Statements recorded under section 132(4) cannot be made the sole basis for making additions unless it is supported by any documentary evidence

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Statements recorded under section 132(4) cannot be made the sole basis for making additions unless it is supported by any documentary evidence

Short Overview  Where on date of search, books of account of assessee were incomplete and printouts of cash book as taken by the search team did not reflect true and correct balance available which was made part of the seized papers, then statements recorded under section 132(4) could not be made the sole basis for making additions for unexplained cash, unless it was supported by any documentary evidence.

Assessee was a partnership firm, engaged in manufacturing and trading (including export) of designer jewellery made of gold and silver studded with precious and semi-precious stones. Pursuant to a search operation under section 132, unexplained cash was found and based on statement recorded on oath under sections 132(4) and 131, addition was made.

 It is held that  As on date of search, books of account of assessee were incomplete and printouts of cash-book as taken by the search team did not reflect true and correct balance available which was made part of the seized papers. Cash balance as appearing in such incomplete books of account and taken as recorded cash balance as per books as on the date of search was wrong being not updated. Statements recorded under section 132(4) cannot be made the sole basis for making additions unless it is supported by any documentary evidence. CBDT has clarified by clarification dated 10-3-2003 (No. 286/2/2003-Income Tax) that while recording statement during the course of search and seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income. Additions based on the alleged surrender obtained during the course of search are in contravention to the circular and instruction of the CBDT and therefore, the same deserved to be deleted. Sale was duly recorded in the books of accounts and after inclusion of the same in total sales, cash balance, profits and stocks were derived which were accepted by revenue. Further, addition by alleging the same as excess cash tantamount to taxation of an income twice-one in shape of sales and profits embedded therein and again by making addition by alleging the same as unexplained excess cash.

Decision: In assessee’s favour.

Referred: Video Master v. Jt. CIT (2016) 66 Taxmann.com 361 (SC) : 2015 TaxPub(DT) 3763 (SC), CIT v.  Excel Industries Ltd. (2013) 358 ITR 295 (SC) : 2013 TaxPub(DT) 2414 (SC), Pr. CIT v.  Roshan Lal Sancheti [ITA No. 47/2018, dated 30-10-2018] : 2018 TaxPub(DT) 7549 (Raj-HC), Thiru S. Shyam Kumar v. Asstt. CIT (2018) 99 taxmann.com 39 (Mad.) : 2018 TaxPub(DT) 7162 (Mad-HC), CIT v. M.S. Aggarwal (2018) 93 Taxmann.com 247 (Del-HC) : 2018 TaxPub(DT) 2537 (Del-HC), T. Lakhamshi Ladha & Co. v. CIT (2016) 73 Taxmann.com 117 (Bom) : 2016 TaxPub(DT) 3930 (Bom-HC), Ravindra Kumar Verma v. CIT (2013) 30 Taxmann.com 367 (All), Bhagirath Aggarwal v. CIT (2013) Taxmann.com 274 (Del) : 2013 TaxPub(DT) 0672 (Del-HC), CIT v. Vishal Exports Overseas Ltd. [Tax Appeal No. 2471 of 2009, dt. 3-7-2012], CIT v. O. Abdul Razak (2012) 20 Taxmann.com 48 (Ker) : 2012 TaxPub(DT) 3290 (Ker-HC), CIT v. Lekh Raj Dhunna (2012) 20 Taxmann.com 554 (P&H) : 2010 TaxPub(DT) 2280 (P&H-HC),  CIT v. Kailash Jewellery House [ITA No. 613/2010 (Del-HC), dt. 9-4-2010], CIT v. Jaora Flour and Foods (P) Ltd. (2012) 344 ITR 294 (MP) : 2012 TaxPub(DT) 2013 (MP-HC), Vinod Bhandari v. Pr. CIT [ITA Nos. 350/Ind/2017, 66/Ind/2017, 57/Ind/2019, dt. 20-3-2020] : 2020 TaxPub(DT) 1705 (Ind-Trib), Bannalal Jat Construction (P) Ltd. v. Asstt. CIT 2018 TaxPub(DT) 319 (Jp-Trib), Dy.CIT v. Shri Manoj Kumar Johari [ITA Nos. 479/JP/13 & 383/JP/13, dt. 16-10-2015], Parasmal Jain v. Asstt. CIT [1TA No. 916/JP/12, dated 17-10-2015] and Manmohan singh Vig v. Dy. CIT (2006) 6 SOT 18 (Mum-Trib) : 2006 TaxPub(DT) 898 (Mum-Trib).

IN THE ITAT, JAIPUR BENCH

RAMESH C. SHARMA, A.M. & SANDEEP GOSAIN, J.M.

Jewels Emporium v. ACIT

ITA Nos. 303, 234/JP/2019

15 September, 2020

Assessee by: Manish Agarwal, CA

Revenue by: B.K. Gupta, CIT-DR

ORDER

R.C. Sharma, A.M.

