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TMI Blog2020 (4) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T.A No’s.3188 & 3189/AHD/2011 - - - Dated:- 4-2-2020 - Shri Sandeep Gosain, Judicial Member And Shri O.P. Meena, Accoutant Member For the Assessee : Shri Rasesh Shah - CA For the Revenue : Shri Srinivas T. Bidari - CIT(D.R.) ORDER PER O. P. MEENA, AM: 1. The above cross appeals by the Revenue and Assessee are directed against the order of learned Commissioner of Income tax (Appeals)-II, Ahmedabad (in short the CIT (A) ) dated 19.10.2011 for the Assessment Year 2008-09, which in turn has arisen from the assessment order passed under section 143(3) dated 31.12.2010 of Income Tax Act, 1961 (in short the Act ) by the Deputy Commissioner of Income-Tax, Central Circle 1, Surat (in short the AO ). I.T.A.No. 3188/AHD/2011/A.Y.2008-09 (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valued at ₹ 45,31,58,050/-, received in laser Department as unaccounted stock and added the same to total income as per observations made in para 7.5 and 7.6 of assessment order u/s. 69 of the Act. 4. Being, aggrieved, the assessee filed an appeal before the Ld.CIT(A). Wherein, it was explained that stock entered in Annexure BF-16 has been added twice i.e.: firstly at the time of main process as noted in Annexure BF-15 to BF-17 and thereafter at the time of resending for reprocess as noted in Annexure BF-16.Thus, it was contended that the stock of rough diamonds of 220873 carats was not properly computed by the AO. It was pointed out that the original weight in carats was totaled as gross weight and not sawed weight i.e. net weight. There were repetitive notings of gross weight/carats of various lots in various laser machines/shifts. It was contended that when one lot / packet (with kapan number) is laser processed in two shifts or sawed on more than one laser machines, the gross weight was noted as original weight/carats 2-3 times and totaled twice/ thrice, whereas the sawed weight/ carats on all such machines / shifts is equal to one gross weight/carats only. Due to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition of ₹ 45,31,58,050/- made by the AO. 5. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The Ld. CIT (DR) supporting the assessment order submitted that during survey several loose papers including loose paper file annexure BF-45 were found and impounded. These register were maintained for laser department as well as for polished diamonds. However, polishing work of diamonds and Ghat work was not being done at the factory premises of the assessee. The total stock of rough diamonds as per impounded register of laser department was at 220873 carats and during this period, the rough diamonds issued as per register were at 35,098.43 carats. Hence, rough diamonds issued were not found matching. Although the assessee has failed to reconcile the lot wise matching and even benefit of rough diamonds issued is given from stock of rough diamonds, still there was difference of 1,85,774.57 cts [220873-35098.43]. The CIT (A) has simply relied on the details given by the assessee. The entries made in laser register was unexplained investment in the hands of the assessee. Therefore, the AO was right in making addition on this account. 6. Per contra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notings in Annexure BF-8 to15 17 and worked out the diamonds sent to laser department at 97837.27 carats excluding Annexure BF-16 and duplicate entries taking net weight, which has been reproduced by the Ld. CIT (A) at Page No. 37 to 39 of appellate order. Accordingly, the CIT (A) considered the stock of rough diamonds from stock register of rough diamonds from 27.11.2007 to 14.02.2008 at 114603.95 carats and found that the AO has wrongly taken 220873 carats rough diamonds and made addition of difference rough diamonds of 185774.57 carats valued at ₹ 45,31,58,050/- on mere presumption. However, as per impounded register of laser department and difference of rough diamonds issued to laser department was very much less than the stock on hand maintained by the assessee for of which findings are given at para No. 9 9.1 of the appellate order. We are therefore, of the opinion that in such a situation, no addition on account of excess stock can be made. We also notice that there was no excess stock of rough diamonds found during survey. Further, the Ld. CIT (DR) has also not controverted these facts and findings as recorded by the Ld.CIT(A) and simply supported the AO`s observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process. It was also stated that registers identified as Annexure BS 1, 2 3 were found and seized from 1-Diamond Park , Kohinoor Road, Surat where only the process known as Talia, Mathla, Pale Dhar etc. are carried out by the jobwork parties. However, the AO was not satisfied with reply and made addition of ₹ 22 47,56,571/- by applying yield ratio of 45.37% as per his observation in para No. 24-26 of the assessment order by holding that yield in the Ghat process is around at 69%. 