TMI Blog2007 (3) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 4,48,40,789 at a GP rate of 12.77 per cent in the immediately preceding year. The AO observed that sales and purchases were fully vouched and stock register has been maintained by the assessee. It was noticed by the AO that while 56,978.82 cts. Of emerald cuts were sold for Rs. 4,97,39,254 but the closing stock of 43,442.53 cts of the same were valued at Rs. 2,40,500 only. The cost of production was worked out as under: Particulars Rough Carats Value Sale rate Opening Stock 95,510 45,71,420 Import 2,68,515 1,69,94,822 21,980 Import 1,07,171.50 1,93,48,903 3,850 ----------- ----------- ------ 4,71,196.50 4,09,15,145 25,830 Less: Sales 25,830.00 22,42,819 ----------- ----------- Cost 4,45,366.50 3,86,72,326 Add: Wages 14,87,456 ----------- Cost of finished goods of 98521 cts. 4,01,59,782 Cost per carat 407.63 In response to sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997. Its registered office and business premises are at 3815, Laxmi Athithi Grah, 2nd Crossing, MSB Ka Rasta, Johari Bazar, Jaipur. Shri Prakash Chand Dhadda is the main executive working director since incorporation of the assessee company. From 4th July, 1997, he and his wife Smt. Pramila Dhadda were directors. Smt. Pramila Dhadda is primarily a housewife and has not been attending the business of the assessee company actively. She retired on 10th Dec., 1999. In her place her son Shri Shreyans Dhadda was appointed as director from 10th Dec., 1999. Shri Shreyans Dhadda was also a student and therefore during the previous year under assessment, was not actively attending to the business of the assessee company. Shri P.C. Dhadda has been primarily and mainly looking after the business of the assessee company. Shri P.C. Dhadda is also carrying on similar nature of business since long as proprietor of M/s Prakash Chand Dhadda Co. The business of the assessee company and of P.C. Dhadda Co. are being carried on mainly and primarily by Shri Prakash Chand Dhadda and from the same building known as Laxmi Athithi Grah. The stock in trade of the assessee company also remained with its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned lower authorities rejected the correct claim of the appellant company and computed its value in an arbitrary and fanciful manner. The said valuation is without basis, without material, contrary to the material on record and sound principles of valuation of coloured stones. It is based on doubts, suspicions and whims and after ignoring the material on record and the value apprised by the technical person, the DVO. Working out value at average rate is defective and arbitrary action. Many decisions were cited before the lower authorities and it was submitted that provisions of s. 145 are inapplicable. Correct and complete books of account have been maintained. Method of valuation is at cost and as in the past. Karigar Bahis and stock registers have been maintained, produced and examined. These were produced before the AO and the CIT(A). No defect has been noticed by the lower authorities. We are producing the same for further verification, if any. Rejecting the trading results and revaluing closing stock is erroneous and unsustainable in law (para 1.12, PB 34). The precious stones are the nature's product. There is no standard quality of the lumps of rough emeralds which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck-in-trade as computable from the said books of account and record as on 29th Oct., 1999 were submitted. Its value was Rs. 66,31,434. Such details were submitted with the letter dt. 10th Nov., 1999 under the signatures of Shri B.C. Jain, part-time accountant (PB 130-133 paras 4 and 5). In the letter dt. 11th Nov., 1999, it was again asserted that the entire stock under seal is duly accounted for and no part of it is undisclosed (PB 134-137 paras 6 and 12). In the letter dt. 13th Nov., 1999, it was again informed that the current books of account of the assessee company are lying on the ground floor of the business premises at 3815, Laxmi Athithi Grah. 2nd Crossing, MSB Ka Rasta, Johari Bazar, Jaipur. With the letter dt. 11th Nov., 1999, Shri Shreyans Dhadda and accountant submitted copy of the stock register of the assessee company at pp. 64-67 before the Dy. Director of IT (Inv.), Jaipur, on 11th Nov., 1999 and much before resuming of search and the seizure effected on 11th Nov., 1999 (PB 138-146, 147-148 paras 1-3). The stock under seizure is fully accounted for. No part of it is undisclosed (para 3.1 PB 3-4). Letter dt. 29th Nov., 1999 complaining seizure of stock of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account are audited. 