K B JWELLERS,GANDHIDHAM vs. ITO WARD 1 GANDHIDHAM, GADHIDHAM

The captioned appeal filed by the assessee is directed against the order passed by the Learned Commissioner of Income Tax (Appeals), [in short, Ld. CIT(A)], which in turn arises out of an assessment order passed by the Assessing Officer (in short “AO”) under section 143(3) of the Income-tax Act, 1961 (in short, ‘the Act’) dated 28.12.2022.

The grounds of appeal

Hon'ble CIT(A) has erred in law in confirming the addition made by learned assessing officer by not following procedure u/s 144.”

The facts of the case which can be stated quite shortly are as follows: The assessee, filed its return of income (ROI) on 28/09/2014, declaring total income at Rs.2,63,220/-. The return was processed u/s 143(1) of the Act. The case was selected as Compulsory Manual Criteria, as per CBDT instruction No. 8 of 2015 for scrutiny assessment. Accordingly, a notice u/s 143(2) of the I.T. Act was issued on 21/09/2015, and was duly served upon the assessee. Subsequently, a notice u/s 142(1) along with questionnaire was issued on 17/06/2016 and was duly served upon the assessee. In response to the notices issued, the A.R. of the assessee, attended the office time to time and furnished details and documents. In the case of assessee, a survey had been conducted on 20-21/11/2013. During the course of survey, the assessee disclosed a sum of Rs.1,50,00,109/-, as unaccounted income for assessment year (A.Y.) 2014-15. During the year, the assessee was engaged in the business of manufacturing and trading of Diamond, Gold and Silver ornaments including all kinds of jewel items. During the course of assessment proceeding, it was noticed by the assessing officer that the gross profit (G.P.) & net profit (N.P.) shown by the assessee for the current year and previous years are as under:

The assessee submitted that total shortage is of 3206.073 and out of which in normal course of business shortage is, of 613.132 grams and other shortage is due to closer of business at 2592.941 grams ( 3206.073-613.132). The assessee submitted that they have closed their business almost in the month of January 2014. It is universal fact, that gold ornaments cannot be sold without running the business and fashion are also changing day by day. It is also a fact that no one will purchase the ornaments of assessee’s pattern etc, in short period of time and even in many case it is not possible to sell out the same in short period of time. Therefore, ultimately to recover the fund blocked in the gold ornaments, the assessee had decided to melt out all the ornaments and as such assessee sent all these ornaments (as per list enclosed) for melting to the expert. Before, sending the ornaments for melting, the assessee for his satisfaction that how much loss will be due to stone, mani, meena etc, the assessee sent the same for valuation to the valuer namely Jayantilal M. Thadeshwer of Mumbai. The copy of this certificate stating all the details with each and every items containing gold, stone etc with gross and net weigh are submitted before the assessing officer. This certificate shows possible loss due to stone, mani, meena etc and other than that there will be a loss due to impurity of gold which used/added while Page 4 of 15 2014-15 KB Jewellers making the ornaments. It is a universal fact that none of the ornaments are made from 24 carat pure gold but there is mix of other metals also. All these ornaments are converted in to 24 carats pure Gold.

The assessee, submitted that above said data are found in the stock statement submitted earlier/also enclosed herewith which shows that Gold ornaments of 916 (22 Carat) having quantity 12058.633 grams transferred for melting and out of which 24 carat gold received was of 9655.903 grams means there was a loss of 2402.73 grams. Same way Gold ornaments of 18 carat was sent for melting and out of which 24 carat gold received was of 362.800 grams and there was a loss of 190.091 grams. Thus total loss due to closer of business is of 2592.821 Grams (2402.73 + 190.091). The proof of the goods sent for melting with all the details i.e. gross weight, net weight received with details of loss due to meena etc and due to impurity etc and final quantity received from the Ridhi Sidhi Jewellers to whom for melting ornaments was given are submitted before the assessing officer. All these supporting evidences proves that loss/shortage is due to either regular business loss which all the businessmen is incurring or major shortage is due to closer of business and sent for melting and get pure 24 carat gold from the ornaments. This has been seen form the stock statement submitted by the assessee, before the assessing officer. The assessee also submitted proof of the shortage for the FY 2012-13 and for earlier also which shows that this shortage is consistent and factual also. It is universally accepted that and showing all the businessmen that old ornaments sent for melting will be resulted in shortage of goods. Therefore, no addition should be made for the shortage of goods which is incurred in regular course of business and having all the supporting evidences in support of assessee’s claim. It is fact and also can be seen from the stock statement that most of the 24 carat pure gold are sold during the year and only 4.70% goods are remain in stock as on Page 5 of 15 2014-15 KB Jewellers 31.03.2014. The sale price is of 24 carats gold only and thus all the proof are proving that loss is genuine and book result shown by the assessee is correct.