10. Being, aggrieved, the assessee filed an appeal before the Ld. CIT (A). Where it was submitted that average yield up to Ghat process comes to 69.25% and average yield after Ghat process comes to 49.45% on the basis of seized material inventoried at BF-47 and BF-49. Therefore, it was submitted that if average yield of 49.45% is calculated on 69.24% and not on 100%, the ultimate yield comes to 34.25%. The assessee in its audited accounts has shown yield at 34.65%. Considering these facts, the ld.CIT(A) observed that that the yield ratio for manufacturing diamonds is near to 34% to 36% and not 45.37% as assumed by the AO. The yield working in the impounded pages of Annexure BF-47 gives average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any is also covered by extra declaration made by the assessee and reflected in the return of income. 13. We have heard the rival submissions and perused the relevant material on record. 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. The 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. 14. Ground No. 3 states that the Ld.CIT(A) has erred in law and on facts in deleting ₹ 9,55,04,826/- out of total addition of ₹ 10,81,01,908/- in respect of unaccounted manufacturing expenses even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially a lump sum amount has been paid and the balance were outstanding. For example, in first entry out of total charges of ₹ 98,690/, initially ₹ 65,000/- paid and balance ₹ 33,690/- outstanding. Similarly, in second and third entry ₹ 1,00,000/- and ₹ 2,30,000/- charges were paid and ₹ 32,183/- and ₹ 3,98,993/- were outstanding respectively. In sixth column, the rate/cost per piece is mentioned. For example in first entry, total 2642 pieces were issued for process of Ghat for which the job charges incurred at 98690. By dividing from piece, the rate comes at ₹ 22.92. In addition, it can be seen that rate of job charges is the least for Ghat work (involving less labour) and highest for fancy work (involving highest labour). The similar trend has been seen in all these pages. From the above analysis, It was very much evident that these impounded papers are related to job work expenses/ majuri expense etc. and do not pertain to unaccounted sale receipt. During the course of survey proceeding, the statement of partner and key person Shri Manu J. Balar was recorded on 15.02.08. The same was very much admitted by the partner of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs of advances by workers as per Page No. 8,10,11,20 23 of Annexure BF-45. The ld.CIT(A) has discussed the issue at Page No. 61 and 62 of appellate order at para No. 13. The ld. CIT (A) further held that the figure of ₹ 6,04,11,050/- is for 8 months and not for 10 months. The ld.CIT(A) has therefore, given set off of ₹ 4,21,09,258/- on proportionate basis for labour charges shown in the books of accounts for 8 months only. The ld.CIT(A) has further given set off ₹ 57,04,710/- for majuri expenses against unaccounted production on which disclosure for unaccounted sales of ₹ 4,01,17,636/- shown by the assessee. Accordingly, the addition of ₹ 1,25,97,082/- was confirmed by treating as unaccounted payments by the appellant under section 69C of the Act and balance addition of ₹ 9,55,04,826/- was deleted as per findings as given in para No. 13 13.1 of the appellate order. 18. Being aggrieved, the Revenue has filed this appeal before the Tribunal against the deletion of addition of ₹ 9,55,04,826/- and the assessee has filed the appeal against the confirmation of addition of ₹ 1,25,97,082/- vide Ground No. 2 of appeal of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptember 2007 October 2007, but the Majuri payments made in succeeding month may be relating to the work done in September 2007 and October 2007, if the set off for 10 months is allowed, then there would not be any addition, which could have been sustained. Even otherwise, the Ld.CIT(A) has confirmed the addition of ₹ 1,25,97,082/- under section 69C of the Act, which debars corresponding deduction as business expenditure, if the source of the expenditure would not be explained by the assessee as per its proviso. It was submitted that the proviso to section 69C provides that if the assessee could not explain source of expenditure, then no deduction from business income be allowed. However, the impounded material on the basis of which addition was made was received from the factory premises where the survey was conducted. So obviously, the source of the expenditure was out of business receipts as in the course of survey, the assessee was not found to be deriving any other income except the income from business. Accordingly, the assessee is entitled to deduction under section 37 of the Act as per the decision of Hon ble Gujarat High Court in the case of DCIT vs. Radhe Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7, if the set of for 10 months are allowed then there would not be any addition, which would have been sustained. On careful consideration of facts, we are inclined to agree with submissions of the Learned Counsel of the assessee that the set off for 10 months should be allowed. If that is done, then there would not be any addition which could be sustained. Therefore, we allow the set off for 10 months, and delete the addition of ₹ 1,25,97,082/- sustained by the ld. CIT(A). Even otherwise, we also observe that the addition of ₹ 1,25,97,082/- has been confirmed under section 69C of the Act, which debars the corresponding deduction as business expenditure, if the source of the expenditure is not explained by the assessee as per its proviso. It was