DCIT Vs Jamna Dass Nikkamal Jain Saraf P. Ltd. (ITAT Chandigarh)
Summary: The Chandigarh Bench of the Income Tax Appellate Tribunal dismissed the Revenue’s appeal for AY 2023-24 and upheld the CIT(A)’s treatment of excess and short jewellery stock on a cumulative basis. The assessee, engaged in the jewellery business from a single premises, was subjected to search under section 132 on 24.11.2022. During stock verification, excess stock was initially valued at Rs.604.88 lacs. After certain discrepancies were accepted, the Assessing Officer treated excess stock weighing 8875 grams and valued at Rs.393.97 lacs as unexplained expenditure under section 69C r.w.s. 115BBE.
Separately, shortage of jewellery weighing 7508.66 grams and valued at Rs.390.07 lacs was treated as representing out-of-book sales and profit of Rs.52.38 lacs was estimated by applying a GP rate of 13.43%. The AO also estimated Rs.7.34 lacs as capital employed for unaccounted sales. The assessee contended that gold jewellery was fungible and that 24-carat gold was routinely converted into 22K/20K/18K/14K jewellery, while unsold or old jewellery was melted and reused. Its Tax Audit Report also disclosed inter-category movements under “From Process” and “To Process”.
The CIT(A) accepted that the excess and shortage arose from the same inventory and business activity, with no evidence of any parallel business or independent source of investment, and treated only the net stock difference of Rs.3.90 lacs as additional business income. The Tribunal affirmed this approach. It held that a strict category-to-category comparison could not mechanically be applied to a jewellery business where gold is routinely converted between forms and purities. Both discrepancies were detected during the same stock-taking exercise at the same premises and related to the same class of inventory.
There was no evidence of separate books, separate premises, an undisclosed business or an independent source for acquiring the alleged excess stock. The Tribunal further observed that if shortage represented unaccounted sales, those sales generated proceeds capable of funding acquisition or replenishment of stock. Telescoping prevents the same income or underlying transaction from being taxed twice under different descriptions. The Tribunal accordingly upheld the telescoping benefit and dismissed the Revenue’s appeal. The separate additions relating to shortage of wrist watches and suppressed profit on Kundan/Polki jewellery had already been sustained by the CIT(A) and accepted by the assessee.
Cases Discussed
- Om Jewellery Pvt. Ltd. (ITA No.490/Mum/2016; dated 18.06.2018) – relied upon by the assessee for telescoping of excess and short stock on similar facts.
- M/s AP Knit Fab (ITA No.732/Chd/2022) – cited for the proposition that where excess and short stock form part of mixed business stock without independent physical identity, the discrepancy is to be considered in the context of business stock.
- Shri Aman Batra (ITA Nos.1041/Chd/2024 & ors.) – relied upon by the Tribunal as supporting telescoping benefit under similar circumstances.
- Saraf The Jeweller (ITA Nos.1232/Chandi/2025 & ors.) – relied upon by the Tribunal as supporting telescoping benefit under similar circumstances.
- Assessee’s own case for AY 2022-23 (ITA No.403/Chd/2025 dated 04.11.2025) – distinguished as concerning the GP rate on stone-embedded ornaments, an issue not arising in the Revenue’s present appeal.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHANDIGARH
Aforesaid appeal by revenue for Assessment Year (AY) 2023-24 arises out of an order of learned Commissioner of Income Tax (Appeals)-5, Ludhiana [CIT(A)] dated 09.01.2026 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s 143(3) of the Act on 30.03.2025. In the assessment order, Ld. AO made certain additions of discrepancies in stock and estimated addition on alleged suppressed sales which stood deleted by Ld. CIT(A). Aggrieved, the revenue is in further appeal before us.
2. The Ld. CIT-DR advanced arguments and opposed adjustment of excess stock with deficit stock. Reference has been made to decision of Tribunal in assessee’s own case for earlier years. The Ld. AR also advanced arguments and likewise referred to various judicial decisions supporting such an adjustment. Having heard rival submissions and upon perusal of case records, our adjudication would be as under.
