“PER BENCH The captioned five appeals relate to the same assessee and involve certain common issues, therefore, they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.the Act”), pertaining to the assessment year 2003-04. In this appeal, the assessee has raised 2 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 two issues as is evident from the following two abridged Grounds of Appeal:-
2. First, we shall take up the appeal of the assessee in ITA No. 748/PN/2009 which is an appeal directed against the order of the Commissioner of Income-tax (Appeals) Kolhapur dated 19-3-2009 which, in turn, has arisen from order dated 8-8-2008 passed by the Assessing Officer, under section 143(3) r.w.s. 153A(b) of the Income-tax Act, 1961 (in short ”
“On facts and in law,
1) The learned CIT(A) erred in sustaining an addition of Rs. 7,01,589/- on account of customers’ gold/silver lying with the appellant by holding that the said customers’ gold/silver belonged to the appellant and hence, there was under valuation of stock to that extent.
2) The learned CIT(A) erred in confirming an addition of gross profit of Rs. 3,00,365/- by holding that the appellant must have carried out trading activity out of the customers’ gold/silver and hence, the GP addition was warranted.”
3. Before proceeding to adjudicate specific Grounds of Appeal raised, it would be appropriate to refer to the background of the case. The assessee is a partnership firm which is, inter-alia, engaged in the business of sale and purchase of jewellery. The assessee-firm is regularly assessed to tax. On 26-10-2005, a search and seizure action u/s 132(1) of the Act was conducted at the residential as well as business premises of Gadgil Group, Sangli and the assessee being run by the members of Gadgil family was also covered. Pertinently, on 10-3-2005, a survey action u/s 133A of the Act was also carried out at the business premises of the assessee- firm on which occasion, assessee had made a declaration of additional income in respect of excess stock amounting to Rs. 71,56,219/- for A.Y. 2005-06. As a consequence of search action on 26-10-2005 also, assessee-firm had made a declaration of additional income on account of excess stock of Rs. 97,11,449/- for A.Y. 2006-07. The aforesaid additional incomes declared by the assessee have been duly assessed in the respective assessments.
4. In so far as A.Y. 2003-04 is concerned, originally, assessee filed a return of income on 31-10-2003 declaring total income of Rs. 91,63,603/-. Consequence to the search action, a notice u/s 3 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 153A(a) of the Act was issued on 12-12-2006 requiring the assessee to furnish a return of income for A.Y. 2003-04, in response to which, assessee stated that there was no change in the income originally declared and that the return of income filed originally on 31-10-2003 be treated as return filed in response to notice u/s 153A(a) of the Act. In the assessment finalized by the Assessing Officer u/s 143(3) r.w.s. 153A(b) of the Act dated 8-8-2008, the total income has been assessed at Rs. 1,08,41,510/- after making certain disallowances/additions. The subject matter of dispute before us pertains to two additions viz. Rs. 7,01,589/- and Rs. 3,00,365/- representing additions on account of gold/silver belonging to customers treated as belonging to the assessee and gross profit on sales out of customers’ gold/silver treated as of the assessee respectively.
4. In this background, both the parties have made their submissions and the assessee had also furnished two Paper Books, containing pages 1 to 59 and 1 to 34 respectively.
5. In the assessment order, the Assessing Officer has noticed that the Auditor appointed in terms of section 142(2A) of the Act was directed to examine the details of gold jewellery received from the customers year-wise and for how much period it remained with the assessee before it was adjusted or returned. The Auditors furnished list of customers whose gold/silver was lying with the assessee-firm since F.Y. 2002-03 to 2005-06. The Assessing Officer required the assessee to explain the said balances and to prove the genuineness of such balance of gold lying with the assessee. The assessee submitted that the quantity of customers’ gold/silver lying with the assessee was a very insignificant percentage of the total gold/silver 4 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 received from the customers against orders and the same was mainly on account of human error and mistakes in computer data feeding . The Assessing Officer however, held that such quantity of gold actually belonged to the assessee and accordingly in the A.Y. 2003-04 made an addition of Rs. 7,01,589/- as tabulated in para 3 of Annexure ‘E’ to the assessment order. The CIT(A) has also sustained the said addition, against which assessee is in appeal before us.
6. Before us, the learned counsel for the assessee vehemently pointed out that the addition has been made on an incorrect assumption that the balance of gold/silver standing in the account of customers actually belonged to the assessee. The learned counsel pointed out that the quantity as well as percentage of gold lying in stock at the close of the year was insignificant as compared to the total quantity of gold/silver received from the customers against orders and that the same was attributable to mistake in entries on account of wrong computer feeding and that in reality, no such gold belonged to the assessee. In any case, it was also pointed out that when the customer places an order, he is given a specific date on which the ornaments will be ready. As such, when the ornaments are received from the Karigars after making it is separately kept in a bag for delivery and therefore, there is no question of such item being included in the stock of assessee-firm. It was also pointed out that there has been no evidence found at the time of search which indicated that the balance of gold in the name of customers’ gold/silver actually belonged to the assessee. It was therefore, contended that the addition made be deleted. 5 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07
7. On the other hand, the learned CIT –DR appearing for the Revenue has contended that as per the list, some of the balances have remained unchanged over a long period and that there was no satisfactory explanation as to why such balance of gold belonging to different customers have not been claimed by them. It was therefore, contended that the addition has been rightly made by the Assessing Officer.
