Talwarsons Jewellers v. Assistant Commissioner of Income-tax

ORDER

Joginder Singh, J.M. :

These are two cross-appeals by the assessee as well as by the Revenue challenging the order of the learned CIT(A), dt. 19th March, 2004 in respect of block assessment for the period from 1st April, 1999 to 14th May, 2001.

2. Brief facts leading to the present appeals are that search under s. 132 was conducted at the business premises of the assessee, i.e., M/s Talwarsons Jewellers, SCO Nos. 14 and 15, Sector 22-D, Chandigarh, and also at the residential premises of the partners of the firm, namely, Shri Anil Talwar and Shri S.P. Talwar. Consequent to the search, the assessee was asked to file the return for the block period. The assessee declared income of Rs. 81 lacs as undisclosed income for the block period in its return. The bifurcation of the undisclosed income was as under :

3. The learned AO completed the block assessment at an income of Rs. 1.40.81.634 as detailed below :

4. The assessment was carried in appeal before the learned first appellate authority raising various grounds of appeal disputing the additions made by the AO to the returned income of the assessee. The learned CIT(A) sustained the addition of Rs. 1.50 lac in respect of 22 carat gold jewellery against which the Revenue is in appeal. However, the learned CIT(A) deleted the additions vide its order dt. 19th March, 2004.

The assessee has raised the following grounds :

1. " The learned CIT(A) has erred both on facts and in law in upholding an addition of Rs. 1.50 lac out of the total addition of Rs. 22,49,930 made to the undisclosed income of the assessee on account of excess 22 carat gold jewellery found from the business premises of the assessee during the course of search.
2. The learned CIT(A) has erred in upholding the addition of Rs. 1.50 lac as undisclosed income of the assessee on account of excess stock of 22 carat jewellery found at the business premises of the assessee during the course of search on ad hoc basis without proper application of mind.
3. 3. The upholding of addition of Rs. 1.50 lac being on ad hoc basis is both against facts and erroneous in law and is therefore liable to be deleted.
4. 4. The assessee craves leave to add, to alter or amend the grounds of appeal before the same are heard and disposed of.

On the other hand, the Revenue has raised the following grounds :

1. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addition of Rs. 52,07,599 on account of unaccounted investment in stocks of diamond.
2. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addition of Rs. 3,64,930 on account of excess stock of 22 carat gold jewellery.
3. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addition of Rs. 50,735 on account of valuation of 24 carat gold bars.
4. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addition of Rs. 48,328 on account of unaccounted stock of 18 carat gold used in diamond jewellery.
5. The learned CIT(A) has erred both in law and on the facts of the case on deleting the addition of Rs. 1,60,401 made on account of unexplained investment in renovation of SCO 14-15, Sector 22-D, Chandigarh.
6. The learned CIT(A) has erred both in law and on the facts of the case in directing not to levy surcharge on the tax worked out on undisclosed income as income pertains to search prior to 1st June, 2002."

5. In the appeal of the Revenue, the first ground pertains to deleting the addition of Rs. 52,07,599 on account of unaccounted income in the stock of diamonds. As per the order of the learned AO during the search operation, inventory of loose diamond and diamond studded in gold jewellery was prepared and got valued from the approved valuers which was valued at Rs. 1,01,22,942. The value of the diamonds as per the books of account was computed and a difference of Rs. 52,07,599 was worked out by the learned AO. The assessee in response to show-cause notice, issued by the Department, submitted that the weight of the diamonds found at the time of search tallied with the weight of the diamonds as per books of account. A copy of the inventory of closing stock was prepared on 31st March, 2001, i.e., at the close of the immediate preceding accounting year and was submitted during the course of search. As per this list, the weight of the diamonds comes to 1,022.03 carats. This does not include the weight of the diamonds included in items mentioned against "A. Old items." The weight of the diamonds studded in this jewellery based on registered valuer report, came to 31.64 carats. As such, the total weight of the diamonds as per closing stock inventory as on 31st March, 2001 came to 1,053.67 carats. From the total weight, the weight of the diamonds as per the books of account of the assessee as on the date of search arrived at was as follows :

The major contention of the learned Departmental Representative is that the action of the learned CIT(A) in deleting the addition is incorrect and the valuation done at the time of search and the value of diamonds was definitely in excess of the value shown as per books of account. Therefore, the AO was justified in making the impugned addition. As regards the inconsistency in the valuation done by the two valuers, the valuation of Sh. Vijay Kumar was acceptable to the assessee. He further stated that the variation in two valuation reports is in respect of one item only and the contention of the assessee that the weight of diamonds found at the time of search tallies with the weight of the diamonds as per the books of account cannot be accepted in the absence of any evidence at the time of search.

On the other hand, the learned counsel for the assessee in nutshell supported the orders of the learned CIT(A) by contending that the assessee had been maintaining complete records of the diamonds and the quantity, and as per the books of account, at the time of search, it was 944.63 carats. The quantity as per books of account was 967.05 carats. As per the learned Authorised Representative, the details of the same were part of the seized record. Our attention was invited to p. 201 of the paper book which is Annex. A-46 of Panchnama, dt. 14th May, 2001, which was the quantity as per the books of account. It was further pointed out that the assessee had been submitting inventory of its closing stock forming part of the balance sheet before the Revenue whereby the quantity and the value of diamonds have been precisely stated. For this contention, our attention was invited to paper book pp. 318 to 338 and 238 to 240 which are copies of the inventory for each of the years starting from 31st March, 1992 to 31st March, 2001, giving details of the weight and value of diamonds held on the last date of accounting year. The learned counsel for the assessee strongly submitted that all purchases of diamonds are duly accounted for and supported by the purchase invoices indicating quantity and value. There is no difference in the quantity of diamonds found at the time of search and quantity as per books of account. Mr. Jain further contended that the assessee has been valuing its stock at cost or market price, whichever is lower. The diamonds found at the time of search are part of books of account and as such no adverse inference can be drawn against the assessee merely on the basis of two valuation reports which otherwise are contradictory to each other. The learned Authorised Representative asserted that the statement made by the learned Departmental Representative that there is a difference in valuation done by two valuers is only in respect of one item is incorrect, for which our attention was invited to pp. 243 to 254 of the paper book which is a comparative chart of the valuation done by the two valuers to point out that there is a variation in 252 items out of the 546 items in respect of the valuation done by them and the difference in the valuation ranges in some of the items to more than 100 per cent as is evident from the following cases :

Mr. Jain further submitted that the second valuer has not carried out the valuation of all items as is evident from the comparative list where the figures of the second valuer match precisely in rupees with the first valuer which clearly suggests that the second valuer has copied the valuation in respect of the remaining items without actually valuing the same. A strong plea was raised by the assessee that besides these defects in the valuation, it is an accepted principle that the valuation of the stock has to be taken at cost or market price whichever is lower and in this case the assessee produced the evidence in respect of the diamonds found weighing 944.63 carats and has also established the valuation of the same with the supporting purchase vouchers and the inventory submitted every year with the IT Department much before the date of search which forms part of the seized record. Therefore, there was no reason for the AO to adopt the valuation and tax the same as undisclosed income. Reliance was also placed on the decision of the Delhi Bench of the Tribunal in the case of Pioneer Publicity Corporation Ltd. v. Dy. CIT [2000] 67 TTJ (Del) 471and V.V.S. Alloys Ltd. v. Asstt. CIT [2000] 68 TTJ (All) 516,wherein it has been held that the report of the valuation officer cannot be a ground for addition in the block assessment. Reliance was also placed upon the decision of the Ahmedabad Bench in the case of Gautam Laljibhai Gajjar v. ITO [1991] 41 TTJ (Ahd) 542z. In the rejoinder, the learned Departmental Representative sought time to verify the contention of the assessee that the details of diamonds for each year and the quantity stated as per the books of account by the assessee, are on the record and the same was also found at the time of search and is a part of seized record. If that be so, then the contention of the assessee that there was no excess stock can get established, specially when these facts were admitted by the Revenue.

We have considered the rival submissions and perused the record. It is now an admitted fact by the Revenue as well as by the assessee that the quantity of diamonds as per books of account comes to 967.05 carats. The quantity as found during the course of search was 944.63 carats meaning thereby that there was no much difference in stock of diamonds. Further, the assessee has established its valuation which he is doing on cost basis with the purchase invoices. No much discrepancy has been pointed out or found in these documents. The assessee has been consistently valuing its stock at cost or market price, whichever is lower. In view of these facts, broadly, we are of the view that there is no reason to make an addition by valuing the diamonds which already form part of the disclosed account of the assessee. The block assessment proceedings cannot be used by the Revenue by taxing the income which has not yet been earned by the assessee. The cost for the purpose of computing the income of the assessee has to be the cost actually incurred. No material whatsoever was brought on record by the Department that the assessee has incurred cost more than what has been declared for the purchase of diamonds. In the absence of any such material, no addition can be made merely on the basis of valuation. The Allahabad Bench of the Tribunal in the case of V.V.S. Alloys Ltd. (supra), wherein there was no material with the Department found against the assessee. Investigations were carried out, post-search to verify the purchases made from suppliers in Surat and Mumbai. There was no evidence whatsoever to show that the assessee had paid underhand cash for the purchase of diamonds. It was held that no addition can be made on account of difference in the valuation of diamonds, where purchases have been duly recorded. This judicial pronouncement supports the case of the assessee. Accordingly, on the basis of above facts, we hold that the learned CIT(A) was justified in deleting the addition made by the AO. Therefore, this ground, of the appeal of the Revenue is having no merit.

6. The second ground raised by the Revenue is that the learned CIT(A) erred in deleting the addition of Rs. 3,64,930 on account of excess stock of 22 carat gold jewellery. The learned Departmental Representative submitted that the first appellate authority was not justified in giving a relief of Rs. 3,64,930 specially when the assessee failed to produce any evidence that the jewellery found at the time of search includes personal jewellery of the partners of the assessee firm and their family members. It was further argued that the assessee failed to produce evidence in respect of customers jewellery which was available with the assessee for repair at the time of search. On the other hand, the contention of the learned Authorised Representative is that the submission of learned Departmental Representative is not correct, Specially when the assessee during the course of assessment proceedings filed photocopy of repair register, copy of which is placed at paper book pp. 210 to 216. Submission was also made that list of customers with addresses whose jewellery for repair was received and confirmations from such customers were also filed with the AO vide letter dt. 9th May, 2003, to which our attention was invited to certain pages of paper book which were filed before the AO. As regards personal jewellery, it was submitted that complete details were filed during assessment proceedings vide letter dt. 15th Jan., 2003. The total jewellery as per these evidences was 1,511.020 gms. The jewellery found from lockers and persons was 1,196.080 gms. and the balance jewellery of 315 gms. was claimed to be included in the above 22 carat gold excess jewellery. Our attention was invited to the statement of Shri Anil Talwar, partner, recorded on the date of search. The learned Authorised Representative submitted that the AO was not justified in ignoring these evidences and making the additions in an arbitrary manner.

We have considered the rival submissions and perused the material on record. The learned AO made a total addition of Rs. 22,49,930 as against Rs. 17,35,000 included by the assessee in the block return. An excess addition of Rs. 5,14,930 was contested by the assessee before the learned CIT(A) wherein relief of Rs. 3,64,930 was, given and addition of Rs. 1.50 lac was sustained for which the assessee is also in appeal before us. The facts leading to the above addition are that as per AO, an excess stock of 22 carat gold jewellery weighing 5,324.230 gms. was found during the course of search. As per the assessee, it was converted into 24 carat by the AO and worked out excess weight of gold of 480.544 gms. and by applying a rate of Rs. 415 per gm. worked out the value at Rs. 21,23,036 by adding a sum of Rs. 1,26,894 on account of labour charges by applying the rate of Rs. 26 per gm., thus, a total addition of Rs. 22,49,930 was worked out. The assessee has disputed the calculation of the AO. As per the assessee, the total weight in excess was only 4,111.85 gms. of 22 carat gold jewellery. The difference of 1,002.380 gms. was on account of jewellery of customers for repair and 315 gms. was personal jewellery of partners and their family members. Submission was also made that the AO has given credit only of 105 gms. on account of customer's jewellery for repairs as against 1,002.38 gms. Further, the assessee applied the labour charges @ Rs. 23.30 per gm. as against Rs. 26 per gm. applied by the AO. Thus, according to the assessee, the total undisclosed income on this count works out to Rs. 17,35,000 as against Rs. 22,49,530 worked out by the AO. It is further seen that the AO worked out the weight of the jewellery available for repair by applying an average formula at 105 gms... However, the fact remains that the assessee has submitted in the form of confirmation and the details of customers whose jewellery was available on the date of search for repair. A list of customers with their addresses and the quantity of jewellery received from them is available at p. 10 of the paper book. The total of the list comes to 1,002.38 gms. These confirmations were filed before the AO. In view of these facts, we find no reason for the AO to ignore the contention of the assessee on this point, specially when if the AO was not satisfied with the evidence furnished during assessment proceedings, nothing prevented him to make further verification. Therefore, without bringing any adverse material on record against the assessee, the AO was not justified in ignoring the contention of the assessee.

As regards the personal jewellery, we found that the explanation given by the assessee is born out from the records. The details of the jewellery along with weight were submitted claiming the same of the partners and their other family members and HUF. The credit of the same has to be allowed. We notice that in this case search was carried out both at business as well as residential premises of the assessee. The search was also carried out in the lockers and the inventory of the jewellery prepared by the Revenue also includes the jewellery found on person. In such circumstances, there is no justification in rejecting the explanation given by the assessee by not taking into consideration the total quantity of the personal jewellery. Accordingly, we hold that AO was not justified in not giving credit of 315 gms. on account of personal jewellery and restricting the credit of customers' jewellery to 105 gm. as against 1,022.38 gms. claimed and evidenced by the assessee. Further, we notice that the AO was not justified in applying the labour charges @ Rs. 26 per gm. against the average rate of Rs. 23.30 per gm. worked out on the basis of total labour got done during the financial year 2000-01 without bringing any comparative figures from other persons/jewellers. Therefore, the AO has estimated the labour charges without considering any comparative labour charges of the relevant period from other persons of the related field. Therefore, taking into consideration the above facts, we hold that the AO was not justified in taking the undisclosed income on account of excess stock of 22 carat gold jewellery at Rs. 22,49,930 against Rs. 17,35,000 worked out by the assessee. Therefore, we upheld the stand of the learned CIT(A) by dismissing ground No. 2 of the appeal of the Revenue.

7. The ground No. 3 in the appeal of the Revenue pertains to deletion of addition of Rs. 50,735 on account of valuation of 24 carat gold bars. During the course of search, 44 bars of 24 carat gold weighing 4,664.65 gms. were found as against 'NIL' as per the stock register. The assessee while filing the block return valued the same at Rs. 19,78,800 and accordingly, included it as part of the undisclosed income. The learned AO valued the same at Rs. 20,29,535 by applying the rate of Rs. 435 per gm. on the basis that the same was the prevailing market rate. Thus, there was a dispute in the valuation to the extent of Rs. 50,735. The learned first appellate authority accepted the contention of the assessee and the valuation of these gold bars at Rs. 19,78,800 by giving a relief of Rs. 50,735. The learned CIT(A) accepted the contention of the assessee that these gold bars were part of 65 gold bars weighing 7,584.600 gms. purchased on 17th April, 2001 from the SBI, Chandigarh, for a sum of Rs. 32,15,550. These purchases were duly reflected in the books of account. The assessee issued all the gold bars to the Karigars for making the jewellery in the books but the fact of the matter was that 40 gold bars weighing 4,664.65 gms. were not issued but instead of the same, old unaccounted jewellery accumulated over the years was issued to the Karigars for making the jewellery. Thus, the cost of unaccounted stock of 40 gold bars should have been valued at purchase price instead of market price. The learned Departmental Representative during argument has simply relied upon the assessment order. On the other hand, the learned counsel for the assessee stated that there is no dispute regarding the quantity of gold bars which as per the Revenue as well as by the assessee is 4,664.65 gms. The assessee has applied the actual rate for the purchase of gold bars made from SBI, Chandigarh. The copy of the purchase invoice has been placed in the paper book clearly gives the rate of Rs. 428.30 per gm. and as such the undisclosed income has to be worked out on the basis of actual amount paid by the assessee for its purchase instead of estimated market rate of Rs. 435 per gms applied by the AO. The learned counsel further submitted that the contention of the assessee is duly supported by the statement of partner, Shri Anil Talwar, tendered on the date of search where he has explained the source of purchase of these gold bars.

On perusal of record and after hearing the rival submissions, it is seen that the facts are quite clear. The assessee has applied the actual rate paid for the purchase of these gold bars as the date of search was 14th May, 2001 and the gold bars were purchased on 17th April, 2001. The purchase vouchers clearly state the rates paid by the assessee for the purchases. The learned AO has not given any reason for estimating the value at a higher rate. In view of these facts, the valuation done by the assessee and upheld by the learned CIT(A) is quite justified which is based on some documentary evidence issued by SBI, Chandigarh. Therefore, this ground of the appeal of the Revenue deserves dismissal.

8. The next ground i.e., ground No. 4 in the appeal of the Revenue, which pertains to the deletion of Rs. 48,328 on account of unaccounted stock of 18 carat gold used in diamond jewellery has been challenged. The said dispute is arising on account of the fact that the assessee claimed a credit of 290 gms. on account of weight of diamond and stone studded in the diamond jewellery while working out the excess gold stock, whereas the AO gave a credit of 190 gms. only. Further, the AO applied the labour rate of Rs. 26 per gm. as against Rs. 23.30 per gm. mentioned by the assessee. The contention of the assessee was accepted by the learned CIT(A) by deleting the addition.

The learned Departmental Representative strongly defended the order of the AO in support of its contention. On the other hand, the learned Authorised Representative submitted that the assessee has done a precise calculation of Rs. 12,28,024 on account of excess stock of 18 carat gold used in diamond jewellery. The calculation of the same is available on p. 24 of the assessment order. While competing the above amount, the assessee has excluded the weight of diamonds and precious stones of 290 gms. (190 gms. + 100 gms.). The AO while doing the computation himself has deducted 190 gms. as is evident from p. 25 of the assessment order. No reasons have been given for taking only 190 gms. by the AO which apparently seems to be a clerical mistake. Further, the rate of labour charges has to be actual rate paid during the financial year 2000-01 against the rate of Rs. 26 per gm. adopted by the AO for the month of April, 2001.

We have considered the rival submissions and perused the material on record. We are in agreement with the contention of the learned counsel for the assessee that the rate to be applied has to be the actual rate paid during the period when the jewellery was acquired and not as adopted by the AO, specially when the AO has not brought out on record any concrete material to substantiate its adoption of rates. Therefore, we find no reason to interfere with the order of the learned CIT(A), specially when nothing has been pinpointed by the Revenue that the calculation done by the assessee and upheld by the learned CIT(A) is wrong. Therefore, this ground of the Revenue is dismissed.

9. The next ground, i.e. ground No. 5 in the appeal of the Revenue pertains to deleting the addition of Rs. 1,60,401 made on account of unexplained investment in the renovation of SCO Nos. 14-15, Sector 22-D. Chandigarh. The fact leading to the issue is that during the course of search operation, certain documents in respect of building renovation were found totalling to the tune of Rs. 1,60,401. The AO held that the same is unexplained expenditure and accordingly added to the income. The assessee took a plea before the learned first appellate authority that these documents have nothing to do with the building renovation undertaken by the assessee and should not have been included as undisclosed income. The learned CIT(A) applied the ratio of the decision of the Chandigarh Bench of the Tribunal in the case of Jagdamba Rice Mills v. Asstt. CIT [2000] 67 TTJ (Chd) 838 and accepted the contention of the assessee.

The contention of the learned Departmental Representative is that the learned CIT(A) was not justified in holding the documents as dumb as not relatable to the assessee, specially when these documents were found from the premises of the assessee, therefore, the action of the AO in making the addition was justified. On the other hand, the learned counsel for the assessee strongly defended the orders of the first appellate authority by inviting our attention to the documents placed in the paper book by submitting that the same are dumb documents and do not belong to the assessee. Contention was also raised that no inquiry was made by the AO from the concerned persons despite complete addresses available on the document and explanation given by the assessee has remained uncontroverted. The learned Authorised Representative further submitted that even if it is held that these documents' pertain to the assessee, then also the nature of expenditure being repair will be allowable under s. 37(1) of the Act and it will not have any impact on the income of the assessee. In support thereof, the learned Authorised Representative referred to the judgments of the Delhi Bench of the Tribunal in the cases of Raj Sons Jewellers v. ITO [2004] 86 TTJ (Del) 1106 and Ashish Soni v. Dy. CIT in ITA No. 273/Del/2001, dt. 7th April, 2006.

