M/sJagadamba Jwellers AND Pearls. V. The Commissioner of Income TGax

ITTA/21/2004

AI Insights

This case involves a partnership firm dealing in pearls and jewelry, which faced scrutiny following a search that uncovered excess stock and unaccounted bank accounts. The Income Tax Appellate Tribunal (ITAT) valued the excess stock at the costliest variety of pearls and included the entire sale proceeds of unaccounted items in the taxable income. The firm contested these decisions, arguing for average valuation and partial taxation based on gross profit. The court upheld the ITAT's decisions, emphasizing the need to prevent tax evasion and the lack of correlation between the firm and the income declared by Sri Darpan Agarwal.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 727359 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 11-02-2015
• Assessment Year: misc
• Laws Referred To: Income Tax Act
• Result in Favour of: Respondent
• Court: HIGH COURT
• Keywords: Block period; Excess stock; Income Tax; Unaccounted sales; Valuation
• Section: 158BC

Judgement Text

"THE HON'BLE SRI JUSTICE DILIP B. BHOSALE AND THE HON'BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.No.21 of 2004 ORDER: (Per Hon’ble Sri Justice A.Ramalingeswara Rao) This appeal was filed against I.T.(S.S).A. No.26/Hyd/2002 for the block period 1988-89 to 1997-98 and 01.04.1997 to 16.07.1997 on the file of the Income Tax Appellate Tribunal, Hyderabad “A” Bench, Hyderabad. The appeal was admitted on the following substantial questions of law: “I. Whether on the facts and in the circumstances of the case, the ITAT was justified in law in valuing the excess stock at the rate applicable to the most expensive variety of pearls against the plea of the assessee that the stock has to be valued at average purchase price? II. Whether on the facts and in the circumstances of the case, the ITAT is justified in holding that the entire sale proceeds of Rs.1,22,844 ought to be taxed, ignoring fundamental principles that only profits ought to be brought to tax? III. Whether on the facts and in the circumstances of the case, the ITAT was justified in denying a set off of Rs.5,11,400 against the unexplained investment in excess stock?” The facts of the case are that the appellant is a partnership firm dealing in the business of sale and purchase of pearls, semi- precious stones, silver and gold jewellery. A search was conducted on the business and residential premises of the assessee on 16.07.1997 and certain excess stock of pearls was noticed. It was also noticed that there was some deficit stock of semi-precious stones and American diamond silver jewellery. There were unaccounted bank accounts in the names of partners of the assessee firm, Sri Prahladrai, his wife and children. It is an admitted case that the excess stock of pearls found was 53.81 kgs. A deposition was taken from the main partner, Sri Prahladrai on 09.10.1997 and he accepted the excess stock to the tune of 53.81 kgs. A notice was issued under Section 158BC of the Income Tax Act on 19.03.1998 and the firm filed its return on 26.05.1998 declaring the undisclosed income of Rs.3,07,852/- for the years 1993-94 to 1998-99. The stock-in-trade found at the time of search was inventorised and valued by an approved valuer. The value of the various items was compared with the book stocks. The excess and deficit stock found was as under: Description Weight Value as per physical inventory Weight Value as per books difference Rs. Rs. Rs. Pearls 413 kg 49,20,240 360 30,51,000 (+)18,69,240 Semi precious -- 56,000 -- 83,000 (-) 27,000 Beads -- 2,93,900 -- 2,44,000 (+) 49,900 American diamonds silver Jewellery -- 1,22,160 -- 2,18,000 (-) 95,840 Gold -- 28,644 -- 10,000 (+) 18,644 The Assessing Officer quantified the undisclosed income for the block period as Rs.20,81,644/- after deducting the total income returned. Challenging the order of the Assessing Officer, the appellant preferred an appeal to the Commissioner of Income Tax (Appeals)-V, Hyderabad. Out of the said amount, an amount of Rs.19,37,784/- relates to the excess stock of pearls, beads and gold, and addition of the said amount was upheld. An amount of Rs.1,22,844/- relates to the value of deficit stock and the addition of the said amount was also confirmed. However, the addition of Rs.75,388/- relating to the profit determined @ 30% of the unaccounted turnover of Rs.2,51,290/- routed through the undisclosed bank account opened in the name of Sri Darpan Agarwal when he was a minor and operated by his father Sri Prahladrai on behalf of the firm, was ordered to be deleted. The last addition of Rs.20,020/- towards excess cash found in the business premises of the appellant firm was also upheld by the appellate authority by his order dated 27.02.2002. Against the said order of the Commissioner of Income Tax (Appeals)- V , Hyderabad, the appellant preferred an appeal before the Income Tax Appellate Tribunal, Hyderabad “A” Bench, Hyderabad. Before the Tribunal, the appellant gave up the claim with regard to the addition of Rs.49,900/- and Rs.18,644/-, being the value of excess stock of beads and gold found during the search. The Tribunal allowed the appeal partly by order dated 04.03.2003. Against the order of the Tribunal, the present appeal was preferred. Learned Counsel for the appellant submitted that, i) with respect to the valuation of the