Telescoping of Excess and Short Jewellery Stock Upheld by ITAT Chandigarh: Key Ruling on Fungible Inventory in Search Assessments
Overview of the Case
The Chandigarh Bench of the Income Tax Appellate Tribunal, in DCIT Vs Jamna Dass Nikkamal Jain Saraf P. Ltd. (ITA No.527/CHANDI/2026, order dated 15.09.2026), delivered a significant ruling concerning the treatment of stock discrepancies discovered during a search conducted under Section 132 of the Income Tax Act, 1961. The Tribunal dismissed the Revenue's appeal and affirmed the relief granted by the Commissioner of Income Tax (Appeals) for Assessment Year 2023-24, holding that excess and short stock arising from the same fungible inventory at the same business premises must be assessed on a cumulative basis, with the telescoping benefit being fully applicable.
This ruling carries material implications for jewellery businesses — and, by extension, other industries dealing in inherently fungible commodities — where stock is routinely converted between forms, purities, or categories as part of normal manufacturing and trading operations.
Background Facts
The Assessee and Its Business
The assessee, Jamna Dass Nikkamal Jain Saraf P. Ltd., is part of the Nikkamal Group of Companies and is engaged in the business of jewellery manufacturing and trading. Its entire business operations were conducted from a single business premises. The nature of its trade involves maintaining multiple categories of gold jewellery — 14K, 18K, 20K, 21K, 22K, and 24K — with gold routinely being converted between these categories depending on design requirements and customer demand. Unsold or obsolete jewellery is melted and reconverted; old jewellery purchased from customers is similarly melted and reintroduced into the manufacturing cycle.
The Search and Stock Verification
A search was conducted under Section 132 of the Income Tax Act, 1961 on 24.11.2022 in the case of the Nikkamal Group, which triggered the assessment in question. During stock verification carried out as part of the search proceedings, the department's valuer found excess stock valued at Rs. 604.88 lacs.
Subsequently, certain discrepancies in the valuation approach — notably, the valuer having considered jewellery on a gross basis while the assessee recorded stock on a net basis after deducting the weight of stones and beads — were partially accepted by the Assessing Officer. After adjusting for these discrepancies, the Assessing Officer (AO) determined that:
- Excess stock of 8,875 grams, valued at Rs. 393.97 lacs, remained unexplained and was treated as unexplained expenditure under
Section 69Cread withSection 115BBEof the Income Tax Act, 1961. - Short stock of 7,508.66 grams in the 20K/21K/22K categories, valued at Rs. 390.07 lacs, was treated as representing out-of-book sales, on which estimated profit of Rs. 52.38 lacs was added by applying a gross profit (GP) rate of 13.43%.
- A further addition of Rs. 2.29 lacs was made on account of shortage of 25 wrist watches, applying the same GP rate of 13.43%.
- Capital estimated to have been employed for unaccounted sales was added at Rs. 7.34 lacs, computed by applying the GP rate on the combined short stock value of Rs. 54.67 lacs (i.e., Rs. 52.38 lacs + Rs. 2.29 lacs).
- An additional amount of Rs. 11.25 lacs was added on account of suppressed profit on Kundan/Polki/Meena jewellery, computed by applying an additional GP of 2.49% on total sales.
Position of the Assessee
The assessee resisted the additions primarily on the ground that the gold jewellery stock was entirely fungible in nature. It was contended that: