TMI Blog2008 (9) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount No. (Rs. in lacs) ------------------------------------------------------------ 1. Investment in the purchase of 40 Nos. gold bars. 19.79 ------------------------------------------------------------ 2. Investment in excess stock of 22 carat gold 17.35 jewellery. ------------------------------------------------------------ 3. Investment in excess stock of 10 carat gold 12.28 jewellery. ------------------------------------------------------------ 4. Unaccounted cash found from business premises. 0.64 ------------------------------------------------------------ 5. Investment in the construction of SCO 91-92-93, 28.70 Sector 34, Chandigarh ------------------------------------------------------------ 6. Amount spent on the repair/renovation of H. No. 1.08 598, Sector 8, Chandigarh ------------------------------------------------------------ 7. Excess cash found from the residential premises 1.15 of partners and belonging to the firm. ----------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of excess 22 carat gold jewellery found from the business premises of the assessee during the course of search. 2. The learned CIT(A) has erred in upholding the addition of Rs. 1.50 lac as undisclosed income of the assessee on account of excess stock of 22 carat jewellery found at the business premises of the assessee during the course of search on ad hoc basis without proper application of mind. 3. The upholding of addition of Rs. 1.50 lac being on ad hoc basis is both against facts and erroneous in law and is therefore liable to be deleted. 4. The assessee craves leave to add, to alter or amend the grounds of appeal before the same are heard and disposed of. On the other hand, the Revenue has raised the following grounds: 1. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addition of Rs. 52,07,599 on account of unaccounted investment in stocks of diamond. 2. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addition of Rs. 3,64,930 on account of excess stock of 22 carat gold jewellery. 3. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total weight 1,055.90 ct Less: Weight of diamonds in sale value of 88.85 ct Rs. 3,29,650 (i.e., sale as per our books from 1.4.2001 to 12.5.2001). Based on above purchase rate and adding 24% GP as shown in our books for the year ending 31.3.2001 i.e., sale rate of Rs. 3,710 per contention. Weight of diamonds as per our books as on 967.05 ct The major contention of the learned Departmental Representative is that the action of the learned CIT(A) in deleting the addition is incorrect and the valuation done at the time of search and the value of diamonds was definitely in excess of the value shown as per books of account. Therefore, the AO was justified in making the impugned addition. As regards the inconsistency in the valuation done by the two valuers, the valuation of Sh. Vijay Kumar was acceptable to the assessee. He further stated that the variation in two valuation reports is in respect of one item only and the contention of the assessee that the weight of diamonds found at the time of search tallies with the weight of the diamonds as per the books of account cannot be accepted in the absence of any evidence at the time of search. On the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------- Item Item Higher Lower Difference No. valuation valuation by one by other --------------------------------------------------------- 68 Tops 10,850 4,060 167% --------------------------------------------------------- 246 Rings 7,200 1,500 380% --------------------------------------------------------- 320 Solitaire Rings 34,350 16,250 111% --------------------------------------------------------- 332 L Rings Solitaire 66,600 31,980 108% --------------------------------------------------------- 354 Rings 23,125 81,25 185% --------------------------------------------------------- 359 L Rings 28,160 12,600 123% --------------------------------------------------------- 360 L Rings 24,450 8,965 173% --------------------------------------------------------- 361 L Rings 35,450 11,495 208% --------------------------------------------------------- Mr. Jain further submitted that the seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. No much discrepancy has been pointed out or found in these documents. The assessee has been consistently valuing its stock at cost or market price, whichever is lower. In view of these facts, broadly, we are of the view that there is no reason to make an addition by valuing the diamonds which already form part of the disclosed account of the assessee. The block assessment proceedings cannot be used by the Revenue by taxing the income which has not yet been earned by the assessee. The cost for the purpose of computing the income of the assessee has to be the cost actually incurred. No material whatsoever was brought on record by the Department that the assessee has incurred cost more than what has been declared for the purchase of diamonds. In the absence of any such material, no addition can be made merely on the basis of valuation. The Allahabad Bench of the Tribunal in the case of V.V.S. Alloys Ltd., wherein there was no material with the Department found against the assessee. Investigations were carried out, post-search to verify the purchases made from suppliers in Surat and Mumbai. There was no evidence whatsoever to show that the assessee had paid underhand cash for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d perused the material on record. The learned AO made a total addition of Rs. 22,49,930 as against Rs. 17,35,000 included by the assessee in the block return. An excess addition of Rs. 5,14,930 was contested by the assessee before the learned CIT(A) wherein relief of Rs. 3,64,930 was given and addition of Rs. 1.50 lac was sustained for which the assessee is also in appeal before us. The facts leading to the above addition are that as per AO, an excess stock of 22 carat gold jewellery weighing 5,324.230 gms. was found during the course of search. As per the assessee, it was converted into 24 carat by the AO and worked out excess weight of gold of 480.544 gms. and by applying a rate of Rs. 415 per gm. worked out the value at Rs. 21,23,036 by adding a sum of Rs. 1,26,894 on account of labour charges by applying the rate of Rs. 26 per gm., thus, a total addition of Rs. 22,49,930 was worked out. The assessee has disputed the calculation of the AO. As per the assessee, the total weight in excess was only 4,111.85 gms. of 22 carat gold jewellery. The difference of 1,002.380 gms. was on account of jewellery of customers for repair and 315 gms. was personal jewellery of partners and their f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in applying the labour charges @ Rs. 26 per gm. against the average rate of Rs. 23.30 per gm. worked out on the basis of total labour got done during the financial year 2000-01 without bringing any comparative figures from other persons/jewellers. Therefore, the AO has estimated the labour charges without considering any comparative labour charges of the relevant period from other persons of the related field. Therefore, taking into consideration the above facts, we hold that the AO was not justified in taking the undisclosed income on account of excess stock of 22 carat gold jewellery at Rs. 22,49,930 against Rs. 17,35,000 worked out by the assessee. Therefore, we upheld the stand of the learned CIT(A) by dismissing ground No. 2 of the appeal of the Revenue. 7. The ground No. 3 in the appeal of the Revenue pertains to deletion of addition of Rs. 50,735 on account of valuation of 24 carat gold bars. During the course of search, 44 bars of 24 carat gold weighing 4,664.65 gms. were found as against 'NIL' as per the stock register. The assessee while filing the block return valued the same at Rs. 19,78,800 and accordingly, included it as part of the undisclosed income. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not given any reason for estimating the value at a higher rate. In view of these facts, the valuation done by the assessee and upheld by the learned CIT(A) is quite justified which is based on some documentary evidence issued by SBI, Chandigarh. Therefore, this ground of the appeal of the Revenue deserves dismissal. 8. The next ground i.e., ground No. 4 in the appeal of the Revenue, which pertains to the deletion of Rs. 48,328 on account of unaccounted stock of 18 carat gold used in diamond jewellery has been challenged. The said dispute is arising on account of the fact that the assessee claimed a credit of 290 gms. on account of weight of diamond and stone studded in the diamond jewellery while working out the excess gold stock, whereas the AO gave a credit of 190 gms. only. Further, the AO applied the labour rate of Rs. 26 per gm. as against Rs. 23.30 per gm. mentioned by the assessee. The contention of the assessee was accepted by the learned CIT(A) by deleting the addition. The learned Departmental Representative strongly defended the order of the AO in support of its contention. On the other hand, the learned Authorised Representative submitted that the assessee has done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the learned CIT(A) was not justified in holding the documents as dumb as not relatable to the assessee, specially when these documents were found from the premises of the assessee, therefore, the action of the AO in making the addition was justified. On the other hand, the learned counsel for the assessee strongly defended the orders of the first appellate authority by inviting our attention to the documents placed in the paper book by submitting that the same are dumb documents and do not belong to the assessee. Contention was also raised that no inquiry was made by the AO from the concerned persons despite complete addresses available on the document and explanation given by the assessee has remained uncontroverted. The learned Authorised Representative further submitted that even if it is held that these documents pertain to the assessee, then also the nature of expenditure being repair will be allowable under s. 37(1) of the Act and it will not have any impact on the income of the assessee. In support thereof, the learned Authorised Representative referred to the judgments of the Delhi Bench of the Tribunal in the cases of Raj Sons Jewellers vs. ITO (2004) 86 TTJ (Del) 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conducted on 14th May, 2001, admittedly, the aforesaid judicial pronouncement clearly favours the case of the assessee. Respectfully following these judicial pronouncements, we hold that no surcharge is leviable in the present appeal. Accordingly, this ground of the Revenue is dismissed. 11. Now, we shall take up appeal of the assessee where ground Nos. 1 to 3 pertain to upholding the addition of Rs. 1.50 lac as undisclosed income on account of excess stock of 22 carat jewellery found at the business premises of the assessee during the course of search. This issue has been deliberated upon by us in the preceding paras dismissing the appeal of the Revenue. Therefore, ground Nos. 1 to 3 in the appeal of the assessee are allowed. The remaining grounds are merely prayer, require no deliberation from our side. Therefore, appeal of the assessee is allowed. In the result, appeal of the Revenue is dismissed and that of the assessee is allowed. N.K. SAINI, A.M.: 10th April, 2007 I have the liberty to go through the proposed draft order of learned JM, but I am unable to persuade myself to agree with the conclusion arrived at therein at p. 10, para 5, p. 14 of para 6, p. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luer Sh. Vijay Kumar Less: Value of 18 carat gold weighing 57,650.7 18,13,250 gms. considered separately Balance: Value of diamonds 88,89,692 Less: Value of diamonds worked out as per 31,02,093 trading account of diamonds as on date of search: Rs. 30,41,293 Value of 190 gms. of 18 carat gold in lieu of 945 carats of diamonds weight: Rs. 60,800 Net balance value of excess, loose and studded 52,07,599 diamonds at cost value The aforesaid difference of Rs. 52,07,599 was confronted to the assessee and it was asked to explain as to why the same may not be treated as undisclosed income for the block period. In response to that the assessee submitted as under: "The weight of the diamonds found at the time of search tallies with the weight of the diamonds as per our books. A copy of the inventory or closing stock prepared on 31st March, 2001 i.e., at the close of the immediately preceding accounting year was submitted during the course or search. As per this list the weight of the diamonds came to 1,022.03 carats. This does not include the weight of the diamonds included in item mentioned against 'A old items'. The weight of the diamonds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of search, no adverse inference can be drawn. Valuation report of the registered valuer is only an opinion of person and is purely based on estimation, knowledge and experience of that person in this type of business. The valuation of the diamond jewellery was got done by the Department from Shri Vijay Kumar of M/s Banu Mal Inder Lal Jewellers, Ambala Cantt. During the process of valuation, as the assessee found that the valuation done by Shri Vijay Kumar was unrealistic and unscientific, the matter was pointed out to the Dy. Director of IT, Chandigarh, vide our letter dt. 16th May, 2001. The Department appointed another valuer namely, Shri Sudhir Kumar of M/s Windlas Jewellers and Shri Surya Kant Jain of M/s Jain Jewellers. The jewellery was again got valued from these registered valuers. The total value of the diamond jewellery, including value of 18 carat gold and labour was worked out by Shri Vijay Kumar at Rs. 1,01,22,942 and by the other two valuers collectively at Rs. 98.50 lacs. However, the valuation done by Shri Vijay Kumar was prima facie accepted by the assessee for limited purpose of ascertaining the value of bank guarantee to be furnished for getting the seized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hased over number of years and are duly supported by their purchase bills, (copies of the purchase bills of the diamonds included in the inventory of diamonds as on 31st March, 2001 were also attached). It is the real income that is taxable in the hands of the assessee and the income engrossed in the closing stock can be taxed unless and until the same are sold in the market. The registered valuers have failed to take into account the following facts that were brought to their notice during the course of valuation: (i) Some of the diamond jewellery/diamonds were very old and their cost price to us is much less than the value as on the date of search. (ii) The assessee purchases loose diamonds from Bombay and Surat and gets the jewellery manufactured by himself from the local Karigars. In that way the profit of the middleman and the manufacturer is saved. The registered valuers have valued the jewellery on the basis of the wholesale price of jewellery as is available to them at Chandigarh. They have missed to exclude the margin of the middleman as well as that of the manufacturer of jewellery while taking into account the value of the diamond jewellery. Keeping in view the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g number of carat of gold in stock and as per valuation report being the same, the AO asked to give the details of quantity of diamonds in carat but the assessee did not furnish such information on the ground that it was not maintaining any stock register in respect of diamonds since it was not feasible. The AO pointed out that during the course of search some of the bills with regard to purchase of diamonds were seized and the assessee was asked to explain whether the diamonds purchased as per those bills had been sold and if not then the corresponding particulars in the inventory of stock found during the course of search may be provided. The assessee stated that it was not possible to pinpoint the item-wise details of diamonds and that the diamonds were segregated as per the weight, quality, grade at the time of preparing inventory. It was further stated that valuation of loose diamonds sold and balance remaining as per bills and each item of jewellery was made from different weight, quality, grade and value of loose diamonds. The AO prepared detailed inventory by making reference to each purchase bill and loose diamonds. The assessee had shown inability to compare purchase or l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to co-relate those to certain solitaires which were found during the course of search, the value of which was approx. Rs. 8 lacs. The AO asked the assessee to produce the bills of purchase of those solitaires (old items) to verify the veracity of the arguments taken by the assessee. However, no evidence in support of this contention was furnished. The AO, therefore, did not accept the contention of the assessee. 5.3 The AO further observed that the valuers had valued the diamond studded jewellery at cost price i.e. price at which such diamonds could be purchased. The value determined at Rs. 1,01,22,942 included the value of diamonds at Rs. 80,79,720 and if the margin of assessee was to be added, the market price of those diamonds should have been at Rs. 1,00,99,650 against the book value as claimed by the assessee at Rs. 30,41,293. The AO was of the view that the value of the diamonds had increased by more than 3 times and if that was the position, the margin of profit i.e. Gross profit should automatically increase every year. He also pointed out that the gross profit rate in assessee's case was approx. 24 per cent in the last so many years and the fact that the gross profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- 5 31.3.98 2,36,825 331 2,90,487 ------------------------------------------------------ 6 31.3.99 1,88,078 351 2,17,342 ------------------------------------------------------ 7 31.3.2000 6,47,167 389 6,75,445 ------------------------------------------------------ 8 31.3.2001 16,66,525 406 16,66,525 ------------------------------------------------------ Miscellaneous items ------------------------------------------------------ 9 31.3.1997 84,061 305 1,11,897 ------------------------------------------------------ 10 31.3.2000 65,836 389 68,713 ------------------------------------------------------ 11 31.3.2001 33,696 406 33,696 ------------------------------------------------------ Total 30,58,078 32,59,423 ------------------------------------------------------ According to the AO stock value of the diamonds valued by three valuers would have been in the near vicinity of Rs. 32,59,423 against which they had valued the diamonds at Rs. 72,79,000 (Rs. 80,79,000 - Rs. 8,00,000 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working out the value of diamonds at Rs. 83,09,692. Accordingly, the difference of Rs. 52,07,599 (Rs. 83,09,697 - Rs. 30,41,293 - Rs. 60,800) was added to the income of the assessee considering the same as undisclosed income of the assessee from undisclosed sources within the meaning of s. 158B(b) of IT Act. 6. The assessee carried the matter to the learned CIT(A) and submitted that the assessee had been dealing in gold and diamond jewellery since the last several years and had been consistently valuing the closing stock at cost or market price whichever is less. It was stated that the registered valuer Shri Vijay Kumar had not done the valuation properly, therefore, two other valuers, namely, Shri Surya Kant Jain and Sudhir Kumar were appointed and the valuation of stock as on the date of search was done. It was contended that there was difference in valuation done by the two valuers to the extent of 350 per cent in several items and overall difference was of Rs. 2.73 lacs. It was stated that the assessments for about six years were made under s. 143(3) and there were certain items where valuation in closing stock was shown and accepted at about Rs. 2,00,600, but the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TD 137 (Asr)(TM) (vi) Dr. R.M.L. Mehrotra vs. Asstt. CIT (1999) 64 TTJ (All) 259 : (1999) 68 ITD 288 (All) (vii) B Brothers Engineering Works vs. Dy. CIT (2003) 78 TTJ (Ahd)(TM) 876 : (2003) 84 ITD 243 (Ahd)(TM) (viii) Sunder Agencies vs. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) 63 ITD 245 (Mumbai) (ix) CIT vs. Ravikant Jain (2001) 167 CTR (Del) 566 : (2001) 250 ITR 141 (Del) (x) Kay Cee Electricals vs. Dy. CIT (2003) 81 TTJ (Del) 734 : (2003) 128 Taxman 159A (Del) (Mag) (xi) Elite Developers vs. Dy. CIT (2000) 68 TTJ (Nag) 616 : (2000) 73 ITD 379 (Nag) Learned CIT(A) further observed that s. 158B(b) defines "undisclosed income" as any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act or any expense, deduction or allowance claimed under this Act which is found to be false. He further observed that the undis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd directed the AO to delete the addition. Now, the Department is in appeal. 8. Learned Departmental Representative for the Revenue strongly supported the order of AO and submitted that the diamonds found during the course of search were valued by an independent registered valuer and later on the same were valued at the instance of the assessee by the registered valuers of his choice. He further submitted that excess jewellery was worked out. He referred to page No. 14 of assessment order. He contended that the assessee claimed that certain jewellery was old jewellery, however, no evidence had been furnished in support of that contention. It was emphasized that the valuation done by the valuers of assessee's choice was accepted, so, no grievance of the assessee should have been there as regards to the value adopted by the AO on the basis of valuation done by the valuers of assessee's choice, particularly when the partners had accepted the valuation done by the valuers. It was stated that the assessee did not furnish any detail of the diamonds purchased and even no corresponding particulars in the inventory of stock, vis-a-vis the purchase bills were provided, simply it was state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kula clearly stated that in case of diamond 1ewellery the difference in the valuation had been worked out to be Rs. 69,20,489 as per seizure memo dt. 25th May, 2001, that valuation had been challenged on various grounds and only for limited purpose of seizure, the valuation accepted was subject to right to contest under the provisions of IT Act. It was stated that the valuer Shri Vijay Kumar adopted the rate at which the same quantity should have been purchased by him as on the date of valuation and the valuer Shri S.K. Jain had mentioned that he had taken the rate at which he as a purchaser would buy such stock in Chandigarh. He, therefore, submitted that if GP rate was to be deducted from the market value then the stock of diamonds was only worth Rs. 30 lacs approximately which was near to the value shown in the books of account. Learned counsel for the assessee further submitted that there were differences in the value of the same item by the two valuers. Reference was made to page No. 243 of assessee's compilation. It was stated that the assessee was maintaining purchase bills. Reference was made to page Nos. 255 to 311 of assessee's paper book. It was argued that both the weig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he diamonds recorded in the books of account and found during the course of search matched. Learned counsel for the assessee submitted that no material or the documents were found reflecting that purchase of diamond studded jewellery was invalid or incorrect and undisclosed stock formed part of the recorded stock and as such could not be the subject-matter of undisclosed income. He submitted that the report of the valuation officer could not be the ground for addition in block assessment. Reliance was placed on the following case law: (i) Pioneer Publicity Corporation Ltd. Ors. vs. Dy. CIT (ii) V.V.S. Alloys Ltd. vs. Asstt. CIT He vehemently argued that the Department carried out the investigation in Surat and Mumbai from the suppliers who confirmed the assessee's version and nothing adverse was found. He further stated that the assessee specifically pointed out the defects in the valuation report vide letter dt. 7th April, 2000 filed with the AO. So, the valuation report could not have been made the basis for making addition. He also submitted that the purchase vouchers of diamonds found during the course of search were duly entered in the books of account and there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the true value of the jewellery found, the assessee was required to furnish the evidence in support of the value taken by it in the books of account. The primary evidence in such type of cases is the stock register wherein the date of purchase, description of the item, date of sale, closing balance etc. are mentioned. It was also the duty of the assessee to get reconciled the closing stock reflected in the stock register with the physical inventory prepared during the course of search. However, the partner of the assessee firm, namely Shri Anil Talwar who was looking after the business, stated in his statement on oath that it was not possible to maintain the stock register and no such register was maintained. The another evidence could have been the bills of purchase of diamonds, however, in those purchase bills the description given was "cut and polished diamonds". No other description was given. So, it was not possible to ascertain which diamond was purchased vide which purchase bill. In other words, the assessee was not in a position to identify the diamonds mentioned in the purchase bills vis-a-vis the diamonds found during the course of search. So, the only way to find out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... description mentioned regarding the diamonds was one "packet of cut and polished diamonds". From that description, nobody can ascertain how much pieces were there in one packet and what was the individual size and value of those diamond items, in other words, it can be said that the assessee miserably failed to link the diamond jewellery inventorised at the time of search with the purchase bills or the stock register. In my opinion, the AO was justified in taking the value of the closing stock of diamonds at Rs. 83,09,692 against the value shown by the assessee at Rs. 30,41,293. Since the assessee was unable to reconcile the diamond jewellery with reference to purchase bills vis-a-vis items lying in the closing stock and was also, unable to correlate the diamond studded jewellery with the purchase bills, the assessee was also unable to satisfy the AO that how the value of stock as per books was worked out at Rs. 30,41,293, particularly when the items were not correlated with any of the purchase bills. It is true that undisclosed income is to be computed on the basis of evidence found as a result of search. In the instant case, the diamond jewellery was found during the course of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to valuation of the closing stock since no description was given in the purchase bills and no stock register was maintained by the assessee, so, it was not possible to ascertain the cost price on the basis of purchase bills. The learned CIT(A) also stated that value of certain items appearing in the closing stock was accepted by the Department at Rs. 2 lacs which had been valued by the valuers at Rs. 8,07,470. In my opinion that cannot be a basis to delete the whole of the addition, particularly when the total value worked out was more than Rs. 1 crore and the assessee pointed out the difference only with regard to Rs. 8,07,470, that too, has been considered by the AO while framing block assessment which is clear from para 6 of the block assessment order dt. 30th May, 2003. 10.2 As regards to the reason given by the learned CIT(A) that the assessee had been making purchases of loose diamonds directly from Surat and Mumbai and the Department has verified the purchases and found nothing adverse, this reason given by the learned CIT(A) is without appreciating the facts in right perspective because the main basis for making the addition was that the assessee was unable to li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect. On the other hand, the valuation was got done by the Department from the independent valuer and also from the valuers of assessee's choice. 