2020 (1) TMI 399 - AT - Income Tax

Valuation of stock of jewellery - addition u/s.69C by treating the purchases of 823.57 carats of diamonds made during the year as unexplained expenditure - HELD THAT - There is no need to treat the opening balance of diamonds of 278.04 carats as unaccounted stock or make any addition thereon on account of valuation difference. It is not in dispute that the opening balance as on 01/04/2004 of 278.04 carats of diamonds have been duly reflected in the books of accounts of the assessee with proper valuation and part of it were also found as stock on the date of survey. The total stock found during the survey was subjected to valuation by the departmental valuer and difference in valuation was attributed for the opening stock quantity also. We hold that since the opening balance of diamonds have already been duly reflected in the books of accounts and duly accounted by the assessee, there cannot be any addition in the sum being the valuation difference on the same. Hence, we hold that the ld. CIT(A) had rightly deleted the said addition. AO in the second round of proceedings had made an addition u/s.69C by treating the purchases of 823.57 carats of diamonds made during the year as unexplained expenditure. It would be pertinent to note that the second round of proceedings had emanated out of the directions given by the Tribunal as reproduced supra. Admittedly, in the first round of proceedings, there was no addition made u/s.69C by the revenue. AO could not have made any addition u/s.69C in the second round of proceedings. Even otherwise, we find that the assessee had duly offered to tax in the return of income, the value of purchase of 823.57 carats of diamonds in consonance with the declaration made by him at the time of survey and hence there is no need to make any further addition thereon. We find that the revenue had raised an additional ground challenging the deletion of addition u/s.69C. No arguments were advanced by the ld. DR at the time of hearing before us in this regard. We find that even the written submissions filed by the ld. DR, does not make any mention about the addition made u/s.69C of the Act. We hold that the ld. CIT(A) had rightly deleted the addition made u/s.69C of the Act in the sum of ₹ 1,59,53,910/- on which, we do not find any infirmity. Addition made on account of value of 823.57 carats of diamonds purchased during the year - HELD THAT - We find that the ld. CIT(A) had erred in holding that ₹ 33,49,991/- being the difference in value of diamonds purchased during the year would go to increase the purchase cost thereon and consequently to be allowed as deduction, thereby making it revenue neutral. In this regard, it is pertinent to note that this finding of ld. CIT(A) is misconceived in as much as the difference of ₹ 33,49,991/- , being the valuation difference in respect of purchase of 823.57 carats of diamonds during the year, could be added only u/s.69C of the Act as unexplained expenditure and as per the proviso to Section 69C of the Act, the addition made thereof cannot be allowed as deduction. The argument of the ld. AR that this sum of ₹ 33,49,991/- to the extent proportionately included in closing stock as on 31/03/2005 should be allowed to be carried forward and allowed as deduction as and when they are sold, is devoid of merit and against the provisions of the Act. Hence, the said argument of the ld. AR is hereby rejected. Accordingly, the original grounds and the additional grounds raised by the revenue are disposed in the aforesaid manner.

Summary

Issues Involved:
1. Valuation of stock of jewellery.
2. Addition of unexplained investment in stock.
3. Addition under Section 69C of the Income Tax Act for unexplained expenditure.

Issue-wise Detailed Analysis:

1. Valuation of Stock of Jewellery:
The primary issue raised by the revenue concerns the valuation of the stock of jewellery. The assessee, engaged in the trading of diamonds, underwent a search and seizure operation, followed by a survey where diamonds worth 1089.70 carats were valued at ?2,55,41,800 by an approved valuer. The assessee did not retract this valuation and included it in the filed return. However, the Assessing Officer (AO) made an additional valuation of ?52,64,584, arguing that the total closing stock of 1101.61 carats was undervalued. The assessee contested this, stating that the valuer did not consider mixed diamonds, which have a lower value. The AO dismissed this objection, maintaining that the valuation was fair and based on average rates.

2. Addition of Unexplained Investment in Stock:
In the initial assessment, the AO added ?52,64,584 to the assessee's income, claiming it as unexplained investment in stock. The Tribunal, upon appeal, remanded the case back to the AO for re-evaluation, directing the AO to consider the actual cost price of the opening stock as per the books. In the second round, the AO made an addition of ?1,59,53,910 as unexplained expenditure under Section 69C, despite this amount already being offered by the assessee in the return. The AO also added a balance sum of ?3,00,150, making a total addition of ?1,62,54,060.

3. Addition under Section 69C for Unexplained Expenditure:
The CIT(A) deleted the addition of ?1,59,53,910 under Section 69C, observing that this amount was already declared by the assessee. The Tribunal upheld this deletion, noting that the AO could not introduce a new addition under Section 69C in the second round of proceedings, especially since the amount had already been offered to tax by the assessee. Furthermore, no arguments were presented by the Departmental Representative (DR) regarding this addition during the hearing.

Separate Judgments:
The Tribunal agreed with the CIT(A) that the opening stock of 278.04 carats, duly reflected in the books, could not be treated as unaccounted stock, thus deleting the addition of ?19,14,593. However, the Tribunal found fault with the CIT(A)'s decision to treat the valuation difference of ?33,49,991 as revenue-neutral, clarifying that this amount should be added under Section 69C and cannot be deducted as per the proviso to Section 69C.

Conclusion:
The Tribunal partially allowed the revenue's appeal, maintaining the deletion of ?1,59,53,910 under Section 69C and the valuation difference of ?19,14,593 for the opening stock, but upheld the addition of ?33,49,991 as unexplained expenditure under Section 69C, disallowing any deduction thereof. The final judgment was pronounced on 11/12/2019.