Neha Jewellers Pvt. Ltd. , Delhi vs Assessee

ITA No. 4018/Del/2010 Assessment Year: 2006-07 Deputy CIT, vs. Neha Jewellers Pvt. Ltd., Central Circle-12, 1170-Kucha Mahajani, New Delhi. Chandni Chowk, (PAN: AAACN7129G) (Appellant) (Respondent)

Appellant by: Shri Ved Jain, CA Respondent by: Shri Vivek Wodekar, CIT(DR)

Date of hearing : 01.06.2015 Date of pronouncement: 26 :06.2015

ORDER

PER I.C. SUDHIR: JUDICIAL MEMBER These are the cross appeals against the common First Appellate Order.

2. The Revenue has questioned First Appellate Order on the following

grounds:

"1. The order of the Ld. CIT(A) is not correct in law and facts.

2 2. In the facts and circumstances of the case, Learned CIT(A) has erred in law and on facts in deleting the addition of Rs.3,12,88,397/- on account of unexplained investment (in terms of excess stock of jewellery) without appreciating the issue raised in remand report of the A.O."

3. The assessee on the other hand has impugned First Appellate Order on

the following grounds:

"1. On the facts and circumstances of the case Ld. Commissioner of Income Tax (Appeals), was not justified in dismissing legal ground of the assessee that 'the order passed by the A.O. u/s 153A was without jurisdiction since, there was no specific authorization u/s 132 of the I.T. Act in the name of the assessee and hence in view of the decision of Allahabad High Court in the case of CIT vs. Vandana Sharma in ITA No. 2 of 2009 the order of the A.O. is void ab initio.'

2. On the facts and in circumstances of the case Ld. Commissioner of Income Tax (Appeals), has erred in confirming addition of Rs.1,65,26,469/- towards value of excess stock of gold ornaments and jewellery.

3. Ld. Commissioner of Income Tax (Appeals), was not justified in accepting the valuation report of Department Valuation Officer as sole basis for valuation of stock of gold ornaments and jewellery, and failed to appreciate the anomalies pointed out in the valuation report of DVO, by the 3

Appellant before the Assessing Officer and during appellate proceedings.

4. On the facts and in circumstances of the case Ld. Commissioner of Income Tax (Appeals), was not justified in rejecting the valuation report of independent registered valuer, on valuation of stock-in trade on the date of search at Rs.11,72,88,275/-, submitted by the assessee during assessment and appellate proceedings.

5. Ld. Commissioner of Income Tax (Appeals), was not justified in rejecting appellant's explanation regarding contribution of 18548.448 grams of gold ornaments in the stock-in-trade by Mr. Sanjeev Kumar Agarwal, Director of the Appellate Company, during various years, sourced from additional income offered for taxation by him.

4. Heard and considered the arguments advanced by the parties in view

of orders of the authorities below, material available on record and the

decisions relied upon.

5. The facts in brief are that the business premises of the assessee and

residential premises of its director Shri Sanjiv Kumar Aggarwal was

subjected to search and seizure operation under sec. 132 of the Income-tax

Act, 1961 on 9.12.2005. The assessee company filed its return of income on

29.11.2006 declaring income of Rs.5,85,119 which was latter on revised to 4

the income of Rs.1,78,65,526. The revised income included Rs.1,65,73,947

towards value of excess stock and Rs.7,06,460 towards excess cash found

during search. The assessee is engaged in the business of manufacturing and

trading of gold ornaments and jewellery. During the course of search at

business premises, the stock in trade of gold ornaments, jewellery and

diamonds was found and was valued by a certified valuer at

Rs.13,93,13,844. After considering the submissions of the assessee along

with revised return of income, the Assessing Officer added an amount of

Rs.4,78,14,866 towards value of excess stock with observation that during

the course of search and seizure operation at the business premises, stock of

gold of 1,52,577.210 grams was found and also stock of jewellery (gold +

diamond) of 6,230.45 carats found which were together valued at

Rs.13,93,13,844 by the registered valuer. After considering the submissions

and explanation offered by the assessee and additional income of

Rs.1,65,73,947 offered in the revised return in respect of undisclosed stock

for assessment year 2006-07 and Rs.50,00,000 for assessment year 2005-06,

the Assessing Officer computed value of unexplained stock at

Rs.4,78,14,866 and added the same to the income of the assessee. Besides

this, the Assessing Officer also added Rs.4,01,020 in respect of unexplained

cash and Rs.50,000 in respect of disallowance out of various expenses. 5

Consequently, the Assessing Officer assessed income of assessee at

Rs.6,61,41,410.

