TaxTMI 
TaxTMI 
2023 (11) TMI 860
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....eged excess stock of diamonds (723.37 carats) u/s 69 of the Act as per para 8.1 of the impugned order 2,11,27,468/- 2. That while upholding the aforementioned additions, Ld. CIT(A) has failed to appreciate that there is no enabling provision in the Act authorizing the authority conducting the survey u/s 133A of the Act to obtained valuation report and obtaining of valuation report is contrary to the provisions of section 133A read with section 142A of the Act. The valuation report can only obtained by making a reference for the purpose of assessment or reassessment, whereas u/s 133A of the Act, the income tax authorities are empowered to make an inventory of the stock checked or verified by him and there is no provision enabling the income tax authority conducting the survey to call for valuation. All the additions sustained by the Ld.CIT (A) are based on the value determined by the valuer. The valuation report as not being in accordance with law is liable to be ignored. 3. That under the facts and circumstances of the case, Ld. CIT (A) has erred in law as much as in fact in not holding that valuation report obtained by the AO during the course of survey was in....
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....tion of Rs. 12,41,652/- despite the fact that Ld. CIT(A) has accepted that overall difference of weight of 453.82 gms between two items of jewelry namely 14 Kt. and 18 Kt. which was difficult to be identified that whether the fact difference pertains either to 14 Kt. or 18 Kt. Ld. CIT(A) has also failed to appreciate that the difference of 453.82 gms being meager and come to 0.58% which was liable to be ignored in view of large quantity of those these items which was of 77962.74 gms. Thus, the addition of Rs. 12,41,652/- is liable to be deleted. 9. That under the facts and circumstances of the case, Ld. CIT (A) has erred in law as much as in fact in upholding the addition of Rs. 2,11,27,468/- without proper application of mind on the submissions made by the assessee by simply relying upon the findings of the AO. Ld. CIT(A) has failed to appreciate that the possibility of intermixing of 14kt and 19kt gold jewellery studded with diamonds could not be ruled out and request of the assessee for seeking clarification from the valuers regarding the basis adopted for calculating the weight of the embedded diamonds was rejected on the ground of such request being belated request. T....
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.... 6. After considering the reconciliation submitted by the assessee during the course of assessment proceedings, the AO has prepared a chart which is at page 2 of the Assessment Order which is reproduced below: S.No. Particulars of Item As Per Books As Per Valuation Difference in Weights Rate Amount 1. GOLD22(INGMS) 22242.380 14226.71 -8015.670 2959.00 -2,37,18,368 2. POLKI22(INGMS) 12700.880 20830.050 8129.170 5286.00 4,29,69,894 3. 14KGOLD(INGMS) 70894.976 59875.590 -11019.386 2280.00 -2,51,24,200 4. DIAIN14KT(INCIS) 14974.360 13408.830 -1565.53 23242.45 -3,63,86,752 5. 18KG0LDC1NGMS) 7067.757 18540.970 11473.213 2736.00 3,13,90,711 6. DlAIN14KT(INCIS) 2112.180 4501.610 238943 29207.00 6,97,88,082 7. After accepting the reconciliation, the AO recorded in the notice dated 01.04.2021 that the assessee has submitted a reconciliation where gold and Polki 22kt, 14kt gold and 18kt gold and diamond and they are required to be clubbed together for the purpose of valuation as they have been considered as similar items. 8. The AO show cau....
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.... 22kt gold and such there is no ground or justification for making inflated valuation of Polki studded 22kt gold jewellery. There being apparent congruity between these two items and on combine analysis, it can be seen that the net difference is only of 113.50 gms (8129.170 - 8015.67). Such difference in percentage being 0.08 percent of the entire stock, therefore being negligible is to be ignored and be taken as there is no difference and otherwise also such difference can be on account of various factors like humidity/moisture content, accuracy/precision/sensitivity of the measuring scale and even existence of wax used for pasting of Polki. DIFFERENCE BETWEEN 14KT & 18KT GOLD JEWELLERY 11. So far as, it relates to difference in the quantity and jewellery wherein there is negative difference in 14kt gold jewellery of 11,019.38 gms and in 18kt gold jewellery there is a positive difference gms was explained that the said difference was due to inter-mixing at the time of valuation and as such there is no difference as has been alleged was submitted that it is almost impossible from physical appearance to differentiate between and 14kt gold jewellery and the same can only be ide....
