1990-VIL-91-ITAT-AHM

Equivalent Citation: [1990] 36 TTJ 664

Income Tax Appellate Tribunal AHMEDABAD

ITA No. 751/Ahd/1987, ITA No. 752/Ahd/1987

Date: 15.02.1990

DEVANBABU PVT. LTD.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : K. R. DIXIT., B. M. KOTHARI.

JUDGMENT

The assessee has preferred these two appeals against the orders passed by the CIT(A) for asst. yrs. 1982-83 and 1983-84. The assessee has raised the following grounds in its appeal from asst. years. 1982-83.

"1. The learned CIT(A) erred in holding that disallowance of Rs. 18,000 being salaries to Directors was justified. Your appellant submits that the expenditure on salaries is allowable and prays that the same be allowed.

2. The learned CIT(A) erred in holding that disallowance of Rs. 19,000 out of purchase was justified. Your appellant submits that the expenditure on purchases was allowable and prays that the disallowance be deleted.

3. The learned CIT(A) erred in holding that Rs. 4,47,319 was rightly included in total income as value of stocks source of acquisition of which were not satisfactorily explained. Your appellant submits that addition of this amount was not justified an prays that the same be deleted.

4. Without prejudice to Ground No. 3, the learned CIT(A) erred in not recording any finding on the appellant's contention that the real value of the closing stock was much less than that adopted by the Departmental valuer.

5. The learned CIT(A) erred in confirmed the interest under s. 217 amounting to Rs. 1,08,968 charged by ITO. Your appellant submits that the interest should have been waived and prays that the same be deleted."

2. In asst. yr. 1983-84 the assessee has challenged the disallowance of Rs. 18,200 being salary to Directors made by the ITO which was confirmed by the CIT(A). Thus this ground is similar to ground No. 1 in asst. yr. 1982-83.

3. Ground No. 1 for Asst. yrs. 1982-83 & 1983-84

The salary has been paid to two Directors at the rate of RS. 9,000 each. This has been disallowed by the ITO on the ground that no such salary was paid in the past. Further the assessee has not established the necessity for payment of such salary to the Directors. It has been further mentioned in the assessment of order that no resolution authorising such payment of salary was passed by the Board of Directors, in the absence of which such salary payment cannot be allowed.

3.1 Our attention was drawn by the learned counsel for the assessee towards written submissions submitted before the CIT(A) in which it has been submitted that both the Directors Shri M.G. Shah and Shri C.G. Shah, to whom aforesaid salary was paid are acclaimed jewellers and have rich experience of about 35-40 years. They are also partners in the firm of M/s. Kirti Kumar &Co. A firm engaged in the import and export of precious and semi precious stones. The Directors have proven capabilities of handling the precious stones and also possess administrative and other capabilities necessary for conducting the company's business affairs. The payment of the salary of Rs. 750 p.m. To both these Directors of proven capabilities hardly warrants any disbelief or suspicious and ought to have been allowed by the learned ITO.

3.2 The learned D. R. Repeated the reasons recorded in the assessment order and contended that the salary has been rightly disallowed in the absence of any resolution of the Board of Directors and in the absence of any evidence to prove that the Director applied their skill and experience for the business purposes of the assessee company.

3.3 We have considered the rival; submissions made by the learned representatives and have gone through the orders passed by the learned authorities below. The CIT(A) has confirmed the aforesaid disallowance in view of the reasons mentioned I the assessment order. He has himself accepted the contention of the assessee that these Directors possess silk land long experience in this line of trade. In order to determine the allowability of any expenditure the necessity of incurring such expenditure is not the relevant consideration but if an expenditure has been incurred on account of commercial considerations, the same deserves to be allowed. The Directors possess long experience in this line of trade and the meagre salary of Rs. 750 pm. Allowed to each one of them hardly warrants any disallowance in any of the assessment years under consideration. In view of this the disallowance of salary made in both the years under consideration is deleted. Accordingly ground No. 1 for asst. yr. 1982-83 and the only ground for asst. yr. 1983-84 is allowed.

4. Ground No. 2: The ITO has disallowed a sum of Rs. 19,000 representing the purchase price of 190 Kg. Of rough emeralds purchased by the assessee from Shri Chandulal M. Patel of Cambay. In order to examine the genuiness of the aforesaid purchase a statement of Shri Chandulal M Patel was recorded by the ITO on 27th March, 1985. Shri Patel has agreed in the aforesaid that he had sold the aforesaid goods to the assessee company. The ITO, however, did not accept the genuineness of the aforesaid purchase on the ground that Shri Chandulal Patel could not satisfactorily explain the source from which the same had been acquired. Shri Chandulal Patel is a petty dealer in precious and semi precious stones and has income by way of detail on such transactions. The ITO has observed that a petty dealer could not have been held 190 Kg. Of rough emeralds and, therefore, he did not accept the source of acquisition of such rough emeralds by Shri Chandulal Patel. It was further observed by him that the payment received by Shri Patel from the aforesaid company by cheque was encashed on the same date, which, according to the ITO, further proves that the aforesaid goods were not in fact sold by Shri Patel to the assessee company. The CIT(A) observed that in the normal course the transaction would have been accepted, as genuine on the basis of statement of Shri Chandulal Patel. However, he confirmed the disallowance made by the ITO on the ground that payment of Rs. 19,000 made by cheque was encashed by Chandulal Patel on the same date and there is reason to believe that he may have returned the cash back to the assessee. The mode of payment has made the transaction of a doubtful nature. The CIT(A) further observed that Shri Chandulal Patel being only a petty dala could not explain the acquisition of rough emeralds weighing 190 kg. And on that basis he confirmed the disallowance made by the ITO.

