TMI Blog1998 (10) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... dia but also in ANTWERP and New York, apart from DTC London and that large quantities of rough diamonds are purchased from the family s Belgian concerns and exports are made to family s New York concern. In order to verify the correctness of the returned income, the Assessing Officer issued notice under section 143(2) to the assessee and when he did not find the particulars given in the books of account to his satisfaction, he issued a questionnaire to the assessee, asking the assessee to furnish specific details regarding the colour, clarity, shape and number of pieces per carat in respect of lots of roughs issued for cutting and polishing and received back so that he could attempt some correlation between the lots of roughs imported and the lots of cut and polished diamonds exported. The assessee, however, declined to give these details stating that it did not maintain details of polished diamonds on the basis of weight, cut, clarity, shape and number of pieces. The Assessing Officer came to the conclusion that in the absence of such vital details being available from the books of account and the persistent refusal of the assessee to supply the required information, the book resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the results in the cases of assessee s group and assessee s own case for assessment year 1989-90 the GP rate shown at 5.61% as against 15.50% and 9.68% in the cases of assessee s own sister concerns for the assessment year 1989-90 he would make flat addition @ 5% on disclosed sales of Rs. 7,75,00,985. This resulted in an addition of Rs. 38,75,050 to the disclosed income of the assessee. 2. The assessee went in appeal. The ld. CIT(A) took into account various explanations given by the assessee to the effect that the GP rate of this year was highest between 1980-81 to 1988-89. He also took into consideration assessee s explanation why GP rate for assessment year 1989-90 was higher than this year. He also considered the argument of the assessee to the effect that the GP rate should be compared with the GP rate of prior years and not with the subsequent years. After considering these arguments and the case law relied upon by the ld. counsel for the assessee, he deleted the entire addition of Rs. 38,75,050 against which the revenue has come in appeal before us. 3. The ld. Departmental Representative heavily relied on the order of the Assessing Officer. It was argued by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer had taken great pains in framing this assessment order and had demonstrated a very good understanding and knowledge of the diamonds and diamond business, the CIT(A) decided this appeal merely on the basis of the submissions made by or on behalf of the assessee without considering the facts discussed in the assessment order and taking care to check even superficially the veracity of the arguments and the facts as well as law submitted before him. Anybody who knows something about diamonds, knows at least that the prices of diamonds depend on four Cs. They are ( i ) carat ( ii ) cut ( iii ) colour and ( iv ) clarity. We may elaborate it taking each factor into account separately. Thus, if the price of 0.10 carat or 10 cents as it may be called in the diamond trade, is Rs. 5,000, the price of a diamond having all other similar qualities but weighing .20 carat or 20 cents. would not be Rs. 10,000 but may be Rs. 15,000 and the price of a diamond of one carat of the same quality, i.e., similar cut, colour and clarity would not be Rs. 50,000 i.e. 5000 10 but may be around Rs. 1 lac or more. Similarly, the price of a .05 carat or 5 cents may be around Rs. 400 instead of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s further mentioned in the second part of the same paragraph "It is further submitted that in a year, we deal in millions and millions of pieces of diamonds. To keep piecewise records of the stock would therefore be a Herculean task and a meaningless one (emphasis supplied by us). The comparison between grains of rice and pieces of diamonds was drawn only to point out the futility and impossibility of maintaining such records. The `Carat is a very accurate unit of measurement and the weighing scales used by us are very modern electronic scales which are so very accurate that no mistakes are possible and the same have been universally employed throughout the world...".However, in the same paragraph it is written "It is once again reiterated that the manner in which the books of account are maintained is our prerogative (emphasis supplied by us) and that the books maintained by us are in the same manner and format as were being done since the inception of the firm. The same having been found to be correct and complete in our earlier assessments, they cannot now be sought to be rejected." 