Citation Codes

Equivalent Citations

citation codes

Case Number

ITA No. 2220.Kol/2017 (Assessment Year: 2011-12)

Attorney(S)

Shri Pijush Mukherjee, Addl. CIT Sr. DR, Advocate
Shri A. Biswas, FCA & Shri D. Dasgupta, AR, Advocate for the Assessee.

Judges

A.T Varkey, J.M
Dr. A.L Saini, A.M

Acts

u/s 143(3) of the Income Tax Act, 1961 ( in short the Act)
sec 32 of I.T. Act, 1961.

See more information ...

Smart Summary

Tribunal Summary: M.P. Jewellers (Calcutta) & Co. — ITA No.2220/Kol/2017 (Assessment Year 2011-12)

Factual and Procedural Background

This appeal was filed by the assessee M.P. Jewellers (Calcutta) & Co. against an order of the Commissioner of Income Tax (Appeals)-13, Kolkata, which arose out of an assessment order passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 dated 18.03.2014 for assessment year 2011-12.

The assessee raised multiple grounds of appeal. Two principal issues emerged from those grounds: (i) disallowance of depreciation claimed on a residential building (grounds 1 and 2), and (ii) an addition in respect of a claimed "melting gain" of gold of 277.702 grams (ground 3), which the Assessing Officer had treated as income and added back to the assessee's total income. The CIT(A) confirmed both the disallowance of depreciation and the addition for melting gain, and the assessee appealed to the Tribunal.

Legal Issues Presented

Whether the assessee was entitled to depreciation on the identified residential building and, if so, at what rate (contention involved 5% as the residential building rate and 2.5% where the building was used for less than 180 days during the relevant year).
Whether the gain in quantity resulting from melting of old gold (277.702 grams) — which the assessee maintained was recorded in its stock register and reflected in the financial statements — constituted taxable income and therefore required addition to taxable income by the Assessing Officer.

Arguments of the Parties

Appellant's Arguments (Assessee)

On depreciation: The assessee accepted that the building was residential and argued entitlement to depreciation at the residential building rate of 5%. Further, because the building was used for less than 180 days in the relevant previous year, the assessee contended it was entitled to claim depreciation at half the rate (2.5%) on a written-down value of Rs. 24,87,942, producing an amount of Rs. 62,199.
On melting gain: The assessee explained industry practice — old ornaments purchased from customers are estimated for purity (touchstone), sent for melting into 24K material, and then issued to smiths for manufacture. The alleged gain/ loss on melting is only an intermediate quantitative difference between initially estimated purity and actual post-melting quantity. The assessee asserted that the melted quantity (including any excess) was recorded in the stock register, included in the closing stock as per the tax audit report, valued at cost, reflected in the profit & loss account, and therefore should not be treated as immediate taxable income. The taxable event, the assessee contended, arises only upon sale (transfer of ownership) to a customer.

Revenue's Arguments (Assessing Officer / Departmental Representative)

On depreciation: The Assessing Officer held that the building was residential and used by staff members and partners as and when required; therefore it was not used for business purposes and depreciation at the claimed rate should be disallowed. The CIT(A) upheld this view, noting the assessee had not produced confirmation from the resident welfare association nor employment documentation to show the facility was not reflected as a perquisite in employees' hands.
On melting gain: The Assessing Officer observed that the gain of 277.702 grams had not been disclosed in the tax audit report and profit & loss account, and therefore added the value of this quantity (Rs. 5,75,648) back to the assessee's income. The Departmental Representative before the Tribunal primarily reiterated the Assessing Officer's stance.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Hind Construction Ltd., 83 ITR 211 (SC)	Principle that "No one can sell his goods to himself" — i.e., a taxable event requires transfer of ownership to another (sale) before income is recognized.	The Tribunal relied on this principle to support the assessee's position that the melting process and any intermediate quantitative gain do not amount to a taxable event so long as ownership of the melted metal or manufactured jewellery remained with the assessee; taxable income arises only when the jewellery is sold and ownership passes to the customer.

Court's Reasoning and Analysis

The Tribunal reviewed submissions, evidentiary material and the records of accounting and tax audit schedules. Its reasoning proceeded in two principal strands corresponding to the two contested issues.

1. Depreciation on the Residential Building

The Tribunal recorded counsel's submission that the building qualified for depreciation at the residential building rate of 5%, and that, because the building was used for less than 180 days during the relevant previous year, depreciation should be allowed at half the annual rate (2.5%) on the written-down value of Rs. 24,87,942, amounting to Rs. 62,199.
The Departmental Representative expressly agreed with the assessee's legal proposition and the applicable arithmetic (i.e., entitlement to 2.5% for usage less than 180 days).
Given both parties' agreement on the applicable legal rate and the evidence that usage during the year was less than 180 days, the Tribunal directed the Assessing Officer to allow depreciation of Rs. 62,199. The Tribunal therefore reversed the disallowance to the extent of that amount.

2. Treatment of Melting Gain (277.702 grams)

The Tribunal examined the accounting records and tax audit particulars supplied in the paper book. It noted that: (a) month-wise cost of old gold purchased had been debited to the profit & loss account; (b) the quantitative details in the tax audit report disclosed a stock of old gold; and (c) the melted quantity (the 277.702 grams) was included in the stock register and reflected as part of the closing stock and valued at cost.
Factually, the Tribunal accepted the assessee's explanation of industry practice: goods (old ornaments) are estimated for purity at purchase, then melted; the difference between estimated and actual quantity post-melting is inherent to that conversion process and becomes embedded in the melted material which then enters production. The identity of any particular purchased item is lost on melting, so any "gain" in quantity is not separately identifiable as income deriving from some discrete sale or receipt.
Applying accounting principles and the cited precedent (Hind Construction Ltd.), the Tribunal concluded that recognition of income cannot be premised on an intermediate increase in quantity that remains in the assessee's stock and is valued at cost in the financial statements. The taxable event according to the Tribunal is the sale (transfer of ownership) to a third party, not the internal melting process.
The Tribunal also observed an inconsistency in the Assessing Officer's treatment across years: in the subsequent year's assessment the Assessing Officer did not consider this increase in valuation of closing stock as opening stock, undermining the claim that the earlier addition represented a true omission of income.
On these bases, the Tribunal found the Assessing Officer's addition unjustified and deleted the addition of Rs. 5,75,648 that had been sustained by the CIT(A).

Holding and Implications

Holding: The Tribunal allowed the appeal of the assessee. The decision contained two operative directions:

Depreciation: The Tribunal directed the Assessing Officer to allow depreciation of Rs. 62,199 (which is 2.5% of Rs. 24,87,942), reflecting the residential building rate halved for usage of less than 180 days.
Melting Gain: The Tribunal deleted the addition of Rs. 5,75,648 made by the Assessing Officer in respect of the alleged melting gain of 277.702 grams, concluding that the quantity and value were already reflected in the assessee's stock and financial statements and did not constitute income until sale.

Implications: The direct effects are the allowance of the specified depreciation amount and deletion of the addition for melting gain for the assessment year under appeal. The Tribunal's reasoning relied on accounting principles and the established principle (as cited from Hind Construction Ltd.) that sales to oneself do not create a taxable event; the opinion does not purport to set a broader legal precedent beyond applying those principles to the facts of this case. No further or novel precedent was declared by the Tribunal in this order.

Order pronounced in Court on 23.01.2019. The appeal of the assessee was allowed. (Members: A.T. Varkey and A.L. Saini)

Disposition and Administrative Details

Result: Appeal allowed. The order contains directions to the Assessing Officer to give effect to the Tribunal's findings as described above.

Copies were forwarded to the parties and relevant tax authorities as listed in the order (assesseee, JCIT Range-40 Kolkata, CIT(A), CIT-Kolkata, CIT(DR) Kolkata Benches, and Guard File).

Show full summary ...

To access the original judgment, please Sign In or Subscribe.

M.P Jewellers (Calcutta) & Co. Assessee v. Joint Commissioner Of Income Tax Revenue.

