ACIT., CIRCLE-6(1), HYDERABAD vs. P MANOHAR LAL JEWELLERS AND EXPORTERS, HYDERABAD

2024, pertaining to the assessment year 2020-21. 2. The grounds raised by the Revenue read as under :

The brief facts of the case are that, assessee is a partnership firm and is engaged in the business of trading in jewellers under the name and style of “M/s. P. Manohar Lal Jewellers and Exporters”, filed its return of income for the Assessment Year 2020-21 on 09.02.2021, declaring total income of Rs. 60,83,01,720/-. The case was selected for scrutiny, and the assessment has been completed under Section 143(3) of the Income-tax Act, 1961 on 26.09.2022 and determined total income at Rs. 21,97,40,851/- by making additions towards disallowance of business promotion expenses of Rs. 2,30,52,559/-, variation in respect of disallowance on account of shortage of stock for Rs. 12,00,27,746/- and further, an addition towards 10% ad hoc

Aggrieved by the assessment order, the assessee preferred

The first issue that came up for our consideration from Ground Nos. 2 to 4 of Revenue’s appeal is deletion of addition made

The facts with regard to the impugned dispute are that the assessee firm engaged in the business of trading in gold jewellery has been operating a scheme called ‘Swarnabhishekam’, whereby interested customers can pay an amount of Rs. 5,000/- /Rs. 10,000/- / Rs. 20,000/- each per month for a period up to 10 months, and after the end of 11 months, the customers will be allowed to purchase jewellery worth of Rs. 55,000/- / Rs.

The Ld. CIT-DR for the Revenue, Dr. Narendra Kumar Naik, submitted that, the Ld. CIT(A) erred in deleting the additions made towards business promotion expenses by admitting additional evidence submitted by the assessee during the course of appellate proceedings without providing an opportunity to the A.O., contrary to Rule 46A of the Income-tax Rules, 1962. The Ld. CIT- DR further submitted that, the A.O. observed that, the assessee has not furnished any details, whereas the Ld. CIT(A) claims that, the assessee has furnished details of discount allowed to customers or premium paid to the customers. From the above, it is very clear that, the Ld. CIT(A) has admitted the additional evidence and allowed relief to the assessee as per Rule 46A of the Income-tax Rules, 1962. Further, although the assessee claims to have paid one-month premium to the customers and the same has been adjusted against purchase of jewellery, but no evidence has been furnished. Therefore, he submitted that, the Ld. CIT(A),

The learned counsel for the assessee, on the other hand, supporting the order of Ld. CIT(A), submitted that, it is an admitted fact that, the assessee is operating a Scheme for monthly subscription of the customers, whereby the customers subscribed for 10 months, and upon completion of 10 months, the assessee will provide one-month premium to the customers, which is in the nature of interest or premium for making advance amount for purchase of jewellery. Further, the amount credited to the customers’ account has been debited to business promotion account, because it is not in the nature of interest and it is in the nature of discount or premium given to the customers for promoting the sale of goods. The assessee has furnished all the details, including the relevant customers’ ledger account along with gift vouchers, to prove that, the assessee has credited premium to the accounts of the customers and the same has been adjusted against the sale of jewellery. Since it is not a discount allowed to the customers and only a premium paid for advance of payment of money for purchase of jewellery, the same has not been shown as discount in the invoices. The A.O. without appreciating the relevant facts, simply disallowed the entire business expenditure. The Ld. CIT(A), after considering the relevant facts, has rightly deleted the addition made by the A.O. Therefore, he submitted that, the order of the Ld. CIT(A) should be upheld and the additions made by the A.O. should be deleted.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. The assessee has been operating a scheme called ‘Swarnabhishekam’, whereby the interested customers can pay an amount of Rs. 5,000/- / Rs. 10,000/- / Rs. 20,000/- per month for 10 months, and the assessee firm will allow the customers to purchase jewellery worth Rs. 55,000/- / Rs. 1,10,000/- / Rs. 2,20,000/- after 11 months. As per the Scheme, various customers have paid monthly subscription on which the assessee has credited one month subscription as premium to the accounts of the customers and the balance available in the customers’ accounts, including the premium has been adjusted against purchase of jewellery. This is evident from the relevant ledger

