Mehra Jewel Palace Pvt. Ltd., New Delhi vs Department Of Income Tax

BEFORE SHRI G. C. GUPTA, HON'BLE VICE PRESIDENT AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No. 2011/Del/2011 Assessment year : 2003-04 ITO, Ward 6(3), Vs. Mehra Jewel Palace Pvt. Ltd. New Delhi C-11, Connaught Place, New Delhi GIR / PAN:AAACM5178K

I.T.A.No. 2313/Del/2011 (Assessment Year 2003-04) Mehra Jewel Palace Pvt. Ltd. Vs. ITO, Ward 6(3), C-11, Connaught Place, New Delhi New Delhi (Appellant) (Respondent)

Appellant by : Shri Salil Aggarwal, Adv. Shri Shailesh Gupta, CA Respondent by : Shri P Dam Kanunjha, Sr. DR

Date of hearing : 11.03.2015 Date of pronouncement : 25.03.2015

ORDER

PER T.S. KAPOOR, AM:

These are cross appeals filed by revenue as well as by assessee against the order of Ld. CIT(A) dated 24.12.2010. The grounds of appeals taken by Revenue as well as by assessee are reproduced below:

I.T.A.No. 2011/Del/2011 (Revenue's appeal):-

"i) The order of the Ld. CIT(A) is erroneous and contrary to facts and law.

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ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.19,99,840/- made on account of undisclosed stock.

iii) The Ld. CIT(A) ignored the finding recorded by the A.O. and the fact that the Ld. CIT(A) relied on the evidences/documents which were not produced before the A.O."

I.T.A. No. 2313/Del/2011 (Assessee's appeal):-

i) The assessment made is bad in law and in facts.

ii) The Ld. CIT(A) willfully and wrongly added a sum of Rs.4,57,340/- on account of undisclosed profit.

iii) That the assessee reserve the right to add, alter, modify and subtract the any of the above and additional ground.

2. Ld. A.R. first took up the appeal of assessee and invited our attention to last para of assessment order and submitted that A.O. has made addition of Rs.4,57,340/.- holding that the assessee had in earlier years had inflated the purchases made from M/s. Mehra Jewels Pvt. Ltd. and, therefore it must have inflated purchases in this year also and therefore, he rejected trading results and applied GP rate of 15% and made the addition of difference between such GP and declared G.P. Ld. A.R. submitted that in earlier years, the assessee had earned commission/rental income from leased properties of assessee and it was the allegation of A.O. that such income has been set off against losses managed by assessee by making purchases from related parties whereas in the year under consideration, no such income was earned by the assessee and, therefore, the facts of the present case are distinguishable from the facts in earlier years. Ld. A.R. submitted that in earlier years, the Tribunal in I.T.A. No. 2311 and 2312/Del/2011 vide order dated 07.02.2014 had remanded back the issue to the file of Ld. CIT(A) for readjudication. It was submitted that the Tribunal had remitted back the issue for the limited purpose of carrying out the verification of transactions as to whether they were at the prevailing market price or not.

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It was submitted that in the present year such comparison was filed with the A.O. Ld. A.R. invited our attention to page 29 and specifically to page 30 to 33 of the paper book and submitted that in response to a specific query from the A.O., the assessee had filed details regarding purchase rates from M/s. Mehra Jewel Pvt. Ltd. and market rates and, therefore, it was submitted that in the present year, the comparison between market rate and purchase rates were furnished to A.O. and, there was no difference between the same and rather assessee had earned some profits from the purchases made from M/s. Mehrason Jewellers Pvt. Ltd., therefore, in view of above facts, it was submitted that the present case need not be sent back to Ld. CIT(A) as in the present year comparison of purchase rates with market price were furnished to A.O. and the A.O. had not found any discrepancy between the same and had arbitrarily relied upon earlier years for making the disallowance. Ld. A.R. argued that the rule of res-judicata does not apply to income tax proceedings and every year has to be looked into separately.

2. Ld. D.R. on the other hand argued that the A.O. has given clear cut findings and in this respect, last para of assessment order was read and therefore he argued that the order of Ld. CIT(A) should be upheld or in the alternative, it could be set aside to Ld. CIT(A) as done in earlier years. Ld. A.R. in his rejoinder submitted that none of the augments taken by him has been rebutted by Ld. D.R.

