DCIT (CENTRAL)-2, INDORE vs. PUNJAB RETAIL (P) LTD., INDORE

The first ground relates to addition of Rs. 14,07,74,148/- on account of excess stock found during the course of search.

The brief facts leading to the case is this that the assessee is engaged in trading and manufacturing business of gold and diamond jewellery. A search operation under Section 132 of the Act was carried out on 28.09.2016 at the business as well as residential premises of Anand & Punjab Group of Indore including the assessee along with other concerns/business associates wherein certain discrepancies in the quantity of closing stock were found. The assessee offered additional income of Rs. 10,10,00,000/- on account of the aforesaid difference in the quantity of stock found in the said search proceeding. Subsequently, another survey proceeding under Section 133A was carried out on the business premises of the assessee on 15.11.2016 which was concluded on 19.11.2016. During the course of survey additional income to the tune of Rs. 1,20,02,793/- was declared by the assessee on account of excess stock. While filing the income tax return on 07.11.2017 the valuation of difference in quantity of stock was calculated at 10,14,95,122/- which was duly incorporated in the books of accounts and shown separately in the Profit and Loss for the year ended on 31.03.2017. In the said return income of Rs. 1,20,02,793/- was also offered by the assessee company. In fact, the assessee company on 07.11.2017 declared the total income at Rs. 28,56,20,940/- including additional income surrendered of Rs. 10,14,95,122/- and Rs. 1,20,02,793/- during the course of search and survey proceeding respectively. The AO calculated the difference in the valuation of stock to the tune of Rs. 24,17,74,248/- at the time of search and upon allowing the credit of additional income so offered at the time of search of Rs. 10,10,00,000/-, difference of the same was calculated of DCIT vs.M/s. Punajb Retail Pvt. Ltd. Asst.Year –2017-18 - 3 – Rs. 14,07,74,248/- and added the same to the total income of the assessee. Before the First Appellate Authority the said addition stood deleted. Hence, the instant appeal before us.

We have heard the respective parties and perused the relevant materials available on record.

The case of the assessee is this that as on the date of search on 28.09.2016 the Departmental Valuation Officer (DVO) calculated the market price of stock as lying in all the showrooms of the respondent assessee company to the tune of Rs. 106,03,64,733/-, whereas the valuation of stock as found at the time of search on the basis of books of accounts of the assessee was only of Rs. 81,85,90,485/-. The AO wrongly compared the valuation of stock as per books of accounts and as calculated by the DVO and the difference in the amount of stock was calculated at Rs. 24,17,74,248/-.

The addition of Rs. 14,07,74,248/- was made by the Ld. AO on account of difference in the valuation of stock as physically found and as shown in the books of accounts. The difference in the quantity was duly accepted and offered by the assessee during search. The Ld. AO notionally made addition on the basis of market price, totally ignoring the case of the assessee. The addition represents the notional profit of stock in hand of the appellant and not the actual profit. We have further considered inter alia the following submission made by the assessee made in the written notes of submission submitted before us: “1.9] That if the valuation of book stock converted at the market price by taking the rate as applied by the DVO in that case the overall difference was of Rs 2,78,25,512/- only whereas the respondent assessee had declared additional income of Rs 10,14,95,122/-. The same is calculated as under:- Particulars Stock as per Book Stock as DVO per DVO Rates valuation Cl. Stock as on 31.03.2016 (As per Annex. 1) 855514351 1048141462 Add: Purchases between 01.04.2016 & 28.09.2016 516053030 516053030 Add: Making Charges between 01.04.20 1 6 & 0 21321624 28.09.2016 Less: Sales between 01. 04.2016 & 61 1767 1 371567381 1 5855 16 116 28.09.2016 779 Less: GP as per Audit Report 5 87 90 for AY 2016-17 9.61% 884 55 29 76895 55 29 76 895 Cl. Stock as on 28.09.2016 as per Books of A/C 818590486 1032539221 Physical Stock as per DVO Reports 1060364733 1060364733 Excess Stock -24 1774247 -27825512 Less: Stock Surrendered 101495122 101495122 Short/ Excess Surrendered -140279125 73669610 1.10] That if the books stock in term of quantity as on the date of search was calculated as per the rates as adopted by the DVO, in that case also the valuation of book stock would increase from Rs 81,85,90,485/- to Rs 99,75,79,091/- . The valuation as calculated by the Departmental valuation officer in his report was of Rs. 1,06,03,64,733/- and accordingly the difference in the valuation of stock calculated comes to Rs.6,27,85,642/- only as against additional income of Rs 10,14,95,122/- was offered for tax by the appellant. The same is calculated as under:-

