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The Dy. Commissioner of incometax, Circle-9, Surat Versus M/s Bhadiyadra Gems

2015 (9) TMI 841 - ITAT AHMEDABAD

Rejection of books of accounts - as per AO the assessee had failed to maintain quality-wise data of diamond manufactured and to furnish the relevant production record - CIT(A) reversed AO order - Held that:- There is no dispute that assessee’s books of account pertaining to its diamond stock are being maintained on “carat basis”. This method is consistently followed in preceding and succeeding assessment years. The case file contains details of quality-wise closing stock as on 31st March, 2007, .....

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enue.

Addition made after estimation of gross profit - Held that:- It is admitted that assessee’s gross profit from assessment year 2004-05 to the impugned assessment year 2007-08 reads 9.67%, 5.04%, 6% and 3.96%; respectively. The assessee attributed this fall to increase in turn over along with decline in export and local rates @ ₹ 1,251/- and ₹ 3,406/- respectively. The Assessing Officer neither disputes this rate fluctuation specifically nor does he draw any comparable .....

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ncome - CIT(A) deleted addition - Held that:- once the assessee’s book result already stands accepted in preceding paragraph, this issue is rendered academic. We further notice that the very yield in assessment year 2005-06 was 26.93% much less than 30.35% in assessment year 2004-05. This year comprises of yield rate @ 27.63% ie. much more than that in assessment year 2005-06. The Assessing Officer does not seem to have made addition on account of yield fluctuation attributable to peculiarities .....

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for assessment year A.Y. 2007-08 arises from order dated 17-05-2010 passed by the CIT(A)-V, Surat, in Appeal No. CAS-V/249/09-10, in proceedings under section 143(3) of the Income Tax Act, 1961, in short the Act. 2. Revenue s first substantive ground challenges CIT(A) s order reversing the Assessing Officer s action in rejecting books of accounts. Its contention is that the assessee had failed to maintain quality-wise data of diamond manufactured and to furnish the relevant production record. We .....

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enance of books of accounts by the assessee as described hereunder. 4.1 The AO observes that it is very relevant to maintain piece wise quantitative data in the stock register so as to determine the correct state of affairs of the business. It is also observed by the AO that such data is mentioned invariably in this line of business in every bill including those of the assessee as well. From an examination of the stock register, furnished in the form of computerized print outs by the assessee, t .....

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allocate cost to the same, the" AO did not accept the contention as the former has not maintained details of closing stock quality wise which according to the AO has a significant bearing on the basis of valuation. 4.2 Thus, the AO came to the conclusion that such non maintenance of detailed qualitative record of the closing stock, piece wise, by the assessee tantamount to non maintenance of books of accounts and documents on the basis of which the income declared in the return could be co .....

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t and defective. 5. The appellant submits that piece wise record does not have much importance as far as valuation of closing stock is concerned as is the market practice prevalent. It is also submitted that even business transactions and the dealings in the stock take place only on the basis of carat as a unit of measurement and not piece wise. In support of its contentions, the appellant submits that import of rough diamond is always quantified on carat basis, sales price of polished diamonds .....

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e purposes of safety, insurance, customs clearance and is indicative of informative data rather than accurate quantitative business measurements. Thus, it is contended that piece wise details have got no relevance on this issue. 5.1 The appellant further submitted mat the identity of the rough diamonds are possible only till a particular stage of production after which the innumerable pieces of the final out put are mixed and then assorted on the basis of certain parameters, as discussed by the .....

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ossible demand and is against the accepted trade practices. 5.2 With respect to the quality wise maintenance of stock details, it is submitted that the appellant had repeatedly furnished the books of accounts disclosing the same before the AO during the assessment proceedings. The closing stock details clearly show linkages of not only the quality but weight also. It is also submitted that the valuation of the closing stock of finished goods (polished diamonds) is completely supported with evide .....

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e earlier years. It is further submitted the books of accounts are subjected to Tax Audit and that there is no adverse remark or inference in the Tax Audit Report either Regarding the reliance placed by the AO oh the decline in GP as indicative of undervaluation of stock, the appellant submits that the GP ratio of the firm has never been consistent through the years as it depends on many variables, including the volume of business in terms of turnover, quality of rough diamonds purchased, genuin .....

