SHRI JAYANTILAL P. SATIKUNVER,,RAJKOT-GUJARAT vs. THE COMMISSIONER OF INCOME TAX-III,, RAJKOT-GUJARAT

आदेश / O R D E R

PER BENCH:

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax -III, Rajkot [Ld. CIT) in short] dated 15/07/2014 arising in the matter of assessment order passed under s. 263 of the Income Tax Act, 1961 (hereinafter referred to as "the Act") relevant to the Assessment Year (A.Y.) 2010-11.

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- 2 - 2. The only interconnected issue raised by the assessee is that the learned CIT erred in holding the assessment framed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of Revenue and therefore directed to make various additions to the total income.

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- 3 - stock register but the same was not part of the financial books of accounts. Thus, there was no difference in the quantity of gold stock found based on the documentary evidence. The assessee in support of his contention filed the copies of the agreements showing the borrowings of gold from the relatives which was used to display in the showroom. However, ld. CIT was not satisfied with the reply of the assessee on the reasoning that there was nothing mentioned in the impugned stock register that the quantity of gold received from the relatives were returned back to them. Similarly, in the statement furnished by the assessee at the time of survey, he has clearly admitted in reply to question No. 18 that there was no stock lying in his business premises belonging to other persons or firms. Likewise, even in the earlier assessment years there was nothing recorded in the audit reports that the stocks of 22 karat of gold belonging to other parties were recorded in the books of accounts. The agreements between the assessee and the relatives showing the receipt of gold were made in the month of October 2009 whereas the difference in the stock as discussed above relates to 31 March 2009 and 1 April 2009. Accordingly, no credence can be given to such agreements. Furthermore, all the agreements were worded identically. Similarly, the gold was received by the assessee from the relatives who were under the direct influence. In view of the above facts, the learned CIT rejected the contention of the assessee and direct the AO to make the addition of - 1,43,09,724.00 by observing as under:

Keeping in view the above facts, it is evident now that the assessee has introduced his own unaccounted stock of 21590.402 gms of 22 Ct gold ornaments on 01/04/2009 in his regular books of accounts under the garb of opening stock. Though reasonable opportunity has been allowed to explain the same, the assessee has failed in explaining the same satisfactorily. As on 01/04/2009, cost of fine gold was Rs.1510/- per gms; accordingly cost of gold content in 22 Ct gold ornaments is worked out to Rs.2,98,81,116/-. Needless to say that there is cost towards the ornaments making charges from gold which was Rs.1,09,13,374/- the gross hem labour expenses as given by the assessee, during the revisionary proceedings, for 66773.676 gms of 22 ct gold (closing balance + sales – opening balance) during the relevant period. Thus total cost of 31590.402 gms of 22 Ct gold ornaments is to be assessed at Rs.34,96,350/- (Rs.161.94 per gms). Under the circumstances, the Assessing Officer is directed to make an addition of

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- 4 - Rs.1,43,09,724/- on account of unaccounted excess golg ornaments recorded in opening stock as on 01/04/2009. The assessee has not only concealed but also furnished inaccurate particulars of his income, appropriate penalty proceedings are also be initiated for the same.

B. As on the date of survey, the difference between the physical quantity of gold stock of different purity and the quantity of the books of accounts were found which was valued at - 3,05,35,145.00 as per the rate of the gold according to its purity. However, the learned CIT was of the view that gold ornaments of different purity can be valued in the manner as detailed below:

(i) Cost of the metal (i.e., gold, platinum, silver etc) including the soldering metal. (ii) Cost of the precious and semi-precious stones (diamonds, ruby, pearls, emerald, sapphire etc) studded in the jewellery. (iii)Making/labour charges depending on nature of artery, design, polish and look of the piece of jewellery.