We have considered the rival submissions and perused the record. We notice that the documents do not mention the name of the assessee. At the same time, the AO has not made any effort and no inquiry was conducted to ascertain the true nature of these documents, specially when addresses of the concerned persons were available. At the same time, we agree with the contention of the learned Departmental Representative, to the extent only that it is the assessee who is to explain about the documents since these were recovered from his possession but at the same time it is the duty of the learned AO to consider the explanation of the assessee and further to examine and verify the nature of these documents, specially when the addresses of the concerned persons were available but that was not done by him. Even otherwise, we are in agreement with the contention of the learned counsel for the assessee that the expenditure will be allowable under s. 37(1) of the Act in view of two judgments i.e., Raj Sons Jewellers (supra) and Ashish Soni (supra). Therefore, we see no reason to interfere with the finding of the learned CIT(A). This ground of the Revenue is dismissed.

10. The last ground, i.e., ground No. 6 in the appeal of the Revenue pertains to levy of surcharge on the tax worked out on undisclosed income, in nutshell, the learned Departmental Representative supported the assessment order whereas the learned Authorised Representative supported the orders of the learned CIT(A).

On perusal of record and after hearing the rival submissions, it is seen that this issue is covered in favour of the assessee by various decisions of the Tribunal like :

(i) Mrs. Aruna M. Katara v. Dy. CIT [2004] 82 TTJ (Pune) 363
(ii) Om Parkash Sharrna v. Dy. CIT [2004] 83 TTJ (Jp) 246
(iii) Satyabhushan v. Dy. CIT [2004] 84 TTJ (Bang) 165
(iv) VS Fabrics & Investment Co. (P.) Ltd. v. Asstt. CIT (ITA No. 1218/Chd/1996 dt. 22nd Nov., 2002)
(v) DGP Windsor (India) Ltd. v. Dy. CIT [2002] 74 TTJ (Mumbai) 291 : [2003] 84 ITD 641 (Mumbai)
(vi) Merit Enterprises v. Dy. CIT [2006] 102 TTJ (Hyd)(SB) 748 : [2006] 101 ITD 1 (Hyd)(SB)

The ratio laid down in the aforesaid decisions is that no surcharge is leviable in respect of search which has taken place prior to 1st June, 2002. In the present appeal, since the search was conducted on 14th May, 2001, admittedly, the aforesaid judicial pronouncement clearly favours the case of the assessee. Respectfully following these judicial pronouncements, we hold that no surcharge is leviable in the present appeal. Accordingly, this ground of the Revenue is dismissed.

11. Now, we shall take up appeal of the assessee where ground Nos. 1 to 3 pertain to upholding the addition of Rs. 1.50 lac as undisclosed income on account of excess stock of 22 carat jewellery found at the business premises of the assessee during the course of search. This issue has been deliberated upon by us in the preceding paras dismissing the appeal of the Revenue. Therefore, ground Nos. 1 to 3 in the appeal of the assessee are allowed. The remaining grounds are merely prayer, require no deliberation from our side. Therefore, appeal of the assessee is allowed.

In the result, appeal of the Revenue is dismissed and that of the assessee is allowed.

N.K. SAINI, A.M.: 10th ApriL 2007

I have the liberty to go through the proposed draft order of learned JM, but I am unable to persuade myself to agree with the conclusion arrived at therein at p. 10, para 5, p. 14 of para 6, p. 19 of para 9, p. 20 of para 10 and p. 21 of para 11. So, I proceed to pass a separate dissenting order.

2. First, I will deal with the Departmental appeal in IT(SS)A No. 48/Chd/2004.

3. First ground of this appeal relates to deletion of addition of Rs. 52,07,599 on account of unaccounted investment in stock of diamonds.

4. Although my learned Brother has discussed the facts in the proposed order but I want to discuss the same separately.

5. The facts in brief are that search under s. 132 was conducted at the business premises of the assessee i.e., SCO Nos. 14-15, Sector 22-D, Chandigarh, and at residential premises of the partners of the assessee firm. Subsequently, notices under s. 158BC were issued to the assessee and the partners of the assessee firm, all the three persons filed returns of income for the block period. The assessee declared undisclosed income at Rs. 81 lacs for the block period 1st April, 1991 to 14th May, 2001. The contention of the partners was that the entire income on account of investments in the properties and on account or renovation/construction or any undisclosed income on account of investment in valuables or articles had been surrendered by them as income of the assessee firm. The facts related to the issue under consideration as appearing in the block assessment order dt. 30th May, 2003 are that during search operation, inventory of loose diamonds and diamond studded jewellery found from the business premises of the assessee was prepared and got valued from the valuer of assessee's choice. The valuer valued it at a wholesale price and the total value of the stock was worked out at Rs. 1,01,22,942 as per following details :

The value so arrived at was confronted to the assessee by the Dy. Director of IT (Inv.), the assessee raised certain objections. The AO after considering the objections of the assessee, the difference in the value of stock of diamond studded jewellery was worked out as under :

The aforesaid difference of Rs. 52,07,599 was confronted to the assessee and it was asked to explain as to why the same may not be treated as undisclosed income for the block period. In response to that the assessee submitted as under :

"The weight of the diamonds found at the time of search tallies with the weight of the diamonds as per our books. A copy of the inventory or closing stock prepared on 31st March, 2001 i.e., at the close of the immediately preceding accounting year was submitted during the course or search. As per this list the weight of the diamonds came to 1,022.03 carats. This does not include the weight of the diamonds included in item mentioned against 'A old items'. The weight of the diamonds studded in this jewellery based on registered valuer report came to 31.64 carats. As such, the total weight of the diamonds as per the closing stock inventory as on 31st March, 2001 came to 1,053.67 carats. From the above weight of the diamonds as per our books as on the date of search can be arrived at as follows :

The weight of diamonds found during the search as per registered valuer's report is 944.63 carats. The difference comes to 22.42 carats only which is 2.31 per cent of the overall weight and is negligible and has to be ignored. The small difference may have arisen because of clerical error while weighing/preparing the valuation report.

The weight of the loose diamonds and the diamonds studded in the jewellery as per the physical stock taking is 944.63 carats. The stock inventory list dt. 12th May, 2001 (seized during search) contained only the weight of the diamonds studded in ready-to-sell jewellery lying in our shop at 860.57 carats and did not include the weight of the loose diamonds and the diamonds studded in the unfinished jewellery. This stock was mixed up with the ready jewellery (tagged items) and the same was got valued accordingly. Prima facie, it appears that the detail/description of such unfinished/old jewellery is contained in pp. 42 and 43 of the report of registered valuer, M/s Banu Mal Inder Lal Jewellers. The total weight of these diamonds studded in jewellery as well as those of loose diamonds come to appox. 122 carats, After deducting the same from the total weight of 944.63 carats, the net difference comes to 37.94 carats only. This difference is very negligible. Since the weight of the diamonds as per our books tallies with the weight of the diamonds found out physically at the time of search, no adverse inference can be drawn. Valuation report of the registered valuer is only an opinion of person and is purely based on estimation, knowledge and experience of that person in this type of business.

The valuation of the diamond jewellery was got done by the Department from Shri Vijay Kumar of M/s Banu Mal Inder Lal Jewellers, Ambala Cantt. During the process of valuation, as the assessee found that the valuation done by Shri Vijay Kumar was unrealistic and unscientific, the matter was pointed out to the Dy. Director of IT, Chandigarh, vide our letter dt. 16th May, 2001. The Department appointed another valuer namely, Shri Sudhir Kumar of M/s Windlas Jewellers and Shri Surya Kant Jain of M/s Jain Jewellers. The jewellery was again got valued from these registered valuers. The total value of the diamond jewellery: including value of 18 carat gold and labour was worked out by Shri Vijay Kumar at Rs. 1,01,22,942 and by the other two valuers collectively at Rs. 98.50 lacs. However, the valuation done by Shri Vijay Kumar was prima facie accepted by the assessee for limited purpose of ascertaining the value of bank guarantee to be furnished for getting the seized jewellery released. Neither the valuation, done by Shri Vijay Kumar and nor the valuations done collectively by Shri Sudhir Kumar and Shri Surya Kant Jain are acceptable to the assessee because of the following reasons which are apparent from their valuation reports :

(a) The difference between the value adopted by different valuers for the same item goes upto 350 per cent. Reference is invited to item No. 246 of the valuation report of Shri Vijay Kumar. The value of diamond studded in a ring has been taken at Rs. 1,500 by him whereas as per valuation report of Shri Sudhir Kumar the value for the same diamonds has been estimated at Rs. 7,200.
(b) There are about 253 items out of the total of 546 items valued by both the valuers separately where the difference in the valuation of diamonds studded in individual items is more than 25 per cent, i.e., one-fourth of the value adopted for same diamonds in a particular item. The overall variance in the number of items where the difference in value in individual item exceeds one-fourth comes to 46.33 per cent, i.e., there is difference in almost fifty per cent items where the value adopted by different valuers for the same diamonds exceeds 25 per cent.
(c) The variance in the total value of diamonds taking the maximum value and the minimum value adopted by different values for the same diamonds comes to Rs. 14,39,191. The maximum and minimum value of same diamonds adopted by different valuers come to Rs. 85,09,525 and Rs. 70,70,334, respectively. In that way the variance in the value of diamonds done by different valuers comes to 20 per cent.

Taking into consideration the above facts and figures, it is proved beyond doubt that the above valuation reports are not only unrealistic but are also unreliable and as such cannot be relied upon. (A comparative chart showing the above variances was also enclosed).

The main objection raised during the course of search operations as regards the valuation of diamonds was method of accounting. As regards the valuation of closing stock of diamonds (is cost or market price whichever is less), this method of accounting has regularly been followed in the past and has been accepted by the Department from year to year. The registered valuers have adopted the value of diamonds as on the date of search and have ignored the fact that inventory of diamonds consisted of diamonds purchased over number of years and are duly supported by their purchase bills, (copies of the purchase bills of the diamonds included in the inventory of diamonds as on 31st March, 2001 were also attached). It is the real income that is taxable in the hands of the assessee and the income engrossed in the closing stock can be taxed unless and until the same are sold in the market.

The registered valuers have failed to take into account the following facts that were brought to their notice during the course of valuation :

(i) Some of the diamond jewellery/diamonds were very old and their cost price to us is much less than the value as on the date of search.
(ii) The assessee purchases loose diamonds from Bombay and Surat and gets the jewellery manufactured by himself from the local Karigars. In that way the profit of the middleman and the manufacturer is saved. The registered valuers have valued the jewellery on the basis of the wholesale price of jewellery as is available to them at Chandigarh. They have missed to exclude the margin of the middleman as well as that of the manufacturer of jewellery while taking into account the value of the diamond jewellery.

Keeping in view the fact that the weight of the diamonds found at the time of search tallies with those as per our books and are duly supported by their purchase bills, it is prayed that no adverse, inference on the basis of the registered valuer's report may kindly be taken."

The AO after considering the submissions of the assessee observed that the objections raised were same and similar which were raised before the Dy. Director of IT (Inv.), Chandigarh. He further observed that at the time of search, inventory of stock was prepared and Shri Vijay Kumar, registered valuer, valued the diamond jewellery including loose diamonds at Rs. 1,01,22,942, this value included the value of diamonds and 18 carat gold in which the diamonds were embedded, and after reducing the labour charges along with cost of 18 carat gold, value of diamonds was worked out at Rs. 80,79,720. The AO pointed out that during the course or valuation of jewellery, the assessee objected to the valuation report prepared by Shri Vijay Kumar. Subsequently, two other valuers, namely, Shri Surya Kant Jain and Sudhir Kumar or assessee's choice were appointed to value the diamond jewellery. Both the valuers valued the jewellery at Rs. 87 lacs. On comparison with the list of items of jewellery as valued by Shri Vijay Kumar and as valued by the other two valuers, it was noticed that item No. 364 to item No. 399, as mentioned in the list of Shri Vijay Kumar, the value of which was worked out to Rs. 11.50 lacs had not been included in the list of valuation prepared by Shri Surya Kant Jain and Sudhir Kumar. The discrepancy was pointed out to the partners of the assessee firm, namely, Shri Anil Talwar. After considering that discrepancy, the value of diamonds was considered by the AO at Rs. 98.50 lacs. This, discrepancy was shown to the assessee and after verification it was accepted that the discrepancy was there in the valuation report submitted by Shri Surya Kant Jain and Sudhir Kumar. It was further stated by the assessee that the valuation report of Shri Vijay Kumar was acceptable. The AO, therefore, took the value of the studded diamond jewellery and loose diamonds on the date of search including of gold chains at Rs. 1,01,22,942. He accordingly held that once the value had been accepted by the assessee, any other contention of the assessee could not be accepted.

5.1. As regards to the assessee's submissions regarding number of carat of gold in stock and as per valuation report being the same, the AO asked to give the details of quantity of diamonds in carat but the assessee did not furnish such information on the ground that it was not maintaining any stock register in respect of diamonds since it was not feasible. The AO pointed out that during the course of search some of the bills with regard to purchase of diamonds were seized and the assessee was asked to explain whether the diamonds purchased as per those bills had been sold and if not then the corresponding particulars in the inventory of stock found during the course of search may be provided. The assessee stated that it was not possible to pinpoint the item-wise details of diamonds and that the diamonds were segregated as per the weight, quality, grade at the time of preparing inventory. It was further stated that valuation of loose diamonds sold and balance remaining as per bills and each item of jewellery was made from different weight, quality, grade and value of loose diamonds. The AO prepared detailed inventory by making reference to each purchase bill and loose diamonds. The assessee had shown inability to compare purchase or loose diamonds as per purchase bills with the items or diamond jewellery found at the time or search. It was pointed out by the AO that the only description given on the bills was "cut and polished diamonds" and no other information with regard to quality and grade was mentioned on those bills. The AO stated that during the course of search proceedings, a total of 944 carats of diamonds were found. The assessee could not identify the items forming part of the stock on the date of search which according to him would have been available as part of the closing stock as on 31st March, 2001. The AO categorically stated that the assessee had not maintained any quantitative details of closing stock of diamonds and those were not furnished along with return of income filed although it was the requirement of Form 3 CD filed along with return of income. According to him the assessee had failed to correlate the purchases, sales and closing stock of diamonds with reference to stock purchased and in closing stock. The AO pointed out that the assessee was not maintaining any stock registers with respect to quantitative details of goods sold and purchased during any year. With regard to assessee's contention that report of the valuer was only an opinion and was purely lossed on estimation knowledge and experience of that person was concerned, it was pointed out by the AO that three valuers including two valuers of assessee's choice have valued the diamond jewellery and loose diamonds and valued it at Rs. 1,01,22,947 (Departmental Valuer) and Rs. 98.50 lacs (two registered valuers of assessee's choice) which valuations were in the near vicinity of each other with a variation of only Rs. 2.75 lacs and that Shri Anil Talwar (partner of assessee firm) admitted the valuation of jewellery as correct.

5.2. The AO, therefore held that with the opinion of three valuers, the assessee had also agreed that the valuation made by them is correct. Once it had been accepted, challenging again the same facts does not serve the assessee's purpose. The AO stated that the cost of jewellery had been accepted by the assessee at Rs. 1,01,22,942 after the post- search inquiries. He further stated that the assessee furnished list of diamond jewellery and certain items had been shown as old items but the weight of diamonds of those items had not been mentioned. According to him the assessee had tried to co-relate those to certain solitaires which were found during the course of search, the value of which was approx. Rs. 8 lacs. The AO asked the assessee to produce the bills of purchase of those solitaires (old items) to verify the veracity of the arguments taken by the assessee. However, no evidence in support of this contention was furnished. The AO, therefore, did not accept the contention of the assessee.

5.3. The AO further observed that the valuers had valued the diamond studded jewellery at cost price i.e. price at which such diamonds could be purchased. The value determined at Rs. 1,01,22,942 included the value of diamonds at Rs. 80,79,720 and if the margin of assessee was to be added, the market price of those diamonds should have been at Rs. 1,00,99,650 against the book value as claimed by the assessee at Rs. 30,41,293. The AO was of the view that the value of the diamonds had increased by more than 3 times and if that was the position, the margin of profit i.e. Gross profit should automatically increase every year. He also pointed out that the gross profit rate in assessee's case was approx. 24 per cent in the last so many years and the fact that the gross profit had remained same or similar in the last 10 years clearly implied that most of the stock which was purchased by the assessee was sold by the end of the year, therefore, the stock which was lying in the closing stock was actually fresh and was not recorded in the books of account. The AO also observed that the jewellery is a fashion drive industry and moreso in the case of diamonds where the designs of diamond jewellery frequently change and jewellery more than six months old becomes obsolete. He also pointed out that there was no evidence to the fact that the diamond studded jewellery was remade number of times. According to the AO, the basis of valuation of items of jewellery which were stated as old had not been furnished in spite of the fact that it was specifically asked.

5.4. As regards to the contention of the assessee that some of the items of jewellery were very old and the value of that jewellery increased over a period of time, the AO observed that no details had been furnished with regard to the purchase of diamonds available with the assessee as reflected in the closing stock as on 31st March, 2001. The AO noticed that certain jewellery purchased from 31st March, 1994 onwards formed part of the list of closing stock as on 31st March, 2001. According to him, if the value of that jewellery was translated to the current value based on price index for the purpose of capital gain, then it should have given a fare view of the market price of those diamonds. On that basis, the AO worked out the value of those diamonds at Rs. 32,59,243 against book value of Rs. 30,58,078. The AO has given the following details :

According to the AO stock value of the diamonds valued by there valuers would have been in the near vicinity of Rs. 32,59,423 against which they had valued the diamonds at Rs. 72,79,000 (Rs. 80,79,000 - Rs. 8,00,000 of old items stated by the assessee). The AO pointed out that the difference in the valuation made by the valuer and the value of diamonds as worked out on the basis of indexed cost was more than 123 per cent; according to him the diamond trade had not witnessed that type of price valuation (sic-escalation) in any of the year to which the stock was related to be shown. The AO also pointed out that more than 54.50 per cent (Rs. 16,66,525 out of Rs. 30,58,078) of the stock purchased in 2000-01 formed part of the diamonds and miscellaneous items mentioned in Parts C and D of the list of closing stock of diamonds found and seized from the assessee firm, so, there could not be much increase in respect of that stock which implied that stock purchased from 1994 onwards to 31st March, 2000 valued at Rs. 13,91,553 had grown to, Rs. 56,13,195 (Rs. 72,79,720 - Rs. 16,66,525), i.e., the value of those diamonds had appreciated by 403 per cent which was an unheard price increase. The AO further observed that as per assessee's books of account, the diamonds were embedded in 2,331.020 gms. of 14 carat gold. However, in fact the entire diamond jewellery was embedded in 5,650.70 gms. of 18 carat gold. Therefore, the variation in the quantum of 14 carat gold and 18 carat gold was almost of 142 per cent which implied that the number of diamonds as actually received and diamonds as actually accounted for differed by more than 142 per cent. The AO pointed out that the assessee's sale bills did not depict the carats but depicted only the number of diamonds without mentioning the weight of diamonds. He therefore, did not accept this contention of the assessee that number of carats were similar. The AO accordingly held that the assessee was unable to reconcile the diamond jewellery with reference to purchase bills vis-a-vis items lying in the closing stock and was also unable to co-relate the diamond studded jewellery with the purchase bills. He, therefore, rejected all the contentions raised by the assessee and took the value of closing stock of diamonds at Rs. 83,09,692 against the cost claimed as per books of account at Rs. 30,41,293. He further allowed a benefit of Rs. 60,800 being the value of 190 gms. of 18 carat gold in lieu of 945 carat of diamonds weight to the assessee as the same was required to be deducted along with the value of 18 carat gold weighing 5,650.70 gms. while working out the value of diamonds at Rs. 83,09,692. Accordingly, the difference of Rs. 52,07,599 (Rs. 83,09,697 - Rs. 30,41,293 - Rs. 60,800) was added to the income of the assessee considering the same as undisclosed income of the assessee from undisclosed sources within the meaning of s. 158B(b) of IT Act.

6. The assessee carried the matter to the learned CIT(A) and submitted that the assessee had been dealing in gold and diamond jewellery since the last several years and had been consistently valuing the closing stock at cost or market price whichever is less. It was stated that the registered valuer Shri Vijay Kumar had not done the valuation properly, therefore, two other valuers, namely, Shri Surya Kant Jain and Sudhir Kumar were appointed and the valuation of stock as on the date of search was done. It was contended that there was difference in valuation done by the two valuers to the extent of 350 per cent in several items and overall difference was of Rs. 2.73 lacs. It was stated that the assessments for about six years were made under s. 143(3) and there were certain items where valuation in closing stock was shown and accepted at about Rs. 2,00,600, but the value of the same stock as on the date of search had been taken at Rs. 8,07,470 which was roughly about four times the value which had been accepted by the Departmental authorities in the course of assessment. It was further stated that the valuation was done by the valuers by adopting the sale rate prevailing in Chandigarh market as on the date of search whereas the assessee was making the purchases of loose diamonds direct from Surat and Mumbai parties and got jewellery made itself. It was also stated that the margin of profit available to the middleman was ranging between 10 per cent to 15 per cent which was not kept in mind while making the valuation. It was contended that the Departmental authorities have got verified the purchases from Surat and Mumbai during investigation and did not find anything adverse in possession to draw any adverse inference. It was also contended that even the weight of diamonds as per record by and large tallied with the stock taken by the search party. It was pointed out that no evidence was found that the assessee purchased diamond jewellery without recording the same in the books of account and the difference in the valuation was only because of the fact that the different rates had been adopted by different valuers, otherwise there was no difference in the weight of the diamond jewellery found at the time of search and the weight of the diamonds as per books. It was stated that the market rate of diamonds could not have been applied by ignoring the cost of purchases over the last various years which was fully evidenced by the purchase invoices. The assessee, therefore, prayed to delete the addition or Rs. 52,07,599.

