TMI Blog2016 (5) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Taxability of stock of diamond - Held that:- The stock of diamond 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 ₹ 13,47,63,640/- is taxable either under Income from Business & Profession or under income from other sources. Rejection of books of account u/s.145(3) - Held that:- AO fail to appreciate the fact that appellant has declared income during search operation at ₹ 13.47 crores and accordingly recorded the same in its books of accounts. The valuation carried out by another Govt. Approved valuer has nothing to do with the amount declared by the assessee but the same was done to prove on the part of assessee that the value of dia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) for allowing set off of business loss against income declared during the course of survey/search, accordingly, this appeal of the revenue is also dismissed. - ITA No.4411/Mum/2014, ITA No.4412/Mum/2014 - - - Dated:- 31-5-2016 - SHRI R.C.SHARMA, AM SHRI SANDEEP GOSAIN, JM Revenue by : Ms. Arju Garodia Assessee by : Shri Rakesh Joshi O R D E R PER R.C.SHARMA (A.M): These are the appeals filed by the revenue with respect to two different assessees belonging to same group, against the order of CIT(A), Mumbai, for the assessment year 2011-2012. 2. As common issues are involved in both the appeals, both the appeals are heard altogether and now disposed off by this consolidated order. ITA No.4411/Mum/2014 : 3 This is an appeal filed by the revenue against the order of CIT(A) for the assessment year 2011-2012 in the matter of order passed u/s.143(3) r.w.s.153A of the I.T.Act. In this appeal, the revenue is aggrieved for deleting the addition of unexplained stock u/s.69A by allowing set off of such stock against loss incurred on trading activity. Revenue is also aggrieved for deleting the trading addition made by AO after rejecting books of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Carats Rate Per Carat Total Value 12.05 300,000 3,615,000 60.70 111,250 6,752,875 275.50 115,000 31,682,500 412.70 90,000 37,143,000 516.30 75,000 38,722,500 Total 1277.25 117,915,875 Page 77 A Star Exports Total Carats Rate Per Carat Total Value 115.00 100,000 11,500,000 306.33 90,000 27,569,700 237.33 75,000 17,799,750 386.33 60,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 entity Carats Amount (Rs.) 1. M/s Rahil Agencies 1302.95 10,56,66,666/- 2. M/s Asian Star Diamonds International Pvt. Ltd. 1435.49 10,45,70,210/- 3. M/s A Star Exports 1277.25 13,47,63,640/- Total 4015.69 34,50,00,516/- 4.2.4. The statement of Shri Vipul P Shah was again recorded on 27/12/2010, wherein he admitted the unaccounted stock of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68814143 Total income (rounded off u/s.288A) 68814140 4.3. The AO observed that though the appellant had declared undisclosed income of ₹ 13,47,63,640/- in the form of stock of polished diamonds under the head profit and gains of the business, a loss was shown as incurred on the subsequent sales of these diamonds. This loss claimed at ₹ 6,59,80,534/- was adjusted against the undisclosed income of ₹ 13,4 7,63,640/-. It was thus noted by the AO that in effect the appellant whittled down the undisclosed income in the return of income filed. The AO held that the unaccounted undisclosed polished diamonds found was unexplained investment of the appellant which was covered 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the appellant and unrecorded investment in diamonds worth ₹ 13,47,63,640/- was held to be unexplained investment in terms of sec. 69/69A of the Act. Thereafter the AO also held that the opening words of sec. 14 of the Act -save as otherwise provided by this Act - clarified that this Act may provide certain situations in which the income (chargeable to tax) may not be classified under any head. He concluded that the deemed income u/s. 68 to 69A may not be classified under any heads of the income but may be charged to tax separately without referring to any head of income. He also noted that the amounts deemed to be income u/s.68/69A can be deemed to be income under certain circumstances. He concluded that there cannot be any source for such deemed income and that such income are often in the nature of application 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 paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved that the same stock' of diamonds of 1277.25 carats was valued at ₹ 11,79,15,875/- in the loose paper found at the time of search but was shown to have been finally sold for ₹ 6,95,55,842/- only.. The AO noted that the appellant could not furnish evidence to support his claim that the global prices and the liquidity position forced the appellant to sell the undisclosed diamonds at a loss. The AO observed that the other concerns belonging to same assessee group had shown profit and therefore there was no reason for losses to be incurred on sale of undisclosed polished diamonds found during the