Per Dr. A. L. Saini:

1. The captioned appeal filed by the Assessee pertaining to assessment year 2011- 12, is directed against an order passed by the learned Commissioner of Income Tax (Appeals)-13, Kolkata (in short the ld. CIT(A)], which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 ( in short the Act) dated 18.03.2014.

2. The grounds of appeal raised by the assessee are as follows:

1) For that on the fact and in the circumstances the ld. CIT(A) was wrong in holding that the appellant failed to establish that the aforesaid building has been used for business purpose despite his acceptance of the fact that M.P. Jewellers (Calcutta) & Co. ITA No.2220/Kol /2017 Assessment Year:2011-12 Page | 2 the identified employees of the appellant stayed at the said residential flat during the assessment year under appeal and thereby erred in upholding the disallowance of the specified depreciation rate of 5% as per I T Rules on residential building used for business purpose.

2) For that ld. CIT(A) was wrong in not allowing the depreciation of Rs. 62,199/- on the residential building (2.5% of Rs. 24,87,942), on the ground that The park has not been declared in the hands of the employees, when no such requirement has been specified in sec 32 of I.T. Act, 1961.

3. a) For that the ld. CIT(A) wrongly and arbitrarily upheld the addition of melting gain of gold of 277.702 grams amounting to Rs. 5,75,648/- although said quantity of 277.702 grams had been recorded in the stock register.

b) For that the ld. CIT(A) failed to examine and give his finding on that part of the written statement depicting the aforesaid gain of 277.702 gram and its inclusion in the Quantity Received as per 24 Karat (Kt) Register.

c) For that the ld. CIT(A) failed to consider that the intermediate process of gain or loss in quantity from melting, which results in the form of Gold Bars or manufactured jewellery, Does not have a separate cost, Are not required to be valued separately when the quantity of closing stock of Gold Bars and Manufactured Jewellery are valued at cost and reflected in the financial statement.

4) The appellant craves leave to add to and/or alter, amend, modify or rescind the grounds hereinabove before or at the time of hearing of this appeal.

3. The ground nos. 1 and 2 raised by the assessee relates to the issue of disallowance of depreciation claimed by the assessee to the tune of Rs. 1,24,397/- on office building.

4. The brief facts qua the issue are that during the assessment proceedings, the Assessing Officer observed that assessee claimed depreciation on residential building, since it was a residential building for the purpose of residence therefore depreciation should not be allowed @ 10%. The Assessing Officer has also noted that the aforesaid building was used for the staff member and the partners of the firm as and when required. Since the building was not used for business purposes. M.P. Jewellers (Calcutta) & Co. ITA No.2220/Kol /2017 Assessment Year:2011-12 Page | 3 Therefore, the Assessing Officer made the disallowance to the tune of Rs. 1,24,397/-.

5. On appeal, the ld. CIT(A) confirmed the addition made by the Assessing Officer. During the appellate proceedings, the assessee was asked to furnish the confirmation of resident welfare association of the building but he did not submit any proof. The assessee has also not submitted the employee and employer contract agreement which proves that the aforesaid facility has not been reflected as a perk, in the hands of employees. Therefore, since the assessee has not established that the perquisite of the same has not been shown in the hands of the employees; and the building has been used for business purposes; hence depreciation should not be allowed.

6. Aggrieved the assessee is in appeal before us.

7. We have heard both the parties and perused the material available on record. We note that the ld. Counsel for the assessee submitted before us that the assessee in any case is entitled to claim depreciation @ 5% of Rs. 24,87,942/-. Since the building was used for less than 180 days during the previous year, relevant to assessment year, therefore the assessee is entitled to claim depreciation @ 2.5% of Rs. 24,87,942/-, which comes to the tune of Rs. 62,199/-. On the other hand, the ld. DR for the revenue has fairly agreed that since it is a residential building which qualifies for depreciation @ 5% and since the building has been used by the employees during the previous year, relevant to the assessment year for less than 180 days therefore the assessee is entitled to claim the depreciation @ 2.5% of Rs. 24,87,942/- which comes to the tune of Rs. 62,199/-. We note that the ld. DR for the revenue has fairly agreed with the propositions canvassed by the ld. Counsel for the assessee that the assessee is entitled to claim the depreciation to the tune of Rs. 62,199/- @ 2.5% of Rs. 24,87,942/-. We note that depreciation rate on residential building is 5%, therefore we direct the Assessing Officer to allow the depreciation to the tune of Rs. 62,199/-. M.P. Jewellers (Calcutta) & Co. ITA No.2220/Kol /2017 Assessment Year:2011-12 Page | 4