7. Learned CIT(A) after considering the submissions of the assessee, observed that no addition in the block assessment could be made on conjectures, surmises and post-search inquiries and that the block assessment was not a substitute for regular assessment. Reliance was placed on the following case law :

(i) Commissioner Of Income-Tax v. Smt. Usha Tripathi [2001] 166 CTR (All) 77 : [2001] 249 ITR 4 (All)
(ii) Hotel Vrindavan v. Asstt. CIT [2000] 67 TTJ 139 (Pune)
(iii) ( D.N. Kamani (HUF) v. Dy. CIT [1999] 65 TTJ (Patna) )(TM) 504 : [2000] 241 ITR 85 (Pat)(AT)
(iv) Smt Rajrani Gupta v. Dy. CIT [2000] 66 TTJ (Mumbai) 582 : [2000] 72 ITD 155 (Mumbai)
(v) Mrs. Purnima Beri v. Dy. CIT [2002] 76 TTJ (Asr)(TM) 467 : [2002] 82 ITD 137 (Asr)(TM)
(vi) Dr. R.M.L. Mehrotra v. Asstt. CIT [1999] 64 TTJ (All) 259 : [1999] 68 ITD 288 (All)
(vii) B & Brothers Engineering Works v. Dy. CIT [2003] 78 TTJ (Ahd)(TM) 876 : [2003] 84 ITD 243 (Ahd)(TM)
(viii) Sunder Agencies v. Dy. CIT [1997] 59 TTJ (Mumbai) 610 : [1997] 63 ITD 245 (Mumbai)
(ix) CIT v. Ravikant Jain [2001] 167 CTR (Del) 566 : [2001] 250 ITR 141 (Del)
(x) Kay Cee Electricals v. Dy. CIT [2003] 81 TTJ (Del) 734 : [2003] 128 Taxman 159A (Del) (Mag)
(xi) Elite Developers v. Dy. CIT [2000] 68 TTJ (Nag) 616 : [2000] 73 ITD 379 (Nag)

Learned CIT(A) further observed that s. 158B(b) defines "undisclosed income" as any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly Income or property which has not been or would not have been disclosed for the purpose of this Act or any expense, deduction or allowance claimed under this Act which is found to be false. He further observed that the undisclosed income refers to the income which has not been or would not have been disclosed. Therefore, the estimated addition cannot be made in block assessment. Reference was made to the following case law :

(i) Commissioner Of Income-Tax v. Shambhulal C. Bachkaniwala [2000] 162 CTR (Guj) 435 : [2000] 245 ITR 488 (Guj)
(ii) CIT v. Vinod Danchand Ghodawat [2000] 163 CTR (Bom) 432 : [2001] 247 ITR 448 (Bom)
(iii) Chander Mohan Mehta v. Asstt. CIT [1999] 65 TTJ (Pune) 327 : [1999] 71 ITD 245 (Pune)
(iv) Samrat Beer Bar v. Asstt. CIT [2000] 69 TTJ (Pune)(TM) 113 : [2002] 18 IT Rep. 220 (Pune)(TM)
(v) P.K. Ganeshwar v. Dy. CIT [2004] 91 TTJ (Chennai) 970 : [2002] 80 ITD 429 (Chennai)

Learned CIT(A) further observed that the valuation in the present case was not the valuation of property and that the valuation of the DVO was not valid for block assessment proceedings. Reliance was placed on the following case law :

(i) Essem Intra-Port Services (P.) Ltd. v. Asstt. CIT [2000] 68 TTJ (Hyd) 103 : [2000] 72 ITD 226 (Hyd)
(ii) Agrawal Motors v. Asstt. CIT [2000] 66 TTJ (Jab) 130 : [1999] 68 ITD 407 (Jab)
(iii) ( CIT v. Vinod Danchand Ghodawat (supra)
(iv) S. Prasad Gupta v. ITO [2003] 128 Taxman 88 (Del)(Mag)

Reference was also made to the judgment of Hon'ble Supreme Court in the case of Amiya Bala Paul v. Commissioner Of Income Tax, Shillong [2003] 182 CTR (SC) 489 : [2003] 262 ITR 407 (SC) , wherein it has been held that the Department has got no power to refer a case to the DVO for valuation except under s. 55A of IT Act. Learned CIT(A) further observed that there was a difference of 350 per cent in the valuation of diamonds done by the two valuers and the method of valuation of closing stock on the cardinal principle of cost or market price whichever is less had been accepted in the assessee's case throughout and that value of closing stock accepted by the Department which was about Rs. 2 lacs had been valued by the valuers at Rs. 8,07,470. He also pointed out that the Department had verified that the assessee was making purchases of loose diamonds directly from Surat and Mumbai and nothing adverse was found. According to him the valuation at market price by ignoring the cost of purchases made it clear that the valuation had been done on conjectures, estimate and assumptions especially when there was no difference in the weight. He accordingly, decided the issue in favour of the assessee and directed the AO to delete the addition. Now, the Department is in appeal.

8. Learned Departmental Representative for the Revenue strongly supported the order of AO and submitted that the diamonds found during the course of search were valued by an independent registered valuer and later on the same were valued at the instance of the assessee by the registered valuers of his choice. He further submitted that excess jewellery was worked out. He referred to page No. 14 of assessment order. He contended that the assessee claimed that certain jewellery was old jewellery, however, no evidence had been furnished in support of that contention. It was emphasized that the valuation done by the valuers of assessee's choice was accepted, so, no grievance of the assessee should have been there as regards to the value adopted by the AO on the basis of valuation done by the valuers of assessee's choice, particularly when the partners had accepted the valuation done by the valuers. It was stated that the assessee did not furnish any detail of the diamonds purchased and even no corresponding particulars in the inventory of stock, vis-a-vis the purchase bills were provided, simply it was stated that it was difficult to pinpoint the item-wise details of diamonds. It was submitted that in the purchase bills only the gross weight was mentioned, and there was no description of the diamonds purchased, therefore, the purchases were not verifiable. It was also stated that the detail was prepared on the basis of jewellery found and the addition was made only on actual basis, so, there was no scope of presumptions and conjectures, as such, the learned CIT(A) was not justified in stating that the addition had been made only on the basis of presumption and conjectures. He further stated that the learned CIT(A) simply accepted the version of the assessee and deleted the addition in a slipshod manner, without making any comments with respect to valuation report which was made by the valuers of assessee's choice and was accepted by the partners of the assessee firm which clearly established that the learned CIT(A) had not applied his mind and deleted the addition which was made by the AO on the basis of documents, after making proper verification, considering the inventory prepared at the time of search and stock mentioned in the books of account. So, the value adopted by the AO was the actual value of the jewellery and the addition was rightly made. Learned Departmental Representative for the Revenue reiterated the observations of the AO for making the addition and strongly supported the assessment order passed by the AO. Learned Departmental Representative for the Revenue drew our attention towards page No. 20 of Departmental paper book which is the copy of the statement of Shri Anil Talwar partner of the assessee firm, recorded on 15th May, 2001 on oath. He pointed out that a specific question was asked to Shri Anil Talwar regarding maintenance of stock register for gold and diamond jewellery and the partner admitted that in the register no description of the gold received or sales made was given and no stock register of the diamonds was maintained because it was not possible to maintain. He, therefore, prayed to restore the addition made by the AO.

9. In his rival submissions, learned counsel for the assessee strongly supported the order of learned CIT(A) and reiterated the submissions made before the authorities below. He further stated that the assessee vide letter dt. 7th Nov., 2001 written to the Dy. Director of FT, IT Department, Circle HQ at Panchkula clearly stated that in case of diamond jewellery the difference in the valuation had been worked out to be Rs. 69,20,489 as per seizure memo dt. 25th May, 2001, that valuation had been challenged on various grounds and only for limited purpose of seizure, the valuation accepted was subject to right to contest under the provisions of IT Act. It was stated that the valuer Shri Vijay Kumar adopted the rate at which the same quantity should have been purchased by him as on the date of valuation and the valuer Shri S.K. Jain had mentioned that he had taken the rate at which he as a purchaser would buy such stock in Chandigarh. He, therefore, submitted that if GP rate was to be deducted from the market value then the stock of diamonds was only worth Rs. 30 lacs approximately which was near to the value shown in the books of account. Learned counsel for the assessee further submitted that there were differences in the value of the same item by the two valuers. Reference was made to page No. 243 of assessee's compilation. It was stated that the assessee was maintaining purchase bills. Reference was made to page Nos. 255 to 311 of assessee's paper book. It was argued that both the weight of diamonds that is found during the course of search and the weight in the books of account tallied, therefore, the AO was not justified in adopting the market value as on the date of search instead of purchase value shown by the assessee. He contended that whatever was disclosed in the books of account, could not have been considered as undisclosed Reliance was placed on the judgment of Hon'ble Supreme Court in the case of K.P. Varghese v. ITO [1981] 24 CTR (SC) 358 : [1981] 131 ITR 597 (SC) .He further contended that the assessee maintained proper books of account in the regular course of business and no finding had been given by the AO that the items mentioned in the books of account were not found during the course of search or there was any difference in the weight.

9.1. As regards to the valuation report by the registered valuer he stated that the valuation report was only an opinion and not the exact value of the diamond jewellery. On the other hand, the valuation made by the assessee was on the basis of purchase bills. It was submitted that while releasing the jewellery the Department was satisfied and the valuation was accepted. So, the addition was rightly deleted by the learned CIT(A). Reliance was placed on the following case law :

(i) Gautam Laljibhai Gajjar v. ITO [1991] 41 TTJ (Ahd) 542
(ii) CIT v. Ravikant Jain (supra)

Learned counsel for the assessee submitted that the valuation report by the valuer was not authentic and it was a mere opinion since there were differences in the valuation adopted by the two valuers. Reference was made to page Nos. 133 to 150 of assessee's compilation. He also submitted that in few of the items, the difference was to the extent of 350 per cent, so the valuation by the valuer could not have been made a basis for making the addition, particularly when proper books or account were maintained and entry was made therein. He submitted that if everything went on assumption then what was the need to maintain the books of account and if the books were maintained and entry was made therein, no addition could be made in the block assessment for the items which were disclosed by the assessee. He accordingly submitted that the learned CIT(A) was fully justified in deleting the addition made by the AO since the addition was made only on the basis of surmises and conjectures, particularly when the quantity of the diamonds recorded in the books of account and found during the course of search matched. Learned counsel for the assessee submitted that no material or the documents were found reflecting that purchase of diamond studded jewellery was invalid or incorrect and undisclosed stock formed part of the recorded stock and as such could not be the subject-matter of undisclosed income. He submitted that the report of the valuation officer could not be the ground for addition in block assessment. Reliance was placed on the following case law :

(i) Pioneer Publicity Corporation Ltd. v. Dy. CIT (supra)
(ii) V.V.S. Alloys Ltd. v. Asstt. CIT (supra)

He vehemently argued that the Department carried out the investigation in Surat and Mumbai from the suppliers who confirmed the assessee's version and nothing adverse was found. He further stated that the assessee specifically pointed out the defects in the valuation report vide letter dt. 7th April, 2000 filed with the AO. So, the valuation report could not have been made the basis for making addition. He also submitted that the purchase vouchers of diamonds found during the course of search were duly entered in the books of account and there was no evidence that the assessee had made anything in cash for purchase of diamonds. It was contended that the onus was on the Department to prove that some underhand money had been paid for purchase of diamonds. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of K.P. Varghese v. ITO (supra). It was argued that no addition could have been made on account of the difference in valuation of diamonds where the purchases were recorded. He accordingly submitted that the learned CIT(A) was justified in deleting the addition made by the AO.

10. We have heard both the parties and carefully gone through the material available on record. As regards to the facts of this case are concerned, there is no dispute that during the course of search, loose diamonds and diamond jewellery were found from the business premises of the assessee. The inventory was prepared and got valued from registered valuer, Shri Vijay Kumar. That value was found by the assessee as unrealistic and unscientific. Thereafter, another two valuers, namely, Shri Surya Kant Jain and Sudhir kumar were appointed. The valuation done by Shri Vijay Kumar was at Rs. 1,01,22,942 and by other two valuers collectively at Rs. 98.50 lacs. However, the valuation done by Shri Vijay Kumar was accepted by the assessee for limited purposes of ascertaining the value of bank guarantee to be furnished for getting the seized jewellery released. In the instant case, the AO made the addition by invoking the provisions of s. 158B(b) of IT Act which read as under :

"(b) undisclosed income includes any money, bullion jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions where such money, bullion jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act (or any expense, deduction or allowance claimed under this Act which is found to be false)."

From the above provisions, it is clear that undisclosed income includes jewellery or other valuable article or thing or any income based on any entry in the books of account. In the instant case, the jewellery was found during the course of search and the same was also entered in the books of account. For ascertaining the true value of the jewellery found, the assessee was required to furnish the evidence in support of the value taken by it in the books of account. The primary evidence in such type of cases is the stock register wherein the date of purchase, description of the item, date of sale, closing balance etc. are mentioned. It was also the duty of the assessee to get reconciled the closing stock reflected in the stock register with the physical inventory prepared during the course of search. However, the partner of the assessee firm, namely Shri Anil Talwar who was looking after the business, stated in his statement on oath that it was not possible to maintain the stock register and no such register was maintained. The another evidence could have been the bills of purchase of diamonds, however, in those purchase bills the description given was "cut and polished diamonds". No other description was given. So, it was not possible to ascertain which diamond was purchased vide which purchase bill. In other words, the assessee was not in a position to identify the diamonds mentioned in the purchase bills vis-a-vis the diamonds found during the course of search. So, the only way to find out the correct value of the diamonds and jewellery found during the course of search was to get those valued from registered valuers. The valuation was got done from independent registered valuer as well as from the valuers of assessee's choice. The value worked out was almost equal since the value worked out by Shri Vijay Kumar was at Rs. 1,01,22,942 while the value worked out by the another two valuers of assessee's choice, namely, Shri Surya Kant Jain and Sudhir Kumar, was at Rs. 98.50 lacs. The main objection of the assessee was that there was much difference in the valuation of various items in different valuation reports. However, overall difference was very small. So, it cannot be said that the valuation done by the registered valuers was not authentic or was without any basis. The assessee pointed out that in one item placed at SI. No. 246, the difference was about 350 per cent. It is noticed that the value adopted by the valuer for the said item was only Rs. 7,200 which was negligible in comparison to the overall value of the diamonds worked out at about Rs. 1 crore. It was incumbent upon the assessee to reconcile the stock found with the stock register as well as books of account. It was also the duty of the assessee to link the diamonds and jewellery found during the course of search item-wise with the purchase bills but it has not been done by the assessee, rather inability was shown by stating that it was not possible to pinpoint item-wise details of the diamonds. The assessee also stated that the items were old, however, no evidence had been furnished for old items of jewellery. It was simply stated that the items valued at Rs. 8,07,470 were old items, value of which at Rs. 2,00,600 was accepted by the Department. However, in respect of rest of the diamond jewellery, the assessee was unable to provide any information to substantiate that the remaining jewellery was also disclosed earlier to the Department.

10.1. It is not in dispute that in these days society is fashion oriented and designs of diamond jewellery change frequently, so, it cannot be believed that the jewellery in possession of the assessee, was old jewellery, even if at all it was to be accepted that the jewellery was old, onus was on the assessee to link the jewellery with the purchase bills, however, the assessee was unable to do such an exercise. Moreover, in the purchase bills the description mentioned regarding the diamonds was one "packet of cut and polished diamonds". From that description, nobody can ascertain how much pieces were there in one packet and what was the individual size and value of those diamond items, in other words, it can be said that the assessee miserably failed to link the diamond jewellery inventorised at the time of search with the purchase bills or the stock register. In my opinion, the AO was justified in taking the value of the closing stock of diamonds at Rs. 83,09,692 against the value shown by the assessee at Rs. 30,41,293. Since the assessee was unable to reconcile the diamond jewellery with reference to purchase bills vis-a-vis items lying in the closing stock and was also, unable to correlate the diamond studded jewellery with the purchase bills, the assessee was also unable to satisfy the AO that how the value of stock as per books was worked out at Rs. 30,41,293, particularly when the items were not correlated with any of the purchase bills. It is true that undisclosed income is to be computed on the basis of evidence found as a result of search. In the instant case, the diamond jewellery was found during the course of search and the assessee was unable to link that jewellery with the purchase bills. So, the AO was justified in adopting the value on the basis of valuation done by the registered valuer. It is well-settled that the assessment for block period is to be framed on the basis of return of income furnished by the assessee in response to notice under s. 158BC of IT Act. The correctness of the said return of income has to be examined by the AO with reference to the material in his possession having nexus of assessment of undisclosed income which is with him. In the instant case, the onus was on the assessee to prove the correctness of the value of diamond jewellery stock in the books of account. However, the assessee was unable to prove such value since no stock register was maintained and no description of diamonds, item-wise and quality wise, was given in the purchase bills. In such circumstances, the only way to work out the correct value of the jewellery found, was the valuation by the independent expert persons. In the present case the valuation was done by three persons who are expert in this field and the AO has allowed the benefit of assessee's margin and has taken the value after considering the value of old jewellery amounting to Rs. 2,00,600 which the assessee claimed that it was disclosed to the Department. In my opinion, the AO was fully justified in making the addition of Rs. 52,07,599, since learned CIT(A) while deleting the addition has not given any cogent reason. He simply accepted the version of the assessee and even did not discuss in the impugned order how and in what manner the objections of the assessee were sustainable. The learned CIT(A) accepted the contention of the assessee on the basis that there was a difference to the extent of 350 per cent in the valuation of few items of diamonds done by the two valuers: However, the value of that jewellery was only Rs. 7,200 which is negligible. The another reason given by the learned CIT(A) for accepting the contention of the assessee was that the method of valuation of closing stock on the cardinal principle of cost or market price (whichever is less) had been accepted in assessee's case throughout. However, the learned CIT(A) has not uttered a single word how the value adopted by the assessee, was the cost price or the market price because the assessee miserably failed to produce any evidence with regard to valuation of the closing stock since no description was given in the purchase bills and no stock register was maintained by the assessee, so, it was not possible to ascertain the cost price on the basis of purchase bills. The learned CIT(A) also stated that value of certain items appearing in the closing stock was accepted by the Department at Rs. 2 lacs which had been valued by the valuers at Rs. 8,07,470. In my opinion that cannot be a basis to delete the whole of the addition, particularly when the total value worked out was more than Rs. 1 crore and the assessee pointed out the difference only with regard to Rs. 8,07,470, that too, has been considered by the AO while framing block assessment which is clear from para 6 of the block assessment order dt. 30th May, 2003.

10.2. As regards to the reason given by the learned CIT(A) that the assessee had been making purchases of loose diamonds directly from Surat and Mumbai and the Department has verified the purchases and found nothing adverse, this reason given by the learned CIT(A) is without appreciating the facts in right perspective because the main basis for making the addition was that the assessee was unable to link the purchase bills with the value of the stock declared since in the purchase bills no description and quality of the diamonds has been given, it is simply mentioned "packet of cut and polished diamonds". In the present case, although the authenticity of the purchases from Surat and Mumbai was not in doubt but the question of item-wise purchase price on the basis of purchase bills remained unanswered at every stage. Therefore, the only way to ascertain the value was the valuation by an expert and independent valuer which has been got done in this case. The learned CIT(A) also stated that the valuation at market rates by ignoring the cost of purchases made it clear that the valuation had been done on conjectures, estimates and assumptions, especially when there was no difference in the weight. This observation of the learned CIT(A) is also not correct since the valuation was not a mere estimate on assumptions because the valuation which was done by three independent persons, who are experts in this field was almost the same and the assessee was not in a position to produce any evidence that the value worked out by it was based on cost of purchase because in the purchase bills, it was not mentioned that what was the size and quality of the diamonds and how many pieces were there in one packet which is evident from page Nos. 253 to 311 of assessee's compilation which are the copies of invoices and bills. The learned CIT(A) also stated in the impugned order at para 7 that in view of the inexorable logic and spate of judicial pronouncements on this issue, the ground of appeal was to be decided in favour of the assessee. However, he did not emphasize specifically what was the inexorable logic in his discussion because much discussion has not been done. He has also not stated how and in what manner the cases relied on by the assessee, were applicable to the facts of assessee's case. In the instant case, the simple issue was related to the valuation of closing stock, the assessee was required to furnish documentary evidence in support of valuation of diamond studded jewellery. However, the assessee was unable to produce any evidence in support of valuation adopted by it because no stock register was maintained in respect of this jewellery and also no description was given in the purchase bills which could establish that the rates adopted by the assessee were correct. On the other hand, the valuation was got done by the Department from the independent valuer and also from the valuers of assessee's choice.

