M/S SRINIDHI GOLD,MANDYA vs. ITO, MANDYA

PER S. JAYARAMAN, ACCOUNTANT MEMBER :

These are the appeal & the cross objection filed by the assessee for the

assessment years 2008-09 & 2007-08 respectively.

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ITA No.494/Bang/2012 – A. Y. 2008-09 filed by the assessee :

silverware. It purchases standard gold and old gold ornaments,

convert them into ornaments and sells them. In the assessment

made for ay 2008-09, the AO made the following additions:

(i) The assessee firm has arrived at an opening stock as on 1.4.2007 at Rs. 1,10,45,800/- on the net weight of gold at 25201.830 gms., which works out to Rs.438.29 per gram. For the F.Y.2006-07 relevant to the A.Y.2007-08, the closing stock was arrived at 25428.56 grams by the department by recasting the trading account which is having direct impact on the opening stock as on 1.4.2007. The suppression of closing stock of 226.73 grams which was omitted by the appellant in arriving at the closing stock was duly accounted for the YE 31.3.2007 and the assessment for the A.Y.2007-08 was duly concluded. Accordingly, the AO has taken the opening stock as on 1.4.2007 at 25428.560 grams as against 25201.830 shown by the appellant . The A O noticed that the assessee has arrived at the value of opening stock as on 1.4.2007 at Rs.438.29 per gram as against the value of Rs.849.639 per gram determined by the department on the basis of the average cost method as on 31.3.2007. On the same basis, the closing stock as on 3 1.3.2008 was worked out by the assessee at Rs.1,63,21,900/- on the net weight of Rs.30242.50 grams at Rs.539.700 per gram. The AO proposed to adopt

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the valuation of closing stock at average cost method for which the assessee objected . The AO did not accept its contention on the ground that the assessee has already accepted the average cost method of valuation of closing stock as on 31.3.2006. Accordingly, the AO worked out the average cost at Rs.999.76 per gram and valued the closing stock at Rs.3,02,35,241/-. After reworking the trading account, he worked out the additional net profit at Rs.29,04,567/- and added to the returned income .

(ii) The assessee debited Rs.41,81,082/- towards making charges’. On verification of vouchers produced by the assessee, the AO found that they were self vouched . The assessee firm prepared the receipts for converting standard gold to ornament gold at Rs.15.81 lakhs. He also found that the Sl. nos. are also not reflected in the vouchers and the complete details of the person is not reflected in the vouchers so produced. Considering the volume of vouchers produced he proposed to disallow 10% of the making charges at Rs.4,18,908/- which was accepted by the assessee and accordingly disallowed Rs.4,18,908/- as unexplained expenditure u/s 69C.

Mysuru. The CIT (A) confirmed the additions. The assessee is on

appeal before us with the following grounds :

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Tribunal, in its order in MA No 45(B)/2000 in ITA No 464(B)/2009 & MA No

107(B)/2000 in ITA No 464(B)/2009 in the asssessee’s case for a Y 2006-

07 dt 11.3.2005 has extracted the its order in ITA No 464(B)/2009 dt

24.9.2009 as under :

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“5. We have heard the rival contentions and perused he material on record. On our careful perusal of the facts and circumstances, we are inclined to hold that one the AO had computed the missing quantity of gold on the basis of purchase and sale from the impounded books of accounts and on the basis of survey conducted it was an exercise to be made for valuing the missing stock of 1442.01 grams. The learned counsel before us has indicated that the exercise was undertaken by the AO who had recasted the trading account which figures have been incorporated for computing the value of per gram in the said missing jewellery estimated by him at 1,442 Kgs. Therefore, after having undergone the exercise of computing the missing stock, the AO sought to find the difference in closing stock value on the basis of stock as per impounded books and stock as per the trading account in respect of gold or framing the addition. The asses see before the first appellate authority submitted the same but without relating the same o the facts noted y the AO for the addition of Rs.18,63,7111- in place of addition of Rs. 7,66,665 or Rs. 8,68,061 which we are unable to co-relate to the finding of the AO. The AO on page 6 of his order has clearly established that the assessee had suppressed stock as on 31-03-2006 to the extent of 1306.735 grams, therefore, would have left no room for learned CIT(A) to value the same at Rs . 18,68,711 was not cons idere d appropriately by the learned CIT(A). The assessee being a firm of gold jewelers established in the impugned assessment year only was to adopt a method of valuation of closing stock at lower of cost or market value to be consistently followed which the AO had agreed to and accepted therefore was only an exercise to value the closing stock of the missing quantity which remains undisputed in so far as both the authorities accepted the same. Therefore, we do not find any infirmity in the real gold content quantity which was to be valued in the closing stock in the missing quantity of physical stock as on 3103-2006. Rs. 18,68,711 therefore, does not figure anywhere near the computation, valuation, co- relation between the quantity of purchase and sale that could be considered for taxation in the impugned year itself as against market value of gold and not jewellery. In the light of the above, the addition is to be confirmed o the extent of

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Rs. 7,76,665 being the value adopted by the AO @ Rs.538.599 per gram being the gold content in. the jewellery which quantity computed by the AO stands at 1442.01 grams. The profit on sale of this stock in the future would be income of that year, which profit cannot be taxed in the year itself for inconsistent valuation. Consequential levy of interest under section 234A & 234B is directed to be levied in accordance with the mandatory provisions of the Income Tax Act, 1961".