search. He also did not accept, for the reasons stated in the order, that the diamonds were sold to meet the tax liability of the appellant. The AO also did not accept the contention of the appellant that the polished diamonds were 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Rahil Agencies 10,56,66,666/- 2. M/s Asian Star Diamonds International Pvt. Ltd. 10,45,70,210/- 3. M/s A Star Exports 13,47,63,640/- Total 34,50,00,516/- The statement of Sh. Vipul Shah was again recorded on 27/10/12 wherein he admitted the unaccounted stock of ₹ 34,50,00,516/- including unaccounted stock of ₹ 13,47,63,640/- pertaining to the appellant. The appellant had declared undisclosed income of ₹ 13,47,63,640/- in form of stock of polished diamonds under the heads profits and gains of business and profession and further the same had been set off u/s.70 of the I.T. Act against losses of ₹ 6,59,80,534/- incurred on trading activity during the year. It was argued that the AO was wrong in treating the stock of polished diamond u/s.69/69A of the I.T. Act and also holding that the same was headless deemed income not liable to be adjusted or set off u/s. 70/71 of the I.T. Act. It was claimed that the stock of polished diamond found was declared as stock in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome is assigned to the additional income disclosed, whether business or other source, it becomes available for set off against current year business loss as current year business loss is allowed to be set off against Current year income under any other head (Section-71). The assessee was therefore eligible to set off current year business loss with income declared during survey. The A. O. is directed to set off current year business loss against additional income declared during survey. Further AO relied upon the decision in case of Kim Pharma (P) Ltd vs CIT (ITA No.106 of 2011 (0 M) is also misplaced. In this case the assessee has adjusted current year undisclosed income with the carried forward business losses and since in current year there is no business income, hence the same has been disallowed. But in case of the appellant the losses claimed for set off pertains to current year which is eligible for set off against any head of income except salary income. Therefore the ratio of above decision is not applicable on the facts of the appellant's case. 6. An appeal was also filed by the revenue in ITA No.4412/Mum/2014 against the order of CIT(A) for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und from the assessee which was from an illegal activity cannot be part of . the business stock. In contrast, in the case of the appellant, the main object was carrying on the business in diamond which is a legal business. It was further submitted that the decision in the case of Fakir Mohamed Hazi Hassan relied upon by the Ld AO was subsequently considered by the Hon'ble Gujarat High Court in the case of DCIT vs. Radhe Developers India Ltd. (2010) 29 ITR 1 (Guj.) and CIT -11 vs. Shilpa Dyeing printing Mills Pvt. Ltd. It was argued that the subsequent decision of Gujarat High Court has noted that the earlier decision did not consider the sec.14 and sec. 56 of the on a conjoint basis. It was argued that the Apex Court decision in the case of D.P.Sandhu Brothers Chembur Pvt. Ltd.(2005) 273 ITR 1 supports the view that all income has to fall in one of the heads of the income provided in the income tax act. Some decisions were cited to support the view that the income reflecting the unaccounted stock of diamond during search cannot be headless income, and it should be considered to be taxable either under the head of income from business or income from other sources. It was then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks at ₹ 13.47 crs. but only to highlight the fact that the valuation made by the departmental valuer was on the higher side. The appellant argued that the AO was incorrect in holding that the appellant M/s. A' Star Exports had sold the diamonds to Indigo Trading FZE at a profit in the month .of March where as the appellant had sold goods to the same party at a loss. It was argued that each diamond has a different value based on shape, cut, clarity and colour and therefore no two sale purchase transactions can be considered to be the same. Further, the loss has occurred on account of the cost price considered viz-a-viz the sales price and not on the basis of the party to whom the goods are sold. Sale to the same party where the cost is less results in profit which is higher than the case where the cost is more. As regards the maintenance of stock register, the appellant has maintained carat wise stock register. Further, details such as cut, clarity, colour is difficult to maintain and is not a practice in the diamond industry. The details as maintained in the stock register of the appellant has been approved by ITAT Mumbai Bench in the case of Dharamchand Paraschand Expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough diamonds, cutting and polishing and export of polished finished diamonds. It is also engaged in buying and selling polished diamonds. As per the audited accounts of the flagship company of the group viz. Asian Star Co. Ltd., the sales in the current year is ₹ 1455.91 crores on which profit before tax of ₹ 37.68 crores is shown. The purchases of finished goods ie polished diamonds are shown at ₹ 29.19 crores. The material cost comprising of rough diamonds is shown at ₹ 1246.05 crores. The processing expenses are shown at ₹ 73.03 crores. As seen from the copies of audited accounts for AY 2001-02 till AY 2001-02 till AY 2011-12, A-star Exports (earlier named as Vipul Trading Company), with its office at 104/116-C, Mittal Court, Nariman Point ,Mumbai, has business activity of Cutting, polishing of rough diamonds and sale of polished diamonds. The business was of import, export processing of diamonds. In AY 2010-11, a SEZ unit was set up in Surat. As seen from copies of audited accounts for AY 2002-03 to AY 2012-13, Asian Star Diamonds International Pvt Ltd., with its office at 114-C, Mittal Court, Nariman Point, Mumbai , has business of trading in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar business of the assessee, and a logical doubt can arise that the same is not stock in trade. Such is not the case in this appeal. Even, in such a case, where unaccounted business is carried, often only bank account is found wherein cash deposits and withdrawals are reflected. It may be very difficult to produce evidence that the unaccounted business is carried out, since by the very fact that the transactions are unaccounted and in cash, documentary evidence will not be there. 4.8.3. In the statements recorded at the time of search and post search investigation, these diamonds found were always referred to as stock in trade. The extracts of the statements are reproduced below. Statement on oath of Shri Vipul Prabodh Shah, aged 43 years, s/o Late Shri Prabodh Shah, recorded on 30-10-2010 u/s. 132(4) of the Income Tax Act, 1961 during the search proceedings u/s. 132 of I.T. Act, 1961, at the office premises of Asian Star Company Ltd at 114, 11th floor, Mittal Court 'C' Wing, Nariman Point, Mumbai 400 021 on 30.10.2010. Q.6 During the course of search u/s. 132 of the I.T. Act in the premises of M/s. Asian Star Cam. Ltd., it was found that there is stock of diamonds both ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/- I do not have any documents in support to state that they are accounted for in the books of accounts of the respective entities. I wish to disclose this unaccounted investment in stock amounting to ₹ 29,76,71,845/- as unaccounted income/investment in the respective entities for the current financial year 2010-11 and pay income tax there upon. Q.10 Please state as to where the stock of diamonds mentioned by your as pertaining to M/s A Star Exports, M/s Rahil Agencies and M/s Asian Star International Pvt. Ltd. and are accounted for in the books of accounts of the respective entities are kept? Ans. The same are kept in the safe number 2 found in the executive main cabin in this premises. The keys of the same are not available right now. We will produce the same on Tuesday as the same are available with on of our employees who is out of station and is expected to be back in Mumbai o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1435.49 13,47,63,640/- Total 4015.69 34,50,00,516/- Please confirm the same. Ans. Yes I confirm the same. Statement on oath of Shri. Vipul Prabodh Shah aged 45 yrs.old recorded u/s. 131 of the I.T.Act, 1961 on 01.02.2011 at the Office of the Dy.DIT(lnv.), Unit-VII 1(3), Room No.323, 3rd Floor, Scindia House, Ballard Estate, Mumbai-400038 in connection with the search action u/s. 132 of the I.T. Act, 1961 carried out on 29.10.2010 in the case of M/s. Asian Star Co. Ltd. and their related group concerns. 0.16 Please produce the stock reconciliation between opening stock on 01.04.2010 and the physical stock found on 29.10.2010 during the course of search proceedings also work out the yield percentage of diamond process during the above period. Ans. I am submitting as per the Annexure 7. 0.17 Do you want to say anything else? Ans. We have fully co-operated during search proceedings and no incriminating material or loose papers were found. We have explained and reconciled all loose papers found. The cash and stock of M/s. Asian Star Co. Ltd. are fully reconciled and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted under the Act. The meaning of the opening words of this section, therefore, is clear that, the charge of income tax shall be only on the enumerated heads of income, profits and gains, that is to say, on the heads of income falling under one or more of the heads mentioned in that section. Therefore, it will not be permissible to hold that there can be some other source of income other than the heads enumerated in this section, such as, income which is statutorily liable to income tax in the hands of assessee. In this case the issue being discussed was the head under which the income of a minor liable to clubbed with the income of assessee, will fall. It was held to be assessable under the head income from other sources'. 