8. Ground no. 3 raised by the assessee relates to addition of melting gain of gold of 277.702 grams amounting to Rs. 5,75,642/-.

9. The brief facts qua the issue are that during the assessment proceedings, the assessee was asked to furnish the details of gain from melting of old gold and accordingly the assessee furnished the statement showing gain amount, out of melting to the tune of Rs. 277.702 grams in quantity. The Assessing Officer noted that the same gain was not shown by the assessee in the tax audit report. The assessee was requested to explain the gain of 277.702 grams of gold. In response the assessee submitted that it is established practice in the jewellery industry that all old ornaments are purchased from customers, in exchange of sale of finished jewellery, after Assessing the purity by in-house tester with the help of touch stone and on the basis of his observation. Thereafter, all the old ornaments are sent for melting for recycling into 24 K old gold, to distinguish from 24 k bullion, in the process of melting there may arise an actual gain / loss in quantity. The accumulated old gold of 24K irrespective of gain / loss post melting is issued to smiths, who in turn fabricate jewellery in pieces. All such pieces are received as unique stock number against serially numbered voucher(s). Notwithstanding the

24 k old post melting, is very much part of assessees stock. This has already been considered as input at the time of issue to the smiths and also included in the finished jewellery received back from the smiths thereby duly recognized in the books and reflects in the financial statement. However the Assessing Officer rejected the contention of the assessee and noted that audit report and profit & loss account of the assessee did not consider the said gain of 277.702 grams of gold, so the value of 277.702 grams of gold as on 31.03.2011 was added back to the stock and therefore Rs. 5,75,648/- was added back to the total income of the assessee.

10. Aggrieved by the order of the Assessing Officer the assessee filed an appeal before the CIT(A) who has confirmed the addition made by the Assessing Officer.

11. Aggrieved the assessee is in appeal before us. M.P. Jewellers (Calcutta) & Co. ITA No.2220/Kol /2017 Assessment Year:2011-12 Page | 5

12. The ld. Counsel for the assessee submitted before us that the assessee has followed correct accounting practice which is prevailing in the jewellery market / manufacturing process of jewellery by taking old ornaments from the customers. On the other hand, ld. DR for the revenue has primarily reiterated the stands taken by the Assessing Officer which we have already noted in our earlier para and the same is not being reiterated for the sake of brevity.

13. We have given a careful consideration to the rival submissions and perused the material available on record. We note that so far the quantity reconciliation and accounting treatment is concerned the assessee in the appeal under consideration has followed the practices prevailing in the jewellery manufacturing process in case of old jewellery received from the customers during the course of business. So far the quantity reconciliation is concerned, we are of the view that old gold from customers in the form of Bangles, Ring, Ear-ring, Necklace etc. were purchased from customers. The 24 k of this gold is estimated on the basis of touchstone for the purpose of making payments to the customers. The cost so incurred is debited to the profit & loss account. Periodically this old gold purchased, say during a week or fortnight from the customers are sent to the Melters for melting. After melting the identity of gain or loss from a particular item of purchase is lost. After melting, the quantity obtained from the melters were compared to the estimated quantity at the time of purchase and the difference may be either gain or loss. Actually, this is not a gain arising from melting. This is the difference between the earlier estimated quantity of jewellery purchased with the actual quantity obtained from melters. That excess or short is not separately identifiable but embaded in the melted piece in the form of bar, strip etc. So far the accounting treatment is concerned, we are of the view that as detailed in Page