10.3. In view of the aforesaid discussion, I am unable to persuade myself to agree with learned JM who concurred with the learned CIT(A) in confirming the deletion of addition made by the AO, particularly when nothing is on record that the post-search inquiry established that the purchase price of the diamonds was correct because no description as regards to the size and quality of the diamonds vis-a-vis item-wise price was mentioned in the purchase bills so to ascertain the cost price (as claimed by the assessee) on the basis of purchase bills was just like to find a diamond in the coal mine. In the instant case, the dispute was not related to the quantity but to the valuation of diamonds and the assessee miserably failed to adduce proper evidence to establish that the valuation of stock taken by it was the correct value which was based on the purchase invoices, therefore, the AO in such peculiar circumstances was fully justified in adopting the value worked out by the valuers of assessee's choice, particularly when the partner of the assessee firm who is also working partner, agrees for the same. I, therefore, in the light of the above discussion, propose to set aside the order of learned CIT(A) and to restore the addition made by the AO.

11. Second ground of Departmental appeal relates to deletion of addition of Rs. 3,64,930 made by the AO on account of valuation of excess stock of 22 carat gold jewellery.

12. The facts related to this issue have been discussed by the AO who discussed this issue in detail at para 11 of block assessment order dt. 30th May, 2003. According to him, during the course of search proceedings, inventory of 22 carat gold jewellery was prepared and the total stock was found as under :

The AO Further observed that as per books of account and stock register maintained by the assessee inventory was 42,882.84 gms. He therefore worked out the excess stock of 22 carat gold jewellery at 9,668.934 gms. (52,551.774 - 42,882.840 gms.). When questioned about this excess stock, Shri Anil Talwar, one of the partner stated that he did not have any objection regarding the physical stock taking. He further stated that out of this stock approx. 400 to 500 gms. of jewellery belonging to his family was lying at his business premises which had been brought for remaking and no remaking had been done. It was further stated that approx. 400-500 gms. of jewellery belonging to some customers was also lying at shop which was given for repair. It was further stated that the discrepancy in stock except the aforesaid two items, would be offered in the returns for block period. It was also stated that all this jewellery belonged to the assessee firm and this stock had been acquired out of undisclosed income earned over a period of time through unaccounted sales and jewellery. The value of excess stock at prevailing market rate of Rs. 435 per gm. was calculated at Rs. 41,06,880 as per following calculation :

The AO asked the assessee to explain as to why the investment in excess stock of 22 carat gold jewellery at Rs. 41,06,880 may not be treated to have been made from its undisclosed income for the block period. The assessee submitted that the difference of excess stock of 9,668.934 gms. was not correct. It was pointed out that jewellery weighing 7,437 590 gms. had been inventoried on 14th May, 2001, i.e., on the first day of the search. Out of the above jewellery, jewellery weighing 4,340.03 gms. was shown to be mainly comprised of the miscellaneous items. No description of any nature against those miscellaneous items had been given in the stock list. It was also stated that no valuation had been got done of those miscellaneous items from any registered valuer and the value worked out by the Department was unreliable inasmuch as until the exact nature of those items was ascertained, any hypothetical value adopted for its valuation could not be at any stretch of imagination be relied upon because it would be without any basis and not supported by any report of the registered valuer. It was further stated that as per inventory prepared immediately before the date of search i.e., on 12th May, 2001, physical stock in the shape of 22 carat gold jewellery was 48,312.070 gms. It was contended that the partner of the assessee firm during search operations stated that although item wise details of stock had not been maintained by the assessee but in order to control the inventory a list of stock inventory, category-wise was prepared by them to ascertain the physical stock in shop as on a given date and the stock had been categorized into 8 categories comprising of bangles, chains, earrings, pendants, rings, sets, ordered items and miscellaneous items. If the stock of gold jewellery found at the time of search was categorized as above, it was found that all the items tallied with the list maintained by the assessee in one category or the other except the stock of miscellaneous items. It was submitted that overall difference in the stock of gold jewellery category-wise came to 4,239.704 gms. whereas the difference in miscellaneous items alone was 4,267.77 gms. It was stated that difference in each category was explainable inasmuch as the items lying separately made on order basis placed by the customers had been mixed under different categories like bangles, rings, chains, etc. while taking the physical inventory of the stock as on the date of search whereas as per list of the assessee, those items were taken separately under the "order items". It was stated that the total difference in all the categories excluding order items came to 590.344 gms. against the items shown on order basis weighing 618.41 gms. The difference was negligible and might have occurred during the course of weighing of the jewellery. It was further stated that excess stock over and above the stock of 48,312.070 gms. consisted of the difference of 4,239.704 gms. of silver ornaments/jewellery lying in assessee's shop in the form of samples of jewellery normally shown to the customers while booking order from them and used for making designer jewellery on approval basis before the order placed by the customer was finalized. It was stated that this practice was being followed in order to save the wastage of gold while making samples of jewellery on order basis. It was submitted that the stock of this jewellery was lying separately and had been accounted for in stock physically verified by the Department on 14th May, 2001 under the head "Miscellaneous items" and this fact came into light only at the time of preparation of block assessment return and while reconciling the figures of stock as per books with that of the report of the valuation officer. It was further stated that stock of silver jewellery weighing 4,790 gms. was at Rs. 29,183 as on 31st March, 2001 and this jewellery was purchased in the year 1992-93. It was explained that as per repair register the weight of jewellery received by the assessee on repair basis was 1,002.380 gms. and that jewellery could not be got verified at the time of search as the same was mixed with other jewellery. It was further stated that gold jewellery owned by the families of the partners of the assessee was verifiable from the seized records as well as from the WT returns/personal books maintained by the assessee from year to year. The detail given was as under :

It was explained that following jewellery was found from the residential premises of the partners and the lockers of the family members during the course of search :

It was also explained that the balance jewellery of 315 gms. (1,511.020 - 1,196.080 gms.) was lying in the shop for remaking and accordingly, the same was required to be reduced from the jewellery found from the shop during the course of search. On the basis of aforesaid explanations, the assessee worked out the difference at 4,111.850 gms.. The calculation done was as under :

On the basis of aforesaid explanation, it was stated that the addition on account of excess jewellery could have been made for Rs. 17,35,406 and the figure of, Rs. 41,06,880 as worked out by the AO was based on wrong facts and had to be ignored.

12.1. The AO after considering the submissions of the assessee, observed that the total weight of jewellery inventoried on 14th May, 2001 worked out to 12,101.590 gms. and after reducing the weight of 40 number of 24 carat gold bars weighing 4,664 gms. net weight came to 7,437.590 gms. He further observed that item Nos. 142 and 144 to 172 had been shown as miscellaneous items weighing 4,340 gms. for which no description had been recorded. He pointed out some of the items recorded under the head miscellaneous items and their weight as described in the inventory as per following detail :

The AO discussed the list of tagged items of stock as on 12th May, 2001 as per seized page No. 9 of Annex. A-16. The detail of those items was as under :

Gold

Diamond

The AO pointed out that in the list of stock of gold items as mentioned in the aforesaid list, miscellaneous items numbering 57, were weighing 239.39 gms. and as per inventory prepared on 14th May, 2001, the weight of such items at SI. Nos. 142, 144 to 172 had been mentioned at 4,230 gms. He further stated that no stock of silver was inventoried in either of the list as on 14th May, 2001 or on 15th May, 2001. He also pointed out that as per record the assessee was showing stock of sliver items at Rs. 29,183 since 31st March, 1993 weighing 4,790 gms. and the same was appearing in the account statement filed for subsequent years also and was also shown as in closing stock on 31st March, 2001 and 31st March, 2002. However, the AO accepted this contention of the assessee that it was normal practice with goldsmith to prepare samples in silver before making designer jewellery as the same saves loss of gold.

12.2. As regards to the contention of the assessee that weight of all items found and inventoried on 14th May, 2001 and 15th May, 2001 tallied with the list of tagged items and there was marginal variation which was attributed to weighing error etc., the AO stated that this contention was also verified. Except for the miscellaneous items there was practically no difference in weight of items as per seized list of stock on 12th May, 2001 and as inventoried on 14th May, 2001 and 15th May, 2001. He also observed that on 14th May, 2001, services of the valuer had not been called for and the valuables had not been inventoried. The AO, therefore, accepted the contention raised by the assessee that its silver jewellery/items had been inventoried along with gold under the head "Miscellaneous" on 14th May, 2001 when no valuer was present and the inventory was prepared without the assistance of registered valuer. The AO asked the assessee to furnish original register maintained in respect of gold jewellery of customers in the shop to the extent of 1,002.380 gms. However, the assessee had shown its inability to produce the register on the ground that the same was not available. The assessee also stated that such registers were maintained but the same were destroyed in view of the fact that it had no financial implications. The AO pointed out that at the time of search, the assessee was not able to identify the jewellery of customers lying in the shop. As regards to the contention of the assessee that jewellery for repair was also included in the list of stock found in the shop, i.e., list of tagged items and was part of 48,312.070 gms. of jewellery, the AO observed that list of tagged items was the list of stock of assessee for sale in the shop and jewellery received for repair or any personal jewellery could not have been included in the list of tagged items of stock of the assessee unless the same was part of the stock in the trade of the assessee. Therefore, he did not accept this contention of the assessee that the jewellery of customers for repair also formed part of the tagged items. The AO further pointed out that as per seized register maintained in respect of repair of jewellery of customers for the period 1st April, 2000 to 31st March, 2001, the assessee received in all 6,404 gms. of jewellery and average time of repair of jewellery item was from 2 to 10 days. The AO was of the view that on that basis, average period of repair could be taken at 5 to 6 days. He, therefore, held that normal jewellery of customers for repair available should have been 105.27 gms. against which the assessee claimed it at 1,002.380 gms. He also pointed out that as per repair register, 110.71 gms. of jewellery of customers was available with the assessee as on 31st March, 2001 which was in clear vicinity of average jewellery for repair. He, therefore, considered that on an average 105.27 gms. of jewellery was available in the shop for repair and allowed the benefit of 105 gms. in the absence of original record.

12.3. As regards to the assessee's contention that 315 gms. of jewellery of the family was also lying in the shop for modification/remaking, the AO observed that the assessee had not filed any evidence. He also pointed out that as per practice whenever the assessee firm received any jewellery from any person, then it was entered in the repair account register. According to him there was no such entry in the regularly maintained books of account vis-a-vis repair account register upto 31st March, 2001. In respect of the later period, the assessee had not produced the repair register to prove its claim. The AO therefore, did not accept the contention of the assessee. The AO worked out 4,880.544 gms. of jewellery as unaccounted stock in the following manner :

The AO also pointed out that the assessee had adopted a rate of Rs. 23.30 per gm. for labour charges on the basis of average labour charges paid in the last year. According to the AO, the record of the assessee for the period 1st April, 2001 to 13th May, 2001 revealed that the assessee was paying Rs. 26 per gm. as labour charges to its Karigars. He also stated that as per the statement recorded on 14th May, 2001 of Sh. Anil Talwar, partner of assessee, labour charges were paid at Rs. 26 per gm. In view of the above the AO made the addition of Rs. 22,49,930 considering the same to be the investment in jewellery found during the course of search at assessee's premises as undisclosed income within the meaning of s. 158B(b) of IT Act.

13. The assessee carried the matter to the learned CIT(A) and submitted that the AO worked out the excess 22 carat gold jewellery at 5,429.230 gm. It was stated that the assessee while making surrender of Rs. 81 lakhs had considered the value of excess stock of 22 carat gold jewellery at Rs. 17,35,000 weighing 4,111.850 gms., thus excess jewellery worked out by the AO came to 1,317.380 gms. for which he adopted the value at Rs. 5,14,930. It was reiterated that the assessee received various items of jewellery for the purpose of repair from the customers and total weight of such jewellery was 1,002.380 gms., the detail of which was filed before the AO and the assessee could obtain confirmations from some of the major customers which were also filed before the AO. It was also submitted that the jewellery weighing 315 gms. belonging to various family members was lying in the premises of the assessee for which also credit had not been allowed. It was emphasized that whatever jewellery was declared in the WT returns, could have been found either at the residence of the assessee or in the lockers or in the business premises. It was stated that the partners of the assessee and their family members had declared jewellery weighing 1,511.020 gms. in the WT returns while the jewellery found on the. date of search was 1,196.080 gms. from the lockers and the assessee's premises. Accordingly, it was submitted that whatever credit was claimed on account of jewellery belonging to the partners and their family members should have been allowed to the assessee.

13.1. As regards to the labour charges paid for manufacturing of jewellery, it was stated that the assessee had paid the labour @ Rs. 23.30 per gm while the AO applied rate of Rs. 26 per gm. It was explained that the assessee had adopted the average rate of last year in the year ending 31st March, 2001 whereas the AO adopted the rate of April, 2001. It was submitted that most of the jewellery lying with the assessee was old and the best alternative for working out the value was to apply the rate which was prevalent during the year ending 31st March, 2001. It was accordingly submitted that if the aforesaid three contentions of the assessee were accepted no difference would remain on account of 22 carat gold jewellery between the value adopted while making the ; surrender and the value adopted by the AO. The assessee requested to delete the addition made by the AO.

14. Learned CIT(A) after considering the submissions of both the parties, sustained the addition of Rs. 1.50 lakh only by observing as under :

"I have considered the rival positions carefully and though there is some persuasion in the contentions of the learned Authorised Representative for the assessee, the AO has however, stated vide p. 11 of his assessment order that with regard to the assessee's contention that 315 gms. of jewellery of the family was also lying in the shop for modification/ remaking, however, the assessee has filed no evidence to this effect. As per practice whenever the assessee firm receives any jewellery from any person, then it is entered in the repair account register. However, no such entry is recorded in its regularly maintained books of account viz. repair account register upto 31st March, 2001. In respect of the later period, assessee has not produced the repair register to prove his claim. In view of the same contention raised by the assessee is not accepted.

After considering the above 4,880.544 gms. of jewellery as. calculated below is treated as unaccounted stock.

The learned Authorised Representative for the assessee objected to the application of the labour rates of a later period to an earlier period. He has also stated that credit for the jewellery declared in the WT returns of the family members should have been given too. After examining the rival submissions, I consider it just and fair to restrict the disallowance to Rs. 1.5 lac under this head basically on account of the lack of confirmations from some of the customers having given their jewellery for repairs, and the 315 gms. of jewellery, explanation in respect of which does not seem plausible enough. Therefore, while the addition of Rs. 3,64,930 is deleted; and addition of Rs. 1.5 lac is confirmed hereby."

Now the Department is in appeal.

15. Learned Departmental Representative for the Revenue strongly supported the order of AO and submitted that there was difference in the inventory prepared during the course of search vis-a-vis stock available as per books of account, the assessee was in possession of excess stock of all the items found during the course of search and mentioned in Panchnama, and that the credit had been given to the assessee for the jewellery which was entered in the books of account. He further submitted that the assessee could not produce any evidence to substantiate that the jewellery found during the course of search, included jewellery received from the customers for repair, etc. He emphasised that there was no entry in the stock register and reiterated the observation, of, the AO mentioned in para 8 of the page Nos. 8 to 12 of assessment order. He submitted that the contention of the assessee relating to some jewellery received from the customers had been accepted and the credit was given for the jewellery received from the customers. It was further stated that the jewellery which was declared in the WT returns of the partners and the family members had duly been considered by the AO but there was no evidence that the jewellery claimed to be belonging to the partners and their family members was included in the inventory prepared during the course of search. He vehemently argued that the learned CIT(A) simply accepted the contention of the assessee without considering the relevant facts on record and had not given the basis for the subtenants of the addition of Rs. 1.50 lakh out of the addition of Rs. 22,49,930 made by the AO. He prayed to restore the addition made by the AO.

16. In his rival submissions learned counsel for the assessee reiterated the submissions made before the learned CIT(A). He further submitted that the AO while considering the stock of jewellery found during the course of search had not given credit for the jewellery belonging to the family members of the assessee. He further submitted that the bona fide of the assessee was established because no credit had been taken for the jewellery belonging to the wives of the partners since that jewellery was not present at the business premises of the assessee. He further stated that the contention of the assessee was unrebuttable and the explanation offered was rejected by the AO arbitrarily.

16.1. As regards to the jewellery belonging to the customers he submitted that the confirmations were filed from the customers who categorically stated that they had given the jewellery for repairs. Reference was made to page Nos. 362, 364 and 365 of assessee's compilation. It was submitted that the assessee furnished the details of the customers along with addresses from whom jewellery was received for repair. Reference was made to page No. 210 of assessee's compilation. He also submitted that copy of repair register was furnished to the AO which included the names of the customers from whom jewellery was received. He accordingly submitted that since all the details were furnished to the AO, there was no reason to disbelieve the contention of the assessee.

16.2. As regards to the jewellery belonging to the family members, it was stated that jewellery which was found from lockers was weighing 1,196.080 gms. whereas the total jewellery as per WT return was weighing 1,511.020 gms., therefore, the balance jewellery weighing 315 gms. was lying in the business premises of the assessee, the credit for which had not been given by the AO and the learned CIT(A) considered this fact and allowed the claim.

17. The rival contentions and the material available on record were considered by me. In the present case it is noticed that excess stock of jewellery weighing 5,324.23 gms. amounting to Rs. 22,49,930 was worked out by the AO. The assessee accepted the difference of 4,111.850 gms. valuing Rs. 17,35,000. The difference was remaining to the extent of 1,212.380 gms.. The claim of the assessee was that 1,002.380 gms. of jewellery was given by the customers for repairs but the AO accepted only 105 gms. Thus, the difference remained at 897.380 gms.. Remaining jewellery weighing 315 gms. was claimed to be belonging to the family members.

17.1. Now, the controversy to be resolved relates to the addition of Rs. 5,14,930 since the assessee had accepted the addition of Rs. 17,35,000 out of total addition of Rs. 22,49,930 worked out by the AO. Learned CIT(A) sustained the addition of Rs. 1.50 lakhs only and allowed relief of Rs. 3,64,930. However, he had not given any cogent reason and the basis for allowing relief to the assessee. The main claim of the assessee was that the jewellery belonging to the customers was lying in the business premises. However, the assessee did not identify the jewellery of the customers in the shop. The AO categorically stated that no register of customers was produced before him. Learned CIT(A) in the impugned order had also not stated that the assessee reconciled the jewellery noted in Panchnama with the jewellery mentioned in the register of customers. Similarly, for the jewellery weighing 315 gms. claimed to be belonging to the family members, no reconciliation had been made by the assessee with the jewellery disclosed to the Department and found at the time of search. In view of the aforesaid facts, I am of the opinion that the learned CIT(A) had passed a non-speaking order while allowing the relief of Rs. 3,64,930 to the assessee and sustaining the addition of Rs. 1.50 lakh since he had not assigned the reason and the basis for sustaining the addition of Rs. 1.50 lakh only. Therefore, the order passed by the learned CIT(A) is a non-speaking order in the eyes of law.

17.2. It is well-settled that the order /judgment unsupported by reason is not a judgment in the eyes of law. It is also true that the reasons are the links between the material on record and conclusion thereafter by the Court/appellate authority. It is, therefore, incumbent upon the learned CIT(A) to consider properly the arguments of the assessee as well as findings given by the AO and thereafter he should have made independent findings either in favour or against the assessee. Considering the entire facts of the instant case in my opinion, the learned CIT(A) had not passed proper order in the eyes of law. At this stage, a reference can be made to the decision of Tribunal Ahmedabad Bench in the case of Gujarat Themis Biosyn Ltd. v. Jt CIT [2000] 67 TTJ (Aha) 386 : [2000] 74 ITD 339 (Ahd) . The Tribunal, Ahmedabad Bench, while interpreting the provisions of s. 250(6) of the IT Act, 1961 held as under :

"The provisions of s. 250(6) provide that the appellate orders of the CIT(A) are to state the points arising in the appeal, the decision of the authority thereon and the reasons for such decision. The underlying rationale of the provisions is that such orders are subject to further appeal to the Tribunal. Speaking order would obviously enable a party to know precise points decided in his favour or against him. Absence of the formulation of the point for decision for want of clarity in a decision undoubtedly puts a party in quandary. Sec. 250(6) expressly embodies the principle of natural justice and such a provision is clearly mandatory in nature. The impugned order passed by the CIT(A) in violation of the provisions of s. 250(6) could not, therefore, be sustained."

