"1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 25,16,504 made by the assessing officer on account of rough, cut and polished diamonds mentioned in the stock register of the assessee's manufacturing division.
2. The Commissioner (Appeals) has also erred in deleting the value of 829.39 carats of diamonds received by the assessee from one of the labour party namely Shri Talshibhai Patel.
3. Commissioner (Appeals) has also erred in directing to allow deduction under section 80HHC on the addition under section 69 of unexplained investment made by the assessee in the purchase of diamonds.
4. The Commissioner (Appeals) has also erred in deleting the interest charged under section 234B of the Income Tax Act." The facts of the case custom authorities carried out search on 21-23-3-1991, at the business and residential premises of the assessee.
One boy named Raju Bhamre was found in possession of diamonds, which were seized by the Custom Authorities. The diamonds were accepted by the assessee as belonging to him and Raju Bhamre was explained as an employee of the assessee- company. Total diamonds and their value so seized were as under:- These are further divided into those purchased from Shri L.L. Moradia of 1890.71 Cts. and those purchased from Shri Thackersey V. Patel of 2583.18 Cts.
Polished diamonds received from Karigars to whom issues were made as per the The total value of polished diamonds at Sr. Nos. (iii) & (iv) is placed at Rs. 63,56,443.
Entire lot of diamonds valued at Rs. 88,72,947 was treated as unexplained and added to the total income of the assessee. The Commissioner (Appeals) after considering the submissions of the Learned Authorised Representative of the assessee held the diamond valuing Rs. 25,16,504 as explained on the following grounds : (1) The assessing officer had not doubted genuineness of the entries in the stock register of the manufacturing division.
(2) The stock register was seized by the Custom authorities. There could not have been any scope for manipulation of entries.
(3) The books have not been rejected. However, assessing officer could not dispute the lawful possession of stock of cut and polished diamonds/rough diamonds consumed in first category as above.
Against this, the learned Departmental Representative submitted that there is no stock register as mentioned by the assessing officer. At least nothing was produced before him. If at all, there was any, then it must have been seized by the Custom Authorities. No such evidence has been produced. In absence of genuine stock register of manufacturing division, the Commissioner (Appeals) was not justified in deleting the addition. On the other hand, the learned Authorised Representative relied on the order of the Commissioner (Appeals) and drew our attention to pages 160 to 157 (sic) of the assessee's paper book, which according to him, was the stock register.
We have considered the rival submissions and material on record. The pages 150 to 157 of the Paper Book claimed to be the pages to stock register of rough diamonds are not apparently reliable. Firstly, they seem to have not been stamped by the Custom authorities, if they were seized. If it was a copy of what was seized by Custom authorities, it did not bear the stamp of inspection. Secondly, why the customs authorities had not considered the register as genuine is also not on record. As entire diamonds have been seized by Custom Authorities, they seem to have not placed any reliance on the veracity of such stock register. We also find that these pages 150 to 157 of the assessee's Paper Book, alleged to be the stock register, have been written in one sitting whereas it runs from 1-4-1990 to 11-3-1991, writing in one sitting is not possible, if it was genuine stock register. We, therefore, restore the matter to the file of the assessing officer to find out whether any stock register was maintained prior to the search, if so, where it is lying at present. Whether Custom authorities have seized such stock register and if yes, what finding they have given.
What explanation the assessee has furnished before the Custom authorities about the source of the diamonds and what view they have taken on the explanation furnished by the assessee. Further, if the diamonds were purchased then how the payments were made and whether the sellers were in a position to sell the diamonds to the assessee. We feel that there is a contradiction in the views one taken by assessing officer that there was no stock register of manufacturing division and other taken by Commissioner (Appeals) (that there was a stock register). Thus, a fresh verification of facts is necessary before accepting or rejecting the explanation of the assessee. Accordingly, this issue is restored back to the file of assessing officer. This ground of revenue is allowed for statistical purposes.
The second ground is about deletion of addition of the value of 829.39 Cts. of diamonds. We find that Commissioner (Appeals) has merely relied upon stock register for accepting the fact that the diamonds were recorded therein. We have held in respect of first ground that the stock register as shown to us is not reliable. It has to be enquired as to, whether it is confirmed/ matched with the actual stock register kept prior to the search. The issue is, therefore, for the same reasons as in ground No. 1, is set aside to the file of assessing officer for verification of facts and stock register kept prior to the search. This ground is also allowed for statistical purposes only.
The third ground is about Commissioner (Appeals) allowing deduction under section 80HHC on the addition made under section 69. There was a business loss of Rs. 30,40,117 as computed under sections 28 to 43. But after the addition made under section 69, a positive income emerged.
