MAHENDRA LALJIBHAI PATEL,AHMEDABAD vs. THE DY.CIT, CIRCLE-2(1)(1), AHMEDABAD

Since common issues arise in these matters and all the appeals relate to the same assessee, this batch of appeals was heard together and is being disposed of by this consolidated order for the sake of convenience. For the purpose of adjudication, ITA No. 1079/Ahd/2023 for AY 2014–15 is treated as the lead case, and the decision rendered therein shall apply mutatis mutandis to the remaining appeals.

The Revenue has taken following grounds of appeal:- “1. Whether the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.4,22,38,731/- u/s 69 of the Act made an account of undisclosed investment without considering the facts of the case.

Whether the Ld.CIT(A) has erred In law and on facts in restricting the disallowance u/s14A of the Act to the extent of Rs.10,623/ out of total disallowance of Rs. 12,87,520/- without appreciating the findings of the AO."

The assessee has raised following grounds of appeal in AY 2014-15:-

The brief facts of the case are that the assessee is an individual engaged in the business of trading in gold and silver jewellery under the proprietorship concern M/s. Bhagwati Jewellers. The return of income for the assessment year 2014-15 was filed on 29.11.2014 declaring total income of Rs. 18,13,070/- which was processed u/s 143(1) of the Act. The case was subsequently selected for - 3– scrutiny under CASS and statutory notices under sections 143(2) and 142(1) were issued and duly served.

1 During the course of assessment proceedings, it emerged that a survey u/s 133A of the Act was carried out at the business premises of the assessee on 23.10.2013. During the survey, physical verification of stock was undertaken and alleged discrepancies were noticed. As per the survey findings, excess stock of gold jewellery valued at Rs. 2,77,52,474/- along with excess cash of Rs. 3,38,333/- was determined. The assessee, in his statement recorded during the survey proceedings, admitted the discrepancies and agreed to offer the same for taxation. Subsequently, the assessee retracted from the said disclosure by filing letters dated 22.11.2013, 04.12.2013 and 15.01.2014, contending that the alleged excess stock represented jewellery received on approval basis from various suppliers. It was further contended that relevant approval vouchers were available at the premises during survey but were not accepted by the survey team. In support of this contention, affidavits from various suppliers were also furnished. The Assessing Officer, however, rejected the explanation of the assessee. It was noted that the assessee had made a clear admission during survey proceedings including in his own handwriting and no evidence of coercion was brought on record. The Assessing Officer further observed that post-survey enquiries conducted u/s 131 of the Act from the alleged suppliers revealed several inconsistencies as under:- i. In most of the cases, there was no entry of the items given on on-account in the books of the parties, nor is any outward or inward register produced. Also in most of the cases, no stock statement was given. ii. The on-account jewellery was claimed to be returned back (after the date of survey). However, no proof for returning back of the same was produced either by these parties or by M/s. Bhagwati Jewellers. In some cases, a small portion is shown as sold to M/s. Bhagwati Jewellers and in some cases, the entire jewellery was claimed to be received back.

On the basis of aforesaid findings, the Assessing Officer concluded that the claim of jewellery received on approval basis was not genuine and was an afterthought to explain the discrepancies found during survey. Accordingly, the Assessing Officer treated the excess stock of Rs. 2,77,52,474/- and excess cash of Rs. 3,38,333/- as unexplained investment u/s 69 of the Act.

Further, based on data retrieved from impounded electronic records, the Assessing Officer inferred that unaccounted stock had been introduced from undisclosed sources and computed addition of Rs. 4,22,38,731/- u/s 69 of the Act. The Assessing Officer further estimated gross profit at 17.8% on alleged unaccounted sales of Rs. 1,44,86,257/- and made an addition of Rs. 25,78,553/-. The Assessing Officer also made disallowance u/s 14A r.w. Rule 8D of Rs. 12,87,520/-. The total income of the assessee was thus assessed at Rs.4,81,89,814/-.

Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) examined the matter in detail and noted that the assessee had initially admitted excess stock during survey proceedings - 6– but later retracted the admission. The Ld. CIT(A) observed that the Assessing Officer had conducted detailed post-survey enquiries u/s 131 of the Act from various suppliers and noted that the findings of such enquiries clearly indicated that the claim of approval basis transactions was not substantiated. Therefore, the Ld. CIT(A) agreed with the Assessing Officer that the approval vouchers and affidavits filed by the assessee were not supported by any independent corroborative evidence such as stock registers, inward/outward records, or proof of return of goods. The Ld. CIT(A) also observed that in several cases, approval transactions were shown immediately before the date of survey. Accordingly, the Ld. CIT(A) upheld the addition of Rs. 4,22,38,731/- made by the Assessing Officer towards unexplained investment in stock; however, held that once the entire addition towards unaccounted stock was sustained, separate addition on account of estimated gross profit on alleged unaccounted sales could not be justified. Accordingly, the addition of Rs. 25,78,553/- was directed to be deleted. The relevant observations of the Ld. CIT(A) in this regard are as under:-

2 On perusal of the submissions filed by the appellant, it is found that most of the contentions has been taken, which were already taken before the AO and the AO had rebutted the same by giving detailed findings in the assessment order. The appellant has also taken some alternate arguments also, which are being discussed in the following paras.

3 With regards to the contention of the appellant regarding excess stock, it is necessary to reproduce the relevant portion of the findings of the AO in respect of retraction and subsequent claim of on-approval jewellery for ready reference:- - 8– 41.3.1 In view of the above, it is crystal clear that the appellant had admitted the excess stock found during the survey proceedings. Hence, the claim of the appellant is rejected.

4 Similarly, it is also relevant to reproduce the relevant para of the findings of the AO in respect of enquiry made after survey proceedings related to contentions taken in the retraction affidavit for ready reference;- - 9– - 10–

1 In view of the above detailed findings, it becomes clear that the excess stock found during the course of survey proceedings was not explained by the appellant by furnishing supporting evidences but only taken vague pleas in the affidavit which were not substantiated.

5 It is also important to mention here that keeping in view of the detailed findings given in para 7 of this order, the plea regarding rejection of books of account u/s.145(3) is rejected.

6 In view of the above facts, the addition made by the AO amounting to Rs.4,22,38,731/- is confirmed.

7 As regard GP addition of Rs.25,78,553/- on unaccounted sale of the said excess stock investment from unaccounted source of Rs.4,22,38,731/- is concerned, the same is required to be deleted as the undersigned has confirmed the entire addition on account of unaccounted investment in excess stock. Therefore, further addition of GP on such excess stock found required to be deleted. Therefore, the addition made of Rs.25,78,553/- on account of unaccounted GP on unaccounted sale is deleted.”

The Ld. CIT(A) further considered the assessee’s alternate plea of telescoping. It was noted that additions on account of estimated gross profit on unaccounted sales had been sustained in earlier assessment years aggregating to Rs. 6,64,84,710/-. Out of the said amount, telescoping benefit to the extent of Rs. 1,46,55,622/- had already been granted in AY 2013-14. The ld. CIT(A) held that the balance amount of Rs. 5,18,29,088/- was available for set-off against the addition sustained in the current year. Since the available telescoping exceeded the addition of Rs. 4,22,38,731/-, the Ld. CIT(A) held that the addition stood fully covered and deleted the same on the basis of telescoping benefit. Thus, while the addition was initially confirmed, it was eventually deleted by granting set-off of earlier year income. The relevant observations of the Ld. CIT(A) in this regard are as under:- “41.8.1 In this regard, it is found that the alternate plea of the appellant is acceptable because it is undisputed facts that the AO had made addition of estimated gross Profit on unaccounted sales in various earlier years amounting to Rs.6,64,84,710/- (Rs.83,62,800/- for A.Y.2008-09 + Rs.1,30,84,680/- for A.Y.20019-10 + Rs.1,42,43,040/- for A.Y.2010-11 + Rs.1,77.25,400/- for A.Y.2011-12 + Rs.1,30,67,790/-for A.Y.2012-13), which has been confirmed by the undersigned while adjudicating the appeal for A.Y.2008-09 to A.Y.2012-13 (supra). Therefore, confirmed additions made for undisclosed income earned in earlier assessment years from unrecorded sale should be considered as a source from which investment has been made in acquiring stock of gold ornaments found during the current year. Since, out of the total confirmed addition amount of Rs.6,64,84,710/-, the undersigned has given the benefit of telescoping amounting to Rs.1,46,55,622/- in the A.Y.2013-14, Therefore, the amount available for telescoping in the current year is of Rs.5,18,29,088/- (Rs.6,64,84,710 -Rs.1,46,55,622). Thus, this amount of Rs.5,18,29,088/- is available to the appellant for taking the benefit of telescoping towards undisclosed investment of Rs.4,22,38,731/- (confirmed addition).