6. Against the above action of the Assessing Officer, the assessee

preferred first appeal questioning the computation done by the Assessing

Officer. It was contended that the Assessing Officer has wrongly compared

the stock as per books of account as on 01.40.2005 and as on the date of

search i.e. 09.12.2005. The Assessing Officer has considered absolute value

to find out the excess stock instead of first determining the quantity of the

excess stock and then applying the rate on the date of the search on such

quantity. It was further contended the difference in the quantity as per books

and the actual quantity of gold ornaments comes to 31,184.862 grams. Out

of this, 18,548.448 grams is the weight of the gold ornaments contributed by

Shri Sanjiv Kumar Aggarwal, the director in whose hands the additional

income has been offered as per the statement filed by him. The Learned

CIT(Appeals) called for the remand report from the Assessing Officer and

after considering the remand report, he has accepted the contention of the

assessee that Assessing Officer was incorrect in valuing the entire stock both

disclosed and undisclosed at market value and then deducting the stock as on

01.04.2005 at book value for making the addition. The Learned 6

CIT(Appeals) held that the difference in the quantity of the gold ornaments

as per the books and as physically found comes to 32,184.862 grams and the

value of the same on the date of search comes to Rs.3,31,00,417.

7. The Learned CIT(Appeals), however, did not allow the deduction of

18,548.448 grams of gold claimed to have been contributed by its director,

Shri Sanjiv Kumar Aggarwal. On this basis the Learned CIT(Appeals) held

that the value of undisclosed stock as on the date of search comes to

Rs.3,31,00,417. After deducting the additional income offered by the

assessee for this year at Rs.1,65,73,948, the Learned CIT(Appeals)

confirmed the balance amount of Rs.1,65,26,469 as against Rs.4,78,14,866

made by the Assessing Officer.

8. The Learned CIT(Appeals) has thus given a partial relief of

Rs.3,12,88,397, which has been questioned by the Revenue in its appeal and

the assessee is in appeal in respect of the addition of Rs.1,65,26,469 upheld

by the Learned CIT(Appeals) by not giving deduction in respect of the gold

ornaments contributed by its director Shri Sanjiv Kumar Aggarwal. 7

9. In the appeal of the Revenue, ground No.1 is general in nature, hence,

it does not need independent adjudication.

10. Ground No.2 is regarding deletion of addition of Rs.3,12,88,397. In

assessee's appeal, is general in nature. Ground No.1 is regarding validity of

jurisdiction acquired by the Assessing Officer under sec. 153A of the Act,

which has not been pressed by the Learned AR during the course of hearing.

The said ground is rejected as such. The ground No. 2 is general in nature.

Ground Nos. 3 and 4 of the appeal of the assessee are regarding valuation of

undisclosed stock as on the date of search and ground No. 5 thereof is

regarding contribution of jewellery by its director over the years in the stock

in trade of the assessee company sourced from his undisclosed income

declared by him.

11. We thus find that the issues involved in the above cross appeals are

same.

12. In support of the ground No.2 raised in the appeal preferred by the

Revenue, the learned CIT(DR) has basically placed reliance on the

assessment order. He contended that during the course of search, inventory 8

of stock of gold and jewellery found was prepared and the valuation of the

same was done by an approved valuer. The total value as per this valuation

was Rs.13,93,13,844. The Assessing Officer after taking into consideration

the opening stock as on 01.04.2005 of Rs.6,99,25,031 and also the

stock/undisclosed income offered by the assessee for taxation in the earlier

years of Rs.2,15,73,947 has correctly computed the unexplained stock at

Rs.4,78,14,866 and the Learned CIT(Appeals) was not justified in reducing

this amount to Rs.1,65,26.269. He submitted that valuation of jewellery is

the core issue in the present appeal.