These are the cross appeals filed by the assessee and the revenue against the order of learned Commissioner (Appeals)-IV, Jaipur dated 12-12-2018 for the assessment year 2015-16 in the matter of order passed under section 143(3) read with section 153B(1)(b) of the Income Tax Act, 1961 (in short, the Act).

  1. The hearing of the appeals was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.
  2. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a partnership firm, engaged in manufacturing and trading (including export) of designer jewellery made of gold and silver studded with precious and semi-precious stones. A search operation under section 132 was carried out on 17-12-2014 at the business premises of the assessee situated at M.I. Road, Jaipur and its sales outlet at Hotel Rambagh Palace, Jaipur. Besides this, simultaneously the search at the residential premises of its partners and other key persons of the group was also carried out. During the course of search, loose papers and cash were found and seized and the entire stock available at both the business premises was valued by the departmental valuer at market price as on the date of search. Statements of the partners and key persons were also recorded and a surrender towards the alleged excess cash and stock was obtained in the statements recorded of one of the partner Shri Anup Bohra.
  3. The assessee filed its return of income for the year under appeal on 16-9-2015 declaring total income at Rs. 9,97,510 and the assessment was completed at total income of Rs. 6,50,52,710 by making additions of Rs. 33,57,059 towards alleged excess cash and Rs. 6,14,97,858 towards alleged excess stock. Against such order, assessee preferred appeal before the learned Commissioner (Appeals) who vide order 12-12-2018 has deleted the addition made on account of excess stock. However, addition on account of excess cash was upheld by the learned Commissioner (Appeals). Against the order of the learned Commissioner (Appeals), both, i.e., the assessee and the revenue are in appeals before us wherein following grounds have been taken by the assessee and the revenue :–

Grounds of assessee’s appeal:

“1. On the facts and in the circumstances of the case and in law, learned Commissioner (Appeals) has grossly erred in confirming addition of Rs. 33,57,039 made by learned assessing officer by alleging the same as unexplained cash found during the course of search arbitrarily without appreciating the submissions made, thus the addition of Rs. 33,57,039 deserves to be deleted.

1.1 That the learned Commissioner (Appeals) has further erred in confirming the addition of Rs. 33,57,039made by learned assessing officer, by completely ignoring the submission of the assessee that the said cash is on account of sale of Rs. 30,80,745, which remained unincorporated in books of accounts as on the date of search and later the same stood incorporated and due profit as included in the total income has been accepted, thus, difference in cash as per books and as found during the course of search is fully explained. Appellant prays addition made on this account be deleted.

1.2 That the learned Commissioner (Appeals) has further erred in not accepting the submission of assessee that assessee has already declared the sales and profit thereon from the sale of goods against the alleged excess cash of Rs. 33,57,039, thus any further addition tantamounts to double taxation and therefore, the entire addition of Rs. 33,57,039 deserves to be deleted.

  1. That the appellant craves the right to add, delete, amend or abandon any of the grounds of appeal either before or at the time of hearing of appeal.”

Grounds of revenue’s appeal:

“1. Whether on the facts and in the circumstances of the case and in law learned Commissioner (Appeals) is justified in deleting the Additions of unexplained cash found during the course of search & additions on undisclosed excess stock.

  1. Whether on the facts and in the circumstances of the case and in law learned Commissioner (Appeals) is justified in deleting of initiating penalty proceedings under section 271AAB of the Income Tax Act, 1961.”
  2. We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that the assessing officer in para 5 of the assessment order has observed that assessee is engaged in manufacturing and trading of gems and designer jewellery and handicrafts and its main clientele is rich Indian and international tourists. The assessing officer then alleged that most of the sales made is in cash and not recorded in the book of accounts. It is true that assessee is engaged in manufacturing and trading of designer jewellery and its customers mainly comprises of foreign tourists however, neither the product is as such that the same could be sold at a hefty price since it is made of precious metal (gold and silver) whose price is governed by the international market and the extraordinary price cannot be asked for the precious stone embedded therein since the customer though coming from the international market but most of them are dealing in the same goods and having deep knowledge about the quality and tentative prevailing rate of such type of precious stones. Further the allegation that most of the sales is in cash which was not recorded in books of accounts is wrong and based on no evidence found as a result of search or brought on record at any stage of proceedings. Most of the sale of the assessee is to foreign tourists where they preferred to make the payment through credit cards and in case of cash payments the same is to be taken in convertible foreign exchange for which the preparation of bill and filing of the details of the same to the relevant authorities is not only mandatory to the assessee but also it is mandatory for the customer to carry and produce the invoice before the custom authorities at the time of leaving the country. Since the foreign tourists have preferred payment through credit card, around 80% of payment against total sale have been received in convertible foreign exchange through credit card. The remaining 20% payment is either received through banking channels or, in case of foreign tourists even cash payment made by them is in the shape of convertible foreign exchange the entire sales is duly recorded. Further as a result of search not a single instance was found where sales have been made and not recorded in the books of accounts.
  3. During the course search operation total cash of Rs. 49,72,600 was found at various premises searched. Out of the total cash found, a sum of Rs. 3,15,000 was claimed as belonging to group firm M/s. Masters Strokes and the balance was claimed as belonging to the assessee and its partners. The cash balance as per cash book lastly updated upto 15-12-2014 was of Rs. 12,99,938 and for the balance Rs. 33,57,000 a surrender was obtained from Shri Anup Bohra (one of the partners of the assessee firm) though he himself has stated that the books of accounts are not completed as on the date of search. Thereafter on the receipts of the seized documents, assessee completed its accounts and filed the return of income wherein after incorporating the sales which remained un-entered as on the date of search, there was no difference in cash. However, the assessing officer has failed to appreciate all the facts and evidences furnished and made the addition of balance amount of Rs. 33,57,000 by holding the same as unexplained. By the impugned order, the learned Commissioner (Appeals) confirmed the addition.
  4. It was contended by the learned CIT-DR that statement recorded on oath under section 132(4) and 131 cannot be brushed aside unless and until the assessee explained that these statements were made under coercion or duress and these are having evidentiary value. Further, if the retraction is to be made, it should be at the earliest. However, in the instant case, the retraction was made indirectly by not declaring the undisclosed income as declared under section 132(4)/131 in the return of income filed by the assessee. Reliance was placed by the learned CIT-DR on the following judicial pronouncements in support of the above contention —

