TMI Blog2014 (7) TMI 819X X X X Extracts X X X X X X X X Extracts X X X X ..... is year can be treated as a demarcating year from the past years – it is a reasonable and fair approach to compute the value of the stock of the polished diamond at ₹ 6448/- per carat as an average value of the closing stock - Closing stock of the diamond was 12909.74 Ct. and by applying the rate of ₹ 6,448/- the value to be worked out is ₹ 8,32,42,003/-, out which the value declared as per assessee is to be reduced of ₹ 6,00,30,337/; thus the balance comes to ₹ 2,32,11,666 – Decided partly in favour of Revenue. Under valuation of closing stock of rough diamonds – Held that;- The valuation of the stock is to be made at the market price or the cost price, whichever is lower - when the complete information about the quality of the stock is not made available then to resolve the issue a middle path is to be adopted - the assessee was in possession of the rough diamond - the difference of the two, i.e., purchase cost (- minus) sale cost is the correct method for determining the valuation of the rough diamond - The average of the two is ₹ 803 per carat, is required to be adopted by replacing the closing stock of diamonds calculated by adopting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of Assessee. - ITA No.3379/Ahd/2007, ITA No.2469/Ahd/2008 - - - Dated:- 30-6-2014 - Shri Mukul Kr. Shrawat And Shri Anil Chaturvedi,JJ. For the Petitioner : Shri K. C. Mathews, Sr.D.R., For the Respondent : Sri Ashwin Parikh, Ld AR ORDER Per Shri Mukul Kumar Shrawat, Judicial Member These two appeals pertained to the A.Ys. 2002-03 2003-04, respectively filed by the Revenue Department and the assessee arising from the orders of learned CIT(A)-III, Surat dated 05.05.2007 and learned CIT(A)-II Ahmedabad dated 11.01.2008. For the sake of convenience these two appeals have been consolidated and hereby decided by this common order. A) REVENUE S APPEAL ( A.Y. 02-03 ): 2. We shall first take up A.Y. 2002-03, an appeal filed by the Revenue Department and the grounds raised are hereby decided as follows: 1. The CIT(A) has erred on the facts and circumstances of the case and in law in restricting the disallowance on account of labour charges to ₹ 10 lacs as against the total disallowance of ₹ 1,08,83,214/- made by the Assessing Officer. 3. Facts in brief as emerged from the corresponding assessment order passed u/s.144 r.w.s. 145 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the account. Side by side, on the other hand, Labour Charges of ₹ 10,88,32,143/- were debited. According to AO, it was found that there was no mention of receipt of commission in the said account. All the cheques were received from the supplier were deposited in the bank account of the assessee and in turn cheques were issued to labourers. According to AO, this type of transaction could not be treated as an activity to earn only commission. To verify the correctness of the claim, the AO issued summons u/s.131 to the job workers. Some of the summonses were served and some remained un-served. Few of them have complied with the notice. It was also commented by the AO that a search in the year 1999 was conducted and it was found that the registration certificate by Surat Municipal Corporation (SMC) for those job workers were found from the business premises of M/s. M. Kantilal Group, whose addresses were the same as that of factory premises of M/s. Kantilal Group. Some of the job workers were interrogated. According to AO, those were not the independent job workers, but were employees of the group. Those employees must be getting small monthly basic salary. Even, the mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p such as M/s. M. Kantilal Exports, M/s. Anjana Exports and M/s. R. Vipul Co. It was ₹ 245/- per carat in A.Y. 1998-99, ₹ 222/- per carat in A.Y.1999-2000, ₹ 239.50 per carat in A.Y. 2000-01. The figures of A.Y. 2001-02 are not being considered since the consumption and production of diamonds is disputed in appeal. The average rate of labour charges in earlier three years was ₹ 240/- per carat. It is also established fact of the diamond industry that labour charges vary from lot to lot of diamond depending upon quality of diamond such as goli, Russian, german etc., size of diamond purchase price of diamond as also other factors such as colour and cleanliness of diamonds. There cannot be any flat rate of diamond labour as allegedly claimed by the assessee. 