4.1. The learned counsel for the assessee submitted that the assessee has discharged the burden of proving that genuineness of the aforesaid purchase by producing Shri Chandulal M. Patel before the learned ITO who has duly confirmed the fact that he supplied 190 kg. Of rough emeralds to the asssessee company and received Rs. 19,000 from the assessee company. It was further contended that it is not obligatory upon the assessee to prove the source where from the company had purchased such rough emeralds. It source where from the company had purchase such rough emeralds. It has not been denied by the department that Shri Chandulal Patel is a dealer of such goods. It was further pointed out that Shri Patel had been treated as a trader of such goods in the case of M/s. Rasik Jewellers in whose case also the purchase made from Shri Chandulal M. Patel has been accepted as genuine. It was, therefore, contended that the aforesaid disallowance made by the ITO and confirmed by the CIT(A) deserves to be deleted.

4.2 The learned D. R. Supported the orders passed by the CIT(A) and the ITO. He also submitted that Shri Chandulal M. Patel in his statement has stated that he got these goods at the time of his father's death 15 years back and nobody would keep such goods for a long time without using the same by way of sale or by way of processing. In view of this the disallowance made by the ITO was fully justified.

4.3 We have heard that the parties and have also gone through the orders passed by the authorities below. We have also carefully gone through the papers to which our attention was drawn during the course of hearing. It is an undisputed fact that the statement of Shri Chandulal M. Patel was recorded by the ITO on 17th March, 1985 in which he clearly confirmed the sale of aforesaid 190 kgs. rough emeralds to the assessee. He further confirmed the receipt of the said sum of Rs. 19,000 by way of cheque. The mere fact that Shri Chandulal Patel is a petty dealer and had withdrawn the amount of Rs. 19,000 from his bank account on the same day when he received the cheque cannot amount to an evidence to prove that the said amount of Rs. 19,000 was given back by Shri Chandula Patel to the assessee company. There is no material or evidence on records to support the wrong suspicion formed by the learned ITO and the CIT(A) in their respective orders. The learned D.R. has alsonot dispted the fact that Shri Chandulal Patel has been treated as a trader in case of M/s. Rasik Jewellers, Bombay. The mere fact that Shri Patel could not, according to the ITO, satisfactorily explain the source where from he got these rough emeralds cannot result in disallowance of the purchase made by the assessee from him. In view of the fact that the supplier had duly confirmed having supplied the aforesaid goods to the assessee and has also confirmed the receipt of a sum of Rs. 19,000 being the purchase price for the aforesaid goods purchased by the assessee company, the disallowance made by the ITO and confirmed by the CIT(A) deserves to be deleted. Accordingly, ground No. 2 is also allowed.

5. Ground No. 3 & 4: In these grounds the assessee had challenged the addition of Rs. 4,47,319 made by the ITO on account of unexplained stocks found during the course of search, which has been confirmed by the CIT(A). The aforesaid addition consists of the following items:

5.1 Addition of Rs. 2,98,800: Proceedings under s. 132 were conducted at the business premises as well as at the residence of the Directors of the appellant company at Bombay and Cambay 500 kgs. Of rough emeralds valued at Rs. 4,98,000 as per annexure 2 to the Panchnama dated 28th Feb., 1982 in the case of the appellant was found at Cambay. The assessee explained during the course of search that 200 kgs of these rough emeralds were purchased from M/s. Empire Exports Pvt. Ltd., Bombay and 300 kgs. Were received on "Jangad" (on approval basis) from M/s. Kirtikumar &Co. Bombay, Jangad memo of M/s Kirtikumar &Co. Was also shown to the authorised officers during the course of search at the time when the statement of Shri Babubhai alias Manilal G. Shah was recorded by the authorised officers on 26th Feb., 1982. The ITO has observed that freight and transport expenses and transit insurance expenses in respect of transportation of aforesaid 300 kgs. Of rough emeralds from Bombay to Cambay has not been accounted for in the books of accounts of the assessee company or in the books of M/s. Kirtikumar & Co. The assessee stated that these goods were transported from Bombay to Cambay in the car. However, the ITO did not believe this explanation on the ground that according to him it was difficult to carry 300kgs. of rough emeralds in six wooden boxes in a car from Bombay to Cambay. The ITO further observed that another similar lot of 200 kgs. of rough emeralds purchased from M/s. Empire Export Pvt,. Ltd., Bombay had been transported by train. He has further observed that these 300 kgs rough emeralds have subsequently been shown as purchased on 26th April, 1982, after the date of search, at the rate of Rs. 75 per kg. And have again been shown as returned on 1st July, 1982. He further mentioned in the assessment order that it is not understood why the assessee has shown these gods as having been purchased within the accounting year relevant to asst. yr. 1983-84 and then shown as against returned the first day of the accounting year relevant to asst. yr. 1984-85. According to the ITO the aforesaid circumstances indicated that the 300 kg. Of rough emeralds found on the date of search and valued by the departmental valuer at Rs. 2,98,000 are not the same as were imported by M/s. Kirtikumar & Co. He, therefore, treated the aforesaid sum of Rs. 2,98,000 as unexplained assets found in the possession of the assessee and accordingly taxed the same in asst. yr. 1982-83.