17.3. The ratio laid down by the Tribunal, Ahmedabad Bench, in the aforesaid referred to case is squarely applicable to the facts of the present case. In the present case it appears that the AO has also not considered this contention of the assessee that jewellery was declared in WT returns by the partners, he should have referred the record before taking the view against the assessee. Therefore, in view of the above discussion, the order of learned CIT(A) is set aside and the issue is remanded back to the file of AO for fresh adjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

17.4. As regards to the labour charges claimed to be paid at Rs. 23.30 per gm. by the assessee and Rs. 26 per gm. applied by the AO, it is noticed that Sh. Anil Talwar, partner of the assessee, in his statement dt. 14th May, 2001 (which is available at p. 78 of Departmental paper book) on oath had stated as under :

"I am Anil Talwar, aged 39, partner of M/s Talwar Sons Jewellers, SCF Nos. 14-15, Sector-22D, Chandigarh. I am overall incharge of all different sections of the business which includes purchases, sale and general administration. I buy only standard gold from SBI, Sector 17, Chandigarh. Diamonds come from Bombay and Surat. I don't purchase readymade jewellery. Jewellery is got made from various Karigars in and around Chandigarh. We issue gold first and then only they make jewellery. The labour is paid @ Rs. 26 on an average. In outstation our main Karigars are Vipan Kumar Pradeep Kumar, Amritsar and Saraswati Jewellers, Amritsar. Both the firms are sister concerns. Mr. Pradeep Kumar of these firms visits twice or thrice a week to deliver the jewellery. As on date there is no stock of gold stands issued to the abovesaid firms."

17.5. In view of the above statement, I am of the opinion that the AO was justified in considering the labour paid @ Rs. 26 per gm. As mentioned in the former part of this order that the assessee had not reconciled the jewellery claimed to be belonging to the customers and family members with the jewellery found during the course of search and the learned CIT(A) had passed a non-speaking order on this issue, I deem it proper to set aside this issue back to the file of AO for fresh adjudication.

18. The next issue vide ground No. 3 relates to the deletion of addition of Rs. 50,735.

19. The facts related to this issue in brief are that during the course of search 40 number of 24 carat gold bars were found at the shop whereas as per stock register it was nil as on 15th May, 2001. This discrepancy was pointed out to Sh. Anil Talwar, one of the partners of the assessee firm, on 16th May, 2001, He admitted that this bullion was the unaccounted stock earned from unaccounted income in the last number of years and the same would be declared in the return of block period. The AO asked the assessee to explain the source of purchase of those 40 gold bars. He also pointed out that it was not clear whether the undisclosed investment in 40 gold bars of 10 totals each was declared or not while furnishing the return of block period. The assessee submitted that the value of that stock was not Rs. 20.59 lakhs which had been worked out on the basis of market value as on the date of search. It was stated that the cost price of the stock was only Rs. 19,78,800. It was also stated that the assessee purchased 65 number of gold bars weighing 7,581.600 gms. on 17th April, 2001 from SBI for a sum of Rs. 32,15,550 and the payment of the same was made from regular books of account, it was further stated that gold bars weighing 5,832 gms. were shown to be issued to the Karigars for making jewellery on 17th April, 2001 and the balance gold bars weighing 1,749.60 gms. were shown to be issued on 18th April, 2001 to the Karigars for making jewellery. It was stated that instead of actually issuing 40 gold bars, weighing 4,664-65 gms. to the Karigars out of 7,581.60 gms. of standard gold, old unaccounted jewellery accumulated over the years was issued by the assessee for making jewellery and the value of unaccounted stock of 40 number of gold bars to the assessee on the basis of its purchase price was Rs. 19,78,800 and not Rs. 20,59,000 as calculated by the AO on the basis of market price. The AO, after considering the reply of the assessee, observed that as on the date of search 40 number of 24 ct gold bars were found and those were not recorded in the books of account, as the stock instead of standard gold as on the date of search was nil. According to the AO, there was no stock of standard gold in the books of account as per quantitative inventory maintained. He, therefore, held that 40 number of 24 ct gold bars were purchased from undisclosed sources and as on the date of search value at the prevailing market value @ Rs. 439 per gm. of standard gold came to Rs. 20,29,535. Accordingly the addition was made by invoking the provisions of s. 158B(b) of IT Act.

20. The assessee carried the matter to the learned CIT(A) and reiterated the submissions made before the AO. It was further stated that the gold bars were purchased on 17th April, 2001 and out of 65 gold bars, 40 gold bars weighing 4,664.65 gms. were not issued to the Karigars and instead of the same, old unaccounted jewellery accumulated over the years, was issued to the Karigars for making jewellery and that market price which the assessee paid was Rs. 19,78,800 and not Rs. 20,29,535 adopted by the AO.

21. Learned CIT(A) deleted the addition by stating that there was no justification in adopting the value of 40 numbers of 24 carat gold bars at Rs. 20,29,535 he directed the AO to slash it down to Rs. 19,78,800. Now, the Department is in appeal.

22. Learned Departmental Representative for the Revenue strongly supported the order of AO and submitted that the assessee was in possession of 40 gold bars on the date of search. The AO applied the market rate on the date of search since the gold bars were found on the date of search. It was further stated that the learned CIT(A) has not given any basis for making the deletion of addition made by the AO.

23. In his rival submissions, learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the gold bars were purchased from SBI on 17th April, 2001. Reference was made to page Nos. 192 and 193 of assessee's compilation. It was submitted that the assessee issued old accumulated jewellery to the Karigars for making new jewellery and 40 gold bars out of 65 gold bars purchased on 17th April, 2001 remained at the business premises which were found unaccounted during the course of search. He submitted that the rate applied by the assessee was based on average rate of last year. Therefore, the AO was not justified in applying the market rate on the date of search and the learned CIT(A) rightly deleted the addition.

24. We have heard both the parties and carefully gone through the material available on record. It seems that the assessee tried to co-relate the gold bars found unaccounted during the course of search with the gold bars purchased on 17th April, 2001 by taking the plea that old accumulated jewellery was issued to the Karigars instead of gold bars and 40 gold bars remained with the assessee. This explanation of the assessee does not appear plausible since it was the claim of the assessee that gold bars purchased on 17th April, 2001 from SBI were entered in the books of account. At the same time, the assessee accepted that 40 gold bars found during the course of search were not recorded in the books of account. So, the stand of the assessee was contradictory. Moreover, no evidence was brought on record to substantiate that old jewellery accumulated was given to the Karigars for making new jewellery. If that was so then why the assessee adopted the rate which was prevailing on 17th April, 2001 stated to be the date of purchase of 65 gold bars and not the actual rate when the jewellery accumulated. In fact, the assessee could not produce any evidence that 40 gold bars found during the course of search were purchased at a lesser rate than the rate adopted by the AO. Since the gold bars were found unaccounted during the course of search, the AO was justified in applying the rate which was prevailing at the date when unaccounted gold bars were found in possession of the assessee. I, therefore, reverse the order of learned CIT(A) on this issue and restore that of the AO.

25. The next issue vide ground No. 4 relates to deletion of addition of Rs. 48,328 on account of unaccounted stock of 18 carat gold used in diamond jewellery.

26. The facts related to this issue, in brief, are that the assessee used 18 carat gold weighing 5,650.70 gms. in diamond jewellery. The AO noticed from the seized books of account that this 24 carat gold had not been reflected in the books of account. The AO also observed that in the issue book gold vouchers (A-52 of Panchnama, dt. 15th May, 2001 of M/s Talwarsons Jewellers), gold receipt voucher book (A-51 of Panchnama, dt. 15th May, 2001) and the corresponding register of gold issue and receipt from Karigars (D. No. A-51 of Panchnama dt. 15th May, 2001), revealed that the assessee had issued gold of 24 and 22 carats for conversion into 22 carat and 14 carat jewellery only and no issue or receipt of 18 ct gold was shown. According to him the entire 18 carat of gold weighing 5,650.70 gms. valuing Rs. 18,13,252 was not recorded in the books of account. He, therefore, asked the assessee to show cause as to why it should not be treated as unaccounted stock of gold. In response to that the assessee submitted that diamond jewellery made of 18 carat gold weighing 5,650.70 gms. was found from the business premises of the assessee during the course of search but there was no stock of jewellery made of 18 carat gold in the books of account and the stock register, instead the jewellery in which the diamonds were studded was shown to be made of 14 ct gold weighing 2,331.020 gms. It was further submitted that the purity of gold jewellery in which the diamonds were studded was changed from 14 carat to 18 carat. However, the relevant entries were not made in the books or account and the jewellery in which the diamonds were studded continued to be shown to be made of 14 carat purity in the books of account. It was further stated that since no jewellery made of 14 carat was found during the course of search, credit of the same had to be allowed to the assessee while; arriving at the quantum of undisclosed investment made in the stock of 18 carat jewellery. It was also stated that sale bills of diamonds had shown the jewellery to have been studded in 14 carat gold. Reference was made to the bills of labour paid for making diamond jewellery as well as the gold issue register wherein 14 carat gold was mentioned, It was contended that no document was found from the premises of the assessee during the course of search to establish either that the stock had been sold outside the books of account or the diamond studded jewellery was got manufactured in purity of 18 carat gold. It was submitted that although jewellery was being manufactured in 18 carat purity but for all purposes the entries in the books of account continued to be made in 14.carat purity. The assessee worked out the value of excess stock of 18 carat gold jewellery found during the course of search at Rs. 12,28,024. In the said jewellery labour charges have been applied @ Rs. 23.30 per gm. The AO had reproduced the calculation given by the assessee at para IV(3) of the block assessment order. On the basis of above, the assessee contended that in any case, the addition on this account could not exceed Rs. 12,28,024. The AO after considering the submissions of the assessee observed that 2,331.020 gms. of 14 carat gold was considered in the books of account. He therefore, allowed the benefit of this quantity to the assessee.' He further observed that the value of 190 gms. of 22 carat gold which was equivalent to weight of 945 carat of diamonds was allowed to the assessee. The AO worked out the value of unaccounted 18 carat gold at Rs. 12,76,352. The AO applied labour charges @ Rs. 26 per gm while calculating the aforesaid value. Accordingly, the AO considered the value of 18 ct gold used in diamond jewellery at Rs. 12,76,352 instead of Rs. 12,28,024 declared by the assessee.

27. The assessee carried the matter to the learned CIT(A) and submitted that the difference in the amount declared by the assessee and adopted by the AO on this account was mainly due to different labour charges which were adopted by the AO at Rs. 26 per gm instead of Rs. 23.30 per gm adopted by the assessee. It was stated that detailed submissions with respect to same had been furnished to the AO. Therefore, the action of the AO was highly unjustified.

28. Learned CIT(A) allowed the claim of the assessee by stating that the labour rates applied by the AO had not been approved while deciding ground No. 2 of the assessee.

29.. After considering the rival submissions and the material available on record, it is noticed that similar issue, i.e., relating to the application of labour rate, was involved in ground No. 2 of Departmental appeal. Therefore, the findings given therein shall apply mutatis mutandis. In that view of the matter, I am of the opinion that the learned CIT(A) was not justified in deleting the addition made by the AO. Accordingly, the order of learned CIT(A) on this issue is set aside and that of the AO is restored.

30. Next ground vide ground No. 5 relates to deletion of addition of Rs. 1,60,401 made by the AO on account of unexplained investment in renovation of SCF Nos. 14-15, Sector 22-D, Chandigarh.

31. The facts related to this issue in brief are that during the course of search operation, document No. A65 of Panchnama, dt. 15th May, 2001 titled "building renovation" was seized. The document contained vouchers pertaining to expenditure on renovation of the building in question. This fact was also confirmed by the partner of the assessee firm that the document related to renovation of SCF 14-15, Sec. 22-D, Chandigarh. It was submitted that all the documents had been reflected in the regular books of account. However, while cross-examining, the vouchers amounting to Rs. 2,75,161 were not found by the AO recorded in the regular books of account. He, therefore, asked the assessee to explain as to why that sum may not be treated as income from undisclosed sources and taxed accordingly. The assessee explained each and every item noted by the AO. The AO after considering the submissions of the assessee worked out the complete details of the work done, rate charged and the amount in respect of each job of work done. According to him, the bills run, into three pages and the total of all the bills was Rs. 1,60,401. He further pointed out that the last page of the bill indicated the total amount of work done by Sh. Amar Chand Parjapati and the balance amount payable. According to him, the assessee had not debited the payment of Rs. 8,500 or amount of Rs. 70,000 (wrongly mentioned at Rs. 75,000) or the balance amount of Rs. 85,401 in the books of account which indicated that the assessee made payments outside the books of account. The AO did not accept this contention of the assessee that it. was an estimate, and observed that the bill not only gave the details of the work done but also the amount of total bill and the payment already received along with the balance payment. The AO held that the assessee was unable to furnish the source of payment of Rs. 1,60,401 to Sh. Amar Chand Parjapati in respect of the work done in SCF Nos. 14-15, Sec. 22-D, Chandigarh, so the payment was outside the books of account. He accordingly treated this as undisclosed income of the assessee and made the addition of Rs. 1,60,401.

32. The assessee carried the matter to the learned CIT(A) and submitted that the document containing details of Rs. 1,60,401 issued by Shri Amar Chand Parjapati was, in fact, mere estimate of the work proposed to be got executed from him in respect of SCF which was being constructed by Shri Anil Talwar and his wife, Smt. Neena Talwar at Sector 34, Chandigarh. It was further submitted that undated document had nothing to do with the building renovation undertaking by the assessee and should not have been included as undisclosed income of the block period.

33. Learned CIT(A) after considering the submissions of the assessee, deleted the addition by stating that the dumb document could not be a ground for addition in search assessment. Reliance was placed on the judgment of Tribunal, Chandigarh Bench, in the case of Jagdamba Rice Mills reported as Jagdamba Rice Mills v. Asstt. CIT [2000] 67 TTJ (Chd) 838 . Now, the Department is in appeal.

34. Learned Departmental Representative for the Revenue strongly supported the order of AO and further stated that the assessee had not disclosed the expenses incurred on renovation in the books of account. Therefore, the income was earned outside the books of account which was rightly added by the AO in the hands of the assessee and the learned CIT(A) was not justified in deleting the same.

35. In his rival submissions, learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the document was a dumb document, no date was mentioned on that document. He further stated that the person whose name was mentioned in the document, was not related to the assessee. It was contended that even if it is to be held that the assessee earned the income outside the books of account which was utilized for the renovation of building, no addition was called for since the entry was revenue neutral, if those expenses were to be considered equivalent to the income earned by the assessee.

36. After considering the rival submissions, I am of the opinion that no addition was called for on this account. Since the AO had not doubted the expenses and if it is to be presumed that the assessee earned income outside the books of account to incur those expenses, no addition was called for because the expenses incurred will neutralize the income earned. As such, the entry is revenue neutral and no addition is called for. Therefore, I agree with my learned Brother and see no reason to interfere with the findings of learned CIT(A). However, I differ from him on account of reasoning given to confirm the action of the learned CIT(A).

37. The last ground agitated by the Department relates to levy of surcharge on the tax worked out on undisclosed income.

38. The facts related to this issue in brief are that the AO levied surcharge on the tax calculated on undisclosed income.

39. The assessee carried the matter to the learned CIT(A) and objected to the levy of surcharge by the AO by placing reliance on the following decisions of the various Benches of Tribunal :

(i) Hemco Inds v. Asstt CIT(ITA No. 5/Asr/1996, order dt. 25th Oct., 2002)
(ii) V.S. Fabrics & Investment Co. (P.) Ltd. v. Asstt. CIT (supra)
(iii) DGP Windsor (India) Ltd. v. Dy. CIT (supra)

It was also stated that surcharge was not leviable in the block period assessment of search conducted before 1st June, 2002.

40. Learned CIT(A) after considering the submissions decided the issue in favour of the assessee. Now, the Department is in appeal.

41. Learned Departmental Representative for the Revenue supported the order of AO and stated that the surcharge was leviable in this case. Reliance was placed on the judgment of Hon'ble jurisdictional High Court in the case of Lalit Hosy v. Union of India (CWP No. 2046 of 2005, order dt. 18th Oct., 2006). Copy of the said order was furnished.

42. In his rival submissions, learned counsel for the assessee reiterated the submissions made; before the authorities below and further-stated that the surcharge was not leviable in the cases where the search had taken place before 1st June 2002. Reliance was plaeed on the following case law :

(i) Mrs. Aruna M. Katara v. Dy. CIT (supra)
(ii) Om Parkash Sharma v. Dy. CIT (supra)
(iii) Satyabhushan v. Dy. CIT (supra)
(iv) V.S. Fabrics & Investment Co. (P.) Ltd. v. Asstt. CIT (supra)
(v) DGP Windsor (India) Ltd. v. Dy. CIT (supra)
(vi) Merit Enterprises v. Dy. CIT (supra)

43. After considering the rival submissions and the material available on record, it is noticed that the latest decision of Hon'ble jurisdictional High Court was not brought to the notice of the learned CIT(A) since the same was not available to him. For that reason he followed the earlier decision of the Tribunal and decided the issue in favour of the assessee. It is also noticed that the Tribunal, Hyderabad Bench 'A' (SB), in the case of Merit Enterprises v. Dy. CIT (supra) decided the issue in favour of the assessee by holding that,

"levy of surcharge on tax on undisclosed income prior to introduction of proviso to s. 113 w.e.f. 1st June, 2002 is riddled with complexity to the extent of making it unworkable and impossible to harmonise and, therefore, levy fails."

43.1. However, Hon'ble jurisdictional High Court in the case of Lalit Hosy (supra) has taken a different view and held as under :

"Having regard to the fact that in the Finance Act, 2000, a specific provision has been incorporated merely because addition in the IT Act has been incorporated only w.e.f 1st June, 2002 did not affect liability of the assessee to pay surcharge. It is not possible to accept that a provision in a Finance Act could not be given effect to unless the same was incorporated in the main IT Act.

As regards the order of this Court in Roshdn Singh Makker's case (supra) we find that provisions of Finance Act, 2000 were not brought to the notice of the Tribunal nor the same were brought to the notice of this Court by the learned counsel for the Revenue in that case and do not find mention in the order of the Tribunal which has been extracted in the order of this Court. This Court only interpreted the effect of proviso to s. 113 added w.e.f. 1st June, 2002 without taking into account the provisions of the Finance Act, 2000 which has been relied upon in the impugned order. The said order cannot thus, be taken to be any authority for the proposition that irrespective of a provision in the Finance Act, levy of surcharge was not permissible on the ground that proviso to s. 113 of the Act was added only w.e.f 1st June, 2002."

It is well-settled that in the judicial hierarchial system of Courts decision of higher forum is binding on the tower tier. Therefore, the judgment of Hon'ble jurisdictional High Court is binding on the Tribunal, so, by keeping in view the ratio laid down by the Hon'ble Punjab and Haryana High Court in the case of Lalit Hosy (supra), the order of learned CIT(A) is set aside and surcharge levied by the AO is restored.

44. Now, I will take up the appeal of the assessee in IT(SS)A No. 39/Chd/2004.

45. In this appeal following grounds have been taken :

"1. The learned CIT(A) has erred both on facts and in law in upholding an addition of Rs. 1,50,000 out of the total addition of Rs. 22,49,930 made to the undisclosed income of the assessee on account of excess 22 carat gold jewellery found from the business premises of the assessee during the course of search."

"2. The learned CIT(A) has erred in upholding the addition of Rs. 1,50,000 as undisclosed income of the assessee on account of excess stock of 22 carat gold jewellery found at the business premises of the assessee during the course of search on ad hoc basis without proper application of mind."

"3 The upholding of addition of Rs. 1,50,000 being on ad hoc basis is both against facts and erroneous in law and is therefore, liable to be deleted."

"4 The assessee craves leave to add, to alter or amend the above grounds of appeal before the same are heard and disposed off."

"5. It is prayed that the impugned addition sustained by the learned CIT(A) may kindly be deleted on the above grounds of appeal."

46. From the above grounds, it would be clear that the grievance of the assessee only relates to sustenance of addition of Rs. 1.50 lakh. On this issue the Department is also in appeal vide ground No. 2. While deciding issue in the aforesaid appeal of the Department, identical issue has been remanded back to the file of AO for fresh adjudication. In that view of the matter, this issue is also restored to the file of AO for fresh adjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

47. In the result, appeal of the Department is partly allowed and that of the assessee is dismissed.

REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961

N.K. SAINI, AM. : 10th April, 2007

As there is a difference of opinion between the undersigned Members of the Bench who heard the appeal on the following points, the matter is referred to the Hon'ble President, Tribunal, under s. 255(4) of IT Act for the opinion of Third Member :

"1. Whether on the facts and in the circumstances of the case, the CIT(A) was justified in deleting the addition of Rs. 52,07,599 on account of unaccounted investment i in; stock of diamonds when no stock register was maintained and the assessed was unable to link the purchases with stock of diamonds found during the course of search. ?"

