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TMI Blog2014 (7) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... y the A.O. on account of labour charges." 3. Facts in brief as emerged from the corresponding assessment order passed u/s.144 r.w.s. 145(3), dated 29.03.2005 the assessee firm is stated to be in the business of purchase of rough diamonds and manufacture the polished diamonds and export the diamonds. The firm is also doing cutting and polishing of diamonds on job work basis. It was noted by the AO that there was decline in the GP rate as per the following chart: - 3.1 Because of the decline in the GP, the AO has asked for certain details. In respect of the books of account, the observation of the AO was that only ledger, cash book and bank accounts were produced; however, the production record, date-wise details of diamond received and diamond given to job workers, etc. were not produced. Further, labour expenses register, production register, inventory of stock register, etc. have also not been produced. It has also been noted by the AO that "janghads" have also not been produced. 3.2 On the other hand from the side of the assessee, it was informed that separate accounts have been maintained in respect of the different activities carried by the assessee. The position of the gros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the labourers were furnished by the assessee. The labourers were not having their own Plant and Machinery. Certain serious doubts have been raised about the payment of labour charges at flat rate of Rs. 300 per carat in all cases of the group. He has compared the payment of labour charges from the rates of payment made in the past years. As per a comparative chart, there was increase in payment of labour charges per carat during the year under consideration. In A.Y. 2001-02, the assessee had paid Rs. 267 per carat however for the year under consideration it was Rs. 300, therefore, the assessee was asked to explain as to why the labour charges payments to the extent of Rs. 60 per carat be not disallowed. In the absence of any satisfactory explanation, the AO had disallowed the labour expenses 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 the genuineness of the labour expenses and to substantiate increase in the rate of labour charges from average labour charge at the rate of Rs. 240/- per carat in earlier assessment years to R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not improbable that some part of the labour payment is excessive. 1 am therefore of the considered view that a token disallowance of Rs. 5 lacs out of labour charges paid will serve the interest of justice and the balance disallowance of Rs. 29,21,284/- is directed to be deleted." 4.1 Regarding disallowance of labour expenses of Rs. 16,74,429/-, learned CIT(A) has granted part relief and restricted to Rs. 2 lac only and balance was deleted in the following manner: "I have considered the submissions and find that as per the show cause notice issued by AO, it was mentioned that profit of 4 to 5% would be there in this kind of business while the appellant has shown profit of only 2%. If 10% of such labour payments arc disallowed, the profit would work out to 12% against 4% proposed in the notice. However, it is also seen that the appellant's contention that it was earning only 2% commission only is also not true & correct, since by its own admission and details furnished, the commission worked out to 2.08% to 2.21%. Since, the appellant is contradicting itself on this issue, 1 am of the considered view that it would be fair & reasonable, if a part of the labour payment is disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced below: "The CIT(A) has erred in law and on facts in directing to delete the addition of Rs. 1,02,53,498/- made by the AO on account of under valuation of closing stock of polished diamonds. " 6.1 The AO has prepared a list of month-wise sale of polished diamonds and compared the same with the purchase of the diamonds. It was found that the average sale price of the polished diamond during the month of March, 2002 was Rs. 7,741 per carat. Whereas the average sale price for the whole year was Rs. 10,862/-. The AO has found certain defects in the valuation and thereupon he has computed the valuation of the closing stock of the polished diamond as follows: "The closing stock is to be valued at cost or realizable value whichever is lower. If the basic principle of valuation is adopted, the valuation of closing stock can never be less than cost and realizable value of the polished diamond is determinable form sale instances. Considering sale instances of diamonds as at the end of the year, there is no logical reason as to why the value of closing stock of diamonds should not be adopted at Rs. 7741.34 as against average sale price for the whole year at Rs. 10,862/- per cara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and the total cost of manufacture was Rs. 3,00,69,398/- A perusal of details also shows that the appellant sold 6,920 carats from polished diamonds at an average cost of Rs. 3,829 per carat as was evidenced by the copies of sale invoices. If the said amounts are deducted from the total cost of manufacturing, the average cost of closing stock would work out at Rs. 2,000 per carat. It is also seen that the same method of valuation was followed by the appellant in earlier years also and therefore, the AO had no justification in changing the method of valuation without having a strong reason for it. The AO in this case has made additions and disallowances without bringing any adverse material on record and has gone by conjectures & surmises only. Therefore, I am of the view that the method of valuation of closing stock in respect of polished diamonds is not correct and this kind of an addition is not sustainable. 1 am also inclined to agree with the appellant that a closing stock is valued at a higher price, the opening stock for the current year as well as the next year would also have to be valued by the same method which would in a fact result in lower profit for the year under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage value of the polished diamond in the closing stock at Rs. 4,650/- however the value per carat of the diamond in the month of March, 2002 was Rs. 8,247/-. We therefore comment that the average price at Rs. 4,650/- per carat was towards lower side. To resolve the issue a mid path can be adopted. 