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2015 (12) TMI 989 - ITAT AHMEDABAD

2015 (12) TMI 989 - ITAT AHMEDABAD - TMI - Invoking of provisions of section 145(3) for rejecting the books of accounts of assessee - only reason for which the Assessing Officer has rejected the books of accounts is for non-maintenance of quality-wise and piecewise detail of polished diamonds and has prepared vouchers for payment of labour charges - Held that:- Assessee is dealing in polished diamonds, better GP rate in comparison to preceding year, no specific default in the books of accounts, .....

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etails of goods dealt has to be kept by each assessee. Therefore, applying the ratio of the decision of M/s Dhami Brothers vs. ACIT [2010 (8) TMI 817 - ITAT AHMEDABAD ] we are of the view that Assessing Officer was not correct in invoking the provisions of section 145(3) of the Act and accordingly, we uphold the order of CIT(A) and reject this ground of Revenue. - Decided in favour of assessee.

Addition on account of disallowance of excess labour expenses - CIT(A) deleted the addition .....

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since last three years whereas the Assessing Officer on the basis of his experience of assessing another unit has come to an average rate of ₹ 236 per carat of job work charges. This comparison and imposing of rates charged by other units can be justified only if the Assessing Officer proves that assessee had paid less amount than the amount actually shown in the supporting vouchers and there has been no such case observed by the Assessing Officer. So much so that when Assessing Officer c .....

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the purpose of business. We accordingly set aside the orders of the authorities below and delete the addition. - Decided in favour of assessee.

Addition on account of suppressed yield - as per AO there was NIL rejection in the preceding year in comparison to 1.78% rejection during the year and secondly qualitywise and piece wise details were not available and he has tried to place in the facts of other assessees assessed by him - CIT(A) deleted the addition - Held that:- Assessing Off .....

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riation in yield has arisen due to variation in rates and use of little inferior quality of rough diamond during the year in comparison to previous year. However, overall yield in Asst. Year 2008-09 is 29.25% in comparison to 29.12% yield in asst. year 2007-08. Further regarding rejection it is only from the rough diamonds of lower purchase price. Assessee has properly maintained quantitative details along with quantity of goods produced and quantity of wastage and yield. The very basis taken by .....

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r or the management and the level of yield, GP/NP achieved will vary from case to case depending on the application of strategic mind by the businessman. In view of above discussions, we find no infirmity in the order of ld. CIT(A) and uphold the same.- Decided in favour of assessee. - ITA No.3257/Ahd/2011 - Dated:- 30-11-2015 - Shri Kul Bharat, JM, and Manish Borad, AM. For The Appellant : Shri Albinus Tirkey, Sr.DR For The Respondent : Shri M. R. Shah, AR ORDER PER Manish Borad, Accountant Mem .....

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f the I.T. Act, 1961. (2) On the facts and in the circumstances of the case and in law the CIT(A) has erred in deleting the addition of ₹ 32,24,477/- made by the A.O. on account of disallowance of excess labour expenses. (3) On the facts and in the circumstances of the case and in law the CIT(A) has erred in deleting the addition of ₹ 23,08,633/- made by the A.O. on account of suppressed yield. (4) On the facts and in the circumstances of the case and in law, the CIT(A) ought to have .....

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01.09.2009. During the course of assessment proceedings Assessing Officer observed that assessee was not able to provide quality-wise and piece-wise details of goods, labour expenses were not properly supported as well as there was suppressed yield as the assessee has shown more wastage during the year and accordingly made additions to the income of the assessee and assessed the income at ₹ 52,01,560/-. 4. The first ground of Revenue relates CIT(A) s allowing the appeal of assessee regardi .....

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rocessed diamonds by the labourers whereas in the similar types of cases labourers have been paid piece-wise and labour contractors have been paid carat-wise. On the contrary in the case of assessee labour contractor did not raise any bill(s) of production/polishing and assessee printed its own bills giving credit to the labour contractors which were countersigned by the labour contractors. Due to these very reasons the Assessing Officer made a finding that it is impossible to verify closing sto .....

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provisions of section 145(3) of the Act to be not valid by, observing as under :- 4.3 I have considered the reasons given by the Assessing Officer and also the submissions of appellant. After carefully going through the facts of the case, it is seen that book results has been rejected only on the ground that qualitywise and piecewise details have not been maintained. However, book results cannot be rejected on this ground as held by Hon ble ITAT Ahmedabad Bench in the case of M/s Dhami Brothers .....

