TMI Blog2014 (7) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... losing stock - Closing stock of the diamond was and by applying the rate - The decision in Dy. Commissioner of Income-Tax Versus M/s. M. Kantilal Exports [2014 (7) TMI 819 - ITAT AHMEDABAD] followed - the AO is directed to re-calculate the valuation of the polished diamond by adopting the average rate of the two figures and accordingly compute the under valuation of the polished diamonds – Decided partly in favour of Revenue. Valuation of closing stock of polished diamonds - Valuation made without any method – Valuation made at average rate of purchases – Held that:- The valuation of the stock is to be made at the market price or the cost price, whichever is lower - when the complete information about the quality of the stock is not made available then to resolve the issue a middle path is to be adopted - the assessee was in possession of the rough diamond; hence, the difference of the two, i.e., purchase cost (- minus) sale cost is the correct method for determining the valuation of the rough diamond - The decision in Dy. Commissioner of Income-Tax Versus M/s. M. Kantilal Exports [2014 (7) TMI 819 - ITAT AHMEDABAD] followed - the AO is directed to re-compute the valuation of th ..... X 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. 6. The CIT(A) has erred in law and on facts in directing to restrict the disallowance ₹ 34,21.248/- to ₹ 2,00,000/- made by 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed for the respective units of ₹ 1,71,06,420/- and ₹ 1,67,44,290/- the AO has raised serious doubts and proceeded to disallow the same. An inspector was deputed to submit his report and noted that incorrect information about 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 ₹ 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 ₹ 267 per carat however for the year under consideration it was ₹ 300, therefore, the assessee was asked to explain as to why the labour charges payments to the extent of ₹ 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 ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any adverse findings on record to support that the job charges paid were bogus or highly initiated, disallowance on this account cannot be sustained. However, since complete records of such labour charges were not produced and a few persons to whom summons were issued did not appear before the AO, it is not improbable that some part of the labour payment is excessive. 1 am therefore of the considered view that a token disallowance of ₹ 5 lacs out of labour charges paid will serve the interest of justice and the balance disallowance of ₹ 29,21,284/- is directed to be deleted. 4.1 Regarding disallowance of labour expenses of ₹ 16,74,429/-, learned CIT(A) has granted part relief and restricted to ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er carat can be allowed instead of ₹ 300 as claimed by the assessee. We hereby reverse the finding of learned CIT(A) in respect of an adhoc disallowance of ₹ 5 lac and ₹ 2 lac, respectively and direct the AO to re-compute the disallowance after adopting the rate as settled by us. Accordingly, this ground of the Revenue is partly allowed. 6. Ground Nos.2 and 3 are reproduced below: The CIT(A) has erred in law and on facts in directing to delete the addition of ₹ 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 ₹ 7,741 per carat. Whereas the average sale price for the whole year was ₹ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout increasing the value of opening stock for that year. 1 have gone through the details and find that the stock of polished diamonds of 1,785.91 carats was out of manufacturing bill of 11.1.2002. A perusal of detailed filed by the appellant shows that it manufactured 8,706.45 carats out of this. The cost of labour on this was ₹ 86,77,524/- by using 9,6430.08 carats. Further, there was a heavy rejection of 67,505 carats out of these diamonds and the total cost of manufacture was ₹ 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 ₹ 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 ₹ 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 conject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exact valuation of the polished diamond as furnished by the assessee; we are of the view that the valuation of the polished diamond could have been made by adopting the basis of the sale of the last month of the accounting period. This figure can thus be a starting point for the calculation. Hence, by comparing the sale price of the last month a reasonable view can be adopted about the exact position of the valuation of the closing stock. The assessee had adopted the average value of the polished diamond in the closing stock at ₹ 4,650/- however the value per carat of the diamond in the month of March, 2002 was ₹ 8,247/-. We therefore comment that the average price at ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be fairer and more appropriate to apply the rate which is relevant to ascertain the value of the closing stock. Naturally the value of the stock prevailing on the last day of the accounting period is relevant, however, the value prevailing on the first day of the accounting period is not at all relevant in the present situation, especially, when the assessee has failed to bring any material necessitating for making any corresponding changes in the value of the opening stock. In the present 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 328.03 1125.84 = 202.19 X 54406.32 carats) The said addition is warranted due to the following facts:- 11. When the matter was carried before the First Appellate Authority, learned CIT(A) has deleted the addition as follows: I have considered the submissions and have gone through the details furnished. It is seen that as per bill dated 5.03.2002, 1533 carats of rough diamonds purchased on 6.02.2002 were issued to job workers on 14.02.2002, rough diamonds weighing 1,641.97 carats purchased on 13.2.2002 were issued on 18.02.2002 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 ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue is partly allowed. 13. Ground Nos. 7 and 8 are reproduced below: 7. The CIT(A) has erred in law and on facts in admitting additional evidence without reporting it to the Assessing Officer and directing to allow the deduction u/s.80HHC of the Act on export realization during the extended period. 8. The CIT(A) has erred in law and on facts in not considering the fact that the assessee was not in possession of approval of extended period from the Competent Authority till the date of assessment order. 14. Having heard the submissions of both the sides, 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 ₹ 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not maintained; hence, the AO was justified in applying the provisions of Section 145(3) of IT Act. On rejection of this ground, the assessee is now in appeal. 16.2 This issue was discussed by us in the case of M/s. M. Kantilal Exports (supra) and after having detailed discussion we have approved the rejection of books of account by the Revenue Authorities. On the same lines, this ground of the assessee is hereby dismissed. 17. Ground Nos. 2 and 3 are reproduced below: 2. The learned CIT(A) has grievously erred in law and on facts in confirming disallowance of labour expenses at ₹ 60 per carat amounting to ₹ 27,64,847/- without finding any defects in labour payment made at market rate of ₹ 300 per carat allowed in A.Y. 2001/02. The addition of ₹ 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 ₹ 7,44,120/- at 10% of ₹ 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 ₹ 7,44,120/- should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27,64,847/- made by the Assessing Officer is confirmed. 19. Heard both the sides. While deciding the appeal of M/s. Kantilal Exports (supra), we have taken a middle path and held that to resolve the issue an average of the two can be adopted to work out a reasonable labour charges; relevant paragraph 23 is reproduced below: 23. While deciding the appeal of the assessee for A.Y. 2002-03, we have dealt with this issue wherein we have noted that one of the admitted fact was the labour charges are different from lot to lot depending upon the quality of the diamond manufactured. We have also noted that while explaining the correctness of the valuation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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