(i) Video Master v. JCIT (2016) 66 taxmann.com 361 (SC) : 2015 TaxPub(DT) 3763 (SC)

(ii) Banna Lal Jat Construction (P) Ltd. v. ACIT in ITA No. 720/JP/2017 vide Order, dated 29-12-2017

(iii) PCIT v. Shri Roshan Lal Sancheti in DB ITA No. 47/2018, dated 30-10-2018 : 2018 TaxPub(DT) 7549 (Raj-HC)

(iv) Bhagirath Aggarwal v. CIT (2013) taxmann.com 274 (Del) : 2013 TaxPub(DT) 0672 (Del-HC)

(v) CIT v. O Abdul Razak (2012) 20 taxmann.com 48 (Ker) : 2012 TaxPub(DT) 3290 (Ker-HC)

(vi) CIT v. Lekh Raj Dhunna (2012) 20 taxmann.com 554 (P&H) : 2010 TaxPub(DT) 2280 (P&H-HC)

(vii) Thiru S. Shyam Kumar v. ACIT (2018) 99 taxmann.com 39 (Mad.) : 2018 TaxPub(DT) 7162 (Mad-HC)

(viii) CIT v. M.S. Aggarwal (2018) 93 taxmann.com 247 (Delhi) : 2018 TaxPub(DT) 2537 (Del-HC)

(ix) Ravindra Kr. Verma v. CIT (2013) 30 taxmann.com 367 (All)

(x) T. Lakhamshi Ladha & Co. v. CIT (2016) 73 taxmann.com 117 (Bom) : 2016 TaxPub(DT) 3930 (Bom-HC)

(xi) Manmohan Singh Vig v. DCIT (2006) 6 SOT 18 (Mum) : 2006 TaxPub(DT) 0898 (Mum-Trib).

  1. On the other hand, the learned AR has reiterated the contentions raised before the learned Commissioner (Appeals).
  2. We have considered the rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by the lower authorities in their respective orders as well as cited by the learned AR and learned DR during the course of hearing before us in the context of factual matrix of the case. From the record, we found that as on the date of search, the books of account of M/s. Jewels Emporium were incomplete and the printouts of cash books as taken by the search team did not reflect the true and correct balance available which is made part of the seized papers. Under these circumstances the cash balance as appearing in such incomplete books of accounts and taken as recorded cash balance as per books as on the date of search is wrong being not updated. Following explanation was given to the assessing officer with regard to discrepancy in the cash balance which was explained as per note No. 5(c) of schedule 15 of balance sheet —

(c) As evident from above, during the course of search, excess cash amounting to Rs. 33,57,039 was also found, which was seized by the department. This excess cash pertains to sale of difference in stock of Rs. 30,80,745 which could not be incorporated in the Books of Accounts at that point of time. After incorporation of the said sale in the books of accounts, there is no excess cash being worked out.

