Shree Mukt Jewellers,, Baroda vs Assessee

M/s.Shree Mukt Jewellers ACIT, Cir.5 Gendi Gate Road Vs Vadodara. Nr. State Bank of Saurashtra Vadodara.

PAN : AAFFS 8286 B

अपीलाथ!/ (Appellant) "#यथ!/ (Respondent)

Assessee(s) by : Shri M.K. Patel, AR Revenue by : Shri B.L. Yadav, SR-DR

सन ु वाई क तार ख/ Dateof Hearing : 02/03/2015 घोषणा क तार ख / Date of Pronouncement: 13/03/2015

आदे श/O R D E R

PER N.S. SAINI, ACCOUNTANT MEMBER: This an appeal filed by

the assessee against order of the CIT(A)-V, Baroda dated 29.4.2010 for Asstt.Year 2007-08.

2. The first issue involved in this appeal is that the CIT(A) erred in confirming the disallowance to the extent of Rs.2,82,689/- out of labour expenses.

3. Brief facts of the case are that the assessee has debited an amount of Rs.39,94,519/- as labour charges in profit & loss account. In order to verify the labour charges, three labourers were presented before the AO and their statements were recorded. They claimed before the AO that they have not signed vouchers while receiving payments. On the other hand, the assessee submitted the confirmations from the labourers, after recording of statement that they ITA No.2207/Ahd/2010 2

have received the payments as per the amount debited and that the entire expenditure were incurred for business purposes. The AO did not accept the confirmation on the ground that it was after thought and the vouchers did not contain signatures and labour expenses were inflated. He, therefore, made disallowance of 20% of the labour charges amounting to Rs.7,98,904/- and added to the income of the assessee.

4. Before the CIT(A), the assessee argued that the labour payments were made for manufacturing of gold ornaments and that the statements were general in nature and the labourers have confirmed receiving the payments and that TDS was deducted on such payments and PAN numbers were also quoted in the certificates and that there was no basis for ad hoc disallowance.

5. The CIT(A) after considering the submissions, observed that out of total expenses for labour expenses of Rs.39,94,519/-, Rs.11,67,624/- were credited in the accounts and partly paid through cheques and the balance of Rs.28,26,895/- was made in cash to various workers. The AO recorded statement of three workers who claimed to have received the payments without signing on vouchers and subsequently filed confirmations of having received the complete amount. The AO inferred from these facts that the expenses were inflated.

6. A perusal of the statement of Shri Ajithbhai revealed that he claimed to have annual income of Rs.1.5 lakhs whereas he received labour charges of Rs.2,27,262/- from the assessee. Shri Harishbhai stated that he had received an amount of Rs.3,00,000/- whereas the books of the assessee showed payment of Rs.5,49,791/-. Therefore, the CIT(A) observed that he was in partial agreement with the AO that subsequent confirmations were in the nature of self-serving documents and that payment through self-generated vouchers without identifying the recipients, could make the manipulations easier. He further observed that it is also a fact that in the trade of jewellery manufacture, ITA No.2207/Ahd/2010 3

payments were made in cash to the skilled workers and this was the prevalent practice of the trade. Keeping in view these facts, he restricted the disallowance to 10% of the cash payments i.e. Rs.2,82,689/- and partly allowed the claim of the assessee.

7. Before us, the AR of the assessee reiterated the submissions made before the CIT(A) whereas the DR supported the order of the CIT(A).

8. We have considered rival submissions and perused the orders of the lower authorities and material available on record. We find no specific error in the order of the CIT(A) could be pointed out by the AR of the assessee. The AR of the assessee could not explain the discrepancy pointed out by the CIT(A) in the confirmation and statement of Shri Ajitbhai and Shri Harishbhai. No material was brought before us by the AR to show how much labour charge expenses was accepted in the case of the assessee in earlier years. In the circumstances, we do not find any good reason to interfere with the order of the CIT(A), which is confirmed and the ground of appeal of the assessee is dismissed.

9. The second issue involved in the appeal of the assessee is that the CIT(A) erred in confirming the addition of Rs.5,81,631/- on account of the difference in the value of closing stock.

