TMI Blog2012 (12) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the ITAT Mumbai Bench in the case of DCIT vs. Samir Diamonds Exports (P) Ltd. [1998 (10) TMI 509 - ITAT MUMBAI BENCH]. Order of AO to enhance the gross profit by 4% of the total turnover restored. - Decided in favor of revenue. - ITA no.3089/Ahd/2007 AND ITA no.2585/Ahd/2009 - - - Dated:- 31-1-2012 - SHRI D. K. TYAGI AND SHRI A. K. GARODIA, JJ. Revenue by :- Shri Vinod Tanwani, Sr. DR Assessee by:- Shri M K Patel, AR ORDER PER D K TYAGI (JM): - These two appeals have been filed by the Revenue against two separate orders dated 09-04-2007 and 30-06-2009 passed by the Learned Commissioner of Income-tax (Appeals)-V, Surat [ learned CIT(A) ] for Assessment Years (AY) 2004-05 and 2005-06 respectively. 2. In both the appeals, the Revenue has challenged the orders of the learned CIT(A) on the ground that the learned CIT(A) has erred in deleting the additions made by the AO in respect of low Gross Profit. Since in both the appeals, the issue is same, we are disposing of these two appeals by this consolidated order, by taking the facts of Assessment Year 2004-05. ITA no.3089/Ahd/2007 for AY 2004-05:- 3. In this appeal filed by the Revenue, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary to have a record of both the quantity in terms of carats as well as quality of rough diamonds given to each labour contractor or to each labourer, as it is only from these packets, the polished diamonds would come out. The labourers / contractors after doing the exercise of cleaving and polishing, return the polished diamonds along with the residual to the business man both in weight and pieces. The assessee, after segregating them quality wise, fix the sale price. This would mean, the assessee is in full knowledge of the quality of each and every diamond manufactured out of the rough diamonds. This particular knowledge of the quality of the diamond is necessitated from the fact the value of polished diamonds varies from Rs.1,000/- per carat to Rs.1,00,000/- per carat or even more. Needless to say, it is a known fact that the price of diamonds depend upon 4 Cs. They are (i) carat (ii) cut (iii) colour and (iv) clarity. 4.1 This aspect may be elaborated by 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 cara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer to compute the assessee's total income in accordance with the provisions of the I.T. Act. From this, it follows that the purpose and intention of Legislature in enacting the provisions of section of 44AA of the Act is to put an obligation on the assessee to maintain and keep primary records on the basis of which the tax authorities are able to ascertain and compute the assessee's correct income. From this it also follows that it is not always the prerogative of the assessee to maintain the records the manner in which it likes. However, as noticed in the preceding paras the assessee did not maintain the books of accounts and documents on the basis of which the income declared in the return could be ascertained. If the primary records were maintained by the assessee they were not produced before the undersigned for examination and to compute the correct income. 6.1 Here it would be pertinent to mention that the assessee had shown closing stock of polished diamonds of the quantity of 321.39cts. at Rs.83,36,970/-. The detailed inventory of the stock in terms of quality was called for. However, the assessee has not produced any such details. Therefore, in absenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of Rs.1,01,82,895/- on gross turn over of Rs.7,37, 47,135/- @ 13.81% as compared to gross profit of Rs.1,07,26,776/- on gross turnover of Rs.5,36,39,699/- @ 20.%. 7.2 In view of the above, vide this office letter 30.10.2006, the assessee was given one more opportunity to explain the fall in gross profit ratio. The relevant portion of the show cause notice is reproduced as under: "It is seen that there is a sharp fall in the gross profit rate from 20% last year to 13.81% of export division this year. You have, in your submission, has attributed the fall in g.p. due to the business competition, increase in cost of rough and decrease in rate of polished diamond, money crisis in diamond business, change in Govt. Exim Policy and recession in whole economy. The reason cited by you for fall in g.p. margin from 20% of the last year to 13.81% during the year under consideration, does not seem to be convincing as any business competition will not result in decrease in business profit margin by 6.19%, since even 0.10% margin may result in loss of lakhs of rupees. A fluctuation in margin of 0.5% Plus or minus can be there in business of precious commodities, but by any stretch of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture by us it is depend of quality of Rough, skill of karigar etc. Job work on commission basis whatever rough is received from the party we handed over to Labour Parties for manufacturing and after manufacturing, we received polished diamond from Labour Parties, same we return to the original party. We have concern only for commission. In our own manufacture we require quality of diamond because we have to export it and thereof we want perfect cutting, shape, weight etc. and therefore we paid more labour charge to get good quality of diamond so we can sold in a market with a reasonable price". 