9 In view of the above, towards addition of Rs.4,22,38,731/- on account of undisclosed investment in 22 Ct. gold, total telescoping available to the appellant is Rs.5,18,29,088/-, therefore, entire addition of Rs.4,22,38,731/- is deleted.”

Aggrieved by the order of the Ld. CIT(A), both the assessee and the Revenue are in appeal before the Tribunal – the assessee is aggrieved by the sustaining of additions and adverse findings recorded by the lower authorities, whereas the Revenue is aggrieved by the relief granted by the Ld. CIT(A) by deleting the addition of Rs. 4,22,38,731/- on account of unexplained investment in stock by allowing telescoping benefit.

Before us, the Ld. AR submitted that the addition made by the Assessing Officer and sustained by the Ld. CIT(A) is not justified either on facts or in law. It was contended that the entire addition is based on a survey statement recorded u/s 133A of the Act, which was duly retracted by the assessee with valid explanation supported by affidavits and documentary evidence. It was further submitted that the alleged excess stock was actually jewellery received on approval basis from genuine parties, and the same stood duly explained during appellate proceedings. The Ld. AR further argued that the post-survey enquiries conducted u/s 131 were not conclusive and were relied upon selectively by the lower authorities without confronting adverse material properly to the assessee.

The Ld. DR on the other hand, strongly supported the orders of the Assessing Officer. It was submitted that during the course of survey proceedings, excess stock and cash were physically found and the assessee himself had admitted the discrepancy in his statement recorded u/s 131 of the Act. The subsequent retraction was merely an afterthought and not supported by any - 13– credible or contemporaneous evidence. The Ld. DR submitted that post-survey enquiries u/s 131 clearly established that the claim of approval basis transactions was not genuine. The parties examined either denied such transactions or failed to produce any supporting books, stock registers, or evidence of return of goods. It was further pointed out that in several cases, approval stock was shown to have been issued just one day prior to the survey. The Ld. DR also argued that the Ld. CIT(A) was not justified in deleting the addition of Rs. 4,22,38,731/- by granting telescoping benefit, since the availability of such past income was itself based on estimations and could not be treated as a definite source of investment. The Ld. DR accordingly prayed for restoration of the order of the Assessing Officer.

We have heard the rival contentions and perused the material available on record. The primary issue arising in the Revenue’s appeal relates to the addition of Rs. 4,22,38,731/- sustained by the Assessing Officer and subsequently deleted by the Ld. CIT(A) on account of telescoping. The facts on record indicate that the addition in question originated from survey findings, wherein alleged discrepancies in stock were noticed and treated by the Assessing Officer as unexplained investment. However, the Ld. CIT(A), after examining the factual matrix and the past additions sustained in earlier years on account of unaccounted sales, has granted telescoping benefit. In this regard, the CIT(A) has recorded a categorical finding that sufficient telescoping was available to explain the investment in stock. The excess stock found at the survey was Rs.2.77 crores on account of excess gold of 22 ct. gold.

1 The assessee has filed affidavits from Sneh Chain Pvt Ltd, Vimalachal Orna, Vardhman Ornaments, Private Ltd, Vishal Jewellers, K.D. Jewellers, Vardhman Ornaments Pvt Ltd and Soni Virendrakumar Ramanlal. The same have not been examined by the Revenue in proper prospective judiciously. The Assessing Officer held that the letters/affidavits furnished by the assessee in respect of the parties mentioned in the reply have been duly verified. It was noticed that after the survey proceedings, summons under section 131 of the Act were issued to the said parties, and statements u/s 131 of the Act were recorded in these cases. It was also found from the record that these statements were also provided to the assessee for his comments. The findings of the statements recorded of the above- mentioned parties as summarized by the Assessing Officer were as under:–

2 In view of the above, the Assessing Officer held that the on-approval vouchers produced by the assessee were self-serving evidences and were not supported by any concrete evidence or proof and, therefore, were without any basis. It was further held that the circumstantial evidence indicated that the claim of on-approval jewellery was an afterthought to cover up unaccounted business transactions carried out by the assessee. The Assessing Officer also held that the retraction made by the assessee was not supported by any material or corroborative books of account and that the facts and material found during the course of survey had not been rebutted by the assessee with cogent evidence. Accordingly, the Assessing Officer rejected the claim of the assessee and treated the excess stock of Rs. 2,77,52,474/- as investment from unaccounted sources and the excess cash of Rs. 3,38,333/- as income from unaccounted sources.

