M/S AGROHA ORNAMENTS,,GWALIOR vs. ACIT., CENTRAL, GWALIOR

Assessment Proceedings 2.1 The assessee being resident firm is stated to be engaged in jewellery business. The assessee was subjected to search action u/s 132(1) on 01-12-2016. The firm was constituted on 30-08-2016. It was reconstituted on 19-10-2016 and the new partners were Shri Naveen Jain and Shri Madan Parihar. 2.2 During the course of search, it was noted that the assessee deposited cash of Rs.12.76 Crores in its two bank accounts held with Yes Bank and Axis Bank during demonetization period. The statement of Shri Naveen Jain was recorded u/s 132(4) in which he stated that cash was sourced out of sales. However, he could not produce documentary evidences. 2.3 In response to notice u/s 142(1) during the course of assessment proceedings, the assessee stated that the firm started its operations only in August 2016 and the deposits were out of sales. The assessee furnished purchase register and creditors ledgers. Except for purchases of Rs.65.09 Lacs, all the purchases were stated to be made after 14.11.2016 whereas the sales were made earlier. The complete details were not mentioned on sales bills. The Ld. AO also alleged that the assessee did not maintain proper stock records. After rejecting, assessee’s vehement arguments, Ld. AO added the deposits of Rs.12.76 Crores u/s 69A and framed the assessment. Appellate Proceedings 3.1 The assessee assailed the impugned additions by way of elaborate written submissions. The assessee contended that Ld. AO examined the books of accounts containing sales, purchases and bullion received from melting centers were was fully recorded in stock register. The sales were fully accepted by Ld. AO. The assessee also submitted the affidavits of the partners and proprietors of melting centers in respect of bullion received from melting centers. The stock so received by the assessee was sold. No fault was found in the affidavits as filed by the assessee. 3.2 The Ld. CIT(A) noted that through these affidavits, it was claimed that due to demonetization, the prices of gold increased substantially and therefore, the owners of gold demanded their gold and the melting centers purchased gold from the assessee firm and the same was returned to the customers by the melting centers. The assessee also filed ledger account of purchases and sales. Shri Naveen Jain, in statement u/s 132(4), made voluntary disclosure of Rs.2 Crores. However, the statement was retracted after 22 months from the date of search. The Ld. CIT(A) held that entire sales could not be held to be profit of the assessee as per the decision of Hon’ble MP High Court in the case of CIT vs. Balchand Ajit Kumar (263 ITR 610) and also in the case of Manmohan Sadani vs CIT (304 ITR 52). In these decisions, it was held that total sales could not be regarded as the profit of the assessee rather it was net profit rate which was to be adopted in such cases. Reliance was placed on various other judicial decisions to support this conclusion. Therefore, Ld. AO erred in adding the entire cash deposit which was generated out of recorded and unrecorded sales affected in cash. Only profit embedded therein has to be charged to tax. The assessee stated that entire quantity received from melting centers received for conversion and manufacturing of ornaments being not purchase, it was not entered in purchase account but due to abnormal and unprecedented demand of gold and bullion, the same was sold and later on returned to melting centers. The same would show that few of the purchases were also not recorded. The assessee declared profit of 2.58% on regular sales. In the light of judicial decisions of jurisdictional High Court, by applying this rate, Ld. CIT(A) estimated the income of assessee at Rs.32.92 Lacs. However, the partner of the assessee firm made voluntary disclosure of Rs.2 Crores in statement recorded u/s 132(4). The admission would be a good piece of evidence though not conclusive and the same could be used against the person who makes it. Therefore, considering the admission so made, the impugned addition was restricted to the extent of Rs.2 Crores and the remaining addition was deleted which has led to cross-appeals before us. Our findings and Adjudication 4. From the facts as borne out of records, it could be ascertained that the assessee came into existence on 20-08-2016 and the search happened within a short span of time on 01-12-2016. During the course of search, no incriminating material has been found which would show that the assessee earned unaccounted income of impugned magnitude within short span of time. The assessee, undisputedly, carries out the business of jewellery. It transpired that the assessee deposited cash of Rs.12.76 Crores in two bank accounts. During search, statement of Shri Naveen Jain (Partner) was recorded. The assessee furnished explanations and stated that cash deposit was out of sales proceeds of bullion and gold ornaments which was duly recorded in the books of accounts i.e., in the stock register in Tally data which was also seized by search party. It was also explained that apart from purchase of bullion and jewellery, the assessee had received bullion from gold melting centers for conversion of bullions into ornaments. Since the gold prices increase abruptly at the time of demonetization, the assessee sold the bullions so received from melting centers and later on returned bullion to these centers. In support, the assessee furnished affidavits of partners and proprietors of those entities. Apparently, Ld AO had looked into the stock register by only considering the quantity as recorded in the purchase account but overlooked quantity as recorded in stock register which apart from purchases, also recorded the gold / bullion as received from melting centers. Further, the cash so deposited by the assessee was duly recorded in the cash book. The assessee also placed on record, the affidavits of melting agents (Page Nos.16 to 34 of the paper- book) from whom the bullion was received. However, no credence was been given by Ld. AO to these affidavits and no independent enquiries have been conducted to verify the veracity of the same. The assessee has also placed on record, the copies of stock register of gold bullion on Page Nos.8 to 15 of the paper book which bolsters the claim of the assessee that bullion was received from melting centers. The same has been found recorded in Tally data as seized during search.