B.1 However, the making charges which constitute approximately 10 to 15% or 25 to 30% depending upon the design of the gold ornaments, has not been considered while valuing the unaccounted stock found as on the date of survey. On question by the learned CIT, the assessee has explained that the valuation of the unaccounted stock as on the date of survey was made by the government approved valuer. Furthermore, such value was inclusive of the labour expenses/ making charges. According to the assessee, it has claimed labour charges amounting to - 46,38,738.00 in the trading account and - 53,33,789.00 in the profit and loss account which were verified in the assessment proceedings. Thus, it was contended by the assessee that the valuation of the unaccounted gold/ornaments/jewellery of different purity have been made as on the date of survey after considering the labour charges/making charges. However, the learned CIT disregarded the contention of the assessee by observing as under:

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- 5 - On going through the records, it is noticed that the assessee has paid labour charges at the rate of Rs.112/- per gram for making ornaments given on job work in Oct., 2009. Unaccounted jewellery of different purity found was weighing to 21071.323 gms. Accordingly, jewellery making charges are determined at Rs.23,59,988/- for unaccounted stock of jewellery found during survey. The assessment made by the Assessing Officer on this count is, therefore, set aside. The Assessing Officer is directed to add the aforesaid labout charges integral to the valuation of unaccounted stock of gold jewellery found during the survey.

C. The learned CIT further found that the assessee has valued closing stock shown in the books of accounts taking the average cost which is not in consonance with the accounting standard 2 i.e. valuation of inventories, issued by the ICAI. According to the learned CIT the ornaments are studded with diamonds and other precious stones as well as artwork of different purity. These items of gold ornaments of different purity cannot be interchanged with other items. Thus, according to the learned CIT, the basis adopted by the assessee for valuing the closing stock based on average cost is not proper and is not in consonance with the accounting standard issued by the ICA I. Accordingly, the learned CIT set aside the issue to the file of the AO for fresh verification by observing as under:

During the revision proceedings, the assessee was asked to provide necessary information enabling this office to value the closing stock as per clause 14 of AS2. However, he did not produce any information in this regard. Therefore the matter is restored to the file of Assessing Officer, who will assessee the value of gold ornaments in closing stock as per clause 14 of AS2, after giving reasonable opportunity to the assessee and will finish the proceedings within two months of the receipt of this order. The assessee shall extend all necessary co-operation as per requirement of the Assessing Officer so as to facilitate the proceedings in the time limit given. In case, the assessee fails to do so, the Assessing Officer will complete the proceedings on the basis of evidences available on record b y the timeline given above.

D. The learned CIT also found that there were wristwatches of - 1,78,060.00 as per the inventory of the stock found during the course of survey but the same were not shown in the books of accounts. Likewise, these wristwatches were not available physically. Thus, it was concluded by the learned CIT that these have been sold without recording the same in the

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- 6 - books of accounts. Accordingly, the learned CIT directed the AO to make the addition by observing as under: Under the circumstances, it is held that the assessee has acquired wrist watched of Rs.1,78,060/- from his unaccounted income. Further, as the wrist watched are not found either in closing stock or fixed assets, hence it is held that the assessee had sold the same. Therefore, further addition of Rs.50,250/- on accont of GP @ 28.22% (G.P. ratio for the year) is made for gross profit earned on sales of wrist watches. The assessment made by the Assessing Officer on this count is, therefore, set aside. The Assessing Officer is directed to add the aforesaid amount on account of unaccounted stock os wrist watches and GP thereon and initiate the penal proceedings as per law.

E. The learned CIT found that the assessee has received gift from his son in the form of gold which was accounted in the books of accounts as capital receipt. The assessee subsequently has converted the gift as stock in trade. According to the learned CIT conversion of capital asset into stock in trade is a transfer within the meaning of the provisions of section 45(2) of the Act and therefore the same is liable to tax under the head capital gain. The cost of acquisition of such gold received as a gift was - 90,05,389.00 and the same was converted at the market value at -1.72 crores leading to a difference of - 81,94,611.00 which represents the short-term capital gain but the same was not verified by the AO during the assessment proceedings. Therefore, the ld. CIT directed the AO to make the addition to the total income of the assessee by observing as under: As discussed above, the full value of the consideration is Rs.1,72,00,000/- and cost of acquisition of the asset is Rs.90,05,389/- the short term capital gain arising from transfer of the capital asset in to stock in trade is worked out as under: Full value of consideration: Rs.1,72,00,000/- Less: Cost of acquisition : Rs.90,05,389/- Short term capital gain : Rs.81,94,611/- Thus the assessee would be liable to income tax on STCG of Rs.81,94,611/-. The Assessing Officer did not verify this aspect at all, therefore, the order passed by him is held to be erroneous and prejudicial to the interest of the revenue. He is directed to add this sum to total assessed income, charge the tax as per law and initiate the penal proceedings u/s.271(1)(c) of the Act.