10.3 In view of the aforesaid discussion, I am unable to persuade myself to agree with learned JM who concurred with the learned CIT(A) in confirming the deletion of addition made by the AO, particularly when nothing is on record that the post-search inquiry established that the purchase price of the diamonds was correct because no description as regards to the size and quality of the diamonds vis-a-vis item-wise price was mentioned in the purchase bills so to ascertain the cost price (as claimed by the assessee) on the basis of purchase bills was just like to find a diamond in the coal mine. In the instant case, the dispute was not related to the quantity but to the valuation of diamonds and the assessee miserably failed to adduce proper evidence to establish that the valuation of stock taken by it was the correct value which was based on the purchase invoices, therefore, the AO in such peculiar circumstances was fully justified in adopting the value worked out by the valuers of assessee's choice, particularly when the partner of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of this gold @ Rs. 435 per gm. (rate as adopted by the valuer on the date of search) Rs. 38,55,487.50 Add: Labour charges paid @ Rs. 26 per gm. as stated by Shri Anil Talwar in his statement dt. 14th May, 2001 (26 x 9,668.934) Rs. 2,51,392.50 Total value of excess stock Rs. 41,06,880 The AO asked the assessee to explain as to why the investment in excess stock of 22 carat gold jewellery at Rs. 41,06,880 may not be treated to have been made from its undisclosed income for the block period. The assessee submitted that the difference of excess stock of 9,668.934 gms. was not correct. It was pointed out that jewellery weighing 7,437 590 gms. had been inventoried on 14th May, 2001, i.e., on the first day of the search. Out of the above jewellery, jewellery weighing 4,340.03 gms. was shown to be mainly comprised of the miscellaneous items. No description of any nature against those miscellaneous items had been given in the stock list. It was also stated that no valuation had been got done of those miscellaneous items from any registered valuer and the value worked out by the Department was unreliable inasmuch a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It was stated that this practice was being followed in order to save the wastage of gold while making samples of jewellery on order basis. It was submitted that the stock of this jewellery was lying separately and had been accounted for in stock physically verified by the Department on 14th May, 2001 under the head "Miscellaneous items" and this fact came into light only at the time of preparation of block assessment return and while reconciling the figures of stock as per books with that of the report of the valuation officer. It was further stated that stock of silver jewellery weighing 4,790 gms. was at Rs. 29,183 as on 31st March, 2001 and this jewellery was purchased in the year 1992-93. It was explained that as per repair register the weight of jewellery received by the assessee on repair basis was 1,002.380 gms. and that jewellery could not be got verified at the time of search as the same was mixed with other jewellery. It was further stated that gold jewellery owned by the families of the partners of the assessee was verifiable from the seized records as well as from the WT returns/personal books maintained by the assessee from year to year. The detail given was as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,111.850 gms. Value of this jewellery converted into 24 Rs. 16,39,600 ct gold 3,769.190 gms. @ Rs. 435 per gm. as adopted by registered valuer in his report Add: Average labour charges @ 23.30 per Rs. 95,806 gm. (on the basis of books for the year ending 31.3.2001) on jewellery weighing 4,111.850 gms. Total value of 22 carat excess jewellery Rs. 17,35,406 found On the basis of aforesaid explanation, it was stated that the addition on account of excess jewellery could have been made for Rs. 17,35,406 and the figure of. Rs. 41,06,880 as worked out by the AO was based on wrong facts and had to be ignored. 12.1 The AO after considering the submissions of the assessee, observed that the total weight of jewellery inventoried on 14th May, 2001 worked out to 12,101.590 gms. and after reducing the weight of 40 number of 24 carat gold bars weighing 4,664 gms. net weight came to 7,437.590 gms. He further observed that item Nos. 142 and 144 to 172 had been shown as miscellaneous items weighing 4,340 gms. for which no description had been recorded. He pointed out some of the items recorded under the head miscellaneous items and their weight as described in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t --------------------------------------------------------- 2 Ladies ring 240 No. 240 pcs 177.40 carat --------------------------------------------------------- 3 Nose pins 160 No. 160 pcs 30.23 carat --------------------------------------------------------- 4 Pendant 15 No. 15 pcs 6.78 carat --------------------------------------------------------- 5 Sets 63 No. 63 pcs 345.92 carat --------------------------------------------------------- 6 Tops 176 No. 352 pcs 224.71 carat --------------------------------------------------------- The AO pointed out that in the list of stock of gold items as mentioned in the aforesaid list, miscellaneous items numbering 57, were weighing 239.39 gms. and as per inventory prepared on 14th May, 2001, the weight of such items at Sl. Nos. 142, 144 to 172 had been mentioned at 4,230 gms. He further stated that no stock of silver was inventoried in either of the list as on 14th May, 2001 or on 15th May, 2001. He also pointed out that as per record the assessee was showing stock of sliver items at Rs. 29,183 since 31st March, 1993 weighing 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee that the jewellery of customers for repair also formed part of the tagged items. The AO further pointed out that as per seized register maintained in respect of repair of jewellery of customers for the period 1st April, 2000 to 31st March, 2001, the assessee received in all 6,404 gms. of jewellery and average time of repair of jewellery item was from 2 to 10 days. The AO was of the view that on that basis, average period of repair could be taken at 5 to 6 days. He, therefore, held that normal jewellery of customers for repair available should have been 105.27 gms. against which the assessee claimed it at 1,002.380 gms. He also pointed out that as per repair register, 110.71 gms. of jewellery of customers was available with the assessee as on 31st March, 2001 which was in clear vicinity of average jewellery for repair. He, therefore, considered that on an average 105.27 gms. of jewellery was available in the shop for repair and allowed the benefit of 105 gms. in the absence of original record. 12.3 As regards to the assessee's contention that 315 gms. of jewellery of the family was also lying in the shop for modification/remaking, the AO observed that the assessee had not fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 carat gold jewellery at 5,429.230 gm. It was stated that the assessee while making surrender of Rs. 81 lakhs had considered the value of excess stock of 22 carat gold jewellery at Rs. 17,35,000 weighing 4,111.850 gms., thus excess jewellery worked out by the AO came to 1,317.380 gms. for which he adopted the value at Rs. 5,14,930. It was reiterated that the assessee received various items of jewellery for the purpose of repair from the customers and total weight of such jewellery was 1,002.380 gms., the detail of which was filed before the AO and the assessee could obtain confirmations from some of the major customers which were also filed before the AO. It was also submitted that the jewellery weighing 315 gms. belonging to various family members was lying in the premises of the assessee for which also credit had not been allowed. It was emphasized that whatever jewellery was declared in the WT returns, could have been found either at the residence of the assessee or in the lockers or in the business premises. It was stated that the partners of the assessee and their family members had declared jewellery weighing 1,511.020 gms. in the WT returns while the jewellery found on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also stated that credit for the jewellery declared in the WT returns of the family members should have been given too. After examining the rival submissions, I consider it just and fair to restrict the disallowance to Rs. 1.5 lac under this head basically on account of the lack of confirmations from some of the customers having given their jewellery for repairs, and the 315 gms. of jewellery, explanation in respect of which does not seem plausible enough. Therefore, while the addition of Rs. 3,64,930 is deleted; and addition of Rs. 1.5 lac is confirmed hereby." Now the Department is in appeal. 15. Learned Departmental Representative for the Revenue strongly supported the order of AO and submitted that there was difference in the inventory prepared during the course of search vis-a-vis stock available as per books of account, the assessee was in possession of excess stock of all the items found during the course of search and mentioned in Panchnama, and that the credit had been given to the assessee for the jewellery which was entered in the books of account. He further submitted that the assessee could not produce any evidence to substantiate that the jewellery found duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m jewellery was received. He accordingly submitted that since all the details were furnished to the AO, there was no reason to disbelieve the contention of the assessee. 16.2 As regards to the jewellery belonging to the family members, it was stated that jewellery which was found from lockers was weighing 1,196.080 gms. whereas the total jewellery as per WT return was weighing 1,511.020 gms., therefore, the balance jewellery weighing 315 gms. was lying in the business premises of the assessee, the credit for which had not been given by the AO and the learned CIT(A) considered this fact and allowed the claim. 17. The rival contentions and the material available on record were considered by me. In the present case it is noticed that excess stock of jewellery weighing 5,324.23 gms. amounting to Rs. 22,49,930 was worked out by the AO. The assessee accepted the difference of 4,111.850 gms. valuing Rs. 17,35,000. The difference was remaining to the extent of 1,212.380 gms. The claim of the assessee was that 1,002.380 gms. of jewellery was given by the customers for repairs but the AO accepted only 105 gms. Thus, the difference remained at 897.380 gms. Remaining jewellery weighing 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the provisions of s. 250(6) of the IT Act, 1961 held as under: "The provisions of s. 250(6) provide that the appellate orders of the CIT(A) are to state the points arising in the appeal, the decision of the authority thereon and the reasons for such decision. The underlying rationale of the provisions is that such orders are subject to further appeal to the Tribunal. Speaking order would obviously enable a party to know precise points decided in his favour or against him. Absence of the formulation of the point for decision for want of clarity in a decision undoubtedly puts a party in quandary. Sec. 250(6) expressly embodies the principle of natural justice and such a provision is clearly mandatory in nature. The impugned order passed by the CIT(A) in violation of the provisions of s. 250(6) could not, therefore, be sustained." 