  1. It is clear from the above that the books of accounts of the assessee were not complete as on the date of search and there were certain cash sales which had taken place prior to search in respect whereof the necessary entries were pending to be recorded in the books of accounts. After the search and on receipt of seized documents assessee had completed its books and recorded these sales in its books, copies of the relevant voucher was also submitted to the assessing officer. However, the assessing officer failed to appreciate the same by observing that during the course of search in the statement recorded, Shri Anup Bohra, partner never stated that books of accounts are incomplete and accepted the excess cash as undisclosed income of the firm. Learned Commissioner (Appeals), without appreciating the facts and the submissions made alongwith the relevant documentary evidence has concurred with the finding of the assessing officer and confirmed the addition.
  2. We also found that both the assessing officer as well as learned Commissioner (Appeals) failed to appreciate the fact that sales to the extent of Rs. 33,57,000 was duly incorporated and recorded in the books of accounts while completing the same after search and thus there remained no difference in the cash physically found and as per books of accounts as on the date of search, therefore, no adverse inference could be drawn. It is settled proposition of law that assessee should be allowed to complete its books of accounts upto the date of search. In this regard reliance is placed on the decision of the ITAT Ahmedabad Bench reported in107 Taxman 85 in the case of V.M. Thakkar v. ACIT wherein it has been held that “It is incumbent upon Authorised officer during search or during assessment to allow the assessee to complete his books till date of search”.
  3. Furthermore, we found that as on the date of search, i.e., on 17-12-2014, the cash as per books was taken by the search team at Rs. 12,99,938 was actually the closing cash balance of 15-12-2014 (i.e. the date upto which the books were written and completed). Perhaps the partner Shri Anup Bohra was not aware of the fact that the books of account were written up to 15-12-2014 and his aversion made in the statement recorded during the course of search are based on the printouts of cash as per books completed till 15-12-2014 and not up to immediate preceding day of search, i.e., 16-12-2014. The copy of printouts of such cash book which was forming part of the seized recorded is marked as Annexure A-1 pages 4-20 wherein the cash balance of Rs. 12,99,938 taken as the cash as per books of account as on the date of search was actually for 15-12-2014 which did not include the amount of cash sales made on 16-12-2014.This also supports the contention of the assessee that books of account were not complete as on the date of search which is duly evidenced from the seized papers itself. It is pertinent to note that after receiving copies of all the documents and inventory sheets, assessee completed the books and reconciled all the papers/valuation and went to meet with the investigating officials who advised him to raise this contention before the assessing officer. Thereafter assessee at first opportunity, i.e., in the return filed for the year under appeal did not include any amount on account of surrender obtained in respect of both excess cash and stock, by the search authorities and immediately after filing the return a detailed letter was filed before the assessing officer on 16-9-2015 and an affidavit of Shri Anup Bohra was also filed during the course of assessment proceedings re-affirming these facts which remained uncontroverted.
  4. It was contended by the learned CIT-DR that if the amount of excess cash found during search is taken to be on account of cash sales remained to be recorded in books of the assessee until the date of search then, the assessee would have collected TCS on the same under section 206C of the Act, and since no such TCS has been collected by the assessee, the contention of the assessee is not acceptable. In this regard, we observe that as per the provisions of section 206C as were applicable at that point of time, only in cases where goods sold in cash are in excess of Rs. 5 lacs TCS is required to be collected is evident from the voucher submitted for these cash sales that no single sale was made for an amount exceeding Rs. 5 Lacs. Thus, no TCS was collectible and hence the allegation of the assessing officer is incorrect, in as much as the excess cash found during search was indeed on account of genuine cash sales made, which were remained to be entered in the books, as on the date of search. The statements recorded under section 132(4) cannot be made the sole basis for making additions unless it is supported by any documentary evidence.
  5. In this regard, the CBDT has clarified by clarification dated 10-3-2003 (No. 286/2/2003-Income Tax) that while recording statement during the course of search and seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income. Thus, the additions based on the alleged surrender obtained during the course of search are in contravention to the circular and instruction of the CBDT and therefore the same deserves to be deleted.
  6. From the record, we also found that one major fact was ignored by the assessing officer as well as by learned Commissioner (Appeals) that the sale of Rs. 33,57,039 was duly recorded in the books of accounts and after inclusion of the same in total sales, cash balance, profits and stocks were derived which were accepted by both the authorities without any doubts. Thus, further addition by alleging the same as excess cash tantamount to taxation of an income twice. One in the shape of sales and profits embedded therein and again by making addition by alleging the same as unexplained excess cash. For this purpose, reliance may be placed on the following judicial pronouncements :–

(i) CIT v. Kailash Jewellery House ITA No. 613/2010 (Delhi High Court), dt. 9-4-2010

(ii) CIT v. Jaora flour and Foods Pvt. Ltd. (2012) 344 ITR 294 (MP) : 2012 TaxPub(DT) 2013 (MP-HC)

(iii) CIT v. Vishal Exports Overseas Ltd., Tax Appeal No. 2471 of 2009 Gujarat High Court, dt. 3-7-2012

(iv) Shri Vinod Bhandari v. Pr. CIT, ACIT-2 (1), DCIT-2(1), ITAT, Indore, dt. 20-3-2020 in ITA Nos. 350/Ind/2017, 66/Ind/2017, 57/Ind/2019 : 2020 TaxPub(DT) 1705 (Ind-Trib)

