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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Pawan Singh (JM)
Per B.R. Baskaran (AM) :-
The appeal filed by the Revenue is directed against the order dated 10.4.2014 passed by the learned CIT(A)-37, Mumbai and it relates to A.Y. 2011-12. Grounds of appeal urged by the Revenue read as under :-
(i) Whether on the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing the set off of loss incurred on sale of polished diamond goods against deemed income assessed u/s. 69A. (ii) Whether on the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the sales on account of undisclosed stock of diamond goods added u/s. 69A was business sales.
(iii) Whether on the facts and circumstances of the case and in law, the learned CIT(A) erred in treating the loss on sale of the diamonds as genuine without appreciating the fact that the assessee has sold the stock at much lower rate than that arrived at by the Government valuer.
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(iv) Whether on the facts and circumstances of the case and in law, the learned CIT(A) was right in deleting the addition of gross profit at the rate of 3.30% made by the Assessing Officer rejecting the books of accounts, relying on the various discrepancies pointed out by the Assessing Officer in his account.
The assessee is a diamond merchant. Search and seizure operation u/s. 132 of the Act and survey action u/s. 133A of the Act was carried out in the case of Asian Star Group on 29.10.2010. The assessee was also covered under the search action. The assessee filed its e-return on 29.9.2011 showing income of ` 4.05 crores. Assessment was completed u/s. 143(3) of the Act determining total income at ` 10.91 crores. In the assessment order, the Assessing Officer disallowed claim of loss incurred on subsequent sale of undisclosed unaccounted diamonds found during course of search. The Assessing Officer also added gross profit estimated at 3.3% of sale of unaccounted diamond. In the appellate proceedings the learned CIT(A) deleted both the additions and hence the Revenue has filed this appeal before us.
At the time of hearing learned counsel appearing for the assessee submitted that identical additions were made in assessee group case name M/s. ‘A’ Star Exports and the Tribunal, vide its order dated 31.5.2016 passed in ITA No. 4411/Mum/2014 has upheld relief granted by the learned CIT(A). Learned Departmental Representative also did not dispute the factual aspect presented by learned AR.
We have heard the parties and perused the record as well as order passed by the Coordinate Bench in the case of ‘A’ Star Exports (supra). We noticed that the Tribunal has deleted the identical additions made in the hands of the above said concerns with the following observations:-
We have considered rival contentions, carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. DR and AR during the course of hearing before us. From the record we found that the assessee a
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partnership firm is in the business of trading, import, export, manufacturing, wholesale and retail dealing in diamonds, gems and jewellery The main object of the assessee firm is to carrying out the business of import, export, manufacturing, wholesale and retail dealing in diamonds, gems and jewellery. The partnership business was of importers, exporters, manufacturers, processors, investors, wholesalers, distributors, retailers, dealers and indenting agent of diamonds, synthetic stones, gems and jewellery, precious and semi precious metals and miners and ornaments and article made thereof including jewellery, decorative and precious objects of arts and crafts and to cut, design polish rough diamond, gems and precious stones and that of investment and lending and to do any other business as may be mutually agreed upon by the partners. In the return of income filed for the year under consideration, the assessee has shown income under the head profit and gains of business and profession and other sources. In the search action, three loose papers were found and seized as part of Annx - 5 of the panchnama prepared on 29.10.2011 at the office premises of 114/116, Mittal Court, C-Wing, 11th floor, Nariman Point, Mumbai - 400021. These documents mention the carat value, rate per carat and total value of diamonds. In the course of search proceedings Shri Vipul Shah confirmed that these loose papers were containing stock details of M/s A'Star Exports, M/s. Asian Star Diamond International P. Ltd. and M/s. Rahil Agencies. The stock mentioned in the above referred seized papers was stated as placed in one safe located at the office premises. The stock of diamonds found from the safe was valued by the Govt. Approved valuer appointed by the Income Tax Department at the time of prohibitory order execution and was valued as follows:
Sr.No. Name of the entity Amount (Rs.)