5.2 The CIT(A) confirmed the aforesaid addition and has held that the 300 kg. of rough emeralds found during the course of search were different from the goods which had been claimed to have been imported by M/s. Kirti kumar &Co. M/s. Kirtikumar & Co is a sister concern and it is had really sent these rough emeralds on approval basis to the appellant at Cambay. then its entry should have been there in the books of accounts as in respect of other batch of rough emeralds weigh in 200 kg. purchased by the appellant company from another sister concern M/s. Empire Exports Pvt. Ltd. The absence of entries in the books of account clearly establishes the fact that the goods were of unaccounted nature. He further observed that the six wooden boxes packed with 3 quintals of precious stones like rough emeralds could not have been brought in a car all the way from Bombay to Cambay as contended by the assessee. Since there was no evidence to support the transportation of such rough emeralds from Bombay to Cambay the findings given by the ITO deserved to be confirmed. He further observed that the subsequent entries relating to sale and subsequent return passed after the date of search also made the version of the assessee wholly doubtful. He, therefore, confirmed the findings given by the ITO that the stock of rough emeralds weighing 300 kgs. Were unaccounted and unexplained and sustained the aforesaid addition.

5.3 The learned counsel for the assessee contended that the fact that the aforesaid 300 kgs. rough emeralds were received by the appellant company on Jangad from M/s. Kirtikumar & Co. Was corroborated by Shri Mantilal G. Shah. Director of the appellant company in his very first statement recorded during the course of sea hand he not only confirmed this submission but the Jangad memo was also shown and submitted to the authorised officers during the course of search itself. This fact was once again confirmed by Shri M.C. Shah (alias Babubhai) in his statement recorded once again on 28th Feb., 1982. After considering the aforesaid statement and after perusing the Jangad memo available at the time of search, the authorised officers are fully satisfied that the aforesaid contention is true and correct and, therefore, they had chosen not to seize the aforesaid rough emeralds found during the course of search. It was further contended that the assessee was once again required to explain the nature of possession and source of the aforesaid 300 kgs. of rough emeralds during the course of proceedings under s. 132(5) vide notice dated 17th May, 1982. The assessee submitted a detailed reply during the such proceedings and brought the aforesaid facts once again to the notice of the then IAC(Asst) The IAC, after considering the entire evidence and material existing on records was again fully satisfied about the correctness of the aforesaid explanations and, therefore, while passing the order under s. 132(5) no addition in respect of the value of aforesaid 300 kgs. of rough emeralds received on jangad from M/s. Kirtikumar &Co. Was made. It as further submitted that the proceedings of search were simultaneously conducted at the premises of M/s Kirtikumar &Co. on the same date and these 300 kgs. Of rough emeralds imported by them were not found at their business premises. The fact that they had sent the aforesaid emeralds on approval basis to the appellant company was corroborated by them during the course of search and is also verifiable from their assessment records. Enquiries were made by the assessing authority of M/s. Kirtikumar & Co. And this fact is verificable from the enquiries made by the assessing authority of that concern at Bombay. As regards entries in the books of account it was pointed out by the learned counsel that question of making any entries of the gods received on jangad does not arise as the transaction of purchase of the said material was yet to be finalised at the time when raid was conducted. The learned counsel further invited our attention towards the fact that the ITO had forwarded the draft order for levy of penalty under s. 271)1)(C) for asst. yr. 1982-83 to the IAC in respect of the aforesaid addition of Rs. 4,47,319 which included the said sum of Rs. 2,98,800 being the value of 300 kgs. Of rough emeralds. The IAC after considering the entire material and evidence existing on records, came to the conclusion that it is not a fit case for levy of penalty and he accordingly dropped the penalty, proceedings under s. 271(1)(c). This is evident from the order under s. 271(1)(c) passed by the ITO pursuant to such directions from the IAC vide order dated 19th August, 1987. He, therefore, strongly urged that the aforesaid addition of Rs. 2,98,800 deserved to be cancelled.

