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2016 (5) TMI 1312

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.... books of accounts. Precise grounds taken by revenue reads as under :-  (i) Whether on the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing the set off of loss incurred on sale of polished diamond goods against deemed income assessed u/ s. 69A. (ii) Whether on facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the sales on account of undisclosed stock of diamond goods added u/ s. 69A was business sales. (iii) Whether on the facts and circumstances of the case and in law, the learned CIT(A) erred in treating the loss on sale of the diamonds as genuine without appreciating the fact that the assessee has sold the stock at much lower rate than that arrived at by the Government Valuer. " (iv) Whether on the facts and circumstances of the case and in law, the learned CIT(A) was right in deleting the addition of Gross Profit at the rate of 3.30% made by the AO rejecting the books of accounts, relying on the various discrepancies pointed out by the AO in his account.". 4. Rival contentions have been heard and record perused. Facts in brief are that a search and seizure action u/s. 132 and survey action ....

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....oned in seized papers was procured out of unaccounted income. He gave the details of stock as follows: Sr.No. Name of the entity Amount (Rs.) 1. M/s Rahil Agencies 8,01,81,720/- 2. M/s Asian Star Diamonds International Pvt. Ltd. 9,95,74,250/- 3. M/s A'Star Exports 11,79,15,875/- Total   29,76,71,845/-   4.2.3. Further he stated that he did not have any document to prove that they were accounted for in the books of accounts of above entities and made a declaration of Rs. 29,76,71,845/- as unaccounted investment in stock, which included Rs. 11,79,15,875/- belonging to M/s. A-Star Exports (i.e., the appellant in this case). The stock mentioned in above referred seized papers was stated to be kept in one safe located at the office premises. During the course of the search action a prohibitory order u/s. 132(3) of the Act was placed on the safe as keys of the safe were not traceable at time of search. This prohibitory order was withdrawn and safe operated on 27.12.2010 i.e. after a gap of approximately 2 months. The stock of diamonds found from safe was valued on the same day by the Govt. approved Valuer Shri Dinesh Salvi, as follows: Sr.No. Name of the ent....

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....d u/s. 69/69A of the IT.Act. Accordingly the AO held that the loss under the head profit and gains of the business cannot be set off against the deemed income u/s. 69/69A of the I.T.Act. AO held that both the sections 70 and 71 as applicable to the facts of the case did not allow the business loss to be adjusted against the deemed income u/s. 69A which is not falling under any of the heads of income. After recording the statement of Shri Vipul P.Shah, Director of the assessee company, the AO concluded that Shri Vipul.P.Shah could not furnish evidence in support of his claim that there was unrecorded trading in diamonds. The AO then went on to issue show cause notice to the appellant as to why the undisclosed diamonds should not be treated as deemed income u/s. 69/69A of the !.T.Act. The appellant submitted that the polished diamonds found was undisclosed trading stock and not undisclosed investment. Further, if the polished diamonds is not accepted as undisclosed stock and therefore as 'business income' then the same can be assessed under the head 'income from other sources'. It was then argued that any income u/s. 69/69A also has to fall under one of the specified ....

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....lication of income. The AO finally concluded that if the source of investment as explained are known then the income from the said source can be brought to tax under the relevant head and not as deemed income u/s. 68 to 690. He thereafter relied on the Hon'ble Gujarat High Court decision in the case of Fakir Mohamed Hazi Hasan (247 ITR 290). Relying on the paragraph quoted from the decision by the Gujarat High Court, the AO drew support for his contention that the deemed income u/s. 69 to 69A is not income from salary, house property, profit and gains from business or capital gains nor income from other sources. Since the source is not known such deemed income will not fall even under the head 'income from other sources'. The AO held the unexplained investment of Rs. 13,47,63,640/- as a separate item below the total income from all other heads of income in the computation of income. 4.3.1. The AO did not accept the action of the ,appellant of setting off of the loss under the head profit of business against the deemed income. The AO observed that in the normal course the assessee can deal with the unexplained investment u/s. 69/69A or 69B of the Act in two manners. The....

