2014 (4) TMI 343 - AT - Income Tax

Deletion of addition u/s 69 OR 69A of the Act Opportunity to admit fresh evidences u/r 46A of the Rules - Declaration of Long term capital gain - Conversion of capital asset into stock-in-trade u/s 45(3) of the Act Held that - AO has rightly was of the view that the assessee had not shown any purchase during the year - The stock shown was the net figure of Rs.85.15 lakhs - there were no sundry debtors or creditors or any loans - on verification of return of previous years filed with the department, it was found that the assessee has been holding closing stock of jewellery - assessee has not been able to support his claim since no details of conversion of personal jewellery into stock-in-trade has been filed with supporting evidence. Both returns of income of partners do not indicate any GIR Number or PAN Number - The basic claim of assessee firm is that their partners were owning gold ornaments, which they had introduced as their respective capitals of the firm after offering capital gains/loss on conversion of such ornaments belonging to their respective Hindu undivided family into stock-in-trade in the A.Y.2002-03 there was violation of Rule 46A by CIT(A) thus, the matter is required to be remitted back to the AO for examination of the documents so as to substantiate that HUF partners were having jewellery which they have converted into stock-in-trade by offering capital gains in their respective income tax return and same was introduced as capital in the assessee s firm Decided in favuor of Revenue.

Summary

Issues Involved:
1. Legitimacy of the addition under Section 69A of the I.T. Act.
2. Admissibility of fresh evidence by CIT(A) without giving opportunity to the AO under Rule 46A.
3. Verification of the partners' declaration of long-term capital gain on the conversion of personal jewelry into stock-in-trade.

Detailed Analysis:

1. Legitimacy of the Addition under Section 69A of the I.T. Act:
The Assessing Officer (AO) added Rs. 85,16,248/- as unexplained money under Section 69A, observing that the assessee did not show any purchases during the year and failed to provide details of conversion of personal jewelry into stock-in-trade. The AO concluded that the assessee's contention of holding closing stock of jewelry for previous years was false and without basis.

The CIT(A) deleted this addition, noting that the assessee had provided copies of returns of income and wealth tax returns of partners, which showed that capital was introduced in the form of jewelry in the assessment year 2002-03, complying with Section 45(3). The CIT(A) found that the AO had not questioned the nature of the source of investment in earlier years or doubted the books of accounts. The CIT(A) concluded that the jewelry declared in the wealth tax returns could not be treated as unexplained investment.

2. Admissibility of Fresh Evidence by CIT(A) Without Giving Opportunity to the AO under Rule 46A:
The Revenue contended that the CIT(A) admitted fresh evidence regarding the declaration of capital gain without giving the AO an opportunity to examine it, violating Rule 46A. The CIT(A) accepted additional evidence showing the partners' declaration of long-term capital gain on the jewelry converted into stock-in-trade.

The Tribunal found that the CIT(A) has co-terminus powers with the AO and can examine the evidence that the AO failed to consider. However, the Tribunal noted discrepancies in the returns of income filed by the partners, which did not indicate any capital gains or losses, contrary to the computation of income presented. This required further examination by the AO.

3. Verification of the Partners' Declaration of Long-term Capital Gain on the Conversion of Personal Jewelry into Stock-in-trade:
The Tribunal observed that the returns of income filed by the partners did not support the claim of offering capital gains on the jewelry converted into stock-in-trade. The returns lacked details of jewelry or other immovable property held by the respective HUF. The Tribunal emphasized the need to verify the correctness of the assessee's contention regarding the offering of capital gains in the assessment year 2002-03.

The Tribunal restored the matter to the AO for a detailed examination of the documents to substantiate the claim that the partners had converted their personal jewelry into stock-in-trade and introduced it as capital in the firm. The Tribunal instructed that the assessee should be given a due opportunity of being heard.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes, directing the AO to re-examine the evidence and documents to verify the legitimacy of the addition under Section 69A and the partners' declaration of long-term capital gain on the conversion of jewelry into stock-in-trade. The Tribunal emphasized the importance of a thorough investigation to reach a correct conclusion.