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TMI Blog2016 (5) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... ed explanation and nature of source of acquisition as undisclosed stock received from the unaccounted trading of diamond as source of income. The partner of the firm has time and again stated in his statement that diamond found in the premises during the search is out of unrecorded trading of diamonds hence the third part of section 69 is not satisfied hence the said stock is not taxable under section 69 of the Act. Taxability of stock of diamond - Held that:- The stock of diamond declared during the search is taxable under the heads of income as defined in section 14 read with section 56 and not taxable separately. As there cannot be taxable income of income out of the 5 heads of income as specified in section 14 of the Act. Hence the stock of diamond of 13,47,63,640/- is taxable either under Income from Business 13.47 crores and accordingly recorded the same in its books of accounts. The valuation carried out by another Govt. Approved valuer has nothing to do with the amount declared by the assessee but the same was done to prove on the part of assessee that the value of diamond found during the search was much less therefore the assessee has to sell it at lower value. The AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal of the revenue is also dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... e 115.00 100,000 11,500,000 306.33 90,000 27,569,700 237.33 75,000 17,799,750 386.33 60,000 23,179,800 390.50 50,000 19,525,000 1435.49 99,574,250 Page 78 A'Star Exports Carats Rate Per Carat Total Value 176.50 92,000 16,238,000 184.50 75,000 13,837,500 214.54 68,000 14,588,720 184.90 56,000 10,354,400 297.21 50,000 14,860,500 245.30 42,000 10,302,600 Total 1302.95 80,181,720 4.2.2. These documents were confronted to Shri Vipul Shah, partner of the assessee company, in the course of search proceedings. Sh. Vipul Shah confirmed that these loose papers were containing stock details of M/s. A' Star Exports, M/s. Asian Star Diamond International Pvt. Ltd. and M/s. Rahil Agencies. Shri Vipul P Shah further stated that the stock mentioned in seized papers was procured out of unaccounted income. He gave the details of stock as follows: Sr.No. Name of the entity Amount (Rs.) 1. M/s Rahil Agencies 8,01,81,720/- 2. M/s Asian Star Diamonds International Pvt. Ltd. 9,95,74,250/- 3. M/s A'Star Exports 11,79,15,875/- Total 29,76,71,845/- 4.2.3. Further he stated that he did not have any document to prove that they were accounted for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent sales of these diamonds. This loss claimed at ₹ 6,59,80,534/- was adjusted against the undisclosed income of ₹ 13,4 7,63,640/-. It was thus noted by the AO that in effect the appellant whittled down the undisclosed income in the return of income filed. The AO held that the unaccounted undisclosed polished diamonds found was unexplained investment of the appellant which was covered u/s. 69/69A of the IT.Act. Accordingly the AO held that the loss under the head profit and gains of the business cannot be set off against the deemed income u/s. 69/69A of the I.T.Act. AO held that both the sections 70 and 71 as applicable to the facts of the case did not allow the business loss to be adjusted against the deemed income u/s. 69A which is not falling under any of the heads of income. After recording the statement of Shri Vipul P.Shah, Director of the assessee company, the AO concluded that Shri Vipul.P.Shah could not furnish evidence in support of his claim that there was unrecorded trading in diamonds. The AO then went on to issue show cause notice to the appellant as to why the undisclosed diamonds should not be treated as deemed income u/s. 69/69A of the !.T.Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded that the deemed income u/s. 68 to 69A may not be classified under any heads of the income but may be charged to tax separately without referring to any head of income. He also noted that the amounts deemed to be income u/s.68/69A can be deemed to be income under certain circumstances. He concluded that there cannot be any source for such deemed income and that such income are often in the nature of application of income. The AO finally concluded that if the source of investment as explained are known then the income from the said source can be brought to tax under the relevant head and not as deemed income u/s. 68 to 690. He thereafter relied on the Hon'ble Gujarat High Court decision in the case of Fakir Mohamed Hazi Hasan (247 ITR 290). Relying on the paragraph quoted from the decision by the Gujarat High Court, the AO drew support for his contention that the deemed income u/s. 69 to 69A is not income from salary, house property, profit and gains from business or capital gains nor income from other sources. Since the source is not known such deemed income will not fall even under the head 'income from other sources'. The AO held the unexplained investment of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loss. The AO observed that the other concerns belonging to same assessee group had shown profit and therefore there was no reason for losses to be incurred on sale of undisclosed polished diamonds found during the search. He also did not accept, for the reasons stated in the order, that