M/S VIJAY GEMS & JEWLLERY ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX 5(2)(1), BANGALORE

In both the years, the assessing officer estimated the “net profit” of the assessee by rejecting books of accounts. The Ld CIT(A) confirmed the rejection of books of accounts in AY 2013-14, but he held that the rejection is not justified in AY 2012-13. However, in both the years, the Ld CIT(A) held that the AO should have estimated the “Gross Profit” only. Accordingly the Ld CIT(A) estimated the gross profit in both the years and allowed deduction of expenses. The orders so passed by LD CIT(A) gave partial relief to the assessee. Hence both the parties are in appeal before us assailing the decision of Ld CIT(A) on the points decided against each of them.

The assessee is a partnership firm. It is engaged in the business of trading in loose diamonds and diamond studded jewellery. The partnership firm was formed on 01.04.2011. So the first year of operation of the assessee is AY 2012-13.

A search operation u/s 132 of the Act was conducted in the hands of the assessee 20-04-2012. The said search operation was in consequence of search undertaken in Challani group of cases in Chennai on 19-04-2012, where one diamond studded jewellery was found. Mr. Jayantilal Challani had deposed that he had purchased above said diamond studded jewellery from the assessee herein by paying cash and also agreed to declare the same as his unaccounted investment. Consequently, the assessment of AY 2012-13 was completed u/s 153A r.w.s. 143(3) of the Act and the assessment of AY 2013-14 was completed u/s 143(3) of the Act. In both the years, the AO rejected the books of accounts and estimated the total income @ 4.50% of the turnover of that year. & 1336/Bang/2017 & 1393 & 1394/Bang/2017 Page 3 of 9 5. As stated earlier, the Ld CIT(A) confirmed rejection of books of accounts in AY 2013-14, being the year of search in view of deficiencies found during the course of search. Considering the deficiencies noticed during the course of search proceedings, the AO had also rejected the books of accounts in AY 2012-13, i.e., the year immediately preceding the year of search. Since the AO did not point out any specific deficiency in AY 2012-13, the Ld CIT(A) held that the rejection of books of accounts in that year is not justified. Before Ld CIT(A), the assessee had taken alternative contention in both the years that the estimate should be made only at Gross Profit level and not at Net profit level as done by the AO. The Ld CIT(A) accepted the above said alternative contentions in both the years and accordingly applied the rate of 4.50% at Gross profit level and allowed deduction of expenses.

In the appeal filed by the assessee, the rejection of books of accounts and estimation of income are being contested. In the appeal of the revenue, the relief granted by Ld CIT(A) is being contested. The first issue relates to the rejection of books of accounts. According to the assessee, it has offered explanations to all the queries raised by the AO and explained the differences, if any, noticed during the course of search. Hence there is no justification for rejection of books of accounts in AY 2013-14. The assessee has further contended that the AO has not found any deficiency in the books of accounts pertaining to AY 2012-13. The AO has simply followed his decision taken for AY 2013-14 for rejection of books of accounts in AY 2012-13 also. Accordingly it was contended that the rejection of books of accounts for assessment year 2012-13 is not justified. The Ld A.R reiterated the contentions raised before the tax authorities in this regard. The Ld D.R, on the contrary, submitted that the search action revealed that the books of accounts maintained by the assessee are not reliable for the reasons discussed by the AO in the & 1336/Bang/2017 & 1393 & 1394/Bang/2017 Page 4 of 9 assessment order. He submitted that the deficiencies pointed out by the tax authorities are related to the State of Affairs of business carried on by the assessee. Hence the same cannot be restricted to the year of search alone. He submitted that the theory of preponderance of probabilities could very well be applied in income tax proceedings. Since the assessment of AY 2012-13 came to be reopened on account of search, the findings related to the state of affairs of the assessee found in the year of search can be applied to the year relevant to AY 2012-13 also.