3.4 According to AO, there could not be an identical rate of job charges for all the lots of diamond processed. So, it was held by the AO that the claim of payment of ₹ 300/- per carat was excessive. In earlier years, it had varied from ₹ 245 per carat for A.Y. 1998-99 to ₹ 220 per carat for A.Y.1999-00. For A.Y. 2000-01 the payment was @ ₹ 239 per carat. According to AO, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised before us that in the past the labour charges as claimed by the assessee have been accepted by the Revenue Department. However, in this connection, we want to say that the doctrine of res judicata is not strictly applicable in tax matters. Each assessment year is independent of others. Issue relevant to a particular assessment year is to be considered and decided on the facts pertained to that particular assessment year, irrespective of the fact that the same issue had arisen in earlier years. In any case, the present factual situation is that the specific record about the payment of labour charges had not been maintained by the assessee, therefore, there was no alternative but to adopt an estimation. The AO had thought it proper that the abrupt increase of ₹ 300 per carat from the previous year payment of ₹ 240 was excessive; hence, the difference between the two, i.e., ₹ 60 was disallowed. The final finding as also the calculation of the disallowance was as under: In view of detailed discussion on labour expenses and applicability of the provisions of Section 145(3) of the Act in the earlier paras, it is clear that the assessee has failed to explain th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... polished diamond, the AO had made a list of sale of polished diamond for the month of March, 2002. Total sales as per 24 invoices was stated to be for a sum of ₹ 11,56,42,548/- in respect of 14022.08 carats. The average sale price of the diamond during the month of March, 2002 was therefore calculated at ₹ 8,247/- per carat. As per AO, the average sale price for the month of February, 2002 was ₹ 5635/- per carat. The AO has calculated the average sale price of the year at ₹ 7772/- per carat. The AO s version was that the sale price had never fallen below ₹ 5635/- per carat during the year. But the appellant had shown closing stock of the polished diamond at the average rate of ₹ 4650/- per carat. According to AO, the assessee has under valued the closing stock. The AO s objection was that the assessee had not produced the stock register. The AO has also computed the average manufacturing cost per carat at ₹ 6969.41, therefore, the AO has opined that the value of the closing stock at ₹ 4650 per carat was not possible. He has therefore made an addition on account of under valuation of closing stock at ₹ 4,64,36,371/- as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een made for the current year. According to him, the addition was made on hypothetical basis. The addition was deleted after assigning following reasons: I have considered the submissions and have gone through the various documents furnished before me. It is seen that the AO has made the addition disregarding the evidences to the effect filed during the course of assessment proceedings. A perusal of the export invoices of the year show that the appellant's contention of having sold superior quality diamonds during the year is correct. It is a normal practice in any trade that a superior quality item gets sold more easily and quicker than an inferior quality item. This is more so in diamond business, where superior quality diamond are in high demand whereas the inferior quality ones are sold with difficulty and at a lower realizable value. The AO has taken the details of sale for the month of January, February March only and has worked out the average sale price of the year at ₹ 7,272/- per carat and has also stated that the sale price never fell below ₹ 5,635/- through the year but has not taken into account the sale invoices or the calculations given by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to us it was an incorrect observation. What the AO has adopted was in fact based upon the material on record, i.e., details of the sales made in the month of March, 2002 and likewise the sales of few other months of the financial under consideration. According to the said details a sum of ₹ 8,247/- per carat was found to be the average sale price for the month of March, 2002. In a situation when there was no other convincing factor to determine the exact valuation of the polished diamond as furnished by the assessee; we are of the view that the valuation of the polished diamond could have been made by adopting the basis of the sale of the last month of the accounting period. This figure can thus be a starting point for the calculation. Hence, by comparing the sale price of the last month a reasonable view can be adopted about the exact position of the valuation of the closing stock. The assessee had adopted the average value of the polished diamond in the closing stock at ₹ 4,650/- however the value per carat of the diamond in the month of March, 2002 was ₹ 8,247/-. We therefore comment that the average price at ₹ 4,650/- per carat was towards lower side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly then because of the value enhancement due to quality enhancement the valuation of the closing stock has to be adopted at a reasonable price. From the records, it is not clear whether LIFO method was consistently followed or not. It is also not clear whether in this particular year the assessee had adopted FIFO method because one of the argument is that the old stock remained unsold. It is for the AO, after examining the facts, to consider whether it would be fairer and more appropriate to apply the rate which is relevant to ascertain the value of the closing stock. Naturally the value of the stock prevailing on the last day of the accounting