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....e overvalued by the government valuer at the time of search, on the ground that the appellant had not filed any letter of objection about the alleged over valuation of stock of diamonds during and after the search proceedings. The AO also noted that even in the Page no. 76 of Annex. A-5 the value of diamonds of 1277.25 carats was considered at Rs. 11,79,15,875/- and that this valuation is made by the appellant itself. The AO also did not-accept the valuation report obtained by the appellant in January 2011 wherein the same diamonds were valued by the registered valuer viz. Sharad Jhaveri who valued these diamonds at Rs. 7,94,58,400/-.The AO doubted the valuation report submitted by the appellant. He found defects in the description of quality of diamonds as per the valuation report of Shri Jhaveri submitted by the appellant as not matching the quality mentioned in the valuation report prepared at the time of search. The AO also observed that though the valuation report obtained by the appellant showed the value at a lower figure of Rs. 7,94,58,400/-, but the appellant did not revise the value in its books of account nor has the auditor made any comment about the revaluation of stoc....

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.... of polished diamond found was declared as stock in trade and this contention of the appellant was accepted by the investigation officer, who therefore did not seize the diamonds. It was submitted that in the statement recorded of Sh. Vipul Shah partner of the firm on 20/11/12, it was stated that this undisclosed income is generated on account of unrecorded trading of diamond. It is argued that since the declaration was related to trading business, the unaccounted polished diamonds found was stock in trade and therefore the same was offered as income of business or profession. It was argued that both the business that was recorded in the books of account and that which was not recorded in the books of account were only on account of business activity. The stock was found at the office premises of the appellant. It was argued that investment in stock of polished diamond was earned only through business income of the appellant' firm. There was no other source of income found during the search and therefore, there was no question of any other source of income. It was argued on without prejudice basis that even if the above undisclosed income i.e. the unexplained investment of the ....

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....nst the order of CIT(A) for the assessment year 2011-2012, wherein same grounds have been raised as have been raised in ITA No.4411/Mum/2014 in case of M/s A' Star Exports Ltd., Mumbai, as discussed above. The CIT(A) has deleted the addition and allowed the set off of stock against the business loss after having the following observations :- 4.5. I have perused the submission filed and the explanation given in the oral hearings in the appellate proceedings carefully. From the submission of AR , it is seen that it was argued that the investigation team released the unaccounted stock of diamonds after valuation only because the same was stock in trade. Had it been investment the same would have been seized by the investigation team. The appellant quoted the sec.132(1 )(8)(iii) to buttress its argument that the investigation team was bound to seize such unaccounted polished diamond found in the course of the search and only such valuable items will not be seized which are stock in trade of the business. It was further argued that requirement of sec.69/69A are not fulfilled because the appellant has offered explanation and has given the nature of source of acquisition as undisclosed ....

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....ness or income from other sources. It was then argued that the current year's loss should be set off against the income in terms of sec.70/71 of the I.T.Act. Reliance was placed on the judgment in the case of Chensing Venture Vs. CIT [2007) 163 Taxman 175 (Mad.). In this decision, the case of Fakir Mohamed Hazi Hassan has been considered. It has been noted that the decision in the case of Fakir Mohammed Hazi Hassan was over turned by Hon'ble Gujarat High Court itself in their decision in Radhey Developers Pvt. Ltd. the appellant also submitted that the AO has incorrectly relied upon the decision in the case of Kim Pharma (P) Ltd. Vs. CIT. In that case the assessee had adjusted current year's undisclosed income with the carried forward business loss and since in the current year there was no business carried out and no such source of income, hence the same had been disallowed. However, in the case of the appellant, the loss claimed for set off pertains to the current year wl1ich is eligible for set off against any head of income except salary income. 4.6. As regards the rejection of books of account and estimation of gross profit, the appellant submitted that the seized loose pape....

