ORDER
A.L. Gehlot, A.M.
1. This appeal by the assessee is directed against the order passed by the Dy. CIT (Asstt.) for the block asst. yrs. 1986-87 to 1996-97.
Addition of Rs. 23,50,760 on account of stock
2. The assessee is proprietor of M/s Kwality Steel Suppliers doing business of ship breaking. In this business old and discarded ships were purchased from global market and brought at the ship breaking yards where these ships are broken and sold as scrap items. Action under Section 132 was taken on 20th Sept., 1995. Action under Section 133A was also carried out at factory premises, M/s Saibaba Steel India, wherein the assessee is partner. The other facts recorded by the AO are as under :
“During the search proceedings the following valuables were seized :
Cash Rs. 1,00,000 Jewellery Rs. 3,91,437 Silver Rs. 2,12,551
Incriminating documents were also seized, on the basis of which assessee made a total disclosure of Rs. 1,76,09,437. The source of this undisclosed income was stated to be unaccounted sale of materials cut from the ships, from the business activity of Kwality Steel Suppliers. Based on the entries found in the seized material, assessee gave following application of this unaccounted income :
Rs.
1. Unaccounted loan given and interest accrued 1,14,00,000
thereon till date.
2. Unexplained investment in 4 winches 20,00,000
3. Unexplained investment in residential 10,00,000
premises and office
4. Unexplained investment in cranes 20,00,000
5. Expenses incurred as per Annex. A-4 2,18,000
6. Unexplained investment in gold and jewellery 3,91,437
7. Unexplained household expenses & investment 5,00,000
in miscellaneous items
8. Unexplained cash 1,00,000
1,76,09,437
ALANG
At the ship breaking plot of Alang various stock of ferrous and non-ferrous items and other items were found, which were inventorised as per Annexures X, P, N, K, M and since the grounds raised by the assessee were argumentative, the assessee furnished concise grounds of appeal–2. These items were valued also, except that Annex. Z-2 and Annex. M, which are inventories of certain valuable articles which were not valued. Winches and cranes were also inventorised and valued.
The stock worth Rs. 22,63,761 as well as cranes and winches worth Rs. 30 lakhs were placed under deemed seizure. Later, an application made by the assessee, the stock of ferrous and non-ferrous materials and other items worth Rs. 22,63,761 was released by the order of CIT, Guj-II, dt. 26th July, 1996.
The assessee made disclosure regarding unaccounted investment in winches and cranes, which are included in the disclosure of Rs. 1,76,09,437. However, following disclosures made in respect of stock found at Alang were over and above disclosure of Rs. 1.76 crores made at Bhavnagar’:
Rs.
1. Unexplained stock of cables 3,15,000
2. Unexplained stock of non-ferrous metal . 6,98,835
3. Unexplained cables and mixed non-ferrous metal 1,95,000
4. Unexplained investment in ferrous metal 10,54,926
------------
Total 22,63.761.
------------ "
The AO made the addition of Rs. 23,50,760 with following observations :
"The assessee's stand is not acceptable because of following reasons :
1. Though the stock-taking was done on estimate basis, but such estimate was made, in turn, on the basis of assessee’s estimate only. This is clear from the inventory and also as per statement of Shri Rajendra Gupta and employees in this respect. A statement of Shri Rajendra Gupta was recorded in 26th Sept., 1996, in which he accepted that the estimate was provided by the assessee and his employees.
2. The employees and finally Shri Rajendra Gupta, Prop, of Kwality Steel Suppliers, were confronted during search proceedings with the stock valuation. The assessee accepted the valuation, raising no objection whatsoever.
3. Not only the valuation was accepted, but the discrepancy was also accepted as representing undisclosed investment in stock. Thus, the disclosure was voluntarily made by the assessee.
4. Regarding assessee’s stand that the disclosure was made because of mental pressure, it is to be noted that the disclosure regarding unaccounted investment in the stock was made on 26th Sept., 1995, i.e., 5 days after the search. Thus, contention regarding mental pressure and fatigue is not acceptable. Shri Rajendra Gupta in his statement dt. 26th Sept., 1996, has accepted that there was no pressure/coercion for making disclosure.
5. Further, the assessee did not make any retraction in reasonably immediate future after the search proceedings were over. This is an important point because, if the disclosure is made wrongly and because of pressure, the assessee was expected to make retraction within a reasonable period of time, if not during the search proceedings itself. Making a retraction after a lapse of 4 months is indicative of the retraction being an afterthought with a view to reduce the extent of taxable undisclosed income.
6. Assessee’s contention that the stock of ferrous and non-ferrous materials and other things can come only out of the ship being cut at the site (M.V. Dikson) is without any evidence. The concerned stock may be the materials taken out from some other ship or this may be got from other sources. Exact source of this material is well known to the assessee itself. The relevant point is that assessee repeatedly accepted these stocks as undisclosed investment.