7.3 A plain reading of the submission of the assessee shows that the assessee himself gives contradictory statements. At one place, the assessee states that it is not possible to give quality of diamond manufactured by it and it depends upon the quality of rough, etc. On other hand it is stated that in their own manufacture they require quality of diamond as they have to export good quality of diamond. Further, for the query raised on account of excess labour payment per carat on own manufacture when compared to the job work manufacturing, the assessee has stated that for their own man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uffice to say that in view of the fact that the assessee had not maintained the records of production in terms of quality from the rough diamonds and their subsequent sales, the assessee's declaration of closing stock of polished diamonds cannot be verified as the assessee had not furnished the detailed inventory of closing stock. Hence, assessee's claim of increase in cost price and also the reduction in sales price per carat affecting the overall GP, remained unverifiable on account of non-maintenance of production of polished diamonds in terms of quality. 7.7 However, taking into account the defects in the books of accounts, it is evident that the correct profit there from cannot be deduced at. I, therefore, in view of the defects in the system of method of accounting, reject the books of accounts of the assessee under section 145(3) of the I.T. Act and proceed to estimate the gross profit as under:- 7.8 Here, it would be reiterated that during the year under review, the assessee had shown the fall in GP of 6.91% in the export activity of diamonds. However, taking into account the difference in exchange rate and also the reasons put forth by the assessee especially the incre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ) O/s of Polish Diamonds 1174.30 16776583 Cost of Mfg. of Polish Diamond 4921.43 55124627 - - - - - - - - - - - - - - - - - - - - - - - - Total cost of polish diamond 6095.46 71901210 Les s : Closing Stock 321.39 8336970 - - - - - - - - - - - - - - - - - - - - - - - - - - - - Cost of Polish Diamond Export 5774.38 63564240 i .e. Rs.11007.98 per car at Sale pr ice of diamond exported during the year 5774.36 73747135 i .e. Rs.12,771.44 per car at Sale pr ice of polish diamond per cts. 12771.74 Less : Cost price of polish diamond per cts. 11007.98 - - - - - - - - - - - - - - - - Profit per cts. 1176.46 - - - - - - - - - - - - - - - In AY 2003-04 profit per cts. is Rs. 2605.91 Less :Profit in AY 04-05 per cts . is Rs. 1763.46 - - - - - - - - - - - - - - - 842.45 - - - - - - - - - - - - - - - Total sales (export ) of Polish Diamond Ct s. 5574.36 X Less Profit earned per Cts. as compared to last year 842. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish Paints India Ltd., the operative portion of the expenses were not taken into consideration while arriving at the value of closing stock. Thus, on the basis of above discussed facts, the AR pleaded that the addition as made by the Assessing Officer on account of low gross profit after rejecting its books of accounts may be deleted. 8. Taking into consideration the above submissions made by the AR of the assessee, the learned CIT(A) gave relief to the assessee by observing as under:- 6.1 I have perused the facts of the case and went through the case laws as relied upon by the Assessing Officer. Similarly, I have also gone through the submission as made by the A. R. and the various judicial pronouncements relied upon by him in support of his contentions. After analyzing the facts and statistics with regard to the cost of polished diamonds and the sale receipts against these diamonds on per carat basis for the year under consideration as well as for the immediate preceding assessment year, it is noticed that the A. R. has properly explained the fall in gross profit ratio during the year under consideration in comparison the gross profit ratio reflected by it in the immediate p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings. The assessee also failed to substantiate that fall in GP was due to increase in the cost of rough diamonds and reduction in sale price of polished diamonds. Therefore, the enhancement of GP was quite justified and reasonable and supported by the specific defects of non maintenance of qualitative and quantitative details of stock. The learned CIT(A) while giving relief to the assessee has placed reliance on the two decisions of ITAT the facts of which were quite distinguishable from the facts of this case. The learned DR placed reliance on the decision of the ITAT Mumbai Bench-C in the case of DCIT vs. Samir Diamonds Exports (P) Ltd. (1999) 71 ITD 75 wherein on identical facts the rejection of books of account was upheld and estimation of income after rejection of books of account. Further reliance was placed on the decision of the ITAT Ahmedabad Bench-D in the case of Balar Exports. Concluding his argument, the learned DR submitted that the order passed by the learned CIT(A) may kindly be set aside and that of the AO be upheld. 