F. The learned CIT on examination of the assessment records found that the assessee has shown income from the running of windmill which was used to generate the power amounting to - 43,79,129.00 in addition to the

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- 7 - guarantee claim of - 5,14,356.00. The assessee against such income has claimed only direct expenses i.e. operational and maintenance expenses of - 7,73,201.00 only. As such, the assessee has shown net profit from such activity for - 40,10,342.00 only which was claimed as exempted under section 80-IA of the Act. However, the ld. CIT found that 1 There was no separate book of account maintained by the assessee with respect to the windmill business. 2 Against the income of windmill, the assessee has claimed only the direct expenses without claiming any fixed and variable overhead. 3 In the financial year 2007-08, there was huge secured loan from the HDFC bank but no such loan was shown in the balance sheet in the year under consideration. 4 There was no finding about the source of investment made by the assessee in the windmill business.

F.1 Based on the above, the learned CIT found clarification from the assessee. The assessee in response to such notice submitted that he is maintaining separate books of accounts with respect to its windmill business without which it was not possible to work out the profit. There was overdraft facility available with the assessee from the HDFC Bank but the same was closed as there was no utilization. As such the assessee claimed that the amount of profit shown from the wind mill business was correct and as per the provisions of law. However the learned CIT was not satisfied contention of the assessee that there was separate books of accounts maintained by the assessee with respect to windmill business. As such on perusal of the records it was found that the combined books of accounts were maintained for jewellery and windmill business as evident from the audited financial statements. As such the ld. CIT was of the view that the expenses in the nature of fixed and variable overhead pertaining to windmill business have

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- 8 - been attributed against the jewellery business. This fact was not verified by the AO during the assessment proceedings. Thus the learned CIT after considering the indirect expenses and the depreciation allocated in the ratio of turnover of both the business of the assessee and worked out a sum of - 7,52,199 which was to be allocated to the windmill business. As such learned CIT directed the AO to make the addition for a sum of - 7,52,199.00 to the total income of the assessee by observing as under: As the assessee has earned profit of Rs.32,58,143/- only from his windmill business, the same is eligible for deduction u/s 80IA of the Act. Thus the Assessing Officer has allowed excess dedcuction u/s.80IA of the Act. Thus the Assessing Officer has allowed excess deduction u/s.80IA of the Act by Rs.7,52,199/-. He is directed to restrict the deduction u/s.80IA of the Act to Rs.32,58,143/- only and initiate penal proceedings accordingly for making a wrong and inaccurate claim. F2. In view of the above, the learned CIT held that the order passed by the AO under section 143(3) of the Act is erroneous insofar prejudicial to the interest of revenue for the reasons as discussed above and therefore, the same needs to be revised the manner as discussed above.

6.1 As per the learned AR, there were filed various documents and contentions were also raised by the assessee before the ld. CIT with proper explanation which were supported based on the documentary evidence. But the learned CIT has

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- 9 - directed the AO to make the addition without the necessary verification. Thus, it was prayed by the learned AR that instead of directing to the AO for making the addition, the direction of the learned CIT can be suitably modified for re- examining the issue afresh after giving necessary opportunity to the assessee.

6.2 Without prejudice to the above, the ld. AR further contended that the difference in the quantity of the stock of 22 carat gold represents the gold loan received from the relatives by the assessee. Such gold loan was not own by the assessee during the survey proceedings. Since the gold loan was belonging to the relatives, it cannot be reflected in the financial statements as on 1-04-2009.