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....f Dharamchand Paraschand Export vs. ACIT no. 2833/Bom/91 where it has been held that carat wise stock register will be sufficient. Similar observations has been made by the Hon'ble Bombay High Court in the case of CIT -5 vs. M/s. Sundaram Gems Pvt. Ltd. (ITA No.6785 of 2010) In this decision the Bombay High Court did not accept the rejection of books of account by the AO and held that the maintenance of carat wise stock register is a regular practice prevalent in diamond trade. The decision in the case of DCIT vs. Samir Diamond Export was reversed by the Hon'ble ITAT in the case of Dharamchand Paraschand Export mentioned above. The ITAT Mumbai Bench has observed that it is not practically possible to maintain the quality wise stock register because of large variety of diamonds Involved. Several other decisions were cited on the aspect of rejection on books of accounts and it is argued that the AO could not point out any defect I the books of account except that quality wise stock register is not maintained. 4.7. The appellant thereafter argued that there was discount given to the parties to whom the diamonds were finally sold and the observation of the AO that the loss is....

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....ing in Cut and Polished Diamonds. It was also a partner in Vipul Trading Company, now A-Star Exports. As seen from copies of audited accounts for AY 2000-01 to AY 2011-12, Rahil Agencies, was also having business of trading of export and import of diamonds. The directors/partners of these firms/company such as Vipul Shah, Dharmesh D Shah, Dinesh Shah and Arvind Shah, are all in diamond trade. The diamonds found during search was from the office premises at 114/116, Mittal Court, C-Wing, 11th floor, Nariman Point, Mumbai-400 021. This is also the head office of the flagship company, Asian Star Co Ltd. Diamonds valued at Rs. 106,73,74,569 were also found at this premises which belonged to Asian Star Co. Ltd. Similar stocks belonging Asian Star Co Ltd. were found at 704, Aman Chambers, 7th Floor, Queens Road, Opera House, Mumbai valued at Rs. 92,56,33,242/-, at 1st Floor, Mehta Mahal, Mathew Road, Opera House, Mumbai valued at Rs. 7,85,19,165 and at 604, Aman Chambers, 6th Floor, Queens Road, Opera House, Mumbai valued at Rs. 2,05,59,790/- and has been assessed in its hands as stock in trade. The diamonds found belonging to the three concerns, subject matter of the present appeal, are....

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....shed as mentioned in the stock inventory taken by the government approved valuer, valued at Rs. 1,06,73,74,569/- as per Annexure 1 to this statement. Please confirm the same and state whether the same is accounted for in your books of accounts. Ans. Yes, I confirm that the stock inventory taken by the government approved valuer, valued at Rs.,1,06,73,74,569/- as per Annexure 1 to this statement pertains to that of our company, M/s, Asian Star Co. Ltd. There may be difference in the value of stock of diamonds as per books and what is physically found. This is because of the fact, we would have accounted for the value of stock at cost, whereas the government valuer has valued the same at market value as on this day. However, the stock quantity as per books and what is physically found are almost tallying. I am submitting herewith a copy of the stock reconciliation statement. The minor difference may be due to weighing scale difference and that is insignificant compared to the quantum of stock at hand. Q.8 During the course of search u/s. 132 of the I.T. Act on the premises of M/s. Asian Star Co. Ltd., A loose papers found and seized as page no 76, 77 and 78 in the file seized as Anne....

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....l Court, Nariman Point, Mumbai-400 021 on 27.12.2010. 0.2 Do you aware of the proceedings that today we have come for operation of prohibitory order placed on Safe No. 2 in Strong Room in Executive Main Cabin at 114C, 11th floor, Mittal Court, Nariman Point, Mumbai-400 021? Ans. Yes. I am aware of the proceedings. 0.3 I am showing your statement recorded on oath u/s. 132(4) on 30.10.2010 to you. While answering to Q. No. 8, 9, 10 % 11, you had stated that there were some unaccounted diamonds worth Rs. 29.76 crores of three entities namely M/s. Rahil Agencies, M/s. Asian Star Diamonds International Pvt. Ltd. and M/s. A' Star Exports. You had further stated that they were kept in safe No.2 for which keys were not available readily on that day. Do you have any other kept inside this safe. Have you got keys for the same, since we have to lift the P.O. today, please explain? Ans. Yes. I am aware of the proceedings. Ans. Yes, I have gone through my statement recorded on 30.10.2010 and I confirm it once again. I understand that in the Safe No.2, unaccounted diamonds to the extent of Rs. 30 crores, are kept. I also understand that there are certain papers relating to this stock and oth....

