TaxTMI 
TaxTMI 
2022 (8) TMI 1331
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....ssee, M/s Sham Jewellers is a Partnership Firm engaged in the business of manufacturing of Gold and Diamond jewellery. There are four partners in the firm namely S/Sh Ghansham Dass, Harinder Singh, Davinder Singh and Gagandeep Khurana. A search and seizure action u/s 132(1) of the Income Tax Act, 1961 [in short 'the Act']was carried at the business and residential premises of M/s Sham Fashion Group of cases on 15.09.2016 and the assessee firm was also covered in the said search.. The assessee filed the return of income for assessment year 2017-18 i.e. the captioned assessment year declaring total income at Rs. 10,86,80,430/- under the head 'income from business or profession'. The case was selected for compulsory scrutiny being the assessment year relevant to the previous year in which search was conducted. 3.1 As per the assessment order, during the course of search, physical inventory of the stock lying at the premises of the assessee firm was prepared by the Registered Valuer of the Income Tax Department in the presence of the Partner of the Firm Shri Gagandeep Khurana and two witnesses. In such physical verification, the inventory of the stock was found as under:- ....
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....t trading account. 3.6 The AO also observed that the other surrender of Rs. 3 crores was also shown in the Profit and Loss account on the credit side by showing it as income surrendered other than stock but further an amount of Rs. 2 crores had been debited to the Profit and Loss account on account of di fference in the valuation as per loose sheets. As per the AO, thus, only an amount of Rs. 1 crore was effectively disclosed in the Profit and Loss account. 3.7 The assessee was asked to explain the differences as mentioned above and was also required by the AO to show cause as to why the provisions of section 115BBE not be invoked. 3.8 In response to the query and the Show Cause Notice issued by the AO, the assessee filed detailed submissions challenging the valuation of stock and submitted that the said valuation had been incorrectly made because when the assessee was maintaining regular books of account and the same books of account were available and were made up to date on the date of search, the action of the Department in recasting the Trading Account by applying the gross profit rate was incorrect. It was also submitted by the assessee before the AO that the rate ap....
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.... AO, Shri Gagandeep Khuarna had failed to provide any explanation with regard to the excess cash found to the tune of Rs. 10,40,000/-, the AO proceeded to add this amount of Rs. 10,40,000/- to the income of the assessee as 'undisclosed income' u/s 69A of the Act and also held that tax was to be charged @ 60% in terms of the provisions of section 115BBE of the Act. 3.12 The assessment was completed at an income of Rs. 25,72,88,050/-. 3.13 Aggrieved, the assessee preferred an appeal before the Ld. First Appellate Authority who allowed part relief to the assessee by upholding addition of Rs. 2,41,91,512/- as against the addition of Rs. 11,66,04,162/- on account of valuation of jewellery in respect of the stock found at the time of search. The Ld. CIT(A) also upheld part addition in respect of alleged unaccounted sales and expenditure by upholding addition of Rs. 73,90,025/-as against addition of Rs. 2,54,02,358/- made by the AO. The Ld. CIT(A) also went on to uphold the addition of Rs. 1,40,000/- made by the AO on account of excess cash found during the course of search. 3.14 The Ld. CIT(A) also upheld the invocation of provisions of section 115BBE of the Act. 3.15 Aggriev....
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....ion of Rs.10,40,000/- made on account of excess cash applying the provisions of Section 69A of the Act which is arbitrary and unjustified. 8. That the Ld. CIT(A) has erred in upholding to applying the judgment of Hon'ble Punjab & Haryana High Court in the case of Kim Pharma, which has been distinguished in later judgments and also in that judgement, the stock and receivables have been held to be business income and only cash has been) treated as deemed income u/s 68 and hence that judgment is not applicable at all. 9. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the charging of tax at 60% applying the provisions of Section 115 BBE which are not applicable in the instant case and as such the order passed is arbitrary and unjustified. 10. That the Ld. Commissioner of Income Tax (Appeals) has further erred in holding that the source and nature of income on account of various unexplained transactions have remained unidentified, unknown, unexplained and undisclosed which is factually incorrect in as much as the only source of income of the assessee firm is business and the search team as well as the Assessing Officer has....