And then observed as under in para 13

“In the face of the above, we have to take a look at the findings of the Tribunal in its order dated 24-09-2009 reproduced by us, at para-8 above. What we find is that the Tribunal had indeed considered the argument of the assessee on gold content in the stock and held that only real gold content was to be considered. It also held that the valuation at rate of 538.599 per gram, as done by the assessee considering the actual gold content in 91.6 purity gold jewellery was correct. The result of this exercise is that variation was limited to difference in quantity in the closing stock alone and not in the pricing. Difference in quantity in closing the Tribunal as 1,442 01 grams is the same as mentioned by us at para-5 above and valuation has been directed to be taken at Rs.538.599. If we are to say that the rate of 538.599 per gram considered for valuing the closing stock was incorrect or if we are to say that the difference in quantity in stock was only 1,306.335 grams and not 1,442.01 grams, this, in our opinion, would be nothing but equivalent to a review. To draw a conclusion that actual cost per gram was Rs.60 1.98 will in fact be equal to re-writing the order of the Tribunal. Our hands are tied and powers very limited in a rectificatory proceedings under section 254(2) of the Act. We can only rectify a glaring and apparent mistake that throws upon itself by a bare reading and not through a re-assimilation of entire facts. We are constrained to come to a conclusion that no such mistake is apparent in the order of the Tribunal.”

argument of the assessee on gold content in the stock and held that only

real gold content was to be considered. It also held that the valuation at

rate of 538.599 per gram, as done by the assessee considering the

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actual gold content in 91.6 purity gold jewellery was correct. Since

the method of valuation has to be consistant , following that

decision we direct the AO to rework the net profit in accordance

with the above Tribunal decision . To this extent, this appeal

ground is allowed.

charges, inter alia, on the ground that the vouchers are self-vouched

and not verifiable etc the CIT(A) held that inter alia that “apparently,

it is an agreed addition and there is no dispute about the

observations made by the AO. I find that the disallowance is

reasonable and accordingly, the addition is confirmed”. The assessee has

not let in any material to dislodge the above findings and hence we dismiss

this ground of appeal.

Cross Objection 42/Bang/2012 – A. Y. 2007-08 filed by the assessee :

partnership firm dealing in gold jewellery and silverware. It purchases

standard gold and old gold ornaments, convert them into

ornaments and sells them.

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of gold at Rs.438.29 per gram. The AO on his part proposed to value the

closing stock by applying an average cost of purchase at Rs.837.20 per

gram. For working out the average cost of purchase of gold, the AO

valued the opening stock of 18382.87 grams @ Rs.601.98 per gram,

reworked the net profit at Rs.78,90,381 and assessed it as against

the admitted net loss of Rs.7,28,244/-. (ii) The assessee paid making

charges to various persons and claimed such expenditure. The AO verified

the details from the appellant's books and found that it paid to 25

different persons at Rs.31,10,253/-, out of this, Rs.75,029/- was paid

to 3 persons and in each case the payment was less than Rs.50,000/- in

the full year and hence he allowed such claim and in the balance 22 cases

the amount paid was exceeding Rs.50,000/- per person but the assessee

did not deduct TDS on such payments. Since, the assessee failed to deduct

tax as per provisions of sec 194C, the AO disallowed the claim at

Rs.30,35,224/- u/s 40(a)(ia) of the Act .

that this Hon'ble ITAT in the appellant's case in a y 2006-07 had held

that the closing stock of gold as on 3 1.3.2006 be valued @ Rs.538.59 per

gram. Adopting it, the CIT(A) arrived the average cost of gold for the

purpose of valuation of the closing stock and reworked the net profit at

Rs.87,18,317/- as against the net profit determined by the AO at

Rs.78,90,381. Thus, it resulted in an enhancement to the extent of

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Rs.8,27,936/-. The CIT(A) held that the enhancement is a result of the

stand taken by the appellant and hence there is no need to provide any

further opportunity to it on this issue. Technically, he allowed this issue by

accepting the appellant's argument that the opening stock as on

1.4.2006 should be valued at the same rate as decided by the ITAT for

valuation of the closing stock as on 31.3.2006. With regard to the

disallowances made u/s 40(a)(ia), the CIT(A) confirmed the disallowance.

