2015 (9) TMI 841 - AT - Income Tax

Tribunal upholds CIT(A)'s decision, rejects Revenue's appeal. Rejection of books unjustified.

The Tribunal upheld the CIT(A)'s decision in dismissing the Revenue's appeal on all three substantive grounds. It found that the rejection of books of ... Rejection of books of accounts - as per AO the assessee had failed to maintain quality-wise data of diamond manufactured and to furnish the relevant production record - CIT(A) reversed AO order - Held that:- There is no dispute that assessee’s books of account pertaining to its diamond stock are being maintained on “carat basis”. This method is consistently followed in preceding and succeeding assessment years. The case file contains details of quality-wise closing stock as on 31st March, 2007, audit report as well as sample copy of stock register for March 2007 relating to the relevant previous year. The Revenue fails to controvert correctness thereof except making oral submissions. The above stated consistency of past practice in maintaining books and stock caratwise is not rebutted. There is no other material quoted so as to reject assessee’s books of account. We uphold the CIT(A)’s order in these facts and hold that the same does not call for any interference. - Decided against revenue. Addition made after estimation of gross profit - Held that:- It is admitted that assessee’s gross profit from assessment year 2004-05 to the impugned assessment year 2007-08 reads 9.67%, 5.04%, 6% and 3.96%; respectively. The assessee attributed this fall to increase in turn over along with decline in export and local rates @ ₹ 1,251/- and ₹ 3,406/- respectively. The Assessing Officer neither disputes this rate fluctuation specifically nor does he draw any comparable instance to re-estimate the impugned gross profit. Be that as it may, the fact also remains that the very basis of this estimation is rejection of assessee’s books of account which already stands decided against the Revenue. It also fails to quote any evidence much less is specific one citing appropriate comparable instances in the course of hearing. We uphold the lower appellate findings accordingly.- Decided against revenue. Fall in diamond yield by 1.28% resulting in addition to income - CIT(A) deleted addition - Held that:- once the assessee’s book result already stands accepted in preceding paragraph, this issue is rendered academic. We further notice that the very yield in assessment year 2005-06 was 26.93% much less than 30.35% in assessment year 2004-05. This year comprises of yield rate @ 27.63% ie. much more than that in assessment year 2005-06. The Assessing Officer does not seem to have made addition on account of yield fluctuation attributable to peculiarities of the assessee’s business. Nor is any specific material pin pointing defecting the yield rate in question is being cited. We accordingly hold that the CIT(A) has rightly reversed the Assessing Officer’s findings under challenged. - Decided against revenue. Issues Involved:1. Rejection of books of accounts by the Assessing Officer.2. Estimation of gross profit.3. Fall in diamond yield and related addition.Issue-wise Detailed Analysis:1. Rejection of Books of Accounts:The Revenue challenged the CIT(A)'s decision to reverse the Assessing Officer's (AO) action of rejecting the books of accounts due to the assessee's failure to maintain quality-wise data of manufactured diamonds and relevant production records. The AO noted deficiencies in the maintenance of books, specifically the lack of piece-wise quantitative data in the stock register, which is crucial for determining the correct state of business affairs. The AO argued that the market value of polished diamonds depends on quality parameters such as carat, cut, color, and clarity, which were not detailed in the assessee's records. The AO concluded that the non-maintenance of detailed qualitative records amounted to non-maintenance of books of accounts, leading to their rejection under Section 145(3) of the Income Tax Act.The assessee contended that piece-wise records were not significant for the valuation of closing stock, which is typically done on a carat basis in the diamond industry. The assessee argued that the valuation method followed was consistent with industry practices and had been accepted in previous years. The CIT(A) agreed with the assessee, noting that the books were maintained on a carat basis consistently and that the AO did not provide any opportunity for the assessee to rebut the basis of rejection, violating principles of natural justice. The CIT(A) concluded that the rejection of books on the grounds of not maintaining piece-wise details was not tenable in law.The Tribunal upheld the CIT(A)'s order, noting that the assessee's method of maintaining books on a carat basis was consistent with past practices and was not rebutted by the Revenue. The Tribunal found no material evidence to justify the rejection of the books of accounts and dismissed the Revenue's first substantive ground.2. Estimation of Gross Profit:The Revenue's second substantive ground involved the addition made after estimating the gross profit (GP). The AO rejected the assessee's explanation for the fall in GP from 6% in the preceding year to 3.99% in the current year, attributing it to underreporting. The AO estimated the GP at 6% based on the previous year's figures and made an addition of Rs. 90,12,001/- to the income returned.The assessee argued that the fall in GP was due to a decrease in sale prices and an increase in turnover. The CIT(A) noted that the rejection of books was not tenable, and therefore, the estimation of GP at a different rate was also not justified. The CIT(A) observed that each year is distinct and that GP rates are liable to vary. The AO's estimation was not based on comparable cases or evidence, and the assessee was not given an opportunity to rebut the estimation. The CIT(A) directed the deletion of the addition made on this account.The Tribunal upheld the CIT(A)'s findings, noting that the AO did not dispute the rate fluctuation specifically or provide any comparable instances to justify the GP estimation. The Tribunal found no evidence to support the AO's estimation and dismissed the Revenue's second substantive ground.3. Fall in Diamond Yield:The Revenue's third substantive ground involved the issue of a fall in diamond yield by 1.28%, resulting in an addition of Rs. 1,97,13,893/-. The AO observed a decrease in the yield ratio from 28.91% in the preceding year to 27.63% in the current year and estimated the yield ratio based on the previous year's figures. The AO cited a comparable instance of M/s. Paladia Brothers to support his assumptions.The assessee contended that yield ratios vary due to numerous factors and that the AO's estimation was based on presumptions without specific evidence. The CIT(A) noted that the rejection of books was not upheld, making the yield estimation untenable. The CIT(A) also observed that the AO did not provide an opportunity for the assessee to rebut the estimation and failed to explain how the third-party case was comparable.The Tribunal noted that the yield ratio varied in different years and that the AO did not cite any specific material pinpointing defects in the yield rate. The Tribunal upheld the CIT(A)'s decision, finding no justification for the AO's estimation and dismissed the Revenue's third substantive ground.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order on all three substantive grounds, finding no basis for the rejection of books, estimation of gross profit, or addition due to fall in diamond yield.