In so far as the argument of the Ld. CIT-DR in the light of Rule 46A of the Income-tax Rules, 1962, in our considered view, there is no violation of Rule 46A of the Income-tax Rules as claimed by the Revenue, because the Ld. CIT(A) has analyzed the issue in the light of various evidences filed by the assessee and he found that, the same evidences are already filed before the A.O. at he time of assessment proceedings. Therefore, it is not a case of admission of additional evidence as claimed by the Revenue and herefore, the grounds of appeal raised by the Revenue on this aspect has been rejected. Thus, we are inclined to uphold the findings of Ld. CIT(A) and reject the grounds taken by the Revenue.

The next issue that came up for our consideration from Ground Nos. 5 and 6 of Revenue’s appeal is deletion of addition made towards stock shortage claimed by the assessee. During the Financial Year 2019-20 relevant to the Assessment Year 2020-21,

The Ld. CIT-DR submitted that, the Ld. CIT(A) erred in deleting the additions made towards shortage of stock without appreciating the fact that, the vouchers and ledgers furnished by the assessee are from the assessee’s books of account, which is not corroborated with bills or vouchers containing the other parties’ signatures and acknowledgements. The Ld. CIT-DR further submitted that, once again the Ld. CIT(A) has allowed relief to the assessee by admitting additional evidence without

The learned counsel for the assessee, on the other hand, supporting the order of Ld. CIT(A), submitted that, the assessee is into the business of manufacturing of gold ornaments, and as evident from the nature of business of the assessee, it is true that, there is a loss of gold in the process of manufacturing of ornaments. The assessee purchased raw gold and made ornaments through goldsmiths. The assessee has also entered into agreements with goldsmiths, whereby a loss of gold in the manufacturing process is agreed. The assessee had also maintained relevant records, including the Stock Inward and Outward Register, along with slips for movement of gold to the goldsmith premises and receipt of manufactured ornaments, and from the above, it is very clear that, the assessee has received less gold ornaments when compared to the raw gold sent to the goldsmiths. The assessee has also furnished a complete list of goldsmiths to whom he has entrusted the work of gold ornaments.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, the assessee is into the business of trading in gold jewellery and in that process purchased raw gold and makes ornaments. It is also an admitted fact that, in the process of manufacturing gold ornaments, there was a loss of wastage of gold. The assessee has claimed stock shortage of 27,825 grams of gold for the year under consideration, which works out to 4.49% of total gold ornaments sold by the assessee. If we exclude the stock shortage on account of melting loss, the loss on account of manufacturing of ornaments works out to 4.49% of total sales. The assessee has explained the melting loss due to remaking of jewellery when the customer has rejected the ornaments made by the assessee, and in the process of remaking jewellery, the goldsmiths need to remove the studs and, in that process, there will be a loss of gold. To prove this argument, the assessee has furnished the details and as per the details furnished by the assessee, it appears that,

Insofar as the shortage of stock on account of manufacturing jewellery, we find that, the Ld. CIT(A) recorded a categorical finding in the light of the Government of India’s Trade Policy Handbook issued by the Ministry of Commerce and Industry as part of the Foreign Trade Policy, as per which wastage norms have been fixed at different percentages for different jewellery, and in the case of studded jewellery and articles thereof, the maximum percentage of 5% has been fixed by the Government of India. If we consider the handbook issued by the Government of India for allowing wastages in the manufacturing of studded jewellery and consider the loss percentage claimed by the assessee while making jewellery, in our considered view, the loss or wastage claimed by the assessee is within the limit fixed by the Government of India. Therefore, the reasons given by the A.O. that, the assessee has claimed excessive wastage/shortage of stock is incorrect.