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....nst Rs. 1,05,61,33,543/- valued by the Department's Valuer on the date of search. It was submitted that the difference has arisen due to the method of valuation. The Ld. AR submitted that the approved Valuer had first counted the stock item-wise, the number of pieces of a particular item without specifying the weight of each item and had then converted the same into gross weight and net weight of stones etc. and had, thereafter, applied the Gold Rate whereas, the assessee valued the stock on weight basis and had applied the average cost of purchase prevailing during the year. It was submitted that the main reason for dif ference was that the Valuer had valued the entire stock at the current market rate at the time of search and had not made any distinction between stock existing in books and stock found existing outside books. 4.2 The Ld. AR further submitted that, the Department had erred in recasting the trading account only on the basis of gross profit rate for the last three years and in calculating the value of Rs. 87,19,51,342/- which was far from the actual figures because the books of account showed the value of stock at Rs.94,76,47,602/-. 4.3 The Ld. AR further submi....
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....e of search amounts to 3725 grams and excess value of diamond has been worked out at Rs. 5,77,52,570/- which is not in dispute. The Ld. AR submitted that, therefore, the assessee proceeded to re-compute the valuation of closing stock and the difference between the assessee's calculation and the Department's calculation amounted to Rs. 7,24,21,955/- as against the surrender of Rs. 14 crores towards surrender of excess stock which was debited to the Profit and Loss account so as to show the correct value of surrender and to pay the tax due on correct income. The Ld. AR submitted that, therefore, the addition of Rs. 11,66,04,162/- on account of di fference in stock and sustained by the Ld. CIT(A) to the tune of Rs. 2,41,91,512/- was completely incorrect. The Ld. AR submitted that the Ld. CIT(A) has erred in upholding this addition by applying the gross profit rate, although, the stock details were available in the stock register maintained on the computer. 4.7 It was further submitted that the assessee is a manufacturer and seller of Gold and Diamond Jewellery and the assessee has been consistently being following the Average Cost Price method for the valuation of closing stock for....
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....n search cases. 4.12 The Ld. AR further submitted that ground No.6 of the appeal challenges the action of the Ld. CIT(A) in upholding the addition of Rs. 73,90,025/- as against addition Rs. 2,54,02,358/- made by the AO on account of unaccounted sales of Rs. 3,54,02,358/- and expenses bills found at the time of search. The Ld.AR submitted that during the course of search the assessee firm had surrendered an amount of Rs. 3 crores in respect of miscellaneous discrepancies found in the books of account and seized documents but while filing the return of income, on making a detailed working, the surrender value was recalculated at Rs. 1 crore which was duly disclosed in the return of income and the assessee had submitted a detailed reply to the AO giving point wise explanations in respect of each and every entry and loose papers found during the course of search. It was submitted that copy of this reply has also been placed in the paper book at pages 11 to 16. Referring to the said replies filed before the AO, the Ld. AR submitted that a perusal of the above replies would show that the assessee firm has given elaborate explanation in respect of each and every entry and each and ever....
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....en purchased only from the unaccounted business receipts of the assessee and it is not the case of the Department that the assessee has some other source of income which would have generated income for the purpose of investment in stock. It was submitted that, therefore, the income as declared under the head of business income should be accepted and the same should not be treated as deemed income under sections 68 or 69 of the Act and, therefore, the provisions of section 115BBE would not apply in the case of the assessee. 4.17 Similarly, with respect to the act of invoking the provisions of section115BBE of the Act with regard to the unaccounted sales, the Ld. AR submitted that the surrendered income of Rs. 1 crore again was in the nature of business income of the assessee as, admittedly, and, undisputedly, the assessee had no other source of income. The Ld. AR further submitted that as far as the issue of invocation of provisions of 115BBE of the Act vis-a-vis cash found during the course of search is concerned, such excess cash found was also sourced from the business income of the assessee and, therefore, the question of attracting provisions of section 115BBE would not aris....
