ITO, NEW DELHI vs. M/S. DWARKESH DIAMONDS PVT. LTD., NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”: NEW DELHI BEFORE SHRI I.C.SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.4692/Del/2011 (Assessment Year: 2007-08) ITO, Dwarkesh Diamonds Pvt. Ltd, M-77, 1st Floor, Vikash Puri, New Delhi Ward-10(4), Room No.199C, Vs. CR Building, New Delhi PAN:AACCD4952F (Appellant) (Respondent)

Assessee by : Sh. Anil Kr. Sharma, Sr. DR Revenue by: Sh. Sameer Kapoor, CA Date of Hearing 18/10/2016 Date of pronouncement 05/01/2017 O R D E R PER PRASHANT MAHARISHI, A. M. This is an appeal filed by the by revenue against the order of the ld CIT(A), 1. XVIII, New Delhi dated 05.08.2011 for the Assessment Year 2007-08. 2. The assessee has raised the following grounds of appeal:- “i) Whether on the fact and circumstances of the case, the Ld. CIT(A) was correct in deleting the addition of Rs. 5,23,525/- made on account of estimated net profit without appreciating the fact that the assessee failed to produce complete books of accounts during the course of assessment proceedings and remand report proceedings. ii) Whether on the fact and circumstances of the case, the Ld. CIT(A) was correct in deleting the addition of Rs. 45,19,950/-/- made on account of sundry creditores without appreciating the fact that the assessee failed to prove the genuineness of the sundry creditors and required evidences during the course of assessment proceedings and remand report proceedings . iii) Whether on the fact and circumstances of the case, the Ld. CIT(A) was correct in deleting the addition of Rs. 35,38,559/-/- made on account of unaccounted sales without appreciating the fact that the assessee failed to produce required evidences during the course of assessment proceedings and remand report proceedings . iv) Whether on the fact and circumstances of the case, the Ld. CIT(A) was correct in deleting the addition of Rs. 41,41,309/-/- made on account of unaccounted purchases without appreciating the fact that the assessee failed to produce documentary evidences during the course of assessment proceedings and remand report proceedings.” 3. During the course of hearing, revenue has made an application dated 11/03/2015 for admission of an additional ground of appeal. The additional ground raised by the revenue is as under:-

Page 2 of 10 “whether these CIT (A) has erred in admitting additional evidence in this case is the conditions as stipulated in rule 46 (1) was not satisfied in this case and no order in this regard was passed and further that the evidence admitted were also not called for by the CIT (A) on his own under rule 46 (4) of the income tax rules.” 4. The Ld. departmental representative submitted that this is a legal ground, which goes to the root of the matter, therefore can be raised at any time, and hence should be admitted. The Ld. authorized representative of the assessee objected to the admission of the additional ground submitting that Ld. CIT appeal has granted proper opportunity to the Ld. assessing officer whose remand report was obtained before deciding the issue and therefore he submitted that the remand report is placed in the paper book from page No. 99 -117 and therefore there is no reason to admit the additional ground raised by the revenue. 5. We have carefully considered the rival contentions and also perused the remand report by the assessing officer, dated 13/11/2010 submitted to the CIT (A) and therefore we are not inclined to admit the additional ground raised by the revenue as proper opportunity of making out a case to the Ld. assessing officer was granted by the Ld. 1st appellate authority. Further on perusal of Para No. 4.2 of the order of the first appellate authority, it is evident that remand report was called by the Ld. First Appellate authority from the assessing officer and the Ld. authorized representative vide letter dated 27/09/2010 has also requested for admission of additional evidences. To this letter, the Ld. assessing officer objected vide report dated 13/01/2011, which has been discussed by the first appellate authority in Para No. 4.4 of his order. Furthermore vide Para No. 4.6 of the order of the first appellate authority; it is apparent that he sent the material submitted by the assessee for examination by the Ld. assessing officer who submitted a second report on 16/03/2011, which has also been considered by the Ld. 1st appellate authority. Subsequently, in Para No. 4.8 the additional evidences were admitted stating that they were very much related to the issues involved and are critical for deciding the grounds of appeal and therefore they were sent to the ld. assessing officer to examine during the remand proceedings and submitted remand reports and hence after that he has admitted the same applying rule 46A of the Income Tax Rules, 1962. In view of this, we reject the additional ground raised by the revenue.