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rds the valuation of closing stock, the Assessing Officer has failed to prove that there is any under valuation of closing stock. As assessee has consistently adopted the method to value closing stock on the basis of market price less average rate of margin, valuation of stock cannot be said to be defective. There are various methods for arriving at the cost of closing stock and above method is one of the accepted methods of valuation and the same has been consistently followed by assessee. As n .....

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by the auditors, GP rate for the year under appeal at 6.38% which is higher in comparison to the GP rate declared in immediately preceding year at 6.27%. The ld. AR further submitted that a few labor parties have been produced before the Assessing Officer and they have accepted to have received the payments for the labour charges as per the supporting vouchers prepared by the assessee and countersigned by the labour contractors. There has been no other specific default pointed out by the Assess .....

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has maintained regular books of accounts, financial statements, are duly audited under section 44AB of the Act, complete quantity details have been maintained and have been reported by the auditors in the Tax Audit report, no specific mistake has been reported in the purchase and sales of the assessee, GP rate for the year under appeal shown at 6.38% which is higher than the GP rate of 2.67% declared by assessee in the immediately preceding year. The only reason for which the Assessing Officer h .....

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re us. The AO has rejected the assessee s books of accounts and estimated the value of closing stock as well as GP. The reasoning given by the AO for rejecting the books of accounts reads as under: 5.8 It would not be out of place to make a mention in this context that, as per the provisions of section 44AA of the I.T. Act, every person carrying on business is compulsorily required to keep and maintain such books of accounts and other documents as may enable them AO to compute the assessee s tot .....

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likes. However, as noticed in the preceding paras the assessee has not maintained 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 for examination to compute the correct income. 5.9 Here it would be pertinent to mention that the assessee has hown closing stock of polished diamonds of the quantity of 44299.10 cts. At ₹ 54,23,81,050/-. The detailed i .....

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n 188 ITR 44, has been held that where the accounts are prepared without disclosing the real cost of the stock in trade albeit on sound expert advise in the interest of efficient administration of business, it is the duty of the AO to determine the taxable income by making such computation as he things fit. Therefore,the claim of the assessee that it is assessee s option to maintain the books of accounts in the manner that suits to it can no longer be accepted and has to be rejected. In this con .....

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were duly audited. Each items of sale/purchase is verifiable. The only dispute is with regard to maintenance of qualitative details for the processing of the diamond by the assessee. The assessee maintained complete date-wise details of quantity of each lot of the diamond given for the processing as well as polished diamonds received after the processing. Such date wise details of the processing of the diamonds were furnished before the AO and copy of which is also enclosed from page no.63 to 1 .....

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same fashion since preceding many years and it was always accepted in the past. Section 145(3) which empowers the AO to reject the assessee s trading results and make the assessment in the manner provided under section 144 reads as under: 145. Method of accounting.-(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee (2) .....

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accounts of the assessee, he may make an assessment in the manner provided in section 144. In this case, there is no dispute about the correctness of the assessee s accounts. As per the AO for want of qualitative details of the processing of diamonds, the accounts of the assessee cannot be said to be complete. We are unable to agree with the above views of the AO. Section 44AA provides for maintenance of the books of accounts. As per the sub-section (2), every person carrying on business or pro .....

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tain specific profession. However, no books of accounts are prescribed for the person carrying on business. Thus, the assessees carrying on business are required maintain such books of accounts as will enable the AO to compute the income of the assessee. The present assessee has maintained the regular books of accounts which were duly audited. The sale and purchase of the assessee is vouched and verifiable.The assessee has also maintained quantitative details in respect of diamonds purchased and .....

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t in the system of method of accounting of the assessee which requires rejection of the book results under Section 145(3) of the Act and estimation of the GP. 10. The facts discussed above in the above referred decision of the co-ordinate Bench are almost identical to the facts of the case of assessee which is also dealing in polished diamonds, better GP rate in comparison to preceding year, no specific default in the books of accounts, prepared quantitative details with calculation of wastage a .....

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efore, applying the ratio of the decision of the co-ordinate Bench as discussed above and discussions made by us, we are of the view that Assessing Officer was not correct in invoking the provisions of section 145(3) of the Act and accordingly, we uphold the order of CIT(A) and reject this ground of Revenue. 11. The next ground relates to deletion of addition of ₹ 32,24,477/- on account of disallowance of excess labour expenses. The Assessing officer made disallowance of excess labour expe .....

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tails. In the diamond market it is a common practice to pay the labourer on piecewise basis. 8.2 The facts found during the verification of the books, issues raised, replies by the assessee have been discussed in the earlier paras. After due consideration to all the submission of the assessee, it has been held that the books of accounts are not reliable and are rejected u/s 145 of the Act. It is seen that the assessee has failed to substantiate its expenses on labour in absence of proper books o .....

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The assessee was issued a show cause notice dated 16.12.2010. The assessee has failed to give any satisfactory explanation to the same. 8.3 Thus the excess payment per carat is found to be at ₹ 139 per carat. Considering the total makeable rough consumed during the year the excess labour charge found unsubstantiated is held to be ₹ 32,24,477/- and disallowed. The excess payment considering the total diamonds polished is at ₹ 32,24,477/-. Therefore, the excess payment of labour .....

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at rate of labour charges has remained stagnant since, last three years and according to him the rate of labour charges should have reduced during the year under consideration as there was problem of excess labour due to recession. In this regard, the assessing officer has also placed reliance on the rate of labour charges paid by M/s Fine Manufacturing. In this context, I am of the opinion that reliance cannot be placed on the rate of labour charges paid by said entity firstly because complete .....

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bour charges has increased in the year under consideration in case of alleged comparable instance relied upon by assessing officer himself, he is not justified in drawing adverse inference in assessee s case on the ground that the rate of labour charges should have reduced in assessee s case for the year under consideration due to glut in the diamond market. The most important fact is that there is no increase in the rate of labour charges for year under consideration and even though there is re .....

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counter signed by the labour contractors and thus, it is acknowledgement by them relating to the contents of said labour bills. In view of above discussion, I am of the opinion that there is no justification in treating the rate of labour charges as excessive to the extent of ₹ 139 per carat. Hence, addition made by assessing officer is hereby deleted and the ground of appeal is allowed. 13. Aggrieved, the Revenue is now in appeal before the Tribunal. The ld. DR supported the order of Ass .....

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ment at lower rates. In this regard, it is submitted that Assessing Officer has not given any details of comparable cases cited by him. It is a settled law that if Assessing Officer wants to place reliance on certain materials which he has collected on his own, it is imperative on his part to supply details relating to alleged comparable cases. It is also settled principles of law that whatever is apparent is real unless there are cogent evidences which indicates that whatever is apparent is not .....

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bour charges paid by other entity cannot be applied to the facts of instant case. 15. As assessee produced all the relevant records in support of labour charges the onus cast on assessee to prove genuineness of expenditure stands very much discharged. If Assessing Officer is still of the opinion that expenditure is inflated in that case it is very much imperative for him to bring cogent evidence on record to indicate the quantum of inflation. However, in the instant case, Assessing Officer has n .....

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in some cases he may have observed that other assessees paid to the labourers on the basis of their bills and the labour charges vary on the basis of quality of goods whereas in the case of assessee they have been paid on the basis of quantity. The assessee has been paying job charges @ of ₹ 375 per carat of roof diamond consistently since last three years whereas the Assessing Officer on the basis of his experience of assessing another unit has come to an average rate of ₹ 236 per .....

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ived the same amount of labour charges as mentioned in the supporting vouchers which have been countersigned by them. Similar issue was also dealt by the Tribunal in the case of ACIT vs. Veer Gems in ITA Nos.4136/Ahd/2008 for Asst. Year 2005-06 wherein vide order dated 11.6.2010 the co-ordinate Bench has held as under :- 12. We have heard the rival submissions and considered the material available on record. The A.O. disallowed ₹ 10 per carat labour expenses would prove that substantial ex .....

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the substantial income. The rates paid to the job workers ranges differently. According to assessee all the payments are made through account payee cheques only after making TDS. Therefore, considering the history of the assessee and nature of business and that profit is higher as compared to the preceding assessment year, would prove that assessee spent genuine expenditure wholly and exclusively for the purpose of business. We accordingly set aside the orders of the authorities below and delet .....

