JOINT COMMISSIONER OF INCOME TAX (OSD) , CIRCLE-, CUDDALORE V. M. RAMESH JEWELLERS, TIRUKOYILURE

ITA 587/CHNY/2025

AI Insights

The case involves cross appeals by the Revenue and the assessee, M. Ramesh Jewellers, against the order of the Commissioner of Income Tax (Appeals) - 18, Chennai, pertaining to the assessment year 2016-17. The primary issue arose from a survey conducted under section 133A of the Income Tax Act, 1961, which revealed excess stock of gold at the assessee's premises. The Assessing Officer (AO) valued this excess stock at a higher rate than the assessee, leading to additional income being assessed under section 69C of the Act. The CIT(A) modified the valuation but sustained the addition under section 69B. The Tribunal, however, accepted the assessee's valuation method and deleted the additions made under sections 69B and 69C.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 825046 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-12-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2016-2017
• Appeal Filed On: 27-02-2025
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GAUTAM S. MUKUNDAN
• Assessee Lawyers: R. VIJAYARAGHAVAN
• Keywords: Set aside; Business income; Reasonable cause; Unexplained expenditure; Unexplained investment; Cost of acquisition
• Section: 69C; 145

Judgement Text

" आयकर अपील य अ धकरण, ‘ए’ \u000eयायपीठ, चे\u000eनई IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI \u0015ी एबी ट वक\u0019, \u000eया\u001aयक सद य एवं \u0015ी एस. आर. रघुनाथा, लेखा सद य क े सम$ BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.:587/Chny/2025 \u001aनधा%रण वष% / Assessment Year: 2016-17 JCIT (OSD), Circle – 1, Cuddalore. vs. M. Ramesh Jewellers, 60, Sannathi Street, Tirukkoyilur – 605 757. (अपीलाथ'/Appellant) [PAN: ABAFM-1329-F] (()यथ'/Respondent) आयकर अपील सं./ITA No.:1539/Chny/2025 \u001aनधा%रण वष% / Assessment Year: 2016-17 M. Ramesh Jewellers, 60, Sannathi Street, Tirukoilur, Tirukkoyilur – 605 757. vs. JCIT (OSD), Circle – 1, Cuddalore. [PAN: ABAFM-1329-F] (अपीलाथ'/Appellant) (()यथ'/Respondent) Assessee by : Shri. R. Vijayaraghavan, Advocate Department by : Shri. Gautam S. Mukundan, JCIT सुनवाई क5 तार ख/Date of Hearing : 09.10.2025 घोषणा क5 तार ख/Date of Pronouncement : 29.12.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM : The cross appeals filed by the Revenue and Assessee are directed against the order passed by the learned Commissioner of Income Tax (Appeals) - 18, Chennai, [herein after “ld.CIT(A)”] dated 26.12.2024 and pertains to assessment year 2016-17 against the order of the Income Tax Officer, Ward – Printed from counselvise.com :-2-: I.T.A. Nos:587 & 1539/Chny/2025 2, Villupuram, passed u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 28.12.2018. 2. At the outset, we find that there is a delay of 89 days in appeal filed by the assessee for which an affidavit and a petition for condonation of delay, setting out the reasons for such delay, has been filed. After considering the affidavit and the petition filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the assessee for adjudication. ITA No.587/chny/2025 – Revenue’s Appeal : 3. The Revenue has raised the following grounds of appeal: 1. “The order of the ld.CIT(A) is contrary to the facts and findings of the Assessing Officer, which were made in the assessment order. 2. The ld.CIT(A) erred in arriving at the figure of Rs.1874/- per gram for unaccounted gold jewellery against rate of Rs.2,640/- per gram determined by the Assessing Officer in the assessment order. 3. the ld.CIT(A) while arriving figure of Rs.1,874/- for unaccounted gold jewellery erred to hold that most of the gold was purchased from the HUF Entity whereas the assessee had not established that most of the purchases were made from HUF entity only and the assessee itself had admitted that most of its purchases were old gold from local customers, vide its written submission made on 09.11.218 during the assessment proceedings. 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld.CIT(A) be setaside and that of the Assessing Officer/TPO be restored.” ITA No.1539/chny/2025 – Assessee’s Appeal: 4. The assessee has raised the following grounds of appeal: 1. “Set Off of Excess Stock in Subsequent Year. 2. Valuation Method- Simple Average vs Weighted Average. 