5. Mr. N.M. Ranka invited our attention to submission before learned CIT(A) dt. 18th Oct., 2004, where the movement of stock i.e. opening stock 95,510 cts. (para 1.18 PB 91). Rough emeralds imported on 9th April, 1999 vide bill PB-43, both purchased at US $ 1 to 2.50 per carat and only one lot purchased with cost of US $ 30 (para 1.19 PB-91), rough emerald imported on 20th May, 1999 (bill PB-44) and bulk purchases were between US $ 1 to 5 per carat and maximum rate US $ 9 per carat (para 1.20 PB-91), which was sorted Khard out of Tall and was of cheap quality which was put to manufacturing and ultimately finished product of 39,105 carats with cost of Rs. 2,03,926 remained in stock (para 1.21 PB 91, para 1.31 PB-115). Entire sale bills were produced before the authorities below and some of them were filed. He further argued that high quality goods were sold and residual were of low quality. To this, he invited our attention to sale bill dt. 14th May, 1999 (PB 45) which was sold 5.34 carats at Rs. 15,000 per carat for Rs. 80,100; 50.45 carats at Rs. 6,000 per carat for Rs. 1,55,350; bill dt. 14th May, 1999 (PB 46) which was sold at Rs. 1,175 and Rs. 1,500 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (PB 8-9). The assessee has replied on 24th Dec., 2002 before AO (PB 13-16 paras 2-5). (i) Affidavit of Shri P.C. Dhadda (PB 103 para 4), (ii) Affidavit of Shri H.C. Jain, accountant (PB 105), (iii) Certificate of Mr. Bafna, chartered accountant (PB 119) were filed. Mr. Bafna and Mr. H.C. Jain also appeared in person who stood to the testimony and were not controverted. Shri P.C. Dhadda was not required to appear for examination. It is well-settled that in such circumstances contents of the affidavits/certificate stood proved in view of Hon'ble apex Court decision in the case of Mehta Parikh Co. vs. CIT (1956) 30 ITR 181 (SC). There was no admission by Shri Bafna and Shri H.C. Jain. As directed by the AO, detailed workings were submitted and well explained but ignored by the AO. Alleged admission, if any, was not finding on the assessee by the AO. The Hon'ble apex Court decision in the case of Pullangode Rubber Produce Co. Ltd. vs. State of Kerala Anr. 1972 CTR (SC) 253 : (1973) 91 ITR 18 (SC) supports the arguments, which was cited before the learned CIT(A) also. There was assessee's reply vide para 1.28 (PB 114) and objection dt. 17th Dec., 2004 (PB 119). 8. The impugned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative, on the other hand, supported the orders of lower authorities. 12. We have perused the facts of the case. As stated, a search was carried out on 29th Oct, 1999 at the common premises of M/s P.C. Dhadda Co. and that of the assessee and the search warrant was in the name of M/s. P.C. Dhadda Co. and not on assessee and P.C. Dhaddha was out of station at the time of search. There was a mixing of goods of M/s P.C. Dhaddha Co. and that of the assessee. The assessee has submitted, vide various letters before the authorities below, the quantitative details of opening, purchases, sales and closing stock. The movement of goods was duly explained as is evident from details of opening, purchases, manufacturing and sale from 1st April, 1999 to 29th Oct., 1999 at PB-38 and trading account of rough emeralds and cut emeralds at PB-38 for the same period. Mr. P.C. Dhadda was out of India at the time of search and returned only on 12th Nov., 1999. Inventory of closing stock as on 29th Oct., 1999 of the assessee company along with copy of stock register were submitted before the seizure was made on 11th Nov., 1999. As per explanation submitted by the assessee at PB-38 and PB-39 through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed the actual cost of 43,442.53 carats including the wages at Rs. 2,40,500. Therefore, the working done as per AO's order cannot become a basis of valuation of 43,442.53 carats. No defect has been pointed by the AO or learned CIT(A) in the opening stock, purchases, manufacturing, closing stock and the valuation as mentioned hereinbefore except the impugned valuation in closing stock. The said explanation was given before the AO and the learned CIT(A) through various letters and submissions. No defect has been pointed out except there is no qualitative tally, which is neither possible nor practicable on account of special features of the trade of manufacturing. The raw Kharad is nature's product and each stone differs from the other. 