SUROVI MANSION JEWELLERS PVT LTD,KOLKATA vs. I.T.O WD - 12(1),KOLKATA, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

It was submitted that when customers exchanged their old ornaments in place of new ornaments then assessee accounts for purchase and sale of the ornaments simultaneously. The difference between purchase & sale value is settled either by cash or account payee cheque. In such a situation, assessee issued two invoices – one for purchase of ornaments and other one for sale of ornaments. Similarly, assessee records the payment transactions against the purchase and receipt transactions against the sale of ornaments in the cash book. However, in the actuality the transaction will only be settled with the customer at the amount of the difference arising between purchase and sale value of ornaments. The AO on examining the cash book found that payment for old gold purchase account exceeds ₹20,000/- and as such it violates the provisions of section 40A(3) of the Act. The plea of the assessee that the transaction of purchase and sale of the ornaments should be verified in the context of net of purchase-sales was disregarded by the AO. During the assessment proceedings, AO found that the assessee has made purchase of ornaments exceeding the payment of ₹20,000/- which aggregates to Rs. 28,69,878/-. The AO also observed that such transaction is also not falling under any of the exception category as specified in rule 6DD of Income Tax Rules 1962 and finally disallowed a sum of ₹28,69,878/- for the violation of the provisions of section 40A(3) of the Act and added to the total income of the assessee.

Surovi Mansion Jewellers Pvt Ltd. v. ITO Wd-12(1) Kol. Page 3 4. Aggrieved, assessee preferred an appeal to learned CIT(A) who confirmed the action of AO by observing that the additions was made for the violation of section 40A(3) of the Act on account of the payment for purchase of old ornaments exceeding Rs. 20,000/-. Accordingly the plea of assessee was rejected that the aforesaid disallowance relates to the transactions of purchase of old ornaments in exchange of new ornaments and transaction of purchase of old ornaments should be viewed in the context of net figure of purchase and sale.

Being aggrieved by this order of Ld CIT(A) assessee is in second appeal before us.

Surovi Mansion Jewellers Pvt Ltd. v. ITO Wd-12(1) Kol. Page 4 was paid to the aforesaid party. However, in the cash book both purchase & sale were recorded at the full value. The assessee also submitted that wherever the payment exceeds ₹20,000 then the payment was made by way of account payee cheque only. Besides the above, assessee further submitted that the above process of payments are permitted in terms of clause (d) of rule 6DD of Income Tax Rules. On the other hand, ld. DR vehemently supported the order of lower authorities.

5.1 From the aforesaid discussion, we find that the AO has invoked the provisions of section 40A(3) of the Act on the ground that assessee has made the payment in cash exceeding ₹20,000 for the purchase of old ornaments and the same was confirmed by the Ld CIT(A). However, from the facts of the case and submission of the assessee, we find that in none of the case the payment is exceeding ₹20,000 for the purchase of old ornaments. In all the cases where the addition was made by the AO on account of deemed payment of ₹20,000 on the purchase of old ornaments, the assessee sold ornaments in exchange thereof. As a result, the net payment was made the party for the purchase of old ornaments. However the assessee in its books of accounts was showing purchase and sale in full value and the same was also recorded as payment for the purchase and receipt for the sale in the cash book. In our considered view merely recording the connected purchase and sale transactions independently and separately instead of net adjusted amount in the cash book does not amount the violation of section 40A(3) of the Act. On examination of record of the net amount of purchase and sale of the ornaments we did not find even a single case where the payment is exceeding ₹20,000. However we find that wherever the payment exceeds for purchase more than ₹20,000, it has been made through account payee cheque only as evident from the submission of the assessee which is placed on page number 1 and 2 of the paper book. The Ld DR also failed to bring anything corroborative evidence on record to controvert the arguments of the ld. AR. In addition to the above, we also find that an exception in clause (d) to Surovi Mansion Jewellers Pvt Ltd. v. ITO Wd-12(1) Kol. Page 5 Rule 6DD of Income Tax Rules 1962 has been provided which reads as under:- “(d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee.”

In view of the above, we conclude that the assessee has not violated provisions of section 40A(3) of the Act on account of payment exceeding for the purchase of old ornaments exceeding ₹20,000. Accordingly, we reverse the orders of lower authorities and this ground of appeal of the assessee is allowed.

6. Second issue raised by assessee in this appeal is that ld. CIT(A) erred in confirming the order of AO by disallowing a sum of ₹2,53,243/- under section 40(a)(ia) of the Act considering the melting loss incurred by KARIGARS is nothing but payment made to KARIGARS without deducting TDS. For this, assessee has raised effective ground as under:- “2) That the Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.2,53,243 made arbitrarily by the Assessing Officer under section 40(a)(ia) of the Income Tax Act, 1961 on the alleged ground that the melting loss incurred by karigars is, actually, amount paid to them without deducting tax at source.”

7. The assessee hired the services of KARGARS for the making of ornaments. During the year, assessee in some cases received the lesser weight of gold from the KARIGARS and those KARIGARS were either paid lesser or no amount for their services. Accordingly the AO opined that the payment to those KARIGARS has been paid in the form of the gold. The assessee submitted that the lesser gold was received due to loss of gold in manufacturing process which is bound to happen and the same loss is also recognized in Foreign Trade Policy to the extent of 3.5% as wastage. Accordingly, the assessee submitted the working of such loss of 906.880 grams with reconciliation but failed to reconcile such loss to the extent of Surovi Mansion Jewellers Pvt Ltd. v. ITO Wd-12(1) Kol. Page 6 166.170 grams. Accordingly the AO opined that the loss on making of ornaments to the extent of 166.170 grams represents the payments to KARIGARS in the form of gold as it is excess gold left with them in lieu of making charges. The AO further opined that this payment had been made in the form of gold without deducting TDS under section 194C of the Act. Therefore it was disallowed under section 40(a)(ia) of the Act. Accordingly the AO made an addition of Rs. 2,53,243.00 (166.170 X Rs. 1524) to the total income of the assessee.

8. Aggrieved, assessee preferred an appeal to ld. CIT(A) who confirmed the action of AO by observing that the loss to the extent of 3.5% was accepted in terms of foreign trade policy as melting and manufacturing loss. The loss more than 3.5% was disallowed due to non-availability of reconciliation statement.

Being aggrieved by this order of Ld CIT(A) assessee is in second appeal before us.

11. Third issue raised by assessee in this appeal is that the learned CIT(A) erred in confirming the order of AO by making addition of Rs.45,872/- on account of non-production of the reconciliation statement of the gold deposit lying with the assessee. For this, assessee has raised effective ground as under:-.

Surovi Mansion Jewellers Pvt Ltd. v. ITO Wd-12(1) Kol. Page 8 “3) That the Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.45,872 made by the Assessing Officer on the alleged ground that the assessee could not reconcile and file evidences in respect of gold deposits lying with the assessee.

Being aggrieved by this order of Ld CIT(A) assessee is in second appeal before us.

Surovi Mansion Jewellers Pvt Ltd. v. ITO Wd-12(1) Kol. Page 9 14. We have heard rival contentions and perused the materials available on record. Before us ld. AR submitted that gold was deposited by the customers and the same has been reflected in the books of accounts and none of the liability with regard to the gold deposit has been written off in the books. Therefore the question of treating the unexplained gold as income does not arise. On the other hand the ld. DR relied on the order of authorities below.