2020 (4) TMI 521 - AT - Income Tax

Unexplained investment u/s 69 - unaccounted investment in rough diamonds by the assessee on the date of survey - HELD THAT - There was no excess stock of rough diamonds found during survey. CIT (DR) has also not controverted these facts and findings as recorded by the CIT(A) and simply supported the AO s observations. In alternate, where no physical stock was found at the time of survey, and there is shortage, then in such situation, at the most the profit can be estimated by the AO on account of unaccounted sales, if it is proved that there were unrecorded sales, which are also covered by declaration made by the assessee and shown in that returned income. The movement of rough diamonds might have been more because of the unrecorded sales declared by the assessee. The assessee has declared ₹ 5 crores and therefore, considering the Gross Profit @6.27%, the unaccounted turnover comes to ₹ 79,74,48,166/- of which profit is far less than declaration as made by the assessee. This view is also fortified by decision in the case of CIT v. President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT wherein it was held that only percentage of profit could be considered for addition where shortage of stock. Therefore, considering the all the facts on record, circumstances of the case and the facts that the CIT(A) has carried out detailed verification and working as filed before him, we therefore, do not find any infirmity in the order of ld.CIT(A), accordingly, same is upheld. This grounds of appeal of revenue is therefore, dismissed. Unaccounted income from sale of polished diamonds on suppression of yield even though it was categorically analyzed in the body of assessment order that the assessee had suppressed its yield - HELD THAT - We find that as per impounded Annexure B-47 Page No. 90 to 99 10 to 104, the yield till Ghat process comes to 69.86% and yield after Ghat process comes to 52.30% and therefore, the overall yield of rough diamonds polished diamonds was 36.24% as per notings of Page nos. of Annexure B S -47. AO has also stated that the yield till Ghat process is 69%. There is always, further loss of 50% after Ghat process and even the seized material shows such as loss at 49.45%, therefore, the yield shown by the assessee is about 35% which was very much reasonable. Hence, the addition made by the AO was rightly deleted by the Ld. CIT (A). Therefore, we do not find any infirmity in the order of CIT (A). In view of these facts and circumstances, this ground of appeal is therefore, dismissed. Unaccounted manufacturing expenses - As submitted that the disclosure of ₹ 5 crores was made by the assessee after considering the unaccounted expenses - HELD THAT - The disclosure of ₹ 5 crores was net income offered by the assessee after considering all the expenses by the assessee and therefore, no addition is required to be made for unaccounted expenditure, when the unaccounted expenditure is less than ₹ 5 crores. The assessee has declared ₹ 5 crores and therefore, considering GP of 6.27%, the unrecorded turnover comes to ₹ 79, 74, 48, 166 and, therefore, manufacturing expenses are clearly deductible under section 37. In view of above facts and circumstances, we dismissed the appeal of the Revenue and allow the appeal of the assessee. Unaccounted income from unaccounted manufacturing of finished diamonds from rough diamond and sold outside Books - HELD THAT - Whole sales cannot be added and only % of the profit can be added in view in the case of CIT v. President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT and CIT Samir Synthetics 2008 (1) TMI 591 - GUJARAT HIGH COURT unless there is no concrete evidence that the assessee has made investment outside the books before receipts of the sale consideration. The assessee has proved on the basis of seized paper only that to the AO wrongly made the addition that the assessee was having more stock then the rough diamonds stock issued to the lesser Department and so Ld.CIT(A) has rightly deleted by giving detailed findings - there was no excess stock of rough diamonds was found at the time of survey. Thus, no physical stock was found at the time of survey, hence, at the most the profit can be estimated by the AO for unaccounted sales which is covered by the declaration made by the assessee. The assessee has declared peak investment found of polished diamonds at the time of survey. No infirmity in the order of CIT (A), accordingly, same is upheld. Addition of undervaluation of closing stock - HELD THAT - The assessee had disclosed ₹ 5 Crore as unaccounted income including excess stock of ₹ 98,82,364/- and set-off of excess finished stoke of ₹ 98,82,364/- has already been granted against the proposed addition of ₹ 98,41,832/-. CIT(A) has further granted set-off of ₹ 98,41,832/- on account of undervaluation of polished diamond by deleting the addition of undervaluation of polished diamond. The AO has also of the view that set off should be allowed. In view of this matter, this ground of appeal is therefore, dismissed. Undervaluation of closing stock - HELD THAT - We find that the assessee has included the excess stock of polished diamonds in the disclosure of ₹ 5 crores and not shown separately in the Profit Loss Account but has shown the same in balance sheet at ₹ 12,26,39,769/- inclusive of excess stock of polished diamonds. Therefore, the findings recorded before the CIT(A) are appears to be correct. Hence, no interference is called for. Accordingly, this ground of appeal is therefore, dismissed. Stock register prepared by the assessee although the assessee was maintaining Lot Wise Registers which were impounded during survey for each of the manufacturing process - HELD THAT - We find that there is no discrepancy between lot wise register impounded during the course of survey and stock register produced by the assessee as Ld. CIT (A) has deleted the addition based on the lot wise register. Accordingly, this ground is dismissed. Rejection of books of accounts u/s 145 - HELD THAT - As during the course of survey, there was impounding of registers, the papers related to diamond manufacturing business, discrepancies in stock, and Appellant firm admitted additional income of ₹ 5 crores. The AO cited decision of Hon ble Delhi High Court in the case of Action Electrical v. DCIT 2002 (7) TMI 64 - DELHI HIGH COURT held that books of accounts cannot be relied to be complete and liable to be rejection, as the same does not give correctness and completeness to the accounts. In view of this matter, we do not find any infirmity in the order of CIT (A), accordingly, same is upheld. This ground of appeal is therefore, dismissed. Unaccounted manufacturing expenditure incurred u/s 69C - HELD THAT - We find that this grounds of appeal is covered by Ground No. 3 of appeal of revenue, wherein we have held that the manufacturing expenditure is allowable as deduction in the light of judgements of Hon ble Gujarat High Court in the case of CIT v. Shilpa Dyeing and Printing Mills Pvt. Ltd. 2015 (7) TMI 691 - GUJARAT HIGH COURT . Therefore, this grounds of appeal is allowed in the favour of the assessee. Addition made under section 69 - unexplained investment made in finished diamonds - HELD THAT - When rough diamonds are found to be short, it did not mean that the polished diamonds were manufactured afterwards, but in fact, it means that either the polished diamonds have already been manufactured out of the shortage of rough diamonds or rough diamonds were sold which is available for investment in excess stock. Assessee is entitled to set off the addition against the balance declaration of ₹ 4,01,17,636/-. It is to be noted that the AO has given the set off ₹ 5 crores against all the additions, which has been withdrawn by the CIT(A) without giving notice of enhancement. No enhancement can be made without giving showcause notice as held by various court s , hence, on that count also this addition is required to be deleted - assessee is entitled to set off against declaration as allowed by the AO in assessment himself in assessment order - Shortage of rough diamonds means either same were sold outside India of which are available for investment or it has been used in manufacturing of polished diamonds. Therefore, same are covered either by disclosure hence, telescoping of the same is allowable against excess polished diamonds sales of ₹ 4.01 crores. Therefore, in any circumstances, no separate addition is sustainable in law.

