TaxTMI 
TaxTMI 
2007 (3) TMI 315
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....gainst sales of Rs. 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 &....
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....ssessee moved the application before Settlement Commission. Therefore, the AO did not accept the explanation of the assessee and the valuation of 43,442.53 carats of closing stock was valued at Rs. 407.63 per carat, i.e. the rate worked out as per AO's order p. 2 at Rs. 1,77,08,478 for under-valuation of closing stock. The learned CIT(A) confirmed the action of AO vide para 5.7 of his order by holding as under: "The value of the stock shown by the assessee at Rs. 2,40,500 is therefore wrong and cannot be accepted since the appellant adopted the cost or market price which is lower. In this case the sale price of finished product as discussed earlier is higher than the cost price. The manufacturing account in Sch. D referred to above proves that the appellant has used 4,45,366.50 carats rough emerald for producing finished emerald 98,521 carats. Therefore, there is neither any ambiguity nor any mistake in adopting the average cost price at Rs. 407.63 per carat as discussed by the AO in his order of assessment and also shown in Annex. - A of this order. In view of the above discussion and taking into consideration the facts and circumstances of the case, I am of the considered opinio....
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.... have been complied with and no mistakes or defects have ever been found by the Regulatory Authorities. Business is on wholesale. Payments for sales in India have also been received by cheques. Complete details in respect of wage payments and other expenses have been maintained. Such expenditure is vouched, detailed and verifiable. Payments above Rs. 20,000 have been made by cheques. Entire purchases and sales are vouched, detailed, verifiable and the working results have always been accepted in the past except the year under appeal (paras 1 and 2 PB pp. 1-2). The assessee company has maintained all possible records for manufacturing/processing as also purchase and sale. The accounts are backed by quantitative tally and stock register. Karigar bahis have been maintained wherein complete details relating to processing/manufacturing have been kept. Same have been produced and examined by the lower authorities (para 2 PB 20). The rough emeralds are nature's product. The precious stones differ in colour, size, luster and quality. Quality differs from piece to piece. It is neither practicable nor possible to maintain a qualitative tally/stock register. No jeweller who is manufacturing/p....
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.... and every piece of precious stone is affixed on a small wooden stick. The polishing is done manually and on hand-driving polishing wheels to give the correct edges. It enhances shine in the stone. After polishing, the polished product is again put in chemicals and thereafter assortments are made. Assortments are kept in packets and from such assorted packet products are mixed by making re-assortments looking to the requirements and demands. As stated hereinabove, the rough product has to come in the hands of different persons and under different processes. As mentioned hereinabove, the rough precious stone being nature's product not of standard quality-the ultimate yield differs (paras 4 to 4.5, PB 4-5). The rough emeralds, ghat, finished products, etc. arc being displayed. Same have been displayed in the past in the case of M/s M.D. Jewellers (PB 54-58 paras 2 and 5) and the Hon'ble Tribunal had spot inspection. There had been a search on 29th Oct., 1999, and onwards. At the material time Shri P.C. Dhadda, director of the assessee company and proprietor of M/s P.C. Dhadda & Co. was out of India. No responsible person was available. Stock-in-trade of the assessee company was lying....
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.... paper book Page Nos. 18.09.2004 20-88 27.09.2004 106-107 18.10.2004 89-97 22.11.2004 108-110 06.12.2004 08-107 16.11.2004 111-113 18.12.2004 114-120 21.12.2004 121-129 The affidavits of Shri P.C. Dhadda (PB page Nos. 103-104); Shri H.C. Jain (PB page No. 105) and certificate of Shri Bafna (PB page Nos. 119 and 153) remained uncontroverted, though Shri Jain and Shri Bafna appeared in person and copies provided to the AO. Shri P.C. Dhadda offered for cross-examination, but not examined. The relevant decisions applicable on facts were submitted but ignored by the learned CIT(A). The appeal was partly allowed. 4. Mr. N.M. Ranka further argued that trading account (PB 39 and 127) was submitted before the authorities bel....
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....ld at Rs. 1,500, and Rs. 1,050 per carat; bill dt. 5th Aug., 1999 (PB 51) which was sold at Rs. 2,100 and Rs. 1,300 per carat. 6. Mr. N.M. Ranka further argued that admittedly stock register, Karigar bahis with quantitative tally, maintained, produced and examined. Only two imports were made. Sale was made in local market and to few parties. Entire sales are vouched, detailed and verifiable and no defect in the said record was found. The AO made no comments on facts. The remand report was also taken where the AO has raised the objection that no quality-wise details were maintained (PB 109-112). Shri N.M. Ranka argued that quality-wise details are neither possible nor practicable and other similar manufacturers are not maintaining and it was not maintained in the past or succeeding years. No revaluation/addition in the past and subsequent years have been made. He invited our attention to the order of the Tribunal in the cases of Raj Enterprises vs. ITO (1995) 51 TTJ (Jp) 408, para 4 PB 101 and Prasadilal Devakinandan 22 Tax World 191 PB 128-129. CIT vs. Gotan Lime Khanij Udhyog (2001) 169 CTR (Raj) 318 : (2002) 256 ITR 243 (Raj) PB 101 para 4.1. Incorrect valuation (PB 112) which i....
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....nsideration before the Judicial Committee as early as 1937 in CIT vs. Laxminarain Badridas (1937) 5 ITR 170 (PC) Therein, Lord Russell of Killowen, speaking for the Judicial Committee, observed: "The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by the assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense, too, the assessment must be to some extent arbitrary." 10. In Reghubar Mandal Harihar Mandal vs. State of Bihar, a case arising under the Bihar Sales-tax Act, 1944, the law relating to "best judgment" assessment was examined....