the diamonds were sold to meet the tax liability of the appellant. The AO also did not accept the contention of the appellant that the polished diamonds were overvalued by the government valuer at the time of search, on the ground that the appellant had not filed any letter of objection about the alleged over valuation of stock of diamonds during and after the search proceedings. The AO also noted that even in the Page no. 76 of Annex. A-5 the value of diamonds of 1277.25 carats was considered at ₹ 11,79,15,875/- and that this valuation is made by the appellant itself. The AO also did not-accept the valuation report obtained by the appellant in January 2011 wherein the same diamonds were valued by the registered valuer viz. Sharad Jhaveri who valued these diamonds at ₹ 7,94,58,400/-.The AO doubted the valuation report submitted by the appellant. He found defects in the description of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under the heads profits and gains of business and profession and further the same had been set off u/s.70 of the I.T. Act against losses of ₹ 6,59,80,534/- incurred on trading activity during the year. It was argued that the AO was wrong in treating the stock of polished diamond u/s.69/69A of the I.T. Act and also holding that the same was headless deemed income not liable to be adjusted or set off u/s. 70/71 of the I.T. Act. It was claimed that the stock of polished diamond found was declared as stock in trade and this contention of the appellant was accepted by the investigation officer, who therefore did not seize the diamonds. It was submitted that in the statement recorded of Sh. Vipul Shah partner of the firm on 20/11/12, it was stated that this undisclosed income is generated on account of unrecorded trading of diamond. It is argued that since the declaration was related to trading business, the unaccounted polished diamonds found was stock in trade and therefore the same was offered as income of business or profession. It was argued that both the business that was recorded in the books of account and that which was not recorded in the books of account were only on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the carried forward business losses and since in current year there is no business income, hence the same has been disallowed. But in case of the appellant the losses claimed for set off pertains to current year which is eligible for set off against any head of income except salary income. Therefore the ratio of above decision is not applicable on the facts of the appellant's case." 6. An appeal was also filed by the revenue in ITA No.4412/Mum/2014 against the order of CIT(A) for the assessment year 2011-2012, wherein same grounds have been raised as have been raised in ITA No.4411/Mum/2014 in case of M/s A' Star Exports Ltd., Mumbai, as discussed above. The CIT(A) has deleted the addition and allowed the set off of stock against the business loss after having the following observations :- 4.5. I have perused the submission filed and the explanation given in the oral hearings in the appellate proceedings carefully. From the submission of AR , it is seen that it was argued that the investigation team released the unaccounted stock of diamonds after valuation only because the same was stock in trade. Had it been investment the same would have been seized by the investigat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joint basis. It was argued that the Apex Court decision in the case of D.P.Sandhu Brothers Chembur Pvt. Ltd.(2005) 273 ITR 1 supports the view that all income has to fall in one of the heads of the income provided in the income tax act. Some decisions were cited to support the view that the income reflecting the unaccounted stock of diamond during search cannot be headless income, and it should be considered to be taxable either under the head of income from business or income from other sources. It was then argued that the current year's loss should be set off against the income in terms of sec.70/71 of the I.T.Act. Reliance was placed on the judgment in the case of Chensing Venture Vs. CIT [2007) 163 Taxman 175 (Mad.). In this decision, the case of Fakir Mohamed Hazi Hassan has been considered. It has been noted that the decision in the case of Fakir Mohammed Hazi Hassan was over turned by Hon'ble Gujarat High Court itself in their decision in Radhey Developers Pvt. Ltd. the appellant also submitted that the AO has incorrectly relied upon the decision in the case of Kim Pharma (P) Ltd. Vs. CIT. In that case the assessee had adjusted current year's undisclosed income with the carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whom the goods are sold. Sale to the same party where the cost is less results in profit which is higher than the case where the cost is more. As regards the maintenance of stock register, the appellant has maintained carat wise stock register. Further, details such as cut, clarity, colour is difficult to maintain and is not a practice in the diamond industry. The details as maintained in the stock register of the appellant has been approved by ITAT Mumbai Bench in the case of Dharamchand Paraschand Export vs. ACIT no. 2833/Bom/91 where it has been held that carat wise stock register will be sufficient. Similar observations has been made by the Hon'ble Bombay High Court in the case of CIT -5 vs. M/s. Sundaram