Summary

Issues Involved:
1. Deletion of addition on account of unexplained investment in rough diamonds.
2. Deletion of addition on account of unaccounted income from sale of polished diamonds.
3. Deletion of addition on account of unaccounted manufacturing expenses.
4. Deletion of addition on account of unaccounted income from unaccounted manufacturing of finished diamonds.
5. Deletion of addition on account of undervaluation of closing stock.
6. Acceptance of stock register prepared by the assessee.
7. Admission of additional evidence without granting opportunity to the Assessing Officer under Rule 46A.
8. Confirmation of rejection of books of accounts under section 145 of the Act.
9. Confirmation of addition under section 69C of the Act on the ground of unaccounted manufacturing expenditure.
10. Confirmation of addition under section 69 of the Act on the ground of alleged unexplained investment in finished diamonds.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Unexplained Investment in Rough Diamonds:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?45,31,58,050/- made by the AO on account of unexplained investment in rough diamonds. The CIT(A) found that the AO had wrongly computed the stock of rough diamonds and made additions based on repetitive notings of gross weight/carats in various registers. The CIT(A) verified the stock records and found that the rough diamonds available were much more than the diamonds sawed/cut in the laser process. The Tribunal agreed with the CIT(A) that no addition on account of excess stock could be made, as there was no excess stock of rough diamonds found during the survey.