5.4. The learned Departmental Representative contended that the aforesaid addition made by the ITO is fully justified in view of detailed reasons given by him in para 4 at page 4 & 5 of the assessment order. He further invited our attention towards paras 9 and 12 of the order passed by the CIT(A). He also invited our attention towards the statement of Shri Babubhai alias M.G. Shah, Director of the company recorded on 28th Feb., 1982 in which he has stated that the 300 kgs of rough emeralds have been received recently from M/s. Kirtikumar & Co. Whereas the jangad memo found during the course of search reveals that the said goods were given on approval on 25th October, 1981. A gap of four months cannot be described as recently by a senior person like the Director of the Company. The Director has also further stated in the said statement that the transaction has been finalised recently but the bill is yet to be taken in the relevant books of accounts and that the bill was shown by him for verification of Shri. A. N. Modi, ADI (Intelligence) during the course of search of the bungalow on 26th Feb., 1982. According to the learned Departmental Representative what was shown during the course of search was not the bill but a jangad memo dated 25th October, 1981. This also throws doubt about the genuineness of the aforesaid transactions. He further, submitted a sequence of event regarding the aforesaid 300 kgs of rough emeralds claimed to have been received on approval basis by the appellant firm from M/s Kirtikumar & Co. Which is reproduced hereunder:

1. This stock of 300 kg emerald was found in possession of Devanbabu at Cambay on 26th Feb., 1982. The date of search but was not found entered in the assessee's books including the stock book.

2. The assessee explains that the same goods were received from Kirti kumar & Co. Bombay on jangad on 25th Oct., 1981.

3. This emerald of 300 kg. Was purchased by the assessee from M/s. Kirtikumar & Co. On 26th April, 1982 at Rs. 2,85,000. This transaction appear to be one to regularise the unaccounted stock of 300 kg. Which was found from the assessee's premises at Cambay. This purchase is shown in the stock book of Devanbabu of 81-82 at entry No. 37. Kirtikumar & Co. Has issued invoice on 26th April, 1982 on the letter pad, copy is filed.

4. This emerald of 300 kg. Valued at Rs. 2,85,000 was returned by the assessee to Kirtikumar &Co on 2nd July, 1982. In assessee's stock register for 1981-82 this stock is shown at entry No. 25. In remark column it is mentioned goods return 1st July, 1982.

The voucher of Devanbabu mentions the date of goods return as 2nd July, 1982 and not 1st July, 1982. Kirtikumar & Co. has shown this transaction in their books on 2nd July, 1982.

5. Kirtikumar sold 300kg emerald to Taj Jems of Bombay on 3rd March, 1983 @2,85,000 (KK"s invoice no. 213 dt. 3rd March, 1983 copy given to IAC).

6. Against this K.K. & Co. Received Rs. 1,50,000 on 2nd Nov., 1983 (Also Vad 12 of S.Y. 2039) by cheque issued on Reserve Bank through bank of Baroda. This was paid by K.K. KK"s a/c with French Bank (Bank National De Paris) Bombay A/s No. 3424 & cleared on the same day.

7. Kirtikumar& Co. issued cheque of Rs. 1,50,000 in favour of Navratna Corpn. Assistant concern on 2nd Nov., 1983.

7A. Navratna Corporation utilised Rs. 41,032 and the remaining amount of Rs. 1,08,968 were returned to Kirtikumar &Co.

8. The remaining amount of Rs. 1,35,000 is still outstanding from Taj Jems till today.

9. Regarding assessee's account in the books of K.K. &Co. For 2038.

Shri Thakkar states that it is just a coincidence that exact amount of Rs. 2,85,000 remained outstanding and had to be carried forward.

This amount is settled in SY 2039 as under:

Devanbabu has a sharafi account with Navratna Corpn. Cambay who runs a theatre and the same in a sister concern. D. S. Pvt. Ltd. Has advanced various loans to Navratna. As per the assessee's account in the books of Navratna the opening balance is Rs. 11,00,133.57 with Havala Rs. 61,559 & 2,85,000 (3,46,559) the debit total goes to 15,48,507 and after several credit/debit entries of advance recovery the closing credit balance of DB remains at Rs. 6,63,683,91.

This sharafi account continues till today.:

It was pointed out by the learned D. R. That the aforesaid subsequent purchase of 300 kgs. Of rough emerald on 26th April, 1982 and the subsequent return of the same goods to Kirti Kumar & Co. On. 2nd July, 1982 have not been properly explained by the assessee. It is further submitted that the same goods were sold on 3rd March, 1983 for the same value of Rs. 2,85,000 to M/s. Taj Jems. It is also strange that there was an outstanding balance of Rs. 2,85,000 in the assessee's account in the books of account of Kirtikumar & Co. For S. Y. 2038 as per the aforesaid company of accounts. Such strange coincidence of subsequent purchase, purchase returns and again selling of the same goods at the same price to M/s. Taj Jems create strong suspicion about the genuineness and correctness of this aforesaid transactions. The goods found during the course of search were not the same which were imported by Kirtikumar &Co. And which are stated to have been sent on approval basis to the assessee company. He further submitted that the 300 kgs of rough emeralds of Kirtikumar & Co. were of Brazilian origin as per the purchase invoice appearing at page 165 of the paper book whereas the jangad memo found during the course of search, which appears at page 14 of the paper book does not show that the rough emeralds found during search were of Brazilian origin. The learned D.R., therefore, strongly urged that in view of the detailed reasons recorded in the orders of the ITO and the CIT(A) the aforesaid addition deserves to be confirmed.