10. The learned counsel of the assessee, on the other hand, reiterated the submissions made before the learned CIT(A) and furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %. In appeal, the learned CIT(A) deleted the entire addition. While deleting the addition, the learned CIT(A) observed that the AO has not brought any deficiency in the books of account or the method of accounting of the assessee and only reason for rejecting the books of account was that there was fall in GP. We do not find this observation of the learned CIT(A) to be correct as the AO had given in details the reasons for his action of rejecting the books of account that the assessee had failed to produce proper books of account like labour payment register, vouchers, etc. and explain the method of valuing the closing stock despite claiming to have not maintained the quality-wise and piece-wise stock of diamonds, etc. The AO has also explained in detail the practice in the diamond industry that the manufacturer has to maintain piece-wise details to monitor the yield and profit of its business. We further find that the learned CIT(A) has also commented in his order that there was only a marginal fall in GP whereas the AO has shown through a detailed chart spanning a period of four years that the gross profit of the assessee had reduced despite the fact that he had been purchasing q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the ITAT Ahmedabad Bench in the case of Keystone India Pvt. Ltd. vs. DCIT (2006) 99 TTJ (Ahd) 386. In that case while deleting the GP addition, the Tribunal stated that the AO has not pointed out any specific defects in the maintenance of books of account, in the absence whereof, book results cannot be rejected. The AO has not been able to establish that the assessee made purchases at higher cost from the group concerns or made sales to them at lower prices. Rejection of book results only on the ground of fluctuation in GP is not tenable. In the case of the assessee, the AO was prevented to determine the correct profits by the assessee by not producing quality-wise stock of the diamonds. The learned CIT(A), therefore, was not correct in applying the above decision as the AO has noted that the nature of the business of the assessee was such that the correct profit cannot be determined without obtaining the quality-wise stock and consumption. 15. Thus, we see that the facts of the above two cases on which the learned CIT(A) placed reliance while deleting the additions, are distinguishable on facts and, therefore, the ratio as laid down in those cases were not applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control over the trading activity. However, f the assessee had declined to furnish such records merely on the ground that the requisite records were not maintained. The very fact that the assessee had admitted that after the cut and polished diamonds received back from the labour parties they were sorted by the assessee in different lots, sizes, quality etc. would indicate that the assessee had been sorting them out on piece by piece basis. In view of the above, we find that the facts in both the cases relied upon by the learned counsel of the assessee are different and, therefore, the ratio as laid down in those cases is not applicable to the facts of this case. 17. On the other hand, we find that the facts in this case are identical to the facts of the case before the ITAT Mumbai Bench in the case of DCIT vs. Samir Diamonds Exports (P) Ltd. (1999) 71 ITD 75 (Mum). The relevant portion of this case read as under:- Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimate of profits - Assessment year 1987-88 - Assessee was diamond exporter - It Imported rough diamonds and after cutting, polishing, etc., exported final product - Assessee admitted before Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1987-88, the Assessing asked the assessee to furnish specific details of colour, clarity and number of pieces per carat in respect of lots of roughs issued for cutting and polishing and received back so that lots of roughs imported could be correlated with lots of cut and polished diamonds exported. The assessee did not provide the said details stating that it did not maintain de polished diamonds on the basis of weight, cut, clarity, shape and number of pieces. Thereafter, the Assessing Officer examined the labour charges and found that a substantial amount was paid to sister concern assessee also could not furnish the details regarding issuing of rough lots given for cutting and polishing, etc., the expected and actual yield from. It stated that such records were destroyed after goods were received back. Therefore, the Assessing Officer inferred that the assortment of rough and of cut and polished diamonds was done