Assessment Proceedings
3.1 The assessee belongs to Nikkamal Group of Companies in whose case a search was conducted by the department u/s 132 on 24.11.2022 which has led to present assessment on the assessee. In this year, the main issue was of discrepancy in stock. The excess stock was found during search which was valued by the valuer at Rs.604.88 lacs. The stock was in the shape of 14K/18K/22K/24K carat jewellery. This issue was confronted to the assessee during assessment proceedings wherein the assessee stated that the stock was recorded in the books on net basis after deducting stones / beeds whereas valuation officer considered the jewellery on gross basis. The assessee also drew attention to various discrepancies in valuation which stood partially accepted by Ld. AO. After weeding out these discrepancies, Ld. AO finally alleged that excess stock weighing 8875 grams valued at Rs.393.97 Lacs remained unexplained. Though the assessee refuted the allegation of Ld. AO, the same stood rejected by Ld. AO. The assessee also contended that one category of excess stock was to be clubbed with another category of short stock. This argument also stood rejected and finally the amount of Rs.393.97 Lacs was added to assessee’s income as unexplained expenditure u/s 69C r.w.s. 115BBE.
3.2 The Ld. AO made separate addition of short stock in 20K/21K/22K carat jewellery. The shortage was initially valued at Rs 51.06 Lacs. It was alleged that the assessee made out-of-book sales. The assessee contended that stock of polki / kundan was inadvertently entered in 22 carat gold category and the assessee furnished reconciliation wherein there was short stock weighing 7508.66 grams valued at Rs.390.07 Lacs. The assessee maintained that stock of all categories was fungible in nature and often converted from one category to another category and therefore, excess stock was to be adjusted with short stock. To support the same, reference was made to quantitative details as provided by the Tax Auditor in Tax Audit Report giving details of inter-category movement of stock. However, Ld. AO estimated profit rate of 13.43% on short jewellery of Rs.390.07 Lacs to make addition of Rs.52.38 Lacs. Similar profit was estimated on short stock of 25 wrist watches. The Ld. AO applied average GP rate of 13.43% on such short stock to make addition of Rs.2.29 Lacs.
3.3 It was presumed by Ld. AO that to make unaccounted sales, the assessee would have made initial investment for such transactions. Accordingly, Ld. AO estimated the same at Rs.7.34 Lacs by applying GP rate of 13.43% on shortage of stock for Rs.54.67 Lacs (Rs.52.38 Lacs + Rs.2.29 Lacs).
3.4 The last addition was in the background of the fact that the assessee was selling certain percentage of stones embedded in the Polki / Meena Jewellery at the price of 22 Carat Gold. It was estimated that the assessee reflected sales of Kundan / Polki / Meena Jewellery at about 3.41% of total sales value of Rs.132 Crores. The assessee’s GP rate for AYs 2019-20 to 2021-22 was around 13.43%. As done in AY 2022-23, Ld. AO estimated additional GP of Rs.2.49% to make addition of Rs.11.25 Lacs.