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llant firm has sold was lower than the market rate was not supported by the AO with any evidence and so is the case with the other observation that the average purchase cost has also decreased and hence the fall in sale price is neutralized. 5.5 In as much as the valuation of the closing stock is concerned, it is further submitted by the appellant that even if it is to be considered for the sake of argument that there was any difference in the valuation of closing stock as being presumed by the .....

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n this count also the action of the AO is untenable for the blatant violation of principles of natural justice. It is therefore, submitted by the appellant that the rejection of books by the AO is untenable, and the following decisions among others were relied upon in support thereof: (i) Sundar Agencies Vs CIT (1997) 63 ITD 245 (ITAT, Bombay) - addition cannot be based on jejune reasoning or guess work (ii) International Forest Co Vs CIT 101 ITR 721 (J&K) - books accounts cannot be rejected .....

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based on suspicion. 6. After carefully going through the submissions of the appellant and the facts as brought out in the records, it is observed that the AO has rejected the books of account of the appellant concern for not maintaining piece wise stock register and qualitative details thereof. The AO, therefore, reached the conclusion that the books of accounts of the appellant did not disclose the true and correct valuation of closing stock. However, it is pertinent to mention that the appell .....

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method of stock statement could also enable determination of the correct valuation of closing stock which the AO did not resort to. Thus, in the absence of any difference in valuation of the closing stock, simply rejecting the books on flimsy grounds of maintaining piece wise details is not tenable in law. Once the appellant starts maintaining piece wise details, the same logic can be attributed for rejection of the books on other parameters like caratage, cut, colour and clarity of each such pi .....

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arious fora of justice which are enumerated below. "Assessee must be given opportunity to rebut estimate - Where the ITO did not state the basis of his estimate and no opportunity was given to the assessee to rebut that basis, his order was liable to be set aside - S. Sarabhaiah Setty & Sons v. CIT [1967] 64 ITR 175 (AP) Where, after rejecting the accounts of the assessee, an estimate of the turnover and gross profits is fixed to the determent of the assessee, the assessee is entitled t .....

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ortunity to cross-examine witnesses -While estimating profits where oral evidence of witness was relied on by the income-tax authorities, the assessee must be given opportunity to cross-examine the witness and where comparative instances of other business were supplied by assessee it was also necessary for the department to come to a finding as to the norm of the gross profit on the basis of comparative cases - CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.). Basis for estimation .....

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Nag.). Estimation must not be arbitrary, vague and fanciful but must be legal and regular - The law says that the ITO shall make the assessment to the best of his judgment; it means that he must make it according to the rules of reason and justice, not according to private opinion, but according to law and not humour, and that the assessment is to be not arbitrary, vague and fanciful, but legal and regular - Mysore Fertiliser Co. v. CIT [1966] 59 ITR 268 (Mad.). Estimate based on both relevant a .....

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nd on the provision of law relating thereto and not on the view which the assessee might take of his right nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC). Where estimation has nexus to material on record and exercise of discretion is not arbitrary or capricious, Tribunal's findings are unquestionable - So long as the best judgment has nexus to material on record and the dis .....

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e gross profit on the basis of comparative cases. Therefore, it is the duty of the Assessing Officer to counter the comparative statement cited by the assessee before he can have the option to estimate the gross profit - CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.)." 6.1 Even thought the AO might have strong reasons to raise his suspicion about the correctness of the book results, however strong the basis could be, it cannot form the sole basis of assessment in without br .....

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ssee supports the CIT(A) s order. There is no dispute that assessee s books of account pertaining to its diamond stock are being maintained on carat basis . This method is consistently followed in preceding and succeeding assessment years. The case file contains details of quality-wise closing stock as on 31st March, 2007, audit report as well as sample copy of stock register for March 2007 relating to the relevant previous year. The Revenue fails to controvert correctness thereof except making .....

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finding hold that his decision on the first issue renders this ground infructuous. He also accepts the assessee s contention on merits as under: 7. After rejecting the books of accounts, the AO further proceeded to examine the fall in GP rate in the current year as against that of the earlier years in the appellant's own case. With respect to the fall in GP rate to 3.99% from 6.00% in the immediate preceding year, the AO did not accept the assessee's contention that it is supported by al .....