period is relevant, however, the value prevailing on the first day of the accounting period is not at all relevant in the present situation, especially, when the assessee has failed to bring any material necessitating for making any corresponding changes in the value of the opening stock. In the present case, due to lack of information about the quality of the diamonds, the AO was in difficulty to correctly assess the valuation. Therefore, it is correct to disturb the valuation at least for the year under consideration so that the discrepanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.1 The assessee had valued the closing stock of rough diamond @ 734 per carat as against that as per the above chart the average cost of rough diamond was at ₹ 872.17 per carat. The addition by the AO was made in the following manner: As stated earlier the assessee firm has not adduced any reason whatsoever for drastic fall in G.P. of 3.48% i.e. from 12.43 to 8.95%. Considering that the fall in G.P. is not explained by the assessee and the book results have been rejected for the reasons discussed elaborately in foregoing paragraphs, G.P. of ₹ 3.48% amounting to ₹ 3,69,61,773/- is estimated. However, since additions of ₹ 1,92,05,203/- on account of inflation in labour expenses ₹ 41,80,910/- on account of disallowance of electricity expenses and ₹ 4,64,36,371/- on account of under valuation of closing stock of polished diamond and ₹ 4,30,07,818/- for under valuation of closing stock of rough diamonds have been made, the assessee is allowed benefit of telescoping. 12. When the matter was carried before the First Appellate Authority, it was explained that the AO had made the addition by adopting average cost of purchase at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable then to resolve the issue a middle path is to be adopted. Therefore, considering the totality of the circumstances and the facts narrated that the assessee was in possession of the rough diamond; hence, the difference of the two, i.e., purchase cost (- minus) sale cost is the correct method for determining the valuation of the rough diamond. The average of the two is ₹ 803 per carat, which according to us is required to be adopted by replacing the closing stock of diamonds calculated by adopting the average rate at ₹ 734.73 per carat. In this manner, this ground of the Revenue is also partly allowed. 14. In the result, Revenue s Appeal is partly allowed. B. Assessee s Appeal (A.Y. 2003-04) 15. Now, we shall take up the assessee s appeal for A.Y. 2003-04 and the grounds are hereby decided as follows: The learned CIT(A) had grievously erred in law and on fact in confirming the rejection of books of accounts without any defects u/s.145(3) of the Act. The books of accounts should held as proper. 16. Facts in brief as emerged from the corresponding assessment order passed u/s.144 r.w.s. 145(3) of IT Act were that the return showing an income of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom labour job workers. According to AO, there was no basis of the said apportionment and how the balance was reflected in the trading account of M/s. M. Kantilal Exports (Job). The AO has opined that the books of accounts did not reflect the correct affairs of the business. The AO had invoked the provisions of Section 145(3) of IT Act. For the invocation of the said provision certain reasons have been given by the AO, however, but keeping brevity in mind not reproduced by us. In the absence of number of days of the manufacturing and the production register a doubt had arisen. So as to ascertain discrepancies in labour expenses account, electricity account and difference closing stock of diamond; the AO has rejected the books of account. It was also noted by the AO that a survey u/s.133A of IT Act was carried out at the different premises of the group on 18.12.2002. A statement of one of the partner, Sri Kanjibhai Manjibhai recorded. He has stated that the electricity bill and some other common expenditure were borne by the firm M/s. M. Kantilal Export. He has also stated that firm was paying ₹ 250 to ₹ 300 per carat for labour job charges. The Revenue Department wanted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irming the disallowance of labour expenses at ₹ 2,89,02,654/- paid at market rate of ₹ 300/- per cts. which was allowed in A.Y.2001/02. The addition should therefore be deleted. 4. The learned CIT(A) had grievously erred in law and on fact in confirming the disallowance of labour expenses of ₹ 85,69,191/- at 10% of job labour payment to sub-contractors without appreciating the only commission charge entitled to appellant at 2.12%. The addition of ₹ 85,69,191/- should be deleted. 20.1 These two grounds are connected with each other, therefore, consolidated and decided as under. 