17.3 The ratio laid down by the Tribunal, Ahmedabad Bench, in the aforesaid referred to case is squarely applicable to the facts of the present case. In the present case it appears that the AO has also not considered this contention of the assessee that jewellery was declared in WT returns by the partners, he should have referred the record before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the unaccounted stock earned from unaccounted income in the last number of years and the same would be declared in the return of block period. The AO asked the assessee to explain the source of purchase of those 40 gold bars. He also pointed out that it was not clear whether the undisclosed investment in 40 gold bars of 10 totals each was declared or not while furnishing the return of block period. The assessee submitted that the value of that stock was not Rs. 20.59 lakhs which had been worked out on the basis of market value as on the date of search. It was stated that the cost price of the stock was only Rs. 19,78,800. It was also stated that the assessee purchased 65 number of gold bars weighing 7,581.600 gms. on 17th April, 2001 from SBI for a sum of Rs. 32,15,550 and the payment of the same was made from regular books of account, it was further stated that gold bars weighing 5,832 gms. were shown to be issued to the Karigars for making jewellery on 17th April, 2001 and the balance gold bars weighing 1,749.60 gms. were shown to be issued on 18th April, 2001 to the Karigars for making jewellery. It was stated that instead of actually issuing 40 gold bars, weighing 4,664.65 gms. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed from SBI on 17th April, 2001. Reference was made to page Nos. 192 and 193 of assessee's compilation. It was submitted that the assessee issued old accumulated jewellery to the Karigars for making new jewellery and 40 gold bars out of 65 gold bars purchased on 17th April, 2001 remained at the business premises which were found unaccounted during the course of search. He submitted that the rate applied by the assessee was based on average rate of last year. Therefore, the AO was not justified in applying the market rate on the date of search and the learned CIT(A) rightly deleted the addition. 24. We have heard both the parties, and carefully gone through the material available on record. It seems that the assessee tried to co-relate the gold bars found unaccounted during the course of search with the gold bars purchased on 17th April, 2001 by taking the plea that old accumulated jewellery was issued to the Karigars instead of gold bars and 40 gold bars remained with the assessee. This explanation of the assessee does not appear plausible since it was the claim of the assessee that gold bars purchased on 17th April, 2001 from SBI were entered in the books of account. At the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of account and the stock register, instead the jewellery in which the diamonds were studded was shown to be made of 14 ct gold weighing 2,331.020 gms. It was further submitted that the purity of gold jewellery in which the diamonds were studded was changed from 14 carat to 18 carat. However, the relevant entries were not made in the books or account and the jewellery in which the diamonds were studded continued to be shown to be made of 14 carat purity in the books of account. It was further stated that since no jewellery made of 14 carat was found during the course of search, credit of the same had to be allowed to the assessee while arriving at the quantum of undisclosed investment made in the stock of 18 carat jewellery. It was also stated that sale bills of diamonds had shown the jewellery to have been studded in 14 carat gold. Reference was made to the bills of labour paid for making diamond jewellery as well as the gold issue register wherein 14 carat gold was mentioned. It was contended that no document was found from the premises of the assessee during the course of search to establish either that the stock had been sold outside the books of account or the diamond studde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, the order of learned CIT(A) on this issue is set aside and that of the AO is restored. 30. Next ground vide ground No. 5 relates to deletion of addition of Rs. 1,60,401 made by the AO on account of unexplained investment in renovation of SCF Nos. 14-15, Sector 22-D, Chandigarh. 31. The facts related to this issue in brief are that during the course of search operation, document No. A65 of Panchnama, dt. 15th May, 2001 titled "building renovation" was seized. The document contained vouchers pertaining to expenditure on renovation of the building in question. This fact was also confirmed by the partner of the assessee firm that the document related to renovation of SCF 14-15, Sec. 22-D, Chandigarh. It was submitted that all the documents had been reflected in the regular books of account. However, while cross-examining, the vouchers amounting to Rs. 2,75,161 were not found by the AO recorded in the regular books of account. He, therefore, asked the assessee to explain as to why that sum may not be treated as income from undisclosed sources and taxed accordingly. The assessee explained each and every item noted by the AO. The, AO after considering the submissions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count. Therefore, the income was earned outside the books of account which was rightly added by the AO in the hands of the assessee and the learned CIT(A) was not justified in deleting the same. 35. In his rival submissions, learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the document was a dumb document, no date was mentioned on that document. He further stated that the person whose name was mentioned in the document, was not related to the assessee. It was contended that even if it is to be held that the assessee earned the income outside the books of account which was utilized for the renovation of building, no addition was called for since the entry was revenue neutral, if those expenses were to be considered equivalent to the income earned by the assessee. 36. After considering the rival submissions. I am of the opinion that no addition was called for on this account. Since the AO had not doubted the expenses and if it is to be presumed that the assessee earned income outside the books of account to incur those expenses, no addition was called for because the expenses incurred will neutralize the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal and decided the issue in favour of the assessee. It is also noticed that the Tribunal, Hyderabad Bench 'A' (SB), in the case of Merit Enterprises vs. Dy. CIT decided the issue in favour of the assessee by holding that, "levy of surcharge on Lax on undisclosed income prior to introduction of proviso to s. 113 w.e.f. 1st June, 2002 is riddled with complexity to the extent of making it unworkable and impossible to harmonise and, therefore, levy fails." 43.1 However, Hon'ble jurisdictional High Court in the case of Lalit Hosy has taken a different view and held as under: "Having regard to the fact that in the Finance Act, 2000, a specific provision has been incorporated merely because addition in the IT Act has been incorporated only w.e.f 1st June, 2002 did not affect liability of the assessee to pay surcharge. It is not possible to accept that a provision in a Finance Act could not be given effect to unless the same was incorporated in the main IT Act. As regards the order of this Court in Roshan Singh Makker's case we find that provisions bf Finance Act, 2000 were not brought to the notice of the Tribunal nor the same were brought to the notice of this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und No. 2. While deciding issue in the aforesaid appeal of the Department, identical issue has been remanded back to the file of AO for fresh adjudication. In that view of the matter, this issue is also restored to the file of AO for fresh adjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee. 47. In the result, appeal of the Department is partly allowed and that of the assessee is dismissed. REFERENCE UNDERS. 255(4) OF THE IT ACT, 1961 N.K. SAINI, A.M.: 10th April, 2007 As there is a difference of opinion between the undersigned Members of the Bench who heard the appeal on the following points, the matter is referred to the Hon'ble President, Tribunal, under s. 255(4) of IT Act for the opinion of Third Member: "1. Whether on the facts and in the circumstances of the case, the CIT(A) was justified in deleting the addition of Rs. 52,07,599 on account of unaccounted investment in stock of diamonds when no stock register was maintained and the assessee was unable to link the purchases with stock of diamonds found during the course of search?" "2. Whether on the facts and in the circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances of the case, the addition of Rs. 48,328 made for the alleged unaccounted stock of 18 carat gold used in diamond jewellery is to be deleted or sustained?" 