6. This reply leads us to draw the following inferences : ( i )It cannot be true that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been maintained by them, nor it is maintained in the trade as such. As a practice only lotwise details of rough diamonds and details of polished diamonds are maintained and they are furnished to the Assessing Officer. The details supposed to be furnished by the assessee to the Assessing Officer are given in Schedule `O of assessee s accounts, a copy of which has been filed before us also. These details show opening stock of polished diamonds at 154 carats valued at Rs. 5,81,962. Product polished diamonds 29087 carats valued at Rs. 7,74,18,469, rough diamonds consumed 1,14,104 cts. valued at Rs. 5,86,51,949. Keeping in mind the factors mentioned earlier in this order and discussed in detail by the Assessing Officer in his order, nothing can be gathered about the correctness and completeness of assessee s accounts from these details. It is not known how much of the opening stock was of US $ 41 carat per quality and how much was of US $ 850 per carat quality, what were the items of sale, what were the diamonds in the closing stock. In fact, the assessee wants that the Assessing Officer should accept that like rice if one k.g. rice costs Rs. 60, 5 kgs. of rice would cost Rs. 300 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one." ( iv )At this point we may observe that what is meaningful for the ITO to find out the correct profits of an assessee, may be meaningless for the assessee (and which we have mentioned cannot and is not meaningless in the case of this particular assessee), but it is for the Assessing Officer to determine whether the books of account are correct and complete according to his satisfaction or not. We may quote from section 145(2) of the Income-tax Act (as it stood at the relevant time) - "Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144". Of course, the appellate authorities are entitled to judge as to whether the Assessing Officer was justified in coming to the conclusion that the books of account were not correct and complete, but it may not give a similar authority to an assessee to tell the Assessing Officer that what the Assessing Officer was asking was meaningless. As mentioned above, the way in which the assessee should have actually maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in a particular manner are to be treated as correct and complete, a succeeding Assessing Officer can point out that looking to the facts of that case and investigation done by him, they cannot be treated as correct and complete. That is what the Assessing Officer who framed the assessment for this year has done. No assessee can claim that since his books of account were fount to be correct and complete in a preceding year, it is a conclusive proof of the fact that the books of account for subsequent year or years are also complete and that no Assessing Officer can either question the assessee on this issue or even after questioning take the view that the books of account for that subsequent year are not correct and complete. Even if the assessee thought that what it was writing pertained to the system of accounting and not the correctness or completeness of the books of account, and which perhaps the ld. CIT(A) accepted while he passed the appellate order on 7-12-1990, the law in this regard has undergone a sea change after the pronouncement of the judgment of the Hon ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 / 54 Taxman 499 (SC). W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor before the ld. CIT(A), nor before us, any evidence has been adduced to corroborate the claim of the assessee that the details required by the Assessing Officer are not maintained in the trade in which the assessee is engaged. At best, it can be said to be a self-serving assertion made by the assessee and accepted by the ld. CIT(A) without any evidence or material in support of this assertion. It has, therefore, to be ignored. 9. Now, coming to the observations of the ld. CIT(A) to the effect that no specific defects had been pointed out by the Assessing Officer in the books of account, we feel that the ld. CIT(A) went more by the arguments advanced on behalf of the assessee with which we shall deal later also, rather than going through the detailed order of the Assessing Officer. The Assessing Officer has discussed the nature of the trade, the basis of valuation of diamonds and the procedure of giving the rough diamonds for cutting and polishing and receiving them back from the labour parties. Correctness of those facts and observations has not been denied by the assessee. Thereafter, in para-8 of his order, he has mentioned that rough diamonds are assorted before giving f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent human being having ordinary commonsense would believe that the yield of cut and polished diamonds would be uniform at 25% to 26% only. Thus, on the basis of preponderance of probability also we hold that the inference of the Assessing Officer to the effect that the correct record of assessee s business had either not been maintained, or even if maintained, was refused to be produced before the Assessing Officer. Therefore, so far as the Assessing Officer is concerned, the books of account produced before him were not correct and complete. Another defect which he pointed out is that there is no record to correlate as to whether the same quality of diamonds has been received after cutting and polishing of which the rough was given. As already discussed, the price of diamonds may vary substantially on the basis of its colour and clarity, cut and carat. Hence, no assessee dealing in diamonds can leave it to the