Gems Pvt. Ltd. (ITA No.6785 of 2010) In this decision the Bombay High Court did not accept the rejection of books of account by the AO and held that the maintenance of carat wise stock register is a regular practice prevalent in diamond trade. The decision in the case of DCIT vs. Samir Diamond Export was reversed by the Hon'ble ITAT in the case of Dharamchand Paraschand Export mentioned above. The ITAT Mumbai Bench has observed that it is not practically possible to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier named as Vipul Trading Company), with its office at 104/116-C, Mittal Court, Nariman Point ,Mumbai, has business activity of Cutting, polishing of rough diamonds and sale of polished diamonds. The business was of import, export & processing of diamonds. In AY 2010-11, a SEZ unit was set up in Surat. As seen from copies of audited accounts for AY 2002-03 to AY 2012-13, Asian Star Diamonds International Pvt Ltd., with its office at 114-C, Mittal Court, Nariman Point, Mumbai , has business of trading in Cut and Polished Diamonds. It was also a partner in Vipul Trading Company, now A-Star Exports. As seen from copies of audited accounts for AY 2000-01 to AY 2011-12, Rahil Agencies, was also having business of trading of export and import of diamonds. The directors/partners of these firms/company such as Vipul Shah, Dharmesh D Shah, Dinesh Shah and Arvind Shah, are all in diamond trade. The diamonds found during search was from the office premises at 114/116, Mittal Court, C-Wing, 11th floor, Nariman Point, Mumbai-400 021. This is also the head office of the flagship company, Asian Star Co Ltd. Diamonds valued at ₹ 106,73,74,569 were also found at this premises which belonged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement on oath of Shri Vipul Prabodh Shah, aged 43 years, s/o Late Shri Prabodh Shah, recorded on 30-10-2010 u/s. 132(4) of the Income Tax Act, 1961 during the search proceedings u/s. 132 of I.T. Act, 1961, at the office premises of Asian Star Company Ltd at 114, 11th floor, Mittal Court 'C' Wing, Nariman Point, Mumbai 400 021 on 30.10.2010. Q.6 During the course of search u/s. 132 of the I.T. Act in the premises of M/s. Asian Star Cam. Ltd., it was found that there is stock of diamonds both rough and polished as mentioned in the stock inventory taken by the government approved valuer, valued at ₹ 1,06,73,74,569/- as per Annexure 1 to this statement. Please confirm the same and state whether the same is accounted for in your books of accounts. Ans. Yes, I confirm that the stock inventory taken by the government approved valuer, valued at Rs.,1,06,73,74,569/- as per Annexure 1 to this statement pertains to that of our company, M/s, Asian Star Co. Ltd. There may be difference in the value of stock of diamonds as per books and what is physically found. This is because of the fact, we would have accounted for the value of stock at cost, whereas the government valuer has v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... executive main cabin in this premises. The keys of the same are not available right now. We will produce the same on Tuesday as the same are available with on of our employees who is out of station and is expected to be back in Mumbai on 2/11/2010. Statement u/s. 132(4) on Oath of Shri. Vipul Probodh Shah, Managing Director of Asian Star Co. Ltd. recorded during the course of search action u/s. 132 of the I.T. 1961 (Operation of P.O) in the case of M/s. Asian Star Co. Ltd. at 114, 11th floor, C wing, Mittal Court, Nariman Point, Mumbai-400 021 on 27.12.2010. 0.2 Do you aware of the proceedings that today we have come for operation of prohibitory order placed on Safe No. 2 in Strong Room in Executive Main Cabin at 114C, 11th floor, Mittal Court, Nariman Point, Mumbai-400 021? Ans. Yes. I am aware of the proceedings. 0.3 I am showing your statement recorded on oath u/s. 132(4) on 30.10.2010 to you. While answering to Q. No. 8, 9, 10 % 11, you had stated that there were some unaccounted diamonds worth ₹ 29.76 crores of three entities namely M/s. Rahil Agencies, M/s. Asian Star Diamonds International Pvt. Ltd. and M/s. A' Star Exports. You had further stated that they were ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and M/s. A Star Exports (formerly known as MI5. Vipul Trading Co.) valued by your valuer at ₹ 34,50,OO,516/- is declared as additional income for F.Y. 2010-11 and other ₹ 1 0 crores as additional miscellaneous income in order to take care of any discrepancy if found during the course search proceedings. We shall pay tax there on before 31/10/2011. Since income declared voluntarily u/s. 132(4) we request you not to initiate any penal proceedings against us. In future also we assure you to fully cooperate with the department. 4.8.4 A perusal of the extracts from the above statements show that the appellant had always explained the diamonds found as excess stock in trade. There is nothing to indicate that the appellant was carrying out any other undisclosed activity or had any other undisclosed source of income. There is also merit in the appellant's contention that accepting this explanation of the appellant that the diamonds are stock in trade, the investigation team did not seize the diamonds found in the course of search. In the above facts and circumstances, I hold that the unaccounted diamonds are stock-in-trade of the appellant. 