TaxTMI 
TaxTMI 
2018 (12) TMI 975
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.... 'The Act') at an income of Rs. 9,87,13,512/- after making the following additions/ disallowances - i. Addition on account of suppression and under valuation of stock Rs. 9,00,01,050/- ii. Addition on account of unaccounted sales of diamond jewellery Rs. 43,938/- iii. Disallowance of salary of partners Rs. 6,00,000/- iv. Disallowance out of travelling expenses Rs. 2,41,242/- v. Disallowance of business promotion and sales promotion expenses Rs. 3,27,356/- vi. Sundry Creditors added back Rs. 46,15,850/- 2.1 The above mentioned additions were made by the AO in light of the following circumstances: 2.1.1 During the course of assessment proceedings on examination of stock statement, the AO noticed that the assessee had declared a closing stock of 50676.819 gms gold valued at the rate of Rs. 1700.40 per gm as on 31.03.2011. However, the AO observed that the assessee had not mentioned the exact quantitative details of 24 carat and 22 carat gold jewellery, the specifications and the correct rates of valuation. The AO also observed that the assessee had applied the same rate of valuation for 24 carat gold as well as for 22 carat gold. The AO also n....
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....ent categories, namely, (i) 24 carat gold bar (raw gold), (ii) finished gold (22 carat), (iii) stock in store/dealers' gold and, (iv) 22000 gms unfixed gold from Nova Scotia. The AO was of the opinion that the stock statement submitted to the bank was more comprehensive and was in continuation of the record of stock being submitted by the assessee itself on monthly basis to the bank. This was having more evidentially value. The AO also observed that the assessee had failed to produce actual record of stock maintained by him and that further the very existence of two varying stock statements would lead to the conclusion that the closing stock declared by the assessee in its Trading account and Balance sheet cannot be relied upon. 2.1.3 The AO asked the assessee to show cause as to why the difference between the two statements should not be added back as undisclosed and unaccounted income on account of suppression of closing stock. 2.1.4 In response, the assessee submitted that the 22,000 gms of gold which was shown as received from Bank of Nova Scotia as 'unfixed gold' for manufacture and export purpose had been received against issue of Letter of Credit of Rs. 5 crores by the....
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....fit rate at the rate of 4.328% on alleged unaccounted sale of diamond jewellery worth Rs. 10,15,200/- which was also calculated by the AO by considering the difference between the stock statement submitted before the bank and the stock declared in the audit report according to which there was a difference and deficit of 100 CTS of diamond jewellery. 2.3 Apart from this, the AO noted that the assessee had debited an amount of Rs. 12,00,000/- under the head 'salary to partners' and required the assessee to submit the ledger account of the same. On perusal of the ledger account, the AO noted that there were 24 instances where the partners had been paid cash in excess of Rs. 20,000/-. The AO was of the opinion that provisions of Section 40(A)(3) of the Act had been and, therefore, proceeded to disallow an amount of Rs. 6,00,000/- out of the salary paid to partners u/s 40(A)(3) of the Act. 2.4 Apart from this, the AO also noticed that the assessee had debited travelling expenses of Rs. 9,57,874/- in its Profit & Loss Account and the AO required to assessee to file relevant details. From perusal of the details filed by the assessee, the AO reached the conclusion that some expens....
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....s deleted by the Ld. CIT (A) on the ground that the discrepancy in stock would have been from earlier assessment years and the discrepancy did not arise in the relevant assessment year under consideration. The Ld. CIT (A) also recommended that the AO may consider taking suitable corrective action in preceding years. (ii) With respect to the addition of Rs. 43,938/- on account of gross profit of unaccounted sale of diamond jewellery the Ld. CIT (A) held that in this case also the difference in the stock continued from the preceding year and, therefore, the addition would not have been made in the year under consideration. (iii) With respect to the disallowance of partners' salary amounting to Rs. 6 lakhs u/s 40(A)(3) of the Act, the Ld. CIT (A) was of the view that the provisions of Section 40(A)(3) were attracted in this case and the disallowance was sustained. (iv) With respect to the disallowance in respect of travelling expenses amounting to Rs. 2,41,242/-, the Ld. CIT(A) held that the totality of the circumstances would have to be looked into and where direct evidences were not available, substantial evidences would be treated as sufficient for decidi....