2. Deletion of Addition on Account of Unaccounted Income from Sale of Polished Diamonds:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?22,47,56,571/- made by the AO on account of unaccounted income from the sale of polished diamonds. The CIT(A) observed that the AO had wrongly assumed a higher yield ratio of 45.37% based on certain registers. The CIT(A) found that the actual yield ratio was around 34.65%, which was consistent with the yield shown by the assessee in its audited accounts. The Tribunal agreed with the CIT(A) that there was no suppression of yield and no unaccounted sales of polished diamonds.

3. Deletion of Addition on Account of Unaccounted Manufacturing Expenses:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?9,55,04,826/- out of the total addition of ?10,81,01,908/- made by the AO on account of unaccounted manufacturing expenses. The CIT(A) found that some expenses were repetitive and some belonged to earlier years. The CIT(A) allowed set-off for labor charges shown in the books of accounts and for majuri expenses against unaccounted production. The Tribunal agreed with the CIT(A) and allowed the set-off for 10 months, deleting the addition of ?1,25,97,082/- sustained by the CIT(A).

4. Deletion of Addition on Account of Unaccounted Income from Unaccounted Manufacturing of Finished Diamonds:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?5,31,93,421/- made by the AO on account of unaccounted income from unaccounted manufacturing of finished diamonds. The CIT(A) found that the AO had wrongly decoded certain notings in the registers as unaccounted sales. The CIT(A) observed that the notings were related to the production and yield of polished diamonds and there were no unaccounted sales. The Tribunal agreed with the CIT(A) that there was no unaccounted production or sales of polished diamonds.

5. Deletion of Addition on Account of Undervaluation of Closing Stock:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?98,41,832/- on account of undervaluation of closing stock. The CIT(A) found that the assessee had valued the closing stock of polished diamonds correctly and there was no undervaluation. The AO had already allowed set-off for the excess stock of polished diamonds disclosed by the assessee. The Tribunal agreed with the CIT(A) that there was no undervaluation of closing stock.

6. Acceptance of Stock Register Prepared by the Assessee:
The Tribunal found no discrepancy between the lot-wise register impounded during the survey and the stock register produced by the assessee. The CIT(A) had deleted the addition based on the lot-wise register. The Tribunal dismissed this ground of appeal.

7. Admission of Additional Evidence Without Granting Opportunity to the Assessing Officer Under Rule 46A:
The Tribunal found that the assessee had not produced any additional evidence before the CIT(A). The AO had agreed in the remand report to the conclusions recorded by the CIT(A). The Tribunal found no violation of Rule 46A and dismissed this ground of appeal.

8. Confirmation of Rejection of Books of Accounts Under Section 145 of the Act:
The Tribunal upheld the CIT(A)'s decision to reject the books of accounts under section 145 of the Act. The AO had cited discrepancies in the stock and unaccounted income disclosed by the assessee. The CIT(A) followed the decision of the Hon'ble Delhi High Court in the case of Action Electrical v. DCIT and upheld the rejection of books of accounts. The Tribunal found no infirmity in the CIT(A)'s order and dismissed this ground of appeal.

9. Confirmation of Addition Under Section 69C of the Act on the Ground of Unaccounted Manufacturing Expenditure:
The Tribunal found that the manufacturing expenditure was allowable as a deduction in light of the judgments of the Hon'ble Gujarat High Court in the case of CIT v. Shilpa Dyeing and Printing Mills Pvt. Ltd. The Tribunal allowed this ground of appeal in favor of the assessee.

10. Confirmation of Addition Under Section 69 of the Act on the Ground of Alleged Unexplained Investment in Finished Diamonds:
The Tribunal found that the assessee was entitled to set off the addition against the balance declaration of ?4,01,17,636/-. The AO had given set-off of ?5 crores against all the additions, which was withdrawn by the CIT(A) without giving notice of enhancement. The Tribunal found that no enhancement could be made without giving a showcause notice. The Tribunal deleted the addition of ?1,86,08,268/- and allowed this ground of appeal in favor of the assessee.