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.... the reliance on stock details, as being maintained by the assessee, was not acceptable. Referring to the itemized list of stock, it was submitted that this list also has discrepancies in as much as the same does not tally either with the books of account or with the physical stock. The Ld. CIT DR submitted that the Ld. CIT(A) has already granted substantial relief in this regard and no further relief is called for. 5.4 The Ld. AR also supported the action of the AO in applying the GP rate and submitted that the AO had no option but to adopt the GP rate for the simple reason that the stock details were not trustworthy. The Ld. CIT DR, referring to the surrender by the Partner of the Firm, submitted that Shri Gagandeep Khurana, in the capacity of the partnership firm, was competent enough to make the surrender and the same at a later stage cannot be retracted under the garb of recalculation by saying that the said partner did not have any knowledge about the intricacies of business or that the said statement had been extracted under any kind of coercion. 5.5 With respect to the assessee's arguments on non application of provisions of section 115BBE of the Act, the Ld. CIT DR s....
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....ncome Tax (Appeals) has erred in upholding the charging of tax @ 60% inadvertently offered during the course of search as 'income from other sources which was in fact Business income' treating the same to be deemed income under section 69 of the Act which is arbitrary and unjustif ied. 5. That the Ld. Commissioner of Income Tax(Appeals) has erred in observing and holding that the source and nature on account of investment in stock in trade has remained unidentif ied, unknown, unexplained and undisclosed, therefore such income on account of such undisclosed assets cannot be covered as income under the heads specif ied u/s 14 of the Act which is contrary to the facts of the appellant and as such the order passed is arbitrary and unjustif ied. 6. That the Ld. Commissioner of Income Tax (Appeals) has further erred in inferring that since the source and nature on account of investment in stock in trade has remained unidentif ied, unknown, unexplained and undisclosed, therefore such income on account of such undisclosed assets cannot be covered as income under the head 'business' or ' Income from other sources' but deemed income under section 69 ....
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....sis to suit the ends of the Department ignoring the fact that Shri Gagandeep Khurana had replied in the affirmative regarding the maintenance of the stock register which was being maintained on a computer system and provided weight-wise details and further and which, as per the statement of Shri Gagandeep Khurana, was up to date on the date of search. In the light of these facts, we agree with the contention of the Ld. AR that the statement of Shri Gagandeep Khurana has not been used by the AO in a proper manner but rather in a selective manner only which cannot be accepted and upheld by us. This selective use of the statement by the AO was further taken as a ground to reject the books of account and apply the average gross profit rate for the purpose of valuation of closing stock and, subsequently, for the purpose of calculation of difference in the valuation of such closing stock. It is very much apparent from the assessment order that after quoting extensively from the statement of Shri Gagandeep Khurana, the AO held that in view of such statement, the assessee was not maintaining any kind of stock details and, therefore, the only course left open for him was to adopt the averag....
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....n as much as even the Ld. CIT(A) has mentioned this fact that no adverse inference had been drawn on the issue of valuation of stock in the assessment orders for assessment years 2011-12 to 2016-17. The Ld. CIT(A) has also observed that the AO should have considered this aspect also while computing the valuation of stock as on the date of search. 10.5 Thus, looking into the past history of the assessee and the fact of the Department having accepted the method of valuation of closing stock in earlier assessment years, as aforesaid, we also accept this contention of the assessee that the method of valuation which has been demonstrated by the assessee to have been regularly followed by the assessee should not have been disturbed either by the Departmental Valuer or by the AO even if they were dealing with a search case where excess stock has been found during the course of physical verification of stock. Therefore, we discard the methodology adopted by the Department firstly of rejecting the books of account on a wrong premise that the assessee was not maintaining any stock details, secondly that the assessee's trading account had to be re-cast to compute the value of stock as per ....
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....99) 240 ITR 3544, their Lordships of the Supreme Court held that the method which was consistently followed by the appellant-bank for valuing the stock-in-trade could not be rejected by the assessing authority in a particular case. 10.8 We agree with the contention of the Ld.AR that the correct way to value the stock as on the date of search was to apply average cost in case of the stock which was existing physically as per the books of account and to apply the market value as on the date of search in respect of excess stock found during the physical inventorisation of stock for the simple reason that the dates on which such excess stock had been acquired by the assessee were not ascertainable and, therefore, the best method to value unaccounted excess stock was to value them at current market value. 10.9 As far as contention of the Ld. CIT DR regarding non-maintenance of stock records by the assessee is concerned, it is seen that although the Department has vehemently been taking the ground that the stock records have not been maintained by the assessee, the fact remains that the inventory as on the date of search and as printed from the computer records has been annexed to ....