6.3 However, such gold received on loan was shown in the stock register. The quantity of gold received on loan was based on the agreements. But, the learned CIT has referred to the loan agreements of the current year only. As such, the similar loan agreements were also made in the earlier years but the same were not considered by the ld. CIT.

6.4 The learned AR with respect to addition made for the labour charges contended that the unaccounted stock was valued by the Government valuer which was also accepted by the survey officer. Thus question of enhancing the unaccounted stock which has already been offered in the income tax return by adding labour charges /making charges does not arise.

6.5 The learned AR with respect to the direction given by the learned CIT for valuing the closing stock in the manner provided in the accounting standard 2 i.e. valuation of inventories issued by the ICAI, has not advanced any argument. As such, the learned AR for the assessee was agreed with the direction issued by the learned CIT.

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- 10 - 6.6 The learned AR with respect to the addition made for the wristwatch for Rs. 2,28,310.00 contended that there was no question raised by the survey team during the survey proceedings for the so called wrist watches and therefore the same cannot be added in the revised proceedings initiated under section 263 of the Act. It was also contended by the learned AR that the assessee does not deal in the business of wristwatches.

6.7 The learned AR with respect to the conversion of gold received by way of gift as stock in trade contended that short-term capital gain computed by the learned CIT in the proceedings under section 263 of the Act was subject to tax year in which such converted stock in trade is sold. It was submitted by the learned AR that the provisions of section 45(2) requires to tax the income arising on the conversion of capital asset as stock in trade in the year in which such stock is sold out. Thus, it was requested paid by the learned AR to provide the direction to the AO to work out income on conversion of such capital asset into stock in trade in which it is sold.

6.8 The learned AR with respect to windmill business contended that the assessee is maintaining separate books of accounts and there was no expense attributable to windmill business has been diverted to the business of the jewellery as alleged by the learned CIT under section 263 of the Act.

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- 11 - reasons. All the allegations/reasons based on which the learned CIT has held the assessment order as erroneous insofar judicial to the interest of revenue have been elaborated/ discussed in the preceding paragraph. As far as the facts of the disputes are concern, there is no ambiguity. Accordingly, for the sake of brevity and convenience, we are not inclined to repeat the same.

The 1st controversy arises whether the direction given by the learned CIT 8.1 for making the addition on account of difference in the quantity of stock found as on 1 April 2009 viz a viz 31 March 2009 is correct and proper. There is no ambiguity to the fact that as a result of survey operation at the premises of the assessee, the difference in the stock was found. Before we touch upon the issue involved on hand, it is pertinent to make a note of the fact that as a result of survey operation, there was found difference in the physical stock viz a viz the stock shown in terms of quantity in the books of accounts. Such difference in the stock was offered by the assessee as income in the income tax return. To this effect, the relevant finding recorded in the order of the ld. CIT reads as under:

A survey u/s.133A of the IT Act was carried out in the business premises of the assessee on 12-14/10/2009 wherein a disclosure of Rs.3,0,35,145/- was made by the assessee on the grounds of difference in stock of items of various categories and difference in cash balance as on the date of survey.

8.2 From the above finding, it is revealed that whatever was the difference in the stock between the books as well as physical quantity has already been suffered to tax. Thus the question arises with respect to the difference found in the quantity of stock between the financial statements viz a viz stock register as discussed above whether the same represents the income of the assessee. Indeed, such difference arises only on the basis of the paper as discussed above. As such nothing was found out by the revenue based on any tangible materials. In other words, if there was excessive stock, as reflected in the stock register, than the quantity shown in the financial statements as on 31 March 2009 viz a viz 1st of April 2009, a question arise where the excess stock has gone? Such excess

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- 12 - quantity of stock, should either be available physically, or the same should have been sold in the open market. As far as the difference in the physically stock viz a viz books stock is concerned, the same has been duly adjusted and the same is not in dispute. Likewise, there was no whisper in the order of the ld. CIT to the effect that such stock was sold in the open market without recording the same in the books of accounts. Accordingly, we hold that such difference, in the stock in the case on hand, based on papers cannot be subject to further addition in the hands of the assessee in the absence of tangible materials. Thus, to our understanding, the addition as made by the learned CIT is not warranted in the given facts and circumstances until and unless it is supported by the some corroborative evidences. As such the income does not depend on the piece of paper, rather it should be based on the tangible materials in the given facts and circumstances.

