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TMI Blog2018 (12) TMI 975X X X X Extracts X X X X X X X X Extracts X X X X ..... - after making the following additions/ disallowances - i. Addition on account of suppression and under valuation of stock Rs. 9,00,01,050/- ii. Addition on account of unaccounted sales of diamond jewellery Rs. 43,938/- iii. Disallowance of salary of partners Rs. 6,00,000/- iv. Disallowance out of travelling expenses Rs. 2,41,242/- v. Disallowance of business promotion and sales promotion expenses Rs. 3,27,356/- vi. Sundry Creditors added back Rs. 46,15,850/- 2.1 The above mentioned additions were made by the AO in light of the following circumstances: 2.1.1 During the course of assessment proceedings on examination of stock statement, the AO noticed that the assessee had declared a closing stock of 50676.819 gms gold valued at the rate of Rs. 1700.40 per gm as on 31.03.2011. However, the AO observed that the assessee had not mentioned the exact quantitative details of 24 carat and 22 carat gold jewellery, the specifications and the correct rates of valuation. The AO also observed that the assessee had applied the same rate of valuation for 24 carat gold as well as for 22 carat gold. The AO also noted that on examination of assessee's books of accounts it was revealed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was in continuation of the record of stock being submitted by the assessee itself on monthly basis to the bank. This was having more evidentially value. The AO also observed that the assessee had failed to produce actual record of stock maintained by him and that further the very existence of two varying stock statements would lead to the conclusion that the closing stock declared by the assessee in its Trading account and Balance sheet cannot be relied upon. 2.1.3 The AO asked the assessee to show cause as to why the difference between the two statements should not be added back as undisclosed and unaccounted income on account of suppression of closing stock. 2.1.4 In response, the assessee submitted that the 22,000 gms of gold which was shown as received from Bank of Nova Scotia as 'unfixed gold' for manufacture and export purpose had been received against issue of Letter of Credit of Rs. 5 crores by the State Bank of India, Overseas Branch and no financial entry of value of this stock was recorded in the books of accounts of the assessee as no provisional price was provided by the bank to the assessee in respect of this gold. However, the receipt of gold was duly entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich there was a difference and deficit of 100 CTS of diamond jewellery. 2.3 Apart from this, the AO noted that the assessee had debited an amount of Rs. 12,00,000/- under the head 'salary to partners' and required the assessee to submit the ledger account of the same. On perusal of the ledger account, the AO noted that there were 24 instances where the partners had been paid cash in excess of Rs. 20,000/-. The AO was of the opinion that provisions of Section 40(A)(3) of the Act had been and, therefore, proceeded to disallow an amount of Rs. 6,00,000/- out of the salary paid to partners u/s 40(A)(3) of the Act. 2.4 Apart from this, the AO also noticed that the assessee had debited travelling expenses of Rs. 9,57,874/- in its Profit & Loss Account and the AO required to assessee to file relevant details. From perusal of the details filed by the assessee, the AO reached the conclusion that some expenses pertained to personal trip/s of the family members of the partners and in some cases, there were no evidences of expenditure incurred as no vouchers and bills were produced. The AO proceeded to disallow an amount of Rs. 2,41,242/- under this head and added the same to the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding years. (ii) With respect to the addition of Rs. 43,938/- on account of gross profit of unaccounted sale of diamond jewellery the Ld. CIT (A) held that in this case also the difference in the stock continued from the preceding year and, therefore, the addition would not have been made in the year under consideration. (iii) With respect to the disallowance of partners' salary amounting to Rs. 6 lakhs u/s 40(A)(3) of the Act, the Ld. CIT (A) was of the view that the provisions of Section 40(A)(3) were attracted in this case and the disallowance was sustained. (iv) With respect to the disallowance in respect of travelling expenses amounting to Rs. 2,41,242/-, the Ld. CIT(A) held that the totality of the circumstances would have to be looked into and where direct evidences were not available, substantial evidences would be treated as sufficient for deciding the case. The Ld. CIT (A) held that the AO had failed to substantiate, with reasoning, the disallowance and directed the deletion of this addition. (v) With respect to business promotion expenses of Rs. 1,67,356/- the Ld. CIT (A) held that the assessee had failed to demonstrate how the payments made to Mahindra Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciating the fact that the assessee failed to produce actual physical stock statement during the course of assessment proceedings. The assessee maintained two different stock statements i.e. one was given with the audit report and another was given to bank authorities whereas the assessee cannot maintain two different stock state if ments in the same financial year 2010-11 relevant to AY 2011-12.order is not accep' „.e on the merits in the assessment year 2008-09. 2. The Ld. CIT(A) has deleted addition of Rs. 43,938/- on account of unaccounted sale of diamond jewellery. 3.The Ld. CIT(A) has erred in deleting the addition of Rs. 46,15,850/- without considering the fact that no compliance was made from sundry creditor in response to the notices issued. 