2014 (7) TMI 819 - AT - Income Tax

Tribunal rules on labour charges, stock valuation, and book discrepancies

The Tribunal partly allowed both the Revenue's and the Assessee's appeals. It upheld the disallowance of labour charges at a reduced rate, adjusted the ... Restriction of labour charges – Held that:- A reasonable rate should have been applied by CIT(A) - it would be fair and reasonable to allow labour charges @ ₹ 270 per carat, instead of ₹ 300 per carat as claimed by the assessee - to settle the issue being very old it is appropriate to adopt an average rate which comes to ₹ 270/- per carat - This rate can be applied on the total diamonds in carats meant for the labour charges – Decided partly in favour of Revenue. Undervaluation of closing stock on polished diamonds – Held that:- The valuation of the polished diamond could have been made by adopting the basis of the sale of the last month of the accounting period - This figure can thus be a starting point for the calculation - by comparing the sale price of the last month a reasonable view can be adopted about the exact position of the valuation of the closing stock - it is correct to disturb the valuation at least for the year under consideration so that the discrepancy as noted in respect of the quality of the diamond can to some extent be rectified - this year can be treated as a demarcating year from the past years – it is a reasonable and fair approach to compute the value of the stock of the polished diamond at ₹ 6448/- per carat as an average value of the closing stock - Closing stock of the diamond was 12909.74 Ct. and by applying the rate of ₹ 6,448/- the value to be worked out is ₹ 8,32,42,003/-, out which the value declared as per assessee is to be reduced of ₹ 6,00,30,337/; thus the balance comes to ₹ 2,32,11,666 – Decided partly in favour of Revenue. Under valuation of closing stock of rough diamonds – Held that;- The valuation of the stock is to be made at the market price or the cost price, whichever is lower - when the complete information about the quality of the stock is not made available then to resolve the issue a middle path is to be adopted - the assessee was in possession of the rough diamond - the difference of the two, i.e., purchase cost (- minus) sale cost is the correct method for determining the valuation of the rough diamond - The average of the two is ₹ 803 per carat, is required to be adopted by replacing the closing stock of diamonds calculated by adopting the average rate at ₹ 734.73 per carat – Decided partly in favour of Revenue. Rejection of books of accounts – Held that:- CIT(A) was rightly of the view that the labour payment was not verifiable in the assessment order and that the day to day consumption and production record of quantity and quality is not maintained - Even in survey complete records were not available – the AO is justified in applying section 145(3) of the Act - merely because in the earlier years the book results are accepted and no addition is made, it does not justify the assessee’s plea that the same status should be applied for the subsequent year - there was no fallacy in rejecting the books of account by the Revenue Authorities – Decided against Revenue. Labour charges disallowed – Held that:- The labour charges are different from lot to lot depending upon the quality of the diamond manufactured - the assessee himself had taken a plea that the diamonds are of two qualities, a superior quality and inferior quality - the valuation of such type of diamonds effect the overall valuation of the closing stock - it was impractical to pay an identical rate of job charges to all the job workers - Certain other doubts have also been raised such as a huge amount of labour charges remain outstanding at the end of the financial year - labour charges @ ₹ 270 per carat is allowed - the AO is directed to recompute the disallowance – Decided partly in favour of Assessee. Valuation of closing stock of polished diamond – Held that:- The assessee was in possession of 31945.14 carat of polished diamonds in the closing stock. The assessee had valued the polished diamonds @ ₹ 8790 per carat, the total value of the closing stock - in the absence of any other factor to determine the exact valuation of the polished diamond the valuation could be determined by considering the sales of the last month of the accounting period - The assessee had adopted the average value of the polished diamond in the closing stock at ₹ 8,790/- per carat, this can be said to be a reasonable and fair approach to resolve the issue as well as to compute the value of the closing stock of the polished diamond at ₹ 9378/- per carat as an average value of the entire stock –thus, the value of the unaccounted closing stock of the polished diamond as determined by the AO is modified – Decided partly in favour of Assessee. Issues Involved:1. Disallowance of Labour Charges2. Under Valuation of Closing Stock of Polished Diamonds3. Under Valuation of Closing Stock of Rough Diamonds4. Rejection of Books of Accounts5. Disallowance of Labour Expenses for Job WorkDetailed Analysis:1. Disallowance of Labour Charges:The Revenue Department contested the disallowance of labour charges, which was reduced by the CIT(A) from Rs. 1,08,83,214 to Rs. 10 lacs. The Assessing Officer (AO) noted discrepancies in the books, such as the absence of 'Production Record,' 'jangads' (receipts for transportation of diamonds), and registers for labour expenses, manufacturing, production, and stock. The AO observed that the labour expenses claimed were unsupported and excessive. The Tribunal held that the AO's disallowance was partly justified due to the lack of evidence and discrepancies. The Tribunal decided to allow labour charges at Rs. 270 per carat instead of the Rs. 300 per carat claimed by the assessee, resulting in a disallowance of Rs. 96,02,640.2. Under Valuation of Closing Stock of Polished Diamonds:The AO added Rs. 4,64,36,371 for under valuation of the closing stock of polished diamonds, arguing that the average sale price was higher than the value declared by the assessee. The CIT(A) deleted the addition, stating that the AO's valuation was hypothetical. The Tribunal, however, found that the valuation by the AO was based on material records and sales in March 2002. The Tribunal adopted an average rate of Rs. 6448 per carat for the closing stock, resulting in a revised addition of Rs. 2,32,11,666.3. Under Valuation of Closing Stock of Rough Diamonds:The AO added Rs. 4,30,07,818 for under valuation of rough diamonds, using an average purchase price of Rs. 872 per carat. The CIT(A) deleted the addition, stating that the AO included purchases from December 2001 without justification. The Tribunal adopted an average rate of Rs. 803 per carat, resulting in a partial allowance of the addition.4. Rejection of Books of Accounts:For A.Y. 2003-04, the AO rejected the books of accounts under Section 145(3) due to discrepancies in labour expenses, electricity expenses, and the absence of day-to-day production records. The CIT(A) upheld the rejection, and the Tribunal confirmed this decision, noting the incomplete information found during the search/survey operation.5. Disallowance of Labour Expenses for Job Work:The AO disallowed Rs. 2,89,02,654 for labour expenses, arguing that the job workers did not own machinery or premises and the labour charges were shown at a flat rate of Rs. 300 per carat. The CIT(A) upheld the disallowance, noting that the job workers were not independent and the expenses were inflated. The Tribunal, consistent with its decision for A.Y. 2002-03, allowed labour charges at Rs. 270 per carat, directing the AO to recompute the disallowance.Conclusion:Both the Revenue's and the Assessee's appeals were partly allowed. The Tribunal provided a balanced approach by partially upholding the AO's disallowances while adjusting the rates to more reasonable figures based on the evidence and discrepancies noted. The Tribunal emphasized the importance of maintaining accurate and complete records to substantiate claims.