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....ording incorrect facts and findings and the same is not sustainable on various legal and factual grounds." 2.9 Similarly the department is also aggrieved by the order of the Ld. CIT(A) and is in appeal before the ITAT in ITA No. 6757/Del/2014 and has raised the following grounds of appeal :- "1. The Ld. CIT (A) has erred in deleting the addition of Rs. 9,00,01,050/- without appreciating the fact that the assessee failed to produce actual physical stock statement during the course of assessment proceedings. The assessee maintained two different stock statements i.e. one was given with the audit report and another was given to bank authorities whereas the assessee cannot maintain two different stock state if ments in the same financial year 2010-11 relevant to AY 2011-12.order is not accep' „.e on the merits in the assessment year 2008-09. 2. The Ld. CIT(A) has deleted addition of Rs. 43,938/- on account of unaccounted sale of diamond jewellery. 3.The Ld. CIT(A) has erred in deleting the addition of Rs. 46,15,850/- without considering the fact that no compliance was made from sundry creditor in response to the notices issued. 4.The Ld ....
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....sessee had failed to record the same in its books of accounts. It was also submitted that the assessee's contention that, while submitting details to the bank, the quantity of 22,000 gms had been inadvertently added rather than reducing it was absolutely false as the assessee had submitted a complete separate account of gold from Nova Scotia in the statement submitted to the bank. It was also submitted that it is undisputed fact that the assessee had not been maintaining stock register in this regard and, therefore, apparently the books of accounts were not to be trusted. It was also submitted that the assessee's claim that there was an inadvertent mistake, which had been continuing from preceding assessment years, was not to be believed as a mistake could not have been perpetrated month after month without the same being detected when the stock statement was being submitted to the bank every month. It was further submitted that the Ld. CIT (A) had grossly erred in deleting the addition by giving a finding that the mistake was relatable to earlier assessment years and, therefore, no addition could have been made in the year under consideration. The Ld. Sr. Departmental Represent....
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....allenged the action of the Ld. CIT (A) in deleting the addition of Rs. 43,938/- on account of gross profit earned on unaccounted sale of diamond, it was submitted that here also the Ld. CIT (A) had accepted the assessee's theory that the difference in stock pertained to earlier assessment years and, therefore, no addition could have been made during the year under consideration. It was submitted that, again, this finding of the Ld. CIT (A) was without any cogent reasoning and the arguments raised by her in respect of ground no.1 would apply for this ground also. 4.2 With respect to ground no. 3 of the department's appeal which challenged the action of the Ld. CIT (A) in deleting the addition of Rs. 46,15,850/-, it was submitted that since the Sundry Creditors had failed to comply to the summons issued by the AO and/or the summons had been returned un-served, the identity of the creditors and their credit-worthiness at that point of time remained unproved. The Ld. Sr. Departmental Representative further submitted that subsequent payment/s by the assessee against the outstanding liability did not prove the genuineness of the transaction at that particular time. 4.3 With respect....
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....y of stock statement submitted to the bank as on 31.07.2011 where no such stock of unfixed gold was mentioned. It was submitted that this impugned clerical error was rectified and, therefore, there was no basis to make any addition. 5.0.3 It was also submitted that since the difference, if at all, was on account of difference in opening stock, therefore, the same could not have been the subject-matter of addition in the impugned year. Reliance was placed on the judgement of the Hon'ble Delhi High Court in the case of CIT vs. Capital Tyres Manufacturing Unit reported in 305 ITR 199 (Delhi) for the preposition that addition could not be made if the difference pertained to a different assessment year. 5.0.4 The Ld. Authorised Representative also drew our attention to the submissions of the assessee made before the Ld. CIT (A), the reconciliation statement placed before the Ld. CIT (A) and the various details submitted before the Ld. CIT (A) and placed at pages 513 to 568 of the paper book and it was submitted that the Ld. CIT (A) had given the impugned relief after duly considering the various documentary evidences submitted in this regard. 5.0.5 The Ld. Authorised Representa....
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....ted that it was unbelievable that the assessee had not maintained the stock register as jewellers, due to the nature of their trade and the value of the items, invariably maintained a daily record of stock. The Ld. Sr. Departmental Representative also submitted that the veracity of the reconciliation statement as submitted and placed on the paper book page 598 was also not established. It was also submitted that the case laws relied upon the assessee were distinguishable on facts. 7.0 Arguing for the assessee's appeal, the Ld. Authorised Representative submitted that ground no. 1 related to disallowance of Rs. 6,00,000/- made by the AO u/s 40A(3) of the Act. It was submitted that this disallowance was bad in law as the withdrawal made by the partners was not on account of payment of any expenditure but what simply a withdrawal against balance available in their accounts. It was further submitted that none of the amounts disallowed u/s 40A (3) were debited in the Profit & Loss Account as expenditure and were rather entries on account of capital account. 7.1 With respect to ground no. 2 of the assessee's appeal challenging the disallowance of Rs. 1,67,356/- made by the AO on ac....