15. Mr. N.M. Ranka, has displayed in the Court, the products at various stages, (from raw material to finished product stage) and explained the process as under: (a) That the precious stones are the nature's product. There is no standard quality of the lumps of rough emeralds which are excavated from the mother earth. Rough emeralds imported, were of big sizes and in lump shape of different sizes. The purchases have to be made in bulk and by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted through affidavits/annexures and are on record. Sh. P.C. Dhadda was not required by the AO for examination. Mr. Barna and Mr. H.C. Jain appeared in person and their statements have not been controverted. There was no admission made by the chartered accountant or accountant, Therefore, the AO is not justified in drawing adverse inference on the statements of Mr. Bafna, chartered accountant and Mr. H.C. Jain, accountant. There is no finding by the AO that the assessee has admitted the valuation, as proposed by AO. Therefore, the contents of the affidavits of Sh. P.C. Dhadda (sic-Mr. B.C. Jain), accountant, attain finality in view of Hon'ble apex Court decision in the case of Mehta Parikh Co. Also, the question arises when the assessee has established, as in the present case, that the closing stock of low quality remains as balance of a particular cost i.e., Rs. 2,40,500, whether applying an average cost at Rs. 407.63 per carat Le., a cost which has the average of value of stock sold which is of much higher value than the value of actual stock of low quality will be the accurate valuation and whether it can be said that such average cost if applied to a quantity of closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be ascertained as to from which lot the sales have been effected, the only way to work out the cost of the balance 78,540 cts issued for production was to take the average cost plus the manufacturing wages incurred thereon. Cost of 89,440 cts rough Rs. 1,06,45,402 Cost of 78540 cts on average 10645402/89440 x 78540 Rs. 93,48,503 Add: Manufacturing wages Rs. 2,01,765 --------------- Rs. 95,49,818 --------------- As the assessee has declared the value of work-in-progress at Rs. 65,72,265 only, an addition of Rs. 29,77,553 is made for undervaluation of work-in-progress." 19. The learned CIT(A) for the reasons mentioned in vide para 6.3 of his order sustained an addition of Rs.9,52,521, thus giving a relief of Rs. 20,25,032. 20. We have perused the facts of the case and after hearing the parties, we find that there is no dispute as regards quantitative details in the stock register maintained by the assessee. The only objection of the AO is that the assessee has not maintained the qualitative details with respect to the work-in-progres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Chand Dhadda. 23. Briefly stated, the facts of the case are that the AO has not made any discussion with regard to the said grounds through a detailed letter dt. 5th Dec., 2002 (PB 1) which was submitted before the AO whereas the learned CIT(A) has given his findings vide paras 5.3 and 5.4 of his order that the plea of the assessee that stock is mixed up with M/s P.C. Dhadda Co. at the time of search is not correct and the Department valuation by the Departmental Valuer who has valued the closing stock which consists of two concerns, namely, M/s P.C. Dhadda Co. and the assessee is not correct. 24. Shri N.M. Ranka, senior advocate, argued that the detailed submissions were made before the learned CIT(A) vide written submissions dt. 18th Sept., 2004 vide paras 1.4 to 1.9 of the written submissions in PB 31 to 33 and the valuation report was also submitted before the learned CIT(A). The Departmental Valuer has apprised the value of the stock found on 29th Oct., 1999 and the cost in the books of account of M/s P.C. Dhadda Co. and the assessee was as under: (i) M/s P.C. Dhadda Co. Rs. 60,92,357 (ii) M/s Shreyans Gems (P) Ltd. Rs. 68,33,199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained by the assessee. Since the explanation of the assessee and the affidavits of Shri P.C. Dhadda and Shri Bafna have not been disproved by any of the authorities below, in such circumstances and facts of the case, the explanation of the assessee has to be accepted and no adverse view can be drawn from the explanation or the statements made or submitted by the assessee. Shri N.M. Ranka relied upon the decisions of Hon'ble apex Court in the cases of Mehta Parikh