8.3 Be that as it may be, the assessee in the given facts and circumstances has tried to explain the difference in the quantity of stock as discussed above by producing the agreements in support of his contention that he has borrowed gold loan from the relatives which was recorded in the stock register for the purpose of the quantity and without recording the same in the financial statements. This contention, of the assessee was rejected by the learned CIT for various reasons as discussed above. To our understanding the learned CIT before rejecting the contention of the assessee, he should have called for the parties for the cross verification. But he has not done so. To our understanding, to meet the principles of natural justice, it is necessary upon the authorities before rejecting the claim of the assessee to carry out the necessary verification and due diligence. But in the given facts and circumstances, we find that no confirmation was received from the respective parties from whom the assessee has claimed to have borrowed the gold loan. Maybe, the argument/ the contention of the assessee is not based on the corroborative material and suffers from several infirmities, but to our understanding to meet the end of justice, it becomes qua sine none that the

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- 13 - revenue authorities have to carry out the necessary inspection/ verification as deemed necessary before rejecting the claim of the assessee. Indeed the learned CIT has pointed out certain infirmities in the contention of the assessee which have been elaborated in the preceding paragraph, but based on this the claim of the assessee cannot be denied without carrying out the necessary independent verification/ examination of the facts and the records. In the case on hand, the learned CIT has directed to make the addition but we are not inclined to confirm the same in the absence of necessary verification. Thus, in the interest of justice and fair play, we modify the direction of the learned CIT passed under section 263 of the Act. As such we are set aside the issue involved in the appeal before us to the AO for fresh/ de-novo examination of necessary verification without getting influenced by the finding of the learned CIT as well as our observation discussed above.

8.4 With respect to the allegation of the learned CIT that the unaccounted stock found during the survey has been valued without incorporating the making charges/ labour expenses which the assessee must have incurred with respect to the unaccounted gold ornaments/jewelries, in this regard, it seems to us that any addition in the unaccounted stock has tax neutral effect. It is for the reason that the unaccounted stock once has been brought in the books of accounts at a lesser value but corresponding sales would certainly be at a higher value which would offset the labour charges added by the learned CIT in the unaccounted stock.

8.5 For example, if it is assumed that there was 100 grams of gold ornaments found as unaccounted and the same has been valued at -1 lakh only which represents the market value. In other words, labour charges were not included in such valuation. Now the assessee will incorporate -1 lakh in the books of accounts. Out of 100 grams of gold, if the assessee makes of sale of 20 grams of gold in the year under consideration, then the assessee will naturally claim lesser

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- 14 - expenses against the sale of 20 grams of gold which would result higher income to the assessee.

8.6 Likewise, the remaining 80 gram of gold will be shown in the books of accounts which will certainly be at the lesser value as it was not inclusive of labour charges. But such closing stock will become the opening stock of the next year, which will reflect greater profit if such stock is sold. However, these facts have not been verified by the learned CIT while directing the AO to make the addition for Rs. 23,59,988.00 representing the labour charges/making charges attributable to such unaccounted stock.

8.7 Furthermore, we also note that there is no direction given by the learned CIT to give effect of the amount enhanced by adding labour charges /making expenses in the unaccounted stock found during the course of survey while recording the same in the books of accounts.