8. We have carefully considered the rival submissions. The assessee-firm is engaged in the business of jewellery and inter-alia, receives orders from customers for making of ornaments, etc. In the course of business, assessee also receives gold/silver ornaments from the customers for execution of their orders. Obviously, such quantity of gold/silver belonged to the customers and not to the assessee as the same are received for making of ornaments as desired by the customers. It also emerges from record that the assessee was maintaining separate records for such gold/silver received. The Assessing Officer noticed that at the end of the year, there were certain quantities of gold/silver lying with the firm which was on account of customers’ deposit. Such balance of gold/silver has been held to be belonging to assessee and accordingly added to the returned income. In this connection, we find that the preliminary plea of the assessee was that such balances represented certain errors in recording the transactions and that there was no such actual gold belonging to the assessee. In this connection, it is seen that for F.Y. 2002-03 relevant for the year under consideration total gold received from the customers was 296958.855 grams and the balance lying with the firm on this count at the end of year was
1351.17 grams. Similarly for A.Y. 2004-05 gold received from customers was 306536.640 grams and balance lying with the firm at 6 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 the end of the year was 1443.88 grams and for A.Y. 2005-06 and 2006-07 the gold received from customers was 341637.670 grams and 359665.840 grams whereas the balance lying at the end of close of the year with the firm was 1456.60 grams and 1456.60 grams respectively. Ostensibly, the explanation of the assessee is borne out from the aforesaid figures. The percentage of gold said to be lying with the firm is quite insignificant and is not more than 0.50% as compared to the quantity of gold received from the customers. The reasons for such difference is sought to be explained on account of human errors while feeding data in computer. Considering the enormity of the gold received from the customers and the balance outstanding at the end of each year, we find that the motive of concealing one’s own gold in the garb of the customers’ gold cannot be attributable to the assessee. Moreover, in the course of search action, there is no such modus operandi which has come to light and therefore, in our view, the explanation of the assessee was liable to be accepted and the income-tax authorities have wrongly inferred that the balances of gold lying in the name of the customers actually belonged to the assessee. Having regard to the facts and circumstances and the material on record, we hold that the inference drawn by the lower authorities is untenable and is liable to be set aside. We hold so. In conclusion, we therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 7,01,589/-. Thus on Ground No. 1, assessee succeeds.
9. Ground No. 2 is related to Ground No. 1. After treating the gold/silver belonging to the customers lying with the assessee as belonging to the assessee, the Assessing Officer inferred that such deposit of gold would have been used by the assessee in its trading 7 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 operations and he thereafter, estimated the gross profit on such sales and accordingly made an addition of Rs. 3,00,365/- for the assessment year under consideration. Since we have deleted the first addition, by holding that balance of gold/silver belonging to the customers lying with the assessee cannot be treated as belonging to the assessee, consequent addition on account of gross profit as aforesaid is also not sustainable. We therefore, reverse the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 3,00,365/-. Thus on Ground No. 2 also, assessee succeeds.
10. In the result, appeal of the assessee in ITA No. 748/PN/2009 for A.Y. 2003-04 is hereby allowed.
11. Now, we shall take up the appeal of the assessee in ITA No. 749/PN/2009 which is an appeal directed against the order of the Commissioner of Income-tax (Appeals) Kolhapur dated 19-3-2009 which, in turn, has arisen from order dated 8-8-2008 passed by the Assessing Officer, under section 143(3) r.w.s. 153A(b) of the Income-tax Act, 1961 (in short ”the Act), pertaining to the assessment year 2004-05. In this appeal, the assessee has raised following issues as is evident from the following abridged Grounds of Appeal:-
“On facts and in law,
1) The learned CIT(A) erred in confirming an addition of Rs. 3,69,254/- on account of estimated gross profit on alleged unaccounted sales.
2) The learned CIT(A) erred in confirming an addition of Rs. 4,69,543/- on account of estimated capital employee for making unaccounted sales.
3) The learned CIT(A) erred in sustaining an addition of Rs. 57,698/- on account of customers’ gold/silver lying with the appellant by holding that the said customers’ gold/silver belonged to the appellant and hence, there was under valuation of stock to that extent. 8 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07
4) The learned CIT(A) erred in confirming an addition of gross profit of Rs. 2,70,944/- by holding that the appellant must have carried out trading activity out of the customers’ gold/silver and hence, the GP addition was warranted.”
12. The dispute in Ground of Appeal No. 1 is with regard to an addition of Rs. 3,69,254/- representing gross profit on certain unaccounted sales noticed as per the material found during the search. With regard to Ground of Appeal No. 1, the relevant facts are that certain diaries/note books and loose papers, bundles were impounded at the time of survey action u/s 133A of the Act and certain incriminating documents were also found and seized from the residence of partners of the assessee-firm covered u/s 132(1) of the Act. Such diaries/note books found reflected notings of certain transactions and the Assessing Officer found it difficult to separate transactions on a page as regards sale/purchase of gold/silver/diamond/jewellery etc. and it was also difficult to ascertain from such diaries whether the transactions recorded therein had been reflected in the regular books of account of the assessee or not. Therefore, the case of the assessee was referred for Special Audit u/s 142(2A) of the Act. The Special Auditors appointed u/s 142(2A) of the Act, examined the seized material and reported the entries which were not found reflected in the regular books of account maintained by the assessee. For the year under consideration i.e. A.Y. 2004-05, such entries which are stated by the auditors to be outside the books of account amount to Rs. 31,76,522/- as per the tabulation in para 8 of Annexure ‘E’ to the assessment order. The aforesaid amount has been treated as unrecorded sales and after applying the average gross profit rate of 11.31%, the gross profit of Rs. 3,59,264/- was worked out which has been assessed as income earned outside the books of account. The 9 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 CIT(A) has also upheld the addition, against which assessee is in appeal before us.