7. It should also be noted that no stock register or records is maintained by the assessee and, therefore, assessee was unable to prove the accountability of stock found. As per provisions of Section 158BB, the deduction can be given only in respect of entries entered in the regular books.
In view of aforesaid, the assessee’s contention is rejected and the stocks found and valued are to be treated as representing undisclosed income of the assessee. The amount of addition would be Rs. 22,63,761 as admitted by the assessee plus estimated value of items inventorised as per Annexs. M and Z-2 which were not valued during the search proceedings. In Annex. Z-2, one item of wireless set has been explained by the assessee to be accounted and, therefore, this is left out for the purpose of deriving undisclosed income. Rest of the items are valued on estimate basis as per records. The reasonable estimate of items of Annex. M comes to Rs. 49,500. The reasonable estimate of items inventorised in Annex. Z-2 (leaving out wireless set) comes to Rs. 37,500. Therefore, these two annexures together imply an unaccounted stock of Rs. 77,000. Therefore, the total addition on account of undisclosed investment in stock would be Rs. 23,50,760.”
3. The learned Authorised Representative reiterated the following submissions :
“(a) The stocks under consideration are of materials taken out from the ship which was being broken and hence there is no question of these being unaccounted if the purchase of ship is accounted.
(b) The stock was done on estimate basis because it was not possible for the search party or the assessee to weigh the huge and weighty materials in a day or two. In fact, as per the assessee, the uncut portion of the ship can also not be weighed at all by any mechanism. Considering that entire process of stock taking was done on estimate basis, the difference of stock worth Rs. 22,63,761 and the entire quantum of stock being to the extent of 22 crores approximately is a difference of only about 1 per cent which is marginal and has arisen because of ‘estimate’ basis of stock-taking.
(c) Further, even the book value of stock was derived arbitrarily by the search party, adopting percentage of 15 per cent for burning and cutting shortage which arises while breaking the ship. The assessee contends that in the past, percentage of cutting loss in its case has remained near about 12 per cent and if this percentage is adopted, then there would not be any excess of stock.
(d) The assessee says that statement regarding investment was given because of mental pressure and confusion.
(e) The assessee further stated in his statement dt. 26th Sept., 1996, that the stocks found were admitted as undisclosed investment during the search, because factual position as well as legal consequences were not clear to him.”
The learned Authorised Representative submitted that the assessee had retracted the disclosure of Rs. 22,63,761, since the same was made on account of ignorance of the facts and a detailed note was filed along with the return of block assessment explaining fully the justification for the retraction of the disclosure which was erroneously made. The contents of the said note pointed out by the learned Authorised Representative are reproduced as below :
“1. Consequent upon the search that has taken place at the business as well as residential premises of the under signed in the month of September, 1995, and in response to the notice under Section 158BC of the IT Act, 1961, issued by the Dy. CIT (Assessment), Special Range-3, Ahmedabad, the return of income in the prescribed Form 2B is being furnished for the captioned period.
2. The profit/loss for the period from 1st April, 1995, till the date of search is worked out on the basis of the trial balance as on 20th Sept., 1995, seized by the IT Department.
3. The P&L a/c as referred above for the current financial year is prepared on the basis of the trial balance as on 20th Sept., 1995, and is subject to updation/changes of the accounting entries to be carried out either on the basis of the documentary evidence that are available with the undersigned or the audit of the accounts which will be carried out under Section 44AB of the IT Act, 1961, before furnishing the regular return of income for asst. yr. 1996-97 under Section 139 of the IT Act, 1961.
4. Provisions for all the expenses as per standard accounting practice are made only at the end of the year. Since the accounting year has not yet ended, the provisions for all the expenses, interest, audit fee, foreign exchange fluctuations, depreciation, GMB expenses, etc. will be made only on 31st March, 1996. The profit/loss for the period upto the date of search as referred above is therefore, subject to proportionate allocation of the above provisions.
5. The undersigned has made certain disclosures of income to the block period in the statement recorded under Section 132(4) during the course of search. Though the disclosures to the extent not factually wrong, are being offered for taxation in the return of income for the block period. The same shall be accounted for in the period subsequent to the date of search, as part of this disclosure is relevant to the financial year 1995-96. The same needs to be adjusted against the profit/loss for the period as referred above.
6. The stock in ship breaking industry at any particular point of time is always subject-matter of estimation as it is not humanly possible for anybody or even for any machineries to weigh the actual stock of ship lying at any particular point of time at the ship breaking yard. Though the quantity of stock as on 20th Sept., 1995, is taken as per the Department’s estimation in the provisional account, the same is subject to verification on the basis of the actual production taken at the subsequent stage.