The Ld. CIT(A) while allowing the appeal preferred by the assessee observed as follows:- “4.1.3 I have considered the factual matrix of the case, plea raised by the appellant and findings of the AO. Search u/s 132 of the IT Act was conducted at the business premises of the appellant on 25-09-2016. The appellant maintained day to day quantity records in GS-11 and GS-12. During the course of search, difference in the DCIT vs.M/s. Punajb Retail Pvt. Ltd. Asst.Year –2017-18 - 7 – quantity as per GS-11 and GS-12 with the quantity as actually found during the course of search as per DVO report was duly accepted by the appellant and additional income to the tune of Rs, 10,10,00,0007- as per the rate adopted by the DVO on the date of search was surrendered. It is an undisputed fact that the difference in the quantity was duly reconciled and additional income on account of difference in quantity was duly surrendered by the appellant. The assessing officer while passing the assessment order considered the valuation of jewellery of all the showrooms of the appellant as per report of the DVO which came to Rs. 106,03,64,733/- as provided on Page No. 3 of the assessment order. The assessing officer then compared the said valuation with the cost of jewellery as per books of accounts as on the date of search which came to Rs. 81,85,90,485/- as provided on Page No. 5 of the assessment order. Difference of these two figures i.e. market value of jewellery found as per the report of DVO of Rs. 106,03,64,733/-and cost of jewellery as per books of accounts of Rs. 81,85,90,485/- was calculated by the assessing officer which came to Rs. 24,17,74,248/- [as per Page No. 6 of the assessment order]. The assessing officer then allowed credit of additional income as already accepted by the appellant to the tune of Rs. 10,10,00,000/- [correct amount actually offered was of Rs.10,14,95,122/-] and balance amount of Rs. 14,07,74,248/- [Rs. 24,17,74,248/- minus Rs. 10,10,00,000] was added to the total income of the appellant. The appellant during the course of assessment proceedings as well as during the course of appellate proceedings has claimed that there was no difference in the quantity which supported the above I addition made by the assessing officer. The addition was made by the assessing officer merely on account of difference in valuation of jewellery as actually found and as shown in the books of accounts. The DVO adopted the market price of gold as on the date of .search i.e. 28.09.2016, whereas average cost of jewellery was considered by the appellant in its books of accounts. The addition made by the assessing officer represented the difference in the valuation of jewellery i.e. difference of cost and market price as on the date of search. If the version of the assessing officer is accepted, in that case, entire jewellery of the appellant shall be converted at market price as on the date of search and the appellant would have been liable to pay tax on the valuation of conversion of jewellery from cost to market price which in any case is not the correct approach of the assessing officer. In case of jewellery business where day to day quantity records were properly maintained and purchase and sale bills were duly accounted for; there was no reason to ignore the quantity as per books of accounts. The appellant during the course of search voluntarily accepted difference in the quantity of jewellery and offered additional income of Rs. 10,10,00,000/- [Correct amount of Rs. 10,14,95,122/-] for tax. After incorporating the quantity which was surrendered by the appellant, there was no difference in the quantity as per books of accounts and as actually found during the course of search. Thus, the appellant claimed that addition made by the assessing officer to the tune of Rs. 14,07,74,248/- was not justified. On perusal of the assessment order and after going through the submission of the appellant, I find strong force in the contention of the appellant that the amount added to the total income of the appellant was on account of difference in valuation of jewellery as per report of the DVO and cost of jewellery as shown in the books of the appellant. The said approach of the assessing officer was not correct more so when the appellant duly accepted additional income on account of difference in the quantity as per books of accounts and as actually found during the course of search

We have considered the judgment relied upon by the Ld. AR passed by the Hon’ble Delhi Bench in the case of Neha Jewellers Pvt. Ltd. vs. ACIT in ITA No. 3711/Del/2010. On the identical situation the Hon’ble Bench was pleased to observe as follows:

Thus, the issue raised in the appeal preferred by the Revenue is as to whether the Learned CIT(Appeals) was justified in computing the undisclosed stock in the manner stated in its order.