13. On the other hand, the Learned AR tried to justify the relief given

by the Learned CIT(Appeals). To this extent, he placed reliance on the First

Appellate Order. He reiterated that computation of excess stock done by the

Assessing Officer was incorrect. He had computed the difference as on

09.12.2005 and as such he was not correct in taking the stock as per books of

accounts as on 01.04.2005. The Assessing Officer should have taken the

stock as per books of account as on 09.12.2005. He contended further that

the whole computation done by the Assessing Officer on the basis of

absolute value without taking into consideration the weight is incorrect. For

the purpose of determination of the excess stock, the Assessing Officer

should have first determined the weight of the stock physically found and 9

from there it was needed to deduct the weight of stock as per books of

account as on the date of search. In support, he placed reliance on the

decision of Chandigarh Bench of the ITAT in the case of Talwar Sons

Jeweller Vs. ACIT- ITA No. 1313 to 1317/Chd/2010 dated 30.9.2013.

14. In support of ground Nos. 3 and 4 of the appeal of the assessee, the

Learned AR contended that the valuation done by the valuer on the date of

search was also incorrect. He invited our attention to the letter dated

10.12.2005 i.e. the date immediately after the date of search, filed with the

Additional Director of Income-tax (Inv.). In this letter, it was pointed out

that the stock stating and the valuation on the date of search was done

cursorily. Further in the case of Kundan Jewellery & Studded Gold

Ornaments, the net weight of the gold was over stated as no deduction for

weight of stones, beads and glasses etc. has been given. It was further

submitted that the valuation of the diamond jewellery has been carried out

by an unauthorized person, Mr. Vikram Mehta. All these issues were raised

by the assessee at the time of search on 09.12.2005 and also followed up

with a letter on 10.12.2005 i.e. the very next day with a valuation report

done by an approved valuer highlighting the major differences in some of

the items to demonstrate that the valuation done on the date of search was

not correct. The Learned AR submitted that these issues were also raised 10

during the course of assessment before the Assessing Officer and before the

Learned CIT(Appeals) but both have rejected the contention of the assessee

in this regard.

15. In support of ground No.5 of the appeal of the assessee, the Learned

AR contended that the Learned CIT(Appeals) was not justified in not

allowing credit to the extent of 18,548.448 grams being the jewellery

acquired out of the undisclosed income offered and taxed in the name of its

director, Shri Sanjiv Kumar Aggarwal. In this regard, he invited our

attention to the contents of page Nos. 66 to 88 of the paper book, wherein

the balance sheet for each of the years of Shri Sanjiv Kumar Aggarwal

showing the undisclosed income offered for taxation and the jewellery

acquired has been stated. It was further submitted that the Learned

CIT(Appeals) was not correct in not allowing the credit of the same by

making a casual remarks to the facts that the arguments cannot be accepted

as no concrete evidences have been filed by the assessee. The Learned AR

submitted that the remarks given by the Learned CIT(Appeals) are general.

Shri Sanjiv Kumar Aggarwal had also filed an affidavit stating that the stock

in trade of Neha Jewellery Pvt. Ltd. i.e. the assessee, includes gold

ornaments acquired out of the income earned by Mr. Sanjiv Kumar 11

Aggarwal. He submitted further that Shri Sanjiv Kumar Aggarwal is the

promoter director and managing the affairs of the assessee company. The

Learned AR submitted that the explanation given by Shri Aggarwal and the

assessee was a logical explanation and there was nothing adverse to reject

the same. The Learned AR submitted that the explanation of Shri Aggarwal

has been accepted by the Assessing Officer himself subsequently in the

assessment order passed under sec. 143(3) of the Act in the assessment year

2008-09 of the assessee company.

16. The Learned CIT(DR) on the other hand submitted that valuation on

the date of search was carried out by an approved valuer and as such the

same cannot be ignored. The letter though filed on the next date of search

was an afterthought and that cannot be taken into consideration. As regards,

ground No.5 (assessee) regarding credit of jewellery acquired out of

undisclosed income offered by its director Shri Sanjiv Kumar Aggarwal, the

Learned CIT(DR) contended that the explanation given by the assessee

cannot be accepted in the absence of any direct evidence being produced by

it despite the fact that its director, Shri Sanjiv Kumar Aggarwal had offered

undisclosed income and which has been assessed in his hands. The credit of 12

the same cannot be given to the assessee in absence of any concrete evidence

as righty observed by the Learned CIT(Appeals).