Page 3 of 10 6. Brief facts of the case is that assessee is a private limited company furnished its income tax return on 31st of October 2007 declaring a profit of Rs. 50300/-. The company is engaged in the business of trading in jewellery. To support its return of income, the company submitted the audited annual accounts of the company along with the tax audit report. During the course of assessment proceedings, the Ld. assessing officer stated that assessee has not produced the books of accounts which were relied upon by the tax auditor and therefore he rejected the return of the assessee and held that in case of jewellery trade the gross profit rate varies between 6 to 8% and net profit rate varies between 4 to 5% and in the absence of the book and non-confirmation from sundry creditors to the net profit rate at 5% on sales of Rs. 1 247 0519/– and estimated the net profit of the company at Rs. 6 23525/–. As the assessee did not produce the books of accounts, The Ld. assessing officer was of the view that assessee has failed to prove the genuineness of the sundry creditors as on the close of the year and therefore he added a sum of Rs. 4 519950/– on account of the sundry creditors which remain unconfirmed. He further made an addition of Rs. 3 538559/– on account of unaccounted sales made to one party M/s Choksi vachraj Makanji of Junagarh. He further made an addition of Rs. 4 141309/– on account of the opening stock in absence of books of accounts. An addition of Rs. 15,000 was also made on account of disallowance of donation. Consequently, the income of the assessee was assessed at Rs. 1 283 7340 wide assessment order dated 31st. December 2009. Against this, the assessee preferred an appeal before the CIT (A). The Ld. CIT (A) on examination of the additional evidence admitted by the assessee and obtaining remand report of the Ld. assessing officer has deleted the addition of Rs. 6 23525/– however he sustained the addition of Rs. 1 lakh as assessee has failed to produce the stock register for diamond and stone and other minor shortcomings. Addition of sundry creditors of Rs. 4 519950/– he deleted the addition as during the remand proceedings the copies of invoices and bills for purchases from the creditors were produced along with the confirmation of the sundry creditors. With respect to the addition of Rs. 3 538559/– on account of unaccounted sales made to M/s CVM he deleted the addition as the assessee has submitted on verification of confirmation from that particular party along with the copy of the challan

Page 4 of 10 and receipt vouchers as well as labour bills for job done. Further, the addition of Rs. 4 141309/– on account of the opening stock was also deleted by the Ld. assessing officer for the reason that the assessee has valued the closing stock in opening stock consistently according to the provisions of the companies act and also on the consistent method of the cost or the market value whichever is lower and also supported by the stock register which was produced and examined by the Ld. assessing officer. He was further persuaded to delete the above addition. For the reason that assessee has produced it books of accounts and bills and vouchers relating to purchases and sales which are recorded in the books of account and are audited. Therefore aggrieved by the order of the Ld. that first appellate authority, the revenue is in appeal before us contesting all the additions deleted by him. 7. The 1st ground of appeal of the revenue is against the deletion of the addition of Rs. 5 23525 made on account of estimated net profit, without appreciating the fact that the assessee has failed to produce complete books of account during the course of assessment proceedings and remand report proceedings. The Ld. departmental representative relied upon the orders of the Ld. and assessing officer and stated that when the books of accounts were not produced before the Ld. assessing officer during the course of assessment proceedings and also notices under section 133 (6) of the income tax act were not responded. Against this, the Ld. authorized representative submitted that the books of accounts were produced before the assessing officer in remand proceedings and further the additional evidences were submitted and merely because some of the creditors could not reply to the Ld. and assessing officers notices it cannot be used against the assessee when the confirmation of them supported by the books of account is produced. 8. We have carefully considered the rival contentions and also perused the relevant evidences produced before us. The Ld. 1st appellate authority has deleted the above addition as under:-