submitted that the proviso to section 69C provides that if source of expenditure could not be explained by the assessee, then no deduction from business income be allowed. However, it is discernible from the impounded material on the basis of which addition was made were recovered from the factory premises only, and were related to business of the assessee firm, where the survey was conducted. The AO has not found any other s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the co-operative society to the assessee. In the circumstances, if the Tribunal has stated that the amount of payment towards acquisition of the development rights has to be deducted even if the provisions of section 69C of the Act are attracted, no infirmity can be found in the order of the Tribunal. Admittedly, the proviso inserted below section 69C of the Act has been made effective from April 1, 1999 as inserted by the Finance (No. 2) Act, 1998 . 21. However, the above decision was relating to financial year prior to amendment made under section 69C with effect from 01.04.1999, however, this decision is applicable to and after amendment as per the ratio of this decision and followed by Hon`ble Gujarat High Court in the case of CIT v. Shilpa Dyeing and Printing Mills Pvt. Ltd. 381 DTR 0381 (Gujarat) which was relating to period after amendment. Without prejudice, it was submitted that the disclosure of ₹ 5 crores was made by the assessee after considering the unaccounted expenses. 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 unaccoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld % No. of PCS Cts. No. of PCS Cts. No. of PCS Cts. 90 AY 68 !761 317.24 1760 227.46 71.70 1760 114.22 50.22 36.00 575.36 71 64.33 71 37.80 58.76 71 26.09 69.02 40.56 90B AY 71 74 10.54 74 7.07 67.08 74 3.39 47.95 32.16 AY 65 86 24.22 85 16.42 67.80 85 8.53 51.95 35.22 91 AY 66 251 115.29 251 60.33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95 . AY 72 218 60.18 217 41.85 69.54 217 21.55 51.49 35.81 AY 79 91 18.44 90 13.46 72.99 90 6.95 51.63 37.69 AY 88 37 4.85 37 3.33 68.66 35 1 .48 44.44 30.52 98 AY 85 40 6.54 40 4.53 69.27 40 2.27 50. tl 34.71 77.08 7 1.82 7 1.43 78.57 7 0.72 50.35 39.56 118.61 5 1.71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35.41 AY 42 78 12.2 78 8.55 70.08 78 4.24 49.59 34.75 I01B 300.45 - 949 266.32 949 166.89 62.67 946 100.26 60.08 37.65 103 AY 47 129 28.54 129 20.24 70.92 129 10.64 52.57 37.28 I03B AY 44 1484 262.24 1484 191.7 73.10 1484 99.13 51.71 37.80 104 AY 64 2289 253.39 2286 181.18 71.50 2286 89.18 49.22 35.19 104 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n there is no unaccounted rough diamonds, the yield is correct, then there cannot be estimation of production of unaccounted polished diamonds and sales thereof to earn unaccounted profits. (iv) The appellant has admitted additional income of ₹ 5 crores, which includes unaccounted stock of polished diamonds found of ₹ 98,82,3647/- and unaccounted sales of ₹ 4,01,17,6367/-, thus, if there are any discrepancies or unaccounted sales, the disclosure take care of the same. 17.1 Having considered the above, I am of the opinion that the impounded pages relied by AO contains notings of production of polished diamonds in carats and yield, ratio, but there are no notings of any unaccounted sale proceeds as decoded by AO. In Ground No. 2 above, I have made discussion at length with regard to unaccounted stock of rough diamonds in laser process and held that there is .no, unaccounted rough diamonds and deleted addition of unexplained investment of ₹ 45,31,58,0507/- made by AO and similarly, in Ground no. 3 above with regard to unaccounted income from sale of polished, diamonds on suppression of yield and held that yield shown by appellant at 34.67% is correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess stock of rough diamonds was found at the time of survey. Thus, no physical stock was found at the time of survey, 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 movement of rough diamonds might have been more because of unrecorded sales declared by the assessee. The assessee has declared ₹ 5 crores and therefore, considering Gross Profit of 6.27% , the unrecorded turnover comes to ₹ 79,74,48,166/-. It is well settled that the whole sales cannot be added and only % of the profit can be added in view of the decision of Hon ble Gujarat High Court in the case of CIT v. president Industries 258 ITR 654 (Gujarat) and CIT Samir Synthetics 326 ITR 410 (Gujarat) unless there is no concrete evidence that the assessee has made investment outside the books before receipts of the sale consideration. 