FOURCCEESS DIAMONDS PIRVATE LIMITED,CHENNAI vs. ITO CORP. WARD 2(1).COM, CHENNAI

The brief facts of the case emanating from the records are that the assessee is a company into the business of trading in diamond and allied products. The assessee filed its original return of income for the AY 2017-18 on19.03.2018 by admitting a loss of Rs.97,40,133/- and a book loss of Rs.98,04,042 u/s.115JB of the Act. Later, the assessee filed a revised return on 03.11.2018 by admitting the same losses. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee. During the course of assessment proceedings, the assessee filed the details and documents as and when called for. On verification of the submission made by the assessee, the AO found that there was a difference in stock records of diamond (loose) to the tune of 46.29 carat when compared to the opening balance as on 01.04.2016 along with the transactions took place during the AY 2017-18 (upto 08.11.2016). Therefore, the AO made an addition to the tune of Rs.76,98,675/- (46.29 carat X Rs.1,66,314/- per carat) as unexplained cash credit u/s.68 r.w.s. 115BBE of the Act. Further, the AO also denied carry forward of losses to the tune of Rs.97,40,133/- as the assessee had not filed return of income within the due date prescribed u/s.139(1) of the Act and passed an order u/s.143(3) of the Act dated 02.12.2019.

Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A). The assessee submitted that the AO has erred in making the addition u/s.68 of the Act on account of difference in sale of loose diamond solitaire by failing to appreciate the stock summary provided during the assessment. The AO has erred in understanding the records filed before the AO, the sales register, purchase register, stock summary, cash book, bank book, VAT returns of November and December 2016. Further the assessee submitted that the AO has wrongly arrived the difference of 46.29 carat in the stock of loose diamond without considering the purchases made during the assessment year and only considered the sales made up to 08.11.2016 while

Aggrieved by the order of the ld.CIT(A), the assessee preferred an appeal before us. The ld.AR for the assessee, assailing the action of the ld.CIT(A), submitted that the assessee had filed the complete stock summary, cash book, sales book, bank statements and VAT returns for the AY 2017-18 and also sown the exact sales effected during the year before the authorities. Further, the AR submitted that the AO in his assessment has admitted that the assessee has filed the entire details during the assessment proceedings. Further, the ld.AR stated that the AO erred in calculation of inventory of loose diamond as on 08.11.2016 and has considered only the sales without considering the purchases made and transfers of stock into the business. Further, the ld.AR stated that it would be impossible for any business to function without purchase. At the time of hearing, the ld.AR filed the inventory position as on 08.11.2016 as detailed below:-

Relying on the above statement, which was produced before the lower authorities has not been considered by them, the ld.AR stated that the AO has

Per contra, the ld.DR relied on the orders of the authorities and prayed for remitting the issue back to the AO for verification in case there is a difference in reconciliation of stock as placed by the ld.AR.

The quantitative reconciliation furnished by the assessee, which forms part of the records before the lower authorities, clearly demonstrates the movement of inventory from the opening balance till 08.11.2016. The reconciliation reflects the opening stock, purchases effected during the period,

It is a settled principle that an addition cannot be sustained on the basis of an incomplete or erroneous appreciation of the quantitative records. The AO has selectively considered only the sales while completely ignoring the corresponding purchases and stock transfers, thereby arriving at an incorrect inventory position. Such an approach is contrary to the settled principles governing appreciation of stock records maintained by an assessee carrying on regular business.

We further find that the ld.CIT(A), instead of independently examining the quantitative reconciliation and the supporting records already available before him, merely affirmed the findings of the AO without assigning any cogent reasons for rejecting the reconciliation furnished by the assessee. The appellate authority has also failed to point out any specific defect or discrepancy in the books of account or in the inventory statement produced by the assessee.

The Revenue has also not brought on record any material to establish that the purchases recorded by the assessee were fictitious or that the transfers for manufacturing were not genuine. In the absence of any adverse material disproving the reconciliation furnished by the assessee, the addition made merely on the basis of an incorrect computation of stock cannot be sustained. We are, therefore, satisfied that the inventory reconciliation furnished by the assessee correctly explains the stock position and fully reconciles the quantitative movement of loose diamonds during the relevant previous year. Consequently, the very foundation on which the addition of Rs.76,98,675/- has been made does not survive.

Accordingly, we hold that the AO was not justified in invoking the provisions of section 68 of the Act in the facts of the present case. The addition of Rs.76,98,675/- made on account of the alleged stock difference is directed to be deleted by allowing the corresponding grounds raised by the assessee. 12. In the result, the appeal filed by the assessee is allowed.