before this Tribunal in ITA No 631(BNG)/2011 and the assessee filed this

CO. Since the tax effect involved in the Revenue’s appeal is below Rs.10

lakhs, this Tribunal dismissed the Revenue’s appeal in ITA No

631(BNG)/2011 dt 06.01.2016. However, the assessee’s CO remained

undisposed with the following grounds :

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Karnataka in ITA Nos.149 and 144 to 148 of 2003, dt.17.02.2004 pleaded

that CO has to be decided on merits . Para 9 of that order is extracted as

under:

“The cross-objections can be continued even if the appeals are withdrawn. The principle behind Order 41 Rule 22 of CPC clearly providing for the same, is applicable. In view of the above, these appeals are allowed and the order of the Tribunal dated 31-10- 2002 in Cross- objections 73-78/Bang/2001 (in ITA Nos.1859 to 1864/Bang/1992) is set aside and the matters are remitted to the Tribunal for hearing and disposal of Cross- objections No.73- 78/Bang/2001 filed by the appellant in accordance with law.”

With regard to the Valuation of closing stock, the relevant portion of the

CIT(A) order is extracted as under :

“5.1 …………………………………………………………………………………………………… ……………………………………………In the course of appeal proceedings, Sri Subramanian, AR argued that the opening stock of gold as on 1.4.2006 should be the same as the value of the closing stock as on 31.3.2006. Sri Subramanian pointed out that the Hon'ble ITAT in its order in the appellant's case for the A.Y.2006-07 had held that the closing stock of gold as on 3 1.3.2006 be valued @ Rs.538.59 per gram.

5.2 I have gone through the order of the Hon'ble ITAT. I find that, in principle, the argument of the AR has to be accepted. I may mention here that as regards the quantity of the opening or closing stock of gold, there is no dispute. I direct the AO to value the opening stock of gold @ Rs.538.59 per gram as decided by the Hon'ble Tribunal. The average cost of gold for the purpose of valuation of the closing stock is worked out as under:

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5.3 The appellant's net profit is accordingly determined at Rs.87,18,317/- as against the net profit determined by the AO at Rs.78,90,381/-. It results into an enhancement to the extent of Rs.8,27,936/-. The enhancement is a result of the stand taken by the appellant. There is no need to provide any further opportunity to the appellant on this issue. The Ground No.2 is thus technically allowed by accepting the appellant's argument that the opening stock as on 1.4.2006 should be valued at the same rate as decided by the ITAT to be applied for valuation of the closing stock as on 31.3.2006.”

in ay 2006-07 and adopting the consistent valuation method has decided

this issue with which we do not find any infirmity and accordingly we

dismiss the assessee’s appeal ground no 2, supra.

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portion of the assessment order is extracted as under :

“II. Making charges : (i) On perusal of the Trading account filed by the assessee, it is seen that an amount of Rs.31,10,253 is debited to the trading account under the head "Making Charges". As the expenditure incurred on account of making charges falls under the purview of Section 194C of the Act, the assessee was asked to explain vide this office letter dated 21.12.2009 whether he has effected the TDS on the amount of Rs.31,10,253/-. It was explained by the assessee vide its letter dated 23.12.2009 filed in this office on 24.12.2009 as under:

"we submit that manufacture of gold ornaments is a very skilled job.We do not have any person to develop any newDesign. Every gold smith has his own specialization Like some are good at making bangles, some in making Of necklaces etc. Customers also place order for making ornaments to a particular gold smith and its our practice not to give more jobs to a single gold smith as we would be carrying risk. We give gold of a particular weight for manufacture an ornament. We do not enter into any contract in terms of wages payable. The job being skilled takes different time for completion and based on the skill involved and the time taken, the gold smith demands wages for his job and after negotiation, we finally pay him. The wages normally runs to few hundreds or few thousands less than Rs.5,000/-at any time. There are more than 150 gold smiths who are making ornaments for us and they make ornaments others also. When they do our job, we insist (hem to make it in our workshop as a measure of security for our gold. None of them is paid more than Rs.20,000/- at any time and the total payment to a single gold smith in the entire financial year would be less than Rs.50,000/-. The provisiom of Section 194C are inapplicable to us for the above reasons. Since the provisions of Sec.194C are inapplicable we have not made any deduction from such payments. Hence (here is no justification for disallowing the above expenses".

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(ii) The assessee's contention is not acceptable because as seen from the ledger Extract produced there are about 25 persons who did ornaments in the assessee's business premises. Assessee has stated that there are above 150 works man who were paid wages anything around few thousands but not more than Rs.5,000/- The reply filed is far from truth, when compared with the ledger extract submitted by the assessee. As per the ledger extract, the list of persons who have received the making charges is listed below in order to disprove assessee's contention.

