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2016 (11) TMI 664 - ITAT MUMBAI

2016 (11) TMI 664 - ITAT MUMBAI - TMI - G.P. estimation - substantial rise in the payment of job work charges to the workers - Held that:- We have observed that the assessee is not able to justify the substantial rise in the payment of job work charges to the workers i.e. @ ₹ 500/- per carat as against ₹ 108/- per carat in preceding year. The labour charges have substantially gone up as compared to the preceding year which is almost 400% without any justification. It was observed tha .....

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against 6.93% which in our considered view is quite justified and fair keeping in view factual matrix of the case. We do not find any infirmity in the order of the ld. CIT(A). The A.O. adopted the GP rate @ 7.79% whereas the assessee has declared GP rate @ 6.93%. The ld. CIT(A) estimated the GP rate @ 7% keeping in view the peculiar facts and circumstances of the assessee’s case. In our considered view, the view taken by the ld. CIT(A) is quite reasonable and fair considering the peculiar facts .....

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mbai (hereinafter called the CIT(A) ), for the assessment year 2008- 09, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 23rd December, 2010 passed by learned the Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the assessee firm in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under: .....

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nds of ₹ 47,35,18,419/- and local sale of polished diamonds of ₹ 33,45,86,347/- and export sale of rough diamonds of ₹ 79,64,181/-. The assessee firm has shown an income of ₹ 91,01,299/- from the exchange rate difference which is a part of the gross profit. The gross profit of ₹ 5,65,87,574/- was worked out and the GP rate was arrived at 6.93%. The GP ratio arrived in the last assessment year was 7.79%. The assessee firm was asked to explain the reason for the fall .....

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09-10 along with copy of sale invoices duly marked there in the items exported are also filed before the AO. On perusal of the same, it was submitted that the valuation of polished diamonds is proper. The comparative analysis of gross profit, GP % and sales of last three assessment years was culled out as follows:- A.Y. Sales (In Rs.) Gross Profit (in Rs.) G.P.% 2008F09 81,60,68,947 5,65,87,574 6.93 2007F08 65,91,11,112 5,13,28,051 7.79 2006F07 38,31,22,862 3,09,81,525 8.09 From the above table .....

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ns day to day stock register in respect of rough diamonds and polished diamonds. The assessee submitted that the Mumbai Tribunal has deleted the entire addition made by A.O. in assessee s own case in the assessment year 2003-04 and hence the book results may be accepted. The A.O. had gone through the reply of the assessee and observed as under:- (a) The assessee maintains stock register of rough diamonds. It consist of date, mention of whether it is purchase or sent for manufacturing, weight of .....

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purchase is @ ₹ 36,309.60 per carat. The 3rd purchase is @ ₹ 23,927.87 per carat. The last purchase is @ ₹ 24,048/- per carat. The last but one purchase is @ ₹ 22,094.78 per carat. Purchases, as low as @ ₹ 3,770/- per carat has also been made. (b) The average yield has also come down from 43.32% to 41.60%, in comparison to last year. No record of yield of each lot sent for manufacturing has been maintained. (c) The export sale of 1266.81 carats of rough diamond has .....

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on 30.4.2007. This work was carried out in its own factory by the assessee. When the rough diamonds were sent to the factory and which part of the purchases of rough diamonds were sent to the factory, is not evident from the stock register filed, it is not possible to value correctly the polished diamonds received out of rough diamonds sent for manufacturing. (f) Stock register of polished diamond is also filed. It consist of date, opening stock of polished diamonds in carats, weight of polishe .....

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arat. The 4th sale was @ ₹ 31,312.17 per carat; The average value of the opening stock of polished diamonds was @ ₹ 35,841.92 per carat. The lowest rate of sale of polished diamonds ₹ 9,000/- per carat. The highest rate of sale of polished diamonds was ₹ 2,22,582/- per carat. But in nowhere in the stock register the size or number of pieces or quality or clarity or colour of the diamond has been mentioned. (h) In the opening stock of the polished diamonds and in the closi .....

