M/S. JADAUJEWELLERS & MANUFACTURERS PVT. LTD.,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, JAIPUR

During the course of assessment proceedings, the AO also initiated the penalty u/s 271AAA in respect of undisclosed income of Rs. 2,46,00,000/- surrendered by assessee and disclosed in its return of income as well as on Rs 5,30,97,994 towards addition made during the course of assessment proceedings.

During the penalty proceedings, a fresh show cause was issued to the assessee and after taking into consideration the submission of the assessee and order of the Tribunal in the quantum proceedings, the AO imposed penalty of Rs. 30,71,912/- u/s 271AAA on the amount surrendered by the assessee in the return of income amounting to Rs 2,46,00,000 as well as the addition finally sustained by the Tribunal amounting to Rs 61,19,120.

On appeal, the ld. CIT(A) deleted the penalty levied by the AO on the additional income surrendered by the assessee in his return of income amounting to Rs 2,46,00,000. However, he confirmed the penalty on the addition of Rs. 61,19,120/- which was sustained by the Tribunal in the quantum proceedings. The Revenue and the assessee filed cross appeal against the order of the Tribunal before the Tribunal. The appeal filed by the Revenue was dismissed by the Coordinate Bench on account of low tax effect vide order dated 22.08.2019 in and the assessee is now 2 M/s Jadau Jewellers & Manufacturers Pvt. Ltd. Vs. DCIT, Jaipur in appeal before us against the sustenance of penalty of Rs. 6,11,912/- @ 10% on the addition of Rs. 61,19,120/- which was sustained by the Tribunal in the quantum proceedings.

The relevant findings of the ld. CIT(A) which are therefore under challenge reads as under:- “For the other addition of Rs. 61,19,120/- sustained by the Hon’ble ITAT Bench, Jaipur, I am of the view appellant is not covered under the section 271AAA[2] as such addition is not as a result of admissions u/s 132[4]. I may add that such addition is also covered under the definition of undisclosed income being directly relatable to seized documents from the appellant of the specified previous year. Under the stated circumstances I am of the view, appellant gets relief from penalty on a sum of Rs. 2.46 Crore, while the penalty u/s 271AAA is confirmed on the amount Rs. 61,19,120/-. The AO is directed to recompute the penalty. Appellant gets a part relief in Ground No. 1.”

At the outset, the ld AR drawn our reference to the findings of the Co- ordinate Bench in the quantum proceedings and it was submitted that the addition of Rs. 61,19,120/- was sustained by the Tribunal on account of estimation of GP rate and the same does not represent undisclosed income of the assessee. Further, reference was drawn to the definition of undisclosed income as defined in the explanation 2 section 271AAA of the Act which reads as under:- “Explanation –For the purposes of this section,- (a) “undisclosed income” means- (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other 3 M/s Jadau Jewellers & Manufacturers Pvt. Ltd. Vs. DCIT, Jaipur documents or transactions found in the course of a search under section 132, while has- (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) other while not been disclosed to the Chief Commissioner or Commissioner before the date of the search; or (ii) Any income of the specified previous year represented, either wholly or partly, by any entry in respect of any expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted;”

It was submitted by the ld AR that the additional income finally sustained by the Revenue does not come in the purview of undisclosed income as it is purely based on the estimation and it neither represented by undisclosed assets or entry in the books of account or documents. Further, it was submitted that levy of penalty u/s 271AAA is discretionary and not mandatory in nature. Further, reliance was placed on the Hon’ble Supreme Court decision in case of Hindustan Steels Ltd. vs. State of Orissa, 83 ITR 26 (SC) as well as the decision of Hon’ble Rajasthan High Court in case of Shiv Lal Tak vs. CIT [2001] 251 ITR 373 (Raj) and CIT vs. Harshvardhan Chemical & Minerals Ltd [2003] 133 Taxman 320 (Raj).

Per contra, the ld. DR supported the findings of the Assessing Officer as well as of the ld. CIT(A). It was submitted by the ld DR that the ld. CIT(A) has clearly held that the case of the assessee does not fall u/s 271AAA(2) of the Act and therefore, the said findings should be confirmed. 4 M/s Jadau Jewellers & Manufacturers Pvt. Ltd. Vs. DCIT, Jaipur