"2. Whether on the facts and in the circumstances of the case, the sustenance of addition of Rs. 1,50,000 was justified on ad hoc basis out of the addition of Rs. 22,49,930 made in the proceedings under Chapter XIV-B of IT Act or the matter should be remitted back for reexamination of the case. ?"

"3. Whether on the facts and in the circumstances of the case on unaccounted gold bars found during the course of search the rate was to be applied which was prevailing on the date when unaccounted gold bars were found in the possession of the assessee. ?"

"4. Whether on the facts and in the circumstances of the case, the AO was justified in making addition by adopting the labour rate prevailing at the date when unaccounted gold bars were found in the possession of the assessee and that rate was supported by the statement of the partner recorded during the course of search. ?"

"5. Whether on the facts and in the circumstances of the case the deletion of addition can be made in the block assessment for the entry which was revenue neutral. ?"

"6. Whether on the facts and in the circumstances of the case surcharge is leviable in the cases where surcharge had taken place before 1st June, 2002. ?"

2. The aforesaid questions are emerging out of the appeal of the Department and the only question arising out of assessee's appeal will be taken care of by the aforesaid question No. 2.

VIMAL GANDHI, PRESIDENT (AS THIRD MEMBER) : 5th Sept., 2008

The Members of Tribunal, Bench 'B', Chandigarh, on account of differences have referred the following questions for disposal of the above appeals under s. 255(4) of the IT Act, 1961 (in short 'the Act") :

"(1) Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in law in deleting the addition of Rs. 52,07,599 on account of unaccounted investment in stock of diamonds ?

(2) Whether on the facts and in the circumstances of the case, the addition of Rs. 1,50,000 out of addition of Rs. 3,64,930 on account of valuation of excess stock of 22 carat gold jewellery is to be sustained or matter is required to be remitted to the AO ?

(3) Whether on the facts and in the circumstances of the case, the CIT(A) erred in law in deleting the addition of Rs. 50,735 made on account of acquisition of gold bars ?

(4) Whether on the facts and in the circumstances of the case, surcharge is leviable when the search took place before 1st June, 2002 ?

(5) Whether on the facts and in the circumstances of the case, the addition of Rs. 48,328 made for the alleged unaccounted stock of 18 carat gold used in diamond jewellery is to be deleted or sustained ?"

2. During the course of hearing before me both the parties agreed that question No. 2 does not correctly reflect the difference between the Members as the learned Judicial Member (JM) deleted the entire addition and did not sustain even Rs. 1,50,000 maintained by the learned CIT(A) which was challenged by the assessee. The contention on verification has been found to be correct. Accordingly, the question is modified as under :

"Whether on the facts and in the circumstances of the case, the addition of Rs. 5,14,930 on account of valuation of excess stock of 22 carat gold jewellery is to be sustained or matter is required to be remitted to the AO ?"

3.1. would straightaway take up this question. As is evident from record a search under s. 132 of IT Act was conducted on the business as well residential premises of the assessee, M/s Talwarsons Jewellers and its partners on 14th May, 2001 and certain gold/diamond jewellery, loose diamonds and gold bars were found for which the assessee was called upon to explain. As far as addition of Rs. 5,14,930 is concerned, the assessee was found to be in possession of excess stock of 22 carat gold jewellery which the assessee accepted to be unexplained and surrendered and disclosed its value in the return at Rs. 17,35,000. The AO took the value at Rs. 22,49,930. In justification of the value disclosed, the assessee furnished the following explanation :

On the above facts and figures, the addition on account of excess jewellery found at the time of search under any circumstances cannot exceed Rs. 17,35,406 as calculated above. The figure of Rs. 41,06,880 as worked out by you is based on wrong facts and has to be ignored."

4. In respect of claim of 315 gms. of jewellery belonging to the family members, the assessee relied upon the WT returns of the family members and personal books maintained by them from year to year. The detail furnished was as under :

5. It was claimed that in the course of search at residence as well as of locker of family members only 1,196.080 gms. of jewellery was found. The balance 315 gms. (1,511.020-1,196.080 gms.), it was explained, was at business premises. As regard jewellery which was received from customer for repair, it was explained that the same stood included and shown in the register separately maintained. The assessee further furnished details with names and addresses and confirmations from customers to support its contention.

6. The AO accepted some of the contentions raised above. He however did not accept that 1,002.380 gms. found belonged to the customers received for repairs. The AO has recorded his reasons at p. 11 for rejecting the claim. He has held that above jewellery was mixed up with tagged items of jewellery. He referred to the details of the jewellery kept for repairs by assessee's customers for the period 1st April, 2000 to 31st March, 2001 and found that in the said period 6,404 gms. of jewellery was received for repairs. On that basis he estimated that period of repair on an average could be taken to be 5 to 6 days. AO found that as on 31st March, 2001, 110.71 gms. of jewellery was available for repair. On the basis of above average, the AO held that only 105.27 gms. of jewellery could be available for repairs against claim of 1,002.380 gms.

7. As regard claim of 315 gms. belonging to the family members, the AO held that the assessee has filed no evidence in support of above claim. There was no entry in the relevant register or in the books of account relating to above jewellery. The AO accordingly valued unaccounted 22 carat gold jewellery at Rs. 22,49,930 against a sum of Rs. 17,35,406 as per the calculation below :

8. It is obvious that difference of Rs. 5,14,930 between the claim and assessment is on account of the following :

(a) for not accepting the jewellery claimed to be belonging to the family members.
(b) for not accepting entire claim of jewellery received for repair from customers.
(c) for not accepting application of labour charges @ of Rs. 23.30 per gm. claimed by the assessee and applying rate of Rs. 26 per gm. The basis of application of the above labour rate is given in the assessment order as under :

"As per statement of Shri Anil Talwar in his statement recorded on 14th May, 2001, assessee is paying Rs. 26 as labour charges against which assessee has adopted a rate of Rs. 23.30 in its calculation based on the average labour charges paid last year. Assessee's records for the period 1st April, 2001 to 13th May, 2001 were also gone through and it is noticed that assessee is paying Rs. 26 per gram as labour charges to its Karigars and on that account labour charges are treated, as Rs. 26 per gram for the purpose of making charges of unaccounted gold jewellery."

CIT(A)'s observation

9. On further appeal, the assessee once again drew learned CIT(A)'s attention to the claim submitted before the AO which is noted at p. 6 of the order. It was reiterated that the claim of jewellery received for repairs weighing 1,002.380 gms. was duly noted in the repair register for which confirmations from the customers were also filed. The claim has been arbitrarily rejected. Likewise assessee was entitled to the credit for jewellery of 315 gms. which belonged to family members and was disclosed in the IT record. Such jewellery was not found anywhere in spite of search of locker as well as residential premises. In support of rate of Rs. 23.30 paise per gm. it was submitted that the above was the average rate for the period ending 31st March, 2001, whereas the AO adopted the rate of April. 2001 which was prevalent on 1.4th May, 2001 when the statement of the partner was recorded. The learned CIT(A) after considering facts and circumstances of the case accepted the claim to the extent of Rs. 3,64,930 with the following observation :

"After examining the rival submissions, 1 consider it just and fair to restrict the disallowance to Rs. 1.5 lacs, under this head basically on account of the lack of confirmations from some of the customers having given their jewellery for repairs, and the 315 gms. of jewellery explanation in respect of which does not seem plausible enough. Therefore, while the addition of Rs. .3,64,930 is deleted; as addition of Rs. 1.5 lacs is confirmed hereby."

Tribunal's decision

10. On further appeal, the Revenue challenged the deletion of Rs. ' 3,64,930. The learned JM observed that the AO was wrong in working out weight of jewellery available for repair by applying average formula at 105 gms.. He found as a fact that assessee had submitted confirmations and details of customers whose jewellery was received for repair. The learned JM found that the list of customers was available at p. 10 of the paper book. The total weight as per the said list worked out to 1,002.38 gms.. The confirmations were available with the AO. If he was not satisfied with evidence, nothing prevented the AO from making further verification. This was not done and without bringing any adverse material on the record, the AO was not justified in ignoring the contention of the assessee. The learned JM further observed as under :

"As regards the personal jewellery, we found that the explanation given by the assessee is borne out from the records. The details of the jewellery along with weight were submitted, claiming the same of the partners and their other family members and HUF. The credit of the same has to be allowed. We notice that in this case search was carried out both at business as well as residential premises of the assessee. The search was also carried out in the lockers and the inventory of the jewellery prepared by the Revenue also includes the jewellery found on person. In such circumstances, there is no justification in rejecting the explanation given by the assessee by not taking into consideration the total quantity of the personal jewellery. Accordingly, we hold that AO was not justified in not giving credit of 315 gms. on account of personal jewellery and restricting the credit of customer's jewellery to 105 gm as against 1,022.38 gms. claimed and evidenced by the assessee. Further, we notice that the AO was not justified in applying the labour charges @ Rs. 26 per gram against the average rate of Rs. 23.30 per gram worked out on the basis of total labour got done during the financial year 2000-01 without bringing any comparative figures from other persons/jewellers. Therefore, the AO has estimated the labour charges without considering any comparative labour charges of the relevant period from other persons of the related field. Therefore, taking into consideration the above facts, we hold that the AO was not justified in taking the undisclosed income on account of excess stock of 22 carat gold jewellery at Rs. 22,49,930 against Rs. 17,35,000 worked out by the assessee. Therefore, we upheld the stand of the learned CIT(A) by dismissing ground No. 2 of the appeal of the Revenue."

11. In the appeal of the assessee challenging the addition of Rs. 1,50,000 sustained by the learned CIT(A), the learned JM in the light of the above reasoning did not find any justification to uphold the above addition. He therefore, deleted the entire addition of Rs. 5,14,930 made by the AO.

12. The learned AM did not agree with the above proposed order of the learned JM. He held as under :

"17.1 Now the controversy to be resolved relates to the addition of Rs. 5,14,930 since the assessee had accepted the addition of Rs. 17,35,000 out of total addition of Rs. 22,49,930 worked out by the AO. Learned CIT(A) sustained the addition of Rs. 1.50 lakh only and allowed relief of Rs. 3,64,930. However, he had not given any cogent reason and the basis for allowing relief to the assessee. The main claim of the assessee was that the jewellery belonging to the customers was lying in the business premises. However, the assessee did not identify the jewellery of the customers in shop. The AO categorically stated that no register of customers was produced before him. Learned CIT(A) in the impugned order had also not stated that the assessee reconciled the jewellery noted in Panchnama with the jewellery mentioned in the register of customers. Similarly, for the jewellery weighing 315 gms. claimed to be belonging to the family members, no reconciliation had been made by the assessee with the jewellery disclosed to the Department and found at the time of search. In view of the aforesaid facts, I am of the opinion that the learned CIT(A) has passed a non-speaking order while allowing the relief of Rs. 3,64,930 to the assessee and sustaining the addition of Rs. 1.50 lakh since he had not assigned the reason and the basis for sustaining the addition of Rs. 1.50 lakh only. Therefore, the order passed by the learned CIT(A) is a non- speaking order in the eyes of law.

17.2 It is well-settled that the order/judgment unsupported by reason is not a judgment in the eyes of law. It is also true that the reasons are the links between the material on record and conclusion thereafter by the Court/appellate authority. It is, therefore, incumbent upon the learned CIT(A) to consider properly the arguments of the assessee as well as findings given by the AO and thereafter he should have made independent findings either in favour or against the assessee. Considering the entire facts of the instant case, in my opinion, the learned CIT(A) had not passed a proper order in the eyes of law."

13. The learned AM then referred to the decision of Ahmedabad Bench in the case of Gujarat Themis Biosyn Ltd. v. Jt. CIT [2000] 67 TTJ (Ahd) 386 : [2000] 74 ITD 339 (Ahd)to emphasise that a speaking order is required to be passed by the learned CIT(A). He further observed that in the present case AO did not consider the contention of the assessee that the jewellery was declared in the WT returns. He also referred to the statement of Shri Anil Talwar dt. 14th May, 2001 relatipg to labour rate of Rs. 26 as an average. As relevant material was not considered, the learned AM thought it fit to set aside the order of CIT(A) on addition of Rs. 5,14,930 and restore the issue to the file of the AO.

14. I have heard both the parties and also considered the material available on the record. The learned Departmental Representative relied upon the order of the AO and the proposed order of the learned AM. She emphasised that learned JM did not write anything on the labour rates and was not justified in accepting confirmations of the customers. The learned counsel for the assessee strongly supported the proposed order of the learned JM. He further pointed out that average labour rate for the period ending 31st March, 2001 was Rs. 23.30 and this fact has not been disputed by the Revenue.

15. On careful examination of all the relevant material, I am inclined to agree with view taken by the learned JM on the deletion of addition of Rs. 3,64,930 There is no dispute that assessee in the regular course of business, is receiving jewellery for repair. Even the AO on the basis of working of some average jewellery received for repairs in the year 2000-01 "has allowed benefit of 105.27 gms. irrespective of the finding that register for repairs was not produced. Even otherwise, it is not possible to agree with the hypothetical basis adopted by the AO on the basis of jewellery received for repairs in financial year 2000-01. The assessee, tin the other hand, had furnished complete details with names and addresses of customers who had given their jewellery for repairs. If the AO had any doubt about the claim put forward by the assessee, it was open to him to carry out verification. Afterall, most of the customers belonged to Chandigarh as per the addresses furnished by the assessee. The AO was not justified in calling upon the assessee to produce the customers for his examination who by no means were under the control of the assessee. The claim was rejected on a basis which cannot be accepted as sound; It is a matter of common knowledge that during marriage and festive seasons people buy more jewellery and also get more jewellery repaired. So, it is not possible to take jewellery received for repairs on average receipt per day and make estimate of receipt of jewellery for repairs on that basis. It was necessary to prove that quantity of jewellery claimed by the assessee supported by documentary evidence was wrong and therefore, claim was unsustainable. No such effort to refute the claim was made and, therefore, the learned JM in the proposed order is right in accepting the claim. There was no justification for accepting part, of the claim, without carrying out any verification and without there being any adverse material on record.

16. As, regards jewellery belonging to the members of the family, the assessee had relied upon IT record and WT returns to show that the family members owned jewellery of 1,511.020 gms, with them. On search the Revenue had found in custody of members jewellery, weighing 1,196.080 gms. It is well known that when action under s. 132 is taken, every nook and corner of residence, lockers, etc. is searched. After above exercise only 1,196.08 gms, of jewellery was found. The difference of 315 gras. was claimed to be at business premises. It has to be appreciated that all the family members are jewellers and purchase and sale of jewellery is their vocation/trade. Therefore, there is nothing unusual in the family members sending part of their jewellery to the business premises for sale/remodeling, etc. The learned CIT(A) and learned JM in the proposed order have adopted a reasonable approach on the facts and circumstances of the case. I do not agree with the reasoning given by the learned AM to set aside and remand the case back to the file of the AO except on addition of Rs 1,50,000 sustained by the learned CIT(A). The jewellery held by various members of family is part of record available with the Revenue. There is no evidence to show that such evidence was not available and could not be examined. On facts of the case there is no justification for permitting a second inning to the Revenue. There is nothing on record, o doubt the claim which is more than reasonable. I am unable to agree with the learned AM that the CIT(A) passed a non-speaking order, The; controversy relating to labour rates was also examined by the CIT(A) but still the the matter is far from clear.; During the course of hearing before me, the learned counsel for the assessee Shri Ved Jain had drawn any attention to the documents to; show average labour rate for the period ending 31st March 2001, when jewellery in dispute was made was only Rs. 23.30, per gm. However; the question whether the above rate or rate @ Rs. 26 per gram is to be applied when undisclosed jewellery was "found" is far from clear and is required to be examined. What is the basis of addition of Rs 1,50,000 is also not clear. Therefore, on the facts and the circumstances of the case, I see justification to remit the matter back to the file of the AO as far as addition of Rs 1,50,000 is concerned and to that extent, I agree with the learned AM. I agree with the order proposed by the learned JM on addition of Rs 3,64,930. The question is answered accordingly.

17. As far as facts relating to third question are concerned, the assessee was found to be in possession of 40 number of 24 carat gold bars, weighing 4,665.6 gms. These bars were admitted to be out of "undisclosed income" and accordingly, a sum of Rs. 19,78,800 was disclosed in the return filed under s. 158BC. The AO determined the value of the gold bars at Rs. 20,29,535. The assessee disputed this in appeal and contended that above gold bars were part of 65 gold bars purchased by the assessee on 17th April, 2001 from the State Bank for a sum of Rs. 32,15,550. On the basis of above purchase, the value of gold bars worked out to Rs. 19,78,800 as disclosed by the assessee. The learned CIT(A) accepted this claim of the assessee.

18. The Revenue impugned the above order in appeal and relied upon the reasons given in the order of the AO. The learned JM agreed with view taken by the CIT(A) and accepted the claim of the assessee that these bars are part of bars purchased on 17th April, 2001 from SBI. The ground of the Revenue was rejected.

19. The learned AM did not agree with the above view. He restored the order of the AO with the following observations :

"24. We have heard both the parties and carefully gone through the material available on records It seems that the assessee tried co-relate the gold bars found unaccounted during the course of search with the gold bars purchased on 17th April, 2001 by taking the plea that old accumulated jewellery was issued to the Karigars instead of gold bars and 40 gold bars remained with the assessee. This explanation of the assessee does not appear plausible since it was claim of the assessee that gold bars purchased oh 17th April, 2001 from SBI were entered in the books of account. At the same time, the assessee accepted that 40 gold bars found during the course of search were not recorded in the books of account. So, the stand of the assessee was contradictory. Moreover, no evidence was brought on record to substantiate that old jewellery accumulated was given to the Karigars for making new jewellery. If that was so, then why the assessee adopted the rate which was prevailing on 17th April, 2001, stated to be the date of purchase of 65 gold bars and not the actual rate when the jewellery accumulated. In fact, the assessee could not produce any evidence that 40 gold bars found during the course of search were purchased at a lesser rate than the rate adopted by the AO. Since the gold bars were found unaccounted during the course of search, the AO was justified in applying the rate which was prevailing at the date when unaccounted gold bars were found in possession of the assessee. I, therefore, reverse the order of learned CIT(A) on this issue and restore that of the AO."

20. I have heard both the parties on this issue. The gold bars in question are admitted to be unexplained and therefore, reference to purchase bill of SBI dt. 17th April, 2001 is not relevant. As gold bars are unexplained, their value is to be taken as per s. 69A of the Act as on the date when the gold bars were "found with the assessee", i.e., the date of the search. The rate of gold varies from day-to-day and there is no justification in adopting the rate of 17th April, 2001. The value of unexplained articles in terms of s. 69A was rightly taken by the AO at the time of the search. Accordingly, I agree with the order proposed by the learned AM. This question is answered accordingly and the addition made by the AO is confirmed.

4th Question

21. That as far as question No. 4 is concerned both the parties agreed that the said question, in light of decision of the Supreme Court, has to be decided against the assessee. I therefore, agree with the order proposed by the learned AM.

5th Question

22. The facts relating to this question are that during the course of search it was found that 18 carat gold has been used in making diamond jewellery which was unaccounted for. The explanation for the assessee relating to this item of addition as recorded in the assessment order is as under :

"3. Taking into account the credit of the weight of 14 carat jewellery as per books as on the date of search, the excess stock of 18 carat gold found at the time of search can be worked out as under :

4. The addition on this account, therefore, in any case cannot exceed Rs. 12,28,024. The figure of Rs. 18,13,252 as worked out by the AO is based on surmises and wrong facts and has to be ignored."

23. The AO did not agree with the above calculation and worked out the addition at Rs. 12,76,352 as per the following observations :

"(b) Contention raised by the assessee has been considered. As per books of account entire diamond jewellery is shown as embedded in 14 carat gold against 18 carat gold as found during search. All entries in books of account are made on the basis of 14 carat gold. Assessee as stated above has contended that benefit of 14 carat gold used in diamond jewellery shown in books of account may be allowed to him and addition on that account works out to Rs. 12,28,024 instead of Rs. 18,13,252 as was proposed. After considering the fact that 2,331.020 gms. on the ground 14 carat gold is considered in books of account, benefit of 2,331.020 gms. of 14 carat is allowed to the assessee. Further, value of 190 gms. of 22 carat of gold which is equivalent to weight of 945 carat of diamonds is allowed to the assessee. Value of unaccounted 18 carat gold is thus worked out as under :

Accordingly, addition of Rs. 12,76,352 was made towards undisclosed income against Rs. 12,28,024 surrendered by the assessee."

