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M/s. Anjana Exports Ashwin Parekh & Co., Surat and others Versus ACIT, Cent. Cir. 2, Surat and others

2015 (7) TMI 933 - ITAT AHMEDABAD

Rejection of the books of accounts - assessment order under section 144 r.w.section 145(3) - Held that:- The defects pointed out by the AO are of such a nature, which authorize him to harbour a belief that true income of the assessee cannot be deduced from those accounts. For example, the assessee had adopted incorrect method of accounting with regard to the purchases and sale of licence premium in trading and profit & loss account. The assessee has been showing such sales in profit & loss accou .....

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unts - Decided against assessee.

Disallowance of labour charges - AO allowed labour charges at the rate of ₹ 240 per carat. This disallowance of ₹ 60/- per carat is multiplied with the total carats of diamonds, then the addition, therefore, worked out to ₹ 45,44,029/- Held that:- even if this disallowance is confirmed, then the assessee will not be burdened with any tax liability, because the moment the expenses will be disallowed, its profit ratio will increase and .....

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in favor of assessee.

Valuation of closing stock - AO took the value of the diamond at cost - Held that:- There is no dispute with regard to the proposition that closing stock is to be valued either at the market price or at cost, whichever is lower. The working given by the assessee before the CIT(A) as well as before us in the paper book is altogether an unscientific calculation, because, the assessee has reduced the cost by sale value of the items sold. Whereas, it ought to have re .....

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r expenses - Held that:- After due consideration of the record, and well reasoned findings recorded by the AO, pointing out defects in the details maintained by the assessee, we are of the view that the CIT(A) has rightly upheld the disallowance - Decided against assessee.

Ee-computation of the deduction under section 80HHC after excluding the job work receipts from the total turnover - Held that:- The ld. CIT(A), after taking into consideration the job work receipt, commission, inter .....

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d any merit in this appeal. - Decided against revenue.

Addition on account of valuation of closing stock of rough diamond - Held that:- As far as purchase of diamond is concerned, there is no dispute. Thus, the invoices are of no help for the assessee. Similarly, as far as the transmission of rough diamonds from Mumbai to Surat, is also not a relevant fact for deciding this issue. The assessee is required to demonstrate on the basis of day-to-day stock register in quality-wise, that a .....

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assessee. Therefore, we do not find any reason to interfere in the order of the ld.CIT(A) on this issue. - Decided against assessee.

Value of rejected diamonds - AO has adopted the value on net realized average value of rejection as accepted by CIT(A) - Held that:- No error in the method adopted by the AO. He valued the rejected diamonds at net realized average value, whereas, the assessee did not disclose any basis. Therefore, we do not find any error in the order of the CIT(A). - De .....

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see. - ITA No.938, 939 and 3775/Ahd/2008,ITA No.965/Ahd/2008 - Dated:- 24-7-2015 - Shri Rajpal Yadav and Shri Anil Chaturvedi, JJ. For the Petitioner : Shri Mehul R. Shah For the Respondent : Shri M.K. Singh, Sr.DR ORDER PER RAJPAL YADAV, JUDICIAL MEMBER: The assessee is in appeal against separate orders of even date i.e. 10.1.2008 passed by the ld.CIT(A)-II, Ahmedabad dated 10.1.2008 for the Asstt.Years 2004-05 and 2005-06, while, the assessee and the Revenue are in cross-appeal against the ord .....

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it is pleaded that the CIT(A) has erred in upholding the rejection of the books of accounts and passing the assessment order under section 144 r.w.section 145(3) of the Income Tax Act. 6. The brief facts of the case are that the assessee is engaged in the manufacture of diamonds and its export. It has filed its return of income on 20.10.2003 declaring an income of ₹ 25,68,598/-. Along with return of income, the assessee has filed tax audit report in form no.3CB and 3CD. The assessee has al .....

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order. 7. This action of the AO has been upheld by the ld.CIT(A). 8. With the assistance of the learned representative, we have gone through the record carefully. Section 145 has a direct bearing on the controversy, therefore, it is salutary upon us to take note of this provision. "145(1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or .....

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en regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." 9. From the bare reading of this section, it would reveal that it provides the mechanism how to compute the income of the assessee. According to sub-clause (i), the income chargeable under the head "Profits and gains of the business or professions or income from other sources" shall be computed in accordance with the method of accountancy employed by an asses .....

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d notified by the Central Government from time to time. Sub-clause (3) provides a situation, i.e., if the Assessing Officer is unable to deduce the true income on the basis of method of accountancy followed by an assessee then he can reject the book results and assess the income according to his estimate or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of assessee and required to seek explanation of the assessee qua those .....

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ot be deduced from those accounts. For example, the assessee had adopted incorrect method of accounting with regard to the purchases and sale of licence premium in trading and profit & loss account. The assessee has been showing such sales in profit & loss account, but it has not been recognizing any opening and closing stock of licence premium. It is quite difficult to cross verify such an item. The electricity expense are manufacturing expenses, these must have been debited to manufact .....