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....s of negative stock of 1665.53 gms in gold jewellery and positive stock of 2389.43 gms of 18kt gold jewellery. The difference calculated between positive and negative stock put together is 723.90 gms being less available stock as per books as compared to value of these items of gold jewellery by valuers during the course of survey. 17. It was explained that the alleged difference only on account of estimation error and correctness of weight of diamonds as mentioned in the valuation report is not free from doubt as it is case of counting and valuing diamonds embedded the jewellery and there is a considerable chance of miscalculating the number and weight of diamonds keeping in mind that valuation was carried out in a haste and in limited time frame. It was submitted that as per standard practice in jewellery business, approximately 4gms to 5gms of gold is required for embedding 1kt of diamond because diamond being a stone requires certain degree of strength the underling metal for sustenance of ornament and this fact further supported by the inconsistency in two valuation reports prepared by two different valuers on two showrooms of the assessee. Following chart was submitted to ....
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....ion report by the valuer not disclosed and is vulnerable to inflate the valuation of stock. Moreover, there is inconsistency in the rate adopted for valuing Polki as its value is substantially lower than fine cut/polished diamonds. Therefore, it was submitted that the element of subjectivity and arbitrariness in the valuation report for valuation of stock is established and is against the settled legal position, according to which the valuation of difference in stock should be on the basis of average purchase price in the hands of the assessee on the basis of well-recognized principle of valuing the stock at cost or market rate whichever is lower. 20. To support the above contentions, following evidences were submitted: 1. Polki stock ledger since FY 2010-11 to of both the showrooms showing that no fresh Polki jewellery purchase is entered as the same is clubbed with gold jewellery and actual sale of Polki jewellery out of old stock is excluded from the stock register. (Annexure-1) 2. Sale bills of Polki jewellery sold out of old stock (Annexure-2) 3. Specimen of purchase invoice showing Polki items included in gold jewellery no specific rate for Polki....
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....proach in weighing and valuation jewellery by both the valuers. 23. It was further submitted that degree/level of estimation involve valuation also has a significant impact while making comparison with recorded stock. Thus, it was requested that in the interest of justice and fair assessment, to ascertain estimation involved, process of evaluation etc. may be made from independent sources such as internal, jewellery experts, third-party valuers or even the valuers from whom the reports in the present case are obtained so that the appropriate adjustments could be made to the figures appearing in the valuation reports. ADDITION WISE CONCLUSION DRAWN BY THE AO AND THE CALCULATION OF ADDITIONS 1st addition of 22 Kt jewellery and 22 Kt Polkit studded Gold jewellery 24. From the explanations and evidences submitted and also taking into consideration the fact that one of the valuers namely M/s Amit Jeweller, in its valuation had also valued Polki under the category of gold jewellery and no separate valuation was done. The AO has also observed that overall combined weight of both the jewellery found during survey almost matches with that recorded in the books of accounts. The A....
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....ellery of 1665.53 kt and positive difference in 18kt gold jewellery of 2388,90 kt. The net difference by combining both items of 14kt gold jewellery and 18kt gold jewellery has been worked out for 723.37 kt. 28. The AO has considered the contention of the for taking collective weight of these items and also the contention regarding incorrect Departmental valuation report on the issue of counting and measuring the weight of diamonds which according to assessee was done on estimate basis and also the contention that the quantity and weight of diamonds embedded in jewellery is fully corroborated from the inventory maintained according to which excess diamonds so calculated by valuers could not have been embedded the available jewellery. The AO has also considered the request of the assessee for seeking clarification from the valuers regarding the basis adopted for calculating the weight of the embedded diamonds which according to AO could not be accepted on account of delay in making such request. 29. The AO has observed that the contentions of the assessee are not acceptable after consideration. The very purpose of survey action is to surprise check the physical stock with the ....
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....s in excess to the physical stock found during survey. The value of such stock as per valuation report is 3,87,10,998/-, Further, there is negative difference of 11019.39 gm in respect of 14Kt gold jewellery valued at Rs. 2.51,24200/-in valuation report. These negative differences have arisen due to out of books unaccounted sales made by the assessee. As the assessee has failed to furnish any plausible explanation in respect of negative difference of 22 Kt gold jewellery, Diamond studded in 14 kt gold jewellery & 14kt gold jewellery found during survey. The same is hereby treated as unaccounted sales........" SUBMISSIONS TO ASSAIL THE ABOVE FOUR ADDITIONS 33. The present case was taken up for scrutiny for the reason that a survey action u/s 18SA of the Act was carried out at the business premises of the assessee on 03-01-2016 leading to discovery of discrepancy in stock of jewellery in both the showrooms of the assessee Perusal of the assessment order would reveal that the whole bass of the additions made are revolving around the discrepancy of stock in jewellery as computed on the basis of valuation reports prepared by two different valuers at each of the showroom The valuat....