13. Before us, the learned counsel for the assessee submitted that the seized material in question has been wrongly interpreted by the Assessing Officer to be containing sale transactions not recorded in the books of account. In this context, our attention was invited to pages 41 to49 of the Paper Book No. 1 wherein sample of such seized papers have been placed. It is sought to be explained that such papers are a part of diary/note book maintained by different salesmen at the respective counters and the notings therein are mere estimations prepared on the asking of the customers, and the same do not reflect ‘actual sales’. The learned counsel explained that when a customer visits, he asks for price of different ornaments and to facilitate decision making, the salesman makes a rough calculation of weight and the labour charges and such notings are made in the impugned note books. The price for the ornaments varies because the prices of gold and silver fluctuate everyday and therefore, the note books are used to calculate the price of ornaments by multiplying the weight displayed on the tag and rate of gold/silver at that moment after adding the labour charges. Out of several articles, which may be inquired by the customer, he may finally select only one article for which final sale bill is prepared by the salesman. However, several calculations made for single customer which are the rough notings made in the seized paper do not reflect actual sales. With reference to the samples of the seized material placed in the Paper Book, it is canvassed by the learned counsel that by the very manner in which the notings have been made they do not reflect actual sales. In any case, it is submitted that wherever possible even such notings have been co-related with 10 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 the entries made in the regular books of account and such amounts have been excluded by the auditors, while arriving at the alleged unrecorded sales. The learned counsel pointed out that the impugned seized material can be understood as a ‘dumb document’, inasmuch as the notings contained therein do not bear the character of sale as alleged by the Assessing Officer and that it was only on a presumption the amounts noted in the seized material have been said to be unrecorded sales.
14. On the other hand, the learned CIT-DR has vehemently pointed out that the factum of the assessee executing sales outside books of account was clearly emerging, inasmuch as in the course of survey operation on 10-03-2005 and at the time of search on 26-10- 2005, assessee had disclosed additional income on account of excess stock of gold/silver jewellery and that such admission of excess stock demonstrated that assessee was making purchase and sale outside the books of account. It was also pointed out that at the time of search at the residence of one of the partners, gold bricks weighing 4 kgs. were found which was unrecorded in the books of account and the assessee group had accepted the fact and disclosed income on such unrecorded transactions. According to the learned CIT DR, the aforesaid clearly shows that the modus operandi of unrecorded sales was being undertaken by the assessee; and therefore, the entries in the seized note book/diaries have been correctly taken as sales, which were not recorded in the regular books of account.
15. In reply, the learned counsel for the assessee has submitted that the impugned seized material does not contain any narration that it reflected actual sales and therefore, the addition has been 11 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 unjustly made by the lower authorities. The additional income declared on account of excess stock at the time of survey as well as search operation has no bearing with regard to the impugned issue as according to the learned counsel, the evidence in question does not reflect any actual sales undertaken by the assessee. It was also pointed out that other than the aforesaid seized material, there was no corroborative evidence to support the inference that the notings in the seized material were actual sales.