4.The Ld CIT(A) has erred in deleting the addition of P ,41,242/- without considering the fact that the assessee did not produce any bills/voucher with regard to the same." 3.0 At the outset, the Ld. Sr. Departmental Representative prayed that the department's appeal may be take up first because it involved a substantial issue in terms of deletion of addition of Rs. 9,00,01,050/- which was made by the AO on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is undisputed fact that the assessee had not been maintaining stock register in this regard and, therefore, apparently the books of accounts were not to be trusted. It was also submitted that the assessee's claim that there was an inadvertent mistake, which had been continuing from preceding assessment years, was not to be believed as a mistake could not have been perpetrated month after month without the same being detected when the stock statement was being submitted to the bank every month. It was further submitted that the Ld. CIT (A) had grossly erred in deleting the addition by giving a finding that the mistake was relatable to earlier assessment years and, therefore, no addition could have been made in the year under consideration. The Ld. Sr. Departmental Representative submitted that the Ld. CIT (A) had not reconciled the stock but had simply accepted the submissions of the assessee without duly verifying and examining the facts. The Ld. Sr. Departmental Representative also submitted that even if the explanation of the assessee regarding inadvertent error in adding the stock rather than reducing it was to be accepted, even then there was a difference of 624.33 gms which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Ld. CIT (A) was without any cogent reasoning and the arguments raised by her in respect of ground no.1 would apply for this ground also. 4.2 With respect to ground no. 3 of the department's appeal which challenged the action of the Ld. CIT (A) in deleting the addition of Rs. 46,15,850/-, it was submitted that since the Sundry Creditors had failed to comply to the summons issued by the AO and/or the summons had been returned un-served, the identity of the creditors and their credit-worthiness at that point of time remained unproved. The Ld. Sr. Departmental Representative further submitted that subsequent payment/s by the assessee against the outstanding liability did not prove the genuineness of the transaction at that particular time. 4.3 With respect to the ground no. 4 of the department's appeal challenging the deletion of addition of Rs. 2,41,242/- relating to travelling of expenses, the Ld. Sr. Departmental Representative submitted that no details had been submitted before the AO by the assessee and the Ld. CIT (A ) had reached a wrong conclusion that the surrounding circumstances can be looked into justify the incurrence of expenditure. The Ld. Departmental Representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. Reliance was placed on the judgement of the Hon'ble Delhi High Court in the case of CIT vs. Capital Tyres Manufacturing Unit reported in 305 ITR 199 (Delhi) for the preposition that addition could not be made if the difference pertained to a different assessment year. 5.0.4 The Ld. Authorised Representative also drew our attention to the submissions of the assessee made before the Ld. CIT (A), the reconciliation statement placed before the Ld. CIT (A) and the various details submitted before the Ld. CIT (A) and placed at pages 513 to 568 of the paper book and it was submitted that the Ld. CIT (A) had given the impugned relief after duly considering the various documentary evidences submitted in this regard. 5.0.5 The Ld. Authorised Representative also submitted that the assessee's case was that of hypothecation of stock and not of pledging of stock and, therefore, the addition could not have been made on that account. Reliance was placed on the judgment of the Hon'ble Apex Court in the case of CIT vs. Balbir Singh Maini reported in (2017) 86 taxmann.com 94 (SC) for the preposition that there was no accrual of income to the assessee when gold had been received as loan from Nov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were distinguishable on facts. 7.0 Arguing for the assessee's appeal, the Ld. Authorised Representative submitted that ground no. 1 related to disallowance of Rs. 6,00,000/- made by the AO u/s 40A(3) of the Act. It was submitted that this disallowance was bad in law as the withdrawal made by the partners was not on account of payment of any expenditure but what simply a withdrawal against balance available in their accounts. It was further submitted that none of the amounts disallowed u/s 40A (3) were debited in the Profit & Loss Account as expenditure and were rather entries on account of capital account. 7.1 With respect to ground no. 2 of the assessee's appeal challenging the disallowance of Rs. 1,67,356/- made by the AO on account of business promotion expenses, it was submitted that the said expenditure was incurred for purchase of membership of Mahindra Holiday Resort on time-share basis for the purpose of business of the assessee. However, it was fairly accepted that there was absence of bills and specific details as the record was very old. Reliance was placed on assessee's submissions before the Ld. CIT (A) in this regard and it was submitted that the Ld. CIT (A) had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books for the tax purposes resulted in an addition in the hands of the assessee. The assessing officer stated that the stock statement submitted to the bank clearly shows the opening stock, stock-in, stock-out and final closing stock of each item separately. Therefore, there cannot be any clerical error. However, the assessee explained before the AO that 22,000 gms of gold which was received from Bank of Nova Scotia was unfixed