The Commissioner (Appeals) was of the view that this addition is business income and hence, eligible for deduction under section 80HHC.Against this, learned Departmental Representative submitted that addition under section 69 is- (i) Not a part of business income. It is only deemed income and not actual income.
(iii) Profit of business is the one which is computed under sections 28 to 43 69. This addition is not the one derived from export. Hence, it is not entitled for deduction under section 80HHC. The learned Departmental Representative relied on the following decisions :-Assistant Commissioner v. Concorde Commercials (P.) Ltd. (2005) 95 ITD 117 (Mum.)(SB)Smt. Vasantibai N. Shah v. CIT On the other hand, learned Authorised Representative relied on the order of Commissioner (Appeals) that addition under section 69 is business income and hence, entitled for deduction under section 80HHC.We have heard the rival submissions and considered the facts and material on record including the case laws cited by the parties. We are of the view that addition under section 69 cannot be tagged with any other head of income. It cannot be treated as income either from 'business' or from 'house property' or 'salary' or 'capital gains' or 'other sources'. It is not an actual income. For the purposes of aggregation alone it is deemed as income. This section falls in Chapter VI which heads "aggregation of income and set-off of carry forward of losses". This income under five heads. (i) Salary (ii) House property (iii) Business income (iv) Capital gains and (v) Other sources is aggregated and then the income under sections 68 to 69 is added. Thus, addition made under Chapter VI is independent of any other head and cannot be given the colour of a particular head previously described.
It is so held in Fakir Mohmed Hazi Hasan v. CIT (2001) 247 ITR 290 (Guj.). The head notes for reference are "The scheme of sections 69,69A, 69B and 69C of the Income Tax Act, 1961, would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and moneys or value of articles not recorded in the books of account or the explained expenditure may be deemed income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. When the income cannot be so classified under any one of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. The provisions of sections 69,69A, 69B and 69C treat unexplained investments, unexplained money, bullion, etc., and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or satisfactorily explained. Therefore, in these cases, the source not being known such deemed income will not fall even under the head "Income from other sources". Therefore, the corresponding deductions which are applicable to the incomes under any of these various heads, will not be attracted in the case of deemed incomes which are covered under the provisions of sections 69, 69A, 69B and 69C of the Act in view of the scheme of those provisions.
Held, on the facts, that it was clear that when the investment in or acquisition of gold, which was recovered from the assessee was not recorded in the books of account and the assessee offered no explanation about the nature and source of such investment or acquisition and the value of such gold was not recorded in the books of account, nor the nature and source of its acquisition explained, there could arise no question of treating the value of such gold, which was deemed to be the income of the assessee, as a deductible trading loss on its confiscation, because such deemed income did not fall under the head of income "Profits and gains of business or profession".
Therefore, the Tribunal was perfectly right in holding that the value of the gold was liable to be included in the income of the assessee as the source of investment in the gold or of its acquisition was not explained and that the assessee was not entitled to claim that the value of the gold should be allowed as a deduction from his income." The deduction as per section 80HHC is allowable on the profits derived by the assessee from the export of such goods or merchandise. The addition made under section 69 cannot be a profit derived from the export of goods outside India. For the meaning of words "derived from" we may safely refer to the decision of Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT "The words "derived from" in section 80HH of the Income Tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking.
Held accordingly, that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under section 80HH." It is clear that profits of the business for the purposes of deductions under section 80HHC should have a direct nexus with the assessee's business. Neither the income assessable under "other sources" not deemed income assessable under section 69 can become part of it. Only those items provided in sub-section (3) of section 80HHC will form part of export business profits. Once meaning of words "derived from" has been extended by virtue of sub-section (3) then such extension will be limited to what has been provided for in that sub-section. Nothing more nothing less. Further an addition under section 69 cannot be said to be actual profit. It is only a deemed income. Deeming fiction cannot be extended to deem further that it is a business profit. Thus, question of it being derived from business of export is even remotely connected.
We derive similarity from the proposition that interest earned from deposits out of business savings and assessable under "other sources" is remotely connected with business of export and is not directly derived from it. Even an income deemed as business income under section 28 like "irnport entitlement" is not considered as the one derived from "industrial undertaking" because the same does not have a direct nexus with it. We derive support for this proposition from the decision in the case of CIT v. Ritesh Industries Ltd. (2004) 274 ITR 324 (Delhi).