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....the same is placed at page 186 of the paper book. Looking into the overall facts and circumstances of the case and in view of our discussion on the aforesaid issue, we agree with the working submitted by the Ld. AR regarding the difference in valuation of stock and we direct that the addition to the extent of Rs. 6,75,78,045/- only (which is as per the admittance itself of the assessee) is liable to be sustained. It is ordered accordingly. The working is being reproduced herein under for a ready reference:- Accordingly, ground Nos. 1 to 5 of the appeal stand allowed. 10.13 Ground No.6 is against the sustenance of addition to the tune of Rs. 73,90,025/- as against addition of Rs. 2,54,02,358/- made by the AO in respect of unaccounted sales and expenditure bills found during the time of search. It is seen that the AO had added the entire amount of unaccounted sales to the income of the assessee and Ld. CIT(A) has held that only unaccounted profit earned on such undisclosed sales by applying the GP rate of 11.34% (amounting to Rs. 40,14,627/-) was taxable and was to be further increased by the unaccounted peak investment made in the purchase for such sales. The Ld. CIT(A) worked....
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....essee's appeal also stands allowed. 10.17 Ground Nos. 8 & 9 challenge the action of the lower authorities in applying the provisions of section 115BBE and thereby charging tax at the rate of 60%. The main thrust of the arguments of the Ld. AR has been that all the additions made or sustained relate only to the business income of the assessee and that nowhere in the assessment order has it been alleged that some other source of income had been detected which gave rise to additional income. It is seen that during the course of assessment proceedings, the various explanations submitted by the assessee have duly mentioned that the surrendered income was derived from the business. A perusal of the assessment order would also show that nowhere in the body of the assessment order, the AO has even contradicted this explanation of the assessee. The AO has not brought on record any iota of evidence to demonstrate that the assessee had any other source of income except income from business and, therefore, it is our considered view that deeming such income under the provisions of sections 68 or 69 would not hold good. In our view, in such a situation, the AO could not have legally and valid....
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....s no separate physical identity of such investment or expenditure, then, first, what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure can it be considered to be taxed u/s 69 of the Act and further where once such investment or expenditure is brought within the purview of tax as undeclared business receipt, then taxing it further as deemed income u/s 69 would be completely out of place. 10.21 Similar view was taken by the Coordinate Bench of ITAT Ahmedabad in the case of Chokshi Hiralal Maganlal Vs. DCIT reported in 131 TTJ 1 (Ahd.) 10.22 It is also seen that the Ld. CIT(A) has relied on the judgement of the Hon'ble Punjab & Haryana High Court in the case of Kim Pharma Ltd. Vs. CIT in ITA No. 106 of 2011 (O&M) and the Ld. CIT DR has also quoted the same in his arguments before us. However, after going through the aforesaid judgement of the Hon'ble Punjab & Haryana High Court, it is seen that in that particular case, the only issue was with regard to the cash surrendered at the time of survey and no other income. The cash found could not be related to the already disclosed and accepted source of income o....
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....Jewellers wherein also we have rejected the action of the Income Tax Authorities in applying the provisions of section 115BBE of the Act. Likewise, on identical facts and on identical reasoning and law, we allow the grounds of the assessee in the present appeal also and hold that the appl ication of provisions of section 115BBE of the Act in the case of M/s Sham Fashion Mall was bad in law and the same cannot be sustained. 13.0 In the result, ITA No. 315/Chd/2022 also stands allowed. 14.0 In the final result, both the appeals of the assessee stand allowed. Order pronounced on 22.08.2022 ============= Document 1 As per Books As per Physical Inventory during search Sr Description Weight Description Weight Difference Comments No. of item of item 01 24 ct. Gold 1742.551 gms 24 ct. Gold 276.16 gms 1466.391 02 22 ct. old 3162.205 gold jewellery gms 22 ct. old 2412.950 gold jewellery 749.255 gms 03 22 ct. Gold 206091.169 22 ct. 208164.540 -252.644 Jewellery gms Gold gms gms Jewellery adjustment after taking into consideration the conversio....