The assessee also submitted that as per the statement recorded during survey it was 1000 gms (24 ct gold) and 4031 gms (916-type gold) was admitted as unaccounted stock/excess stock. This has been shown and recorded in the books of accounts and hence, it is wrong to say that assessee is not consistent as per section 69A/B/C of the Act. These facts and supporting evidences, prove that assessee has not make any adjustment in the books of accounts but shown the correct picture and hence, the same should be accepted and no addition should be made. When income of Rs. 1,50,00,109/- is already shown in the books of accounts how the same can be added twice. Therefore, no addition should be made for the same.The income declared during the survey was with the making charges and hence, again the same cannot be added twice. Therefore, no addition should be made for the making charges as mentioned in the notice.

However, the assessing officer rejected the above contention/ reply of the assessee and held that the value of admitted excess stock of Rs.1,50,00,109/- is taxable as deemed income, under section 69 of the Act.

Being aggrieved by the said order of the Assessing Officer, the assessee filed an appeal before the Ld.CIT(A), but remained unsuccessful. Before learned CIT(A), the assessee argued that assessee had claimed only melting loss, which is normal loss, during the course of business in such type of business, and the declared amount of 1,50,00,109/-, was duly offered in return of income and hence there was no basis for further addition. However, ld.CIT(A) rejected the above contention of the assessee and confirmed the addition made by the assessing officer.

Learned Counsel for the assessee, vehemently submitted that assessee is a partnership -firm engaged in the business of manufacturing and trading of diamond, gold and silver ornaments. During the relevant assessment year, the assessee substantially closed its business operations in the month of January 2014, retaining only minimal activity for the purpose of liquidating remaining stock. During the course of the survey conducted at the business premises of the assessee, as on 20.11.2013 and 21.11.2013, a statement was recorded under section 131 of the Act of one of the partners, Shri Rasiklal Kalyanji Doshi. In the said statement, Shri Rasiklal Kalyanji Doshi admitted that certain gold stock, namely 1,000 grams of 24 carat gold and 4,031 grams of 916-type (22 carat) gold, constituted unaccounted stock, and agreed to offer the market value thereof, being Rs. 1,50,00,109/-for taxation. It is of fundamental importance to note that the stock so admitted was duly recorded in the stock register maintained by the assessee. The stock did not constitute a separate or independent asset but formed an integral part of the trading stock of the assessee. Subsequent to the survey, the assessee took a commercial decision to close its business operations in the month of January 2014. This was not a mere reduction in business activity but a complete cessation of manufacturing and trading operations. In furtherance of this decision, and for the purpose of liquidating the existing stock of gold ornaments, the assessee sent the jewellery for melting to M/s. RIDDHI SIDDHI JEWELLERS, 50/52 Shamshet Street, 5th Floor, Room No. 37, Zaveri Bazar, Mumbai 400 002 (PAN: AACFR3726J), a reputed refiner of precious metals. Therefore, to explain this melting loss, during the course of business, matter may be restored back to the file of the assessing officer, for fresh adjudication.

On the other hand, Ld. Sr. DR for the revenue, argued that during the assessment proceedings, the assessee has failed to explain the creation of huge melting loss on account of conversion of gold from 22 CT to 24 CT and 18 CT to 24 CT, therefore, matter may be restored back to the file of the assessing officer to explain the melting loss, with documentary evidences.

Learned DR also submitted that the assessing officer has taken into account all the arguments of the assessee and then framed the assessment order, which is speaking order, therefore, addition made by the assessing officer may be sustained. Hence, Ld. DR for the Revenue has primarily Page 8 of 15

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon and perused the facts of the case including the findings of the Ld. CIT(A) and other material brought on record. As mentioned above, the survey u/s 133A of the Act, was carried out at the assessee's premises and during the course of survey, excess stock of gold and silver ornaments to the extent of Rs. 1,50,00,109/- was found in the following manner: (a) 24 CT Gold: Unaccounted stock: 1000gms Rs.3153/gmRs.31,53,000/-. (b) 22 CT Gold: Unaccounted stock: 4031 gms. Rs.2939/gm= Rs.1,18,47,109/- The working partner Shri Rasiklal Kalyanji Doshi who has present during the course of survey proceeding agreed in his statement to surrender the excess stock and to pay the taxes thereon. In this connection, it was stated that any unaccounted income that has already been earned earlier is utilized, invested or deployed in any manner including for the purpose of purchase or articles in which the business was carried on, such income will certainly not form part of the business of the assessee and will be treated as per the provisions of section 69B of the Act. The provision of section 69B of the Act has been specifically enacted to deal with situations like such case. It has to be taken note of that provisions of section 69B alongwith provisions of section 68, 69, 69A and 69C are special provisions enacted with a view to deal with such situations which are not clearly covered under the provisions of section 15 to 59 of the 1.T. Act. As the income has already arisen and has remained unaccounted in earlier period, the same should be Page 9 of 15