3. Excess Stock – Not Taxable under Section 69B. 4. Revenue cannot take inconsistent Stands” 5. The brief facts of the case are that the assessee is a firm, engaged in jewellery trading business. A survey u/s.133A of the Act was conducted in the Printed from counselvise.com :-3-: I.T.A. Nos:587 & 1539/Chny/2025 business premises of the assessee on 16.02.2016. During the course of survey, excess stock of gold was found 28,876.26 grams. In a statement recorded during the course of survey, the value of the excess stock of gold found of 28,876.26 gms. was valued at Rs.1,593/- per gram and accordingly, the assessee admitted Rs.4,59,99,881/- as additional income in the return of income for the impugned year. Thereafter, the assessee filed its return of income for the A.Y.2016-17 on 17.10.2016 admitting income of Rs.4,62,60,427/-. The case of the assessee was taken up for scrutiny and during the scrutiny proceedings, the AO questioned the value of Rs.1,593/- per gram of value adopted by the assessee for the excess stock of gold found during the course of survey. In the assessment, the AO observed that the rate of gold as at the beginning of the year of 2015 was Rs.2,665/- per gram and on 16.02.2016, being the date of survey was Rs.2,640/- per gram and on the basis of the above, average rate per gram was Rs.2,652.50 per gram and adopted the same for valuation of gold and accordingly brought the difference of Rs.3,05,94,398/- (28,876.26 grams x (Rs.2,652.50 less Rs.1,593/- [already declared value]) to tax u/s.69C of the Act by holding as under: - “The reply is carefully read by me. In the survey report, there is no mention of accepting the average value of Gold at Rs.1593/- as claimed by the assessee. Now the point to ponder is that the assessee started the jewellery business in the year 2015 when the average rate of gold was Rs.2665/- per gram. If we go by the assessee’s statement that jewellery have been purchased from the HUF entity at the rate of Rs.1593 per gram, then the sale is suppressed at the hand of HUF, because the average rate of the gold at the beginning of the financial year 2015-16 was Rs.2665/gm In view of the above fact the average value of the Gold is then taken at Rs.2652.50 per gram and the value of the excess Gold 28876.26 is thus calculated at Rs.7,65,94,280/- as against Rs.4,59,99,882/- adopted by the assessee. The difference of (79594280 – 45999882) Rs.3,05,94,398/- is the difference value of excess Gold for not taken under consideration by the assessee while computing the value of the Gold. Same is, therefore added back in the income of the assessee under section 69C of the IT, Act 1961” 6. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A). Before the ld.CIT(A), the assessee challenged the issues of addition of Rs.3,05,94,398/- made by the AO on account of the difference in Printed from counselvise.com :-4-: I.T.A. Nos:587 & 1539/Chny/2025 stock valuation arising from the AO’s adoption of average market rate instead of the assessee’s average cost and further contested the consequential assessment completed u/s.69C of the Act. After perusing the assessment order, submissions of the assessee and the evidence filed by the assessee, the ld.CIT(A) with respect to the issue of determination of valuation of the excess stock found at the business premises of the jeweller during the survey undertaken at their premises held as under: - “4.12 The AO has accepted the purchase cost of the jewellery from HUF at the rates shown in the invoices and accounts. But for the calculation of the excess amount the AO is not agreeing to this purchase rate from HUF citing that gold is sold at lower rate. There is no separation of gold purchases from HUF and others. The sales are very meagre compared to the stock of jewellery found during the course of proceedings. Further quality of gold jewellery was brought out by the AO in the order and hence adoption of market rate for entire stock without arriving at quality of gold is not appropriate. 