Co., State vs. Guljari Lal Tandon AIR 1979 SC 1382 and J.A. Naidu vs. State of Maharastra AIR 1979 SC 1537. In view of the arguments made by Shri N.M. Ranka and explanation given by the assessee, we are of the view that the closing stock of the assessee as on 29th Oct., 1999 was mixed up and was under seizure since 11th Nov., 1999 and the said stock was not found anywhere else and the Department has not brought on record that the assessee has sold the stock to any other person and the business of the assessee has been closed and the assessee has filed the return of income for the following years upto assessment year 2006-07 from the impugned assessment (PB 199 to 216) and no unrecorded sales in the following years have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .50 cts] against 59.50 per cent (118050.68 out of 197050 cts) last year. These facts were pointed out to the assessee vide my letter dt. 17th Dec., 2002. The reply filed on 24th Dec., 2002 was that the yield was better last year and the yield may not be compared product cost-wise. This reply is very vague. There was no explanation for high percentage of waste claimed. There was no reply to the question posed in view of the increased cost of rough emerald used and low quantity of Tall produced indicating better quality of material used for production of emerald stones. In view of these facts, I estimate the yield at 25 per cent which means that the production of stones will be 1,11,341.50 cts against 98,521 cts declared, the additional production being 12,820.50 cts. Average sales price of emerald stones was Rs. 872.94 (4,97,39.254/56978.82). At that rate, the value of suppressed production is taken at Rs. 1,11,91,527. An addition of Rs. 1,11,91,527 is therefore, made for suppression of production of emerald stones." 29. The learned CIT(A) deleted the said addition vide para 7.2 at p. 18 of his order (relevant portion is produced): "The AO is not justified in making such additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vii) Jhandu Mal Tara Chand Rice Mills vs. CIT (1969) 73 ITR 192 (P H); (viii) Triveni Pharma vs. ITO (2004) 85 TTJ (Jp)(TM) 950 : (2005) 92 ITD 125 (Jp)(TM); (ix) Uttam Chuna Pathar Udyog vs. ITO (1997) 59 TTJ (Jp) 763 : (1998) 65 ITD 466 (Jp). 31. Therefore, in such circumstances and facts of the case, the AO is not justified in making any addition in the absence of any material on record. Hence, we find no infirmity in the order of the learned CIT(A) who has rightly deleted the addition of Rs. 1,11,91,527 made by the AO. Thus, ground No. 2 of the Revenue is dismissed and ground No. 4 of the CO of the assessee is allowed. 32. In ground Nos. 4 and 4.1 of the assessee and in ground No. 5 of the CO, the assessee's grievance is against the sustenance of disallowance of Rs. 56,012 out of foreign tour expenses. 33. Briefly stated, the facts are as per pp. 6 and 7 of AO's order as under: "Details of travelling expenses of Rs. 3,18,397 filed. This included two amounts of Rs 54,062 and Rs. 11,950 on travel to New York. I had earlier questioned about the directors and vide letter dt. 5th Dec., 2002, the assessee had stated that Shri Shreyans Dhadda became a director on 10th Dec. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and therefore, the AO was not justified in making the addition on this account. Hence, the addition sustained by the learned CIT(A) is reversed. Thus, ground Nos. 4 and 4.1 of the assessee and ground No. 5 of the CO of the assessee are allowed. 36. In ground Nos. 5, 6, 7, 8 and 9, the assessee is aggrieved against the charging of interest under ss. 234B, 220(2) of the Act and computing the total income at Rs. 1,87,68,801 against returned income at Rs. 2,92,390 and not giving of credit of tax of Rs. 1,15,500 and holding the tax and interest payable at Rs. 1,30,24,353. 37. After hearing the parties and on perusal of the facts, we find that the issues raised in the ground Nos. 5, 6, 8 and 9 are consequential and as regards the credit of tax of Rs. 1,15,500 in ground No. 7 of the assessee, the AO is directed to allow the same after examining the claim of the assessee. Thus, ground No. 7 of the assessee is allowed for statistical purposes. 38. The ground No. 10 is general in nature and does not require any adjudication. 39. In the result, the appeal of the assessee in ITA No. 172/Jp/2005 is partly allowed, the appeal of the Revenue in ITA No. 116/Jp/2005 is dismissed and the C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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