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....to fully cooperate with the department. 4.8.4 A perusal of the extracts from the above statements show that the appellant had always explained the diamonds found as excess stock in trade. There is nothing to indicate that the appellant was carrying out any other undisclosed activity or had any other undisclosed source of income. There is also merit in the appellant's contention that accepting this explanation of the appellant that the diamonds are stock in trade, the investigation team did not seize the diamonds found in the course of search. In the above facts and circumstances, I hold that the unaccounted diamonds are stock-in-trade of the appellant. 4.9. Head of Income in respect of unaccounted stock of diamonds 4.9.1. The assessing officer has held that section 69/69A applies to the unaccounted diamonds found belonging to the appellant from its business premises. He has further held that the income to be assessed under these sections are deemed income. He has finally held that such deemed income do not fall under any of the five heads of income enumerated under section 14 of the Act. For this view, the assessing officer has elaborated on the expression" Save as otherwise pro....

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....ot a concept found only under section 68-690. Under income from house property, there is concept of deemed to be let out u/s 23(1 )(a) of the Act. Similarly section 41 deals with remission of liabilities as deemed income. Section 44AD to 44BBB deal with presumptive income as does section 50C and 50D in the Act. No doubt the decision in the case of Fakir Mohamed Hazi Hasan supports the view of assessing officer, but the same has subsequently been overruled, as already discussed above. 4.9.5. The assessing officer may apply section 69/69A if he is no explanation is offered by the appellant as to source of income reflected in the investment/asset or the explanation is not satisfactory as per assessing officer. If the explanation of the appellant is accepted, the income is business income. The assessing officer has not believed that appellant stating that details of brokers/party from whom purchased and party to whom sold in the unrecorded activity has not been furnished. It is likely that details such as the customers/ sellers will not be available since the transactions are unrecorded/ unaccounted. However, considering that polished which is the same product that is in the regular b....

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....on the higher side. At this stage, on examination of the two valuation reports, it is noted that neither of the reports have indicated the number of pieces of diamonds that were found nor has valuation been made based on distinct categories based on cut, colour, carat and clarity. This lends support to the claim of the appellant that such record keeping in stock register is onerous if not impossible. The number of pieces are indicated in the invoices for sales. Some important conclusions are tabulated below: 4.10.2. A look at the above table shows that the categories are not uniform and varies from person to person who assorts/values the diamonds. Further the size of diamonds in question also varies considerably (0.08 cts to 1.64 cts) and so does the rate per carat. It is a subjective exercise. Further. the diamonds in question are not very large sized stones with fancy valuation. The average piece is only 0.28 cts. 4.10.3. The assessing officer has not: found fault with the sales realization shown by the appellant. nor proved any under invoicing. The exports of diamonds are examined and certified by customs department. and the export realization are seen by RBI. Admittedly, no i....

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....llant's claim that the customers did not vale the diamonds at the rates considered in the valuation made at the time of search. Some of these parties are regular customers of the appellant group. There is no evidence that the sales are not genuine or under invoiced. The assessing officer has not verified the details from the customers, the details of which have been furnished to him. I hold that the transactions of sale reported are genuine and the losses arising from these transactions are accordingly genuine and allowed. 4.11. Rejection of books of accounts and estimation of gross profits 4.11.1. The assessing officer has rejected books of accounts u/s 145(3) of the Act and estimated the gross profit. The assessing officer has considered the gross profit based on the SEZ unit of A-Star Exports at Surat. There are two difficulties with the approach of the assessing officer. First, the SEZ unit which operates on fiscal benefits available to SEZ unit and is a manufacturing activity cannot be compared with trading activity. Second, the loss has arisen because of the value considered as its cost. Admittedly, there is no evidence of costs in the books of accounts. The same has be....