20.2 The AO has issued summons u/s.131 to different labourers to verify the claim of labour expenses. Few labourers have attended and their statements were recorded. The AO wanted the details of the work done by them but that could not be produced. In the light of their statements and the defects found in the books of account, the AO has observed certain defects as under: 9.2 The alleged job workers have depicted to be working in different factory premises owned by M. Kantilal group of cases and no rent is paid by them. No plant and machinery are owned by them. As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and applicability of the provisions of section 145(3) of the Act in the earlier paras, it is clear that the assessee had failed to explain the genuineness of the labour expenses and to substantiate increase in the rate of labour charges from average labour charge at the rate of ₹ 240/- per carat in earlier assessment years to ₹ 300/- per carat. Considering the above findings diamond labour charges at the rate of ₹ 60/- per carat for 481710.91 carats of diamonds which work out to ₹ 2,89,02,655/- is disallowed. 20.4 This action of the AO was challenged before learned CIT(A). After considering a remand report furnished by the AO in the past, learned CIT(A) has upheld the addition in the following manner: 5.2 I have considered the assessment order and the above submissions on this issue. 1 find that the appellant has from year to year raised the amount of job work charges. It is also found that it is not in dispute that the job workers are not having any infrastructure facility of their own like machinery, their own premises or their own electricity connection. Even the appellant has accepted this fact in the submissions made before me. It is also noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iamonds are of two qualities, a superior quality and inferior quality; hence, the valuation of such type of diamonds effect the over all valuation of the closing stock. Therefore, we have opined that it was impractical to pay an identical rate of job charges to all the job workers. Certain other doubts have also been raised such as a huge amount of labour charges remain outstanding at the end of the financial year. Facts of the year under consideration are identical with the facts as discussed above for A.Y.2002-03. For A.Y. 2003-04, as well, the AO had allowed ₹ 240 per carat labour charges as against the claim of the assessee of ₹ 300 per carat. To recover up all the points and the objections raised from both the sides it was decided supra that it would be fair and reasonable to allow labour charges @ ₹ 270 per carat. We hold accordingly and the AO is directed to recompute the disallowance. Resultantly, this ground of the assessee is partly allowed. 24. Ground No.3 is reproduced below: The learned CIT(A) had grievously erred in law and on fact in confirming the addition of ₹ 3,75,67,484/- on account of valuation of Closing Stock of polished diamond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy in the stock valuation. Learned CIT(A) was not convinced and affirmed the action of the AO in the following manner: 6.2 I have considered the assessment order and the above submissions. It is found that the appellant has shown the value of stock adopting the value of diamond at ₹ 8790/- per carat. According to the assessing officer the sale price in March 2003 was of ₹ 9966/- per carat. The appellant had claimed that the polished diamond of lower quality was remaining in the stock. For this it is observed by the A.O. that there was no evidence produced by the appellant. The appellant had also not furnished details of manufacturing cost of diamond and the A.O. had observed that the cost of polished diamond was not made available for comparison with the value of closing stock. Hence he had adopted the average sale price of March 2003. The appellant has claimed that they furnished to A.O. list of diamonds remaining in stock. However, this is not supported by concrete evidence that particular diamond is in stock out of particular lot. The appellant has in the submissions before me furnished statement of cost of rough diamond consumed for production of diamond. This c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f polished diamonds. Rather, in our humble opinion each diamond has its own quality based upon the cut, its colour, its size and finally its carat. Manufacturing of diamond cannot compare with the manufacturing of other common products such as bricks, iron sheets, medicines, colours and paints, etc. In respect of all other items, the value of the finished product remains identical for each article of finished goods; hence, an average common rate depicting the cost of purchase, cost of production, to be calculated on average basis. That basis is to be compared with the realizable value of the finished goods. In respect of those items which are identical in value such an average method is an acceptable as well as practicable way of valuation of the closing stock. But that general acceptable principle of valuation of closing stock of finished good cannot be applied as it is in respect of valuation of the diamonds. Reason being each diamond has a specific quality. Because of the distinguishable features one diamond to be value differently from other diamonds. Now, the question is that in a situation when the assessee is not coming forward to give details of the quality of the diamonds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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