TMI Blog2010 (12) TMI 1237X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,427/- disallowed out of the provisions kept for exchange rate difference inspite of the fact that the valuation of foreign exchange was done at later date while filing return of income. 3. It is, therefore, prayed that the appeal order passed by the Learned CIT(A) be set aside and that the assessment order passed by the Assessing Officer u/s.143(3) dated 29.12.2006 be restored. ITA No.3536/Ahd/2007[ Assessee] 1 The learned CIT(A)-V, Surat erred in upholding the addition of ₹ 4,36,729/- made by the Assessing Officer being difference provision kept for exchange rate difference rejecting the contention of the assessee that the exchange difference worked out by taking prevalent rate of exchange as on 31-03-2004 in respect of export credit facility from Andhra Bank, Mumbai and other. 2 The appellant craves leave to add, alter and vary any ground of appeal. 2 Adverting first to ground no.1 in the appeal of the Revenue, facts, in brief, as per relevant orders are that return declaring income of ₹ 1,13,72,140/- filed on 29-10-2004 by the assessee, manufacturing diamonds, after being processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar lot. Since there was steep fall in GP vis- -vis preceding years, in the absence of details, the AO showcaused the assessee, proposing to reject the book results u/s 145(3) of the Act. In response the assessee submitted that the backward valuation of closing stock sought to be adopted on the basis of the sales was not in accordance with the Accounting Standard, the assessee having valued the polished diamonds at cost or net realizable market value, whichever was lower. Since the said method had been followed consistently and accepted by the AO in the scrutiny assessments of the preceding years while the GP declined due to recession in international market, international competition, fluctuation in exchange rate, increase in purchase price of rough diamonds, disproportionate increase in sales of cut and polished diamonds, increase in labour charges etc., the assessee pleaded while relying upon a few judgments that book results may be accepted. However, the AO did not accept the submissions of the assessee for want of qualitative details of stock and in the absence of any co-relation between rough diamonds used in production and polished diamonds ,be it in quantity or quality. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O., in his working as mentioned on page No. 12 of the assessment order had deducted the exchange rate receipts of ₹ 1,29,45,920/- and found out the sales turnover of the appellant and by applying the G.P. rate of 8.12% ,he finally worked out the cost of sales at ₹ 42,88,76,882/- and after deducting the same, from the total cost of opening stock and the diamonds manufactured during the year at ₹ 58,72,85,401/- , he found out the value of closing stock at ₹ 15,84,08,519/- and further, after deducting the value of closing stock as shown by the appellant at ₹ 15,32,36,644/, he finally arrived at the suppression in the valuation of closing stock at ₹ 51,71,875/- . In this regard, on the other hand, it has been submitted by the A.R. ( as mentioned above ) that if the receipt on account of exchange rate difference is deducted from the sales turnover of the appellant then the actual sale receipt worked out at ₹ 46,67,79,367/- (Rs.47,97,25,287/- - ₹ 1,29,45,920/- exchange rate difference receipts) and when the gross profit amount as disclosed by it is divided by this figure the G.P ratio comes to 7% ( 3,26,74,555 / 46,67,79,367 x 100 ) and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it did not exclude exchange rate fluctuation from the imports. Since the assessee did not furnish qualitative details of its production nor the details regarding size or number of diamonds produced, the AO was justified in making the addition. He added that the finding of the learned CIT(A) was recorded on completely wrong facts. 5. On the other hand, the learned AR on behalf of the assessee while carrying us through page 8, 9, 10, 13, 20-21, 28 to 30 and 224 of the paper book contended that the finding of the learned CIT(A) was in accordance with the facts on record. He pointed out that the Revenue was not in appeal against the deletion of addition on account of valuation of closing stock while no other defects were pointed out by the AO. The assessee had furnished quantitative statement of stock. After excluding foreign exchange difference from exports, their gross profit works out to 7% while gross profit worked out to 10.71% if such fluctuation was included in exports but excluded from imports. The AO completely ignored the fact their gross profit after considering the exchange rate fluctuation was better in the year under consideration as compared to the preceding year. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een valued at cost or net realizable value, whichever is lower and the said method of accounting has been accepted by the AO in the preceding assessment years. The Revenue did not dispute this plea on behalf of the assessee at any stage. Instead of finding any flaw in the method of accounting followed regularly by the assessee, the AO worked out the value of closing inventory of cut and polished diamonds backwardly on the basis of sales made by the asssessee and considering the cost of goods sold after deducting the gross profit. The ld. CIT(A) deleted the addition since approach of the AO was not in accordance with law. We are of the opinion that the AO is not empowered to change the method of accounting under the guise of substituting the value of closing stock. In the case of CIT vs. British Paints India Ltd.,188 ITR 44(SC), the Hon ble Apex Court itself stated that the AO is entitled to disturb the value put on the closing stock wherein the cost price adopted was not reflecting all the expenses which would go to make up the cost. In other words, there is no departure from the basic principle that it is the option of the assessee to adopt a particular method of valuation of clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 262 (Assam); R.V.S. and Sons Dairy Farm v. CIT [2002] 257 ITR 764 (Mad); International Forest Co. v. CIT [1975] 101 ITR 721 (J K) ; M. Durai Raj v. CIT [1972] 83 ITR 484 (Ker); Ramchandra Ramnivas v. State of Orissa [1970] 25 STC 501 (Orissa); Action Electricals v. Deputy CIT [2002] 258 ITR 188 (Delhi) and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217 (Gauhati) indicate that the AO is not fettered by any technical rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. Low profit in a particular year in itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The Hon ble Gujarat High Court in the case of CIT Vs. Amitbhai Gunwantbhai, 129 ITR 573 held that if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is shown by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59,427/- by holding that the same was claimed after the closure of books of accounts which was not permissible as per law. While going through the assessment order, it is found that the appellant on account of fluctuation in exchange rates had made a provision for ₹ 69,29,968/- as on 31/03/2004 for sundry debtors and ₹ 55,70,541/- on sundry creditors. According to the A.O., the provisions was made on valuation of foreign exchange rates after the year and i.e. at the time of filing of return of income. Further, according to the A.O., the appellant had claimed exchange loss to the extent of difference of the two provisions at ₹ 13,59,427/- which was not in order as according to him, book results could not be changed after 31/03/2004 and hence, he disallowed the said amount and added the same to its total income for tax purposes. 6. During the appellate proceedings, it has been submitted by the A.R. that the observations of the A.O. was not correct. According to him, the amount of exchange rate difference receipt / loss was worked out on the basis of foreign currency rates prevalent on 31/03/2004 keeping in view the procedure as laid down in Rule115 of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the assessee contended that they have valued the sundry debtors and sundry creditors as on 31-03-2004 in accordance with Rule 115 of the IT Rules, 1962. While relying upon the decision in the case of ONGC Ltd. vs. CIT,322 ITR 380(SC), the learned AR contended that the AO was not justified in making the addition.. 11. We have heard both the parties and gone through the facts of the case. We find that the ld. CIT(A) deleted the addition of ₹ 13,59,427/- on the ground that the amount of exchange rate difference receipt / loss was worked out on the basis of foreign currency rates prevalent on 31/03/2004 in terms of Rule 115 of the I.T. Rules, 1962. Since the ld. AR on behalf of the assessee itself admitted before the ld. CIT(A) that outstanding amount in the form of exchange rate difference as on 31.3.2004 was ₹ 55,70,541/- while the assessee adopted ₹ 51,33,812/- and therefore, income would go up by ₹ 4,36,729/- in terms of working filed before the ld. CIT(A), the said receipt of ₹ 4,36,729/- was, therefore directed to be taxed in the light of the decision in CIT Vs. Amba Impex,282 ITR 144(Guj) . We find that the Hon ble Apex Court in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. 13. Applying the aforesaid factors, Hon ble Apex Court in ONGC Ltd.(supra) held that the loss suffered by the assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure under section 37(1) of the Act, notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred. 14. In the instant case, indisputably, the amount of exchange gain/loss has been worked out by taking the prevalent rates of foreign currencies as on 31/03/2004 in terms of Rule 115 of the IT Rules,1962 while the assessee admitted before the ld. CIT(A) that its income would go up by ₹ 4,36,729/-. Neither the ld. DR nor the ld. AR on behalf of the assessee placed any material before us, controverting the aforesaid findings of facts recorded by the ld. CIT(A). In the light of view taken ..... X X X X Extracts X X X X X X X X Extracts X X X X
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