We heard the parties on this issue and perused the record. We have noticed earlier that the search proceedings in the hands of the assessee were conducted as a consequence of search conducted in Challani Group, Chennai. There is no dispute with regard to the fact that the unaccounted diamond studded jewellery found in the hands of Challani was purchased by them from the assessee herein. However, we notice that there is difference with regard to the explanations offered in that regard by Mr. Challani and the assessee, i.e., Mr. Challani has stated that the above said jewellery has already been purchased by him by paying cash to the assessee. However, the assessee has stated that it has sent the jewellery on sale or approval basis to Mr. Challani. From the assessment order, it is not clear as to whether the above said jewellery was shown as assessee’s stock, if the claim of the assessee that the same has been sent on approval basis was correct. No explanation is also available as to the claim of Mr. Challani that he has already paid cash towards the cost of jewellery. These discrepancies remain unresolved. Further, the value of stock sent to Mr. Challani was shown at Rs.3.21 crores, while the official valuer has valued the same at Rs.4.09 crores.

We notice that the search officials have found difference between book stock and physical stock and the same has been tabulated as under:-

Assessment year : 2012-13 Items As per books Physical stock Difference Gold 70.72 kgs 21.78 kgs 48.94 kgs Loose Diamonds 12,761.642 carat 9505.965 carat 3255.677 carat Diamonds in 7543.296 carat 2295.315 carat 5248.101 carat jewellery Bullion 731.603 grams 767.080 grams 35.477 grams The assessee has explained the difference before the search officials. The main explanations offered were that :-

We have noticed that the AO has rejected the book results of assessment year 2012-13 also by considering the various types of deficiencies noticed by the search team. The contention of the assessee is that the AO should not have rejected the book results of AY 2012-13, as the alleged deficiencies do not relate to the financial year relevant to the assessment year 2012-13. We have noticed that the assessment of AY 2012-13 has been reopened u/s 153A of the Act consequent to search operations conducted u/s 132 of the Act. Hence assessments of AY 2012- & 1336/Bang/2017 & 1393 & 1394/Bang/2017 Page 8 of 9 13 and 2013-14 have been completed together by the assessing officer. Further, in our view, the deficiencies noticed by the search team cannot be considered to be assessment year specific, since it only revealed a particular pattern followed by the assessee or the general state of affairs of business carried on by the assessee. The AO has also observed that the “approval vouchers’ pertaining to the period prior to 1.4.2012 has been destroyed and further the grade wise stock details of diamonds have not been maintained. Since the search team has found out particular pattern followed by the assessee, which is found to be defective and further the state of affairs of business carried on by the assessee is found to be unreliable, in our view, the AO was justified in rejecting the book results for AY 2012-13 also.

Next issue relates to the estimation of income of the assessee for both the years under consideration. We have noticed that the AO has estimated the net income of the assessee @ 4.50% of the turnover. However, the Ld CIT(A) has estimated the Gross Profit of the assessee by adopting the very same rate of 4.50% and has allowed deduction of various expenses/losses claimed by the assessee. There should not be any doubt that, after rejection of book results, the rate of gross profit could be determined by considering the gross profit level declared by comparable cases. While we agree with the view of the Ld CIT(A) that the profit should have been estimated at “Gross profit level”, we notice that the Ld CIT(A) has not brought any comparable cases to determine the Gross profit rate at 4.50% in both the years. Hence, there is fallacy in the approach of the Ld CIT(A) in this regard, which cannot be upheld. We also notice that there was no occasion for the assessing officer to examine various expenses claimed by the assessee, since he had estimated the net profit. Accordingly, we are of the view that matters relating to estimation of gross profit rate by considering comparable cases and examination of various & 1336/Bang/2017 & 1393 & 1394/Bang/2017 Page 9 of 9 expenses claimed by the assessee require fresh examination at the end of the assessing officer. Accordingly, we set aside the orders passed by Ld CIT(A) in both the years and restore the issues relating to estimation of gross profit rate and examination of various expenses claimed by the assessee in both the years to the file of the assessing officer, who shall examine them in accordance with law after affording adequate opportunity of being heard to the assessee.

In the result, both the appeals of assessee and revenue are treated as allowed for statistical purposes.