ITAT upholds deletion of Rs. 3.26 Cr addition based on Gold Melting Gain Assumption

M/s. Rajmal Lakhichand, a firm engaged in the manufacturing and trading of gold and silver ornaments, had filed its income tax return for the fiscal year 2017–18, declaring nil income. During scrutiny, the Assessing Officer (AO) observed that the assessee’s declared melting gain was much lower (0.59%) than in previous years (ranging from 6.83% to 9.07%). Assuming that the assessee had underreported its income, the AO made an addition of Rs. 3.26 crore to the total income because of low melting gains.

The assessee argued that the melting gain percentages are directly impacted by the wide variations in the purity of the gold found in antique ornaments. It kept accurate records and a melting gain register, both of which were examined and found to be error-free. Based on prior ITAT Pune rulings in the assessee’s own cases for AYs 2009–10 and 2014–15, where comparable additions had already been deemed unsustainable, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee’s justification and removed the addition. Thus, aggrieved by the said decision of the CIT(A), the Revenue preferred an appeal before the ITAT, Pune Bench, requesting that the addition made by the AO be restored.

Issue Raised: Whether the addition made due to low melting gain, based only on comparisons with previous years and industry averages, without any defect found in the assessee’s records, is justified?

ITAT Pune’s Decision:

The Hon’ble tribunal, after closely examining the documents, noted that the assessee had maintained a proper melting gain register and that the AO had not pointed out any defects in the books of account. It reiterated that melting gain depends on the purity of gold received, which can vary significantly and cannot be generalized. Referring to its own consistent rulings in the assessee’s earlier assessment years, the tribunal found no merit in the Revenue’s arguments. Accordingly, the tribunal rejected the Revenue’s appeal in its entirety and maintained the CIT(A)’s ruling.

To Read Judgment, Download PDF Given Below.