16. We have carefully considered the rival submissions. The plea set up by the assessee is that the calculation/notings in the seized material are rough calculations made in the course of discussions with the customers who come to purchase gold/silver jewellery from the assessee. As per the assessee, the seized Note-books/diaries are maintained by the salesmen for making rough calculation of estimates and do not reflect actual sales. A sample of such seized diary/Note book has been placed at pages 41 to 49 of the Paper Book. Notably, the calculation and the notings made in the seized Note-books/diary on various dates were subject matter of audit by the Special Auditor appointed u/s 142(2A) of the Act. On the asking of the assessee an exercise was also undertaken whereby the auditors examined the notings on the seized diary and compared the same with the regular account books. The transactions which were found recorded as sales in the regular account books were excluded and the entries/notings which were not found recorded in the regular account books have been treated as sales executed by the assessee outside the regular account books. The assessee challenges the aforesaid inference by the Revenue. 12 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07
17. The plea of the assessee that such diaries/Note-books are dumb documents and do not reflect any income assessable in the hands of the assessee is concerned, the same in our view, is unacceptable. Ostensibly, some of the notings in seized material/diaries tally with the sales recorded in the account books and therefore, the notings/entries in the seized material cannot be completely disregarded as a dumb document. Of course, it is also plausible that each and every narration or noting in the diary is not actual sales executed by the assessee. We say so for the reason that there is no denying the fact that such diaries are maintained by different salesmen and the recordings have not been made in a very formal manner. So however, having regard to the fact that some of the notings in the diary have been found to be actual sales executed by the assessee and that such record maintained is found maintained at the business premises in the course of business, the onus is entirely on the assessee to justify that the notings therein do not reflect any income which is likely to escape assessment. The assessee has sought to explain the seized documents on the basis of a prevailing practice at jewellery shops where the customer while deciding to purchase an article, inquires about several articles and the cost thereof. The calculations are made several times for several articles for a customer after which he may select only one article. The aforesaid practice is not being disputed by the Revenue. Therefore, considering the entirety of the facts and circumstances, we find that the explanation of the assessee cannot be completely brushed aside. So however, in the absence of any clinching evidence with the assessee to prove that all the entries do not reflect actual sales, in our opinion, it would be appropriate to make an estimate of sales, so as to meet the ends of justice. For the said purpose, in our view, 50% of the un-reconciled entries in the seized 13 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 diaries/Note-books be treated as sales effected by the assessee outside the account books. Therefore, we set aside the order of the CIT(A) on this aspect and direct the Assessing Officer to re-compute the addition on account of gross profit on unrecorded sales as estimated in the aforesaid manner. At this point, we may refer to an alternate plea raised by the assessee with regard to computation of gross profit on such unrecorded sales. In A.Y. 2004-05, the gross profit rate in gold business was 5.39% and in silver business it was 17.24% and the Assessing Officer computed the gross profit on unrecorded sales by applying an average of two gross profit rates i.e. @ 11.31%. the assessee has contended that the gross profit be computed with reference to the respective gross profit rate, inasmuch as profit from the sale of gold items be computed by applying rate of 5.39% in gold business and that of silver items by applying 17.24%, as such details are available on record and not on the basis of an average gross profit which is erroneous. The aforesaid point made by the assessee is quite reasonable and in our view, deserves to be considered by the Assessing Officer while re- computing the income from unrecorded sales as directed by us in the earlier paragraphs. In conclusion, we therefore, set aside the order of the CIT(A) and direct the Assessing Officer to re-compute the income on account of gross profit in respect of unrecorded sales in the manner indicated above. Thus on this Ground, assessee partly succeeds.
18. Now, we may take up Ground of Appeal No. 2 which relates to an addition of Rs. 4,69,543/- made by the Assessing Officer on account of capital employed in respect of unaccounted sales identified by him on the basis of seized material, which was the subject matter of consideration in Ground of Appeal No. 1. The 14 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 Assessing Officer reasoned that in order to effectuate unaccounted sales, assessee would have employed capital which was also not recorded in the account books. For the aforesaid reason, a further addition of Rs. 4,69,543/- was made by the Assessing Officer for the assessment year under consideration. Such an addition has also been upheld by the CIT(A) against which, assessee is in appeal before us.
19. Without prejudice to its primary plea that there was no unaccounted sales effected by the assessee and therefore, no addition is merited on account of capital employed, the learned counsel submitted before us that the proportion of alleged unaccounted sales stated by the Assessing Officer is very meager in comparison to the total sales declared in the books of account and therefore, no separate capital was required to undertake such unrecorded sales. In any case, it has also been submitted that credit should be given for the gross profit earned on unrecorded sales in order to arrive at the capital employed for in such unrecorded business.
20. On the other hand, learned CIT-DR has defended the addition made on this score by the Assessing Officer by submitting that necessarily certain level of capital would have been employed by the assessee to undertake the sales which are not recorded in the books of account.
21. We have carefully considered the rival submissions. In principle, we are in agreement with the Revenue that addition is merited on account of capital employed by the assessee in undertaking unrecorded sales. The factum of the assessee 15 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 undertaking unrecorded sales as per the seized material has been upheld by us in the earlier paragraphs, subject to re-working of the quantum of such sales. Keeping that in mind, on this ground also, we find that assessee is eligible to certain relief inasmuch as the quantum of unrecorded sales have been reduced. Considering the aforesaid aspect, we therefore, deem it fit and proper that an addition of Rs. 2,00,000/- on this score would be adequate in order to plug the leakage of revenue, if any. Thus, assessee partly succeeds on this Ground.
22. Ground of Appeal No. 3 relates to an addition of Rs. 57,698/- on account of customers’ gold/silver lying with the assessee. Similar issue came up for consideration before us while dealing with appeal for A.Y. 2003-04. On similar set of facts, our decision on Ground of appeal No. 1 for A.Y. 2003-04 would apply mutatis mutandis to the facts of the case for the year under consideration also. We therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 57,698/-. Thus, on Ground No. 3, assessee succeeds.
23. Ground of Appeal No. 4 relates to an addition of gross profit of Rs. 2,70,944/-. Similar issue came up for consideration before us while dealing with appeal for A.Y. 2003-04. On similar set of facts, our decision on Ground of appeal No. 2 for A.Y. 2003-04 would apply mutatis mutandis to the facts of the case for the year under consideration also. We therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 2,70,944/-. Thus, on Ground No. 4, assessee succeeds.