3 Further, based on the electronic data seized the Assessing Officer made addition of Rs.4.22 crores on account of unaccounted stocks. The determination of the unaccounted stock is based on the stock as per the regular books and as per the digital evidences seized from the premises. The Assessing Officer has also made addition of Rs.25.78 lakhs being the 17.8% of the profit earned on the unaccounted sales of goods worth Rs.1.44 crores (Rs.4.22 – Rs.2.77 crores).

4 The Ld. CIT(A), based on the physical stock found and based on the digital data, confirmed addition of Rs.4.22 crores. The Ld. CIT(A) deleted the addition of Rs.25.78 lakhs being the profit derived on the sales of goods worth Rs.1.44 crores as the addition of unaccounted stock of Rs.4.22 crores have been confirmed by telescoping the profit earned into the value of the stock. Further, the Ld. CIT(A) confirmed the addition made by the Assessing Officer on account of initial investments on the stock and the gross profits derived out of the unaccounted stock from the AY 2008-09 to AY 2013-14. This addition has been confirmed - 18– based on the addition made by the Assessing Officer on account of the digital material/evidences seized by the Revenue from the premises of the assessee during the course of survey and juxtaposing the same with the regular books of accounts. The addition has been made based on the difference between the stock statements given to the bank, issue of jewellery for hallmarking and the difference in the receipts etc. The Ld. Counsel has submitted that the digital evidence and the stock found thereon was maintained for management purpose and when compared with the regular sales they match. At the same time, we are of the conscious view that the evidences filed by the assessee post-survey require systematic and exhaustive verification. Hence, in view of the material available before us, we deem it proper to remand the matter to the JAO for examining authenticated digital evidences along with regular books of accounts and to adjudicate the issue of addition u/s 69, in accordance with law after providing adequate opportunity of hearing to the assessee.

With respect to disallowance u/s 14A of the Act, the Ld. CIT(A) observed that the assessee had earned exempt income of Rs. 10,623/- during the year. The Ld. CIT(A) held that although the Assessing Officer had applied Rule 8D and computed disallowance of Rs. 12,87,520/-, judicial precedents including the decision of the Hon’ble juri ictional High Court in the case of CIT v. Vision Finstock Ltd. (Tax Appeal No. 486 of 2017 and other decisions) consistently held that disallowance u/s 14A cannot exceed exempt income. The Ld. CIT(A) further held that the amendment introduced by Finance Act, 2022 is prospective and not applicable to the year under consideration. Accordingly, the Ld. CIT(A) restricted the disallowance u/s 14A from 12,87,520/- to Rs. 10,623/-.

Aggrieved by the order of the Ld. CIT(A), both the assessee and the Revenue are in appeal before the Tribunal – the assessee is aggrieved by the sustaining of disallowance to the extent of exempt income of Rs. 10,623/-, whereas the Revenue is aggrieved by the restriction of disallowance u/s 14A of the Act from Rs. 12,87,520/- to Rs. 10,623/- as against the disallowance computed by the Assessing Officer. Since the Ld. CIT(A) restricted the disallowance to the extent of exempt income earned, we decline to interfere with the order of the Ld. CIT(A).

In nutshell, the appeals of the assessee for all the years stand remanded to the JAO for passing an order afresh on the issue of stocks, unaccounted investments and unaccounted profits earned. The ground of appeal of the Revenue on account of stock is also restored to the file of the JAO in view of the directions above and the ground of appeal of the Revenue on account of addition u/s 14A of the Act stands dismissed.

In the combined result, the appeals filed by the assessee are allowed for statistical purposes, whereas appeal filed by the Revenue is partly allowed for statistical purposes.