17. Considering the above submission, we find that n the date of the

search physical inventory of the stock of board and jewellery was prepared

and valued at Rs.13,93,13,844. The assessee computed an amount of

Rs.2,15,73,947 as the value of the undisclosed stock as under:

Gold Jewellery Kgs. Gms. mgs. i. Weight of gold jewellery as per report 152 577 210 of Departmental registered valuer ii. Less: Weight of gold jewellery as per Stock Register/ Books of accounts 110 140 345 seized by the Department as on 8.12.2005 iii. Balance of the unaccounted gold 42 436 865 jewellery iv. Less: Weight of gold jewellery contributed by ShriSanjeev Kumar Aggarwal in the Stock of NehaJewellers Pvt. Ltd. out of his unaccounted incomes of Rs. 1,32,23,820 from the purchase and sale of properties for the assessment 18 548 417 years 2000-2001 to 2006-2007 which had been surrendered and had been accepted by the Assessing Officer v. Weight of gold and diamond jewellery which had been surrendered by the 23 888 448 appellant for the assessment years 2005-2006 and 2006-2007 iii. The value of unaccounted weight of (Rs.) gold and diamond jewellery of Rs. 1,42,21,800 which had been surrendered by the appellant by 1,42,21,800 applying the average cost of Rs. 13

595.34 per gm. B. Loose Diaonds and Diamond Jewellery: Weight of loose diamonds on 5504.60 ct. 9.12.2005 as per report of the Departmental Registered Valuer

Less: Weight of loose diamonds as per 3794.53 ct.

Books/stock register seized by Department as on 8.12.2005 Weight of unaccounted weight of loose diamonds:

1710.07 ct.

The value of unaccounted weight of loose diamonds of Rs.70,27,417 by applying the average cost of Rs.

4109.09 per ct. 70,27,417 C Value of unaccounted stones as per 3,24,730 Departmental Valuer D. Total value of unaccounted gold and diamond jewellery, loose diamonds and stones, which had been surrendered by the appellant for the 2,15,73,947 assessment years 2005-2006 and 2006-2007

18. Based on the above reconciliation, the assessee offered a sum of Rs.50

lacs as additional income in the year 2005-06 and balance Rs.1,65,73,947 in

the year under consideration. The Assessing Officer accepted the additional

income of Rs. 50 lacs in the assessment year 2005-06. However, in the year

under consideration,the Assessing Officer was of the view that there is a gap

of Rs.4,78,14,866 over and above the income of Rs.1,65,73,947 offered by

the assessee in the year under consideration. This gap was worked out by the

Assessing Officer on the basis of the value of the inventory as on the date of 14

search and after deducting the value of the inventory as per books of account

as on 01.04.2005.

19. The Learned CIT(Appeals) after examining the facts of the case, held

that the methodology adopted by the Assessing Officer in computing the

unexplained stock is not correct. He agreed with the contention of the

assessee that first weight of undisclosed stock has to be determined on the

date of search. We also concurred with the contention of the assessee that

the basis for making the addition will be difference in the weight of stock as

per books of account as on the date of search and the weight of the stock

found at the time of the search.

20. Thus, the issue raised in the appeal preferred by the Revenue is as to

whether the Learned CIT(Appeals) was justified in computing the

undisclosed stock in the manner stated in its order.

21. It is an admitted fact the computation of undisclosed stock has been

done by the Assessing Officer on the basis of value only without

determining the undisclosed weight of the gold and jewellery. Further the

Assessing Officer has taken the opening stock as on 01.04.2005 as against

the stock as on 09.12.2005. This approach of the Assessing Officer, in our

view, in computing the excess stock as on the date of the search is not 15

correct. The methodology adopted by the assessee, in our opinion, is the

correct procedure to determine the unexplained stock on the date of search.

In this regard, we note from the page No. 104 of the paper book filed on

behalf of the assessee that the weight of the stock as per books of account

has been computed by taking into account the quantity of the stock as on

01.04.2005 and then adding the weight of the purchases made from

01.04.2005 to 08.12.2005 and deducting the quantity of the sales from

01.04.2005 to 08.04.2005. The difference in the weight of the stock

physically found and the weight of stock as per books of account worked out

in the manner stated hereinabove has been taken as weight of undisclosed

stock. This unexplained weight of stock has then been valued by applying

market rate. The Assessing Officer instead of following this methodology

has straight away gone to the value of the stock physically found on the date

of search and there from he has deducted the value of the stock that too as on

01.04.2005, not as on the date of search. Thus, the Assessing Officer has

committed two mistakes. One in not ascertaining the unexplained quantity of

stock and two in taking the stock as per books of account as on 01.04.2005

as against as on 09.12.2005.