M/s Rahil Agencies 10,56,66,666/- 2. M/s Asian Star Diamonds 10,45,70,210/- International Pvt. Ltd. 3. M/s A’Star Exports 13,47,63,640/- Total 34,50,00,516/-
The statement of Shri Vipul Shah was again recorded on 27/12/2010, wherein he admitted the unaccounted stock of Rs.34,50,00,516/- including unaccounted stock of Rs.13,47,63,640/- pertain to the assessee. The computation of the total income of the assessee had declared undisclosed income of Rs.13,47,63,640/- in the form of stock of polished diamonds under the head "profit and gains of the business and profession". In the course of assessment the assessee submitted .its explanation on why the undisclosed stock should be treated as a business
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income. In this connection it was stated that at the time of search, the investigating officers found unaccounted stock in the business premise of the assessee at 114/116, Mittal Court, 'C' Wing, 11th Floor, Nariman Point, Mumbai - 400021. This stock was valued at Rs.13,47,63,640/- by the income tax valuer. Consequently the assessee declared this amount as stock in trade and this contention of the assessee was accepted by the Investigating officer. Who has released the stock after valuation and not impounded/seized. The statement of Shri Vipul P. Shah Partner of the firm was again recorded on 20.11.2012 wherein in reply to the question no. 22 he has stated that this undisclosed income is generated through unrecorded trading of diamonds.
Q.22 Please explain as to how this undisclosed income is generated? Ans: it is through unrecorded trading of diamonds. "
It is clear from the above facts that the declaration was related to business stock in trade hence it is evident that the declaration amount is required to be assessed under the head' Income from Business or profession. Thus, the undisclosed income of Rs.13,47,63,640/- declared voluntarily by the assessee for A.Y. 2011-12, is undisclosed stock held under the customary trading of the business and hence should be treated as the business income of the assessee firm and not as undisclosed investment as held by the AO. If all the three conditions of Section 69 exist together, the unrecorded investment or value of assets can be deemed to be assessee's income of the relevant financial year. In the present case all three conditions as required under section 69 are not fulfilled because the appellant has offered explanation and nature of source of acquisition as undisclosed stock received from the unaccounted trading of diamond as source of income. The partner of the firm has time and again stated in his statement that diamond found in the premises during the search is out of unrecorded trading of diamonds hence the third part of section 69 is not satisfied hence the said stock is not taxable under section 69 of the Act.
Now, we shall deal with the decision relied on by the AO while declining set off of stock offered against business loss. The ratio of decision of Fakir Mohammed Haji Hasan (247 ITR 290) as relied on by the AO are not applicable in the present case because in the above case the assessee was found some gold and currency by the custom authority which was confiscated by the custom department. The assessee has offered the said gold as undisclosed stock and claimed the loss on confiscation of gold as business loss. The assessee was engaged in the illegal activity of smuggling of gold and said gold and currency was found from the assessee which is illegal activity which cannot be part of business stock whereas in the present case the diamond was found from the premises of the assessee and the main object of the firm is to carrying on the
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business of diamond. This judgment has been considered in later decision of the Hon’ble Gujarat High Court in the case of DCIT Vs. Radhe Developers India Ltd. [2010] 29 ITR 1 and CIT Vs.Shilpa Dyeing & Printing Mills Pvt. Ltd. [Tax Appeal No.290 of 2013. In the case of DCIT Vs. Radhe Developers India Ltd. [2010] 29 ITR 1, the Hon’ble Gujarat High Court held that :-
“26. The decisions of this court in the case of Fakir Mohmed Haji Hasan [2001] 247 ITR 290 (Guj) and Krishna Textiles [2009] 310 ITR 227 (Guj) are neither relevant nor germane to the issue considering the fact that in none of the decisions the legislative scheme emanating from the conjoint reading of the provisions of sections 14 and 56 of the Act have been considered. The apex court in the case of O. P. Sandu Bros. Chembur P. Ltd. [2005] 273 ITR 1 has dealt with this very issue while deciding the treatment to be given to a transaction of surrender of tenancy right. The earlier decisions of the apex court commencing from the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) have been considered by the apex court and, hence, it is not necessary to repeat the same. Suffice it to state that the Act does not envisage taxing any income under any head not specified in section 14 of the Act. In the circumstances, there is no question of trying to read any conflict in the two judgments of this court as submitted by the learned counsel for the Revenue.”
