2013 (1) TMI 38 - AT - Income Tax

Search u/s 132(1) - Assessee firm carried on the business of diamond During search found stock of nearly 70,000 carats of cut and polished diamonds and Indian currency of over Rs. 27 lakhs Additional evidence Rule 46A - Assessee had retracted from the original statements - Filing of additional evidence after 30 months of the date of seizure AO argued that it was an afterthought - able to build a concocted story to avoid tax incidence Held that - CIT(A) admitted the additional evidence only after coming to a conclusion that the interpretation of the seized document goes to the root of the issue and from the remand report. In the remand proceedings, it was the AO, who was satisfied that the stock of diamonds found from the assessee was actually the jangad stock and not the trading stock and belonging to Shree Meena International and the conclusion of the three layered investigation conducted by the AO was, nothing adverse is noticed . Hence admit additional evidence Interpretation of a noting in document - Initially the interpretation was given that this represented own trade of diamonds - later on it was retracted that it was the jhangad stock - Shown the impugned amount as liability - Jhangad stock, till the stock is approved, this stock remains with the adahtia till, either it is sold or returned - Held that - The assessee was an adatiya and the notings found on the seized document, relied upon by the department, clearly indicate that they pertained to janghads given to an adahtiya (assessee herein), and does not, pertain to independent diamond trading of the assessee. Therefore, endorse and agree with the findings arrived at by the CIT(A). In favour of assessee Unaccounted sale Whether addition can be made on presumption basis in case search & seizure - AO picked up the accounted figure of sale in each of the concerned year - Applied the 75% proportion thereon - Arrived at the figure of unaccounted sale figure Held that - The addition is on presumptions and really not based on facts. Since it is a case pertaining to search and seizure operation, the addition should have been made on material found and not on inferential presumption . In favour of assessee Addition on the basis of initial capital in the undisclosed business Held that - There is no other business of the assessee except for adahtiya business and if we go in accordance with the statement of Mr. Bharat Kakadiya taken on 26-05-2005, that he had become the partner in the assessee firm in 1994-95. Therefore, question of initial capital in assessment year 2000-01 cannot be accepted. In favour of assessee Disallowance of labour charges AO called for confirmation - Notice u/s 131 - Excessive payments of labour charges - Assessee had paid Rs. 200 per carat whereas the market is Rs. 25 or Rs. 30 per carat Labour did not respond query Held that - Assessee submits complete details in the form of confirmations and copies of account of all four job workers, to whom payments were made through banking channels and even TAS has been deducted. We have noted that the addition made and sustained are not on sound footing, because either the entire amount should have been sustained or none at all, but once, the entire job work charges paid to one person out of four is accepted, then both the issues of excessiveness and non-genuineness fail. In favour of assessee

Issues Involved:
1. Validity of additions made under Section 69 of the Income Tax Act.
2. Admissibility of additional evidence under Rule 46A.
3. Nature and interpretation of the seized document (page 25 of Annexure A1).
4. Rejection of books of accounts under Section 145(3).
5. Estimation of turnover and gross profit.
6. Disallowance of labor charges.

Issue-wise Detailed Analysis:

1. Validity of Additions Made Under Section 69 of the Income Tax Act:
The primary issue revolved around the addition of Rs. 16,28,74,290/- under Section 69 based on unexplained investments in diamonds. The Assessing Officer (AO) concluded that the diamonds found during the search were unexplained investments. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted these additions after detailed investigations revealed that the diamonds were part of the "janghad" stock, which is a common trade practice in the diamond industry. The Tribunal upheld the CIT(A)'s decision, emphasizing the thorough investigation and the genuineness of the transactions.

2. Admissibility of Additional Evidence Under Rule 46A:
The assessee submitted additional evidence before the CIT(A), which was initially not produced during the assessment proceedings. The CIT(A) admitted this evidence after obtaining a remand report from the AO, who conducted a detailed investigation and found nothing adverse. The Tribunal supported the CIT(A)'s decision, citing precedents where additional evidence was admitted to advance the cause of justice. The Tribunal found that the CIT(A) followed due process and the additional evidence was crucial for a just decision.

3. Nature and Interpretation of the Seized Document (Page 25 of Annexure A1):
The seized document was central to the case, initially interpreted by the AO as evidence of unaccounted trading in diamonds. However, the assessee later clarified that the document represented "janghad" transactions, a form of diamond trading on approval. The CIT(A), after considering the remand report and additional evidence, accepted this interpretation. The Tribunal agreed with the CIT(A), noting that the detailed investigation by the AO during the remand proceedings corroborated the assessee's explanation.

4. Rejection of Books of Accounts Under Section 145(3):
The AO rejected the assessee's books of accounts under Section 145(3), leading to the estimation of turnover and gross profit. The Tribunal found that the rejection was not justified, as the books were found to be correct and true during the remand proceedings. The Tribunal held that the AO's rejection of the books was without basis, especially since the detailed investigations did not reveal any discrepancies.

5. Estimation of Turnover and Gross Profit:
The AO estimated the turnover and applied a gross profit rate based on the seized document. However, the Tribunal found that the entire document pertained to "janghad" transactions and not independent trading by the assessee. The Tribunal upheld the CIT(A)'s decision to delete the additions made on this basis, as the seized document was correctly interpreted as relating to the assessee's "janghad" business.

6. Disallowance of Labor Charges:
The AO disallowed labor charges paid to certain job workers, considering them excessive and non-genuine. The CIT(A) and the Tribunal found that the payments were genuine, supported by confirmations and banking transactions. The Tribunal noted that the AO's acceptance of payments to one job worker contradicted the disallowance for others, leading to the conclusion that the disallowance was not justified.

Conclusion:
The Tribunal dismissed the department's appeals for all assessment years, upholding the CIT(A)'s deletion of additions and acceptance of additional evidence. The Tribunal also allowed the assessee's appeal regarding the disallowance of labor charges, finding the payments genuine and supported by evidence.

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