27. We have heard the rival submissions and perused the relevant material on record. We find that the assessee has declared ₹ 5 crores and therefore, considering Gross Profit of 6.27%, the unrecorded turnover comes to ₹ 79,74,48,166/-. It is well settled that the whole sales cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee filed an appeal before the Ld. CIT (A). However, Ld. CIT (A) has given his findings as under: I have carefully pursued the assessment order facts of the case and submissions of the appellant-firm, findings of the assessing Officer, rebuttal explanations evidences furnished by the appellant -firm, contents of disclosure at the time of survey etc. Assessing Officer has made addition of ₹ 98,41,8327/- on account of undervaluation of closing stock of polished diamonds and allowed set-off of disclosure of ₹ 98.82.364/- against this addition. I am inclined to agree with the appellant's view for the following reasons: (i) The appellant has offered disclosure of ₹ 5 crores and the same is credited to profit and loss account as income disclosed during survey u/s 133A of the Act. The disclosure includes ₹ 98,82,364/- on account of excess polished diamonds weighing 988.71 cts found and ₹ 4,01,17,6367- on account of unaccounted sale of polished diamonds/receivables. (ii) The appellant worked out closing stock as manufactured stock of polished diamonds weighing 11281.14 cts valued @ ₹ 9995.21 per carat, valuing at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that during the assessment proceedings addition of ₹ 98,41,832/- was proposed on account undervaluation of closing stock. The same issue was also raised in A.Y. 2007-08 in which the Ld. CIT(A) as well as the Hon'ble ITAT had confirmed the addition. During this A.Y. 2008-09 also when this issue was proposed for addition, the assessee had submitted to set-off the above addition with the excess stock of finished diamond of ₹ 98,82,364/-offered and disclosed in the balance-sheet. Accordingly, no separate addition of ₹ 98,41,832/- under the head undervaluation of finished stock was made and set off had been granted against excess finished stock disclosed of ₹ 98,82,364/-. 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/-. The Ld. 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. 32. The learned counsel for the assessee submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue has filed this appeal before the Tribunal. The ld. D.R. submitted that the CIT (A) was not justified in deleting the addition as the AO had made addition on the ground that the assessee has not shown excess stock of ₹ 98,82,364/- in the Profit Loss Account. 38. Au contraire, the learned counsel for the assessee submitted that the assessee has shown the stock of polished diamonds at ₹ 11,27,57,405/- in the Profit Loss Account but in the balance sheet it was shown at ₹ 12,26,39,769/-. The stock disclosure of ₹ 98,82,364/- was included in the disclosure of ₹ 5 crores that was credited separately into Profit Loss Account and therefore, Ld.CIT(A) has rightly deleted the addition on merits. 39. We have heard the rival submissions and perused the relevant material on record. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. DCIT [2002] 258 ITR 188 (Delhi) held that where there is disclosure of unaccounted income then books of accounts are not complete hence, same were rejected under section 145 of the Act. 46. Being, aggrieved, the assessee filed an appeal before the Ld. CIT (A). Wherein it was contended that books of accounts are audited and complete records are made. It was explained that impounded register BF-8 to 17 don t indicate any unaccounted stock of rough diamonds and impounded material BF 39,42,46 51 did not indicate any unaccounted production. Similarly, Annexure BF-45,47, 51 do not represent any earning of unaccounted sale proceeds and requested that books of accounts be not rejected. However, CIT (A) observed that during the course of survey, there was impounding of registers and 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] 258 ITR 188 (Delhi) 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of judgements of Hon ble Gujarat High Court in the case of CIT v. Shilpa Dyeing and Printing Mills Pvt. Ltd. 381 DTR 0381 (Gujarat). Therefore, this grounds of appeal is allowed in the favour of the assessee as per findings given in Ground No. 3 of revenue appeal. 52. Ground No. 3 states that Ld. CIT (A) has erred in law and on facts in confirming the addition made under section 69 of the Act to the tune of ₹ 1,86,08,268/- on the ground of alleged unexplained investment made in finished diamonds. 53. During the course of survey, the excess stock of polished diamonds was found by 2851.37 Cts and deficit in Diamonds was found by 6146.57 cts. The discrepancy was explained by the assessee firm that from the quantity of lessor of rough diamonds of 6146.57 carats, finished/on its diamonds weighing 2129.79cts were manufactured (6146.57 cts x 34.65% yield). Thus, there was unaccounted excess stock of finished/polished diamonds to the tune of 721.58 Cts (excess polished diamonds 2851.37 cts less 2121.79 cts) polished diamonds manufacture from lessor rough diamonds only. The assessee firm actually offered excess unaccounted stock of polished diamonds found on survey da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made excess declaration as deficit of rough diamonds were found which were adjusted for working out quantity and value of the excess stock. 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. Even otherwise, 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 Ld.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 of ₹ 1,86,08,268/- is required to be deleted. We are therefore, of the considered opinion the assessee is entitled to set off against declaration as allowed by the AO in assessment himself in assessment order. Further, the shortage of rough diamonds means either same were sold outside India of which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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