5.5. We have carefully considered the rival submissions and have also gone through the orders passed by the authorities below. We have also carefully examined all the papers submitted in the paper books of both the parties to which our attention was drawn during the course of hearing. Statement under s. 132(4) of Shri Babubhai alias M.G. Shah, Director of the company was recorded on 26th Feb., 1982 during the course of search when the stock of rough emeralds was found. It will be worthwhile to reproduce the relevant question and answer appearing in the said statement dated on 26th Feb., 1982:

"Q. 5 Today from you cellar emerald rough 300 kgs. Plus 200 kgs. totalling 500 kgs. Is found. What is your explanation?

Ans. These goods belongs to Devan Babu Private Ltd., Cambay and its office is situated on 1st Floor of my house. 200 kgs. Of rough emerald is purchased from Empire Export Pvt. Ltd. And its invoice No. EE/1 dated 14th August, 1980 I present to you, 300 kgs. Of emerald rough is received from Kirtikumar &Co. Bombay and its delivery memo dated 25th Oct., 1981. Is already seen by you today. These goods are of jungad and its final bill is not yet received M/s. Kirtikumar & Co. Is our sister concern."

Statement of Shri Babubhai (alias M.G. Shah) was again recorded by the authorised officers on 28th Feb,. 1982 and the relevant question and answer in respect of the aforesaid item is reproduced hereunder:

Q.2. What are the goods/stocks of business of M/s Devan Babu Pvt. Ltd. Cambay lying at your Bungalow near Bus Stand Cambay? What can be its value according to you and whether this has been shown in the relevant books of accounts. Please give details.

Ans. 500 kgs. Rough emeralds are kept in the premises near S.T,. Stand, Cambay, This Bungalow is used for my residence but office of Devan Babu Pvt. Ltd. Bombay is also situated at the first floor of this bungalow. Hence the stock kept at this bungalow. The cost of stock is Rs. 3,78,000 as stated by me in my statement recorded during the course of search of this bungalow. 200 kg of this stock is already recorded, in one current books of accounts maintained by M/s Devan Babu Pvt. Ltd. Cambay and found by you during the course of search of this building. The remaining 300 kgs. Have been received recently from M/s. Kirtikumar &Co. Bombay. The transaction has been finalised recently but the bill is yet to be taken in relevant books of accounts. This bill was shown by me for verification of Shri A.N. Modi, ADI (Intelligence), Ahmedabad during the course of search of the above stated bungalow on 26th Feb., 1982.

From the aforesaid statements it is clear that this explanation was given by the Director of the appellant company during the course of search in his statements recorded under s. 132(4) and he also produced the delivery memo dated 25th Oct., 1981 at the spot on the first day of the search on 26th Feb., 1982. The contents of such documents found during the course of sudden search and the facts stated in the aforesaid statements deserves weightly consideration. Keeping in view the aforesaid evidence in the form of statement on oath under s. 132(4) and the jangad memo, the authorised officers were apparently satisfied about the nature of possession and source of the stock of aforesaid rough emeralds found during the search and, therefore, the same was not seized. The same matter was examined during the course of proceedings under s.132(5) by the IAC (Asst.) He issued a show cause notice dated 17th May, 1982, inter alia, requiring the assessee to prove the nature of possession and the source of acquisition of the aforesaid rough emeralds found during the course of search. The assessee once again submitted the aforesaid explanations before the IAC(Asst) and the later passed an order under s.132(5) after considering all such material and evidence existing on records and he did not include the value of aforesaid item of rough emeralds while estimating the undisclosed income in the order under s. 132(5) passed on 27th May, 1982. It was explained, vide letter dated 9th March, 1985 to the ITO that the aforesaid 300 kgs. of rough emeralds were carried by Shri Chimanlal G. Shah on 25th October, 1981 in his car from Bombay to Cambay. The assessee also submitted before the authorities below that their suspicion that 300 kgs. of emerald cannot be carried in a car from Bombay to Cambay is totally erroneous since even twice of that quantity can be carried in a car. This fact was also stated in the written submissions submitted to the CIT(A) vide letter dated 7th Jan., 1987 and again submitted in a subsequent written submission before him which appears at pp. 117 to 125 of the paper book. The suspicion this case about the correctness of the aforesaid contention should have come to an end because of the fact that the premises of Kirtikumar & Co. were simultaneously raided on the same day at Bombay and the said material belonging to them was not found with them at Bombay. If the material found with the appellant would have been different than 300 kgs. of rough emeralds imported by Kirtikumar &Co. And shown in their stocks, the same would have been found their business premises during the course of simultaneously search conduced at their place. The assessee further submitted in the written submissions before the CIT(A) that the assessing authority of the appellant company made enquiries with the ITO of Kirtikumar & Co. at Bombay and the matter has been confirmed by the ITO of Kirtikumar and Co. The assessee has also submitted a copy of letter dated 30th Oct., 1985 submitted by Kirtikumar & Co. To their assessing authority at Bombay in which they explained that they had imported 300 kgs of rough emeralds and have confirmed that the same were sent on approval basis (jangad) to M/s Devan Babu Pvt. Ltd. These goods were carried by their partner Shri C.G. shah, who travelled in a car from Bombay to Cambay. The transaction of a subsequent sale vide invoice dated 26th April, 1982 of the said emeralds for Rs. 2,85,000 by Kirtikumar & Co. And the subsequent return thereof on 2nd July, 1982 to them have also been confirmed by Kirtikumar & Co. The only reason on the basis of which the aforesaid addition has been made by the ITO and confirmed by the CIT(A) is that the aforesaid quantity of rough emeralds could not have been carried in a car according to them and the subsequent entries of its purchases by the assessee and return thereof to Kirtikumar & Co. And subsequent transaction made by Kirtikumar & Co. with respect to the aforesaid 300 kgs. Of rough emeralds created serious doubts about in the genuineness of this transaction. The strange coincidence or doubt about the fact that the goods in question could not have been carried in a car cannot amount to evidence or proof admissible in law justifying the rejection of the valid explanations given by the assessee which was consistently the same rights from the inception, i.e., from the date of the search. The assessee's contention is clearly supported by statements recorded during the course of search and by the jangad memo produced during the course of search. The authorised officers were apparently satisfied about the nature of possession and source of the aforesaid goods and, therefore, they had not chosen to seize the same. Again during the course of proceedings under s. 132(5) the assessee's contention was accepted by the assessing authority after due examination and scrutiny in relation to this point. This simultaneous search conducted at the business premises of Kirtikumar & Co. Clinches the aforesaid issue in favour of the assessee. In view of aforesaid discussions and in view of the entire material and evidence existing on records, we are of the considered opinion that the aforesaid addition of Rs. 2,98,800 deserves to be quashed and is accordingly deleted.

