TMI Blog2016 (12) TMI 1241X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee did not file second appeal with the Tribunal with respect to quantum assessment and accepted the appellate order of learned CIT(A) partly allowing the appeal in quantum assessment, owing to the reason that the partner of the assessee Mr Sameer Jhaveri was not well and ultimately expired on 08-05-2009 and the wife of the said Mr. Sameer Jhaveri was not interested in persuing the business as well litigation with the Revenue. In any case , the closing stock of this assessment year would become the opening stock of the next year and ultimately it has got no effect on the taxes payable to Revenue and revenue effect is tax neutral as there is no loss to the Revenue. The penalty levied by the A.O. and as confirmed/sustained by learned CIT(A) is not sustainable in the eyes of law keeping in view peculiar facts and circumstances of the case and the bonafide explanations submitted by the assessee - Decided in favour of assessee - I .T.A. No. 7110/Mum/2012 - - - Dated:- 27-10-2016 - SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Assessee : Shri S.C. Tiwari and Ms. Rutuja Pawar For The Revenue : Shri Sunil Kumar Agarwal,DR ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 3. The Brief facts of the case are that during the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, it was observed by the A.O. that the assessee has undervalued the closing stock of diamonds by ₹ 22,76,454/-. The A.O. s assessment order is reproduced as under:- Valuation of closing stock of diamonds: During the course of assessment proceedings, the assessee was specifically asked to give the quantitative tally of consumption of' various raw materials during the year by adopting standard quantity of consumption require in production of one unit of finished goods, then multiplying it with total number of pieces of that particular item produced during the year. The standard consumption so arrived at should then be compared with actual consumption of various raw materials for the production of finished goods during tile year and the discrepancy between the standard consumption and actual consumption of raw materials should be compared and explanation offered for the discrepancies, if any. It was further asked to give the details of quantity of various raw materials which goes into manufacture of one unit of finished goods lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate comes to ₹ 6,936/-. If your honour see the details of purchases made are from ₹ 3,500/- per cts. to ₹ 18,000/- per cts. which depends upon colour, clarity, cut and carats. The diamonds are purchased in lots or packets which are mixed diamonds and after buying diamonds, we assort diamond from the packet into different quality and sizes. The goods are then issued to the Karigars from these assortments to make a particular piece of jewellery. Depending on the type of jewellery to be made, better/weaker quality goods and smaller/bigger sizes of diamonds are issued and rest is kept in stock for other jewellery to be made later. The stock which are balance are basically lower quality of diamonds which are normally issue for manufacturing as and when low cost jewellery demands by the customer. When stock is taken, it is valued cost or market price which is lower. The values are basically typical and depend upon the carat, quality, clarity and cut. Looking the above facts, the value is determined and taken in closing stock is correct . The submission made by the assessee is duly considered. The assessee did not make an attempt to explain as to why the valuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the values of diamonds lying in the closing stock is the true value. In the absence of the same, I decline to accept the valuation done by the assessee in respect of the diamonds lying in the closing stock. I therefore proceed to adopt the average rate at which the diamonds were purchased during the relevant previous year and the opening stock, which works out to ₹ 5,414.57 per carat. Accordingly, the valuation of closing stock of diamonds is calculated at ₹ 58,83,910/-. The difference of ₹ 22,76,454/- is added to the total income. The A.O. initiated the penalty proceedings u/s 271(1)(c) of the Act for filing inaccurate particulars of income and also issued notice asking the assessee to explain as to why penalty u/s 271(1)(c) of the Act should not be levied. In reply the assessee submitted that the A.O. had made additions in respect of the assessment year 2003-04 as under:- a) On account of loss of gold on mfg. ₹ 48,558/- b) On account of valuation of Diamonds ₹ 22,76,454/- Total ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by the assessee were accepted by the A.O. and hence no inaccurate particulars were furnished by the assessee. It was submitted that valuation of the cut and polished diamonds is highly complex and the value is assigned item-wise while the A.O. adopted the average rate of opening stock and purchase price without giving any technical or commercial reasons. It was submitted that the rate per carat of diamond varies and the average rate adopted by the A.O. cannot be applied. It depends on clarity, looks and shape etc. Even the piece of same size will have different valuation on account of size, shape, cut, clarity , look etc. . The quantity remains the same, but as per the requirement of the customers, they go on mixing all the stock and then make assortment depending