  1. In view of the above discussion and considering the facts and circumstances of the case, we do not find any merit in the addition of Rs. 33,57,039 upheld by the learned Commissioner (Appeals) on account of excess cash. The assessing officer is directed to delete the same.
  2. In the appeal filed by the revenue, the department has challenged deletion of addition of Rs. 6,14,97,858 made by alleging the same as being Excess stock found during search and admitted by partner in the statements recorded during the search operation.
  3. Rival contentions have been heard and record perused. Brief facts are that, during the course of search operation total stock found at the business premises of assessee firm situated at D-7, M.I. Road, Jaipur and shop titled as Boutique, Hotel Rambagh Palace, Jaipur was quantified and valued by departmental valuer at Rs. 26,62,93,376. The search team based on incomplete books of accounts worked out the cost of stock as per books as on the date of search, i.e., on 18-12-2014 at Rs. 20,47,95,518 and the differential amount of Rs. 6,14,97,858 was alleged as excess unexplained stock and based on this working an admission of Shri Anup Bohra, one of the partners of assessee’s firm, was obtained in his statements recorded during the course of search as stated above. On the date of search books of the assessee were not complete and certain entries pertaining to cash sales made on 16-12-2014 remained to be incorporated therein, which fact is established from the copy of cash book print outs seized during the course of search where the cash balance as on 16-12-2014 is appearing in the Balance Sheet marked as Anx-1 page 22 from where the value of stock of Rs. 20,47,95,518.00 is taken by the search team. The other most important factor which is ignored by the department is that while valuing the stock found, the departmental valuer took the value of precious metal and other precious and semi-precious stones at prevailing market price as on the date of search (18-12-2014) whereas in accordance with the specified norms and accounting standards, the stock recorded in the books is at the cost price and or market value whichever is lower and since cost price is lower, same has been recorded at cost price in the books. It is relevant to state that there is no dispute in quantity measured by the departmental valuer. It was thus contended that since the stock found at the time of search was valued at prevailing market value and to compare the stock as per books of accounts which had always been recorded on cost price, the profit element embedded in value estimated by DVO to bring both the values in parity and make them comparable and thereafter the assessing officer is required to find out any excess or any shortage of stock. It was also found that after giving effect to the cash sales made on 16-12-2014, entry of which were remained to be made in the books as on the date of search and further reducing the profit element from the gross value determined by departmental valuer, the total value of stock found as on the date of search was equal to the value of stock recorded in the books of the assessee and therefore no addition is warranted. However, the assessing officer without appreciating the same and simply for the reason that one of the partners had admitted the same as unexplained in the statement recorded during the search, had made the addition. When all these facts alongwith the same evidences which were submitted before the assessing officer during course of assessment proceedings were produced before the learned Commissioner (Appeals) in appellate proceedings, learned Commissioner (Appeals) after appreciating the same had deleted the addition made in this regard. Findings recorded by the learned Commissioner (Appeals) in this regard are as under :–

“9.1 I have perused the written submissions submitted by the learned A.R. and the order of assessing officer. I have also gone through various judgments cited by the learned A.R. and those contained in the order of assessing officer.

9.2 Briefly the facts related to the issue under consideration are that during the search operation stock found at the business premises of the appellant firm situated at D-7, M.I. Road, Jaipur and shop titled as “Boutique”, Hotel Rambagh Palace, Jaipur was inventoried and valued by the departmental valuer at t 26,62,93,376, as against the above, the cost price of the stock as per books of accounts of the firm as on the date of search was worked out by considering opening stock, purchases and sales till the date of search and gross profit related to these sales, which came to 20,47,95,518.

The assessing officer has considered the difference between the two amounting to 6,14,97,858 as excess unexplained stock found during the course of search, as the same was also admitted by Shri Anup Bohra in his statement recorded during the course of search under section 132(4) of Income Tax Act.

9.3 It was submitted before me that stock inventory so prepared during the course of search has been valued at ‘market value’ and has not at all being valued at the ‘cost price’. Accordingly the deduction of GP rate embedded in the value of physical stock is to be considered to arrive at the cost of stock physically found during the course of search for comparing the same with stock as per books of accounts. The working after deducting the Gross Profit embedded in the valuation of physical stock and after considering the same, it was submitted by the learned A.R. that the cost of physical stock so found was more or less same as of the cost of stock as per books of accounts and rather the physical stock was slightly on lower side and the slight difference was only due to estimation of the valuation of the physical stock so done by the approved valuer. The assessing officer has not accepted the argument of the learned A.R. merely on the ground that the partner of the firm in his statement recorded at the time of search has admitted and surrendered the excess stock.

9.4 Accordingly in the return of income so filed by the appellant, no additional income was offered on the impugned excess stock and a note to this effect was also made in audited financial results. The learned A.R. has also given the working of G.P. rate of last four preceding years other than the current year in order to fortify his argument about the G.P. rate in the current year being in the same range as that in earlier years. Moreover the learned A.R. has also furnished raw material wise working of last six years in order to support his argument that the value so taken by the approved valuer has to be the market value and cannot be the cost price.