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of GP ratio of the business. The AO thereafter, proceeded to estimate the GP at the rate of 6%, as was the case in the immediate preceding year in asssessee's own case and made an estimated addition amount of ₹ 90,12,001/- to the income returned. 8. The appellant submitted that the appellant firm was maintaining regular books of accounts and followed a consistent method of accounting year after year. It was further submitted that the method of valuation of closing stock followed by the .....

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ted by verifiable evidences and that there is no need to estimate the GP at a different rate than that arrived at on the basis of such regular book results. It is further submitted that as the volume of profit was the prime motive of business and not the rate of profit, maintenance of same GP as of the previous year at the same level could not be prudently expected from the business man's point of view. It is further pointed out that the reasons for such fall in GP as adduced b appellant wer .....

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377; 1,251/- at 15.8P/0 and that of local sale of polished diamonds by ₹ 3,406/- at 45.5% while estimating the GP of the current year as against that of the preceding year. It was further contended that there were such variancaes in GP in the appellant's own case in the earlier years as well, as pointed out by the AO in the assessment order itself, which were accepted by the Department is those years as such. The appellant further contends that the firm was not provided an opportunity .....

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, discussed supra, as the rejection of books itself has been held as untenable in law and on facts, it naturally follows that without any basis for such rejection, estimation of GP at a figure different from the book results of the current year does not stand on fours and is not based on law and facts of the case. Without prejudice to this, it is also noteworthy to mention that even on merits, the estimation of GP based on previous year's figure itself is not correct accounting as every year .....

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ent year. The same logic, if applied, then there will be no variation in the GP rates of any assessee over the years. Even if the books are rightfully rejected, it is essential for the Revenue to point out the defects that justify the increased estimation of GP which has not been done in the instant case. It is also noteworthy that the appellant was not given any opportunity to rebut such estimation of the GP at a higher rate, which is against the judicial view in this arena as elucidated in the .....

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sessment year 2007-08 reads 9.67%, 5.04%, 6% and 3.96%; respectively. The assessee attributed this fall to increase in turn over along with decline in export and local rates @ ₹ 1,251/- and ₹ 3,406/- respectively. The Assessing Officer neither disputes this rate fluctuation specifically nor does he draw any comparable instance to re-estimate the impugned gross profit. Be that as it may, the fact also remains that the very basis of this estimation is rejection of assessee s books of a .....

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eedings. The CIT(A) s observation on this issue are reproduced as under: 10. During the course of the assessment proceedings, the Assessing Officer observed that the yield ratio of the assessee firm has decreased in the relevant year to 27.63% from 28.91% in the immediately preceding previous year. The AO did not accept the explanation of the assessee on the reasons for such fall. The AO inferred that as the assessee was using modern and advanced sophisticated equipments instead of conventional .....

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n different years and depends upon the rejection ratio in the manufacturing process. The numerous factors affecting the yield being quality of rough purchased, the skill level and experience of the workers, efficiency of management, turnover of the unit, business set up, etc., the straight jacket comparison of such ratio for different years may lead to biased decision in the absence of the full particulars of data of the whole business of the relevant point of time. It is further contended that .....

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y the AO is uncalled for. It is further pointed out that the AO, while holding a variance ol.28% in the yield as a sharp decline, has conveniently brushed aside the steep decrease of 17.82% in the cost per carat, as evidenced by the tabulated data in the assessment order itself, and chose to call it as a marginal decline, shows the self contradictory views, quite indicative enough of the prejudiced mind set and the biased approach of the AO to the whole gamut of the issue. It is further contente .....

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arty, considered as comparable by him. It is further pointed out that the AO has also failed to elucidate as to how the third party case is considered as a comparable instance by virtue of similar quality of rough diamonds used if any and or the rejection rate of that party, nor was the appellant called upon to offer any rebuttal on such assumptions by the AO. Thus, relying on the various case laws, the appellant pleads that the addition made on this count be deleted. 12. Based upon the decision .....

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