As per the provisions of Section 194C of the Income tax Act, any person making payment of Rs.20,000/- at a time or Rs.50,000/- in a year, requires to deduct tax at source at the time of making

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the payments. According to assessee, there is no written contract entered between the assessee and the labourers. Hence TDS provisions is inapplicable. The work is done in his business premises and the payment is made to the persons depending upon the work entrusted to them. It was also explained that the job involves skilled workers, the wages are demanded as per the work and after negotiations they finally pay them , which means ultimately the assessee pays to one single person and he in turn pays it to the other persons who finally gives the finishing touches to the ornament ultimately making it ready for sale. The ledger extract filed in this office also shows that the amount is paid to a single person as is listed above and the assessee cannot take a plea that it is paying to all the workers depending upon their work. It is assessees responsibility to deduct taxes on the amount wherever it exceeds Rs.20000/- one time and Rs.50,000/- in a year as per the provision of Sec. 194C. Hence, the above payments attracts the provisions of section 194C thereby the assessee should have deducted TDS wherever the amount has exceeded Rs.20000/- or Rs.50,000/-.

He cannot discharge the duties of the main labourers by disbursing the wages to all the persons. The assessee is utilizing the above tool to camouflage that section 194C is inapplicable in his case. Therefore, assessee's contention is rejected on the ground that, though there is no written contract entered into between assessee and labourers, there is oral contract exists between the persons and the assessee. This is evident from the list reproduced as in the earlier paragraphs of this order.

A proposal was sent to the assessee on 24.12.2009, proposing to disallow the amount of expenditure debited to trading account amounting to Rs.31,10,253/- towards making charges, posting the case for hearing on 29.12.2009. Assessee did not respond to the above letter. In turn, he filed a revised ledger account showing the making charges paid to the workers as on 31.12.2009 without any explanation for filing the revised ledger account. On verification of the same, it is seen that the assessee has incorporated as many number of workers for whom cash payment is made as per the ledger extract filed.

In the light of the above, the assessee’s claim of Rs.30,35,224 being expenditure on making charges is disallowed and added back to the Income returned as per provisions of Section 40(a)(ia)of the Income Tax Act.”

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under :

“6. The ground No.3 including the sub paras 3.1 to 3.4 pertains to the disallowance of Rs.30,35,224/- u/s 40(a)(ia) of the Act. The facts of the case are that the amount was paid by the appellant to various persons as making charges. The AO verified the details from the appellant's books and found that the amount was paid to 25 different persons and in 22 cases, the amount paid was exceeding Rs.50,000/- in individual case. The details are mentioned on page 8, 9 and 10 of the assessment order. The total making charges debited in the name of 25 persons were Rs.31,10,253/-. Out of this, Rs.75,029/- were paid to 3 persons. In each case the payment was less than Rs.50,000/ in the full year. Hence this was allowed by the AO. However, in the remaining cases, the AO found that in each individual case total payments during the year exceeded Rs.50,000/- and therefore, the appellant should have done TDS. The appellant failed to deduct tax as per provisions of see 194C and therefore the expenditure was disallowed u/s 40(a)(ia).

6.1 The appellant argued that he employees a number of workers who are goldsmiths and work under the control and supervision of the appellant. The work is done in the appellant's premises by these goldsmiths. They are employees of the appellant and the wages paid to them are debited under the head 'making charges'. According to the appellant, the wages are assessable in the hands of the goldsmiths as salary. There is no works contract between the appellant and the goldsmiths and therefore, provisions of sec 194C are not applicable.

6.2 I am not inclined to agree with the appellant. As per the facts disclosed to the AO, the persons who were paid making charges were not employees of the appellant. The appellant has not furnished any details regarding the basis of the making charges paid to each of the 23 persons but it appears from the AO's observations that making charges were paid to each person according to the work completed by him. It is also mentioned in the assessment order that the 23 persons who were paid making charges were actually paid as lead persons for the work completed by their team. This lead person in turn paid to the other workers. But as far as the appellant is concerned, the

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payment is made to the lead person for the work done by himself or his team. Thus there is an implied contract between the appellant and such persons who have been paid the making charges. The provisions of sec 194C are clearly attracted. Even if we assume that the 23 persons who were paid making charges were employees of the appellant, then also in most of the cases TDS provisions are attracted because payment to each individual person exceeded the minimum taxable income. The appellant should have deducted tax u/s 192. The disallowance is therefore, confirmed. The ground of appeal is dismissed.”

has not let in any material to dislodge them. In view of that facts and

circumstances, we dismiss the assessee’s appeal ground no 3, supra. In

the result, the CO is dismissed.

dismissed.

Order pronounced in the open court on 11th day of November, 2016.

Sd/- Sd/-

(VIJAY PAL RAO) (S. JAYARAMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

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