9.5 In this connection it may be pointed out that said difference in value of stock in trade as per books of accounts and as per valuation report of registered valuer as on the date of search, i.e., 17-12-2014. The assessing officer has not held that there was any difference in quantity of stock as per Valuation report and as per books of accounts. The said stock in trade was of studded jewellery of gems stones, for which registered valuer adopts the value of studded stones on estimated basis at market value. Whereas the value as per books of accounts of the said items is supported by purchase bills and vouchers and is as per its cost to assessee as per regular books of accounts and valuation is made by valuer at market price, i.e., at price which it will fetch in open market so profit margin is also there in the value assessed by the valuer. Thus there can be no addition simply on the basis of valuation unless excess quantity of stock is found.

9.6 It is a common practice that during the course of search valuation of stock so physically found at the business premises of any assessee is done on prevailing market value. On the other hand in the present case as in all the cases of jewellers, the assessee is not maintaining the stock register, then stock as per books of accounts as on the date of search could only be determined after considering the opening stock, adding the purchases in it and considering the sales till the date of search as well as the Gross Profit embedded in these sales. It will give us the value/cost of the stock as per books of accounts. Same has to be compared with the cost of physical stock so found, which has to be determined after giving deduction the Gross Profit embedded in the valuation of physical stock so done by the approved valuer. The working for the closing stock accordingly would be :–

S.No. Particulars Amount
1. Valuation as done by DVO during the course of Search 26,62,93,376.00
Less: Value of raw gold 7,68,96,472.00
Less: Value of raw silver 5,70,580.00 7,74,67,052.00
2. Market Value of Stock 18,88,26,324.00
Less: G.P. @ 34.20% 6,45,78,603.00
3. Cost Price of Stock physically found 12,42,47,721.00
Add: Value of raw gold and silver 7,74,67,052.00
4. Cost price of total goods physically found 20,17,14,773.00
5. Stock as per books of accounts as on date of search 20,47,95,518.00
6. Shortage of goods due to estimation [5-4] 30,80,754.00

Thus there is actually a shortage of stock instead of surplus as is determined by the assessing officer.

9.7 This view was also taken by the Hon’ble ITAT in assessee’s own case in assessment year 1987-88, wherein similar issue of valuation of physical stock found during the search conducted was decided by holding that deduction of gross profit embedded in the market value of the physical stock should be given, copy of which was placed before me. In the order no. ITA/1529/JP/91 and ITA/JP/1617, dated 10-4-1995 the Hon’ble ITAT, Jaipur has held as under :–

  1. We hear the learned Counsel for the parties at sufficient length. Whereas the learned Counsel for the assessee mainly urged that the cost of the stock had been correctly estimated in the books and there was no justification at all for arriving at the cost of the stock by making the tag prices, which were in fact the asking price, as basis and supported his reasoning with Tribunal’s approach inACIT v. Bhandari Jewellers (1994) Tax World 292 Sec. 1, the learned D.R. vehemently argued that in view of the statement of Sri Heera Lal employee the tag prices represented Singapore Dollars on verifiable Indian currency by a multiplier of 5.7 and therefore the assessing officer was justified in valuing all the stock by the rates mentioned on the tag.
  2. It is evident in the present case that the articles found either at the shop in the Rambagh Palace Hotel or at the main show room at M.I. Road, Jaipur were valued by the two methods vis, on the basis or the prices mentioned the tags tied with the articles or by the estimate made by the approved value. The difference between the valuations as mentioned in the books and as arrived at either at the time or search or at the time of assessment was the result of the difference in the estimation of the cost of the articles made. After all it was the estimation of the cost or the articles one made by the assessee on the basis of his personal knowledge which was likely to be influenced by personal interest. The estimation of the cost made on the basis of the prices mentioned in the tags could not be, on the fact of it, indicative of the correct cost of the article. It was in the fact the asking price which is ordinarily subject to negotiation between the buyer and seller. Therefore, the estimation of cost made on the basis of the prices mentioned in the tags could not be accepted. The third name was the report of the Approved Valuer. An approved valuer having the special knowledge of the subject may be a better person than others to make estimation of the cost and gie his opinion. His opinion is in the nature of the opinion of an export and hence admissible and as such acceptable if it is uninterested, impartial and trustworthy. In the present case it is not shown that the approved valuer was in any way interested in either of the parties. The estimation made by him of the cost of untagged a articles was, therefore, acceptable. Incidentally such estimation, more or less, tallied with the estimation made by the assessee. Therefore, the cost of the stock declared by the assessee at the time of search must have been accepted. There are thus reasons to take the view that since the basis of the addition of Rs. 54,250 was after all estimation of the cost of articles and such estimation was done at an intermediary stage of the accounting period it is not safe to declare that the assessee was having any stock in excess of that mentioned in the books. It may be mentioned that the cost of the stock was not arrived at itemwise or weightwise so as to pin point the excess articles or weight. Under such circumstances we find it difficult to uphold the sustained addition even. The addition sustained by the learned Commissioner (Appeals) therefore deserved to be deleted. However, as detailed at page 69 and shown in the chart supplied to us during the course of argument at the most addition of Rs. 24,476 only, as declared by the assessee may be and is hereby sustained. We think, we are fortified in our view, by the approach adopted by the Tribunal inM/s. Bhandari Jewellerscase (supra) relied upon by Mr. N.C. Dhadda. Ground relating to this point in assessee’s appeal are, therefore, partly allowed but in Revenue’s appeal dismissed.