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....ort on 31.03.2011. It is an admitted fact that in the tax audit report, the assessee has declared a closing stock of 50676.819 gms of gold valued at Rs. 1700.40 per gram as on 31.03. 2011 whereas the assessee has submitted stock statement to the bank from, whom the loan/s were obtained showing gold stock of 72052.49 gms. Therefore, the vast discrepancy in the quantity of gold shown to the bankers for the purpose of availing the loan and the quantity shown in the books for the tax purposes resulted in an addition in the hands of the assessee. The assessing officer stated that the stock statement submitted to the bank clearly shows the opening stock, stock-in, stock-out and final closing stock of each item separately. Therefore, there cannot be any clerical error. However, the assessee explained before the AO that 22,000 gms of gold which was received from Bank of Nova Scotia was unfixed gold for manufacture and export purposes against issue of Letter of Credit of Rs. 5 crores by State Bank of India, New Delhi. It was contended before the AO that, therefore, the stock was an unpaid stock and did not belong to the assessee but by error it had been included in the stock statem....
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.... order of the learned Commissioner (Appeals), it is apparent that he has presumed what the assessing officer has not stated. The basic fallacy in the order of the Ld. Commissioner (Appeals) is his stating that as the addition has been made by the assessing officer on account of the difference in stock as per the stock statement submitted to the bankers and the stock shown in the profit and loss account for the tax purposes has been taken for the purpose of addition therefore, the assessing officer has presumed that the opening stock statement submitted to the bank and the opening stock shown by the assessee in its profit and loss account are also sacrosanct. We do not find any such observation in the order of the assessing officer. Thus, the learned CIT (Appeals), for deleting the above addition, has presumed what the assessing officer has not stated. Further, it cannot be said that when there is a difference in the opening stock submitted to the bank and the opening stock shown in the books of accounts and there is also difference in the closing stock submitted to the bank and the closing stock shown in the profit and loss account at the end of the year, the addition cannot be mad....
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....the issue is sent back to the file of the assessing officer with a direction to the assessee to produce before the assessing officer the stock register maintained by the assessee along with the month wise stock statements submitted to the bankers and to demonstrate that the difference in each month is on account of unfixed gold only. The assessing officer is also directed to verify the above details, if produced by the assessee, and decide the issue in accordance with the law after giving proper opportunity of hearing. In the result ground number 1 of the appeal of the revenue is allowed with above direction. 9.2.0 Ground no. 2 of the department's appeal challenges the action of the Ld. CIT(A) in deleting addition of Rs. 43,938/- which was arrived at by applying the gross profit rate of 4.328% on alleged unaccounted sales of Rs. 10,15,200/- pertaining to diamond jewellery. Ground no. 2 is identical to the ground no. 1 of the department's appeal and in view our detailed findings as contained in the preceding paragraphs with respect to ground no. 1, this ground is also restored to the file of the assessing officer for examining the issue afresh in light the evidences which the ass....
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....nia and Mr. Vijay Kumar Challa during the assessment proceedings vide its submission dated 03.12.2013. On which the AO failed to give any adverse comment. Here, it is evident from the submission of the Ld. Counsels that two of the creditors under reference are its karigars. One of the liability of Rs. 30,000/- is in respect of purchases. Against which the appellant sold jewellery in the subsequent year. The subsequent payments/sale also proves that the liabilities exist genuinely. The appellant, with the help of above submission and enclosures of the submission explained and rebut the finding of the AO. These liabilities were not quite old. Further, it is also found that these liabilities were liquidated subsequently in short span of time; therefore, the genuineness of these liabilities gets established as the genuine liability cannot lie unclaimed for a long period. Accordingly, it is held that the AO has erred in treating sundry creditors aggregating to Rs. 46,15,850/- as unexplained. Consequentially, the addition of Rs. 46,15,850/- is deleted. The appellant gets relief of Rs. 46,15,850/-. 9.3.1 Although, the Ld. Sr. Departmental Representative has argued at length....
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....ceding paragraphs. 10.0 We now take up the assessee's appeal bearing ITA No. 6062/Del/2014. The first ground taken by the assessee challenges the action of the Ld. CIT (A) sustaining disallowance of Rs. 6,00,000/- u/s 40(3) on account of salary paid to partners. The main thrust of the argument of the Ld. Authorised Representative has been that the submissions of the assessee were not properly considered by the lower authorities in this regard. The Authorised Representative has drawn our attention to the submissions/documents which have been filed by the assessee to support the claim that the impugned payments were not against payment of salary but were rather debited to the capital account and were withdrawals of the partners. Apparently both the lower authorities have not considered this aspect of the assessee's submission. Accordingly, in interest of justice, we deem it fit to restore this issue to the file of the Ld. CIT (A) to verify the claim of the assessee with the books of accounts that the impugned payments were debits to the capital accounts of the partners and were not payments against salary to the partners. The Ld. CIT (A) is directed to decide this issue afresh ....