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of addition of ₹ 23,08,633/- made by the A.O. on account of suppressed yield. During the year under appeal assessee has shown total consumption of 23197.68 carat of rough diamonds and yield of 29.25% was achieved thereby giving production of 6786.24 carat of finished/polished diamonds. In the production process assessee had shown 1.78% of rejection/wastage. Assessing Officer observed that in the immediately preceding financial year i.e. Asst. Year 2007-08 there was NIL rejection shown by t .....

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ail as above, I am of the view that the assessee s books results in respect of yield cannot be entirely relied upon and hence the same are rejected u/s 145(3) of the I.T. Act. From the above discussion it has been established that the assessee has suppressed its yield of polished diamonds from the rough diamond. Therefore, on the facts and in the circumstances of the case as mentioned above and in law, and taking a considered view, the yield of polished diamond suppressed by the assessee is esti .....

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in appeal before CIT(A) who after going through the assessment order and considering the submissions of assessee, held the action of Assessing Officer in rejecting the books of account and invoking the provisions of section 145(3) of the Act as invalid. Further, accepting the contentions of the assessee that the reason of rejection of diamonds was due to use of relatively inferior quality of rough diamonds as compared to preceding year which was duly supported by the fact that cost of rough diam .....

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profit ratio for the year under consideration as can be seen from para 4 of the assessment order. It is seen that assessing officer has arrived at the conclusion that there is a fall in yield by computing yield % on gross quantity of rough diamond i.e. without considering the rejection diamonds whereas, assessee has computed the yield at 29.25% as against 29.12% for immediately preceding year on the net quantity sent for manufacturing i.e. after considering rejection diamonds. Here, it is releva .....

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ed to be computed only on the net quantity of rough diamond which is utilized for manufacturing of cut & polished diamonds and even assessing officer himself made addition at the rate of 1% on the net quantity of makeable rough diamond i.e. after deducting rejection quantity. It is thus, clear that there is increase in yield % for the year under consideration. Not only this, it is also seen that there is rise in GP ratio for the year under consideration as discussed in the earlier ground. As .....

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ral factors which affect the percentage of yield. It is seen that the Hon ble ITAT Ahmedabad bench in case of ACIT vs. Lathiya Brothers cited supra deleted similar addition made on account of low yield. Hence, in view of above facts and decision of Hon ble ITAT, I am of the opinion that addition cannot be made merely on the basis of presumption that yield is high by 1%. Hence, the addition made by the Assessing Officer is hereby deleted and the ground of appeal is allowed. 20. Aggrieved, the Rev .....

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officer computed yield on the total quantity of rough diamond including rejection diamonds which is absolutely incorrect as rejection occurs at the stage of cleaving, sawing etc. & said quantity is not capable of manufacturing of cut & polished diamonds. As such yield in diamond industry is computed only on the net quantity of rough diamonds which is actually utilized for manufacturing of cut and polished diamonds. In fact it is also relevant to point out that assessing officer himself .....

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to obtain more yield in that case the quality/purity of polished diamonds will be lower & consequently its selling price will also be on the lower side. Further every unit has its own quality based on which they have their own customers & own market. It is because of this reason that addition on the ground of low yield cannot be made simply by computing yield of other entities. It is further relevant to mention here that assessee has used relatively inferior quality of rough diamond as .....

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in his letter dated 21/12/2010 but the same has not been properly considered by A.O. It was explained that the import bills referred to by AO contains different lots as is evident from the fact that there is variation in the rate of different packets of rough diamond in the same import bill. As such it is quite natural that it is not possible to obtain uniform yield in respect of single lot pertaining to same import bill. However, the assessing officer has not correctly understood above aspect & .....

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audited accounts & when the same is sold in market the payment is received through account payee cheques only and the transaction is duly supported by relevant sales bills making it capable of complete verification. There is no basis in the action of assessing officer in making addition on account of alleged low yield at the rate of 1% as unaccounted sales as there is not even an iota of evidence on record. 25. Reliance is placed on Hon ble ITAT Ahmedabad Bench in case of ACIT vs. M/s Lathiy .....

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al contentions and perused the material on record. The main reasons which arose in the mind of Assessing Officer to make the addition on account of suppressed yield was that there was NIL rejection in the preceding year in comparison to 1.78% rejection during the year and secondly qualitywise and piece wise details were not available and he has tried to place in the facts of other assessees assessed by him. Assessing Officer did not appreciate the fact that yield in the case of precious stone ca .....

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