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ich were polished and manufactured as finished product. It has processed 75,733.82 carats. It had incurred job work charges at the rate of ₹ 300/- per carat. The learned AO allowed labour charges at the rate of ₹ 240 per carat. This disallowance of ₹ 60/- per carat is multiplied with the total carats of diamonds, then the addition, therefore, worked out to ₹ 45,44,029/-. The reasoning assigned by the AO is that sister concerns and M/s.R. Vipul & Co. had incurred job w .....

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he CIT(A) and confirmed by the ITAT vide order in ITA No.2243/Ahd/2007. He placed on record copy of the Tribunal order. 15. The learned DR, on the other hand, relied upon the orders of the Revenue authorities. 16. On due consideration of the facts and circumstances, we find that there is no change in the facts and circumstances. Almost verbatim discussion was made by the AO in the preceding year. The main arguments of the AO is that 47% of the labour payment in the unit-wise job work done, was f .....

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findings of the CIT(A) and as to how the Tribunal has confirmed it, reads as under: 7. In appeal, the learned CIT(A) partly allowed the appeal of the assessee by holding as under : "Regarding the disallowance of labour charges of ₹ 56.,86,937/- it was submitted that AO's action in allowing labour charges @Rs.240 per carat against he claim of Rs..300 per carat was not correct. The average labour charges pa/d in AY 2000-01 was ₹ 230/- whereas in AY 2001-02, it was ₹ 284/ .....

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to tax and filed complete details of their factory premises and residential premises. According to the AO, the electric expenses were not commensurate with the job charges but this was not correct. The job workers were basically labour contractors and an average rate of ₹ 300 per carat was being paid since January, 2001 which was accepted by the AO in AY 2001-02 also. The AO disregarded all these facts and made the addition on a hypothetical basis. I have gone through the details and find .....

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/s Kantilal Exports for AY2002-03. It is not understood as to how the same job workers would be working in two different units at the same time and the AO's inference on this account appears to be erroneous. I am inclined to agree with the appellant, there would be no correlation between the electricity expenses and wages paid to the job workers, It is also no material, if the addresses of the job workers were their residential addressed. Since all these people were working In five factory p .....

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tax aseseee. However, since complete record 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 that some part of the labour payment is: excessive. I am therefore of the considered view that a token disallowance of ₹ 8 lacs out of labour charges paid will serve the interest of justice and the balance disallowance of ₹ 48,86,837/- is directed to be deleted. 9. Shri V K Sehgal, the learned Depa .....

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miss the first grounds of appeal of the revenue. 17. It is also pertinent to note that even if this disallowance is confirmed, then the assessee will not be burdened with any tax liability, because the moment the expenses will be disallowed, its profit ratio will increase and it will claim deduction under section 80HHC at an higher amount. Therefore, for the purpose of taxability, it is an academic issue and revenue neutral. Respectfully following the order of the ITAT in the Asstt.Year 2002-03, .....

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of polished diamonds in stock. It valued the closing stock at the rate of ₹ 1775/- per carat and worked the total value of ₹ 1,55,28,871/-. The learned AO has observed that in the month of March, 2003, the average sale price of polished diamond was ₹ 4070/- per carat. The average manufacturing cost during the year is ₹ 4231/- per carat. The average sale price of the diamond for the whole year worked out to ₹ 6695.20 per carat. The assessee is required to determine t .....

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f the value shown by the assessee at ₹ 1,55,28,871/-, the learned AO made addition of ₹ 2,14,86,709/-. 20. On appeal, the learned CIT(A) has confirmed the conclusions of the AO. 21. The findings of the learned CIT(A) reads as under: 6.2 I have considered the assessment order and the above submissions. I have also perused the invoices for sale submitted by the appellant along with jarigad chities and the details of stock of polished, diamonds given with appellant's submissions. On .....

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ng higher, the average cost is adopted by the A.O. The appellant has given its working on page 11 & 12 of the submissions which also gives the working on the basis of average cost. The assessee has arrived at the value of stock by working out the cost of total polished diamond which is including opening stock, purchases and manufacturing cost. This value is arrived at ₹ 9,88,48,995/- for total diamond of 23364.58 carats. Out of this the appellant has deducted the sale value of diamond .....

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s, therefore, justified in making addition in the value of closing stock of polished diamonds by ₹ 2,14,86,709/-. This ground of appeal is dismissed. 22. Before us, the learned counsel for the assessee has reiterated his contentions as were raised before the CIT(A). On the other hand, the learned DR relied upon the order of the Revenue authorities below. 23. We have duly considered rival contentions and gone through the record carefully. There is no dispute with regard to the proposition t .....

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cing figure is not correct. The learned First Appellate Authority has rightly rejected the contentions of the assessee. We do not find any merit in this ground of appeal. It is rejected. But, we direct the AO to give credit of this addition in the opening stock of the diamonds in the next year. 24. In the next ground of appeal, the grievance of the assessee is that the ld.CIT(A) has confirmed the disallowance of labour expenses of ₹ 10,24,967/-. 25. The brief facts of the case are that one .....