4.13 Hence, in the facts and circumstances and after considering the case laws, I deem it fit to adopt the average cost of jewellery in the books and adopt the same to the excess stock of gold jewellery found during the survey. The average cost of gold is adopted at Rs.1,874/- per gram as against the appellant claim of Rs.1,539/- per gram. The AO is directed to adopt this rate and arrive at the value of the excess stock. Accordingly, this issue is partly decided in favour of the appellant” and with respect to the next issue of taxation of difference in value of the excess stock of gold u/s.69C of the Act, held as under: - “5.1 The submissions of the appellant in this are considered. As was contended the differential purchase value of gold found during survey cannot be treated as unexplained expenditure and consequently added under section 69C. Any purchases outside books of account has to be considered as investment in purchases and the appellant has to explain the source for such investment. Coming to the facts of the case, the appellant firm started the business from 01.04.2015 and this is the first year of business. Therefore, the question of earning profits within the year covering the value of excess stock for the year does not arise, as in the cases relied upon by the appellant, wherein the facts are that assessees are running business from long and have earlier business incomes. The survey findings are that physical stock of 28876.27 grams of gold was found in excess of the stock that was recorded in the books of account, thereby meaning that the appellant had made investment in such quantum of gold outside the books and the sources for the same stood unexplained. Therefore, the said investment has to Printed from counselvise.com :-5-: I.T.A. Nos:587 & 1539/Chny/2025 be treated as unexplained investment in purchase of gold u/s.69B of the Act and the action of the AO to this extent is modified, i.e., to be taxed u/s.69B instead of 69C. Therefore, the grounds raised in by the appellant in this regard are dismissed” 7. Being aggrieved by the order of the ld.CIT(A), the Revenue has preferred the present appeal before the Tribunal, challenging the relief granted by the ld.CIT(A) in adopting a rate of Rs.1,874/- per gram for unaccounted gold jewellery, as against the rate of Rs.2,640/- per gram determined by the AO in the assessment order. The assessee, through its cross appeal, has challenged the set-off of excess stock in the subsequent year, disputed the valuation methodology by asserting that the simple average method ought to be applied instead of the weighted average method, contended that the alleged excess stock is not taxable u/s.69B of the Act, and further argued that the Revenue cannot adopt inconsistent stands on the same set of facts. 8. Before us, the ld.AR submitted that the ld.CIT(A) has erred in modifying and sustaining the addition by adopting a weighted average rate of Rs.1,874/- per gram, based on the purchases made during the impugned year and treating the difference in the value per gram as unexplained investment u/s.69B of the Act. The ld.AR submitted that the assessee, being in its first year of business, had the statutory right u/s.145 of the Act read with Accounting Standard (AS) - 2 to adopt any recognised and reasonable method for valuation of stock. In line with the statute, the assessee consistently followed the simple average cost method for valuing its closing stock, and this method is duly reflected in the books of accounts maintained in the ordinary course of business. The ld.AR pointed out that the ld.CIT(A) has not disturbed the valuation method adopted by the assessee, and therefore the valuation stands accepted and finalised for the impugned assessment year. 9. The ld.AR further contended that the stock found during the survey was physically indistinguishable from the rest of the business inventory. There was Printed from counselvise.com :-6-: I.T.A. Nos:587 & 1539/Chny/2025 no separate, identifiable, or exclusive stock; the entire quantity formed part of the regular business stock stored at the business premises. In such circumstances, the invocation of section 69B of the Act is legally unsustainable, as the said provision applies only to unrecorded investments or unexplained assets, whereas the Department itself has assessed the alleged excess stock as business income. Once the revenue recognises the stock as arising from business operations, the ld.AR argued that the very foundation for applying Section 69B of the Act collapses. 