24. Resultantly, appeal of the assessee in ITA No. 749/PN/2009 pertaining to A.Y. 2004-05 is partly allowed. 16 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07
25. Now, we shall take up the appeal of the assessee in ITA No. 750/PN/2009 which is an appeal directed against the order of the Commissioner of Income-tax (Appeals) Kolhapur dated 19-3-2009 which, in turn, has arisen from order dated 8-8-2008 passed by the Assessing Officer, under section 143(3) r.w.s. 153A(b) of the Income-tax Act, 1961 (in short ”the Act), pertaining to the assessment year 2005-06. In this appeal, the assessee has raised following issues as is evident from the following abridged Grounds of Appeal:-
“On facts and in law,
1) The learned CIT(A) erred in confirming an addition of Rs. 6,73,624/- on account of estimated gross profit on alleged unaccounted sales.
2) The learned CIT(A) erred in sustaining an addition of Rs. 7,800/- on account of customers’ gold/silver lying with the appellant by holding that the said customers’ gold/silver belonged to the appellant and hence, there was under valuation of stock to that extent.
3) The learned CIT(A) erred in confirming an addition of gross profit of Rs. 4,10,854/- by holding that the appellant must have carried out trading activity out of the customers’ gold/silver and hence, the GP addition was warranted.
4) Without prejudice to the above grounds, assessee submits that in case, the above additions are sustained, the same should be set off against the excess stock of Rs. 71,56,219/- declared by the appellant.”
26. Ground of appeal No. 1 relates to an addition of Rs. 6,73,624/- on account of estimated gross profit on alleged unaccounted sales. Similar issue came up for consideration before us while dealing with the appeal of the assessee in ITA No. 749/PN/2009 pertaining to assessment year 2004-05. On similar set of facts, our decision on Ground of appeal No. 1 for A.Y. 2004-05 would apply mutatis mutandis to the facts of the case for the year under consideration also. We therefore, set aside the order of the CIT(A) and direct the 17 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 Assessing Officer to re-compute the income on account of gross profit in respect of unrecorded sales in the manner as indicated in the preceding paragraphs while dealing with the Ground no. 1 pertaining to A.Y. 2004-05. Thus on this Ground, assessee partly succeeds.
27. Ground of Appeal No. 2 relates to an addition of Rs. 7,800/- on account of customers’ gold/silver lying with the assessee. Similar issue came up for consideration before us while dealing with appeal of the assessee for A.Y. 2003-04. On similar set of facts, our decision on Ground of appeal No. 1 for A.Y. 2003-04 would apply mutatis mutandis to the facts of the case for the year under consideration. We therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 7,800/-. Thus, on Ground No. 2, assessee succeeds.
28. Ground of Appeal No. 3 relates to addition of Rs. 4,10,854/- made on account of gross profit. Similar issue came up for consideration before us while dealing with appeal of the assessee for A.Y. 2003-04. On similar set of facts, our decision on Ground of appeal No. 2 for A.Y. 2003-04 would apply mutatis mutandis to the facts of the case for the year under consideration. We therefore, reverse the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 4,10,854/-. Thus on Ground No. 3 also, assessee succeeds.
29. By way of Ground of Appeal No. 4, an omnibus plea has been raised by the assessee that incase any additions are sustained, the same should be set off against the additional income of Rs. 71,56,219/- offered by the assessee for the year under consideration 18 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 in respect of excess stock. Justifying the aforesaid plea, the learned counsel for the assessee submitted that in case the addition on account of gross profit on unaccounted sales is made and also the declaration on additional income on account of excess stock made by the assessee is retained, it would be an anomalous situation, inasmuch as it would result in double addition. It is sought to be pointed out that the income which was hitherto earned outside the account books, was declared in the form of excess stock amounting to Rs. 71,56,219/- and therefore, the other additions made by the Assessing Officer are not required. It is therefore, sought to be made that the addition, if any, on account of gross profit in respect of unaccounted sales be set off against the additional income on account of excess stock declared by the assessee.
30. In our considered opinion, the plea of the assessee is not misplaced and the addition sustained on account of undisclosed gross profit on account of unrecorded sales, if any, can be said to be subsumed in the additional income declared by the assessee for the assessment year under consideration on account of excess stock amounting to Rs. 71,56,219/-. The Assessing Officer is directed to allow appropriate relief on this score while re-working the income of the assessee. Needless to mention, the Assessing Officer shall give a reasonable opportunity of being heard to the assessee.
31. Thus, the appeal of the assessee in ITA No. 750/PN/2009 for assessment year 2005-06 is partly allowed.
32. Now, we shall take up the appeal of the assessee in ITA No. 751/PN/2009 which is an appeal directed against the order of the Commissioner of Income-tax (Appeals) Kolhapur dated 19-3-2009 19 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 which, in turn, has arisen from order dated 8-8-2008 passed by the Assessing Officer, under section 143(3) r.w.s. 153A(b) of the Income-tax Act, 1961 (in short ”the Act), pertaining to the assessment year 2006-07. In this appeal, the assessee has raised following issues as is evident from the following abridged Grounds of Appeal:-
“On facts and in law,
1) The learned CIT(A) erred in confirming an addition of Rs. 19,00,286/- on account of estimated gross profit on alleged unaccounted sales.
2) The learned CIT(A) erred in confirming an addition of Rs. 6,43,641/- on account of estimated capital employee for making unaccounted sales.
3) The learned CIT(A) erred in confirming an addition of gross profit of Rs. 5,36,763/- by holding that the appellant must have carried out trading activity out of the customers’ gold/silver and hence, the GP addition was warranted.