3.5 Finally, the assessment was framed by making four additions which were subjected to assessee’s first appeal.
Appellate Proceedings
4.1 The assessee assailed the impugned additions by way of elaborate written submissions which have already been extracted in the impugned order wherein reference was made to various judicial decisions supporting set-off of excess stock with short stock in this kind of business. It was, inter-alia, contended that the assessee’s business inherently involves continuous inter-category conversion of stock. The gold jewellery is entirely fungible in nature and 24-carat gold is converted into 22K/20K/18K/14K for making various types of jewellery. The unsold or non-movable jewellery is melted and reconverted back into pure gold. The old jewellery as purchased from customers would be melted and reused. Thus, daily movement from one process to another is a fundamental characteristic of the jewellery trade. This fact was clearly evident from the quantitative details forming part of the Tax Audit Report vide Point No. 35(b) wherein inter-category movement of stock was disclosed under the head ‘From Process” and “To Process”. Accordingly, the stock must be considered cumulatively and not category-wise as wrongly done by Ld. AO. After consolidating all categories, considering the fungible nature of the business and correcting classification errors, the net difference between the alleged excess and alleged short stock would be very less. It was stated that the stock was fungible, category-wise weight determination was incorrect and the valuer did not conduct item-wise weighing and items were mis-classified. Alternatively, even otherwise, separate addition as made by the Ld. AO for excess stock for Rs.393.97 Lacs was unsustainable because short stock is treated as unaccounted sales and excess stock is treated as unexplained investment. But unaccounted sales inherently generate cash, and that very cash is presumed to be used for acquiring any excess stock especially when the stock is of homogenous in nature and identity of short / excess stock can be made out of the same. Therefore, excess stock is automatically covered by the short stock. The assessee was conducting business from a single premises and it has not maintained nor operated any parallel system of unaccounted business. Therefore, the conclusion of Ld. AO was presumptive, baseless, and unsupported by any concrete evidence. Reference was made to various judicial decisions including the decision of Mumbai Tribunal in Om Jewellery Pvt. Ltd. (ITA No.490/Mum/2016; dated 18.06.2018) granting such telescoping on similar facts. The assessee similarly assailed other additions as made by Ld. AO in the assessment order.
4.2 The Ld. CIT(A), at para 5.2.3 of the impugned order, concurred that the excess stock and short stock pertain to the same business inventory and arise from the same trading activity of the assessee carried out from a single business premises. The Ld. AO has not established the existence of any parallel or undisclosed business activity or any independent source of income outside the regular business of the assessee. The assessee contended that the entire difference arose due to the valuation method adopted during search and the practice of maintaining multiple stock categories for internal management purposes. The assessee’s business inherently involves continuous inter-category conversion of stock. The gold jewellery is entirely fungible in nature and 24-carat gold is converted into 22K/20K/18K/14K for making various types of jewellery. The unsold or non-movable jewellery is melted and reconverted back into pure gold. Further, old jewellery purchased from customers is melted and reused. Thus, daily movement from one process to another was a fundamental characteristic of the jewellery trade. This fact was also evident from quantitative details as reported by Tax Auditor. Therefore, the stock was to consider cumulatively and not category-wise as wrongly done by the AO. The cited case law of Mumbai Tribunal supported the case of the assessee. Similar was the decision of Chandigarh Tribunal in M/s AP Knit Fab (ITA No.732/Chd/2022) holding that where excess and short stock form part of mixed business stock and have no independent physical identity, no addition u/s 69 is sustainable and at best, the difference could be treated as business income only. On these facts, the net stock difference of Rs.3.90 Lacs (Rs.393.97 Lacs Less Rs.390.07 Lacs) was to be considered as additional business income of the assessee. Consequently, the addition of estimated capital employed for Rs.7.34 Lacs was also deleted.
4.3 The addition of shortage of wrist watch stock for Rs.2.29 Lacs and the addition of Rs.11.25 Lacs on account of suppression of profit on Kundan / Polki Jewellery was confirmed which has apparently been accepted by the assessee.
4.4 Aggrieved as aforesaid, the revenue is in further appeal before us.
Our findings and Adjudication
5. From the enumerated facts, it is quite clear that the assessee is engaged in jewellery business and it has carried out business from single premises only. The assessee maintains various category of stock and the prime raw material is gold which is completely fungible in nature. The assessee’s business inherently involves continuous inter-category conversion of stock. The gold jewellery is entirely fungible in nature and 24-carat gold is converted into 22K/20K/18K/14K for making various types of jewellery. The unsold or non-movable jewellery is melted and reconverted back into pure gold. The old jewellery as purchased from customers would be melted and reused. Thus, daily movement from one process to another is a fundamental characteristic of the jewellery trade. This fact is also evident from quantitative details as furnished in the Tax Audit Report.