22. During the course of assessment proceedings, the Learned

CIT(Appeals) has also called for the remand report from the Assessing 16

Officer. In his remand report, the Assessing Officer has also not pointed out

any specific error or defect in the computation of the excess stock. As

regards the stock to be taken as on the date of the search as against taken by

the Assessing Officer as on 01.04.2005, the explanation of the Assessing

Officer in the remand report was that in view of the unaccounted sales and

purchases, he was justified in taking the stock as on 01.04.2005. We are of

the view that this contention of the Assessing Officer is not sustainable and

this cannot be the reasoning for taking into consideration the stock as on

01.04.2005 as per books of account as against the stock as on the date of the

search as per books of account. What is to be found out on the date of search

is the stock as per books of account. While finding out the stock on the date

of search i.e. on 09.12.2005, the purchases and sales made and recorded in

the books of account during the period 01.04.2005 to 09.12.2005 have to be

taken into consideration.

23. On having gone through the paper book, we note that the assessee had

submitted complete details of purchases and sales in quantity and value and

no discrepancy or error has been pointed out by the Assessing Officer, either

in the assessment order or in the remand report. The purchases recorded in

the books of account are the disclosed/accounted purchases. Similarly, sales 17

recorded in the books of account are the disclosed/recorded sales in the

books of account. It is not the case of the Assessing Officer that assessee had

manipulated the books of account after the search. On the contrary, we note

that in the remand report, the fact that the reconciliation was supported by

the regular books of account which were found at the time of search, has not

been controverted. Further, the department was having the seized computer

whereby data for the purchases and sales for the period of five years ending

on 08.12.2005 was also there. In view of the above facts, the methodology

adopted by the Assessing Officer in computing the undisclosed stock was

not correct. As against this, the methodology adopted by the Learned

CIT(Appeals) for computing the weight of undisclosed stock is the correct

methodology.

24. The learned CIT(DR) during the course of hearing contended that the

Assessing Officer's computation be upheld but could not point out any

reason to differ with the methodology adopted by the Learned CIT(Appeals).

Accordingly, so far as the Revenue's appeal is concerned, we are of the view

that the methodology adopted by the Learned CIT(Appeals) is correct for

determining the value of the undisclosed stock and the computation done by

the Assessing Officer to determine the value of undisclosed stock is not 18

correct one. For the purpose of making addition on account of undisclosed

stock, first the quantity/weight of such undisclosed stock has to be

determined and then market value of this undisclosed stock is to be added as

income. Accordingly, ground No.2 of the appeal of the Revenue is rejected.

25. Coming to the assessee's appeal, Ground Nos. 3 and 4 are regarding

the valuation done by the approved valuer as on the date of search. The

Learned AR in this regard has relied upon the letter dated 10.12.2005 filed

with the Addl. Director of Income-tax (Inv.) and the report of the approved

valuer submitted along with that. On going through this letter and also the

discrepancy pointed out by the Learned AR in the two valuations, there

appears to be some differences in the valuation carried out on the date of

search. The Learned CIT(Appeals) has considered this issue and has held

that the departmental valuer had properly considered the quantity, rate of

gold jewellery and other precious stones at the time of the search operation

and valued it accordingly. On the basis of these findings, he has rejected the

contention of the assessee regarding the defects in the valuation. Considering

the overall facts and circumstances of the case and the fact that this valuation

was done on the date of search, when stock was physically examined, we do

not see any reason to deviate with the findings given by the Learned 19

CIT(Appeals) on this issue. In result, ground Nos. 3 and 4 of the assessee's

appeal are rejected.