4) The learned CIT(A) erred in confirming an addition of Rs. 1,89,888/- on account of gross profit inr4espect of sale of gold bricks to shri Ganesh H. Gadgil.
5) Without prejudice to the above grounds, assessee submits that in case, the above additions are sustained, the same should be set off against the excess stock of Rs. 97,11,449/- declared by the appellant.”
32. Ground of appeal No. 1 relates to an addition of Rs. 19,00,286/- on account of estimated gross profit on alleged unaccounted sales. Similar issue has come up for consideration before us while dealing with the appeal of the assessee in ITA No. 749/PN/2009 pertaining to assessment year 2004-05. On similar set of facts, our decision on Ground of appeal No. 1 for A.Y. 2004-05 would apply mutatis mutandis to the facts of the case for the year under consideration also. We therefore, set aside the order of the CIT(A) and direct the Assessing Officer to re-compute the income on account of gross profit in respect of unrecorded sales in the manner as indicated the preceding paragraphs while dealing with the Ground 20 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 no. 1 pertaining to A.Y. 2004-05. Thus on this ground, assessee partly succeeds.
33. Ground of Appeal No. 2 relates to an addition of Rs. 6,43,641/- on account of estimated capital employed for making unaccounted sales. Similar issue has come up for consideration before us while dealing with the appeal of the assessee in ITA No. 749/PN/2009 pertaining to assessment year 2004-05. On similar set of facts, parity of reasoning adopted by us while dealing with Ground of appeal No. 2 for A.Y. 2004-05 would apply mutatis mutandis to the facts of the case for the year under consideration also. Following the reasoning given therein, for the year under consideration, we deem it fit and proper that an addition of Rs. 3,00,000/- on this score would be justified in order to plug the leakage of Revenue. Assessee partly succeeds on this ground.
34. Ground of Appeal No. 3 relates to an addition of gross profit of Rs. 5,36,763/-. Similar issue came up for consideration before us while dealing with appeal for A.Y. 2003-04. On similar set of facts, our decision on Ground of appeal No. 2 for A.Y. 2003-04 would apply mutatis mutandis to the facts of the case for the year under consideration. We therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 5,36,763/-. Thus, on Ground No. 3, assessee succeeds.
35. Ground of Appeal No 4 relates to an addition of Rs. 1,89,888/- made on account of gross profit in respect of sale of gold bricks to shri Ganesh H. Gadgil. The facts in this regard are that at the time of search action at the residence of Shri Ganesh H. Gadgil, one of the partners of assessee-firm, jewellery found included 4 pure gold 21 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 bricks of one kg. Shri Ganesh Gadgil could not explain the source of investment and he made a declaration of income on account of undisclosed investment in purchase of such gold bricks at Rs. 27,60,000/- in his personal return of income for the A.Y. 2006-07. In the course of the impugned assessment proceedings of the firm, it was pointed out that the investment in such gold bricks has been admitted by the partner in his individual return. However, to buy peace of mind, assessee firm paid tax on Rs. 1,89,888/- being the profit on such transaction. The Assessing Officer brought to tax the sum of Rs. 1,89,888/- on the ground that the same has been admitted by the assessee as gross profit assessable to tax for A.Y. 2006-07. The CIT(A) has also upheld the said addition.
36. Before us, the only point made by the assessee is that no separate addition be made on this count and that the same be set off against the additional income declared in this assessment year in respect of excess stock of Rs. 97,11,449/-. Similar point has been raised by the assessee for A.Y. 2005-06 in ITA No. 750/PN/2009, wherein we have directed the Assessing Officer to allow appropriate relief on this score while re-working the income of the assessee. For the reasoning given therein, for the year under consideration also, we direct the Assessing Officer to allow appropriate relief while re- working the income of the assessee. Needless to mention, the Assessing Officer shall give a reasonable opportunity of being heard to the assessee and thereafter adjudicate the issue. This ground of appeal is accordingly allowed for statistical purposes.
37. Ground No. 5 raised by the assessee is an omnibus plea similar to that made for the A.Y. 2005-06 which is to the effect that the additions, if any, is sustained be set off against the declaration 22 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 of additional income of Rs. 71,56,219/-. Following the reasoning given while dealing with the assessee’s appeal for A.Y. 2005-06, this ground is treated as allowed for statistical purposes.
38. In the result, the captioned appeals of the assessee are partly allowed in the manner indicated above.
39. Now we shall take up the Revenue’s appeal in ITA No. 394/PN/2010 pertaining to A.Y. 2006-07 which is an appeal directed against the order of the Commissioner of Income-tax (Appeals) Kolhapur dated 20-3-2009 which, in turn, has arisen from order dated 8-8-2008 passed by the Assessing Officer, under section 143(3) of the Income-tax Act, 1961 (in short ”the Act”).