4.9.3. As rightly pointed out by the AR,' the case of Fakir Mohammed Haji Hasan relied upon by the assessing officer is distinguishable on facts. The stock of diamonds found in the search is not a contraband item. Trading in diamonds, though unaccounted, is not illegal business. The loss has not been incurred on confiscation. Further, this decision in the case of Fakir Mohammed on this issue has not been accepted in the subsequent decision of the Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady held that the unaccounted investment in stock of diamonds in this case is stock-in-trade, and therefore the investment will represent business income and loss on its ale will result in business loss which the appellant is entitled to setoff u/s70 of the Act. Even if the income is considered as deemed income, it will have to be assessed under one of the five heads of income enumerated under section 14 of the Act. The heads of income 'Salary', 'Capital gains' and 'House Property' are clearly not applicable in the present case. In my view, the most appropriate head is 'Profits and Gains of business'. In that case the loss can be set off under section 70(1) of the Act. Even if the unaccounted investment is assessed under 'income from other sources' the loss will be set off under section 71 of the Act. Irrespective of whether deemed income reflected in the form of unaccounted diamond stock is treated as Income from business or income from other sources. 4.10. Genuineness of loss 4.10.1. Now I come to the decision of the assessing officer in rejecting the loss on sale of the diamonds and estimating gross profit instead. The loss in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onable grounds to hold that the impugned sales are also genuine. 4.10.6. The assessing officer has implicitly alleged that there is under invoicing and this has resulted in loss. But there is nothing brought on record to substantiate the allegations. The assessing officer has questioned the need to sell the stock of diamonds if good prices were not offered. I find the appellant has rightly pointed out that it is not for the revenue to sit on judgment as to the business decision made by the appellant. The assessing officer called upon the appellant to produce the customs officer who has certified the exports, but I find it to be unreasonable to expect compliance to the same. The assessing officer has written to customs authority but has not received any reply. However, this cannot be a basis for questioning the certification of the customs authorities. The assessing officer has recorded statement of Shri Jhaveri in respect of valuation made on 14-1-2011 and has drawn adverse inference from his inability to certify from the invoice that the diamonds exported are the same that he had valued on14-1-2011. The diamonds valued are a large number of pieces of small carat value. They are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation. iii) The stock register is not based on quality and is based only in terms of carats. 4.11.3. As indicated in the data tabulated earlier in this order, 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. The same is not qualitative. Thus, no meaning full comparison can be made. The valuation of diamonds on 14/01/2011 was not intended for changing the value of stock in the books, and in any case since all stock of diamonds were actually sold prior to 31st March 2011, the question of valuation at year end did not arise. Accordingly, there was no reason for auditors to comment on the same. Lastly, as regards the assessing officers view that qualitative stock register is not maintained, considering the numerous number of pieces and characteristics on which the pieces can be distinguished, the stock is maintained only in terms of carats in the diamond industry. The case laws cited by the appellant support the contention of the appellant. Accordingly, the rejection of books of accounts and estimation of gross profits by the assessing officer is held to be unjustified in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the entity Amount (Rs.) 1. M/s Rahil Agencies 10,56,66,666/- 2. M/s Asian Star Diamonds International Pvt. Ltd. 10,45,70,210/- 3. M/s A Star Exports 13,47,63,640/- Total 34,50,00,516/- The statement of Shri Vipul Shah was again recorded on 27/12/2010, wherein he admitted the unaccounted stock of ₹ 34,50,00,516/- including unaccounted stock of ₹ 13,47,63,640/- pertain to the assessee. The computation of the total income of the assessee had declared undisclosed income of ₹ 13,47,63,640/- in the form of stock of polished diamonds under the head profit and gains of the business and profession . In the course of assessment the assessee submitted .its explanation on why the