The same stand was re-affiremed by the Hon’ble Gujarat High Court in the case of CIT-II Vs. Shilpa Dyeing & Printing Mills Pvt. Ltd. (Tax Appeal No.290 of 2013.
In view of the above and relying on the decision of various high court and tribunal as cited by ld. AR it is clear that the stock of diamond declared during the .search is taxable under the heads of income as defined in section 14 read with section 56 and not taxable separately. As there cannot be taxable income of income out of the 5 heads of income as specified in section 14 of the Act. Hence the stock of diamond of Rs.13,47,63,640/- is taxable either under Income from Business & Profession or under income from other sources.
With regard to AO’s action for rejection of books of account u/s.145(3), we found that assessee’s books of accounts are consistent with the applicable accounting standard and there are no qualifications by the auditors of the assessee with regards to the method of accounting or accounting policies. Furthermore, the
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accounts for the above mentioned assessment year are complete and accurate as it includes the undisclosed stock of 1277.25 carats of polished diamond. From the record we found that all details as and when called for by the Assessing officer during the assessment proceedings had been timely submitted. It is to be noted that the financial statements of the assessee are fully verifiable and as such cannot establish any incompleteness or incorrectness in assessee's books of accounts. One of the reasons stated by the Assessing officer that in spite of revaluation by the assessee, it continue to record the value of diamond in its books at Rs. 13.47 crores. The Ld AO fail to appreciate the fact that appellant has declared income during search operation at Rs.13.47 crores and accordingly recorded the same in its books of accounts. The valuation carried out by another Govt. Approved valuer has nothing to do with the amount declared by the assessee but the same was done to prove on the part of assessee that the value of diamond found during the search was much less therefore the assessee has to sell it at lower value. The AO has wrongly mistaken the purpose of second valuation. Thus the assessee has fully discharged its onus to disclose this stock and offer it as income.
With regard to AO’s observation assessee maintained carat wise stock register, which is a normal practice prevalent in diamond trade. The Gems and Jewellery Export promotion Council has also recognised such practice. In fact, ACIT 16(3) Mumbai has also confirmed that diamond merchants maintained stock of diamond carat wise and this is a practice followed by diamond merchant in Mumbai as well as whole India. The Hon. Bombay High Court in the unreported judgement in case of CIT - 5 vs. M/s Sundaram Gems Pvt Ltd (ITA No.6785 of 2010) has confirmed that the maintenance of carat wise stock register is regular practice prevalent in diamond trade.
"We are of the view that the books of accounts can not be rejected without pointing out any defects in the same. The A. O. has not pointed out any defects whatsoever in the. books of accounts maintained by the assessee. In this regard, the assessee has relied on the several judicial pronouncement before us; but we deem it appropriate to refer to the decision of Hon. Bombay High Court in the case of R.B. Bansil Abirchand Spinning and Weaving Mills. Vs. CIT, 75 ITR 260; Pandit Brothers vs. CIT, 26 ITR 159 (Punjab) and Ashok retractories Co. P Ltd., 279 ITR 457. Considering facts and circumstances prevailing in the present case, we are of the view that learned CIT (A) was right in deleting the addition made by A.O."
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The CIT(A) has given categorical finding to the effect that the AO has considered gross profit based on SEZ Unit on A’ Star Exports at Surat. We found that SEZ Unit operates on fiscal benefits available to SEZ unit and is a manufacturing activity cannot be compared with trading activity. The loss has arisen because of the value considered as its cost. However, there is no evidence of cost in the books of accounts. Further the valuation made at the time of search is a mere one page summary which gives no description of the diamonds and is merely total value of 5-6 packets. Thus, no meaningful comparison can be made. The CIT(A) has categorically dealt with each and every documents and after giving detailed finding in para 4.11, reached to the conclusion that rejection of books of accounts and estimation of gross profit by the AO was not justified on the facts of this case. The findings recorded by CIT(A) are as per material on record and do not require any interference on our part.