2. During the course of hearing before me both the parties agreed that question No. 2 does not correctly reflect the difference between the Members as the learned Judicial Member (JM) deleted the entire addition and did not sustain even Rs. 1,50,000 maintained by the learned CIT(A) which was challenged by the assessee. The contention on verification has been found to be correct. Accordingly, the question is modified as under: "Whether on the facts and in the circumstances of the case, the addition of Rs. 5,14,930 on account of valuation of excess stock of 22 carat gold jewellery is to be sustained or matter is required to be remitted to the AO?" 3. I would straightaway take up this question. As is evident from record a search under s. 132 of IT Act was conducted on the business as well residential premises of the assessee. M/s Talwarsons Jewellers and its partners on 14th May, 2001 and certain gold/diamond jewellery, loose diamonds and gold bars were found for which the assessee was cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------ (iv) Shri Anil Talwar 375.200 ----------------------------------------------- (v) Anil Talwar (HUF) 115.830 ----------------------------------------------- Total weight 1,511.020 ----------------------------------------------- 5. It was claimed that in the course of search at residence as well as of locker of family members only 1,196.080 gms. of jewellery was found. The balance 315 gms. (1,511.020-1,196.080 gms.), it was explained, was at business premises. As regard jewellery which was received from customer for repair, it was explained that the same stood included and shown in the register separately maintained. The assessee further furnished details with names and addresses and confirmations from customers to support its contention. 6. The AO accepted some of the contentions raised above. He however did not accept that 1,002.380 gms. found belonged to the customers received for repairs. The AO has recorded his reasons at p. 11 for rejecting the claim. He has held that above jewellery was mixed up with tagged items of jewellery. He referred to the details of the jewellery kept for repai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing application of labour charges @ of Rs. 23.30 per gm. claimed by the assessee and applying rate of Rs. 26 per gm. The basis of application of the above labour rate is given in the assessment order as under: "As per statement of Shri Anil Talwar in his statement recorded on 14th May, 2001, assessee is paying Rs. 26 as labour charges against which assessee has adopted a rate of Rs. 23.30 in its calculation based on the average labour charges paid last year. Assessee's records for the period 1st April, 2001 to 13th May, 2001 were also gone through and it is noticed that assessee is paying Rs. 26 per gram as labour charges to its Karigars and on that account labour charges are treated as Rs. 26 per gram for the purpose of making charges of unaccounted gold jewellery." CIT(A)'s observation 9. On further appeal, the assessee once again drew learned CIT(A)'s attention to the claim submitted before the AO which is noted at p. 6 of the order. t was reiterated that the claim of jewellery received for repairs weighing 1,002.380 gms. was duly noted in the repair register for which confirmations from the customers were also filed. he claim has been arbitrarily rejected. Likewise ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o carried out in the lockers and the inventory of the jewellery prepared by the Revenue also includes the jewellery found on person. In such circumstances, there is no justification in rejecting the explanation given by the assessee by not taking into consideration the total quantity of the personal jewellery. Accordingly, we hold that AO was not justified in not giving credit of 315 gms. on account of personal jewellery and restricting the credit of customer's jewellery to 105 gm as against 1,022.38 gms. claimed and evidenced by the assessee. Further, we notice that the AO was not justified in applying the labour charges @ Rs. 26 per gram against the average rate of Rs. 23.30 per gram worked out on the basis of total labour got done during the financial year 2000-01 without bringing any comparative figures from other persons/jewellers. Therefore, the AO has estimated the labour charges without considering any comparative labour charges of the relevant period from other persons of the related field. Therefore, taking into consideration the above facts, we hold that the AO was not justified in taking the undisclosed income on account of excess stock of 22 carat gold jewellery at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as well as findings given by the AO and thereafter he should have made independent findings either in favour or against the assessee. Considering the entire facts of the instant case, in my opinion, the learned CIT(A) had not passed a proper order in the eyes of law." 13. The learned AM then referred to the decision of Ahmedabad Bench in the case of Gujarat Themis Biosyn Ltd. vs. Jt. CIT (2000) 67 TTJ (Ahd) 386 : (2000) 74 ITD 339 (Ahd) to emphasise that a speaking order is required to be passed by the learned CIT(A). He further observed that in the present case AO did not consider the contention of the assessee that the jewellery was declared in the WT returns. He also referred to the statement of Shri Anil Talwar dt. 14th May, 2001 relating to labour rate of Rs. 26 as an average. As relevant material was not considered, the learned AM thought it fit to set aside the order of CIT(A) on addition of Rs. 5,14,930 and restore the issue to the file of the AO. 14. I have heard both the parties and also considered the material available on the record. The learned Departmental Representative relied upon the order of the AO and the proposed order of the learned AM. She emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the family, the assessee had relied upon IT record and WT returns to show that the family members owned jewellery of 1,511.020 gms. with them. On search the Revenue had found in custody of members jewellery weighing 1,196.080 gms. It is well known that when action under s. 132 is taken, every nook and corner of residence, lockers, etc. is searched. After above exercise only 1,196.08 gms. of jewellery was found. The difference of 315 gms. was claimed to be at business premises. It has to be appreciated that all the family members are jewellers and purchase and sale of jewellery is their vocation/trade. Therefore, there is nothing unusual in the family members sending part of their jewellery to the business premises for sale/remodeling, etc. The learned CIT(A) and learned JM in the proposed order have adopted a reasonable approach on the facts and circumstances of the case. I do not agree with the reasoning given by the learned AM to set aside and remand the case back to the file of the AO except on addition of Rs 1,50,000 sustained by the learned CIT(A). The jewellery held by various members of family is part of record available with the Revenue. There is no evidence to show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the AO with the following observations: "24. We have heard both the parties and carefully gone through the material available on record. It seems that the assessee tried to co-relate the gold bars found unaccounted during the course of search with the gold bars purchased on 17th April, 2001 by taking the plea that old accumulated jewellery was issued to the Karigars instead of gold bars and 40 gold bars remained with the assessee. This explanation of the assessee does not appear plausible since it was claim of the assessee that gold bars purchased on 17th April, 2001 from SBI were entered in the books of account. At the same time, the assessee accepted that 40 gold bars found during the course of search were not recorded in the books of account. So, the stand of the assessee was contradictory. Moreover, no evidence was brought on record to substantiate that old jewellery accumulated was given to the Karigars for making new jewellery. If that was so, then why the assessee adopted the rate which was prevailing on 17th April, 2001, stated to be the date of purchase of 65 gold bars and not the actual rate when the jewellery accumulated. In fact, the assessee could not prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (190 + 100 gm.) 290.000 gms. -------------- Net excess weight of 18 ct jewellery 3,029.680 gms. Value of 3,029.680 gms. converted in 24 ct. purity i.e., 2,272.260 gms. @ Rs. 435 per gm. Rs. 9,88,433 Add: Difference in 14 ct and 18 ct rate for jewellery weighing 2,331.020 gms. @ Rs. 435 per gm. for 24 ct purity i.e., @ Rs. 72.50 per gm. Rs. 1,68,999 Value of excess jewellery Rs. 11,57,432 Add: Labour charges @ Rs. 23.30 per gm. on excess jewellery of 3,029.680 gms. Rs. 70,592 ------------- Total value of excess stock of 18 ct gold jewellery found during the course of search Rs. 12,28,024 ------------- 4. The addition on this account, therefore, in any case cannot exceed Rs. 12,28.024. The figure of Rs. 18,13,252 as worked out by the AO is based on surmises and wrong facts and has to be ignored." 23. The AO did not agree with the above calculation and worked out the addition at Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, the learned ,JM agreed with the view taken by the learned CIT(A). However, learned AM restored this issue to the file of the AO in the light of his view on ground No.2 of Revenue's appeal discussed above. 1 have already held that on facts and in the circumstances of the case, there is need to examine question whether labour charges are to be calculated @ Rs. 26 or Rs. 23.30 per gram. Therefore, the issue is set aside and remanded to the file of the AO. I therefore, agree with the order proposed by the learned AM. This question is answered accordingly. 25. 1 now proceed to consider question No. 1 which relates to addition of Rs. 52,07,599 deleted by the learned CIT(A). 