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ot same be stated in the stock register. From the above discussion the AO observed that it is clear that assessee is maintaining its production records in such a manner that the : (i) What part of rough diamonds has been sent for manufacturing is not evident. (ii) The number of pieces of diamonds received, weight of each piece, its size or cut, colour of each piece and its clarity etc., of the received manufactured polished diamonds are not evident. (iii) These are the parameters, to decides the .....

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nds at cost and it is not disputed. The AO observed that the assessee's submission that he values its closing stock of polished diamonds at "Cost + labour" and inventory of closing stock of polished diamonds has been filed and on the basis of it the valuation of closing stock is proper, is not acceptable. The inventory of closing stock of polished diamonds consist of weight in carats and its value. What is the number of pieces, what is the colour of pieces, what is the weight of ea .....

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down. Even there is fall in yield, despite the utilization of sophisticated machinery for cutting and polishing. The AO observed that the figures of gross profit rates furnished by the assessee in other cases show that in the case of M/s Riken & Co., the G.P. rate is 8.08%. The AO observed that the assessee maintains day to day stock registers of rough diamonds and polished diamonds which is accepted, but when it lacks basic details as stated above, the same cannot justify the correctness o .....

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onds, sending for manufacturing, its receipt back as polished diamonds and its valuation was not satisfactory. The A.O. observed that it does not give correct profit of the business, hence, this is the reason for fall in the gross profit shown by the assessee. The A.O. also rejected the book results u/s 145 of the Act. The A.O. accordingly worked out the fresh figure of sales at ₹ 83,35,13,362/- by applying GP ratio of 7.79% as it was in the last year. Similarly , the extra profit was work .....

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ufactured in its own factory as well as gets it polished through outside labour parties. The assessee also purchases polished diamonds from the local market and exports polished diamonds as well as sell the same in the local market. The assessee buys various qualities of rough diamonds depending upon the demand in the international market. The assessee maintains day to day stock register in respect of rough diamonds as well as polished diamonds. The assessee submitted that all purchases and sale .....

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ntire packet will be bought by them. The buyer himself assorts the diamond or through his staff and offers the price with a condition that he will buy only 70% to 80% of the goods shown to him depending upon the orders he has in his hand. When such unsold goods are received back from the prospective buyers, these diamonds are again mixed with other packet containing polished diamonds. This cycle of trade is a perpetual one. Hence it is not only cumbersome but a herculean task to maintain the sto .....

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e mainly in the instant assessment year due to fall in the gross profit and that the valuation of opening stock, valuation of manufactured stock and valuation of closing stock was not open to verification and hence the book results of the assessee was rejected and the reasons given for fall in GP were also not acceptable to the A.O. . The assessee submitted that the Tribunal considered the submissions of the assessee on these issues and the appeal filed by the department was dismissed for the as .....

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he entire exports , while in the assessment year 2008-09 out of ₹ 81.60 crore turnover the assessee had exported polished diamonds worth ₹ 47.35 crores and had made local sales of ₹ 33.46 crores. It was submitted by the assessee that there was recession in the international market like USA, Japan, Europe etc. due to bankruptcies of leading bank and mutual fund in USA and it is a common knowledge that the margin of profit is always better in the export market than in the local m .....

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#8377; 36,66,550/-. Xerox copy of the wage register of the entire previous year in this regard was also filed. It was submitted that the partners of the assessee firm had no experience of running the factory and the workers were taking them for a ride. There were go slow practice on the part of the workers which hampered the production as well. The workers were continuously demanding higher wages, bonus, leave pay, etc. which the assessee firm was not willing to give and ultimately at the end of .....

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8 the assessee had bought rough diamonds of high value and high quality of average price ₹ 25,537/- per carat whereas in the assessment year 2008-09, the assessee bought rough diamonds, the average price was ₹ 17,165/- per carat. The average sale price in the assessment year 2007-08 was ₹ 68,241/- per carat whereas the average sale price in the assessment year 2008-09 was ₹ 47,4l5/- per carat and hence the yield of finished product due to inferior quality of rough diamond .....