and recorded but the same were not furnished to him. He also noticed that almost invariably uniform rate of labour charges per carat were shown to have been paid which was inconceivable. He also noticed that the diamonds exported, varied from US $ 41 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent prices which ranged from Rs.615 to 12,750 per carat. Therefore, the Assessing Officer was absolutely justified in coming to the conclusion that the assessee was not disclosing the truth before him and that the Commissioners (Appeals), who was perhaps not aware of these niceties and factors applicable to the diamond business, was too credulous to accept the assessee's version merely because the assessee's accounts had been accepted in the past. Further, the details furnished by the assessee in schedule 'O' of its accounts showed opening stock of polished diamonds at 154 carats valued at Rs.5,81,962, product polished diamonds at 29087 carats valued at Rs.7,74,18,469, rough diamonds consumed 1,14,104 carats valued at Rs.5,86,51,949. Keeping in mind the relevant factors discussed in detail the Assessing Officer in his order, nothing could be gathered about the correctness and completeness of the assessee's accounts and about quanta wise and quality-wise stock position and the sales. This was an attempt by the assessee to hoodwink the Assessing Officer, in which it failed but it appeared to have succeeded before the Commissioner (Appeals). Furthermore, the very fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beit on sound expert advise in the interest of efficient administration of business, it would be the duty of the Assessing Officer to determine the taxable income by making such computation as he thinks fit. Therefore, the claim of the assessee that it was the assessee's prerogative to maintain the books in the manner it liked and that the Assessing Officer could not longer reject them because they had been accepted in the past, could not longer be accepted and had to be rejected. Regarding the question as to whether the Assessing Officer was justified in reject ting the books of account, the Assessing Officer's duty is to ascertain the correct profits from the books of account maintained by the assessee and if the books of account are not correct and complete, the fact that all other assessees in that trade are maintaining similar accounts, cannot be a basis for superseding the decision of the Assessing Officer whereby he had rejected the assessee's books of account. Secondly, neither before the Assessing Officer, nor before the Commissioner (Appeals), nor before the Tribunal any evidence had been adduced to corroborate the claim of the assessee that the details required by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... robability also it was to be held that the inference of the Assessing Officer to the effect that the correct record of the assessee's business had either not been maintained or even if maintained, was refused to be produced before the Assessing Officer, was concerned, was correct. Therefore, so far as the Assessing Officer was concerned, the books of account produced before him were not correct and complete. Another defect which he pointed out was that there was no re correlate as to whether the same quality of diamonds had been received after cutting and polishing of which the rough was given. The diamonds may vary substantially on the basis of its colour and clarity 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. The assessee itself had conceded that when the rough diamonds were given for cutting and polishing expected yield was noted on the packets and when the cut and polished diamonds were received back from the labour parties, they were asi,z into different lots ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght not be necessary to compare this year's results with the trading results of the assessment year 1989-90, but past year s result should be considered for comparison, in the absence of any justification having been given for sharp decline in the trading results, the Assessing Officer was more than reasonable in making an addition at the flat rate to only 10.99 per cent which on the sales. It was obvious that these additions raised the GP rate to only 10.99 per cent which was still lower than the GP rate of 11.70 per cent in the immediately preceding year. Since it had already been held that the Assessing Officer had rightly pointed out that the books of account of the assessee were not correct and complete and since he had specifically invoked his powers under section 145(2) according to the provisions of law, he was justified in making an estimated addition by applying a flat rate of profit at 5 per cent on the disclosed sales. Therefore, the order of the Commissioner (Appeals) in this regard was to be reversed and the addition which had been made by the Assessing Officer was to be restored. 18. In view of the above, following the aforesaid decision of the ITAT Mumbai Bench, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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