26. On further appeal, the learned JM in the proposed order has concurred with learned CIT(A) whereas learned AM has set aside the impugned order and restored the addition to the file of the AO. 27. The facts relating to addition are as under: A search was carried on business premises of assessee firm and at residential premises of its partners under s. 132(5) on 14th May, 2001. From the business premises, some loose diamonds and jewellery studded with diamonds were found. The value of above stock was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is 2.31 per cent of the overall weight and is negligible and has to be ignored. The small difference may have arisen because of clerical error while weighing/preparing the valuation report." 28. The assessee also challenged the valuation carried by Shri Vijay Kumar. The Dy. Director of IT thereafter appointed two more registered valuers, namely, Shri Sudhir Kumar of M/s Windlas Jewellers and Shri Surya Kant Jain of M/s Jain Jewellers. These two valuers collectively worked out value of loose diamonds and diamond jewellery at Rs 98.50 lacs. The assessee objected to the above valuation also and pointed out that difference between the two valuation reports was 350 per cent. It was explained that 253 items out of total 546 items valued by two valuers separately had difference of valuation which was more than 25 per cent. The overall variation in number of items where the difference in value exceeded one-fourth, was 46.33 per cent. The assessee also pointed out other defects in the valuation reports, some of which are noted by the AO at pp. 15 and 16 of the assessment order. The assessee further pointed out that some of the jewellery/diamonds were very old and their cost to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be correct statement as there are the bills of purchase of diamonds which do not contain the information regarding the quality and grade of the diamonds and only the gross carat weight of the diamonds purchased is written on the bills. Only description given on the bills is "cut and polished diamonds". No information with regard to quality and grade is mentioned on these bills. Thus, it will not be possible for the assessee to prepare a detailed inventory by making reference to each purchase bill of loose diamonds at any moment of time. During the course of search proceedings, a total of 944 carats of diamonds were found. However assessee could not identity the items forming part of the stock on the date of search, which according to him would have been available as part of the closing stock as on 31st March, 2001. Also the assessee has not maintained any quantitative details of the closing stock of diamonds and these were not furnished along with the returns of income filed although it was the requirement of Form 3CD filed along with the return. Assessee has failed to correlate the purchases, sales and dosing stock of diamonds with reference to the stocks purchased and in dosing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of certain items of jewellery between 31st March, 1994 to 31st March, 2001. After applying cost index of different years given by the IT Department from year to year under proviso to s. 48 for working out cost of acquisition of capital assets, the AO worked out value of items found at Rs. 32,59,243 against book value of Rs. 30,58,078 as per the chart below, with his further observations to reject the contention: ------------------------------------------------------ Sl. Year ending Cost of Index Indexed No. diamonds Cost cost as on in year of 31.3.2001 purchase ------------------------------------------------------ 1 31.3.1994 2,837 244 4,720 ------------------------------------------------------ 2 31.3.1995 37,968 259 59,517 ------------------------------------------------------ 3 31.3.1996 36,248 281 52,372 ------------------------------------------------------ 4 31.3.1997 58,836 305 78,319 ------------------------------------------------------ 5 31.3.1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,650.70 gms. of 18 carat gold. The variation in the quantum of 14 carat gold and 18 carat gold is almost of 142 per cent, which implies that the number of diamonds as actually received, and diamond as actually accounted for differs by more than 142 per cent. Assessee's is sale bills do not depict the carats but depict only the number of diamonds without mentioning the weight of diamonds. The books of account as well as assessee's contention in this regard that number of carats are similar are thus has no evidentiary value. 7. In view of the above factual position, when the assessee is unable to reconcile the diamond jewellery with reference to purchase bills vis-a-vis items lying in the closing stock and was also unable to correlate the diamond studded jewellery with the purchase bills, which method assessee has contended, time and gain, is being applied every year for valuation of diamond jewellery, all the contentions raised by the assessee are rejected and value of the closing stock of diamonds is taken at Rs. 83,09,692 against the stock as per books at Rs. 30,41,293. Further, a benefit of Rs. 60,800 being the value of 190 gms. of 18 carat of gold in lieu of 945 carats of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording the same in the books of account. The difference in the valuation is only because of the fact that different rates had been adopted by different valuers, otherwise, there is no difference in the weight of the diamond jewellery found at the time of search and the weight of the diamonds as per the books. Your Honour will appreciate that the market rate of diamonds could not be applied by ignoring the cost of purchases over the last various years which is fully evidenced by the purchase invoices. The addition made at Rs. 52,07,599 in the valuation of diamonds is merely on surmises and conjectures and deserves to be deleted." 34. The learned CIT(A) observed that block assessment cannot be made on conjectures and presumptions but must be supported on the basis of evidence found as a result of search. He quoted five decisions in support of the above proposition. He further observed that suspicion howsoever strong it may be, cannot take shape of an evidence. The learned CIT(A), therefore, took into consideration definition of "undisclosed income" under s. 158B(b) and also decision of the Supreme Court and other Courts that Department has no power to refer a case to the DVO. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these facts, broadly, we are of the view that there is no reason to make an addition by valuing diamonds which already form part of the disclosed account of the assessee. The block assessment proceedings cannot be used by the Revenue by taxing the income which has not yet been earned by the assessee. The cost for the purpose of computing the income of the assessee has to be the cost actually incurred. No material whatsoever was brought on record by the Department that the assessee has incurred cost more than what has been declared for the purchase of diamonds. In the absence of any such material, no addition can be made merely on the basis of valuation. The Allahabad Bench of the Tribunal in the case of V.V.S. Alloys Ltd., wherein there was no material with the Department found against the assessee, investigations were carried out, post-search to verify the purchases made from suppliers in Surat and Mumbai. There was no evidence whatsoever to show that the assessee had paid underhand cash for the purchase of diamonds. It was held that no addition can be made on account of difference in the valuation of diamonds where purchases have been duly recorded. This judicial pronouncement su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was required to furnish the evidence in support of the value taken by it in the books of account. The primary evidence in such type of cases is the stock register wherein the date of purchase, description of the item date of sale, closing balance, etc. are mentioned. It was also the duty of the assessee to get reconciled the closing stock reflected in the stock register with the physical inventory prepared during the course of search. However, the partner of the assessee firm, namely, Shri Anil Talwar who was looking after the business, stated in his statement, on oath that it was not possible to maintain the stock register and no such register was maintained. The another evidence could have been the bills of purchase of diamonds; however, in those purchase bills, the description given was 'cut and polished diamonds'. No other description was given. So, it was not possible to ascertain which diamond was purchased vide which purchase bill. In other words, the assessee was not in a position to identify the diamonds mentioned in the purchase bills vis-a-vis the diamonds found during the course of search. So, the only way to find out the correct value of the diamonds and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the diamonds was one 'packet of cut and polished diamonds'. From that description, nobody can ascertain how much pieces were there in one packet and what was the individual size and value of those diamond items. In other words, it can be said that the assessee miserably failed to link the diamond jewellery inventorised at the time of search with the purchase bills or the stock register. In my opinion, the AO was justified in taking the value of the closing stock of diamonds at Rs. 83,09,692 against the value shown by the assessee at Rs. 30,41,293, since the assessee was unable to reconcile the diamond jewellery with reference to purchase bills vis-a-vis items lying in the closing stock and was also unable to correlate the diamond studded jewellery with the purchase bills. The assessee was also unable to satisfy the AO that how the value of stock as per books was worked out at Rs. 30,41,293 particularly when the items were not correlated with any of the purchase bills. It is true that undisclosed income is to be computed on the basis of evidence found as a result of search. In the instant case, the diamond jewellery was found during the course or search and the assessee was unabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losing stock since no description was given in the purchase bills and no stock register was maintained by the assessee, so, it was not possible to ascertain the cost price on the basis of purchase bills. The learned CIT(A) also stated that value of certain items appearing in the closing stock was accepted by the Department at Rs 2 lacs which had been valued by the valuers at Rs. 8,07,470. In my opinion, that cannot be a basis to delete the whole of the addition, particularly when the total value worked out was more than Rs. 1 crore and the assessee pointed out the difference only with regard to Rs. 8,07,470 that too has been considered by the AO while framing block assessment which is clear from para 6 of the block assessment order dt. 30th May, 2003. 