9.8 Accordingly I am of the considered opinion that assessing officer should have considered the deduction of Gross Profit embedded in the valuation of physical stock so done.

The meager difference of stock which is about 1.15% of the total valuation arrived at by the DVO may be ignored which may bound to occur on account of estimation while valuing fair market value of the precious and semi precious stones embedded in the jewellery. Further in my view even if addition is somehow made on account of said valuation of stock and sustained in assessment than credit of the same has to be allowed in year end while computing profit at year end which has not been allowed and as assessing officer accepted declared closing stock as on 31-3-2015 in books of accounts the addition of difference in value as on 17-12-2014 will get set off. The assessee carried forward the closing stock of this year-end as declared in books of accounts as opening stock for next year. The assessing officer neither allowed credit of difference while accepting closing stock at year end but accepted closing stock declared by the assessee which has been taken as opening stock in next year. In next year also no credit allowed for enhanced stock and even it is done it will be revenue neutral exercise.

The Hon’ble ITAT in case of Manoj Kumar Johari (ITA Nos. 479/JP/13 & 383/JP/13 Order, dated 16-10-2015) has held that :–

“Apropos Ground No. 5 of the assessee, we find merit in the arguments of the learned counsel for the assessee that increase in valuation of the closing stock is to be allowed in next year as increase in opening stock in next year, i.e., 2010-11. It has not been disputed that the assessee has not claimed any benefit by increase in valuation of stock in subsequent year. Hence, the addition becomes revenue neutral. Consequently, respectfully following the decision of Hon’ble Supreme Court in the case of CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC) : 2013 TaxPub(DT) 2414 (SC), the addition being tax neutral and the assessee having not derived any benefit, the addition is deleted.”

Also in case of Paras Mal Jain v. ACIT (1TA No. 916/JP/12, dated 17-10-2015) has held that :–

“Assuming an addition on account of closing stock is somehow made, the same is to be allowed to the assessee in the next year as opening stock which will reduce the profits of next year. This exercise is essentially revenue neutral between two years. The Hon’ble Supreme Court in the case of CIT v. Excel India, (2013) 358 ITR 295 (SC) : 2013 TaxPub(DT) 2414 (SC) has held that addition in such revenue neutral exercise should not be made by the Department. Thus on both the counts, there is no justification in retaining the addition which is deleted.”

9.9 In above para, accordingly the addition so made by the assessing officer is deleted and these grounds of appeal of A.R. on this issue are allowed. On the facts and in the circumstances of the case, the assessing officer is directed to delete the addition of 6,14,97,858.

  1. Against the above order of the learned Commissioner (Appeals), the revenue is in further appeal before the ITAT. The learned CIT DR has very vehemently argued to the affect that statement of partner of the firm Shri Anup Bohra recorded during the course of search under section 132(4) wherein he has accepted the amount of Rs. 6,14,97,858 as excess stock cannot be brushed aside and is having full evidentiary value and therefore the retraction so made by the assessee should not be accepted. In this regard we observe that the search started in the early hours of 17-12-2014 and was carried on for a period of around 45 hours and was concluded in the late hours of 18-12-2014 and rather in the morning of 19-12-2014. During this time, statement of Shri Anup Bohra was recorded many times in bits and pieces and he was naturally under tremendous pressure, and he was satisfied about the inventory of physical stock so prepared in so far as quantity of the items are concerned but he is not a person well versed with the accounting principles, he accepted the working of the excess stock so done by the search team in good faith and without going deep into the accounting principles that from the market value of stock so estimated by the approved valuer, the Gross Profit embedded in it is to be reduced for arriving at the cost price for proper and fair comparison with the stock as per books of accounts. There is no retraction from the side of the assessee inasmuch as that the assessee has not retracted or disputed the inventory of the physical stock in quantitative term and has also not disputed the estimated market value of the various items. It is only the calculation part of the arriving at the value of the excess stock that the accounting mistake occurred at the time of search which should be rectified while working out the quantum of excess stock found, if any.
  2. It was further argued by the learned CIT DR that partner Shri Anup Bohra videLetter, dated 22-12-2014 has stated that search was conducted peacefully and satisfactorily and therefore retraction made afterward by the assessee is rejected. In this regard, we observe that there was not at all a retraction of statement but it is only rectification of the mistaken working of the excess stock done at the time of search. Moreover, even this letter only refers that search was conducted in a peaceful manner and does not have any mention of surrender being correct or being reaffirmed. Furthermore, this letter was filed just four days after the search and by that time the assessee neither received the copies of valuation sheets and seized material nor had sufficient time to reconcile the difference.
  3. It was argued by the learned CIT DR is that the gold rates in the year 2012 and 2013 were much higher than the rates adopted for the valuation by the DVO and thus reduction in the value by way of embedded GP is baseless. In this regard, we observe that during the course of assessment proceedings before assessing officer, assessee had filed a table showing party-wise purchases made in the preceding six and half years by the assessee in respect of few item which is placed at paper book pages 60-80 according to which the average rate of gold per gram works out to Rs. 2262 which is very much lower than the rate adopted by DVO (Rs. 2714 per gram). Similarly, average rate of purchase of emerald comes to Rs. 1390 per ct. as against average fair market rate/value taken by DVO at Rs. 4500 per ct. Similar is a position in respect of diamond where average purchase cost is Rs. 18567 per ct. whereas DVO has taken the rate Rs. 25438 per ct.