3. Arguing upon revenue's appeal, Ld. D.R. heavily relied upon the order of A.O. and submitted that the A.O. has clearly held that there was no sufficient stock in the books of accounts of assessee to make sales declared by it and, therefore, sales shown by assessee were out of unaccounted stock and, therefore, addition was rightly made.

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4. Ld. A.R. on the other hand submitted that detailed submissions were field before Ld. CIT(A) and Ld. CIT(A) on the basis of details submitted by assessee, has decided the issue in favour of the assessee and he heavily placed reliance on the order of Ld. CIT(A).

5. We have hard rival parties and have gone through the material placed on record. We first take up appeal filed by assessee. We find that similar issue arose in Assessment Year 2000-01 and 2001-02 and the Tribunal vide its order dated 07.02.2014 had remitted back the issue to the office of Ld. CIT(A) to carry out verification of purchase rates from related parties with the market rates. However, in the year under consideration, the assessee had filed the details regarding purchase rates and market rates and had also filed copies of Hindustan Times depicting gold rates on 13.08.2002 and 22.10.2002. The said copies are placed at paper book page 119 to 120. The assessee vide letter dated 26.12.2005 addressed to A.O. placed at paper book page 29-30 had filed explanations for the purchase prices for purchases made from related party. For the sake of convenience a part of relevance reply is reproduced below:

"2. In the earlier years, the department has disallowed trading loss on the ground that it has been set off against the commission income, to which the assessee company strongly disagrees.

However, such a situation is not there in the current year and in the succeeding years as there has been a trading profit in the current year which is apparent from the gross profit and is continuing in the succeeding years as well. There are no sales with sister concerns in the current year although there is no bar in selling to sister concern at market value.

A query has been raised as to the market rate of Jewellery purchased from sister concerns and in this regard we have to state as follows :

It has been stated earlier that purchases from parties covered u/s 40A(2)(b) are at the prevailing market rate. A separate note has already been given in this regard.

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In reply to your specific query as to the market of rate of 22ct gold jewellery purchased from Mehrasons Jewellers Pv1. Lid., it is stated as under:

We are enclosing the market rate for the dates required. DATE-: Particulars Purchase Rate/Gms Market Rate/Gms 12.082002 Recd. 22Ct Gold Jew 011 App. Rs.480/-

from Mehrasons Jew. P.Ld. 22.10.2002 Purchased 22ct Gold Jew Rs.477/- Rs.477/-

from Mehrasons Jew. PLtd 10 12.2002 Purchased New 22c1. Gold Rs.553/- Rs.489/-

Ornaments from Mehrasons Jewellers Pvt. Ltd.

(Rs.489/- +S.64/- value addition) It would be seen that the purchases and sale of the above acquired stock have been made as per market norms/rate. A analysis of the records will further show and demonstrate that from Feb'2003 onwards the company began its retails operation. The goods purchased from Mehrasons Jewellers Pvt. Ltd. @ Rs.553/- per gms had been sold with a positive value addition, i.e. the average selling price has been in the Rs.600-650 vicinity. Thus, the company has booked a handsom profit on this transaction."

6. From the above submissions of assessee, we find that the assessee had filed sufficient explanations regarding alleged payments covered by Section 40A(2b) of the Act. However, the A.O. without commenting upon the explanations of assessee, made the addition by holding as under:

"The assessee has quoted the rate of gold on the date of sales and purchase by the determining date of purchase and sales through accommodation entries was in the hand of the company and determined the date of sale in case of M/s. Barkha Exports Ltd. just earn the loss.