4.9. Head of Income in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere it is held that the Act does not envisage taxing any income under any head not specified in section 14 of the Act. This view of the Gujarat High Court has been followed in Chensing Venture vs CIT (2007) 163 Taxman 175 (Mad). 4.9.4. The assessing officer has explained that section 68/690 represent deemed income which is distinct from the normal concept of income. The normal concept of income only can be considered under the five heads of income. The deemed income is a headless income. However, deemed income is not a concept found only under section 68-690. Under income from house property, there is concept of deemed to be let out u/s 23(1 )(a) of the Act. Similarly section 41 deals with remission of liabilities as deemed income. Section 44AD to 44BBB deal with presumptive income as does section 50C and 50D in the Act. No doubt the decision in the case of Fakir Mohamed Hazi Hasan supports the view of assessing officer, but the same has subsequently been overruled, as already discussed above. 4.9.5. The assessing officer may apply section 69/69A if he is no explanation is offered by the appellant as to source of income reflected in the investment/asset or the explanation is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o proof with regard to the cost of acquisition of the diamonds. The cost has been considered based on the valuation made by the Departmental Valuer at the time of search. This is much higher than the asking price mentioned in the loose paper 76,77 and 78. If the valuation is high, it will result in loss. If the valuation is low, it will result in profit. The appellant has claimed that the valuation at the time of search was on the higher side. It has relied upon a subsequent valuation to show that the valuation was on the higher side. At this stage, on examination of the two valuation reports, it is noted that neither of the reports have indicated the number of pieces of diamonds that were found nor has valuation been made based on distinct categories based on cut, colour, carat and clarity. This lends support to the claim of the appellant that such record keeping in stock register is onerous if not impossible. The number of pieces are indicated in the invoices for sales. Some important conclusions are tabulated below: 4.10.2. A look at the above table shows that the categories are not uniform and varies from person to person who assorts/values the diamonds. Further the size of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce offered by customers. I find that the assessing officer has not commented on the documentation provided by the appellant in respect of price negotiation with the customers. 4.10.7. The negotiations with overseas parties as per contemporaneous records in respect of sale of unaccounted stocks is summarized below. Asian Star Diamonds Intnl. Pvt. Ltd. 4.10.8. The appellant has submitted credible contemporaneous evidence of price negotiations in respect of sales of unaccounted stock of diamonds. It supports the appellant's claim that the customers did not vale the diamonds at the rates considered in the valuation made at the time of search. Some of these parties are regular customers of the appellant group. There is no evidence that the sales are not genuine or under invoiced. The assessing officer has not verified the details from the customers, the details of which have been furnished to him. I hold that the transactions of sale reported are genuine and the losses arising from these transactions are accordingly genuine and allowed. 4.11. Rejection of books of accounts and estimation of gross profits 4.11.1. The assessing officer has rejected books of accounts u/s 145(3) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n further appeal before us. 8. We have considered rival contentions, carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. DR and AR during the course of hearing before us. From the record we found that the assessee a partnership firm is in the business of trading, import, export, manufacturing, wholesale and retail dealing in diamonds, gems and jewellery The main object of the assessee firm is to carrying out the business of import, export, manufacturing, wholesale and retail dealing in diamonds, gems and jewellery. The partnership business was of importers, exporters, manufacturers, processors, investors, wholesalers, distributors, retailers, dealers and indenting agent of diamonds, synthetic stones, gems and jewellery, precious and semi precious metals and miners and ornaments and article made thereof including jewellery, decorative and precious objects of arts and crafts and to cut, design polish rough diamond, gems and precious stones and that of investment and lending and to do any other business as may be mutually agreed upon by the partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecorded on 20.11.2012 wherein in reply to the question no. 22 he has stated that this undisclosed income is generated through unrecorded trading of diamonds. Q.22 Please explain as to how this undisclosed income is generated? Ans: it is through unrecorded trading of diamonds. " It is clear from the above facts that the declaration was related to business stock in trade hence it is evident that the declaration amount is required to be assessed under