8.8 To our understanding, the claim of the assessee cannot be denied without carrying out the necessary independent verification/ examination of the facts and the records. In the case on hand, the learned CIT has directed to make the addition but we are not inclined to confirm the same in the absence of necessary verification. Thus, in the interest of justice and fair play, we modify the direction of the learned CIT passed under section 263 of the Act. As such we are set aside the issue involved in the appeal before us to the AO for fresh/ de-novo examination of necessary verification without getting influenced by the finding of the learned CIT as well as our observation discussed above.

With respect to the 3rd allegation of the learned CIT, the learned AR did not 8.9 advance any argument. Rather, the learned AR agreed to the direction issued by the learned CIT with respect to the valuation of the inventories in pursuance to the accounting standard 2 i.e. valuation of the inventory issued by the ICIA.

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8.10 With respect to the 4th allegation of the learned CIT for the additions of Rs. 2,28,310.00 on account of wrist watches, in this regard, we note that the primary onus lies upon the assessee to furnish the necessary details. For this purpose, we refer the provisions of section 292C of the Act which reads as under: 56[Presumption as to assets, books of account, etc. 292C. 57[(1)] Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search under section 132 58[or survey under section 133A], it may, in any proceeding under this Act, be presumed59— (i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person; (ii) that the contents of such books of account and other documents are true; and (iii) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person's handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.]

8.11 At the time of survey, the physical stock of the wristwatches were found which was not accounted in the books of accounts. Even the assessee has not recorded the same in the financial statement prepared as on 31.3.2010. As such, the assessee has neither shown the watches in the inventory nor in the schedule of fixed assets. Thus it was noted by the learned CIT that the assessee has been sold in the open market. The assessee has not explained the source of investment in such watches. Therefore, the addition was sustained along with the profit in the hands of the assessee. The finding of the learned CIT has not been controverted by the learned AR for the assessee based on the documentary evidence. There is no force in the argument of the assessee that it does not deal into the business of the wristwatches. Assuming, the contention of the learned AR is to be true, then also the assessee is under the obligation to explain source of investment or prove that the same does not belong to him. But the assessee has failed to do so. Accordingly, we do not find any infirmity in the order of the learned CIT passed

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- 16 - under section 263 of the Act with respect to the difference found in the physical quantity of stock for the wristwatches.

8.12 With respect to 5th allegation of the learned CIT for the addition of - 81,94,611 on account of conversion of capital asset as stock in trade, we are inclined to refer the provisions of section 45(2) of the Act which reads as under: 42[(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a 43business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.]

8.13 Upon the perusal of the above provision, there remains no ambiguity that the conversion of capital asset into stock in trade is a transfer within the provisions of section 45 of the Act and therefore the same is subject to tax under the head capital gain. But the liability for the tax rises in the year in which such converted stock in trade is sold out. There is no finding of the learned CIT about the fact whether converted stock in trade was sold. In the absence of such information, the finding of the learned CIT is not sustainable by making the addition in the hands of the assessee. Accordingly, we modify the direction of the learned CIT to the extent that the question of capital gain will arise in the year in which such quantity of converted stock is sold out. Thus, we set aside the finding of the learned CIT and direct the AO to compute the capital gain on the conversion of capital asset into stock in trade in the year in which such stock in trade is sold out to the customers as per the provisions of law.

8.14 With respect to the 6th addition of Rs. 7,52,199.00 on account of allocating the expenses to the Windmill business, in this regard we find that the assessee is claiming that he is maintain the separate books accounts whereas the learned CIT held that the assessee is not maintaining the books of accounts. Thus we find contradiction in the submission of the assessee and the finding of the learned CIT.

ITA No.469/RJT/2014 A.Y.2010-11 - 17 - It is also important note that the assessee has declared the profit respect of windmill business amounting to Rs. 40,10,342.00 which is not possible to work- out without maintaining the books of accounts. However, in the interest of justice and fair play we are inclined to set aside the issue to the AO for fresh adjudication as per the provisions of law.

8.15 In view of the above, we modify the direction of the ld. CIT under section 263 of the Act to the extent as discussed above. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes.

This Order pronounced in Open Court on 08/07/2022.

Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Rajkot, Dated 08 /07/2022 manish