We have heard the rival contentions and pursued the material available on record. In order to appreciate the rival contentions, we refer to the findings of the Assessing officer which are contained at page 22-23 of the assessment order which reads as under: “It is amply clear from the above discussion that each of the defects found and pointed out in the show cause notice dated 03.10.2012 have been found to have been already addressed and necessary adjustment made by the special auditor. Accordingly, the net profit of the assessee company for the year under consideration as computed in the special audit report at Rs. 7,45,84,379/- on consolidated sales of Rs. 26,96,46,926/- shall be adopted for the purpose of computing the total income of the assessee. As against this, the net profit shown by the assessee in the return filed u/s 153A of the Act amounted to Rs. 2,36,16,893/- on total sales of Rs. 6,98,91,003/-. Accordingly, the sum of Rs. 5,09,67,486/- (7,45,84,379/- minus Rs. 2,36,16,893/-) being the undisclosed income/profit earned from additional sales of Rs. 19,97,55,923/- (Rs. 26,96,46,926/- minus Rs. 6,98,91,003/-) is hereby added to the total income of the assessee. In view of the above facts and circumstances and in the light of the discussion made above; it is clear that the assessee has concealed its particulars of income to the tune of Rs. 5,09,67,486/-. Such concealment of particulars of income was effected by not disclosing the correct sales and the corresponding profit earned thereupon. The additional sales made by the assessee company and the corresponding additional profit earned on such sales were not disclosed in the regular books of accounts nor were the same disclosed in the return filed u/s 153A of the Act. Despite the additional sales and the additional profit having being recorded in the parallel and duplicate set of books maintained under the 5 M/s Jadau Jewellers & Manufacturers Pvt. Ltd. Vs. DCIT, Jaipur fictitious name of M/s Jadau Ji and which were seized during the course of search proceedings u/s 132 of the Act, the assessee company failed to disclose such additional sales and additional profit in the return of income filed u/s 153A of the Act. Being thus satisfied that the assessee company has committed a default u/s 271AAA of the Act, penal proceedings u/s 271AAA of the Act are initiated separately for concealing particulars of income of Rs. 5,09,67,486/-”

Further, we refer to the findings of the ld. CIT(A) and the same reads as under:- “6.3 In these grounds, it is observed that the ld. CIT(A) has upheld the addition to the extent of Rs. 2,59,56,858/- by estimating the profit rate @ 24% on estimated sales of Rs. 26 crores by observing as under:- “After considering the past history of the assessee and gross profit of 15.30% in comparable cases cited by the A.R. of the assessee, I found that the gross profit rate of 26.21% seems to be on higher side in the business of the assessee. The consolidated sales worked out by the assessee after the correction comes to Rs. 25,06,61,673/- but the fact remains the accounts of Jadavji are incomplete and there may remain some more unaccounted sales. Therefore, I estimate the consolidates sales of the assessee at Rs. 26.00 crores. So far as the addition of gross profit is concerned, the Special Auditor has computed the gross profit rate of 26.21% on the basis of sample size selected by him. The A.R. of the assessee has cited some more cases wherein the gross profit rate is (-) 5.67%. If the examples cited by the A.R. of the assessee are added to the sample selected by special auditors, the weighted average gross profit comes to 24.08%. M/s Jadau Jewellers & Manufacturers Pvt. Ltd. Vs. DCIT, Jaipur Considering this fact and assessed gross profit in past and next years, I estimate the gross profit rate of 24% as against 26.21% adopted by the AO and 16.95% shown by the assessee. Thus the gross profit comes to Rs. 6,24,00,000/-. The assessee has shown gross profit of Rs. 1,18,43,142/- in the return filed u/s 153A of the Act. Thus the short fall in gross profit is determined at Rs. 5,05,56,858/-. The assessee has declared Rs.2,46,00,000/- in the return filed u/s 153A of the Act on account of undisclosed income from unaccounted sales/ purchases. In profit and loss account, the assessee disclosed this income by mentioning that ‘’income taken into account on the basis of statement recorded in search/ documents found during the search being income earned from unaccounted sales represented by undisclosed assets (PB pager 103). Further in search statement, Shri Prateek Kothari, director of assessee company admitted this as income earned from unaccounted purchases and sales in the company (PB page 34 43). Further the company being an artificial judicial person, cannot act like a living person. Therefore, whatever earning is there in the company, it comes form activities in the company. The assessee company has no another activity except the jewellery business.

The Assessing officer has given a finding that the reported turnover is Rs 6,98,91,003 as per return of income and the special auditor has computed the consolidated turnover of Rs 26,96,46,926 and thus, there is undisclosed profit from additional sales of Rs 19,97,55,923 not recorded in the books of accounts. On appeal, the ld CIT(A) has considered the consolidated sales of Rs 26 crores. And the Coordinate Bench has finally upheld the figure of Rs 25,06,61,673 based on calculation by the assessee on the basis of seized records as against the figure of reported turnover of Rs 6,98,91,003 as per return of income and the relevant findings of the Coordinate Bench reads as under: M/s Jadau Jewellers & Manufacturers Pvt. Ltd. Vs. DCIT, Jaipur “The assessee had computed the gross turnover of Rs. 25,06,61,673/- on the basis of seized documents and books of account and has pointed out several mistakes and instances of double counting of sales computed by the Special Auditor in the estimates of gross turnover. The ld. CIT(A) as well as AO have not pointed out any defect in the calculation of gross turnover by the assessee on the basis of seized records.