6. It could be seen that the alleged stock and shortage of stock have been considered separately by Ld. AO apparently on the allegation that the two discrepancies represent two independent taxable events. However, the assessee has successfully demonstrated that such an approach would be contrary to the very nature of its business. It has been submitted that the assessee was dealing in gold jewellery and that the stock was inherently fungible. Gold of one purity is routinely converted into another purity during manufacturing. The jewellery which remains unsold or becomes obsolete is melted and re-converted into another category. Similarly, old jewellery as purchased from customers is melted and re-used in the manufacturing process. It has further been explained that the assessee has maintained various stock categories for internal accounting and management purposes and that movement of stock between such categories was a regular and continuous feature of the business. The quantitative details forming part of the Tax Audit Report also recorded such inter-category movements under the heads “From Process” and “To Process”.
7. In our considered opinion, the aforesaid factual aspect assumes considerable significance and duly support the adjudication of Ld. CIT(A). The Ld. AO has proceeded to compare the physical stock and book stock strictly on a category-to-category basis. Such an approach may be appropriate where each category represents an independent commodity having a separate and identifiable physical existence. However, the same approach cannot be mechanically applied to a jewellery manufacturing / trading business where the underlying commodity is gold and where conversion from one form, purity or category into another is an inherent part of the business process. There is no evidence that the alleged excess stock represents a separate acquisition outside the assessee’s regular business. Similarly, no material has been brought on record to establish that the alleged shortage represent a transaction wholly unconnected with the excess stock. On the contrary, both discrepancies were detected during the same stock-taking exercise conducted at the same business premises and relate to the same class of business inventory. We, therefore, find substantial merit in the contention of the assessee that the stock position has to be appreciated in its entirety and on a cumulative basis rather than by treating every category-wise discrepancy as a separate source of income. The assessee has been carrying on its business from a single premises only. The Ld. AO has not brought any material on record to establish that the assessee was carrying on any parallel or undisclosed business activity. There is also no finding that the assessee maintained a separate set of books, a separate cash book, separate premises or any independent source of investment from which the alleged excess stock could have been acquired. In our considered opinion, an addition under the deeming provisions could not be sustained merely because, on a mechanical comparison of individual categories, some items are found to be in excess while some other items are found to be short, particularly when the assessee has furnished a plausible explanation supported by the nature of its business. Therefore, the additions based on arithmetical difference in individual categories, could not be sustained. In our view, once both discrepancies admittedly arise from the same business activity and there is no material showing that the alleged excess stock came from an independent source, the revenue cannot, merely on the basis of separate accounting treatment, presume two independent taxable events. The alleged shortage, if treated as unaccounted sales, necessarily represents stock which has gone out of the business and generated sale proceeds. Those proceeds constitute a source of funds. Where, in the same business and in the same period, excess stock is found and there is no evidence of any other utilisation of the sale proceeds or any other independent source of investment, the possibility that such proceeds were available for acquisition / replenishment of stock cannot be brushed aside. The principle of telescoping is intended to prevent the same income or the same underlying transaction from being subjected to tax twice under two different descriptions.
8. On these facts, the approach of Ld. CIT(A) in granting telescoping benefit could not be faulted with. The cited decisions by Ld. CIT(A) duly supports the case of the assessee. The decision of Chandigarh Tribunal in the case of Shri Aman Batra (ITA Nos.1041/Chd/2024 & ors.) and the decision in Saraf The Jeweller (ITA Nos.1232/Chandi/2025 &ors.) duly supports the granting of telescoping benefit under similar circumstances.
9. The Ld. CIT(A) has referred to the decision of Tribunal in assessee’s own case for AY 2022-23 (ITA No.403/Chd/2025 dated 04.11.2025). Upon perusal of the para-46 of this decision, it could be seen that the bench has upheld GP rate of 14% on stone-embedded ornaments. This very addition has been sustained by Ld. CIT(A) in this year and the same has been accepted by the assessee. Therefore, this issue does not arise in the present year and this decision does not have any bearing on the impugned issue at hand.
10. In the result, the appeal stands dismissed.
Order pronounced on 15/09/2026