Insofar as the observation of Ld. CIT(A) with regard to the evidence furnished by the assessee, the assessee has furnished all the evidence, including the details of goldsmiths, who made the gold ornaments and has also furnished relevant details of movement of stock from the assessee’s premises to the goldsmiths’ premises and return of manufactured gold ornaments. Upon perusal of relevant details, we find that, the assessee has received less quantity of gold ornaments when compared to gold sent to the goldsmiths. From the above, it is very clear that, there is a wastage of gold in the manufacturing process for which the assessee has maintained proper records. Further, the loss claimed by the assessee for the year under consideration is also similar to the loss claimed for the earlier two financial years in respect of manufacturing loss as well as melting loss, which is evident from para 9.2.2 of Ld. CIT(A)’s order. As evident from the above details, the assessee has been claiming the expenditure at a similar percentage for the last year as well. Since the assessee has furnished all the evidence and has proved the loss/wastage of gold claimed in the manufacturing process, in our considered view, the A.O. ought not to have made addition towards shortage of stock. The Ld. CIT(A), after considering the relevant facts, including the agreement between the assessee and Titan Company Ltd., where it has been clearly shown wastage at 5% on different types of jewellery, allowed relief to the assessee. The Revenue failed to bring on record any contrary evidence to counter the findings of fact recorded by the Ld. CIT(A), except stating that, the Ld. CIT(A) has allowed relief by accepting the additional evidence contrary to Rule 46A of the Income-tax Rules, 1962. Therefore, we are of the considered view that, there is no error in the reasons given by the Ld. CIT(A) to delete the additions towards shortage of stock, and thus, we are inclined to uphold the findings of Ld. CIT(A) and reject the grounds taken by the Revenue.

The next issue that came up for our consideration from Ground Nos. 7 and 8 of Revenue’s appeal is deletion of addition made towards ad hoc disallowance of purchases from related parties under Section 40A(2)(b) of the Act for Rs. 83,58,826/-. The assessee has claimed purchases from two related concerns, M/s. Saphaire Gems (India) Pvt. Ltd. and M/s. PMJ Gems and Jewellers Pvt. Ltd. The assessee has purchased Emerald Cut-TKH @ Rs. 375/- per carat from M/s. Saphaire Gems (India) Pvt. Ltd. and further, purchased Ruby Cut - THQ @ Rs. 475/- per carat from the very same party. The A.O. disallowed 10% purchases from related parties and made addition of Rs. 83,58,826/- on the ground that, the assessee has failed to offer any explanation as to why the purchases were made from related parties and that the price paid to the related parties was at arm’s length. It was the explanation of the assessee that, it has purchased Emerald Cut - TKH @ Rs. 375/- per carat and Ruby Cut - THQ @ of Rs. 475/- per carat and the rate paid to the related parties is less than the average rate paid to outside parties for purchase of ruby and emerald. The assessee has furnished a comparative table of purchases from related parties and the rate paid to them and also purchases from third parties like Lucky Gems and Karthikeya Gems and Jewellers for ruby and emerald cut and claimed that, the price paid to the related parties is less than the price paid to the third parties. The assessee further contended that, assuming for a moment the assessee has paid little higher amount to the related parties, but fact remains that, the related parties are separate entities for tax purpose and paid tax at maximum

Ld. CIT-DR for the Revenue, submitted that, the Ld. CIT(A) erred in deleting the addition made towards ad hoc disallowance of purchases from related parties without properly appreciating the fact that, the assessee has made substantial purchases from related concerns and failed to establish that, the prices paid to such related parties were at arm’s length. He further submitted that, the assessee has not brought on record any independent comparable data to prove that, the rates paid to the related concerns were fair and reasonable. Therefore, he contended that,

The learned counsel for the assessee, on the other hand, supporting the order of Ld. CIT(A), submitted that, the assessee has furnished complete details of purchases from related parties as well as from third parties along with comparative rates, which clearly demonstrate that, the prices paid to the related concerns were either lower than or comparable to the prices paid to outside parties. He further submitted that, in the absence of any material brought on record by the A.O. to show that, the prices paid to related parties were in excess of the fair market value, the ad hoc disallowance made under Section 40A(2)(b) of the Act, is not sustainable. Therefore, he submitted that, the order of Ld. CIT(A)

We have heard both parties and considered the relevant arguments of the Ld. CIT-DR for the Revenue and the learned counsel for the assessee. There is no dispute with regard to the fact that, the assessee has made purchases from two related