26. As regards ground No. 5 of the assessee appeal is concerned,

undisputedly search was carried out on the assessee's company as well as

Mr. Sanjiv Kumar Aggarwal. During the course of the assessment, the

assessee company as well as Mr. Sanjiv Kumar Aggarwal had offered

undisclosed income for taxation. The credit of the undisclosed income

offered by the assessee company in the preceding assessment year 2005-06

of Rs.5 lacs and Rs.1,65,75,948 for the year under consideration has been

allowed by the Assessing Officer in the assessment order. The credit of the

income offered by its director Mr. Sanjiv Kumar Aggarwal has not been

allowed despite the fact that such income offered has been assessed in his

hands and details were filed (page Nos. 63 to 88 of the paper book) along

with computation of income during the course of assessment as well as

before the Learned CIT(Appeals). Affidavit was also filed by Mr. Sanjiv

Kumar Aggarwal in support thereof before the Assessing Officer. The

Learned CIT(Appeals) has not accepted the explanation given by the

assessee with this observation that the same canont be accepted as no

concrete evidence was be filed by the assessee. We are of the view that the 20

Learned CIT(Appeals) was not justified in rejecting the explanation offered

by the assessee. The search has taken place on both i.e. assessee company

and its director Mr. Sanjiv Kumar Aggarwal. Undisclosed income has been

offered in the hands of the assessee company as well as Mr. Sanjiv Kuamr

Aggarwal. The income so offered have been assessed in the hands of Mr.

Sanjiv Kumar Aggarwal and the assessee company. The income so offered

having been assessed, there was no reason for not accepting the further

explanation that the income so earned has been utilized for purchase of

jewellery. Though the assessee and Mr. Sanjiv Kumar Aggarwal are two

difference assessees but the fact that Mr. Sanjiv Kumar Aggarwal is the

main working and promoter director of this company, cannot be igonroed.

No material or evidence has been found to contradict the explanation given

by the assessee company as well as Mr. Sanjiv Kumar Aggarwal. The

explanation is supported by affidavit. In the absence of anything contrary,

the explanation offered by the assessee company, being plausible

explanation, the same ought to have been accepted. Accordingly, we hold

that the Learned CIT(Appeals) was not justified in rejecting the assessee's

explanation.

21

27. Our above view is also supported from the fact that subsequently the

Assessing Officer himself in the assessment order for the assessment year

2008-09 in assessee's own case has accepted this explanation. The relevant finding

recorded by the Assessing Officer in the assessment order for the assessment

year 2008-09 are being reproduced hereunder:

"During the year, assessee company has allotted 750000 new equity shares of Rs. 10/- each fully paid up at ar for Rs.75,00,000/- to Mr. Sanjeev Kumar Aggarwal. The source of the same has been explained by the assessee to be out of Mr. Sanjeev Kumar Aggarwal's sale proceeds/value of gold ornaments/jewellery weighing 18548.448 grams invested in assessee company, which asset were acquired by the allottee in earlier years out of his income declared during earlier assessment years 2000-01 to 2006-07 and disclosed in his returns filed during the assessment proceedings u/s 153A which are already on record. the explanation of the assessee is accepted."

28. As such, we are of the view that the Learned CIT(Appeals) was not

correct in not giving credit of the jewellery acquired out of the income

offered by Mr. Sanjiv Kumar Aggarwal and we thus direct the Assessing

Officer to allow credit of the jewellery to the extent of 18,548.448 grams

contributed by its director Mr. Sanjiv Kumar Aggarwal while computing the

valuation of the undisclosed stock as on the date of the search. Ground No. 5

is accordingly allowed.

22

29. In result, the appeal of the Revenue is dismissed and that of the

assessee is partly allowed.

Order is pronounced in the open court on 26 .06.2015

Sd/- Sd/-

( J.S. REDDY ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 26/06/2015 Mohan Lal

Copy forwarded to:

1) Appellant

2) Respondent

3) CIT

4) CIT(Appeals)

5) DR:ITAT

ASSISTANT REGISTRAR 23

Date Draft dictated on computer 24.06.2015 Draft placed before author 24.06.2015

Draft proposed & placed before the second 24.06.2015 member Draft discussed/approved by Second Member. 26.06.2015 Approved Draft comes to the Sr.PS/PS 31.06.2015 Kept for pronouncement on 26.06.2015 File sent to the Bench Clerk 31.06.2015 Date on which file goes to the AR Date on which file goes to the Head Clerk.

Date of dispatch of Order.