ITAT Sides with Diamond Trader, Says Survey Stock Query Was Fully Probed by AO [Read Order]

In a significant ruling, the Income Tax Appellate Tribunal (ITAT) in Mumbai has quashed a revision order passed by the Principal Commissioner of Income Tax (PCIT) against a diamond exporter, holding that the original Assessing Officer had conducted a thorough inquiry into the valuation of stock discovered during a survey. The Tribunal found that the PCIT’s attempt to revise the assessment was unjustified as the officer had already applied his mind to the issue after detailed verification.

The case involved Purna Purshottam Exports, a firm engaged in the import and export of rough and polished diamonds. The dispute originated from a survey action conducted at the assessee’s premises on February 16, 2018. During the survey, a notebook was found which showed two different valuation rates for the same closing stock of diamonds. One rate was recorded at Rs. 35,395 per carat and the other at Rs. 40,919 per carat. Following this discovery, a partner of the firm, in a statement, voluntarily offered an additional sum of Rs. 4.02 crore to buy peace of mind, representing the difference in valuation. This amount was subsequently added to the closing stock value, leading to a higher gross profit for the year.

The Assessing Officer (AO) completed the assessment after scrutinizing the case. He issued multiple notices and questionnaires, specifically asking for trading accounts for periods before and after the survey and details concerning the additional income offered. The assessee provided comprehensive replies, including a detailed stock valuation summary, reconciliation of stock positions, and the impounded notebook. The AO, after considering these submissions, framed the assessment order. However, the PCIT later stepped in, invoking revisionary powers under section 263 of the Income Tax Act. The PCIT held that the assessment order was erroneous and prejudicial to the revenue’s interests because the valuation of diamonds and the rate per carat, as admitted during the survey, had not been fully considered by the AO.

Before the ITAT, the assessee argued that the AO had indeed undertaken a deep and detailed scrutiny of the stock valuation issue. It was emphasized that the survey had found no discrepancy in the physical quantity of the stock, only a difference in its recorded valuation. The tribunal was taken through the extensive correspondence between the assessee and the AO, which included specific queries on the excess stock and the assessee’s detailed responses. The tribunal noted that the closing stock value of over Rs. 42 crore, comprising both rough and polished diamonds, was duly reflected in the books and had been examined by the AO.

The ITAT, in its order, delved into the scope of Explanation 2 to section 263, which deems an order erroneous if passed without necessary inquiries. The bench observed that this provision does not grant the PCIT unfettered power to revise an order merely for a "fuller inquiry," especially when the AO has already conducted a verification process. It stressed that the power under section 263 can only be exercised in gross cases of inadequate inquiry, which was not the situation here. The tribunal referenced the Supreme Court's decision in Malabar Industries Co. Ltd. Vs. CIT (2000) to underline that revision is not permissible merely because the PCIT holds a different view. It found that the twin conditions for invoking section 263, that the order is both erroneous and prejudicial to the revenue were not met.

The bench, comprising Narender Kumar Choudhry (Judicial Member) and Prabhash Shankar (Accountant Member), concluded that the PCIT was not justified in setting aside the assessment order. Consequently, the tribunal allowed the appeal filed by Purna Purshottam Exports and set aside the revision order passed by the PCIT.

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