“4.9 Estimation of Net profit at Rs. 6.23.525/- :- As per the assessment order, during assessment proceeding in response to the AO's notices and questionnaire dated 03.07.2009, the Id. AR of the assessee appeared on various dates and submitted the Tax Audit Report and Balance Sheet. The AO issued a second questionnaire dated 26.08.2009 against which part of the information was furnished by the Id. AR. Subsequently, the AO issued a third questionnaire dated

Page 5 of 10 19.11.2009 against which, the Id. AR furnished confirmations from various sundry creditors. The AO then issued notices to the sundry creditors. Out of the same, two parties replied, in two cases the notices were returned unserved and in remaining 6 cases no reply was received by the AO. Out of the two replies received, the AO noticed some difference in the account of one M/s Choksi Vachraj Makanji & Co of Junagarh. The AO issued a further notice to the above party which was not replied. The AO then issued another notice to the assessee fixing the hearing on 22.12.2009 which was not complied. The AO, thereafter, rejected the audited statement of account of the assessee company on the ground that books of account has not been produced and estimated the net profit from the business at 5%; thereby making addition of Rs. 6,23,525/-. 4.9.1 In the remand reports, it is submitted by the AO that the books of account and stock registers were called upon and produced by the assessee except the stock register for diamond/stones. Further, in respect of purchases made during the year, original bills, vouchers and challans issued by sellers were produced in respect of one party, namely M/s Peeyar Manufacturing and the assessee furnished its own bills/ vouchers relating purchases from other parties. In respect of purchase from M/s Diam Circle for Rs.4.31.387/-, the said bill was not produced, ft is also submitted that there are cuttings/overwriting in some of the assessee's own purchase/sale bills. No making/polish expenses were charged on sales. Old ornaments purchased from Jain family on 23.12.2006 to 28.12.2006 were paid for after a gap on 22.03.2007 and 23.03.2007. There is a decrease in G.P ratio in the year under consideration as compared to the immediately preceding year. 4.9.2 In this regard, it is submitted by the Id. AR that all the books of account and stock registers were produced before the AO and only one register could not be produced, it is argued that non-production of only one register cannot be a ground for addition as held by the Hon'ble Delhi High Court in CIT v. Smt. Poonam Rani (2010) 192 Taxmann 167. As regards the purchase vouchers, it is submitted by the Id. AR that except for the purchases from M/s Peeyar Manufacutring and M/s Diam Circle all other purchases during the year were made from individual household customers who have sold their personal jewellery to the assessee. It is submitted that since individual customers do not carry any personal invoice/challan etc., submitting them is not possible. !t is submitted that the AO was provided with the names and address of these customers to enable him to confirm these transactions and the AO has not made any adverse comments on this. As regard, the purchase bill for M/s Diam Circle, it is submitted by the Id. AR that non-production of only one bill cannot be basis for addition. The Id. AR has relied upon the decision in the case of Shanker Exports v. Addl. CIT (2010) 132 TTJ 107 (JP) in this regard. Further, it is submitted that the AO ignored the part payment made to this party of Rs. 1,99,000/- by the assessee by account payee cheques. Further, the confirmation' of the party and legal notice from the advocate of the party demanding the balance Outstanding amount were also produced before the AO which has not been disputed by the AO. As regards the alleged cutting/overwriting, it is submitted by the Id. AR that these are simply clerical mistakes and the figures in the bills are the same as the figures in the books of account. As regards, making/polish expenses, it is submitted by the Id. AR that it is not necessary to charge them separately in the invoices as the value of purchases/sales include the above making/polishing charges. As regards the purchases from Jain family, it is submitted that said family is an old customer and simply because the payment is made after three months, the transaction does not become non- genuine. As regards the G.P. ratio it is argued by the Id. AR that the AO did not ask for any explanation during the assessment or remand proceeding in this