7. While valuing the stock in trade as on 20th Sept., 1995, the interest to parties has not been considered as the provisions for interest payable to various parties are yet to be made in the books of account, as clarified in para 4 above.
8. In the statement of the undersigned recorded under Section 132(4), over and above the other disclosures, the undersigned had made a disclosure of Rs. 22,63,761 on account of the excess of physical stock of ship breaking material over the book stock as on the date of search. It is submitted in this regard that this statement was factually wrong because of the following reasons :
(A) In ship breaking industry it is the ship as a whole which is being purchased and broken for selling the same in the form of scrap. In the circumstances, the question of unaccounted stock of scrap does not arise if the total purchase is fully accounted for.
(B) It is not possible to weigh the ship lying in stock at any particular point of time. The closing stock of the ship and of the other scrap is thus always subject-matter of estimation. The chances of deviation between actual physical stock and the book stock can, therefore, never be ruled out.
(C) Even the book stock as worked out on the search was only estimated book stock after considering the approximate weight loss. Similarly, the physical stock of uncut ship as taken by the IT Department was also based on estimation only,
(D) Without prejudice to what has been stated above, it is submitted that mere discrepancy between the book stock, and the physical stock, especially in ship breaking industry, does not lead to the conclusion that there was unaccounted income to that extent.
In the circumstances narrated above, the disclosure of Rs. 22,63,761 made on account of the stock difference is not correct and is, therefore, retracted.”
The learned Authorised Representative submitted that though the admission of party is a substantial piece of evidence but same is not conclusive and it is open to the party to show that it is incorrect. The learned Authorised Representative relied upon the decision of Tribunal, Delhi Bench, in the case of India Seed House v. Asstt. CIT (2000) 69 TTJ (Del)(TM) 241. The learned Authorised Representative has also relied upon the following decisions :
(i) Pullangode Rubber Produce Co. Ltd. v. State of Kerala (1973) 91 ITR 18 (SC)
(ii) G. Kangaraj v. Dy. CIT (2001) 73 TTJ (Chennai) 731
(iii) Late Shri Mukand V. Kapadia v. ITO (2002) 77 TTJ (Mumbai) 595.
(iv) Govind Ram Chhugani v. Asstt. CIT (2002) 77 TTJ (Jd) 339
The learned Authorised Representative has also relied upon the CBDT circular which is reproduced as below :
“Circular–Section 132–Search and seizure–Confession of additional income during the course of search and seizure and survey operation
Circular No. 286/2/2003-IT (Inv;), dt. 10th March, 2003
Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search and seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, confessions during the course of search and seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the IT Department Similarly, while recording statement during the course of search and seizures and survey operations, no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely. .
Further, in respect of pending assessment proceedings also, AOs should rely upon the evidence/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders.”
4. The alternative submission of learned Authorised Representative was that if at all it is treated as unaccounted purchase which represents stock, the same is allowable expenses as amendment in Section 69C was made w.e.f. 1st April, 1999. He relied upon the order of Tribunal, Ahmedabad, in ITA No. 423/Ahd/1997 for asst. yr. 1994-95 order dt. 8th Aug., 2003.
5. The learned Departmental Representative, on the other hand, relied upon the order of AO and submitted that stock was not found correctly recorded in the books of account and excess stock was found. The assessee himself has made the disclosure. The assessee did not maintain stock details. In the absence of such details the AO has correctly made the estimation. The learned Departmental Representative relied upon the following decisions :
(i) Manharlal Katurchand Chokshi v. Asstt. CIT (1997) 57 TTJ (Ahd) 639 : (1997) 61 ITD 55 (Ahd)
(ii) V. Kunhambu & Sons v. CIT (1996) 219 ITR 235 (Ker)
(iii) Hotel Kiran v. Asstt. CIT (2002) 77 TTJ (Pune) 87 : (2002) 82 ITD 453 (Pune).
The learned Departmental Representative submitted that decisions cited by the learned Authorised Representative are distinguishable on facts.
6. We have heard the learned Representatives of both the parties and perused the record. It is settled position of law that admission made in statement under Section 132(4) has evidentiary value. However, such admission can be retracted by the assessee. The assessee has retracted from his statement in reply to question No. 3 in the statement recorded on 26th Sept., 1996, as under :
“Q. 3 In the respect of disclosure of Rs. 22,63,761 towards excess of physical stock over book stock, you had subsequently retracted the sale in the return of block assessment, why ?
A. 3 I have already furnished written submissions by way of note appended with above return, as also in various letters subsequently filed with you during search assessment proceedings. The above disclosure was made under ignorance of true factual and legal position and its effect. As a matter of fact as explained in my letters, there was no excess stock of any item including miscellaneous items obtained from ship over the book stock since book stock worked out at the time of search was only estimated stock arrived at by deducting 15 per cent burning/cutting loss. All my purchases are duly accounted for as in ship breaking the purchase of ship is always accounted for. When I came to know about this legal and factual position, I retracted the same while filing the return.”