The explanation of assessee is also rejected a assessee company having history of entering into purchases and sale of gold and diamonds in convenience of its own associated company wherein directors or relatives of directors have substantial interest and earned huge losses in the earlier years mainly to set off the commission/rental income earned in respect of assessee's lease property which is possesses on lease basis. In the past also due to these discrepancies, the transactions are consequently losses were disallowed and the same has been even confirmed by appellate authority in respect of its own case for the earlier Assessment Year. Accordingly, it has 6 ITA Nos2011 &2313/Del/2011

been observed the assessee following similar practice to earned losses as to set off its other business income earned from retail trading activities from other parties, by showing purchases from M/s. Mehrasons Jewellers Pvt. Ltd. at the inflated prices which attracted the provision of Section 40A(2b) of the I. T. Act, 1961. Therefore, the trading result of assessee company is rejected and by taking a lenient view, the G.P. rate is taken at 15% which worked out to Rs.10,21,220/- form the already declared gross profit of Rs.5,63,880/- is reduced resulting undisclosed profit of Rs.4,57,340/- is added to the assessee's income as the income of the assessee from undisclosed profit u/s 68 of the I. T. Act, 1961.

With these remarks, income of the assessee company is computed as under:

Income as per profit and loss account (-)92,968 Add: Undisclosed trading profit as discussed above 4,57,340/-

(ii) Undisclosed stocks, as discussed above 19,99,840/- 24.57.180/-

Total income Rs.23,64,212 Penalty proceedings u/s 271(1)(c) of the I. T. Act, 1961 have been initiated as the company has deliberately set off its speculative losses against income form house property and has concealed the facts.

Assessed at Rs.23,64,212/-. Issue necessary forms. Cahrge interst u/s 234B of the I. T. Act, 1961."

7. We find that A.O. has based his findings on the basis of surmises and conjectures and that too without commenting upon the explanations of assessee. Moreover, in the present year, we find that assessee has not earned any income from lease which fact is verifiable from paper book page 8 where a copy of P & L account is placed and where there is nil other income as compared to earlier year income of Rs.10,02,511/-. Therefore, facts in the present year are distinguishable as in the present year the assessee had filed documentary evidences with respect to gold rates and in this year there is no lease income. The addition sustained by Ld. CIT(A) is not based upon facts.

8. In view of above, appeal filed by assessee is allowed.

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9. Now, coming to the appeal filed by Revenue, we find that the assessee had filed complete details before Ld. CIT(A) regarding discrepancy pointed out by A.O. In this respect, para 4.1 to para 4.8 of Ld. CIT(A)'s order which relate to submissions of assessee and findings of Ld. CIT(A) are important, deserve to be reproduced.

"4.0 Addition of Rs.19,99,840/- on account of undisclosed stock:

4.1 As per the assessment order, the Id. AO reached to the conclusion that the appellant did not have sufficient stock to affect the sales show by it. He, therefore, concluded that the sales shown were made out of unaccounted stock and be thereby made an addition of Rs.19,99,840/- to the income of the appellant.

4.2 The appellant on the other hand argued that the learned AO proceeded on misconceived facts when he made an addition of Rs.19,99,840/- on account of undisclosed stock alleging that neither any evidence was produced for 5043gms of gold jewellery taken on approval from M/s Mehrasons Jewellers (P) Ltd. on 12-8-2002 nor for the purchase of 3195.720gms of 22ct. gold from the said concern on 22-10-2002. It has been alleged that no bills were produced for the purchases so made, stating that the said purchased were un-vouched and have been acquired from undisclosed sources of the company.

4.3 The Id. ARs contented that the reasons given by the Id. AO in the assessment order in making the aforesaid disallowance on account of undisclosed stock are based on misapplication of facts. His conclusion that the appellant company had failed to produce evidence at the time of examining the books of accounts in respect of purchase or receipt of stock claimed to have been received on approval, is totally incorrect, contradictory to the facts and goes on to show that the order was passed mechanically in an arbitrary manner by completely ignoring the detailed reply of the appellant as reproduced below:-

"It has been noted that the company received goods on approval weighing 5043.72 grms on 12-8-02 from M/s Mehrasons Jewellers (P) Ltd. and out of the said goods, the company sold 58.71gms. M/s Swam Gems Pvt. Ltd. on 10-10-02. It has been alleged that on the date (10-10-2002) the company 8 ITA Nos2011 &2313/Del/2011

was not having any stock. The allegation is totally misplaced as the factum of the stock in the company's prossession has already been noted and the said allegation runs contrary to the noting that has been made by the department. Furthermore, the particulars of the stock register is once again reproduced for your benefit:

01-04-2002 Opening Balance 2646.04gms 12-8-2002 Received on approval from Mehrasons Jewellers 5043. 72gms (P) Ltd. (Copy of issue voucher of Mehrasons Jewellers (P) Ltd. enclosed)

23-9-2002 Returned back to Mehrasons Jewellers (P) Ltd. 1818.00gms (Confirmation from Mehrasons Jewellers (P) Ltd. is enclosed) 10-10-2002 Sold to Swam Gems (P) Ltd. (Copy of sale bill enclosed)

The company's stock register has been examined in details and the receipt of the stock by the company has been noted. Evidently, there is no short fall in stock and the company has stock on the date on which it was sold. The allegation that the company has sold 5871.76 gms of 22ct. gold to M/s Swam Gems (P) Ltd. without any stock is baseless.

It has been noted that the opening balance as on 1-4-02 was 2646.04 gms and the company purchase 3195.720gms on 22-10-2002. Therefore, it has been alleged that 3195. 72 gms out of the sale of 5871. 76gms of 22ct gold on 10-10-2002 is from undisclosed purchases as said gold ornaments were sold on 10-10-2002 yet that were purchased on 22-10-2002. This allegation it totally misplaced as the purchase on 22-10-2002 was for the goods that had already been received on approval by the company the receipt of the said stock has been noted by the department and that the said goods were received from Mehrasons Jewellers (P) Ltd. has been noted by the Department. There is therefore no basis to conclude that he said purchases were from undisclosed sources. A confirmed copy of the stock ledger, issue voucher and sale bill of M/s Mehrasons Jewellers (P) Ltd. is enclosed for your perusal. The practice of receiving goods on consignment is an established trade practice and was explained in through details during the said hearing on the last date. Even today, the company receives gold on consignment from the bank of Nava Scoria, the company does sell the said gold received on consignment and purchase the said gold at the later date.

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It is therefore submitted that there were no undisclosed purchases and that there was no shortage of stock and therefore there is no ground for any addition on this ground."

4.4 The appellant submitted that the receipt of stock of 5043.72 gms of 22 ct. gold on 12.08.2002 from M/s. Mehrasons Jewellers (P) Ltd. on approval is fully explained and is verifiable form he following documents:

i) Receipt voucher of Mehrasons Jewellers (P) Ltd. and the corresponding issue voucher of Ms. Mehrasons Jewellers (P) Ltd. and duly confirmed stock ledgers of the parties.

ii) The purchase of 3195.72gms gold from M/s Mehrasons Jewellers (P) Ltd.

is explained from the corresponding sale bill issued by it, the purchase voucher of Mehra Jewel Palace (P) Ltd., the stock records of both the companies, the relevant STI form issued by Sales Tax Department for registered dealer purchase etc.

4.5 The appellant further submitted that the purchase of 3195.72gms of 22ct gold was for goods that had already been received on approval/consignment by the company. This has incorrectly been termed as accommodation entry by the AO. The receipt of the goods was already accounted for and there is no basis to conclude that the said purchases were from undisclosed sources. The practice of receiving goods on consignment is an established trade practice. Even today, the company receives gold on consignment from the Bank of Nova Scotia. The company does sell the said gold received on consignment and purchases the said gold at a later date.

4.6 The appellant argued that the Id. AO has erred in concluding that the stock sold to M/s Swarn Gems (P) Ltd. was in excess by 30.52gms of 22ct. gold. It was submitted that the goods sold on 10-10-2002 were out of the stock which was fully accounted for and that there was no excess stock as shown below:-

1-4-2002 Opening Balance 2646.04gms 12-8-2002 Add: Received on approval 5043.72gms (confirmation filed) 7689.76gms 23-9-2002 Less: Returned back 1818.00gms (confirmation filed) 5871.76gms 10-10-2002 Sold to Swarn Gems (P) Ltd. 5871.76gms 10 ITA Nos2011 &2313/Del/2011

The appellant argued that from the above it is that there was no shortage of stock and that the goods received on approval as well as the purchases were fully explained.

4.7 As mentioned earlier, the Id. AO made an addition of Rs.19,99,8401- on account of undisclosed stock. The above was done by the AO on the basis of the following alleged discrepancies in the accounts of the appellant:-

(i) Unaccounted stock of 3195.72gms, valuing at Rs.15,22,500/-

was sold on 10-10-2002 to one M/s Swarn Gems (P) Ltd.