excess stock of 53.81 kgs of pearls, the Tribunal erred in taking the highest value of pearls instead of taking the average value; ii) the Tribunal was not justified in confirming addition of Rs.1,22,844/- representing the sale proceeds of semi- precious stones and silver jewellery with American diamonds and it should have accepted the offer made by the assessee of the gross profit on the sale of those items; and iii) the set off claimed against the additions made for the income declared as Rs.5,11,400/- should have been allowed. We have carefully perused the orders passed by the Assessing Officer, Appellate Authority and the Tribunal with regard to the points raised by the learned Counsel for the appellant. There is no dispute with regard to the figures indicated under the respective heads, but the dispute is only with regard to the manner of their treatment. With regard to the first ground of not accepting the valuation made by the Assessing Officer on the basis of the valuation given by the Valuer, while calculating the value of excess stock and adding the said value to the income of the assessee by the Tribunal, we noticed that the Tribunal gave the following reasoning for taking the costliest variety for valuing the excess stock found during the search. “If we do not value the excess stock found during the search, in the absence of any contrary evidence, at the value applicable to the costliest variety found during the search, it would, to our mind, throw open the flood gates of evasion in a trade like that of the assessee-firm where there is a wide range of varieties between different lots of stock and the lots are not identifiable or relatable to the corresponding purchase vouchers. If this were not to be done, every trader in this line can keep some low quality stock in books and deal in high quality stock outside the books and when detected plead for valuation of the excess stock at the average purchase price as done in the present case.” It is the contention of the learned Counsel for the appellant that the Tribunal should have taken the average value instead of the value of the costliest variety. It is the case of the assessee that the pearls would be purchased in bulk and they would be later on graded as per their size and value. At the time of search, only the excess stock of graded pearls were noticed, and the said stock found could not be correlated with any purchase vouchers. The Assessing Officer valued the excess stock at Rs.18,69,240/-, whereas the assessee offered the value at Rs.6,40,877/-. The price of the lots of pearls varied from Rs.1,378 per kg to Rs.20,000/- per kg. There is no evidence to show that in which year the pearls were purchased. It cannot be conclusively held that the excess stock of pearls seized belongs to a particular variety, in the absence of which, the method adopted by the Tribunal cannot be found fault. We are also of the opinion that the issue involved relates to a question of fact of valuation of seized stock, which may vary from case to case. No substantial question of law arises with regard to the valuation of the seized stock. In these circumstances, we have to uphold the method adopted by the Tribunal for valuation of the excess stock seized. The next point relates to addition of value of semi-precious stones and silver jewellery with American diamonds. The assessee offered gross profit on the sale of those items, whereas the Assessing Officer made addition of the entire sale proceeds. It has come on record that the assessee has not maintained any stock register and the closing stock had not been reduced because of the unaccounted sales. The Tribunal came to the conclusion that where the closing stock is reduced in accordance with the deficit stock noticed, the entire sale proceeds ought to be taken into consideration and not simply the gross profit alone. Learned Counsel for the appellant failed to indicate the basis for the percentage of gross profit that has to be applied in a case like this. Since there was a deficit stock to the tune of Rs.1,22,844/-, the Tribunal as well as the authorities have not erred in including the said value to the total income of the assessee. The last point urged is with regard to the set off claim of Rs.5,11,400/- which was disclosed in the hands of Sri Darpan Agarwal. It has come on record that the said income was disclosed only at the instance of search officials during the time of search. The said amount does not belong to the firm. In fact, the assessee went in appeal against the addition made in the hands of the assessee firm with regard to the amount standing in the name of Sri Darpan Agarwal and the said amount was allowed by the Commissioner of Appeals. The said Sri Darpan Agarwal was set up as a separate assessee. In those circumstances only, the assessee firm was held to be not entitled to claim the set off for the income declared in the hands of Sri Darpan Agarwal. We are in agreement with the said view of the Tribunal. In view of the rejection of submissions made by the learned Counsel for the appellant in all the points, we answer the substantial questions of law raised in the appeal against the assessee and in favour of the revenue. The appeal is, accordingly, dismissed with no order as to costs. ______________________ (DILIP B. BHOSALE, J) ________________________________ (A.RAMALINGESWARA RAO, J) 11.02.2015 vs "