It was also stated that the scheme of section 68, 69A, 69B and 69C of the Income Tax Act, 1961, would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion etc., owned by the assessee or the source of expenditure incurred are not explained at all, or not satisfactorily explained, then, the value of such investments and money or the value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income on such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of Income for assessment as per the provisions of the Act.However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from "other sources" which have to be sources known or explained. When the income cannot be classified under any of the heads of income under section 14, it follows that question of giving any deductions under the provisions which correspond to such heads of the income will not arise. The assessing officer also noted that the ITAT Ahmedabad Bench vide order in dated 28.02.2005 in the case of Krishnamegh Yarn Industries, Ahmedabad for A.Y. 2001-02 has decided similar issue and the view expressed above has been upheld. Therefore, in view of clear findings of the Jurisdictional Bench of the ITAT as well as from the facts of assessee’s case, the assessing officer treated a sum of Rs. 1,50,00,109/- as deemed income for this assessment year as per Page 10 of 15

In this regard, the assessee has replied before assessing officer, vide his reply dated 24.12.2016 and submitted that, "the unaccounted stock has been shown and recorded in the books of accounts and hence, it is wrong to say that we are not consistent as per section 69A/B/C of the IT Act."

However, assessing officer, noticed that assessee has created a huge fictitious loss due to conversion of gold ornaments as melting loss and set off the same with the value of unaccounted stock disclosed during the course of survey, which is not allowable.The discrepancy between the disclosed income and returned income relates to the following factor: (a). Creation of huge melting loss on account of conversion of gold from 22 CT to 24 CT and 18 CT to 24 CT. (b). Eligibility to allow or otherwise of interest and remuneration to be deductible under the provisions of section 40(b) of the Act claimed to be paid to the partners.

The assessing officer noticed that it is very relevant to state that assessee has incorporated the value of unaccounted stock in the total income of the above assessment year. Therefore, as such the addition of amount is not under dispute, it can be disclosed in the books of account, that is, u/s 69B of the Act. Now, the question that whether on facts it can be said that the investment in stock is out of business income. No material has been brought on record by the assessee, to show that the unexplained investment found in stock is out of business income of the assessee not recorded in the books of account. Investment in unexplained stock could be from various modes and it was for the assessee to bring material on record to show that investment in such stock was sourced from business income earned by the assessee out of Page 12 of 15 2014-15 KB Jewellers books of account, if assessee wants to claim that such unexplained investment in stock should be held to be business income of the assessee. In absence of any such material the same cannot be said to be business income of the assessee as its sources has not been established to be from "business". The assessing officer, therefore, noted that the issue which requires consideration is that the said amount does not represent business income, whether assessee is entitled to get deduction on account of remuneration paid to the partners under section 40(b) of the Act. The provision of law relating to addition made under section 69, 69A, 69B and 69C was considered by the Hon'ble Jurisdictional High Court in the case of Fakir Mohmed Haji Hasan vs. CIT(Supra) and the relevant observations of their lordships, from the said decision are being reproduced below for the said of convenience. “The scheme of section 69A, 69B and 69C would show that in cases where the nature and source of investment made by the assessee or the nature and source of acquisition of money, bullion etc. owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then the value of such investments and money, or value of articles not recorded in the books of accounts or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the. In our opinion, therefore, the Tribunal was perfectly right in holding that value of the gold was liable to be included in the income of the assessee as the source of investment in gold or of its acquisition was not explained and that the assessee was not entitled to claim that the value of gold should be allowed as a deduction from his income........."

We note that when such ornaments are melted and refined to obtain pure gold of 24 carat , the following elements are necessarily removed:

In the present case, the assessee has failed to explain the above items/loss with documentary evidences, therefore, we are of the view that matter may be restored back to the file of the assessing officer with the direction to the assessee to explain the necessity of melting loss, and as per ld DR for the revenue, the valuations of the gold could be done without melting the gold after removing the above items from the ornaments. The creation of huge melting loss on account of conversion of gold from 22 CT to 24 CT and 18 CT to 24 CT, has not been explained by the assessee with documentary Page 14 of 15 2014-15 KB Jewellers evidences. Therefore, for the reasons given above, we are of the view that the order of the ld. CIT(A) on this issue requires to be set aside and the issue needs to be looked into afresh by the assessing officer in the light of the observations as set out above. We hold and direct accordingly. The assessing officer will afford opportunity of being heard to the Assessee before deciding the issue. The Assessee will also be at liberty to let in further evidence to substantiate it’s case. For statistical purpose, the appeal of the assessee is treated as allowed.

In the result, the appeal of the assessee is allowed for statistical purposes.