10. It was specifically submitted that once the excess stock is taxed as business income, it automatically becomes part of the assessee’s business inventory, and consequently the assessee is entitled to treat such stock as opening stock of the succeeding year in accordance with established commercial and accounting principles. The ld.AR emphasised that even the findings of the ld.CIT(A) acknowledge the presence of stock at the business premises, which itself negates the statutory requirement for invocation of Section 69B of the Act. 11. In view of these submissions, the ld.AR prayed that the valuation method adopted by the assessee based on the simple average cost method be accepted for the so-called excess stock as well, that the addition made u/s.69B of the Act be deleted in full and that the excess stock already offered and taxed as income during the impugned year be permitted to be treated as opening stock in the subsequent assessment year, so as to reflect the true commercial position of the assessee’s business. 12. Per contra, the ld.DR during the course of hearing strongly supported the order of the AO and submitted that the ld.CIT(A) erred in reducing the valuation rate of unaccounted gold. It was contended that the AO had determined the value of such jewellery at Rs.2,640 per gram based on the survey findings and available market rate as determined by the AO in the assessment order. However, the ld.CIT(A), without adequate justification and without bringing any Printed from counselvise.com :-7-: I.T.A. Nos:587 & 1539/Chny/2025 independent material on record, arbitrarily adopted a lower rate of Rs.1,874 per gram, thereby substantially reducing the value of unaccounted stock. According to the ld.DR, such a reduction is untenable and deserves to be set aside. 13. The ld.DR further contended that the ld.CIT(A) proceeded on an incorrect premise that most of the gold was purchased from the assessee’s HUF entity, thereby justifying a lower valuation. It was emphasised that the assessee never established that the majority of its purchases originated from the HUF entity. On the contrary, the assessee itself had admitted in its written submissions dated 09.11.2018 before the AO that most of its purchases comprised old gold procured from local customers. In view of this clear admission, the ld.DR argued that the reliance placed by the ld.CIT(A) on purchases from the HUF entity is misplaced, unsupported by evidence, and contrary to the record. 14. The ld.DR therefore submitted that the valuation adopted by the AO at Rs.2,640 per gram should be restored, and the relief granted by the ld.CIT(A) deserves to be reversed, as the assessee had failed to substantiate the basis for adopting a significantly lower valuation. 15. We have heard both the parties perused materials available on record and gone through orders of the authorities below. The admitted facts of the case are that the assessee is a firm, engaged in jewellery trading business. A survey u/s.133A of the Act was conducted in the business premises of the assessee on 16.02.2016. During the course of survey, excess stock of gold found was 28,876.26 grams. In a statement recorded during the course of survey, the value of the excess stock of gold found of 28,876.26 gm was valued at Rs.1,593/- per gram and accordingly, the assessee admitted Rs.4,59,99,881/- as additional income in the return of income for the impugned year. Thereafter, the assessee filed its return of income on 17.10.2016 admitting income of Rs.4,62,60,427/-. During the scrutiny proceedings, the AO questioned the value of Rs.1,593/- per gram of value adopted by the assessee for the excess stock of gold found during the course of survey. The AO observed that the rate of gold as at the beginning Printed from counselvise.com :-8-: I.T.A. Nos:587 & 1539/Chny/2025 of the year of 2015 was Rs.2,665/- per gram and on 16.02.2016, being the date of survey was Rs.2,640/- per gram and on the basis of the above, average rate per gram was Rs.2,652.50/- per gram, adopted the same and according assessed the difference of Rs.3,05,94,398/- (28,876.26 grams x (Rs.2,652.50 less Rs.1,593/-) to tax u/s.69C of the Act. In the first appellate proceedings, the ld.CIT(A) granted partial relief to the assessee by directing the AO to recompute the value of the excess stock by adopting a rate of Rs.1,840/- per gram, as against Rs.2,652.50 per gram applied in the assessment order. The ld.CIT(A) further modified the legal basis of the addition, inasmuch as the AO had made the addition u/s.69C of the Act treating the excess stock as unexplained expenditure, whereas the ld.CIT(A) sustained the addition u/s.69B of the Act by holding the same to be unexplained investment. 