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.... two items of jewellery cannot differently and negative positive theory is not applicable to both these items. After considering these submissions of the assessee, the AO has observed that this contention of the assessee is plausible particularly in view of the fact that one of the valuer M/s Amit Jeweller has also valued polki under the category of 22kt gold jewellery and no separate valuation has been made for the same. The AO has further observed that over all combined weight of both the jewellery found during the survey almost matches with that recorded in the books. The AO further observed that from the sale bills also the assessee is adopting consistent method of valuing polki at applicable gold rates and as such there is no difference between the polki studded and plain 22kt. gold jewellery. It is also observed by the AO that even in the books of accounts the assessee did not maintain separate inventory vis-avis polki jewellery. In view of these findings recorded by the Id. AO, id.AO has arrived at a conclusion that total unaccounted stock in respect of 22kt. gold jewellery and 22kt polki studded jewellery is 113.50gms. For the sake of completeness these observations made in....
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.... being 113.50gms against total weight of the jewellery of these items with the assessee 34,943.26gms. Thus, difference in percentage being 0.32%. During the course of assessment proceedings, it was explained that such a trivial difference can be for many reasons like error occurred at the time of estimation and weighing, which is quite common in the jewellery business and difference in measurement of jewellery/studded jewellery occurs due to various factors such as humidity/moisture content/accuracy/precision/sensitivity of the measuring scale and even existence of wax used for pasting of polki and such a small difference is liable to be ignored for the purpose of valuation. The existence of any of such possibility cannot be ruled out, therefore, taking cognizance of such a small difference in the stock for the purpose of making addition particularly in existence of the fact that on substantial basis all the submissions made the assessee in this regard are found true by the AO on verification made by him, is contrary to the judicial norms for framing a fair assessment of assessable income. The purpose of valuation by the Department of any asset is with a view to find out the correc....
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....s such there is no difference between the Polki studded and plain 22kt gold jewellery. d. Even in the books of account, no separate maintained vis-à-vis Polki jewellery. 40. That having recorded all the above findings, cannot say that there was any sale of 22kt. gold jewellery which has not been recorded in the books of accounts. It has been found by the AO that even in the books of accounts the assessee is not maintaining separate inventory vis-à-vis Polki jewellery. These findings of the AO, which have been recorded by him after verification, clearly indicate that there is a manifest error in arriving at a conclusion that there was any separate stock inventory in the books of accounts of the assessee indicating separate available stock-in-hand in respect of 22kt gold jewellery and 22kt polki studded gold jewellery. When no separate inventory is prepared by the assessee of both these items of jewellery then the same cannot be compared with the separate stock found and recorded in the valuation reports which have been relied upon to say that there was quantified difference of stock-in-hand as has been worked out in the show cause notices issued to th....
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....ry at the time of valuation by valuers. In this regard, the request of the assessee for making further enquiry from the valuers cannot be entertained at the fag end of the proceedings as the contention regarding estimation valuation was never made during the time of survey and also because the jewellery under question is stock-in-trade and thus can't be valued again at this stage. Further, it is seen that there is short/excess of over 11 kg of jewellery in individual segment which goes against human probability. Further, had it been the case where excess stock was found in both the categories respectively or vice-versa, the assessee's explanation would have fallen fiat. However, in case where the figure of short/excess weight in individual segment complement each other and as such the possibility of intermixing of jewellery cannot be ruled out. Accordingly, would be fair to tax net excess of gold jewellery as per valuation reports i.e. Rs. 62,66,511/- (Rs. 3,13,90,711 - Rs. 2,51,24,200) ....................." 43. That from the above observations of the is clear that as per submission of the assessee these items of jewellery were not having any tags mentioning ....
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....ted. 45. That without prejudice to the above contention that entire addition Rs. 62,66,511/- is required to be deleted, the assessee the alternative submits that since the fact of difference of 453.82gms has been accepted by the AO, the only addition can be made for difference of 453.82gms @Rs. 2,736/- gms. being per gram rate of 18kt applied by the AO as can be seen from the above table. Calculating addition on this basis the amount comes to Rs. 12,41,652/-(4x Rs. 2736/-). Therefore, the action of the AO in computing the quantum of the addition by taking the valuation difference of Rs. 62,66,493/-(valuation of 18kt. gold Rs. 3,13,90,703/- value of 14kt gold Rs. 2,51,24,209/-) of these two items contrary to the acceptance by the AO regarding the possibility of intermixing between these two items of jewellery. 46. That now coming to the GP addition of Rs. 42,25,890/- being part of addition of Rs. 1,47,26,510/-, it is submitted that the AO having accepted the possibility of inter-mixing of gold jewellery items and 18kt at the time of survey is not entitled to say again that there was any negative or positive difference between these items of jewellery particularly a....