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work in the premises of the assessee, but the assessee has not debited any electricity expenditure or other expenditure. Taking into consideration overall flaws in the details maintained by the assessee, he disallowed 10% of the labour payment. 26. On appeal, the CIT(A) has confirmed the disallowance. 27. After due consideration of the record, and well reasoned findings recorded by the AO, pointing out defects in the details maintained by the assessee, we are of the view that the CIT(A) has righ .....

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t the ld.CIT(A) has erred in directing the AO to re-compute the deduction under section 80HHC after excluding the job work receipts from the total turnover. 32. Brief facts of the case are that the assessee has claimed deduction under section 80HHC of the Act. According to the AO, it has filed report in Form No.10CCAC showing total turnover of ₹ 14,16,28,527/-. According to the AO, the assessee did not maintain separate accounts for its different activities. Therefore, the labour receipt o .....

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e (baa) of Section 80HHC(3) of the Income Tax Act, 90% of net job work receipts ought to be reduced from the profit and gains of the business while working out admissible deduction under section 80HHC. The ld. AO did not find merit in this contention of the assessee. He observed that the assessee is not maintaining separate account of different units where, different type of activities are claimed to have been undertaken. He held that deduction under section 80HHC is to be worked after including .....

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-connection between both these activities. The ld.First Appellate Authority has accepted the contentions of the assessee and held that job work activity is an independent activity of the assessee, which is not associated with the export. The ld.First Appellate Authority observed that out of the alleged net profit on job work charges only 90% amount is taken, which is to be reduced from the profit of the business while working out the deduction. The CIT(A) further observed that since 10% of the l .....

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ccordance with the provisions of section 10B of the I.T.Act. It has separate trading and profit & loss account. According to it, all the three activities can be directly identified from the books of accounts. The ld.First Appellate Tribunal has accepted this contention of the assessee. The learned DR was unable to controvert this finding of fact. Now question is whether the total job receipts, 90% of the net profit in the job work activity is to be deducted out of the profit of the business. .....

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y way of brokerage, commission, interest, rent, charges or 8any other receipt of a similar nature included in such profits ; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. 35. The ld. CIT(A), after taking into consideration the job work receipt, commission, interest etc. directed the AO to reduce 90% of net receipts from the eligible profit while working out the deduction admissible under section 80HHC of the Act. In our opi .....

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aded that the ld.CIT(A) has erred in confirming the addition of ₹ 5,45,30,060/- which was added on account of valuation of closing stock of rough diamond. 38. The brief facts of the case are that the assessee has filed its return of income on 30.10.2004 declaring an income of ₹ 51,13,244/-. On scrutiny of the accounts, it revealed to the AO that the assessee has 1,17,668 carat of rough diamond valued at ₹ 209,03,014/-. According to the assessee it has purchased rough diamonds i .....

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n of the assessee on the ground that the assessee is not maintaining day-to-day stock quantity wise. It must have consumed diamonds which were purchased first in time. He applied FIFO method for working out the availability of rough diamonds in the closing stock. The leaned AO has adopted the rate which is available in the lots of the closing stock and worked out the value at ₹ 7,54,33,074/-. The difference between these two has been added as undisclosed value of the stock. 39. On appeal t .....

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be correct that only the lower value stock of rough diamonds remained1 in closing stock. The jangad issued are from appellant's Bombay office to Surat Office but no jangads for rough diamonds issued to the job workers or labourers is produced. On perusal of the copies of jangads it is found that there are over writings on certain jangads. Thus there is no basis for stating that diamonds remaining in closing stock are out of a particular purchase having lower cost. The A.O., therefore, justi .....

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The assessee has produced copies of import invoice. Copies of all jangads for movement of rough diamonds from Mumbai to Surat, copy of manufacturing chart showing the issue, consumption and date wise manufacturing. We have gone through all these documents. As far as purchase of diamond is concerned, there is no dispute. Thus, the invoices are of no help for the assessee. Similarly, as far as the transmission of rough diamonds from Mumbai to Surat, is also not a relevant fact for deciding this i .....

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ock. The ld.CIT(A) has appreciated the controversy in right perspective, and has gone through the stand of the assessee. Therefore, we do not find any reason to interfere in the order of the ld.CIT(A) on this issue. The first ground appeal of the assessee is rejected. 41. In the next ground of appeal, the grievance of the assessee is that the ld.CIT(A) erred in confirming the addition of ₹ 1,51,364/-. 42. The brief facts of the case are that the certain diamonds were rejected. The assessee .....

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CIT(A) did not find any error in the method adopted by the AO. 43. On due consideration of the facts, we also do not find any error in the method adopted by the AO. He valued the rejected diamonds at net realized average value, whereas, the assessee did not disclose any basis. Therefore, we do not find any error in the order of the CIT(A). Thus this ground of appeal is rejected. 44. In the result the appeal of the assessee is dismissed. 45. Now we take up the assessee s appeal for the Asstt.Year .....

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