gold for manufacture and export purposes against issue of Letter of Credit of Rs. 5 crores by State Bank of India, New Delhi. It was contended before the AO that, therefore, the stock was an unpaid stock and did not belong to the assessee but by error it had been included in the stock statement submitted to the bank. It was further submitted before the AO that as it was not paid stock it had correctly not been included in the inventory while preparing the profit and loss account and balance sheet for the year although it should not have been included in the stock statement submitted to the bank also. The assessing officer held that there was no basis at all to substantiate that it was a clerical error. The assessing officer observed stated that the unfixe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing officer has presumed that the opening stock statement submitted to the bank and the opening stock shown by the assessee in its profit and loss account are also sacrosanct. We do not find any such observation in the order of the assessing officer. Thus, the learned CIT (Appeals), for deleting the above addition, has presumed what the assessing officer has not stated. Further, it cannot be said that when there is a difference in the opening stock submitted to the bank and the opening stock shown in the books of accounts and there is also difference in the closing stock submitted to the bank and the closing stock shown in the profit and loss account at the end of the year, the addition cannot be made in the hands of the assessee for the year under consideration. We also do not find any reason to uphold the view of the Ld. Commissioner (Appeals) that if the difference is coming from earlier years, no addition can be made in the hands of the assessee in the year in which the difference is detected. The learned Commissioner (Appeals) also failed to appreciate the distinction between the judgment of the Hon'ble Punjab & Haryana High Court cited before him in the case of Sheena Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing proper opportunity of hearing. In the result ground number 1 of the appeal of the revenue is allowed with above direction. 9.2.0 Ground no. 2 of the department's appeal challenges the action of the Ld. CIT(A) in deleting addition of Rs. 43,938/- which was arrived at by applying the gross profit rate of 4.328% on alleged unaccounted sales of Rs. 10,15,200/- pertaining to diamond jewellery. Ground no. 2 is identical to the ground no. 1 of the department's appeal and in view our detailed findings as contained in the preceding paragraphs with respect to ground no. 1, this ground is also restored to the file of the assessing officer for examining the issue afresh in light the evidences which the assessee may submit in this regard and after giving proper opportunity to the assessee before deciding the issue as per law. Accordingly this ground also stands allowed for statistical purposes. 9.3.0 Coming to ground no. 3 of the department's appeal which challenges the action of the Ld. CIT (A) in deleting the addition of Rs. 46,15,850/- which was added on account of Sundry Creditors who had not responded to the summons issued u/s 131 of the Act, it is seen that the Ld. CIT (A) has exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... help of above submission and enclosures of the submission explained and rebut the finding of the AO. These liabilities were not quite old. Further, it is also found that these liabilities were liquidated subsequently in short span of time; therefore, the genuineness of these liabilities gets established as the genuine liability cannot lie unclaimed for a long period. Accordingly, it is held that the AO has erred in treating sundry creditors aggregating to Rs. 46,15,850/- as unexplained. Consequentially, the addition of Rs. 46,15,850/- is deleted. The appellant gets relief of Rs. 46,15,850/-. 9.3.1 Although, the Ld. Sr. Departmental Representative has argued at length that the Ld. CIT (A) has erred in deleting these additions, no factual infirmity or contradiction could be pointed out by her in this regard. We find that the Ld. CIT (A) has reached a logical conclusion in this regard and these factual findings remain un-contradicted. Accordingly, we find no reason to interfere with the findings of the Ld. CIT (A) on this issue and we dismiss ground no. 3 of the department's appeal. 9.4 Ground no. 4 of the department's appeal challenges the deletion of addition of Rs. 2,41,242/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts which have been filed by the assessee to support the claim that the impugned payments were not against payment of salary but were rather debited to the capital account and were withdrawals of the partners. Apparently both the lower authorities have not considered this aspect of the assessee's submission. Accordingly, in interest of justice, we deem it fit to restore this issue to the file of the Ld. CIT (A) to verify the claim of the assessee with the books of accounts that the impugned payments were debits to the capital accounts of the partners and were not payments against salary to the partners. The Ld. CIT (A) is directed to decide this issue afresh after taking in due consideration the submissions to the assessee as well as the evidences on which it seeks to rely upon and, thereafter, pass the order in accordance with law after giving due opportunity to the assessee to present its case. In the result this ground stands allowed for statistical purposes. 10.1 Coming to ground no. 2 of the assesse's appeal which challenges the action of the Ld. CIT (A) in sustaining disallowance of Rs. 1,67,356/- under the head 'business promotion expenses', it is seen that the AO had disal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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