9.1 As a general rule, a profit of a business can only be determined by taking into account the valuation of the stock. There has to be a comparison at the opening with the closing of the accounting year. So as a normal rule, a profit is to be ascertained by valuing stock-in-trade at the beginning as also at the close of the accounting year. There is one more well accepted rule that the valuation can be adopted by taking into account the cost price or the market price whichever is lower. Normally, according to this system, on the first occasion, the stock is brought in at cost price. If any portion thereof is left unsold at the close of the year, the value to be entered therefor, according to this system of accounting, is its market price. If it is found that such market price is below cost, valued accordingly but that would be the valuation of the opening stock of the subsequent year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent 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 discrepancy as noted in respect of the quality of the diamond can to some extent be rectified. We, therefore, hold that this year can be treated as a demarcating year from the past years; hence, without disturbing the value of the opening stock, the AO is authorized to change the method of valuation for valuing the closing stock. With this theory in mind, we hereby hold that an average of the two valuations is the right solution. The average of the two valuations is 6448/-. To resolve this long pending issue, according to us, is a reasonable and fair approach to compute the value of the stock of the polished diamond at Rs. 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 Rs. 6,448/- the value to be worked out is Rs. 8,32,42,003/-, out which the value declared as per assessee is to be reduced of Rs. 6,00,30,337/; thus the balance comes to Rs. 2,32,11,666/-. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002 while 557.42 carats purchased on 18.01.2002 were issued on 25.01.2002 to job workers for manufacture. It is only the diamonds which were purchased after 13.02.2002 which would found part of closing stock of rough diamonds There is no justification whatsoever for ignoring the bills of the appellant and taking into account the rough diamonds which were already issued for job work for valuation of closing stock. Such invoices evidencing the purchase of rough diamonds on 19.02.2002 till December, 2003 were furnished before the A.O also and therefore should have been accepted since the exact quantity and value of such rough diamonds was available. The addition has been made without appreciating the appellant's submissions and totally ignoring the Appellant documentary evidence available and therefore such addition is not sustainable and is directed to be deleted. Further, I am also declined to agree with the appellant that if this addition is sustained, it would result in increased opening stock by the same amount in the next assessment year which would reduce the profit for that year to this extent and therefore would be revenue neutral. The appellant therefore gets a relief of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, we find no force in this ground of the Revenue because learned CIT(A) has examined the requisite approvals and thereafter directed the AO to recompute the deduction of 80HHC in the following manner: "The other ground of appeal is regarding disallowance of deduction u/s 80 HHC of the IT Act on export realisation of Rs. 3,87,77,445/-. This disallowance was made by the AO on account of the fact that the certificate from the C.A. shows that the appellant had not realised this amount and had applied for R.B.I. permission and the extension was granted by R.B.I. The AO held that no such permission was obtained by the appellant, since only the Branch Manager of State Bank of Saurashtra had recommended the said extension. In this connection, it was submitted that the appellant had submitted permission from R.B.I. in accordance with provisions of section 80 HHC (2)(a) of the Act for realisation of the said amount. The State Bank of Saurashtra was authorised for collection and granted the permission for late realization. The same issue arose in AY 1999-2000 also and the nonallowance was deleted by the appellate authorities. 1 have considered the submissions and have gone through the cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 per carat amounting to Rs. 27,64,847/- without finding any defects in labour payment made at market rate of Rs. 300 per carat allowed in A.Y. 2001/02. The addition of Rs. 27,64,847/- should be deleted. 3. The learned CIT(A) has grievously erred in law and on facts in confirming disallowance of labour expenses of Rs. 7,44,120/- at 10% of Rs. 74,41,206/- paid to job workers in case of commission based labour activity without appreciating the facts of 2.12% fixed commission received by appellant per the terms of work. The addition of Rs. 7,44,120/- should be deleted." 17.1 In respect of labour expenses, in the absence of verification of the workers and the disparity in the outstanding labour expenses AO has held that the labour charges to the extent of Rs. 240 would be allowable per carat as against Rs. 300 per carat claimed, accordingly worked out a disallowance of Rs. 27,64,847/-. 18. When the matter was carried before the First Appellate Authority, learned CIT(A) has confirmed the action of the AO as follows: "5.2 I have considered the assessment order and the above submissions on this issue. I find that the appellant has from year to year raised the amount of job work char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the stock in the past year, the assessee himself had taken a plea that the diamonds 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 Rs. 240 per carat labour charges as against the claim of the assessee of Rs. 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 @ Rs. 270 per carat. We hold accordingly and the AO is directed to re-compute the disallowance. Resultantly, this ground of the assessee is partly allowed." 19.1 Having heard the submissions of both the sides, we hereby hold that on the same lines for this appellant as well an average is to be taken f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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