10.2 As regards to the reason given by the learned CIT(A) that the assessee had been making purchase of loose diamonds directly from Surat and Mumbai and the Department has verified the purchases and found nothing adverse, this reason given by the learned CIT(A) is without appreciating the facts in right perspective because the main basis for making the addition was that the assessee was unable to link the purchase bills with the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation was got done by the Department from the independent valuer and also from the valuers of assessee's choice. 10.3 In view of the aforesaid discussion, I am unable to persuade myself to agree with learned JM who concurred with the learned CIT(A) in confirming the deletion of addition made by the AO, particularly when nothing is on record that the post-search inquiry established that the purchase price of the diamonds was correct because no description as regards to the size and quality of the diamonds vis-a-vis item-wise price was mentioned in the purchase bills, so, to ascertain the cost price (as claimed by the assessee) on the basis of purchase bills was just like to find a diamond in the coal mine. In the instant case, the dispute was not related to the quantity but to the valuation of diamonds and the assessee miserably failed to adduce proper evidence to establish that the valuation of stock taken by it was the correct value which was based on the purchase invoices, therefore, the AO in such peculiar circumstances was fully justified in adopting the value worked out by the valuers of assessee's choice, particularly when the partner of the assessee firm who is also wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not in dispute, she placed reliance on certain decisions. She also referred to s. 132(4A) to contend that presumption under the said section was that diamonds found belonged to the assessee, which the assessee had failed to explain. 38. The learned counsel for the assessee pointed out- that assessee's partnership (firm) was in this business for the past several years and it maintained regular books of accounts. It had been filing returns supported by audited accounts and inventory of closing stock. He referrec1 to pp. 318 and 338 of the paper book. Inventory of closing stock as on 31st March, 2001 is available at pp. 238 to 240 of the paper book. Shri Jain further submitted that under Chapter XIV, only income which is undisclosed could be assessed. Loose diamonds and diamond studded jewellery were very much part of the regular accounts. This fact was admitted even by the learned AM in his proposed order at p. 26, wherein the learned AM has stated as under: "In the instant case, the jewellery was found during the course of search and the same was also entered in the books of account. For ascertaining the true value of the jewellery found, the assessee was required to furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that enquiries were made from the sellers of diamonds to the assessee at Surat and Bombay and sale of diamonds was fully confirmed. It was wrong that no reason was given by learned CIT(A) to delete the addition in question. Shri Jain also relied upon the following decisions: 1. K.P. Varghese vs. ITO Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) 2. Pioneer Publicity Corporation Ltd. Ors. vs. Dy. CIT (2000) 67 TTJ (Del) 471 3. V.V.S. Alloys Ltd. vs. Asstt. CIT (2000) 68 TTJ (All) 516 and 4. CIT vs. Ravikant Jain (2001) 167 CTR (Del) 566 : (2001) 250 ITR 141 (Del) 39. I have given careful thought to the rival submissions of the parties. It is a search case and, therefore, assessment has been made under s. 158BC of the IT Act. Both the learned Members had quoted provisions of s. 158B(b) of the IT Act. Both the learned Members reached opposite conclusions on the same facts of the present case. The question before me is whether loose diamonds and diamond studded jewellery have been disclosed under the IT Act? If it is disclosed, no addition is possible. Further, for showing that it is disclosed, the assessee has to give some prima facie evidence to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee shows its acquisition in books, it can be at cost only. In other words, in books only cost of acquisition is to be accounted for. However, if a valuable asset is not accounted for in accounts then, of course, Revenue is entitled to take the value of the said asset when it is found with the assessee, that is, on the date of the search. 41. The learned Representatives of the parties criticized certain portion of the proposed orders of the learned Members as noted above. In my humble opinion, the proposed orders are to be read as a whole and not line by line in isolation. When so read, it is quite clear that learned JM is accepting the case of the assessee and agreeing with the impugned order of learned CIT(A). The learned AM, on the other hand, has taken the opposite view. I, therefore, do not find any substance in above criticism of the learned Representatives. 42. The moot question is whether addition of Rs. 52,07,599 representing loose diamonds and diamond studded articles, on facts and circumstances is justified or not? The detail representing this addition has already been noted earlier. The assessee with reference to vouchers has tallied that jewellery of similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mond) 18,300 3. One ring (Single diamond) 20,000 4. One pair tops (single diamond) 13,000 5. One pair tops (single diamond) 15,800 6. One pair diamond bangles 19,500 7. One gent's ring and one pair diamond tops. 61,000 8. One diamond set (necklace and knt. and ring) 11,500 9. One diamond ring (single diamond) 8,500 10. One diamond ring 13,000 --------- 2,00,600" --------- These items are being shown with small variation in the closing stock since 1994. The assessee also produced purchase vouchers of these items. The detail further shows that 10 single items of different valuation are being repeatedly shown from year to year. Having accepted the claim all along, it was most unreasonable on the part of the Revenue to reject this claim and make addition in the hands of the assessee. Evidence furnished by the assessee on record further shows that the last three items were purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e index cost to find out as to what should be the market value of items shown to be purchased from 1994 onward. It is well known that cost index issued from year to year cannot take into account enhancement in the value of diamonds. A piece of diamond which as per the assessee was purchased for Rs. 2,837 by 31st March, 1994, cannot be taken to have market value of Rs. 4,720 on 31st March, 2001 only based on cost index, it might fetch Rs. 8,000 to Rs. 10,000. It is, therefore, quite difficult to accept calculation in the assessment order based on price index. Other reasons given by the AO are mere surmises and conjectures and do not help to support the case of the Revenue. 44.1 The assessee furnished plausible explanation and established its case with reference to weight of diamonds in carats with a minor difference which has been accepted as negligible. The assessee has duly accounted for jewellery in weight and have also established its purchase price at Rs. 30,58,078. Purchases have also been accepted to be authentic after verification. The Revenue has also given benefit for the purchase amount by deducting Rs. 30.58.078 from the proposed addition. The pertinent question. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed merely on account of difference in the value shown by the assessee and worked out by the valuation reports. Addition on account of difference in valuation is totally unjustified. If the item is shown to be properly acquired as per accounts, then no addition can be made on account of the fact that its valuation shown in the record is lower than what is found by the registered valuer. The moment it is shown to be a disclosed or accounted item, further enquiries to make addition under Chapter XN-B must stop. In regular assessment, the Revenue may be entitled to make addition if valuation of the closing stock is shown at a lower figure, but not under Chapter XIV-B for difference in the valuation of "disclosed" items. 47. I have seen other reasons given in the assessment order as also in the order of learned JM like valuation of the assessee to maintain stock register, cryptic order of learned CIT(A) and failures of the assessee to show quality or grade of diamonds in the purchase vouchers. I do not agree with any of the above reasons. In my view when purchases have been found to be genuine and there is no other incriminating material to show understatement of income, as far as lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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