Page 6 of 10 regard. It was submitted that in the absence of any material defect in the books, the lower G.P. rate compared to the earlier year cannot be a ground of addition as per the decision of Hon'ble Delhi High Court in CIT v. Poonam Rani (supra). 4.9.3 On careful consideration the matter, I find that the AO has not been able to point out any valid material defect in the books of account, registers and bills and vouchers produced by the assessee during the assessment and the remand proceedings. The AO has also not made any adverse comment on the basis of independent enquiry/verification, although permission for the same was provided to him by the CIT(A) specifically. Considering the nature of the business of the appellant, the facts and circumstances of the case and the case laws relied upon, I find that the addition of Rs. 6,23,525/- made by the AO by estimation of the net profit is adhoc and arbitrary in nature and cannot be sustained. However, considering that the assessee has not been able to produce the stock register for diamond/stone and other minor shortcomings as mentioned in the previous paragraphs, I feel an addition of Rs. 1,00,000/- would meet the ends of justice. According, the addition on this ground is upheld to the extent of Rs. 1,00,000/- and the remaining Rs.5.23,525/- is deleted.” 9. On perusal of the order of the first appellate authority, it is apparent that he has deleted the addition of Rs. 6 23525/– made by the Ld. Assessing officer of estimate of the net profit on adhoc basis where the books of accounts of the assessee are audited and no particular defects were pointed out by the Ld. assessing officer, which is patent and glaring. In fact, he has also sustained the addition of Rs. 1 lakh for the reason that assessee has not been able to produce the stock register for diamond and stones and other minor shortcomings as mentioned in his order. The Ld. departmental representative could not point out any infirmity in the order of the Ld. Ld. 1st appellate authority. Therefore, we confirm the finding of the Ld. CIT (A) in deleting the addition of Rs. 5 23525/- on account of rejection of the books of accounts by the Ld. and assessing officer and estimating the net profit. In the result ground No. 1 of the appeal of the revenue is dismissed. 10. Ground No. 2 of the appeal of the revenue is against the deleting the addition of Rs. 4519950/- made on account of the sundry creditors without appreciating the fact that the assessee has failed to prove the genuineness of the sundry creditors and required evidence during the course of assessment proceedings and remand report proceedings. The Ld. departmental representative relied upon the order of the Ld. and assessing officer and stated that when the assessee has not produced the complete details with respect to the genuineness of the sundry creditors the addition has rightly been made. The Ld. authorized representative of the assessee is relied upon the order of the Ld. CIT (A) where it has been held that on submission of the confirmation from payments made to some of the

Page 7 of 10 creditors and with respect to the legal notices issued by some sundry creditors towards outstanding amount and when during the course of remand proceedings the copies of the invoices bills for purchases from a creditor were also produced to prove the genuineness of the transactions the addition has rightly been deleted by the 1st appellate authority. 11. We have carefully considered the rival contentions and also perused the order of the Ld. that 1st appellate authority who deleted the above addition as under:- “4.10 Addition of Rs. 45,19.9507- on account of sundry creditors:- In the assessment order, the AO has added the total of sundry creditors 31.03.2007 amounting to Rs. 45,19,950/- by considering it cessation of liability u7s 41 of the Act. It is submitted by the Id. AR that the confirmation of sundry creditors were duly submitted to the AO during the assessment proceeding as is evident from the assessment order itself. During the remand proceeding, copies of invoices/bills for purchases from the creditors were also produced to prove the genuineness of the transaction. Further, confirmations for payments made to some of the creditors and legal notices issued by some sundry creditors towards outstanding amounts were also produced to prove that there was no cessation of liability. The assessee has also not written off the above amounts in its books of account. It is submitted that mere non-reply to notice u/s 133(6) by some parties cannot be a ground to punish the assessee and the AO can very well proceed against the said party for non-reply to notices as per section 272A(2)(c) of the Act. The Id. AR has relied upon the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Smt Sita Devi Juneja (2010) 187 Taxmann 96 to the effect that the outstanding creditors in the books indicate the acknowledgement of debts payable by the assessee and no addition in this regard is justified. In this regard, no adverse comment has been made by the AO in the remand report. On careful examination of the matter, I find that the assessee has discharged its onus of proving the identity, source and genuineness of the above sundry creditors. On the other hand, the AO has not made any adverse comment in this regard in the remand report. Considering the above, the disallowance made by the AO u/s 41 by treating the above sundry creditors cessation of liability is arbitrary and cannot be legally or factually justified. The said addition is, therefore, deleted. “ 12. We have noted that the Ld. CIT (A) deleted the addition when the assessee has submitted the confirmation of the sundry creditors, which were duly submitted before the Ld. assessing officer during the assessment proceedings and further submitting the copies of invoices and bills for purchase from the creditors to prove the genuineness of the transactions. The assessee also produced confirmation for payments made to some of the creditors and legal notices issued by the some of the sundry creditors towards outstanding amounts and therefore there was no cessation of any liability and nothing has been written off in the books of accounts. The Ld. departmental representative could not point out any infirmity in the order of

