2025 (7) TMI 1587 - AT - Income Tax

Addition on account of jewellery seized - undisclosed business income - addition u/s 69A - while dismissing the appeal of the assessee the ld. CIT(A) was convinced that the unexplained jewellery was indeed the business stock of the assessee firm and has to be treated as excess stock of business and therefore provisions of Section 115BBE would not apply and against this finding the revenue is in appeal - HELD THAT - As factual discussion goes to show that the impugned gold ornaments have been properly explained and have been accepted by the GST Department that they were nothing but movement of stock from head office Mumbai to branch Bangalore and therefore provisions of section 69A of the Act do not apply. Assessee has offered satisfactory explanation about the nature and source of acquisition of jewellery duly recorded in the books of accounts supported by documentary evidence mentioned elsewhere and accepted by the GST Department also mentioned elsewhere. Therefore we do not find any merit in the impugned addition u/s 69A of the Act and the AO is directed to delete the same. AO has made the addition on the presumption that the liability shown in the name of Shri Samresh Guchhait has ceased to exist - We find that the said liability is in respect of labour charges incurred by the assessee towards manufacturing of gold ornaments on which tax has been deducted at source and few was outstanding for payment as and 31/03/2020. Since the gold ornaments were not of standard quality and there were some manufacturing defects the amount was not paid to Shri Samresh Guchhait and the said amount will be paid after resolving the manufacturing defects. Therefore the liability was outstanding. Thus merely because liability was outstanding as on 31/03/2020 would not mean that it has ceased to exist. We do not find any merit in the impugned addition and the same is directed to be deleted. Accordingly the effective grounds raised by the assessee are allowed. Addition of legal expenses - HELD THAT - Since the AO has treated the seized jewellery as unexplained assets the legal expenses were accordingly disallowed. Since we have held that there is no unexplained jewellery u/s 69A of the Act and deleted the impugned addition we do not find any reason to interfere with the findings of the ld. CIT(A). This ground is accordingly dismissed.

Summary

ISSUES:

Whether jewellery seized by police and claimed by the assessee as business stock can be treated as undisclosed business income under Section 69A of the Income Tax Act.Whether addition on account of cessation of liability is justified where liability was outstanding due to manufacturing defects.Whether legal expenses incurred for release of seized jewellery can be disallowed if the jewellery is treated as unexplained assets.Whether double addition under Section 69A can be made in the hands of both the firm and its partner for the same jewellery.

RULINGS / HOLDINGS:

On the issue of seized jewellery, the Court held that the jewellery was satisfactorily explained as business stock with documentary evidence and accepted by the GST Department; therefore, the addition under Section 69A was not justified and was deleted.Regarding cessation of liability, the Court found that the liability was outstanding due to manufacturing defects and had not ceased to exist; hence, the addition was unwarranted and was deleted.Since the addition under Section 69A was deleted, the disallowance of legal expenses related to release of jewellery was upheld as there was no basis to interfere with the CIT(A)'s findings.The appeal against double addition under Section 69A in the hands of the partner was dismissed, recognizing it as a duplicate addition already addressed in the firm's appeal.

RATIONALE:

The Court applied Section 69A of the Income Tax Act, which deems unexplained money, bullion, jewellery, or valuable articles not recorded in books of account as income if the assessee fails to provide satisfactory explanation.The GST Department's acceptance of the movement of jewellery as stock transfer for display and approval, supported by compliance with GST Act provisions and adjudication orders, was a key factor in establishing satisfactory explanation.The Court emphasized that an outstanding liability does not equate to cessation of liability, particularly where payment is withheld due to manufacturing defects, thereby negating assumptions of income arising from cessation.The Court avoided duplication of additions by dismissing the revenue's appeal against the partner where the same issue had been decided in the firm's appeal.