24. On further appeal before the CIT(A), the working of the AO was challenged. It was claimed that in spite of surrender of Rs. 81,00,000, the learned AO made a petty addition by adopting labour charges @ Rs. 26 per gm. against Rs. 23.30 per gm. taken by the assessee. In the light of his finding on other issues, the learned CIT(A) accepted the claim. On further appeal, the learned JM agreed with the view taken by the learned CIT(A). However, learned AM restored this issue to the file of the AO in the light of his view on ground No. 2 of Revenue's appeal discussed above. I have already held that on facts and in the circumstances of the case, there is need to examaine question whether labour charges are to be calculated @ Rs. 26 or Rs. 23.30 per gram. Therefore, the issue is set aside and remanded to the file of the AO. I therefore, agree with the order proposed by the learned AM. This question is answered accordingly.

25. I now proceed to consider question No. 1 which relates to addition of Rs. 52,07,599 deleted by the learned CIT(A).

26. On further appeal, the learned JM in the proposed order has concurred with learned CIT(A) whereas learned AM has set aside the impugned order and restored the addition to the file of the AO.

27. The facts relating to addition are as under :

A search was carried on business premises of assessee firm and at residential premises of its partners under s. 132(5) on 14th May, 2001. From the business premises, some loose diamonds and jewellery studded with diamonds were found. The value of above stock was taken at Rs. 1,01,22,942 by Shri Vijay Kumar, the approved valuer, as per the following details :

The assessee was called upon to explain possession and acquisition of above jewellery. Vide its letter dt. 7th April, 2003, the assessee furnished the following explanation :

"The weight of the diamonds found at the time of search tallies with the weight of the diamonds as per our books. A copy of the inventory of closing stock prepared on 31st March, 2001, i.e., at the close of the immediately preceding accounting year was submitted during the course of search. As per this list, the weight of the diamonds comes to 1,022.03 carats. This does not include the weight of the diamonds included in item mentioned against 'A. old items'. The weight of the diamonds studded in this old jewellery, based on registered valuer's is report, came to 31.64 carats. As such, the total weight of the diamonds as per the closing stock inventory as on 31st March, 2001 comes to 1,053.67 carats. From the above, weight of the diamonds as per our books as on the date of search can be arrived at as follows :

The weight of diamonds found during the search as per registered valuers report is 944.63 carats. The difference comes to 22.42 carats only which is 2.31 per cent of the overall weight and is negligible and has to be ignored. The small difference may have arisen because of clerical error while weighing/preparing the valuation report."

28. The assessee also challenged the valuation carried by Shri Vijay Kumar. The Dy. Director of IT thereafter appointed two more registered valuers, namely, Shri Sudhir Kumar of M/s Windlas Jewellers and Shri Surya Kant Jain of M/s Jain Jewellers. These two valuers collectively worked out value of loose diamonds and diamond jewellery at Rs 98.50 lacs. The assessee objected to the above valuation also and pointed out that difference between the two valuation reports was 350 per cent. It was explained that 253 items out of total 546 items valued by two valuers separately had difference of valuation which was more than 25 per cent. The overall variation in number of items where the difference in value exceeded one-fourth, was 46.33 per cent. The assessee also pointed out other defects in the valuation reports, some of which are noted by the AO at pp. 15 and 16 of the assessment order. The assessee further pointed out that some of the jewellery/diamonds were very old and their cost to the assessee was much less than the value taken on the date of the search. The assessee further stated that loose diamonds were purchased from Bombay and Surat and jewellery got manufactured from local Karigars. This way profit of middleman and manufacturer was saved. The registered valuer had, however, valued diamonds and diamond jewellery at the wholesale price available at Chandigarh. They failed to exclude margin of the middleman as well as that of the manufacturer of the jewellery in the valuation reports.

29. On facts and circumstances of the case, the AO thought that valuation made by Shri Vijay Kumar at Rs. 1,01,22,942 was to be adopted as basis for considering the issue in question. With regard to main contention of the assessee that all the diamonds and diamond studded jewellery found were shown in stock in the books of account, the AO rejected the contention with the following observations :

"2. With regard to the assessee's contention regarding number of carat of diamonds in stock and as per valuation report being the same is concerned, assessee was asked to give details of quantity of diamonds in carat, but assessee has not furnished such information on the ground that assessee is not maintaining any stock register in respect of diamonds and it is not feasible. Therefore, item-wise details of stock were not available. During the course of search, some of the bills with regard to purchase of diamonds were seized (D. No. A 38). Assessee was asked to explain whether the diamonds purchased as per those bills have been sold, and if not, then the corresponding particulars in the inventory of stock found during the course of search may be provided. In response to the same it was stated that it is not possible for him to pinpoint item-wise details of diamonds. It is only at the time of preparing inventory that the diamonds are segregated as per weight, quality, grade and value of loose diamonds sold and balance remaining as per bills, and each item of jewellery is made from different quality, weight, grade and value of loose diamonds. After this exercise is complete, a detailed inventory is then prepared by making reference to each purchase bill of loose diamonds. Further assessee had shown his inability to compare the purchase of loose diamonds as per the purchase bills with the items of diamond jewellery found at the time of search. However this cannot be correct statement as there are the bills of purchase of diamonds which do not contain the information regarding the quality and grade of the diamonds and only the gross carat weight of the diamonds purchased is written on the bills. Only description given on the bills is "cut and polished diamonds". No information with regard to quality and grade is mentioned on these bills. Thus, it will not be possible for the assessee to prepare a detailed inventory by making reference to each purchase bill of loose diamonds at any moment of time. During the course of search proceedings, a total of 944 carats of diamonds were found. However assessee could not identify the items forming part of the stock on the date of search, which according to him would have been available as part of the closing stock as on 31st March, 2001. Also the assessee has not maintained any quantitative details of the closing stock of diamonds and these were not furnished along with the returns of income filed although it was the requirement of Form 3CD filed along with the return. Assessee has failed to correlate the purchases, sales and closing stock of diamonds with reference to the stocks purchased and in closing stock. Assessee is not maintaining any stock registers with respect to quantitative details of goods purchased and sold during any year. Even during the course of assessment proceedings assessee was once again asked to furnish such details but the same have not been furnished on the same grounds as stated above."

(underlined, italicized in print, to emphasise)

The contention of the assessee that report of registered valuer is mere opinion based on estimation and, therefore, cannot be relied upon for making addition, was rejected.

30. The AO also did not accept the claim of the assessee that in the items found at the time of search, there were many old items which were shown in the list for past several years. Copies of list of closing stock were filed with the AO. The AO held that weight of diamonds was not mentioned in the lists and only value as on ,31st March, 1991/31st March, 1992/31st March, 1993 was mentioned. The assessee tried to correlate solitaires found at the time of search with lists filed from time to time having approximate value of Rs. 8 lacs. The AO asked the assessee to produce the bill of solitaires (old items) which assessee could not produce and, therefore, the contention of the assessee was not accepted.

31. The claim relating to margin of middleman was also not accepted. The AO observed that if margin of assessee at 24 per cent is added to the value of diamonds at Rs. 80,79,720 it would work out to Rs. 1,00,99,650 against book value shown by the assessee at Rs. 30,41,293 which would show that value of the diamonds had increased three times. This was not reconcilable with approx. 24 per cent GP shown by the assessee in the last many years. He further observed that stock which was lying in the closing stock was actually fresh and not recorded in the books of account. The AO further observed that diamond jewellery is frequently changed and jewellery more than six months old becomes obsolete. There was no basis to accept that in the valuation there were items which could be treated as old. According to the AO, the assessee did not furnish any supporting evidence.

32. The contention relating to old jewellery was rejected with an additional argument on consideration of list of closing stock furnished by the assessee for the period 31st March, 1992 to 31st March, 2000. One list as on 31st March, 2001 was found and seized during the course of search. The AO found year of purchases of certain items of jewellery between 31st March, 1994 to 31st March, 2001. After applying cost index of different years given by the IT Department from year to year under proviso to s. 48 for working out cost of acquisition of capital assets, the AO worked out value of items found at Rs. 32,59,243 against book value of Rs. 30,58,078 as per the chart below, with his further observations to reject the contention :

On that basis, if the assessee's contention is considered as correct, then the market value of the diamonds valued by the three valuers would have been in the near vicinity of Rs. 32,59,423 against which they have valued the diamonds at Rs. 72,79,000 (Rs. 80,79,000 - Rs. 8,00,000 of old items stated by assessee). The difference in the valuation made by the valuer and value of diamonds as worked out based on indexed cost is more than 123 per cent. The diamond trade has not witnessed that type of price variation in any of the years to which the stock is related to be shown. It is not out of way to mention here that more than 54.50 per cent (Rs. 16,66,525 out of Rs. 30,58,078) of the stock purchased in 2000-01 forms part of diamonds and miscellaneous items mentioned in Parts C and D of the list of closing stock of diamonds found and seized from assessee's firm and in respect of this stock there cannot be much increase. This implies that stock purchased from 1994 onwards to 31st March, 2000 forming part of the stock list as stated above and valued at Rs. 13,91,553 has grown to Rs. 56,13,195 (Rs. 72,79,720 -Rs. 16,66,525), i.e., the value of these diamonds has appreciated by 403 per cent which is a price increase unheard of.

Further, if seen from a different angle, as per assessee's books of account, these diamonds were embedded in 2,331.020 gms. of 14 carat gold. However, in fact, the entire diamond jewellery was embedded in 5,650.70 gms. of 18 carat gold. The variation in the quantum of 14 carat gold and 18 carat gold is almost of 142 per cent, which implies that the number of diamonds as actually received, and diamond as actually accounted for differs by more than 142 per cent. Assessee's is sale bills do not depict the carats but depict only the number of diamonds without mentioning the weight of diamonds. The books of account as well as assessee's contention in this regard that number of carats are similar are thus has no evidentiary value.

7. In view of the above factual position, when the assessee is unable to reconcile the diamond jewellery with reference to purchase bills vis-a-vis items lying in the closing stock and was also unable to correlate the diamond studded jewellery with the purchase bills, which method assessee has contended, time and gain, is being applied every year for valuation of diamond jewellery, all the contentions raised by the assessee are rejected and value of the closing stock of diamonds is taken at Rs. 83,09,692 against the stock as per books at Rs. 30,41,293. Further, a benefit of Rs. 60,800 being the value of 190 gms. of 18 carat of gold in lieu of 945 carats of diamonds weight is also allowed to the assessee as the same was required to be deducted along with value of 18 carat gold weighing 5650.7 gms. while working out the value of diamonds at Rs. 83,09,692. Difference of Rs. 52,07,599 (Rs. 83,09,692 - Rs. 30,41,293 -Rs. 60,800) is made to the income as undisclosed income of the assessee being investment in stocks of diamond from undisclosed sources within the meaning of s. 158B(b) of the Act."

This way addition of Rs. 52,07,599 was made for undisclosed investment in stock of diamonds.

33. This addition was impugned by the assessee in appeal before the CIT(A). The assessee in the first place objected to the various valuation reports. It was contended that there was wide variation in the value of different items and, therefore, these reports were not reliable. It was stated that closing stock was valued as per settled principle at cost or at market price, whichever is less and this principle of valuation has been accepted by the Department year after year. The learned CIT(A) noted further the pertinent contentions of the assessee as under :

"Also, the appellant firm having been assessed in central circle and for about six years assessments were made under s. 143(3), there are certain items where valuation in closing stock was shown and accepted at about Rs. 2,00,600 in the closing stock whereas value of such items (same items) which were in the stock as on the date of search had been valued by the valuers at Rs. 8,07,470, i.e., roughly about four times the value which had been accepted by the Departmental authorities in the course of assessment.

As a result of investigation also, the Departmental authorities have got verified the purchases from Surat and Mumbai parties and have not found anything adverse in possession to draw any adverse inference. Even the weight of diamonds as per the records by and large tallied with the stock taken by the search party.

In short, it could safely be submitted that nothing adverse has been found by the Departmental authorities even after having made thorough investigations. All these days the appellant firm was hoping that in passing order for the block period under s. 158BC, due credit will be given to the petitioners nothing adverse having been found/detected.

No evidence worth the name has been found that the appellant firm had purchased any diamond jewellery without recording the same in the books of account. The difference in the valuation is only because of the fact that different rates had been adopted by different valuers, otherwise, there is no difference in the weight of the diamond jewellery found at the. time of search and the weight of the diamonds as per the books. Your Honour will appreciate that the market rate of diamonds could not be applied by ignoring the cost of purchases over the last various years which is fully evidenced by the purchase invoices. The addition made at Rs. 52,07,599 in the valuation of diamonds is merely on surmises and conjectures and deserves to be deleted."

34. The learned CIT(A) observed that block assessment cannot be made on conjectures and presumptions but must be supported on the basis of evidence found as a result of search. He quoted five decisions in support of the above proposition. He further observed that suspicion howsoever strong it may be, cannot take shape of an evidence. The learned CIT(A), therefore, took into consideration definition of "undisclosed income" under s. 158B(b) and also decision of the Supreme Court and other Courts that Department has no power to refer a case to the DVO. The learned CIT(A) deleted the addition, with the following reasons :

"6. There is force in the contentions of the learned Authorised Representative that,

(a) there was a difference of 350 per cent in the valuation of diamonds done by the two valuers,
(b) that the method of valuation of closing stock on the cardinal principle of cost or market price (whichever is less) had been accepted in the appellant's case throughout,
(c) that certain items, the value of which in the closing stock as accepted by the Department was about Rs. 20,00,000 have been valued by the valuers at Rs. 8,07,470. (about 4 times higher),
(d) that the appellant has been making purchases of loose diamonds directly from Surat and Mumbai (and the Department has verified the purchases and found nothing adverse),
(e) that the valuation at market rates by ignoring the cost of purchases (which is fully evidenced by the purchase invoices), makes it clear that the valuations have been done on conjectures, estimates and assumptions, especially as there is no difference in weight; only in the rates applied.

7. In view of the inexorable logic of the above discussion, and respectfully following the spate of judicial pronouncements on this issue, this ground of appeal is decided in favour of the appellant, and the AO is directed to delete the addition made in this regard. This ground of appeal, therefore, succeeds."

35. The Revenue and the assessee both approached the Tribunal challenging the finding recorded against them. The challenge in Revenue's appeal included relief of Rs. 52,07,599 allowed by the learned CIT(A). After hearing both the parties, learned JM, in his proposed order, confirmed the impugned order, with the following observations :

"We have considered the rival submissions and perused the record. It is now an admitted fact by the Revenue as well as by the assessee that the quantity of diamonds as per books of account comes to 967.05 carats. The quantity as found during the course of search was 944.63 carats, meaning thereby that there was no much difference in stock of diamonds. Further, the assessee has established its valuation which he is doing on cost basis with the purchase invoices. No much discrepancy has been pointed out or found in these documents. The assessee has been consistently valuing its stock at cost or market price, whichever is lower. In view of these facts, broadly, we are of the view that there is no reason to make an addition by valuing diamonds which already form part of the disclosed account of the assessee. The block assessment proceedings cannot be used by the Revenue by taxing the income which has not yet been earned by the assessee. The cost for the purpose of computing the income of the assessee has to be the cost actually incurred. No material whatsoever was brought on record by the Department that the assessee has incurred cost more than what has been declared for the purchase of diamonds. In the absence of any such material, no addition can be made merely on the basis of valuation. The Allahabad Bench of the Tribunal in the case of V.V.S. Alloys Ltd. (supra), wherein there was no material with the Department found against the assessee, investigations were carried out, post-search to verify the purchases made from suppliers in Surat and Mumbai. There was no evidence whatsoever to show that, the assessee had paid underhand cash for the purchase of diamonds. It was held that no addition can be made on account of difference in the valuation of diamonds where purchases have been duly recorded. This judicial pronouncement supports the case of the assessee. Accordingly, on the basis of above facts, we hold that the learned CIT(A) was justified in deleting the addition made by the AO. Therefore, this ground of the appeal of the Revenue is having no merit."

36. The learned AM, did not agree with the above view of the learned JM. He re-examined the orders of the AO and CIT(A). He was of the view that impugned order of CIT(A) is cryptic and non-speaking. He restored the addition made by the AO, with the following observations :

"10. We have heard both the parties and carefully gone through the material available on record. As regards to the facts of this case are concerned, there is no dispute that during the course of search, loose diamonds and diamond jewellery were found from the business premises of the assessee. The inventory was prepared and got valued from registered valuer, Shri Vijay Kumar. That value was found by the assessee as unrealistic and unscientific. Thereafter, another two valuers namely, S/Shri Surya Kant Jain and Sudhir Kumar were appointed. The valuation done by Shri Vijay Kumar was at Rs. 1,01,22,942 and by other two valuers collectively at Rs. 98.50 lacs. However, the valuation done by Shri Vijay Kumar was accepted by the assessee for limited purposes of ascertaining the value of bank guarantee to be furnished for getting the seized jewellery released. In the instant case, the AO made the addition by invoking the provisions of s. 158B(b) of IT Act which read as under :

(b) 'undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act (or any expense, deduction or allowance claimed under this Act which is found to be false).'

From the above provisions, it is clear that undisclosed income includes jewellery or other valuable article or thing or any income based on any entry in the books of account. In the instant case, the jewellery was found during the course of search and the same was also entered in the books of account. For ascertaining the true value of the jewellery found, the assessee was required to furnish the evidence in support of the value taken by it in the books of account. The primary evidence in such type of cases is the stock register wherein the date of purchase, description of the item date of sale, closing balance, etc. are mentioned. It was also the duty of the assessee to get reconciled the closing stock reflected in the stock register with the physical inventory prepared during the course of search. However, the partner of the assessee firm, namely, Shri Anil Talwar who was looking after the business, stated in his statement, on oath that it was not possible to maintain the stock register and no such register was maintained. The another evidence could have been the bills of purchase of diamonds; however, in those purchase bills, the description given was 'cut and polished diamonds'. No other description was given. So, it was not possible to ascertain which diamond was purchased vide which purchase bill. In other words, the assessee was not in a position to identify the diamonds mentioned in the purchase bills vis-a-vis the diamonds found during the course of search. So, the only way to find out the correct value of the diamonds and jewellery found during the course of search was to get those valued from registered valuers. The valuation was got done from independent registered valuer as well as from the valuers of assessee's choice. The value worked out was almost equal since the value worked out by Shri Vijay Kumar was at Rs. 1,01,22,942 while the value worked out by the another two valuers of assessee's choice, namely, S/Shri Surya Kant Jain and Sudhir Kumar, was at Rs. 98.50 lacs. The main objection of the assessee was that there was much difference in the valuation of various items in different valuation reports. However, overall difference was very small. So, it cannot be said that the valuation done by the registered valuers was not authentic or was without any basis. The assessee pointed out that in one item placed at serial No. 246, the difference was about 350 per cent. It is noticed that the value adopted by the valuer for the said item was only Rs. 7,200 which was negligible in comparison to the overall value of the diamonds worked out at about Rs 1 crore. It was incumbent upon the assessee to reconcile the stock found with the stock register as well as books of account. It was also the duty of the assessee to link the diamonds and jewellery found during the course of search item-wise with the purchase bills, but it has not been done by the assessee, rather inability was shown by stating that it was not possible to pinpoint item-wise details of the diamonds. The assessee also stated that the items were old, however, no evidence had been furnished for old items of jewellery. It was simply stated that the items valued at Rs. 8,07,470 were old items value of which at Rs. 2,00,600 was accepted by the Department. However, in respect of rest of the diamond jewellery, the assessee was unable to provide any information to substantiate that the remaining jewellery was also disclosed earlier to the Department.

