TMI Blog2011 (9) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... ed DR that the assessee derives income from import and export of diamonds. That the GP of the assessee has reduced to 6% as against 7.32% in the immediately preceding year. That the AO examined the assessee s books of accounts in detail and found that the assessee has purchased and sold diamonds as per the quality of diamond. Therefore, it is obvious that the assessee has maintained quantitative details quality-wise, otherwise, he could not have proper control over the trading activity. That despite maintaining of such primary records, the assessee has not produced the same before the AO. In this regard, he referred to para 9.1 to 9.4 of the assessment order which reads as under: 9.1 As regards the assessee s contention that practically it is impossible to maintain quality and quantity-wise records in respect of production as well as sales, it would be suffice to say that it cannot be accepted that the assessee should not have been maintaining qualitywise record of the diamonds. If what the assessee says were true, it could not have sold lots of diamonds at different prices. In this context on examination of bills of export on random basis, it was seen that the assessee had ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's total income in accordance with the provisions of the I.T.Act. From this, it follows that the purpose and intention of legislature in evading the provisions of section of 44AA of the Act is to put an obligation on the assessee to main and keep primary records on the basis of which the tax authorities are able to ascertain and compute the correct income. From this it also follows that it is not always the prerogative of the assessee to maintain the records the manner in which it likes. However, as noticed in the preceding paras the assessee did not maintain 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. He therefore requested that the order of the CIT(A) should be reversed and that of the AO should be restored. 4. The learned counsel for the assessee, on the other hand, relied upon the orders of the CIT(A). He has stated that the assessee has maintained the quantitative details which is weight wise. However, the quality-wise quantity details have not been maintained. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in support of such finding. We therefore accept the assessee s contention that the assessee has not maintained the quality-wise quantitative details. 6. Now the second question arises whether the books of accounts of the assessee can be rejected if the assessee has not maintained the quality wise quantitative details. We find that this issue is considered by the ITAT in the case of M/s.Dhami Brothers (supra) in which one of us is a party. In this case the ITAT held as under: 7. We have considered the arguments of both the sides and perused the material placed before 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 total income in accordance with the provisions of the I.T. Act. From this, it follows that the purpose and intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which 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 149 of the assessee s paper book. The AO has stated that in these details quality of the diamond is not mentioned. It is submitted by the learned counsel that it is not practical to maintain the quality wise details of each and every diamond. Each and every diamond is of a separate quality depending upon its colour, clarity, cut etc. and this is almost impossible to maintain quality wise details for each and every piece of diamond. That the assessee is maintaining the quantitative details in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the auditor that the profit cannot be computed from the books of accounts maintained by the assessee. In our opinion, the qualitative details of each piece of diamond is not necessary for computation of the income of the assessee. Income of the assessee can be very well computed on the basis of accounts already maintained by the assessee. In view of the above, we are unable to agree with the AO that there is defect 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. No contrary decision is brought to our knowledge therefore respectfully following the above decision of the ITAT, we hold that due to failure on the part of the assessee to maintain the quality-wise quantitative details, the books of account of the assessee cannot be rejected. No other defect is pointed out by the AO in the books of accounts of the assessee, which is duly audited. Once there is no defect in the assessee s books of accounts, the same cannot be rejected therefore, once the books cannot be rejected the estimated addition made by the AO by enhancing the GP at the rate of 1% of the sales canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n proper appreciation of the facts and material on record rightly noted that the case of the assessee falls in the proviso to section 43(5) of the IT Act because the forward contract entered into by the assessee was hedging transaction and would not be covered by the definition of speculative transaction. The assessee entered into the transaction to safeguard the business interest against fluctuation in rates of foreign exchange. Nothing is brought on record if the assessee has violated any norms issued by Reserve Bank of India. The learned CIT(A), therefore, rightly held that the bank being authorized dealer will not allow the assessee to book forward contracts for speculation purposes. The learned Counsel for the assessee also filed the details of names of the bank of the forward contract to show cancellation date and the gain/loss which support the findings of the learned CIT(A) that assessee s transaction through bank was a genuine business transaction , therefore, loss shall have to be allowed in the case of the assessee. Considering the facts and circumstances and the finding of the learned CIT(A) in the light of the decisions of the Hon ble Bombay High Court and the Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stated by the learned DR that the CIT(A) deleted the disallowance on the ground that the expenditure was reasonable looking to the huge turnover of the assessee, therefore, foreign visits were for the purpose of business. He has stated that AO never doubted that the visits was for the purpose of business, because the AO himself has allowed the air-fare and visa charges fully. But in the absence of details of the expenses and vouchers in support of other expenses, it could not be verified by the AO that other expenditure was for the purpose of business. Even during the visits for the purpose of business, the assessee may incur personal expenditure. That 20% disallowance out of other expenditure was quite fair and reasonable. The learned counsel for the assessee, on the other hand, reiterated the submissions made before the CIT(A) and stated that the turnover of the assessee was ₹ 112 crores and therefore the total expenditure on foreign traveling was 0.13% of the turnover. He therefore stated that the order of the CIT(A) should be sustained. 13. We have carefully considered the arguments of both the sides and perused the material placed before us. There is no dispute that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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