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ery payment of labour charges and wages by account payee cheques only. The ld. CIT(A) considered the submissions of the assessee and observed that there was a slight fall in GP ratio in the assessment years 2006-07 to 2008-09 which is evident from the following table:- A.Y. Sales (In Rs.) Gross Profit(in Rs) G.P. % 2008-09 81,60,68,947/- 5,65,87,574/- 6.93 2007-08 65,91,11,112/- 5,13,28,051/- 7.79 2006-07 38,31,22,862/- 3,09,81,525/- 8.09 It was observed that the turnover of the assessee firm ha .....

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een following a consistent method of valuation of stocks and whether such method is scientific and it is possible to verify the results by examining the details in the light of the method followed by the assessee. It was observed that the rough diamonds purchased during the year have been put to manufacture and the closing stock is nil. As regards the polished diamonds manufactured during the year, the assessee submitted that the value is arrived by considering the cost + labour involved therein .....

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d closing stock is not open to verification does not appear to be correct was the observation of learned CIT(A). It was also observed by the learned CIT(A) that the assessee entered into local market for the first time unlike the earlier years in which he was exclusively engaged in exports. Due to recession in the export markets, the assessee has to change his strategy that he has not only entered into local market, but also into the low value products. Thus, the assessee involved in achieving h .....

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of the purchases and sales of diamonds nor brought any instance on record to show that the assessee has indulged in sales outside the books of account. Though the books of accounts are rejected, the A.O. has no reason to estimate the sales at a figure higher than the reported sales which were audited. Thus, the ld. CIT(A) rejected the A.O. s action in estimating higher sales vide appellate orders dated 16.12.2011. With regard to the fall in G.P. rate, the ld. CIT(A) observed that the labour cos .....

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arges ratio to turnover is misleading and not reliable. Again it was observed that the assessee s submission that the inferior quality rough diamonds involve multi cleaving process resulting in higher labour cost is entirely not correct. It was also observed that from the invoices for labour charges for job work placed on record, the same were charged per carat of rough diamonds worked upon uniformly @ ₹ 500/- per carat irrespective of the quality of the rough diamonds involved. As compare .....

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oduction vis-avis job work. Similarly there was also no proper explanation for abnormal increase in per carat rate of job work charges paid during the year compared to the earlier year. The assessee s contention that he has worked upon inferior quality of rough diamonds may explain part of the increase in the labour charges incurred during the year but it may not be a complete explanation by itself. Thus, it was observed that there is no verifiable information as to the quality of the rough diam .....

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the assessee submitted that the assessee had a GP ratio of 6.93% during the assessment year 2008-09 as against 7.79% in the preceding year. The ld. Counsel submitted that books of account were rejected by the A.O. on the ground that closing stock is not verifiable due to details of received manufactured polished diamonds are not evident and the closing stock is not verifiable as to color, size etc.. The ld. CIT(A) estimated the GP ratio at 7% instead of 6.93% declared by the assessee and upheld .....

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assessee has set up factory where there was a labour problem also which led to higher wages. The ld. Counsel drew our attention to the order of the ld. CIT(A) and submitted that the ld. CIT(A) came to the conclusion that the labour charges paid at a higher rate i.e. ₹ 500/- per carat during the year under consideration whereas the assessee had paid ₹ 108/- per carat in the earlier years. The ld. Counsel submitted that the labour bills are placed at paper book page 28 to 56 and these .....

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the business of diamonds whereby the assessee is purchasing rough diamonds which is being cut and polished. The assessee was earlier engaged in the business of diamonds export whereby the entire cut and polished diamonds were exported. In the impugned assessment year, the assessee has also entered into manufacturing by setting up his own factory whereby the assessee is also engaged in dealing by selling in local market. Due to the setting up of its own factory, higher wages including labour wel .....

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