upon size, shape, cut, clarity, looks etc. This activity takes lot of time and it is not possible and practicable to keep detailed records of each assortment and is a impossible task. Aggrieved by the assessment order of the A.O.in quantum , It was submitted that the assessee preferred appeal before the ld. CIT(A) but was not satisfied with the order of the ld. CIT(A) in quantum proceedings and wanted to file further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of such highly priced items , it was not possible to ascertain the quality, quantity, rates and values of diamonds lying in stock , it is open for the assessee to easily manipulate the value of the diamonds by assigning values as per its whim and fancy. The assessee contended that any addition made to the closing stock would become the opening stock of the next year and as such it has got no effect on the tax. It was contended that there are different grades of diamonds which are almost 6000 to 8000 grades based on cut, clarity, carat and colour and in order to get advantage of better pricing, the assessee always purchased mixed lots of diamonds which contained both good and lower quality of diamonds. The assessee submitted that the purchase bill did not show the value of each individual diamond and it was not practically feasible to be shown as such. It was submitted that the assessee always used better diamonds out of purchases of the mixed lots and the lower quality diamonds were always retained in stock which resulted in the closing inventory being lower than the average purchase price. Thus, the assessee submitted that bona-fide explanations were submitted and hence it cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery. At the same time, the average rate of purchase of diamonds during the year was at ₹ 6936.18 per carat. The learned CIT(A) observed that only explanation coming from the assessee is that the diamonds were purchased in mixed lots, the stock as held contains lower quality diamonds and that the purchase bills do not contained the detailed particulars such as the quality, rate etc. of the items , but only the total weight and the total value and hence not feasible to furnish finer details. The learned CIT(A) observed that there is merit in contentions of the AO that there is an ample scope to the assessee to manipulate the values with regard to valuation of stock. The assessee has not produced any credible evidence or material in order to substantiate the valuation/ evidence quantitative particulars as furnished by the assessee along with the return of income filed with the Revenue. The assessee having not furnished the details of quality , quantity , rate and value of diamonds lying in the stock, the assessee has confounded its position giving room for misgivings as regards the valuation carried out by the assessee. The learned CIT(A) also rejected the contention of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make a particular piece of jewellery, hence, the value of the diamonds is determined as per cost or market price whichever is lower. The A.O. has applied average rate which is not correct and the additions have been made arbitrarily. The ld. Counsel submitted that all the details were submitted before the authorities below of the various jewelleries made out of the diamonds. The ld. Counsel drew our attention to the replies submitted before the authorities below which are placed at paper book page 68 to 110 and also page 37 to 54 of paper book filed with the Tribunal and submitted that no addition can be made on this account. He also drew our attention to the tax audit report filed and submitted that the auditors have duly verified all the records. It was submitted that it is normal to have different rates per carat of diamond. He submitted that closing stock of this year would become the opening stock of the next year and as such it has got no effect on the tax and no prejudice is caused to the Revenue. The ld. Counsel submitted that the allegation of not maintaining the records is not correct. There are different types of diamonds which are of 6000-8000 grades and the rate of dia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has stated that from the assorted diamonds so purchased wherein in the purchase invoice, there are no separate mention of different assorted diamonds , the assessee issues diamond of higher grades first and applies estimated rates for issue based on valuation , while the stock left in the closing stock is of inferior quality which is valued at lower rates. The Revenue has rejected this contention of the assessee but has made any enquiry to bring on record any evidence to controvert the same. The Revenue had made addition to the closing stock of the impugned assessment year on the charge of undervaluation of value of closing stock of diamond by applying average rates , while the assessee has applied rates based on value of grade/variety of diamonds in stock by applying cost or market value which ever is lower of the relevant grade/variety of diamond. Keeping in view the facts and circumstances of the case, average rate cannot be applied in the manner as applied by Revenue and no cogent adverse material has been brought on record by the Revenue to disprove the basis of valuation adopted by the assessee for valuing stock of diamond based on variety/grade of diamond. No enquiries o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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