undisclosed stock should be treated as a business income. In this connection it was stated that at the time of search, the investigating officers found unaccounted stock in the business premise of the assessee at 114/116, Mittal Court, 'C' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the loss on confiscation of gold as business loss. The assessee was engaged in the illegal activity of smuggling of gold and said gold and currency was found from the assessee which is illegal activity which cannot be part of business stock whereas in the present case the diamond was found from the premises of the assessee and the main object of the firm is to carrying on the business of diamond. This judgment has been considered in later decision of the Hon ble Gujarat High Court in the case of DCIT Vs. Radhe Developers India Ltd. [2010] 29 ITR 1 and CIT Vs.Shilpa Dyeing Printing Mills Pvt. Ltd. [Tax Appeal No.290 of 2013. In the case of DCIT Vs. Radhe Developers India Ltd. [2010] 29 ITR 1, the Hon ble Gujarat High Court held that :- 26. The decisions of this court in the case of Fakir Mohmed Haji Hasan [2001] 247 ITR 290 (Guj) and Krishna Textiles [2009] 310 ITR 227 (Guj) are neither relevant nor germane to the issue considering the fact that in none of the decisions the legislative scheme emanating from the conjoint reading of the provisions of sections 14 and 56 of the Act have been considered. The apex court in the case of O. P. Sandu Bros. Chembur P. Ltd. [2005] 273 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome during search operation at ₹ 13.47 crores and accordingly recorded the same in its books of accounts. The valuation carried out by another Govt. Approved valuer has nothing to do with the amount declared by the assessee but the same was done to prove on the part of assessee that the value of diamond found during the search was much less therefore the assessee has to sell it at lower value. The AO has wrongly mistaken the purpose of second valuation. Thus the assessee has fully discharged its onus to disclose this stock and offer it as income. 12. With regard to AO s observation assessee maintained carat wise stock register, which is a normal practice prevalent in diamond trade. The Gems and Jewellery Export promotion Council has also recognised such practice. In fact, ACIT 16(3) Mumbai has also confirmed that diamond merchants maintained stock of diamond carat wise and this is a practice followed by diamond merchant in Mumbai as well as whole India. The Hon. Bombay High Court in the unreported judgement in case of CIT 5 vs. M/s Sundaram Gems Pvt Ltd (ITA No.6785 of 2010) has confirmed that the maintenance of carat wise stock register is regular practice prevalent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of Chensing Venture vs CIT [2007]163 Taxman 175 (Mad). 15. From the record we found that CIT(A) has recorded a categorical finding as per material placed on record and after relying on various judicial pronouncements dealt with the issue in great detail. Accordingly, we do not find any reason to interfere in the order of CIT(A). 16. In the result, appeal of the revenue is dismissed. 17. It was argued by ld. DR that provisions of Section 115BBE is specific provisions of the Act, according to which business loss cannot be set off against income declared during the course of search. 18. On the other hand, it was contended by ld. AR that Section 115BBE was inserted w.e.f.1.4-2013, whereas the assessment year under consideration is 2011-2012, hence this section is not relevant in this case, whereas the contention of ld. DR was that amendment is retrospective in nature and hence, applicable in this year also. 19. We have considered rival contentions and found that by applying provisions of Section 115BBE the AO has declined set off of business loss against income declared during the course of survey/search. The provisions of Section 115BE are applicable on the income taxable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar income. Therefore any bar or restrictions of a claim cannot be applied retrospectively. It is well settled rule of interpretation allowed by time and sanctified by judicial decisions that retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only as per ratio of Hon ble Supreme Court in the case of Govinddas Vs. ITO, (1976) 103ITR 123 (SC). A statue which deals with matter of substantive law and taxation is matter of substantive law-would not be construed to have retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary implication. 22. As per our considered view, Section 115BBE bar from claiming any expenses or allowance from the income taxable under section 68, 69, 69A, 69B, 69C, or 69D of the Act. In the instant case before us the claim was of set off of business loss against income declared during search. There is vital difference between the loss and expenses/ allowance. Hon'b1e Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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