With regard to set off of losses, once it is decided that the income is taxable under either of the head of income A to F of section 14 of the Act, then the set off losses is permitted under section 71 of the Act. The income declared at the time of search was in respect of excess stock found which was in nature of business activity therefore part of business income. Even if the said amount was to be taxed than the same should be under the head income from other sources and therefore current year loss of Rs.13,47,63,640/- have to be set off against the income in terms of provision of section 71 of the Act. Reliance can be placed on the judgment of Chensing Venture vs CIT [2007]163 Taxman 175 (Mad).
From the record we found that CIT(A) has recorded a categorical finding as per material placed on record and after relying on various judicial pronouncements dealt with the issue in great detail. Accordingly, we do not find any reason to interfere in the order of CIT(A).
In the result, appeal of the revenue is dismissed.
It was argued by ld. DR that provisions of Section 115BBE is specific provisions of the Act, according to which business loss cannot be set off against income declared during the course of search.
On the other hand, it was contended by ld. AR that Section 115BBE was inserted w.e.f.1.4-2013, whereas the assessment year under consideration is 2011-2012, hence this section is not relevant in this case, whereas the contention of ld. DR was that amendment is retrospective in nature and hence, applicable in this year also.
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We have considered rival contentions and found that by applying provisions of Section 115BBE the AO has declined set off of business loss against income declared during the course of survey/search. The provisions of Section 115BE are applicable on the income taxable under section 68, 69, 69A, 69B, 69C or 69D of the Act. The income declared by the assessee is unrecorded stock of diamond found during the course of search. The assessee is in the business of diamond trade and such stock was part of the business affair of the company. Therefore since income declared is in the nature of business income, the same is not taxable under any of the section referred above and accordingly section 115BBE has no application in case.
Furthermore, the memorandum to the Finance Bill, 2012 read on Section 115BBE reads as under :-
"Under the existing provisions of the Income-tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc., no tax is levied up to the basic exemption limit. Therefore, in these cases, no tax can be levied on these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate. In order to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit, it is proposed to tax the unexplained credits, money, investment, expenditure, etc., which has been deemed as income under section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of 30% (plus surcharge and cess as applicable). It is also proposed to provide that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Act in computing deemed income under the said sections.
This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years. [Clause 45).”
Thus, in the Act itself it is clearly mentioned that this section is applicable from 1st day of April, 2013. When the legislature itself provided that the particular provisions are applicable prospectively then submission of Ld D. R. that the section is applicable retrospectively without any basis is not tenable. Further, it is not a matter of insertion of explanation or clarification to some existing
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provisions of law. It is a new section inserted barring claim of expenses/ allowance against particular income. Therefore any bar or restrictions of a claim cannot be applied retrospectively. It is well settled rule of interpretation allowed by time and sanctified by judicial decisions that retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only as per ratio of Hon’ble Supreme Court in the case of Govinddas Vs. ITO, (1976) 103ITR 123 (SC). A statue which deals with matter of substantive law and taxation is matter of substantive law-would not be construed to have retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary implication.
As per our considered view, Section 115BBE bar from claiming any expenses or allowance from the income taxable under section 68, 69, 69A, 69B, 69C, or 69D of the Act. In the instant case before us the claim was of set off of business loss against income declared during search. There is vital difference between the loss and expenses/ allowance. Hon'b1e Supreme Court in case of CIT Vs. Wallford share & Stock brokers Pvt. Ltd ( 326 ITR 1) while discussing the issue that losses incurred in mutual fund from which dividend received, cannot be considered for the purpose of section 14A of the Act and held that:
"We may reiterate that one must keep in mind the conceptual difference between loss expenditure, cost of acquisition, etc. while interpreting the scheme of the Act."
In view of the decision of Hon’ble Supreme Court, business loss cannot be treated at par with the expenses / allowances and such business loss can be set off against any type of income as section 71 do not debar from setting off such losses.”
Consistent with the view taken by the co-ordinate bench in the above cited case, we also hold that the order passed by Ld CIT(A) on all the issues does not call for any interference.
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In the result, the appeal of the revenue is dismissed. Order has been pronounced in the Court on 23.11.2016
Sd/- Sd/- (PAWAN SINGH) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 23/11/2016 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai PS