sweet will of the labour party to take rough of higher quality and higher weight from the assessee and give back the cut and polished diamonds of inferior quality and lesser weight per piece. We have also discussed earlier that the assessee itself had conceded that when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that the nature of business and the practice followed in the trade have also to be kept in view and that non-maintenance of accounts in a particular manner cannot be the basis for rejection of accounts. In our view, this is too sweeping an observation made by the ld. CIT(A), which cannot be said to be warranted from the cases mentioned by him in his order. Thus, the first case cited is S. Veeriah Reddiar 38 ITR 52, the correct citation is S. Veeriah Reddiar v. CIT [1960] 38 ITR 152 (Ker.) and not page 52 as mentioned in the order of the CIT(A). The ratio of decision of this case was that merely because the profits disclosed were low and there was no stock register, rejection of accounts was not justified. However, in para-9 of page 171 of that report, the Hon ble Court had observed that the ITO, AAC, or the Tribunal had nowhere in their orders stated that the assessee s method of accounting was such that its income, profits and gains could not be properly deduced therefrom. Further, in that case the only reason given by the Assessing Officer for rejecting the assessee s method of accounting was low profits and absence of regular stock register under provisions of section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w yield of cut and polished diamonds from rough diamonds. Moreover, as we have already mentioned the quantitative details in diamond business cannot be compared or equated with husking of rice. Hence, the ratio of this judgment would also not apply to the facts and circumstances of assessee s case. Finally, the case of Shri Ram Arora v. CIT [1971] 80 ITR 78 (All.) has been mentioned. In this case the assessee had not maintained purchase vouchers for agriculture produce purchased from agriculturists and it was held that this could not by itself be a ground for rejecting assessee s books of account. It is clear that the facts and ratio laid down in the cases cited before the ld. CIT(A) cannot lead to the inferences drawn by the ld. CIT(A) from them and hence in our opinion, his conclusion to the effect that on the basis of this case law the Assessing Officer was not justified in rejecting the assessee s books of account, is not legally and factually correct. We may also mention that most of the cases cited before the ld. CIT(A) were in respect of provisions of section 13 of the Income-tax Act, 1922, which were different from the provisions of section 145 of the Income-tax Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer had drawn his inferences on the basis that the GP rate was only .99% when, according to the statement of the assessee before the ld. CIT(A), it was only the net profit rate. We have noticed that this statement is not correct because on sales of Rs. 7,75,00,985 assessee s profit before taxation for this year is Rs. 11,16,423 which gives a net profit rate of 1.433% and .99% against a net profit rate of 4.466% in the preceding year on sales of about Rs. 6.42 crores. On the other hand, this year assessee s gross profit, by deducting the direct expenses at Rs. 7,31,89,735 from the total sales at Rs. 7,78,60,621 including the foreign exchange difference benefits works out to Rs. 46,70,886 which is 5.99% and not .99%. This clearly shows that it was only a typing mistake in the assessment order. As against this one mistake of typing, the assessee had furnished altogether wrong facts and figures before the CIT(A) on which he relied in his order. Thus, on page-3 of his order, he has given the GP rate including exchange difference, and in another column, excluding exchange difference, for the assessment years 1980-81 to 1989-90. We do not have the details regarding the trading acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the GP rates for assessment years 1980-81 to 1988-89. We have already mentioned that we do not have assessee s figures of sales and direct expenses in the preceding years. But this at least proves that in this year there is a steep fall in assessee s GP and net profit rates. In view of having found out that assessee is capable of furnishing inaccurate particulars and advancing wrong arguments before the first appellate authority who very innocently and in good faith accepted it, we are unable to follow suit. From the facts and figures mentioned above, it is clear that whereas assessee gave an explanation before the Assessing Officer as well as the CIT(A) for the gross profits rates going substantially high in the assessment year 1989-90 and argued that only past year s result and not subsequent year s results should be considered, furnished no explanation before the Assessing Officer or the CIT(A) for a sharp decline in the GP rate from 11.70% in the immediately preceding assessment year 1986-87 to only 5.99% in the assessment year 1987-88 which is under consideration before us. We may accept assessee s argument that it may not be necessary to compare this year s results with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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