It is an admitted fact the computation of undisclosed stock has been done by the Assessing Officer on the basis of value only without determining the undisclosed weight of the gold and jewellery. Further the Assessing Officer has taken the opening stock as on 01.04.2005 as against the stock as on 09.12.2005. This approach of the Assessing Officer, in our view, in computing the excess stock as on the date of the search is not correct. The methodology adopted by the assessee, in our opinion, is the correct procedure to determine the unexplained stock on the date of search. In this regard, we note from the page No. 104 of the paper book filed on behalf of the assessee that the weight of the stock as per books of account has been computed by taking into account the quantity of the stock as on 01.04.2005 and then adding the weight of the purchases made from 01.04.2005 to 08.12.2005 and deducting the quantity of the sales from 01.04.2005 to 08.04.2005. The difference in the weight of the stock physically found and the weight of stock as per books of account worked out in the manner stated hereinabove has been taken as weight of undisclosed stock. This unexplained weight of stock has then been valued by applying market rate. The DCIT vs.M/s. Punajb Retail Pvt. Ltd. Asst.Year –2017-18 - 10 – Assessing Officer instead of following this methodology has straight away gone to the value of the stock physically found on the date of search and there from he has deducted the value of the stock that too as on 01.04.2005, not as on the date of search. Thus, the Assessing Officer has committed two mistakes. One in not ascertaining the unexplained quantity of stock and two in taking the stock as per books of account as on 01.04.2005 as against as on 09.12.2005.

During the course of assessment proceedings, the Learned CIT(Appeals) has also called for the remand report from the Assessing Officer. In his remand report, the Assessing Officer has also not pointed out any specific error or defect in the computation of the excess stock. As regards the stock to be taken as on the date of the search as against taken by the Assessing Officer as on 01.04.2005, the explanation of the Assessing Officer in the remand report was that in view of the unaccounted sales and purchases, he was justified in taking the stock as on 01.04.2005. We are of the view that this contention of the Assessing Officer is not sustainable and this cannot be the reasoning for taking into consideration the stock as on 01.04.2005 as per books of account as against the stock as on the date of the search as per books of account. What is to be found out on the date of search is the stock as per books of account. While finding out the stock on the date of search i.e. on 09.12.2005, the purchases and sales made and recorded in the books of account during the period 01.04.2005 to 09.12.2005 have to be taken into consideration.

On having gone through the paper book, we note that the assessee had submitted complete details of purchases and sales in quantity and value and no discrepancy or error has been pointed out by the Assessing Officer, either in the assessment order or in the remand report. The purchases recorded in the books of account are the disclosed/accounted purchases. Similarly, sales recorded in the books of account are the disclosed/recorded sales in the books of account. It is not the case of the Assessing Officer that assessee had manipulated the books of account after the search. On the contrary, we note that in the remand report, the fact that the reconciliation was supported by the regular books of account which were found at the time of search, has not been controverted. Further, the department was having the seized computer whereby data for the purchases and sales for the period of five years ending on 08.12.2005 was also there. In view of the above facts, the methodology adopted by the Assessing Officer in computing the undisclosed stock was not correct. As against this, the methodology adopted by the Learned CIT(Appeals) for computing the weight of undisclosed stock is the correct methodology.

The learned CIT(DR) during the course of hearing contended that the Assessing Officer's computation be upheld but could not point out any reason to differ with the methodology adopted by the Learned CIT(Appeals). Accordingly, so far as the Revenue's appeal is concerned, we are of the view that the methodology adopted by the Learned CIT(Appeals) is correct for determining the value of the undisclosed stock and the computation done by the Assessing Officer to determine the value of undisclosed stock is not correct one. For the purpose of making addition on account of undisclosed stock, first the quantity/weight of such undisclosed stock has to be DCIT vs.M/s. Punajb Retail Pvt. Ltd. Asst.Year –2017-18 - 11 – determined and then market value of this undisclosed stock is to be added as income. Accordingly, ground No.2 of the appeal of the Revenue is rejected.”

It appears from the reasons that the valuation of closing stock as taken by the DVO was at the prevailing market rate as on the date of search whereas the valuation of stock should have been calculated at cost as per books of accounts maintained by the assessee. In fact, the difference in the quantity was duly offered by the assessee and incorporated with the books of accounts. The case made out by the assessee that the difference as added to the total income of the appellant was on account of valuation of stock and not on the basis of difference in quantity of stock which is not the proper method and which rightly considered by the Ld. CIT(A) is also having substance.

Thus, considering the entire aspect of the matter we find no justification for addition in the difference the valuation of the jewellery to the total income of the appellant. The addition made by the Ld. AO on account of excess stock found during the course of search those cannot be set to be justified in view of the observation made hereinabove and, thus, the deletion of addition made by the Ld. CIT(A) is according to us is just and proper so as to warrant interference. Hence, the grounds of appeal preferred by Revenue is found to be devoid of any merit and, thus, dismissed.

The case of the assessee is this that the amendment in Section 115BBE came into force only on 15.12.2016 whereas the search was conducted on 21.09.2016 and the assessee has paid tax @ 30%. The provision of Section 115BBE of the Act tax prior to the amendment reads as follows: “115BBE. (1) Where the total income of an respondent assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of — (a) the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D , at the rate of thirty per cent; and (b) the amount of income-tax with which the respondent assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).”

The second amendment came into force w.e.f. 15.12.2016 whereas the Income Tax Act Search and Survey was conducted prior to that date and, thus, at the time of declaring the additional income the second amendment was not available under the Income Tax Act. The said amendment took place with the following manner: “(1) Where the total income of an respondent assessee, — (a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or DCIT vs.M/s. Punajb Retail Pvt. Ltd. Asst.Year –2017-18 - 13 – (b)determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a), the income-tax payable shall be the aggregate of— (i) the amount of income-tax, calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent; and (ii) the amount of income-tax with which the respondent assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i). (2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the respondent assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).]”

It is also a fact that the Ld. AO has not brought on record any evidence or material to establish that the assessee was involved in any other activities or DCIT vs.M/s. Punajb Retail Pvt. Ltd. Asst.Year –2017-18 - 15 – having any other source of income. While deleting the addition made by the Ld. AO the Ld. CIT(A) observed as follows: “First of all let me discuss whether the provisions of section 115BBE are applicable to this case or not. The provision of disallowance of any loss with the income as computed under clause (a) of sub section (1) of section 115BBE came into force w.e.f 01.04.2017. Hon'ble Supreme court in the case of CIT vs Vatika Township Pvt Ltd (2014) 24 ITJ 532 (SC); (2014) 271 CTR 1: (2014) 227 Taxmann 121 has held that "An amendment made to the taxing statute can be said to be intended to remove 'hardships' only of the assessee, not of the department-on the contrary, imposing a retrospective levy on the assessee would have caused undue hardship. Hon'ble ITAT Indore in the case of Priyadharshani Construction vs ITO (2012) 19 ITJ 276 (Trib- Indore) has held that "Substantive law shall be understood to be applicable prospectively unless made specifically retrospective. Thus, it is settled position of law that provision of section 115BBE of the Act is clearly not applicable in case of business income which is taxed under section 28 to 44 of the Income Tax Act. The assessing officer also failed to bring on records any other source of income of the appellant apart from the one that is show^i in return of income. The appellant in support has also relied on the following decision:- • Hon'ble Rajasthan High Court in the case of CIT vs Bajargan Traders [Appeal No 258/2017 dt 12-09-2017]; • Hon'ble Ahmedabad bench of ITAT in the case of Chokshi Hiralal Maganlal vs DCIT as reported in 141 TTJ 001; • Hon'ble Jodhpur bench of ITAT in the case of Lovish Singhal & Others vs ITO [Appeal No 143/ Jodh/ 2018]; • Hon'ble Jaipur bench of ITAT in the case of DCIT vs Ramnarayan Borla [Appeal No 482/ JP/ 2015 dt 30-09-2016]; • Hon'ble Supreme Court in the case of Lakhmichand Baijnath Vs CIT as reported in 35 ITR 416; • Hon'ble Apex Court in the case of Nalini Kant Ambalal Mody vs SAL Narayan Row as reported in 61 ITR 428. Considering the submission made and decisions referred, it is undisputed that the appellant is having only source of income from Trading and Manufacturing of jewellery. The additional income was offered on account of difference in the stock as per books of accounts and as actually found during the course of search. The difference in stock as fund was also related to the business of the appellant. I therefore hold that additional income offered and addition made was on account of business income of the appellant and is therefore liable to be taxed under the head of income from business and profession only. The provisions of section 115BBE of the Income Tax Act are applicable where addition is made under section 68, 69, 69A,