6. Addition of Rs. 1,48,519: The ITO has discussed this point, so far as it relates to stocks found and seized at Cambay at page 6 & 7 of the assessment order in para 5. As regards the addition of Rs. 22,614 in respect of unexplained stocks out of stocks seized at Bombay, the ITO has discussed the same in para 8 of the assessment order.

6.1 During the course of search, stocks of precious and semi-precious stones valued at Rs. 3,40,566 were seized at Cambay out of which the ITO has treated stocks valued at Rs. 1,25,905 as unexplained stocks out of the seized items. At Bombay, stocks valued at Rs. 47,641 were seized out of the which the ITO has treated items valued at Rs. 22,614 as unexplained stocks. The ITO has observed that on comparison of stock of precious stones found during the course of search with the stock register revealed various discrepancies and the items of difference have been added as representing the value of unexplained stocks found during the course of search. He also observed that the assessee has tried to explain the difference by showing that certain goods were received on janged. The ITO has rejected the assessee's contention that 53,500 etc. Of rough rubies and rough sapphires were received on janged from M/s Taj Jem of Bombay on 16th Feb., 1982. While making the aforesaid additions with respect to stocks seized at Cambay, the assessing authority has not accepted the repeated request of the assessee that the value of the seized stocks has been determined by the departmental valuer at an extremely arbitrary and excess figure and the same should be got revalued or the assessee should be provided the opportunity to have the same valued by some registered valuer so that the evidence in rebuttal of the report given by the departmental valuer can be submitted.

6.2 The CIT(A) observed that the valuation made by the departmental valuer, who is also an approved valuer, cannot be said to be arbitrary or excessive or unrealisitic unless the assessee points out some prima facie evidence. He therefore, did not accept the assessee's request for getting the made by the ITO. The CIT(A) has not at all specifically discussed the addition of Rs. 22,614 made with respect to seized assets at Bombay. He, however, confirmed the entire addition made by the ITO.

6.3 The learned counsel for the assessee submitted that the appellant had furnished a detailed statement explaining the stock position found on the date of search compared with stock register and movement of goods on jangad. The appellant also produced the stock register before the ITO. Most of the stocks represent items of opening stock and, therefore, there is no question of any discrepancies. It was further submitted that the accounts for the year ended on 30th June, 1981 were duly audited on 4th Dec., 1981. the notes to the audited accounts clearly show the position of opening stock, purchases made and losing stock, etc. Most of the items seized at the time of search on 26th Feb., 1982 were out of the closing stock. As regards the three lots of mixture rough emerald and rough rubies as per valuation report prepared by the valuer of the department at the time of search appearing at Sl. Nos. 8, 9 and 16 of such valuation report totalling to Rs. 1,03,360 it was stated by the assessee that the said items were grossly over valued by the valuer of the department. According to the assessee, the value of the aforesaid items valued by the departmental valuer at Rs. 1,03,360 would be negligible figure of Rs. 5,000 to Rs. 7000. the assessee repeatedly requested the authorities soon after the search and also during the course of proceedings under s. 132(5) and under s. 143(3) for revaluation of the entire stock seized by the department. The learned counsel for the assessee invited our attention towards the various such letters submitted by the assessee before different authorities praying for getting the seized assets revalued by expert and approved valuers. He contended that the learned authorities below erred in not accepting such legitimate and valid request made by the assessee. Unless the correct value is determined by experts having requisite experience and knowledge of different types of precious and semi-precious stones it is impossible to reconcile the stocks found with the respective items appearing in the stock register and it is also not possible to arrive at the correct value of stocks seized by the department. The learned counsel for the assessee contended that soon after the search a letter dated 12th March, 1982 was sent to the DDI, Ahmedabad, requesting that the stocks seized by the department should be got revalued as the departmental valuer had himself stated during the course of search that they were adopting 30% higher value than the average market value. The assessee also submitted that at the time the departmental valuer was estimating the value of the seized items, the assessee had offered those items to the valuer at a discount of 50% of the value adopted by the departmental valuer. It was, therefore, requested that all the seized items should be got revalued in order to determine the correct value of the items. Repeated reminders were thereafter sent to the IAC(Asst) and other authorities during the course of proceedings under s. 132(5) and 143(3). Similar request was also made to the learned CIT(A) in the two written submissions in the month of January, 1987. The refusal to accept such legitimate requests by the learned authorities below is contrary to the provisions of law as also contrary to all canons of natural justice.