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....nd that 50,510 carats of Tall Kharad with its cost of Rs. 15,153 is not worth manufacturing, as per stock register. Finished products of 10,856 carats were manufactured by 12th May, 1999 from 45,000 carats. The resultant Tall was of 4,830 carats, in the process of manufacturing and the said 4,830 carats is reflected in stock register as receipt. Similarly, finished emeralds were shown in the stock register under the emerald cuts. 13. As regards imports made vide inv9ices as per PB 41 to 44, i.e. imported on 29th April, 1999 was made for 2,68,515 carats, which after sorting resulted in 98,000 carats for manufacturing and 1,50,515 carats of Tall and entries were made in stock register. 20,000 carats were sold as it is without processing for Rs. 11,00,000. 98,000 carats of rough emeralds were put to manufacturing on 29th April, 1999 which resulted into finished product of 19,890 carats by 17th May, 1999. There was a Tall of 5,070 carats in the process of manufacturing and corresponding entries were made in the stock register. Out of rough emeralds weighing 1,07,171.50 carats imported, rough emerald weighing 5,830 carats were sold as it is without processing and balance of 1,01,341.50....
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....ted. (c) The selected rough emeralds are given to the Karigars for conversion into various sizes. Marking is done. Cutting is done and 'ghat' is made manually with hand driven machine. Ghat of different pieces are made by different persons/Karigars. (d) After making of ghat/shaping, the pieces are put for polishing. Each and every piece of precious stone is affixed on a small wooden stick. The polishing is done manually and on hand driving polishing wheels to give the correct edges. It enhances shine in the stone. (e) After polishing, the polished product is again put in chemicals and thereafter assortments are made. Assortments are kept in packets and from such assorted packet products are mixed by making re-assortments looking to the requirements and demands. (f) As stated hereinabove, the rough product has to come in the hands of different persons and under different process. As mentioned hereinabove, the rough precious stones being nature's product are not of standard quality. Therefore, the ultimate yield differs. 16. The fall in gross profit was explained by Mr. N.M. Ranka due to tough competition, market being sluggish and slow and the assessee company decided to substa....
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....has rightly identified from the mixed stock of M/s P.C. Dhadda & Co. and valued the same as per details and P&L a/c at PB 38 and 39 in assessee's paper book. Therefore, in our view, the assessee has supplied all the information possible and made the explanation as mentioned hereinbefore, to the AO and learned CIT(A). The books of account have also not been rejected in the present case. Therefore, the act of the AO and/or learned CIT(A) in valuing a different figure than as explained by the assessee for closing stock is not a judicious act. In such circumstances and facts of the case, the valuation of closing stock of 43,442.53 carats is accepted at Rs. 2,40,500. Thus, ground Nos. 1 to 1.13 of assessee's appeal and ground No. 1 of cross-objection of assessee are allowed. 17. In ground Nos. 2 to 2.3 of the assessee and ground No. 2 of C.O., the assessee's grievance is against the addition on account of undervaluation of work-in-progress by Rs. 29,77,553 which has been sustained by the learned CIT(A) at Rs. 9,52,521. And the Revenue grievance in ground No. 1 of their appeal is against sustenance of the addition from Rs. 29,77,553 to Rs. 9,52,521 by the learned CIT(A) . 18. Briefly ....
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....ase 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-progress maintained by the assessee and accordingly the AO opted to value this closing work-in-progress at average cost. The assessee has explained before the authorities below that the assessee has imported 89,440 carats of rough emerald vide bill dt. 30th Aug., 1999 (PB 42 and 120) for Rs. 1,06,45,402 and it consisted of 6 lots with cost between US$ 1.50 to US$ 35. In lot No. 14,449 gms. equal to 22,245 carats was sorted out. After sorting better quality Kharad was sold with weight 1,09,000 carats for Rs. 45,31,750. It includes sale at Rs. 751 and Rs. 600 as well against average rate of 304.15 carats (para 2.3 at PB 93). It was explained vide para 3.1 (PB 124) that the value of left out 11,345 carats was Rs. 25,06,909. The assessee earned a profit of Rs. 2,55,418 i.e. 5.5 per cent which is more than normal rate of 2.3 per cent. On the basis of the working of the AO, profit on sale of Rs. 45,31,000 would be about R....
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....r 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 --------------- Rs. 1,29,05,556 --------------- The said stock also includes the goods on approval given by M/s P.C. Dhadda & Co. of Rs. 3,43,055 and thus there remains a nominal difference and reason whereof are the value put by the DVO at fair market value and if the margin of profit is reduced from the value put by DVO and the....
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....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 been brought on record and has not been pointed out by the learned Departmental Representative and therefore, the findings of the learned CIT(A) are contrary to the material available on record and therefore, the explanation given by the assessee and the valuation made by the Departmental Valuer that cost of stocks of M/s P,C. Dhadda & Co. at Rs. 60,92,357 and that of the assessee at Rs. 68,33,199 is accepted. The ....
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.... 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 addition in absence of any enquiry and examination of purchase and sale out of books whereas the AO has admitted that the purchases and sales are fully vouched and stock register is maintained which is evident from the assessment order. Moreover, the quantity of rough emeralds is much higher in comparison to the preceding assessment order and the purchase price of emerald rough stones has not been examined by the AO and he just....
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....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., 1999. In the letter, it was stated as under: '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.' The assessee was required to explain why the claim for travelling expenses in the name of Shri Shreyans Dhadda be not disallowed as he was not actively engaged in business and was a student only. Vide letter dt. 24th Dec.,....