Thus, this argument of the assessing officer for not allowing deduction of GP embedded in the estimated market value, is devoid of any merit.

  1. The learned CIT-DR relied on the decision of the Hon’ble Supreme Court in the case ofVideo Master v. JCIT (2016) 66 taxmann.com 361 (SC) : 2015 TaxPub(DT) 3763 (SC), in which various loose sheets/papers and unrecorded vouchers were found at the premises of the assessee during the course of search and the surrender made in the statement of the assessee was corroborated from the entries found in the seized material. Accordingly, Hon’ble Court came to the conclusion that no substantial question of law arises against the finding of the tribunal that statement could be used as evidence. However, the facts of instant case of the assessee are quite different as no corroborative evidence by way of unaccounted purchases or unaccounted sales or excess stock was found in the seized material. Accordingly, the aforesaid case-law is not at all applicable in the instant case of the assessee.
  2. The learned CIT-DR also relied on the decision in the case ofBannalal Jat Construction (P) Ltd. v. JCIT of ITAT Jaipur wherein the surrender made in the statement under section 132(4) on 10-10-2014 about the excess cash found at the residence. Later on, about more than one and half month afterwards another statement under section 131 was recorded on 4-12-2014 wherein also the assessee maintained his earlier stand. Therefore, the ITAT rejected the contention of the assessee that earlier surrender made during the course of search was under pressure. Moreover, the ITAT has also observed that in response to question No. 11, the assessee has submitted that considering the various documents, loose papers, entries, cash, investment, advance tax found during the course of search he surrendered Rs. 4,01,43,210 as the undisclosed income. Thus, it is evident that the surrender was based on the various incriminating documents found during the course of search, which is not the case in the instant case of the assessee. Hon’ble High Court has affirmed the decision of the ITAT in view of the above. In the instant case of the assessee, firstly there is no retraction and secondly there was no any reaffirmation of the alleged amount of surrender in the subsequent statement, rather there was no any subsequent statement in the instant case of the assessee. Moreover, no any incriminating documents were found reflecting excess stock.

Accordingly, this case law is also not applicable in the instant case of assessee. Another case so cited by the learned CIT DR is of Ravi Mathur and Others decided by Hon’ble Rajasthan High Court on 13-5-2016. In this case also the surrender was made on the entries in the seized document and accordingly the facts of the cited case are quite different from the instant case of the assessee. Similar is the position in respect of various other cases cited by the learned CIT DR that facts of those cases are quite different and distinguishable with the facts of instant case of the assessee and therefore same are not applicable here.

  1. With regard to contention of the learned CIT-DR regarding deduction of gross profit embedded in the valuation of physical stock, we observe that the department itself in assessee’s own case in assessment year 1987-88, wherein similar issue of valuation of physical stock found during the search conducted was decided has observed that that deduction of gross profit embedded in the market value of the physical stock should be given, copy of the assessment order and order of ITAT are placed in the paper book. Moreover, the Hon’ble Jurisdictional High Court in the case ofCIT v. Akash Gems Pvt. Ltd., having identical issue is involved of allowing deduction of GP out of the value of stock estimated by department valuer at the time of search. The Hon’ble Court has upheld the order of ITAT where the ITAT was of the view that it is a matter of common knowledge that the valuation done by the department valuer at the time of search is on the basis of market price and not on the basis of cost price and for making comparison of the stock as per books reasonable deduction towards the profit is to be given.
  2. In view of above discussion and considering the totality of facts and circumstances of the case, we do not find any infirmity in the findings recorded by the learned Commissioner (Appeals) which are as per material on record, therefore, do not require any interference on our part. Accordingly, we uphold the deletion of addition in respect of excess stock found during the course of search.
  3. In the result, appeal of the assessee is allowed whereas appeal of the revenue is dismissed.

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