40. The first issue raised in the appeal of the Revenue is with regard to addition of Rs. 1,52,47,994/- made on account of excess closing stock which has since been deleted by the CIT(A). At the time of survey on the business premises of the assessee, the stock of gold, silver and diamond found was got valued through Government Approved Valuer and certain difference vis-à-vis the value of stock as per the account books was found. The assessee firm had declared additional income of Rs. 97,11,449/- on account of such excess stock of gold, silver and diamond as detailed below: i) Gold account Rs. 71,35,290/- ii) Silver Account Rs. 1,90,324/- iii) Diamond Account Rs. 23,895,835/- --------------------- Rs. 97,11,449/- --------------------
41. In the course of assessment proceedings, the Assessing Officer noticed that the difference in the stock position noticed was 23 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 to the extent of Rs. 2,49,59,443/- as detailed in para 4 of the order of the CIT(A). The assessee was asked to explain as to why the declaration of additional income on account of excess stock was lower at Rs. 97,11,449/-. The assessee explained before the Assessing Officer that the total amount of gold found, the adjustment was made for the gold receivable from karigars and reduction on account of gold deposits by the customers and by relatives to arrive at physical closing stock which was then compared with the value of stock as per the account books and on the difference assessee had surrendered the additional income. For each of the items of gold, silver and diamond, the assessee furnished the requisite information along with the difference and the value thereof which was in consonance with the additional income of Rs. 97,11,449/- declared by the assessee. The Assessing Officer however, in para 9(iii) of the order has not accepted the explanation of the assessee and accordingly, the difference of Rs. 1,52,47,994/- representing the short declaration made was assessed to tax. Before the CIT(A_), assessee reiterated the submissions made before the Assessing Officer. In para 5 of the order of the CIT(A) the submissions made by the assessee have been reproduced and the plea of the assessee was that the excess value of stock worked out by the Assessing Officer was not correct and that the assessee had correctly worked out the excess stock at the time of survey and the difference to the extent of Rs. 97,11,449/- was correctly declared as the additional income. The CIT(A) has examined the reconciliation furnished by the assessee and found them to be correct and according to him, the declaration of excess stock made by the assessee was correct and no addition was justifiable. The factual findings have been arrived at by the CIT(A) in respect of each of the 24 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 stocks, viz. gold, silver and diamond in para 6 to 11 of the impugned order, which we reproduce hereunder:
“6. I have considered the submissions. During the search, statement of Shri Sameer Gadgil, partner of the appellant firm was recorded. In this statement, he was asked to explain the inventory of gold of 94042 grams. valued at Rs.6.53 crorcs and 932.2 kg silver valued at Rs.
1.07 crorcs. The appellant in reply to the above question gave reconciliation of the gold and silver found with the gold and silver in the books. The reconciliation in terms of weight was as under; As per books (Kgs.) As per Valuation Report (Kgs, Gold 71,234 81.575 Silver 775.331 791.598
7. He admitted that the stock of gold physically present was higher than the books by 10.34 kg and silver by
16.26 kg. The stock of diamond was also in excess of
23.85 lacs. The above difference in the stock of gold, silver and diamond between books and the physical inventory was accepted by him. Again in question No.28, he was asked what was the value of stock on that day. He stated that value of stock of gold was 71.35 lacs and silver 1.90 lacs. In question No.29, it was asked if he had anything more to state. In answer to question No.29, the appellant declared the following amounts with regard to gold, silver and diamonds. Gold Rs. 71,35,290/- Silver Rs. 1,90,324/- Diamond Rs. 28,35,835/-
8. In addition, there was declaration on certain other items viz. labour charges etc. The total declaration was Rs.1,06,04,6847-, out of which, the declaration on account of excess gold and silver was Rs.73,25,614/-.
9. In the appellants answer to question No.26, the quantity of gold as per valuation report is given as 81.575 Kgs and the quantity as per books given at 71,234 Kgs. resulting in difference of 10.34 kgs excess gold found during the survey. The value per gm adopted by the registered valuer is Rs.695/-(65359232/94042 gm). The value of 10.34 Kgs @ 695/- per gm is to Rs.71,83,600/-. The declaration of the appellant is Rs.71,35,290/- which is marginally lower. The adjustments made to the total gold found to arrive at the figure of 81.575 kg is given in the submission of the appellant at para 5 above. The closing stock as per books of accounts similarly is
83701.525 which after adjustment comes down 25 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07
71234.635. The difference between quantities as per physical inventory and books of accounts remains 10.340 Kgs before and after the adjustments. The adjustments are on account of gold deposits from ^ customers and relatives. This gold belongs to other parties and therefore not a part of the closing stock. The stock difference of
10.340 Kg @ 690/- per grm amounts to 71,35,290/- which is the amount declared by the appellant. In the situation, there is no justification for the addition to be made.
10. Similar is the case of silver. Although the adjusted quantity of gold as declared in the statement during the survey is 71234.635 grn, the quantity before adjustment is 83701.525 gms. This quantity should be compared with the physical inventory of 94042. The AO has however compared the quantity in the books after adjustments for gold deposit by third parties of 71235 grns with the unadjusted physical inventory of 94042 gms thereby resulting in the higher difference and the addition made. In the tentative trading account drawn up on the date of survey, the gold amount shows closing stock of Rs.4,50,11,860/-. This is the value of 71235 gms. of gold @ 612/- per gm as stated by the appellant. The AO valued the stock at Rs.695/-. The assessees declaration was at the rate of 690/- per gm.