16. We find that the excess stock of gold quantified during the survey was 28,876.26 grams. Before the ld.CIT(A), the assessee had furnished evidence of purchases made during the year, including VAT returns for the impugned year along with the purchase bills made from the HUF entities, which showed that purchases in the first four months were largely from the assessee’s HUF entity, and thereafter largely from outsiders/ old-gold customers. The ld.CIT(A) noted that the purchases recorded from the HUF entity were fully reconcilable with the sales disclosed in the HUF’s return of income. The monthly purchase details extracted from the VAT records were examined to compute the cost per gram, and on applying the simple average of the monthly averages, the average purchase rate for the year was determined at Rs.1,840.72 per gram. The ld.CIT(A) therefore held that the adoption of market rate by the AO for valuing the entire excess stock, without examining the quality or nature of the gold, was not appropriate of the assessee’s actual cost. 17. Further, we note that the assessee was in the first year of its business, having commenced operations on 01.04.2015. In such circumstances, the valuation of stock must be carried out in accordance with Section 145 of the Act and the principles laid down in AS-2 on valuation of inventories. A simple Printed from counselvise.com :-9-: I.T.A. Nos:587 & 1539/Chny/2025 average of monthly averages cannot be applied for this purpose. The correct method is one that consistently applied to all purchases made during the year so as to arrive at a reliable cost for valuation of stock. This aspect assumes importance because the excess stock found during the survey was shown by the assessee to be physically indistinguishable from the rest of the closing stock, and there is no finding recorded by the AO to state otherwise. The entire stock formed part of the assessee’s regular business inventory. Accordingly, the valuation has to be carried out on the basis of a consistent and recognized cost- based method as required under law. 18. Therefore, the simple average cost per gram method is the appropriate method to be followed in the present case. The assessee has applied this method consistently and has arrived at a value of Rs.1,593/- per gram, which represents the true cost of purchases made during the year. This approach reflects the actual cost structure of the assessee’s business and is in line with the requirement under AS-2, which mandates that the cost of inventory should mirror the pattern in which goods are acquired and consumed. 19. This method also avoids distortions that may arise where small-quantity purchases are made at higher rates or large-quantity purchases are made at lower rates. Based on the valuation on the simple average cost of all purchases made during the year, the assessee has adopted a method that results in a fair and reliable measure of the cost of its closing stock, particularly when the excess stock found during survey was physically indistinguishable from the rest of the inventory. 20. In view of the above discussion, we are of the considered opinion that, since this is the assessee’s first year of operations, the assessee was justified in valuing the excess stock on the basis of the simple average cost of purchases, which is Rs.1,593/- per gram. This method is consistent, reasonable, and in accordance with the principles laid down u/s.145 of the Act and AS-2. We therefore hold that the finding of reduction in valuation rate per Printed from counselvise.com :-10-: I.T.A. Nos:587 & 1539/Chny/2025 gram made by the ld.CIT(A) is set aside, and the AO is directed to accept the value of excess stock as computed by the assessee. 21. Since, the entire additions made by the Assessing Officer has been deleted in our above findings, adjudicating the cross appeal filed by the assessee in respect of invocation of section 69B of the Act, does not arise and hence we dismiss the corresponding grounds raised by the assessee is dismissed as infructuous. 22. In the result, the appeal filed by the Revenue is dismissed, and the cross- appeal filed by the assessee is partly allowed. Order pronounced in the open court on 29th December, 2025 at Chennai. Sd/- Sd/- (एबी ट वक\u0019 ) (ABY T VARKEY) \u000eया\u001aयक सद य/Judicial Member (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखासद य/Accountant Member चे\u000eनई/Chennai, 8दनांक/Dated, the 29th December, 2025 SP आदेश क5 (\u001aत:ल;प अ<े;षत/Copy to: 1. अपीलाथ'/Appellant 2. ()यथ'/Respondent 3.आयकर आयु=त/CIT– Chennai/Coimbatore/Madurai/Salem 4. ;वभागीय (\u001aत\u001aन ध/DR 5. गाड% फाईल/GF Printed from counselvise.com "