10. Brief facts of the case are that the AO observed that the assessee has availed cash credit facility from Baroda City Co-operative Bank Ltd. to whom stock-in-trade was offered as collateral security. The bank reported that the valuation of stock as per statement of stock given by the assessee was of Rs.1,87,77,070.90/- as on 31.3.2007, whereas per the profit & loss account submitted by the assessee the closing stock was shown at Rs.1,81,95,439/-. The assessee explained before the AO that due to rush of work, sometimes pending bills were prepared later ITA No.2207/Ahd/2010 4

on and are recorded subsequently in the books and as a result, there was difference in quantity of gold as per books and the actual quantity, and the statement submitted to the bank every month explains the procedural requirements and thus there could be difference in the stock available and that reported to the bank. The AO was of the view that the method of valuation of stock should not be different for different purposes and to arrive at true and fair result of the business the assessee should make valuation of stock in true and fair manner, and therefore, disallowed Rs.5,81,631/- on account of difference in closing stock and added to the income of the assessee.

11. Before the CIT(A), the assessee pointed out that no defects in the books of accounts of the assessee has been pointed by the AO, and that a consistent accounting method is followed for valuation of inventory. The assessee has relied upon the decision of Hon'ble Madras High Court in the case of CIT Vs. N.Swamy, 241 ITR 363 (Mad) wherein it was held that mere fact that the assessee had made a statement to the third party that by itself cannot be treated as having resulted in irrebuttable presumption against the assessee and the burden of showing that the assessee had undisclosed income was on the Revenue.

12. In appeal, the CIT(A) after considering the submissions of the assessee observed that the AO had enquired from the bank about the stock statement and the examination of the stock details indicated that there were differences in quantity as well as rates in regard to only in 22 carat gold as under:

Description Qty as per Qty as per Rate per Rate per books (gms) bank (gms) gram as per gram as per books bank 22ct gold 22060.672 23035.672 773.19 765.71

13. There was no different in quantity and rates in respect of diamond, 18 carat gold, silver and fine silver items. Therefore, it was ITA No.2207/Ahd/2010 5

difficult to believe that the statement to bank was furnished for meeting procedural requirements more so when all the items except for one tally in quantity as well as in rates. The assessee has not substantiated how the difference in stock was on account of certain bills which remained to be entered in books of account for income-tax purposes, and therefore, the CIT(A) confirmed the order of the AO.

14. The AR before us submitted that the stock statement was filed immediately after the end of the month to the bank. At the time of furnishing of the stock statement an arthematical calculation mistake occurred, because of which, inadvertently mistaken stock of 22 carat gold was reported to the bank. Later on when the accounts were completed the correct stock was reported in the return of income and audited accounts. That, no mistake in the stock regularly maintained by the assessee could be pointed out by AO. Simply because a bona fide mistake took place in the statement given by the assessee to the bank, no advantage thereof can be taken by the Revenue.

15. It is not a case where the stock was under the lock and key of the bank or the bank official verified the physical stock as on 31.3.2007. He relied on the decision of the Hon'ble Madras High Court in the case of CIT Vs. N.Swamy (supra) wherein it was held that where the assessee made a declaration of stock to the bank for getting overdraft which was at a higher figure than that in the books of the assessee for getting overdraft, burden was on the Revenue to show that difference between the value as recorded in the books and that found in the declaration to the bank was the undisclosed income of the assessee. The Revenue cannot rely merely on the declaration made to the bank at a higher figure for making addition to the income of the assessee.

16. On the other hand, DR supported the orders of the lower authorities.

ITA No.2207/Ahd/2010 6 17. We find that the assessee maintained day-to-day stock register and after examination of the same no mistake could be pointed out by the Revenue in the same. The auditor of the assessee has also not made any adverse observation in respect of stock disclosed by the assessee in its books of accounts. In our considered view, the book result reflected by regularly maintained books of accounts cannot be rejected by the Revenue without pointing out any specific error in the entries in the books of accounts, merely on the basis of a statement made by the assessee to a third party. A suspicion howsoever grave cannot take place of proof and a statement to a third party may give rise to suspicion which calls for a careful scrutiny of the books of accounts.

18. Possibility of mistake in the stock statement furnished to the bank cannot be ruled out. No material was brought before us by the Revenue to show that the statement furnished by the assessee himself to the bank was sacrosanct and the statement furnished by the very same assessee in the return of income was incorrect. In the above circumstances, in view of the decision of Hon'ble Madras High Court in the case of CIT Vs. N. Swamy (supra), in our considered view, the addition of Rs.5,81,631/- made by the Revenue is not sustainable. We, therefore, delete the addition of Rs.5,81,631/- , and accordingly allow the ground of appeal of the assessee.

19. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Court on Friday the 13th March, 2015 at Ahmedabad.

Sd/- Sd/- (SHAILENDRA KUMAR YADAV) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 13/3/2015