustified in the facts of this case. In the result, grounds of appeal for A.Y.2011-12 are allowed." 7. Against the above orders of CIT(A), the revenue is in further appeal before us. 8. We have considered rival contentions, carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. DR and AR during the course of hearing before us. From the record we found that the assessee a partnership firm is in the business of trading, import, export, manufacturing, wholesale and retail dealing in diamonds, gems and jewellery The main object of the assessee firm is to carrying out the business of import, export, manufacturing, wholesale and retail dealing in diamonds, gems and jewellery. The partnership business was of importers, exporters, manufacturers, processors, investors, wholesalers, distributors, retailers, dealers and indenting agent of diamonds, synthetic stones, gems and jewellery, precious and semi precious metals and miners and ornaments ....
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....e tax valuer. Consequently the assessee declared this amount as stock in trade and this contention of the assessee was accepted by the Investigating officer. Who has released the stock after valuation and not impounded/seized. The statement of Shri Vipul P. Shah Partner of the firm was again recorded on 20.11.2012 wherein in reply to the question no. 22 he has stated that this undisclosed income is generated through unrecorded trading of diamonds. Q.22 Please explain as to how this undisclosed income is generated? Ans: it is through unrecorded trading of diamonds. " It is clear from the above facts that the declaration was related to business stock in trade hence it is evident that the declaration amount is required to be assessed under the head' Income from Business or profession. Thus, the undisclosed income of Rs. 13,47,63,640/- declared voluntarily by the assessee for A.Y. 2011-12, is undisclosed stock held under the customary trading of the business and hence should be treated as the business income of the assessee firm and not as undisclosed investment as held by the AO. If all the three conditions of Section 69 exist together, the unrecorded investment or value of ass....
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....der of tenancy right. The earlier decisions of the apex court commencing from the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) have been considered by the apex court and, hence, it is not necessary to repeat the same. Suffice it to state that the Act does not envisage taxing any income under any head not specified in section 14 of the Act. In the circumstances, there is no question of trying to read any conflict in the two judgments of this court as submitted by the learned counsel for the Revenue." The same stand was re-affiremed by the Hon'ble Gujarat High Court in the case of CIT-II Vs. Shilpa Dyeing & Printing Mills Pvt. Ltd. (Tax Appeal No.290 of 2013. 10. In view of the above and relying on the decision of various high court and tribunal as cited by ld. AR it is clear that the stock of diamond declared during the .search is taxable under the heads of income as defined in section 14 read with section 56 and not taxable separately. As there cannot be taxable income of income out of the 5 heads of income as specified in section 14 of the Act. Hence the stock of diamond of Rs. 13,47,63,640/- is taxable either under Income from Business & Profession or u....
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....defects in the same. The A. O. has not pointed out any defects whatsoever in the. books of accounts maintained by the assessee. In this regard, the assessee has relied on the several judicial pronouncement before us; but we deem it appropriate to refer to the decision of Hon. Bombay High Court in the case of R.B. Bansil Abirchand Spinning and Weaving Mills. Vs. CIT, 75 ITR 260; Pandit Brothers vs. CIT, 26 ITR 159 (Punjab) and Ashok retractories Co. P Ltd., 279 ITR 457. Considering facts and circumstances prevailing in the present case, we are of the view that learned CIT (A) was right in deleting the addition made by A.O." 13. The CIT(A) has given categorical finding to the effect that the AO has considered gross profit based on SEZ Unit on A' Star Exports at Surat. We found that SEZ Unit operates on fiscal benefits available to SEZ unit and is a manufacturing activity cannot be compared with trading activity. The loss has arisen because of the value considered as its cost. However, there is no evidence of cost in the books of accounts. Further the valuation made at the time of search is a mere one page summary which gives no description of the diamonds and is merely total value....
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....amond found during the course of search. The assessee is in the business of diamond trade and such stock was part of the business affair of the company. Therefore since income declared is in the nature of business income, the same is not taxable under any of the section referred above and accordingly section 115BBE has no application in case. 20. Furthermore, the memorandum to the Finance Bill, 2012 read on Section 115BBE reads as under:- "under the existing provisions of the Income-tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc., no tax is levied up to the basic exemption limit. Therefore, in these cases, no tax can be levied on these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate. In order to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit, it is proposed to tax the unexplained credits, money, investm....