(ii) The goods sold to the aforesaid party were in excess of 30.52gms

4.7.1 The appellant as per its submission has explained that jewellery weighing to 5871.76gms was sold to M/s Swarn Gems (P) Ltd. consisted of opening stock of 2646.04gms and 3195.72gms were out of the goods received on approval from M/s Mehrasons Jewellers (P) Ltd. The appellant has submitted the reconciliation of goods sold to the aforesaid concern and on the basis of the same it has been contended that there was no excess sale of 30.52gms of stock as alleged by the AO. The appellant has submitted copies of the following documents in support of its contention:-

(i) Copy of sale bill dated 10-10-2002 to MIs Swarn Gems (P) Ltd.

(ii) Copy of approval/issue voucher of MIs Mehrasons Jewellers (P) Ltd.

dated 12-8-02, of goods sent on approval and corresponding goods receipt voucher of M/s Mehra Jewel Palace (P) Ltd.

(iii) Copy of sales bill of MIs Mehrasons Jewellers (P) Ltd. dt. 22-10-2002 and corresponding purchase bill of MIs Mehra Jewel Palace (P) Ltd. alongwith corresponding STI Form of Sales Tax Department. "

(iv) Confirmed copy of stock account of Mehrasons Jewellers (P) Ltd. in respect of 22ct Gold.

(v) Copy of stock ledger 22ct for A.Y. 2002-03 of MIs Mehra Jewel Palace (P) Ltd.

4.7.2 The appellant has also submitted a copy of its sales tax assessment order for the F.Y.2002-03. Based on the aforesaid documents, the appellant has vehemently argued that the allegation of sale of unaccounted stock is without any basis.

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4.8 I have considered the findings recorded by the Id. AO as per the assessment order, detailed submission made by the Id. AR and the facts of the case available on record. I have perused copies of various documentary evidences filed by the appellant in support of the purchase of goods from MIs Mehrasons Jewellers (P) Ltd. and sale of goods to M/s Swarn Gems (P) Ltd. All the said documents support the contention of appellant that there is no unaccounted sale of stock as alleged by the

Ld. AO. It has been submitted by the appellant that all these documents were produced during the assessment proceedings; however, the Id. AO did not take any cognizance of the same. Furthermore, I do not find any basis for the value of the unaccounted stock taken by the Id. AO at Rs.19,99,8401- as per the assessment order. The Id. AO has stated that unaccounted stock of 3195.72gms, valuing at Rs.15,22,500/- was sold to M/s Swarn Gems (P) Ltd. Thereafter, he has further mentioned that an excess stock of 30.52gms was sold to the same concern. However, it is not clear as to how on the basis of the above, he arrived at the figure of unaccounted stock of Rs.19,99,840/-. It seems that the addition has been made by him without appreciating the facts of the case and the documents on record. Such addition made without any basis cannot be confirmed. I, therefore, direct the AO to delete the same. The ground No.5 is accordingly allowed to the appellant."

10. We find that during appellate proceedings before Ld. CIT(A), the assessee had filed necessary and relevant documents to demonstrate that Jewellery sold to M/s. Swarn Gems *P) Ltd. consisted out of opening stock and jewellery received on approval basis from Mehrasons Jewellers (P) Ltd.. The assessee had field copy of stock ledger as well as sale tax assessment order for the year under consideration. We find that findings of Ld. CIT(A) are based upon verification of facts and evidences and, therefore, he had rightly deleted the addition.

11. In view of above, appeal filed by Revenue is dismissed.

12. In nutshell, appeal filed by Assessee is allowed and appeal filed by Revenue is dismissed.

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13. Order pronounced in the open court on 25th March, 2015.

Sd./- Sd./- (G. C. GUPTA ) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER Date: 25.03.2015 Sp

Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

S.No. Details Date Initials Designation 1 Draft dictated on 16/3 Sr. PS/PS 2 Draft placed before author 16,17,18,19 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 25/3 Sr. PS/PS 6 Kept for pronouncement 25/3 Sr. PS/PS 7 File sent to Bench Clerk 25/3 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order