the head' Income from Business or profession. Thus, the undisclosed income of ₹ 13,47,63,640/- declared voluntarily by the assessee for A.Y. 2011-12, is undisclosed stock held under the customary trading of the business and hence should be treated as the business income of the assessee firm and not as undisclosed investment as held by the AO. If all the three conditions of Section 69 exist together, the unrecorded investment or value of assets can be deemed to be assessee's income of the relevant financial year. In the present case all three conditions as required under section 69 are not fulfilled because the appellant has offered explanation and nature of source of acquisition as undisclosed stock received from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome under any head not specified in section 14 of the Act. In the circumstances, there is no question of trying to read any conflict in the two judgments of this court as submitted by the learned counsel for the Revenue." The same stand was re-affiremed by the Hon'ble Gujarat High Court in the case of CIT-II Vs. Shilpa Dyeing & Printing Mills Pvt. Ltd. (Tax Appeal No.290 of 2013. 10. In view of the above and relying on the decision of various high court and tribunal as cited by ld. AR it is clear that the stock of diamond declared during the .search is taxable under the heads of income as defined in section 14 read with section 56 and not taxable separately. As there cannot be taxable income of income out of the 5 heads of income as specified in section 14 of the Act. Hence the stock of diamond of ₹ 13,47,63,640/- is taxable either under Income from Business & Profession or under income from other sources. 11. With regard to AO's action for rejection of books of account u/s.145(3), we found that assessee's books of accounts are consistent with the applicable accounting standard and there are no qualifications by the auditors of the assessee with regards to the method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of R.B. Bansil Abirchand Spinning and Weaving Mills. Vs. CIT, 75 ITR 260; Pandit Brothers vs. CIT, 26 ITR 159 (Punjab) and Ashok retractories Co. P Ltd., 279 ITR 457. Considering facts and circumstances prevailing in the present case, we are of the view that learned CIT (A) was right in deleting the addition made by A.O." 13. The CIT(A) has given categorical finding to the effect that the AO has considered gross profit based on SEZ Unit on A' Star Exports at Surat. We found that SEZ Unit operates on fiscal benefits available to SEZ unit and is a manufacturing activity cannot be compared with trading activity. The loss has arisen because of the value considered as its cost. However, there is no evidence of cost in the books of accounts. Further the valuation made at the time of search is a mere one page summary which gives no description of the diamonds and is merely total value of 5-6 packets. Thus, no meaningful comparison can be made. The CIT(A) has categorically dealt with each and every documents and after giving detailed finding in para 4.11, reached to the conclusion that rejection of books of accounts and estimation of gross profit by the AO was not justified on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly section 115BBE has no application in case. 20. Furthermore, the memorandum to the Finance Bill, 2012 read on Section 115BBE reads as under:- "under the existing provisions of the Income-tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc., no tax is levied up to the basic exemption limit. Therefore, in these cases, no tax can be levied on these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate. In order to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit, it is proposed to tax the unexplained credits, money, investment, expenditure, etc., which has been deemed as income under section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of 30% (plus surcharge and cess as applicable). It is also proposed to provide that no deduction in respect of any expenditure or allowance shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act." In view of the decision of Hon'ble Supreme Court, business loss cannot be treated at par with the expenses / allowances and such business loss can be set off against any type of income as section 71 do not debar from setting off such losses 23. We have considered rival contentions in ITA No.4412/Mum/2014 and found that similar issue has been dealt with by us in ITA No.4411/Mum/2014. As the reasoning given by the AO for not allowing set off and reasoning given by the CIT(A) for allowing set off are the same as we have discussed in ITA No.4411/Mum/2014, following the same reasoning given hereinabove, in ITA No.4411/Mum/2014, we do not find any reason to interfere in the findings recorded by CIT(A), which is as per material on record, which had not been controverted by the department by brining any positive material on record. 24. In view of the above discussion, we do not find any infirmity in the order of CIT(A) for allowing set off of business loss against income declared during the course of survey/search, accordingly, this appeal of the revenue is also dismissed. 25. In the result, both appeals of the revenue are dismissed. Order pronounced in the open cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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