10.1 It is not in dispute that in these days society is fashion-oriented and designs of diamond jewellery change frequently, so, it cannot be believed that the jewellery in possession of the assessee, was old jewellery, even if at all, it was to be accepted that the jewellery was old, onus was on the assessee to link the jewellery with the purchase bills; however, the assessee was unable to do such an exercise. Moreover, in the purchase bills the description mentioned regarding the diamonds was one 'packet of cut and polished diamonds' From that description, nobody can ascertain how much pieces were there in one packet and what was the individual size and value of those diamond items. In other words, it can be said that the assessee miserably failed to link the diamond jewellery inventorised at the time of search with the purchase bills or the stock register. In my opinion, the AO was justified in taking the value of the closing stock of diamonds at Rs. 83,09,692 against the value shown by the assessee at Rs. 30,41,293, since the assessee was unable to reconcile the diamond jewellery with reference to purchase bills vis-a-vis items lying in the closing stock and was also unable to correlate the diamond studded jewellery with the purchase bills. The assessee was also unable to satisfy the AO that how the value of stock as per books was worked out at Rs. 30,41,293 particularly when the items were not correlated with any of the purchase bills. It is true that undisclosed income is to be computed on the basis of evidence found as a result of search. In the instant case, the diamond jewellery was found during the course of search and the assessee was unable to link that jewellery with the purchase bills. So, the AO was justified in adopting the value on the basis of valuation done by the registered valuer. It is well-settled that the assessment for block period is to be framed on the basis of return of income furnished by the assessee in response to notice under s. 158BC of IT Act. The correctness of the said return of income has to be examined by the AO with reference to the material in his possession having nexus of assessment of undisclosed income which is with him. In the instant case, the onus was on the assessee to prove the correctness of the value of diamond jewellery stock in the books of account. However, the assessee was unable to prove such value since no stock register was maintained and no description of diamonds, item-wise and quality-wise, was given in the purchase bills. In such circumstances, the only way to work out the correct value of the jewellery found, was the valuation by the independent experts persons. In the present case, the valuation was done by three persons who are experts in this field and the AO has allowed the benefit of assessee's margin and has taken the value after considering the value of old jewellery amounting to Rs. 2,00,600 which the assessee claimed that it was disclosed to the Department. In my opinion, the AO was fully justified in making the addition of Rs. 52,07,599, since learned CIT(A) while deleting the addition has not given any cogent reason. He simply accepted the version of the assessee and even did not discuss in the impugned order how and in what manner the objections of the assessee were sustainable. The learned CIT(A) accepted the contention of the assessee on the basis that there was a difference to the extent of 350 per cent in the valuation of few items of diamonds done by the two valuers. However, the value of that jewellery was only Rs. 7,200 which is negligible. The another reason given by the learned CIT(A) for accepting the contention of the assessee was that the method of valuation of closing stock on the cardinal principle of cost or market price (whichever is less) had been accepted in assessee's case throughout. However, the learned CIT(A) has not uttered a single word how the value adopted by the assessee, was the cost price or the market price because the assessee miserably failed to produce any evidence with regard to valuation of the closing stock since no description was given in the purchase bills and no stock register was maintained by the assessee, so, it was not possible to ascertain the cost price on the basis of purchase bills. The learned CIT(A) also stated that value of certain items appearing in the closing stock was accepted by the Department at Rs 2 lacs which had been valued by the valuers at Rs. 8,07,470. In my opinion, that cannot be a basis to delete the whole of the addition, particularly when the total value worked out was more than Rs. 1 crore and the assessee pointed out the difference only with regard to Rs. 8,07,470 that too has been considered by the AO while framing block assessment which is clear from para 6 of the block assessment order dt. 30th May, 2003.

10.2 As regards to the reason given by the learned CIT(A) that the assessee had been making purchase of loose diamonds directly from Surat and Mumbai and the Department has verified the purchases and found nothing adverse, this reason given by the learned CIT(A) is without appreciating the facts in right perspective because the main basis for making the addition was that the assessee was unable to link the purchase bills with the value of the stock declared since in the purchase bills no description and quality of the diamond have been given; it is simply mentioned 'packet of cut and polished diamonds'. In the-present case although the authenticity of the purchases from Surat and Mumbai was not in doubt but the question of item-wise purchase price on the basis of purchase bills remained unanswered at every stage. Therefore, the only way to ascertain the value was the valuation by an expert and independent valuer which has been got done in this case. The learned CIT(A) also stated that the valuation at market rates by ignoring the cost of purchases, made it clear that the valuation had been done on conjectures, estimates and assumptions, especially when there was no difference in the weight. This observation of the learned CIT(A) is also not correct since the valuation was not a mere estimate on assumptions because the valuation which was done by three independent persons, who are experts in this field, was almost the same and the assessee was not in a position to produce any evidence that the value worked out by it, was based on cost of purchase because in the purchase bills, it was not mentioned that what was the size and quality of the diamonds and how many pieces were there in one packet which is evident from page Nos. 253 to 311 of assessee's compilation which are the copies of invoices and bills. The learned CIT(A) also stated in the impugned order at para 7 that in view of the inexorable logic and spate of judicial pronouncements on this issue, the ground of appeal was to be decided in favour of the assessee. However, he did not emphasize specifically what was the inexorable logic in his discussion because much discussion has not been done. He has also not stated how and in what manner the cases relied on by the assessee, were applicable to the facts of assessee's case. In the instant case, the simple issue was related to the valuation of closing stock; the assessee was required to furnish documentary evidence in support of valuation of diamond studded jewellery. However, the assessee was unable to produce any evidence in support of valuation adopted by it because no stock register was maintained in respect of this jewellery and also no description was given in the purchase bills which could establish that the rates adopted by the assessee were correct. On the other hand, the valuation was got done by the Department from the independent valuer and also from the valuers of assessee's choice.

10.3 In view of the aforesaid discussion, I am unable to persuade myself to agree with learned JM who concurred with the learned CIT(A) in confirming the deletion of addition made by the AO, particularly when nothing is on record that the post-search inquiry established that the purchase price of the diamonds was correct because no description as regards to the size and quality of the diamonds vis-a-vis item-wise price was mentioned in the purchase bills, so, to ascertain the cost price (as claimed by the assessee) on the basis of purchase bills was just like to find a diamond in the coal mine. In the instant case, the dispute was not related to the quantity but to the valuation of diamonds and the assessee miserably failed to adduce proper evidence to establish that the valuation of stock taken by it was the correct value which was based on the purchase invoices, therefore, the AO in such peculiar circumstances was fully justified in adopting the value worked out by the valuers of assessee's choice, particularly when the partner of the assessee firm who is also working partner, agrees for the same. I, therefore, in the light of the above discussion, propose to set aside the order of learned CIT(A) and to restore the addition made by the AO."

37. In order to resolve the difference, the case was fixed as a Third Member case and I have heard both the parties and examined the material available on record. The learned Departmental Representative submitted that assessee was not able to show that loose diamonds and diamonds found studded in jewellery were recorded in the books of account regularly maintained by the assessee. No quality or size was mentioned in the purchase vouchers and, therefore, identification of diamonds found at the time of search was not possible. Size or quality or other description was necessary for proper identification. Even assessee could not relate that a particular diamond was purchased with reference to a particular bill. She also emphasized that assessee did not maintain any stock register to account for diamonds purchased and sold or available at any given point of time with reference to quality or other characteristics of diamonds. She read out the relevant portion of the assessment order. She also read out the following finding in the proposed order of JM :

"Further, the assessee had established its valuation which he is doing on cost basis with the purchase invoices, no such discrepancies have been pointed out or found in those documents."

37.1. It was vehemently contended by the learned Departmental Representative that above observations were factually erroneous. The assessee was not able to correlate diamonds found with reference to purchase bills as no distinguishing features like quality, luster, etc. was mentioned in the purchase bills. It was further argued that onus was on the assessee to prove that loose diamonds found were accounted for in the books. She also read out the proposed order of the learned AM and submitted that in the said order, full submissions of the learned Departmental Representative were recorded. She referred to paras 8 and 9 of the proposed order. .Without stock register and description of diamonds, the assessee could not prove its case. The proposed order of the JM was not supported by any evidence. She also emphasized that it was the duty of the Tribunal to go into details and examine all evidences produced in the case. For the above proposition, which is not in dispute, she placed reliance on certain decisions. She also referred to s. 132(4A) to contend that presumption under the said section was that diamonds found belonged to the assessee, which the assessee had failed to explain.

38. The learned counsel for the assessee pointed out- that assessee's partnership (firm) was in this business for the past several years and it maintained regular books of accounts. It had been filing returns supported by audited accounts and inventory of closing stock. He referred to pp. 318 and 338 of the paper book. Inventory of closing stock as on 31st March, 2001 is available at pp. 238 to 240 of the paper book. Shri Jain further submitted that under Chapter XIV, only income which is undisclosed could be assessed. Loose diamonds and diamond studded jewellery were very much part of the regular accounts. This fact was admitted even by the learned AM in his proposed order at p. 26, wherein the learned AM has stated as under :

"In the instant case, the jewellery was found during the course of search and the same was also entered in the books of account. For ascertaining the true value of the jewellery found, the assessee was required to furnish the evidence in support of the value taken by it in the books of account."

Shri Jain, therefore, contended that when jewellery in question was found in books of account, then there was nothing further for the assessee to prove. It was further argued that main objection of the Revenue was that purchase bills filed by the assessee do not disclose quality or other distinctive features of the diamonds purchased. He referred to the reports of the registered valuers produced by the Revenue to show that quality or size was not mentioned even in those reports and only weight was given. This clearly shows that information sought by the Revenue cannot be maintained in respect of large quantity of diamonds. The assessee has tallied weight of loose diamonds and diamond studded articles with reference to purchases in books of account. As per the practice, diamonds are purchased in packets and in the purchase bills, total weight of diamonds in carats, and rate per carat is only given. The rate charged varies from item to item depending upon the quality of the diamonds. The assessee had purchased diamonds, at different rates which clearly showed that different quality of diamonds were purchased. Revenue's evidence in the shape of valuation reports shows that quality, etc. or other distinguishing features are not mentioned in purchase bills of diamonds. Shri Jain further pointed out that certain old items of jewellery having value of Rs. 2,00,600 were being disclosed from year to year and its purchase bills were also produced. Even doubts were raised about that item without any justification. It is well accepted that valuation is not exact source and there is always a variation even when two competent valuers make valuation in a bona fide manner. In the present case, there were large differences in the valuations as highlighted by the assessee from p. 133 onward of the paper book.

38.1. The learned counsel further emphasized that no unaccounted "income" for purchases or sales, no diary or document of unaccounted purchase or sale or any other information was found. There is nothing on record that purchases were inflated or any sales were made outside the books of account. In the absence of above, s. 158B(b) was not applicable. The onus was on the Revenue to show undisclosed income. The said onus, without material, cannot be said to be discharged. Shri Jain further pointed out that enquiries were made from the sellers of diamonds to the assessee at Surat and Bombay and sale of diamonds was fully confirmed. It was wrong that no reason was given by learned CIT(A) to delete the addition in question. Shri Jain also relied upon the following decisions :

(1) . K.P. Varghese v. ITO [1981] 24 CTR (SC) 358 : [1981] 131 ITR 597 (SC)
(2) . Pioneer Publicity Corporation Ltd. v. Dy. CIT [2000] 67 TTJ (Del) 471
(3) V.V.S. Alloys Ltd. v. Asstt. CIT [2000] 68 TTJ (All) 516 and
(4) CIT v. Ravikant Jain [2001] 167 CTR (Del) 566 : [2001] 250 ITR 141 (Del)

39. I have given careful thought to the rival submissions of the parties. It is a search case and, therefore, assessment has been made under s. 158BC of the IT Act. Both the learned Members had quoted provisions of s. 158B(b) of the IT Act. Both the learned Members reached opposite conclusions on the same facts of the present case. The question before me is whether loose diamonds and diamond studded jewellery have been disclosed under the IT Act ? If it is disclosed, no addition is possible. Further, for showing that it is disclosed, the assessee has to give some prima facie evidence to the satisfaction of the Revenue authority. It is not expected to insist on demonstrative evidence or on evidence which normally is not in possession or control of the assessee.

40. There is big controversy in the present case as to whether valuation reports given by the three registered valuers in this case relating to loose diamonds and diamond jewellery found at the time of search are correct and reliable. As noted above, first registered valuer fixed value of jewellery at Rs. 1,01,22,942. The valuers who valued it subsequently had fixed the value at Rs. 98.50 lacs. There is large variation if two reports are compared item to item. But, above variation, in my humble opinion, is not material as it is admitted by both the registered valuers that they have valued the loose diamonds and diamond studded jewellery at the rate at which they would have got these diamonds on the date of the valuation. This is specifically stated by these valuers at pp. 31 and 32 of the paper book. So, these valuers had valued diamond jewellery at the rate at which its purchase was possible on the date of search/date of valuation. The case of the assessee, on the other hand, is that as per system of account regularly followed by the assessee, these items have been valued in the closing stock from year to year at cost or market rate, whichever is less. In support of its claim, the assessee relied upon copies of closing stock inventory filed along with the IT returns from 1992-93 to 2001-02. The principle of valuation adopted by the assessee is a well recognized principle of commercial accounting to enter into P&L a/c, the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or at market price, whichever is low. In this connection, I may refer to the decisions of the Supreme Court in the cases of Chainrup Sampatram v. Commissioner Of Income Tax, West Bengal [1953] 24 ITR 481 (SC)and of CIT v. Britsh Paints India Ltd. [1991] 91 CTR (SC) 108 : [1991] 188 ITR 44 (SC). The Revenue authorities had not brought any material on record to show that claim of the assessee supported by documentary evidence, available on IT record was wrong or was ever rejected. In the above background, assessee was quite justified in contending that value of above stock as per its books was at cost. Even otherwise, it appeals to logic that in case of dispute on the question of acquisition of an asset if the assessee shows its acquisition in books, it can be at cost only. In other words, in books only cost of acquisition is to be accounted for. However, if a valuable asset is not accounted for in accounts then, of course, Revenue is entitled to take the value of the said asset when it is found with the assessee, that is, on the date of the search.

41. The learned Representatives of the parties criticized certain portion of the proposed orders of the learned Members as noted above. In my humble opinion, the proposed orders are to be read as a whole and not line by line in isolation. When so read, it is quite clear that learned JM is accepting the case of the assessee and agreeing with the impugned order of learned CIT(A). The learned AM, on the other hand, has taken the opposite view. I, therefore, do not find any substance in above criticism of the learned Representatives.

42. The moot question is whether addition of Rs. 52,07,599 representing loose diamonds and diamond studded articles, on facts and circumstances is justified or not ? The detail representing this addition has already been noted earlier. The assessee with reference to vouchers has tallied that jewellery of similar weight in carats is duly recorded in the books and is shown as purchased from time to time. It had also produced purchase vouchers in which weight in carats of diamonds purchased is duly recorded. From the variation in rate of diamonds purchased, a reasonable inference can be drawn that different quality of diamonds were purchased. However, in the purchase bill, quality, grade or other distinctive features of diamonds purchased are not given nor these features are available in the sale bills and, therefore, it is not possible for the assessee to demonstratively show and satisfy the Revenue that each diamond found was purchased through a particular purchase bill. The case of the assessee had been rejected on the ground that features insisted upon by the Revenue are not available in the purchase bills. In other words, case had been rejected for not producing evidence, which is not available with the assessee. Shri Jain is also correct in pointing out that such individualistic characteristics like colour, luster, quality, grade, etc. are not shown even in the two valuation reports obtained by the Revenue from their three registered valuers.

42.1. In my considered opinion, no inference of "undisclosed income" is possible in this case when assessee has accounted for all loose diamonds in weight in the regular books of account. With reference to weight of diamonds in carat, which, in my humble opinion, is the normal practice, the assessee has been able to show that diamond jewellery found with the assessee is duly accounted for and should be accepted as explained. For not accepting the claim of loose diamonds/diamond studded jewellery, the Revenue authorities not only insisted upon non-existing evidence like grade, quality, luster, etc. in the purchase bills and relied upon irrelevant valuation reports whose correctness is reasonably in doubt, but also ignored direct material available on record. For example, (a) the assessee claimed that out of diamond jewellery found, there was old jewellery which was with the assessee for the past several years. Even at the time of search and in the inventory of jewellery found, there was detail of old jewellery. The detail, as per inventory as on 31st March, 2001, is as under :

These items are being shown with small variation in the closing stock since 1994. The assessee also produced purchase vouchers of these items. The detail further shows that 10 single items of different valuation are being repeatedly shown from year to year. Having accepted the claim all along, it was most unreasonable on the part of the Revenue to reject this claim and make addition in the hands of the assessee. Evidence furnished by the assessee on record further shows that the last three items were purchased on 12th Sept., 1997, 2nd Sept., 1996 and 15th Nov., 1996 and copies of purchase vouchers are available at pp. 339, 340 and 341 of the paper book. These items were purchased from private persons whose names and addresses are available on record. There is no justification to reject above evidence. There is nothing on record to show that any error was committed in accepting these items in closing stocks of different years or valuation thereof. There is no justification for not accepting above items as not explained.

43. There is further evidence, which is accepted even by the AO that more than 54 per cent of the jewellery found and having value of Rs. 16,66,525 was purchased only in the year ending 31st March, 2001. The search had taken place on 14th May, 2001. Having regard to proximity of time, there should not be much variation in the valuation of these items whether taken at cost or at market rate. The purchase of the assessee without a dispute is supported by the authentic purchase vouchers which were found at the time of search along with details of closing stock as on 31st March, 2001. Verification of purchases was also carried. In spite of the verification of claim, jewellery had been taken as unexplained because of faulty valuation reports, valuing jewellery at different figures. Dispute raised on acquisition of above items for lack of distinctive features in the purchase bills is totally unjustified.

44. The weights of the other items in the lot found also admittedly tally with the weight reflected in the books and in purchase vouchers. The purchase vouchers duly show that different quality of diamonds were purchased from time to time. Their value was duly reflected in the closing stock filed with the Department for 10 years prior to the search. It may not be possible for a layman to identify that a particular piece of diamond found at the time of search was the same which according to the assessee was purchased three to four years earlier at a specified rate per carat. But, an expert can definitely answer the question and, therefore, reasonably resolve the problem. Experts were available to the Revenue authority and their services were also utilized. Instead, of getting resolved this particular problem, they were asked to give market value of diamonds, which, as noted above, was not relevant. The AO was also quite unreasonable in applying the index cost to find out as to what should be the market value of items shown to be purchased from 1994 onward. It is well known that cost index issued from year to year cannot take into account enhancement in the value of diamonds. A piece of diamond which as per the assessee was purchased for Rs. 2,837 by 31st March, 1994, cannot be taken to have market value of Rs. 4,720 on 31st March, 2001 only based on cost index, it might fetch Rs. 8,000 to Rs. 10,000. It is, therefore, quite difficult to accept calculation in the assessment order based on price index. Other reasons given by the AO are mere surmises and conjectures and do not help to support the case of the Revenue.

44.1 The assessee furnished plausible explanation and established its case with reference to weight of diamonds in carats with a minor difference which has been accepted as negligible. The assessee has duly accounted for jewellery in weight and have also established its purchase price at Rs. 30,58,078. Purchases have also been accepted to be authentic after verification. The Revenue has also given benefit for the purchase amount by deducting Rs. 30,58,078 from the proposed addition. The pertinent question, therefore, is if items of diamonds found are not the same, which were purchased by the assessee, then where are the purchased diamonds ? The Revenue has led no material to show that diamonds found are not the same as are claimed to have been purchased by the assessee from year to year. The assessee purchased various qualities of diamonds at different rates per carat. In this case the Revenue has searched not only business but also residential premises of the partners of the firm and, their lockers and every other place. No other diamond has been found in possession of the assessee or its partners. It is, therefore, not possible for the Revenue to contend after employment of long hurdle like search that diamonds shown by the assessee as purchased were kept elsewhere and are not diamonds which were found at the time of search. There is no justification to treat these diamonds as "undisclosed" when quantity in weight has been fully disclosed and accounted for.

45. I have already referred to the observation of learned JM accepting the case of the assessee. I find that even learned AM, in some portion of his order, has accepted assessee's version. This is what he has observed at the end of para 10 of his order :

"In the instant case, the dispute was not related to the quantity but to the valuation of diamonds and the assessee miserably failed to adduce proper evidence to establish that the valuation of stock taken by it was the correct value which was based on the purchase invoices, therefore, the AO in such peculiar circumstances was fully justified in adopting the value worked out by the valuers of assessee's choice, particularly when the partner of the assessee firm who is also working partner, agrees for the same. I, therefore, in the light of the above discussion, propose to set aside the order of learned CIT(A) and to restore the addition made by the AO."

That as regards the valuation accepted by the assessee, it is clear from the letter of the assessee dt. 16th May, 2001 to the Dy. Director of IT that value was accepted for a limited purpose of furnishing the security to get seized item released and to enable the assessee to carry on with its trade. It was not an admission which can be relied upon for any other purpose.

46. It is further evident from the assessment order as well as from the proposed order of learned AM that addition is being sustained merely on account of difference in the value shown by the assessee and worked out by the valuation reports. Addition on account of difference in valuation is totally unjustified. If the item is shown to be properly acquired as per accounts, then no addition can be made on account of the fact that its valuation shown in the record is lower than what is found by the registered valuer. The moment it is shown to be a disclosed or accounted item, further enquiries to make addition under Chapter XIV-B must stop. In regular assessment, the Revenue may be entitled to make addition if valuation of the closing stock is shown at a lower figure, but not under Chapter XIV-B for difference in the valuation of "disclosed" items.

47. I have seen other reasons given in the assessment order as also in the order of learned JM like valuation of the assessee to maintain stock register, cryptic order of learned CIT(A) and failures of the assessee to show quality or grade of diamonds in the purchase vouchers. I do not agree with any of the above reasons. In my view when purchases have been found to be genuine and there is no other incriminating material to show understatement of income, as far as loose diamonds or diamond studded jewellery is concerned, there was no justification for the Revenue authorities to make the addition.

48. For all the above reasons and on the peculiar facts of the case, I am inclined to agree with the order proposed by the learned JM. I answer question No. 1 in favour of the assessee.

The file should now be placed before the regular Bench for passing an appropriate order in accordance with law.