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.... the assessee firm is to carrying out the business of import, export, manufacturing, wholesale and retail dealing in diamonds, gems and jewellery. The partnership business was of importers, exporters, manufacturers, processors, investors, wholesalers, distributors, retailers, dealers and indenting agent of diamonds, synthetic stones, gems and jewellery, precious and semi precious metals and miners and ornaments and article made thereof including jewellery, decorative and precious objects of arts and crafts and to cut, design polish rough diamond, gems and precious stones and that of investment and lending and to do any other business as may be mutually agreed upon by the partners. In the return of income filed for the year under consideration, the assessee has shown income under the head profit and gains of business and profession and other sources. In the search action, three loose papers were found and seized as part of Annx - 5 of the panchnama prepared on 29.10.2011 at the office premises of 114/116, Mittal Court, C-Wing, 11th floor, Nariman Point, Mumbai - 400021. These documents mention the carat value, rate per carat and total value of diamonds. In the course of search proce....

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.... income of Rs. 13,47,63,640/- declared voluntarily by the assessee for A.Y. 2011-12, is undisclosed stock held under the customary trading of the business and hence should be treated as the business income of the assessee firm and not as undisclosed investment as held by the AO. If all the three conditions of Section 69 exist together, the unrecorded investment or value of assets can be deemed to be assessee's income of the relevant financial year. In the present case all three conditions as required under section 69 are not fulfilled because the appellant has offered explanation and nature of source of acquisition as undisclosed stock received from the unaccounted trading of diamond as source of income. The partner of the firm has time and again stated in his statement that diamond found in the premises during the search is out of unrecorded trading of diamonds hence the third part of section 69 is not satisfied hence the said stock is not taxable under section 69 of the Act. 9. Now, we shall deal with the decision relied on by the AO while declining set off of stock offered against business loss. The ratio of decision of Fakir Mohammed Haji Hasan (247 ITR 290) as relied on b....

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....ond declared during the .search is taxable under the heads of income as defined in section 14 read with section 56 and not taxable separately. As there cannot be taxable income of income out of the 5 heads of income as specified in section 14 of the Act. Hence the stock of diamond of Rs. 13,47,63,640/- is taxable either under Income from Business & Profession or under income from other sources. 11. With regard to AO's action for rejection of books of account u/s.145(3), we found that assessee's books of accounts are consistent with the applicable accounting standard and there are no qualifications by the auditors of the assessee with regards to the method of accounting or accounting policies. Furthermore, the accounts for the above mentioned assessment year are complete and accurate as it includes the undisclosed stock of 1277.25 carats of polished diamond. From the record we found that all details as and when called for by the Assessing officer during the assessment proceedings had been timely submitted. It is to be noted that the financial statements of the assessee are fully verifiable and as such cannot establish any incompleteness or incorrectness in assessee's books of a....

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.... unit and is a manufacturing activity cannot be compared with trading activity. The loss has arisen because of the value considered as its cost. However, there is no evidence of cost in the books of accounts. Further the valuation made at the time of search is a mere one page summary which gives no description of the diamonds and is merely total value of 5-6 packets. Thus, no meaningful comparison can be made. The CIT(A) has categorically dealt with each and every documents and after giving detailed finding in para 4.11, reached to the conclusion that rejection of books of accounts and estimation of gross profit by the AO was not justified on the facts of this case. The findings recorded by CIT(A) are as per material on record and do not require any interference on our part. 14. With regard to set off of losses, once it is decided that the income is taxable under either of the head of income A to F of section 14 of the Act, then the set off losses is permitted under section 71 of the Act. The income declared at the time of search was in respect of excess stock found which was in nature of business activity therefore part of business income. Even if the said amount was to be taxed ....

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....these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate. In order to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit, it is proposed to tax the unexplained credits, money, investment, expenditure, etc., which has been deemed as income under section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of 30% (plus surcharge and cess as applicable). It is also proposed to provide that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Act in computing deemed income under the said sections. This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years. [Clause 45)." 21. Thus, in the Act itself it is clearly mentioned that this section is applicable from 1st day of April, 2013. When the legislature itself provided that the particular provisions are applicable prospectively then submission of Ld D. R. that the section is applicable retrospect....