The head notes are as under : "There must be for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. On the raw material utilised as inputs the assessee pays duty and on thc total component of costs the assessee adds his profit component to arrive at the sale price. It is this profit which is included in the expression 'profits and gains derived from an industrial undertaking'. Merely because under the scheme to encourage exports the duty is refunded subsequently by way of "duty draw back", it cannot be regarded as the profit or gain "derived" from industrial undertaking. It may constitute profits or gains of the business by virtue of section 28 of the Income Tax Act, 1961, but, it cannot be considered as profits or gains "derived" from the industrial undertaking for, its immediate and proximate source is not the industrial undertaking but the scheme for duty drawback. Hence, the amount of duty drawback cannot be regarded as income derived from an industrial undertaking so as to entitle the assessee to a deduction-I." Now we come to some decision relied upon by the learned Authorised Representative for the assessee. In Naginadas & Sons v. Assistant Commissioner (IT Appeal No. 1615 (Bom.) of 1994) for assessment year 1991-92 decided by I-Bench of ITAT on 27-6-2002 was on the question of allowing deduction under section 80HHC on the disclosure made under section 132(4). It was stated that such income was earned as premium from high sea sales. The Tribunal considered it to be business profit and allowed deduction under section 80HHC. The facts are different. No addition under section 69 is involved in the case relied upon by the learned Authorised Representative. Further the effect of decisions of Hon'ble Supreme Court in Padian Chemicals Ltd.s case (supra) and Hon'ble Delhi High Court in Ritesh Industries (supra) are not considered. In other decisions cited by learned Counsel is Asstt. CIT v. Hindustan Chemicals Works (IT Appeal No. 1921/(Mum.) of 1995 for assessment year 1986-87 decided on 25-2-2001 - the question involved was taxing cash credit under the head "Other sources" rather under the head "Business". The Tribunal held there, that it was a business income. The case is distinguishable. We are of the view that the decision of Hon'ble Gujarat High Court in Fakir Mohmed Hazi Hasan's case (supra), which squarely covers the issue, was not considered.
Further, merely because an income is assessed under the head "business" does not automatically lead to the conclusion that the same is derived from the 'export' as held about import entitlement in Ritesh Industries Ltd's case (supra).
From the above, we hold that any addition made under section 69 is not the income derived from the export and hence is not eligible for deduction under section 80HHC. This ground of the revenue is, therefore, allowed.
Ground No. 4 is about deletion of interest levied under section 234B.As the interest under section 234B is consequential in nature, the assessing officer is directed to give consequential effect after finalising the other grounds. This ground of revenue is allowed for statistical purposes.
The first ground is against confirmation of addition of Rs. 24,84,853 being purchases from LL Moradia (Rs. 8,62,934) and from Thackersy Patel (Rs. 16,21,919). The facts of the case are already narrated in departmental appeal above. The Commissioner (Appeals) confirmed the addition on the ground that (i) they were not recorded in any register until the time of search (ii) these two parties did not produce any evidence as to their purchases from identifiable sources (iii) they could not ha-ve sold the same without accepting the payments for the same. Actual payment shown to these parties are insignificant ie. Rs. 1,79,236 + Rs. 80,000 and that too after a gap of considerable time (iv) hence these parties are merely name lenders.
The learned Authorised Representative submitted that the custom authorities ignored the stock register and so the Commissioner (Appeals). The learned Departmental Representative supported the order of Commissioner (Appeals).
After considering the submissions of the parties, we are of the view that the matter is required to be restored back to the file of assessing officer so as to look into (i) original panchnama prepared by custom authorities, whether it shows seizure of any stock register. If yes, whether it contains any entry about the purchases of these diamonds from these two parties. How the payment to these two parties were made and whether purchases by there two parties are genuine so that they could have affected sales to the assessee. In case there is no stock register seized by custom authorities or it does not contain any entry about these purchases then the addition of this sum is sustainable under section 69.
In view of this, this ground of the assessee is allowed for statistical purposes.
Second ground is about receipt of cut and polished diamonds of 563.34 Cts. from M/s. Gayatri Exports. After considering the arguments of the parties and the order of Commissioner (Appeals), we restore this ground to the file of assessing officer to find out whether assessee has originally kept any stock register prior to search as observed elsewhere in this appeal and appeal filed by the department. The assessing officer will decide the issue on the basis of original stock register if any kept by assessee.
The next ground is about claim of business loss of Rs. 88,72,947 on account of confiscation of stock by custom authorities. We find that the assessee has contested the issue before custom authorities and final decision has not yet come. Let this issue be decided after final order by custom authorities. For deciding this issue, the decision of Hon'ble Gujarat High Court in Fakir Mohmed Hazi Hasan's case (supra) may be kept in view. The order from custom authorities on the issue of confiscation will be obtained and considered. The assessee will be given opportunity of being heard in the matter. Thus, this ground of assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.