5 of the Paper Book the month wise cost of old gold purchased (with quantity tallied with Tax Audit Report) has been debited in the Profit & Loss A/c. Aggregate of Month-wise Sales was credited in the Profit & Loss Account (page 5 M.P. Jewellers (Calcutta) & Co. ITA No.2220/Kol /2017 Assessment Year:2011-12 Page | 6 of Paper Book). Stock of Old Gold of 600.474 gms (as per page 34 of the Paper Book- i.e. 436.015+60.671+95.728+8.060=600.474) was disclosed in the quantitative details of Tax Audit Report. The appellant has reconciled that out of the total receipt of 12,541.817 grams (mentioned in the assessment order) , the year-end balance of 24Kt. Gold Register was the aforesaid 60.671 grams. So there is no dispute that the melting gain quantity of 277.702 grams was included in the stock register as well as the closing stock as per tax audit report and also valued at cost and stated in the P&L A/c. This melted quantity thereafter enters in the production process of jewellery manufacture and issued to gold smiths. In assessees case the dispute is whether the value of the melted gold would have to be considered as income or not. Melted Gold (including Gain or Loss) is only an intermediate process which would have to undergo further process of jewellery manufacture and thereafter sold to the customers. According to the appellant the taxable event of income would be triggered as soon as the jewellery is sold and thereby the ownership of the same is transferred from the appellant to the customer. So long the ownership remains with the Appellant on any quantity of Gold or Jewellery produced either semi-finished or finished, no taxable income would arise. This is because of the cardinal principle that No one can sell his goods to himself' [Hind Construction Ltd.83ITR 211 SC]. As per accounting principle the gain in quantity of 277.702 grams would go in reducing the cost of purchase. Since the sales price includes weight of gold, the realization of this quantity of 277.702 grams would be from the customers and thereby the value credited in the Profit & Los Account. The Raw Material stocks are valued at cost. As per accounting principles no recognition of quantitative gain or loss of an intermediate process is required to be separately disclosed. Thus, the appellant had made full disclosure in its Tax Audit Report. There are no further requirements of disclosure in the Tax Audit Report. We note that the Ld A.O. and the Ld. CIT(A) without referring to any specific requirements of disclosure had made a generalized statement that there was no disclosure in the Tax Audit Report. We note that while passing the order u/s 143(3) in the subsequent year's assessment i.e. A.Y. 2012-13, this increase in the valuation of closing stock of Raw Material, by the Ld. A.O. was not considered in the valuation of Opening M.P. Jewellers (Calcutta) & Co. ITA No.2220/Kol /2017 Assessment Year:2011-12 Page | 7 Stock of Raw Materials therefore, we do not accept the addition made by Assessing Officer. Considering the entirety of the facts and circumstances of the case and the facts narrated above we are of the view that the addition made by the Assessing Officer and sustained by the ld. CIT(A) needs to be deleted, accordingly we delete the addition of Rs. 5,75,648/-.

14. In the result, the appeal of the assessee is allowed. Order pronounced in the Court on 23.01.2019 Sd/- (A.T.VARKEY) Sd/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /Kolkata; / Date: 23/01/2019 (SB, Sr.PS) Copy of the order forwarded to:

1. M.P. Jewellers (Calcutta) & Co.

2. JCIT, Range-40, Kolkata

3. C.I.T(A)- 4. C.I.T.- Kolkata.

5. CIT(DR), Kolkata Benches, Kolkata.

6. Guard File. True copy By Order Assistant Registrar ITAT, Kolkata Benches

M.P Jewellers (Calcutta) & Co. Assessee v. Joint Commissioner Of Income Tax Revenue.

Tribunal Summary: M.P. Jewellers (Calcutta) & Co. — ITA No.2220/Kol/2017 (Assessment Year 2011-12)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (Assessee)

Revenue's Arguments (Assessing Officer / Departmental Representative)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Disposition and Administrative Details

M.P Jewellers (Calcutta) & Co. Assessee v. Joint Commissioner Of Income Tax Revenue.

Comments