Page 8 of 10 the first appellate authority in deleting the above addition. Therefore we confirm the order of the Ld. at first appellate authority in deleting the addition of Rs. 4 519950/- on account of the sundry creditors. In the result ground No. 2 of the appeal is dismissed. 13. Ground No. 3 of the appeal of the revenue is against the deletion of addition of Rs. 3538559/– made on account of unaccounted sales without appreciating the fact that the assessee has failed to produce required evidences during the course of assessment proceedings and remand proceedings. The above addition has been made by the Ld. assessing officer because of the reason that debit balance shown in the account of M/s CVM as on the year and was Rs. 426947/- where as per the copy of the account of the assessee in the parties books the debit balance was Rs. 3 965306/–. Therefore, the Ld. assessing officer has made the net addition of Rs. 3 538559 on account of unaccounted sales. The Ld. departmental representative submitted that the assessee has different figure in its books of accounts, whereas the confirmation submitted by the party is different and therefore the addition has been made. He vehemently supported the order of the Ld. assessing officer, against this, the Ld. authorized representative relied upon the order of the Ld. CIT appeal. 14. We have carefully considered the rival contentions and also perused the order of the Ld. CIT appeal deleting the above additions. The Ld. CIT appeal has deleted the above addition vide Para No. 4.11 of his order as under:- “4.11 Addition of Rs. 35,38.559/- on account of M/s Choksi Vachraj & Makanji (CVM):- As per the assessment order, the debit balance shown in the account of M/s CVM as on the year end was Rs. 4,26,947/-, whereas as per the copy of the account of the assessee in the party's books the debit balance was Rs. 39,65,306/-. The AO has added the difference between the two figures as unaccounted sales by the assessee to the above party. In this regard, the Id. AR has argued that the difference in the account was due to one transaction of 5.820 grams of gold for Rs. 38,93,850/- which is wrongly shown by M/s CVM as sale, instead of being accounted for as issue of finished material. It submitted that the gold in question was issued by the assessee to CVM for job work. The re- confirmation from M/s CVM in this regard had-been submitted by the assessee along with copy of challan and receipt and receipt voucher as well as labour bills for job work- done which had been duly forwarded to the AO during the remand proceeding. The AO has not made any adverse comment on the basis of any independent enquiry or verification in this regard. In the remand report, the AO has simply mentioned that reconfirmation and other evidences produced by the assessee are an after-thought. On careful consideration of the matter, I find that the impugned disallowance is not backed by any material finding and cannot be sustained. On the other hand, the appellant has submitted necessary

Page 9 of 10 documentary evidence and explanation clarifying the matter. The said disallowance is, therefore, deleted.”

Page 10 of 10 Ld. assessing officer which has not been controlled by the Ld. assessing officer either in the assessment order or in the remand reports. No infirmity could be pointed out by the Ld. departmental representative in the order of the Ld. first appellate authority in deleting the above addition. In the result we dismiss ground No. 4 of the appeal of the revenue and confirm the finding of the Ld. at first appellate authority in deleting the above addition. This 18. In the result appeal filed by the revenue is dismissed. Order pronounced in the open court on 05/01/2017. -Sd/- -Sd/- (I.C.SUDHIR) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 05/01/2017 A K Keot Copy forwarded to