The admitted fact of the case is that ships brought for breaking are accounted for in the books of account. This fact is supported by the circumstances under which the assessee is purchasing old and discarded ships. There are no materials on record that the assessee has sold scraps out of books of account. The AO has not made out a case on this line. One more admitted fact is that humanly it is not possible for anybody to weigh the actual stock of ship lying at any particular point of time at the ship breaking yard. The Department has estimated the stock at the time of search, which is subject to verification on the basis of actual verification taken at the subsequent stage. The stock estimation made by the AO is only difference of 1 per cent (approx.) which is marginal and which can be possible for not considering certain aspects. The book value of stock estimated by the AO by adopting 15 per cent of burning and cutting shortage whereas the past record of the assessee shows that this was about 12 per cent. If this percentage is adopted then there would not be any excess stock. As regard addition on account of stock, we are of the view that such addition is only warranted in the circumstances where the assessee maintained correct stock in the books of account and excess actual physical stock is found out at the time of search or survey. Though such addition is warranted in those circumstances where corroborate evidence or material is found, in the case under consideration, we find that the assessee has retracted the disclosure by proper reasons and evidences. Looking to the peculiar circumstances/facts of the case wherein estimation of stock is arbitrary and on suspicious circumstances, admitted position of facts that all purchases were found accounted for and if burning loss as per past record by the assessee is considered, then there was no excess stock. Under the circumstances, we are of the view that addition is not warranted. The controversy is entirely based on facts, therefore, the decisions cited by the learned Departmental Representative are distinguishable on facts. We, accordingly, delete the addition of Rs. 23,50,760 under the peculiar circumstances/facts of the case.
7. The second ground raised in the appeal is that the Dy. CIT(A) erred in making addition of Rs. 2,38,831 towards silver articles and not giving the benefit of telescoping where disclosure towards household expenses of Rs. 5,00,000 was made.
8. The AO made the addition with the following observations :
“From the search report it is found that total of 34.5 kgs. of silver articles were found at Bhavnagar premises. Further, certain silver articles and valuables worth Rs. 73,730 were found at Ahmedabad residence. The assessee could produce evidence of accountability to the extent of only 4.50 kgs. and hence from Bhavnagar, seizure of about 30 kgs. of silver valued at Rs. 21,2,551 was made.
During the assessment proceedings the assessee did not offer any satisfactory explanation in respect of silver found of Rs. 73,7,30 at Ahmedabad residence. Regarding silver found at Bhavnagar, the assessee says that, silver to the extent of 6.5 kgs. (apart from 4.5 kgs. explained in the hands of Smt. Anita Gupta) is explainable in the hands of Shri Rajendra Gupta, as he had inherited this much silver along with the other items of jewellery as per will of his mother, late Smt. Mayadevi S. Gupta. The contention of the assessee has been verified from the said will and the WT return of Shri Rajendra Gupta. Therefore, out of seized silver of Rs. 2,12,551, credit for Rs. 47,450 (value of 6.5 kgs. of silver as per the rate adopted on the date of search) is given to the assessee.
Thus, an addition to the extent of Rs. 2,38,831 (2,12,551 – 47,450 + 73,730) is made here on account of unexplained investment in silver valuables. This is to be noted that the assessee’s disclosure of Rs. 1.76 crores cannot incorporate this aspect of unaccounted silver because applications of undisclosed income have already been specified by the assessee and this aspect falls beyond the ambit of applications specified.”
9. The learned Authorised Representative submitted that the assessee has made a disclosure of Rs. 5 lakhs on account of household expenses, therefore, the addition entitles telescoping benefit against that disclosure. Having heard both the sides, we find that while making disclosure the assessee made disclosure of Rs. 3,91,437 against investment in gold jewellery, Rs. 5 lakhs against household expenses and investment in miscellaneous items. After perusal of records and facts, we find that the disclosure of Rs. 5 lakhs on account of household expenses did not include silver articles. The assessee has failed to explain the source of these silver articles before AO as well as before us. Under the circumstances, we do not find any substance in this ground of appeal of the assessee. We, accordingly, confirm the addition of Rs. 2,38,831.
10. The last ground of appeal pertains to not granting deduction under Sections 80HH, 80-I, 80-IA. This issue is squarely applicable by the judgment of Hon’ble Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corporation (2003) 261 ITR 113 (Guj). We respectfully follow the above judgment of jurisdictional High Court and in view of that, we find that the AO has correctly disallowed the claim of the assessee.
10a. In the result, the assessee’s appeal is partly allowed.