11. The value of closing stock in the tentative trading account @695/- per gm works out to Rs.4,95,08,32s/- that is higher than the closing stock shown in the trading account by Rs.44,96,465/- There is a statement attached to the tentative trading account which shows closing stock of gold in quantity terms. According to this statement fine weight of closing stock before adjustment is 83701.525 gms and after reducing gold deposits by customers and family members and gold receivable from Karigars is
71234.635 gms. This is the same quantity mentioned in the statement recorded during the survey. There is therefore no doubt that quantity of 71234 is the quantity after adjustments and cannot be compared with the gross quantity of closing stock found on physical verification before any adjustment.
12. In view of the above, the addition is held to be unjustifiable and made on wrong appreciation of facts. The addition is therefore deleted.”
42. Against the aforesaid, learned CIT-DR has submitted that the CIT(A) was not justified in deleting the addition, inasmuch as, the difference in stock as worked out by the Assessing Officer is quite justified as apparent from record. On the other hand, the learned counsel for the Respondent-assessee vehemently pointed out that the Assessing Officer erred in computing the excess stock, inasmuch 26 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 as on one hand, the stock as per physical inventory was taken and on the other hand, the stock position as per books was adopted which was after adjustment on account of material receivable from karigars, deposited by the customers and by relatives. Our attention was invited to the working reproduced by the CIT(A) in para 5 of his order and therefore, on this basis it is sought to be made out that there was no discrepancy in the excess stock as determined by the assessee at the time of survey.
43. We have carefully considered the rival submissions. It is clear from the order of the CIT(A) that the Assessing Officer has not appreciated the position being canvassed by the assessee in its proper perspective. The assessee explained before the Assessing Officer the manner in which the excess stock on account of gold, silver and diamond was worked out and the additional income thereon was declared. We find that the Assessing Officer has reproduced the reply of the assessee in para 9(ii) of the assessment order. So however, there is no reasoning extended by the Assessing Officer in para 9(iii) thereof as to why such explanation of the assessee is not acceptable. The only reason was that the stock at the time of survey was got valued by a Government Approved Valuer and therefore, the valuation has been adopted as such. So however, the order of the CIT(A) clearly brings out that the excess stock vis-à- vis account books was to be determined after making suitable adjustments enumerated therein. As per such adjustment for which there is no credible negation brought out by the Revenue, the CIT(A) has correctly deduced that the excess stock determined by the assessee for the purposes of declaring additional income of Rs. 97,11,449/- was fair and proper. The order of the CIT(A) is 27 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07 therefore, hereby affirmed. The stand of the Revenue therefore, fails.
44. The last issue in this appeal is with regard to addition u/s 40A(3) of the Act. The Assessing Officer made a disallowance of Rs. 1,03,076/- u/s 40A(3) of the Act as per details in annexure ‘C’ to the assessment order on the ground that assessee had effected purchases in cash of Rs. 5,15,383/- which was in violation of provisions of sec. 40A(3) of the Act. The plea of the assessee was that none of the purchases was in excess of Rs. 20,000/- and therefore, such payment even if made in cash were outside the purview of disallowance of sec. 40A(3) of the Act. The Assessing Officer however, made a disallowance by countering the assessee and holding that because the payments have been made on the same day in excess of Rs. 20,000/-, the disallowance u/s 40A(3) of the Act was justified. The CIT(A) has deleted the addition as per the discussions in para 31 of the impugned order. In terms thereof, the CIT(A) accepted the plea of the assessee that there was no presumption that the payments have been made to one person by way of same transaction. Against the aforesaid decision, the Revenue is in appeal before us.
45. Before us, the learned CIT-DR reiterated his arguments set up by the Assessing Officer which we have already noted in the earlier paragraphs and is not repeated here for the sake of brevity. On the other hand, the learned counsel for the Respondent-assessee has relied upon the finding of the CIT(A) in this regard and has defended the deletion. 28 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07
46. Having considered the rival submissions, we find that the disallowance has been correctly deleted by the CIT(A). The assessing Officer noticed that the assessee had effected the purchases on the same day but the bills have been split up in the name of family members and the individual payment was below Rs. 20,000/- each. The CIT(A) has found that simply because the dates of payment are same and the surnames of the persons to whom the payments have been made or they belong to one group or family it cannot be presumed that the payments have been made to one person by way of a single transaction. In fact, the CIT(A) has given instances where the bills and the receipts numbers are different. We find that the Assessing Officer has made very generalized observation to make impugned disallowance and the CIT(A) made no mistake in deleting the impugned addition. The action of the CIT(A) is hereby affirmed, inasmuch as no infirmity has been brought out on the basis of any cogent reasons and material. Thus, on this issue as well, the Revenue fails.
47. In the result, all the appeals of the assessee are partly allowed whereas the appeal of the Revenue is dismissed. Decision pronounced in the open court on 31 st January 2013. Sd/- sd/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER Pune, Dated: 31 st January 2013 Ankam Copy to:-
1. Assessee
2. Department
3. The CIT (A) Kolhapur
4. The CIT- Kolhapur
5. The Departmental Representative, “B” Bench, I.T.A.T., Pune. By Order //true copy// Sr. P.S. I.T.A.T., Pune 29 ITA No. 748 to 751/PN/2009 And ITA No. 394/PN/2010 P.N. Gadgil A.Y. 2003-04 to 2006-07
