TMI Blog2008 (9) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... is observed that none of the lower authorities have found that the various expenses claimed by the assessee in its profit and loss account were not supported by vouchers or not verifiable or were not genuine. In the above circumstances, the ld CIT (A) was not justified in rejecting various expenses disclosed by the assessee s day-to-day maintained books of account. Merely because the profit disclosed by the other businessmen in terms of the turnover of its business differs from the rate of profit disclosed by the assessee in terms of its turnover will not, by itself, empower the ld CIT (A) to add any amount to the income of the assessee. We are confident that the Revenue authorities must have come across the case of other assessees whereby securing similar or more turnover the assessee suffers a loss in the business or secured lesser profit than the assessee. In the instant case, as no specific defect in the various expenses claimed by the assessee in the profit and loss account could be pointed out by the Revenue, the ld CIT (A) was not justified in arbitrarily applying the rate of net profit of 3 percent in making addition. As the addition on account of valuation of closin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amond business and also crucially linked to the sale price of individual diamond piece, records thereof will acquire the character of primary records and depriving the Revenue of the same to verify the correctness of the income is contrary to the obligation caste upon the assessee to maintain such records for verification and ascertainment of income by the Income Tax authorities. He, accordingly, rejected the books of account and made addition of Rs. 53,07,218/- to the closing stock valuation of the assessee. 6. In appeal, the Ld. CIT(A) observed that accounting does not consist of merely of tally of cash transactions. There should be also tally of goods handled in the business. If the goods in opening stock and purchases do not match with the aggregate of sales and closing stock, there is need for explanation. It is for this reason, that the A.O would insist upon stock account to enable verification as to whether there is a tally. It will not be possible in certain lines of trade like retain grocery or hardware to keep item-wise stock account, so that financial result is not capable of verification. But if gross profit is reasonable in comparison with similar other trade, the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicaps the verifiability of average margin of profits as held in CIT v. Parekh Bros. (1987) 167 ITR 344(Pat.). Improsper valuation is held to be a justifiable ground for rejection of books of accounts by the Hon'ble Madras High Court in the case of CIT v. Sri Viswasardas Gokuldas 14 ITR 110 (Mad.). Non mention of quality would also seriously erode the credibility of day-to-day manufacturing and production accounts themselves. Diamonds quality as per trade practice is dependent on cut, clarity, colour and carat (weight). The cut determines the proportion of the diamond as well as its shape and finish. A well cut diamond will display maximum brilliance and fire which is considered one of the most important qualities of a diamond. In view of the above, the Ld. CIT(A) held that he was in agreement with the A.O that in the instant case, the books of account to be rejected as they are not correct and complete insomuch as the verification of production, corresponding sales cost valuation and the average margin of profit cannot be verified or ascertained in the absence of quality of diamond manufactured. The nature and special character of diamond business gives utmost importance to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proper and fair to estimate the net profit at the lower side at 3%. He observed that this would mean of income of Rs. 4,65,94,861/-since the taxable income as per assessment order was worked out to Rs. 2,46,61,270/-, he made addition for the balance amount of Rs. 2,19,33,591/- to the income of the assessee. 10. Ld. Counsel for the assessee, at the time of hearing, referred to Page-35 of the paper book where P L A/c for the year ended on 31.3.2004 is filed. He submitted that it will be observed that in the year ended on 31.3.2003, the assessee had earned export exchange difference of Rs. 1,10,74,249/- on the turnover of Rs. 129.35 crores. He submitted that in the present year under appeal, the assessee has not earned any export exchange difference and, hence, the net profit shown by it was lower than the immediately preceding year. He, thereafter, referred to Page-46 of the paper book wherein Schedule-K in the notes of account showing raw material consumption, it was pointed out that in the present year, the assessee made import of Rs. 86.36 lakhs and local purchases of Rs. 9.06 crores which in the immediately preceding year was import of Rs. 108.91 lakhs and local purchases of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There has been rise in gross profit in the year under scrutiny A.Y. 2004-05 in comparison of earlier A.Y. 2003-04. This important point should not be, respectfully, brushed aside. So, the firm has shown better position. (4) Exact Nature of Business: Your honour has not given the exact nature of business because in diamond industry exact nature of business has got much relevance. So random comparison can never be made. Because net profit depends on managerial skill, Raw Material Purchase, Marketing, Types of Machinery, Size Attributes of diamonds. Diamonds are natural stones having differed attributes. So all persons, units are not dealing in similar types of attributes of diamonds, all are not having similar managerial skill, marketing etc. So, totality of the facts are to be considered not only single slice of net profit to be examined. So, we with due respect, straight away objects the comparison because in diamond industry even comparison with past of the same unit is not fair justifiable. So question of comparison with other unknown units ceases to exist right from root. (5) Exchange Rate Difference: In the year under scrutiny A.Y.2004-05 the debit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diamonds. The assessee explained before the A.O that on account of numerous quality of diamonds dealt in to maintain the quality-wise details is not practically possible. The A.O. finding this error, rejected the trading result of the assessee and estimated the closing stock of the assessee at Rs. 16,78,67,218/- in place of Rs. 16,25,60,000/- shown by the assessee and thereby made a trading addition of Rs. 53,07,218/-. 14. In appeal by the assessee, the Ld. CIT(A) observed that the rate of gross profit as shown by the assessee comes to 1.28% whereas in case of other assessees, the same was from 7.41% to 3.08%. He, therefore, estimated the net profit of the assessee @ 3% and enhanced the addition by Rs. 2,19,33,591/-. 15. The assessee contended that the additions as aforesaid are without any basis, arbitrary and are unsustainable. He pointed out that the rate of gross profit in his case in the immediately preceding year was 7.7% before considering exchange fluctuation and 6.95% after considering exchange difference. In compare to this, the gross profit shown by the assessee was 10.1% before considering exchange difference and 7.09% after considering exchange difference. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT(A) was not justified in rejecting various expenses disclosed by the assessee's day-to-day maintained books of account. Further, in business, profit is a result of various dynamics. The result of two different businessmen doing the business in the same line may defer greatly because of various reasons for e.g., the value of plant and machinery employed in the business, the ratio of own capital verses borrowed capital employed in the business, time devoted by the owner of the business, risk taking capacity of the owner, etc. Thus, merely because the profit disclosed by the other businessmen in terms of the turnover of its business defers with the rate of profit disclosed by the assessee in terms of his turnover will not, by itself, empowers the Ld. CIT(A) to add any amount to the income of the assessee. The Ld. CIT(A) has brought no material on record to show that the rate of net profit of the assessee should be the same as that in the case of other assessee, which were considered by him. We are confident that the Revenue authorities must have come across the case of other assessee's whereby securing similar or more turnover the assessee suffers a loss in the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X
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