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....less during the course of survey in respect of 14kt jewellery studded with diamonds which has been treated as sales made outside the books of account and GP has been worked out on the value of 1665.53 carats of diamonds. The value of such diamonds has been calculated at Rs. 3,87,10,998/- and GP @ 16.82% has been worked out at Rs. 65,11,190/-which has been treated as part of gross addition of Rs. 1,47,26,510/-. 51. That coming to first addition of Rs. 2,11,27,468/-, it can be seen from the assessment order that there was inter-mixing of and 18kt gold jewellery including such jewellery studded with diamond and reference in this regard can be made to the findings of the AO recorded for addition of Rs. 62,66,511/- and which findings are also reproduced in the above part these submissions. The AO has observed that "as such the possibility of intermix cannot be ruled out". In this background he has accepted the situation to take combined weight of diamonds studded in 14kt and 18kt gold jewellery and after combining both these items he has considered and calculated the difference at 723.37 carats which has been valued at Rs. 2,11,27,468/-. 52. That so far as it relates t....
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....14Kt and 18Kt gold jewellery of 77962.74 gms and as per above judicial proceedings such difference is required to be ignored and no adverse inference can be drawn on account of trivial difference which is due to estimation only. ........................... 58. That with regard to alleged difference of weight between and gold jewellery it was submitted before AO that there is no mention of purity of the jewellery on the tagsand it can only be identified from the hallmark and then the entire stock was not hallmarked and there is a clear case of intermixing the jewellery at the time of valuation by the valuers. In this background the assessee had requested the AO to make fresh inquiries or estimation to rule out any such possibility. However, AO has rejected such contention of fresh estimation on the ground that such request of the assessee cannot be entertained at the fag end of the proceedings. Despite having rejected such contention, Id.AO has observed that view of the fact that the figure of short/excess weight in individual segment complement each other and as such the possibility of intermixing of jewellery cannot be ruled out. Therefore, the AO has accepted th....
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....19 Sir, In continuation of our replies filed earlier explaining the alleged difference between stock found during survey and as recorded in the books of account it is submitted that the alleged differences in various segments of jewellery as per the valuation reports are unrealistic and cannot be made the basis for drawing adverse inference against the assesses We have already highlighted the key discrepancies and inconsistencies in the valuation reports which are reiterated again for sake of ready reference: i. The fact of inter-mixing of 18 kt and 14 kt of jewellery resulting in huge differences in individual segments. No criteria have been given for correctly identifying the gold purity of each jewellery item. ii. Basis for measuring diamond weight in a studded jewellery item not given. It is not known as how the number of diamonds and their weight in carats was ascertained. iii. Valuation of diamond is full of1 subjectivity and no objective criteria based on purchase value of diamond by assessee was adopted resulting in arbitrary high valuation. iv. Highly inconsistent approach in weighing and valuation of Polki studded jewe....
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.... rate of gold at a sum of Rs. 2,736/- per gram in respect of difference of 453.82 grams. * Third addition is with respect to alleged difference of 723.90KT in the diamonds studded in 14KT and 18KT gold jewellery for which the intermixing has been accepted. * Referring to the valuation report submitted at page 243 to 253 of the papber book, the ld. AR argued that it can be seen from the valuation reports that the valuation report is not in respect of individual items of jeweller instead, the valuers have taken bulk of jewellery together for weight and have done the valuation. It is physically impossible to weigh each and every item separately identifying the purity of gold and weight of gold and stones studded thereon on a given single day. Therefore, there is possibility of error in making weighment and assessing the purity and ascertaining the weight of each item separately viz-a-viz quantity of metal and stone. In any case, the weight of metal and stone as well as quality and numbers indicate that there was no other manner except to make an estimate with regard to weight and value, which estimate is bound to differ even if the same person evaluate the same thing....
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....f these items is only 0.32 precent and it has been explained above that in what manner the jewellery was weighed and valued, there is every possibility of error in estimation. It was argued that in such a large quantity the difference of 113.50 grams must not be adversely taken to hold that the same is unexplained. * With regard to the addition of Rs. 12,41,652/-, it was argued that there was inter-mixing of the items of gold jewellery of 14KT and 18KT which was also diamond studded. The fact of intermixing is even accepted, it can be seen from the table reproduced above that combined weight of both these items of jewellery as per books is 77,962.74 grams and difference as per estimated weight is only of 453.82 grams. The percentage of such difference viz-a-viz gross weight of these items is only 0.58 percent and it has been explained above that in what manner the jewellery was weighed and valued, there is every possibility of error in estimation. In such a large quantity the difference of 453.82 grams must not be adversely taken to hold that the same is unexplained. * With regard to the addition of Rs. 2,11,27,468/-, it was argued that his addition is in respect ....