6.4 the learned counsel for the assessee also briefly explained the aforesaid items found and seized at Cambay as under:

The learned counsel for the assessee, therefore, urged that the aforesaid addition of Rs. 1,48,519 consisting of the value of alleged unexplained items of seized assets found and seized at cambay and Bombay deserves to be deleted as the said addition have been made without accepting the assessee's request for getting the same revalued or for allowing the assessee to have it valued by some other registered valuer and also because the authorities have not properly appreciated the facts explained by the assessee that all the items found during the course of search are verifiable from stock records and movement of goods on approval basis.

6.4 the learned D.R. strongly supported the orders passed by the authorities below and relied upon the detailed reasons given by them in their respective orders. It was contended that the value adopted by the departmental valuer is most reasonable as is evident from the fact that value of emerald rough of 300 kgs. Found during the course of search at Cambay by the department had been determined by the departmental valuer at Rs. 2,98,800 as discussed in the earlier part of this order whereas the value of same item as per jangad memo dated 25th October, 1981 of M/s Kirtikumar & Co. Was Rs. 2,85,000. considering the gap of four months between the date of jangad memo of 25th Oct., 1981 and the date of search on 24th Feb., 1982, the value determined by the departmental valuer cannot be said to be arbitrary or excessive, he submitted that this proviso that the value of all other items adopted by the departmental valuer is reasonable and correct. He further submitted that the ITO has made a detailed scrutiny of the stock ledged and had compared the stock as per ledger with the stocks ledger and had compared the stock as per ledger with the stocks found during the course of search and after such careful scrutiny he had sorted out the items of stocks which are found during the course of search which are not verifiable from the stock register. He further contended that the ITO has rightly rejected the assessee's explanation with regard to goods received on jangad. Such explanation, after the date of search can be prepared in any manner at any time. He submitted that the authorities is below were fully justified in not accepting the contention of the assessee that 53,500 cts. Of mixture of rough rubies and rough sapphires were received on jangad by the assessee from M/s Taj Jems Bombay on 16th Feb., 1982. He, therefore, urged that the addition confirmed by the CIT(A) should be sustained.

6.5 we have carefully considered the rival submissions and have also gone through the relevant paragraphs of the assessment order and the order of the CIT(A). We have also carefully examined the various papers which to our attention was drawn during the course of hearing. As regards the addition of Rs. 22,614 in Respect of unexplained items seized Bombay the ITO has not stated a word that the assessee was required to explain these items totalling to Rs. 22,614 out of stocks seized at Bombay. It, therefore, appears that the said addition has been made without providing any reasonable opportunity to the assessee. This view is further supported by the fact that the CIT(A) in his order has not discussed about the aforesaid addition of Rs. 22,614 made with regard to the stocks found and seized at Bombay. The assessee has submitted general submissions about the over valuation of the entire items of stocks seized by the department. The assessee also made general submissions that all the stocks found during the course of search are verifiable from the stock registers and the other explanations relating to movement of goods on jangad, etc. However, no specific submissions with regards to aforesaid addition of Rs. 22,614 was made by the learned counsel for the assessee during the course of hearing.

