Diamond stock valuation method upheld, exchange rate gain included for deduction. Appeal outcome: mixed.

The appeal involved issues of valuation of stock of polished diamonds and inclusion of exchange rate gain difference in calculating deduction u/s 80HHC. The Tribunal directed the Assessing Officer to accept the assessee's valuation method for the diamond stock, reducing the addition from Rs. 77,88,183 to Rs. 3,71,673. Regarding the exchange rate gain difference, the Tribunal ruled in favor of the Department, directing inclusion of the amount in the year of export. Both the assessee and Department's appeals were allowed in part, with the order pronounced on November 30, 2009.

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Issues Involved:
1. Addition on account of valuation of stock of polished diamond.
2. Inclusion of exchange rate gain difference in calculating deduction u/s 80HHC.

Summary:

1. Addition on account of valuation of stock of polished diamond:

In the appeal of the assessee, ground no 2 & 3 are not pressed and the same are dismissed as not pressed. Ground no 1 of the assessee relates to confirming the addition to the extent of Rs. 3,71,673/- on account of valuation of stock of polished diamond. In the appeal of the revenue, Ground 3 relates to restricting the addition to Rs. 3,71,673/- in place of Rs. 77,88,183/- being the addition made on account of under valuation of closing stock. These issues involved in both the appeals are common and, therefore, the same are disposed off together.

The assessee, engaged in the business of export of diamonds, disclosed the value of closing stock of polished diamonds at Rs. 3,00,05,843/- with an average cost per carat of Rs. 20,250/-. The Assessing Officer (AO) proposed to value the closing stock at Rs. 25,506/- per carat, enhancing the value by Rs. 77,88,183/- due to alleged under-valuation. The AO rejected the book results citing reasons such as non-maintenance of a lot-wise stock book and a fall in the GP ratio.

The assessee argued that the valuation was done using the Net Realisable Value method due to the non-homogeneity of diamonds and provided several justifications, including the impracticality of maintaining a detailed stock register. However, the AO did not accept these contentions and applied section 145(3) to reject the books of account, valuing the closing stock at Rs. 25,506/- per carat.

The CIT (A) upheld the AO's rejection of the books but found the addition of Rs. 77,88,183/- unreasonable, reducing it to Rs. 3,71,673/- to align the gross profit rate with past records. The Tribunal noted that the assessee consistently used the Net Realisable Value method, which was accepted in previous and subsequent years. The Tribunal found no major defects in the books of account and held that the rejection of the books by the AO was not justified. Consequently, the Tribunal directed the AO to accept the book results shown by the assessee, allowing the assessee's ground and dismissing the department's grounds.

2. Inclusion of exchange rate gain difference in calculating deduction u/s 80HHC:

Ground 1 & 2 in the appeal of the Department is against directing the Assessing Officer to include the exchange rate gain difference of Rs. 1,12,778/-. The Assessing Officer reduced the amount pertaining to rate gain difference related to earlier year while calculating deduction u/s 80HHC. The CIT (A) allowed the issue in favour of the assessee. Now, this issue has been decided by the Special Bench in case of Prakash L Shah (115 ITD 167) whereby it has been held that the rate difference in exchange gain or loss will be taken into consideration in the year of export. Therefore, in the year under consideration this issue is decided in favour of the Department. However, the Assessing Officer is directed to take into consideration the exchange rate gain difference in the year of export. We order accordingly.

Conclusion:

In the result, the appeal of the assessee as well as of the Department are allowed in part.

Order pronounced on 30th day of November 2009.

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