2012 (11) TMI 625 - AT - Income Tax

Addition on account of labour charge Labour charges on gold jewellery Assessee shown labour charges @ 5.73% of the gold sale, whereas in earlier year it was 10.9% - Held that - As no evidence was produced to show about selling readymade jewellery. It is common knowledge that whenever jewellery item is bought from a jeweler, separate making charges are charged. At the same time it is not necessary that in every year the labour charges proportion would remain same. Restrict the addition on account of labour charges to Rs.1.00 lakh. Partly allowed in favour of assessee Addition on account of revaluation of closing stock of gold - Sum of Rs. 3,80,000/- has been taken in account by adopting the same as purchase of gold but the same has not been added to the closing stock and accordingly a sum of Rs. 3,80,000/- was added to the income of the assessee Held that - As concluding from the facts that the assessee has already reflected undisclosed sales. The gross profit comes to Rs. 11,41,316/- but the same was done as Rs. 15,21,316/ - in P&L account. This amount has been reflected in books. In favour of assessee Valuation of closing stock FIFO or weighted average method Held that - Since the AO has adopted FIFO method whereas the claim before the ld. CIT(A) was that stock has been valued at average rate when it is not clear whether weighted average was taken or not and therefore, we set aside the order of ld. CIT(A) and remit the matter back to the file of AO with a direction to value the closing stock on weighted average after verification of the same. Remand back to AO Disallowance u/s 40A(3) Expense incurred in cash more than Rs. 20,000/- - AO argued that out of surrendered income of Rs. 4.00 lakhs, a sum of Rs. 3,80,000/- was shown as gold purchase out of books and Rs.20,000/ - as silver purchased out of books - AO was of the view that this amount must have been spent in cash exceeding Rs . 20,000 - Held that - The assessee had surrendered a sum of Rs. 3,80,000/ - which was shown as purchases of gold outside the books and this amount was shown as purchases because of the surrender. There is no evidence before the Revenue that this amount was spent in payment of cash exceeding Rs. 20,000/-. Therefore, there is no justification in the addition. In favour of assessee

Summary

Issues Involved:
1. Addition on account of labour charges.
2. Addition on account of revaluation of closing stock of gold.
3. Addition on account of revaluation of closing stock.
4. Addition under Section 40A(3) of the Income Tax Act.

Detailed Analysis:

1. Addition on Account of Labour Charges:
Background: The Assessing Officer (AO) noticed a decline in labour charges in the financial year 2006-07 compared to the previous year. Labour charges were 5.73% of gold sales in 2006-07, down from 10.9% in 2005-06. The AO added Rs. 2,33,941/- to the income, estimating labour charges at 10.9%.

CIT(A) Decision: The CIT(A) deleted the addition, stating it was hypothetical and lacked evidence.

Tribunal's Decision: The Tribunal found no evidence that the assessee was selling readymade jewellery. It noted that labour charges do not necessarily remain constant yearly. Therefore, it restricted the addition to Rs. 1.00 lakh.

2. Addition on Account of Revaluation of Closing Stock of Gold:
Background: The AO added Rs. 3,80,000/- to the income, stating that the surrendered amount was not added to the closing stock.

CIT(A) Decision: The CIT(A) deleted the addition, explaining that the gross profit was already increased by Rs. 3,80,000/- in the profit and loss account, and adding it again would result in double taxation.

Tribunal's Decision: The Tribunal confirmed the CIT(A)'s order, agreeing that the amount was already reflected in the profit and loss account, and further addition would mean double taxation.

3. Addition on Account of Revaluation of Closing Stock:
Background: The AO valued the closing stock at Rs. 795/- per gm using the FIFO method, while the assessee valued it at Rs. 700/- per gm using the average rate method.

CIT(A) Decision: The CIT(A) accepted the average rate method and deleted the addition.

Tribunal's Decision: The Tribunal noted that the average rate method is proper but should be calculated on a weighted average basis. It remitted the matter back to the AO to value the closing stock on a weighted average basis after verification.

4. Addition under Section 40A(3):
Background: The AO invoked Section 40A(3) and added 20% of Rs. 3,80,000/- to the income, assuming the amount was spent in cash exceeding Rs. 20,000/-.

CIT(A) Decision: The CIT(A) deleted the addition, stating that the AO's assumption was baseless and lacked evidence.

Tribunal's Decision: The Tribunal confirmed the CIT(A)'s order, noting that there was no evidence to show that the amount was spent in cash exceeding Rs. 20,000/-. The addition under Section 40A(3) was unjustified.

Conclusion:
The appeal of the revenue is partly allowed. The Tribunal made the following key decisions:
- Restricted the addition on account of labour charges to Rs. 1.00 lakh.
- Confirmed the deletion of the addition on account of revaluation of closing stock of gold.
- Remitted the issue of revaluation of closing stock back to the AO for proper valuation using the weighted average method.
- Confirmed the deletion of the addition under Section 40A(3).