6.6 Before considering the merit of the addition of the entire amount of Rs. 1,48,519 in respect of items seized at Cambay and Bombay, it is necessary to consider the assessee's arguments regarding refusal of its request to get the seized item revalued by the departmental valuer or to give the opportunity to the assessee for getting the same valued by another registered valuer. Proceedings of search were commenced on 26th Feb., 1982 and concluded on 28th Feb., 1982. on 12th March, 1982. A letter was sent by the assessee to the DDI informing that during the course of search it was assured that the assessee will be at liberty to bring his valuer and get the revaluation of the stocks-in-trade found and valued by the departmental valuer. It was further stated that the valuation made by the departmental valuer was extremely excessive and the assessee had offered during the course of search to the departmental valuer to purchase the goods valued by him at discount of 50%. It, therefore, requested that the stocks found during search should be revalued by competent and experienced valuers who are acceptable to the income-tax department and to the assessee. The assessee also suggested that the same may be valued by valuers chosen by the Jems and Jewellery Export Promotion Council. Again there after, on 10th May, 1982 the assessee wrote a letter to the ITO during the course of proceedings under s. 132(5) repeating his request for getting the stock found and seized during the search revalued. He also made an offer that if the department is not willing to accept the prayer for revaluation, the assessee may be provided the facility to bring his own valuer to value the seized stocks. The IAC (Asst), vide letter dated 17th May, 1982, during the curse of proceedings under s. 132(5),informed the assessee that since the valuation was made by the government approved valuers there does not appear to be any ground for grievance and no useful purpose will be served by accepting the assessee's request for getting the stocks revalued. The assessee again wrote back to the IAC(Asst) on 24th May, 1982 explaining the need and the desirability for revaluation of the stocks as the departmental valuer had valued the stock exorbitantly high. He again repeated his request for providing him facility to bring his own registered valuer for valuation of the stocks seized by the department. Even after completion of the order under s. 132(5), the assessee once again wrote letter dated 27th July, 1982 to the IAC, stating that in the interest of fairness and justice the assessee's request for revaluation of the stocks should be allowed. Such repeated requests made by the assessee during the investigation stage with the DDI and during proceedings under s. 132(5) and under s. 143(3) were not accepted by the departmental authorities and the addition was made on the basis of valuation made the CIT(A) also in his written submission dated 7th January, 1985 and in the second written submission that it should be accorded permission and facilities to get the seized stocks valued by a competent registered valuer. It is now well settled law that where an authority makes an order in exercise of a quasi-judicial function it must observe rules of natural justice in the conduct of the enquiry. The ITO before placing reliance on the report of the departmental valuer with regard to valuation of the seized items, which have been added as assessee's income, ought to have afforded an opportunity to assessee to produce evidence in rebuttal of the said valuation report of the departmental valuer on which ITO has placed reliance and has based his judgment. He also ought to have given an opportunity to the assessee and should have provided all the required facilities for getting the seized items valued by the registered valuer to be chosen by the assessee. Such report from the registered valuer to be choosen by the assessee. Such report from the valuer as the assessee desired to obtain would have been placed in rebuttal of the report of the depptl. Valuer and the same could have helped the ITO to come to a fair and judicious conclusion with regard to determination of the correct value of unexplained items of seized assets. The ITO should have also afforded an opportunity to the assessee to cross-examine the departmental valuer with the help of his registered valuer so that the correct estimate of value of the seized items added in the hands of the assessee could be ascertained. Failure to accept such legitimate and valid prayer repeadly made by the assessee amounts to flagrant disregard of the provisions of law and the principles of natural justice. This infirmity could have been cured or set at right by the learned CIT (A) by providing such opportunity to appellant repeatedly desired by them. However, the CIT(A) has also brushed aside such request made by the assessee without assigning any valid reasons whatsoever. It will also be worthwhile to add that before making any addition by resort to ss. 69, 69A, 69B and 69C the burden clearly lies upon the Revenue to prove the correct value of alleged unaccounted stocks found during the course of search and such burden clearly lies upon the revenue to prove the correct value of alleged unaccounted stocks found during the course of search and such burden has to be discharged by the revenue by bringing conclusive and clinching evidence and material on record. We are, therefore, of the considered opinion that the entire addition of Rs. 1,48,519 made with respect to specific items of stocks seized at cambay and Bombay deserves to be set aside and cancelled and the matter should be restored back to the assessing authority on this limited point. The assessing authority is directed to provide the facility to the appellant company to get all the items totalling to Rs. 1,48,519 which are lying amongst the seized stocks with the department which were seized from Cambay and Bombay, valued by any registered valuer or valuers as may be chosen by the assessee and will also grant opportunity to the assessee to cross-examine the departmental valuer with help of the registered valuer of the assessee so that a correct estimate of the value of aforesaid seized items, which have been added in the assessment as income of the assessee, may be determined. Thereafter the assessing authority will consider the assessee's explanation that all those items are verifiable from the stock-register and the movement of goods through jangad, etc., from the various parties. The ITO will also consider the explanations which may be given by the assessee with respect to each of the above referred seized items to prove that those are not unaccounted items. The ITO will thereafter make addition of the redetermined value only in respect of those seized items which he can conclusively prove as items of unaccounted stocks found and seized by the department. Ground Nos. 3 and 4 are, therefore, treated as allowed for statistical purposes.

7. Ground No 5: The learned counsel for the assessee challenged the levy of interest under s. 217 and contended that it should have been waived. The learned D.R. supported the order passed by the authorities below and justified the levy of interest under s. 217.

7.1 We have heard parties and have gone through the orders passed by the authorities below. The learned CIT(A) has held that this ground is of consequential nature and would be taken care of by the ITO while giving effect to his appellate order. The assessee has furnished a return declaring a net loss of Rs. 21,610. the levy of interest under s. 217 is set aside and this matter is also restored back to the ITO to redecided the same along with the preceding point. He may also consider the provisions contained in r. 40 relating to waiver of such interest chargeable under s. 217. he may also consider the judgment of Hon'ble Rajasthan High court in the case of CIT vs. GOLCH PROPERTIES (P) LTD. (1987) 61 CTR (Raj) 185 in this regard while redecinding the matter relating to interest chargeable under s. 217, if any. Accordingly ground No. 5 is also treated as allowed for statistical purposes.

8. In the result appeal for the asst. yr. 1982-83 is treated as allowed for statistical purposes and appeal for asst. yr. 1983-84 is allowed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.