TaxTMI 
TaxTMI 
2012 (12) TMI 5
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....to deletion of an addition of Rs.28,49,884/- made by the AO in respect of low Gross Profit. The AO has dealt with the issue as under:- "2 The assessee, a partnership firm, is engaged in the business of job work of diamond and export of diamond. During the year the assessee has shown gross profit of Rs.1,01,82,895/- @ 13.81% on total turn over of Rs.7,37,47,135/- as against gross profit of Rs.1,07,26,776/- @ 20% on gross receipts of Rs.5,36,39,699/- in the immediately preceding year. Thus, there is a fall in the gross profit ratio in the year under consideration. 3. As noted in the preceding paras that the assessee had shown GP @ 13.81% as compared to GP of 20% in the immediately preceding assessment year. Thus there was a fall in gross profit of 6.19%. Here it would be pertinent to mention further scanning of trading of account revealed that the assessee had carried out export trading activity from its branch office situated at Mumbai and the job work from its head office at Surat. In this context the assessee vide this office query letter dated 19.7.2005 alongwith notice u/s. 142(1), the assessee was categorically asked to explain the fall in gross profit. Before going into ....
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....be Rs.10,000/- (i.e 5,000 x 2) but may be Rs.15,000 and the price of a diamond of one carat of the same quality, i.e., similar cut, colour and clarity would not be Rs.50,000 i.e. (5000 X 10) but may be around Rs.1 lac or more. Similarly, the price of a .05 carat or 5 cents may be around Rs.400 instead of Rs.2,500. The sum and substance of this is that as the size of the diamond increases, the increase in its price is far more than the proportion of increase in the weight of same quality of diamond. Same criteria would apply in the case of cut, i.e. if a diamond is weighing 10 cents but with inferior quality of cuts costs Rs.2,000, a diamond of superior cut but of same weight, i.e., carat, colour and clarity may cost Rs.3,000. Similar considerations apply to the other factors, viz., colour and quality. The less colour a diamond has or in other words, the more it is on whiter side, for the same caratage, cut clarity, the higher would be its price. The same can be stated about the clarity of diamonds. 5. In view of the peculiarity of the business, it becomes necessary to ascertain the production of the diamonds both in terms of quality and quantity. In this backdrop, on e....
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....f diamonds from each lot it is not ascertainable which type of diamonds was produced from a particular lot in order to determine the value. Therefore, in view of this, it would rather be correct to say that the valuation of stock is not verifiable. Here, it would be pertinent to mention that the Hon'ble Supreme Court in the case of British Prints India Pvt. Ltd. reported in 188 ITR 44, has been held that where the accounts are prepared without disclosing the real cost of the stock in trade albeit on sound expert advise in the interest of efficient administration of business, it is the duty of the Assessing Officer to determine the taxable income by making such computation as he thinks fit. Therefore, the claim of the assessee that it is assessee's option to maintain the books of accounts in the manner that suits to it can no longer be accepted and has to be rejected. In this context, reliance is also placed upon the Mumbai ITAT's decision in the case of DCIT Vs. Samir Diamonds Export Pvt. Ltd. reported in 71 ITD 75. Fall in gross profit 7. As already discussed in para-3 above, there is a fall in gross profit ratio 6.19% during the year under consideration as compared to th....
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....or decrease in margin due to money crisis also does not seem to be convincing since you have availed bank loans during the year under consideration. Further the financial charges decrease the net profit and not the gross profit. Another reason cited by you is recession in whole economy which is also not convincing since the economy in F.Y. 03-04 was on boom and not on recession. The GDP growth rate during F.Y.03-04 has increased from around 5% to 8.2%. Thus, the reasons cited by you is general in nature are not convincing. So you are asked to show cause as to why your book result should not be rejected and the gross profit should not be enhanced to that of last year i.e. 20% and the difference should not be added to your total income". 7.3 In response to the above, the assessee vide its letter dated 16.11.2006 has stated as under: During the year under consideration there is a fall in G.P. as compare to last year in this connection, we have given our reason, but you have stated that reason cited by us is general in nature. In this connection we have further to state that in last year we have sold diamond at Rs.13,030/- per Cts. While in the year under consideration the sam....
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....d quality of diamond in shape, colour and clarity for that they require skill workers and the labour payment is more. While for the job work they do not have to look into clarity, cut, shape, weight, etc. for polished diamond. So there was difference in rate of labour charges for own manufacture and job work manufacture. This clearly shows that the assessee himself depends upon the quality for labour payment, but they have not furnished such quality details, even though, it was specifically called for. 7.4 Thus, in view of the above facts, it is apparent that the assessee had the record of production of polished diamonds on the basis of quality. Otherwise, taking into account the quantity of polished diamonds sold, it would become. impossible for the assessee to have a control over the trading activity. However, f the assessee had declined to furnish such records merely on the ground that the requisite records were not maintained. The very fact that the assessee had admitted that after the cut and polished diamonds received back from the labour parties they were sorted by the assessee in different lots, sizes, quality etc. would indicate that the assessee had been sorting the....
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....h diamonds and reduction in sales price of polished diamonds it would be quit reasonable and justifiable to enhance the gross profit by 4% of the total turnover of Rs.7,37,47,135/- on an estimated basis. I, therefore, add a sum o^ Rs.28,49,884/- to the total income of the assessee." 4. Aggrieved by this order, the assessee carried the mat ter in appeal before the first appellate authority. Before the learned CIT(A), the assessee's contention was that the addition on account of low gross profit made by the Assessing Officer was totally uncalled for as it was based on her guess work and surmises. According to the AR of the assessee, due to certain adverse factors such as rise in the cost of polished diamonds and reduction in the profit earned on sale (export) on per carat basis during the year in comparison to immediate preceding assessment year, its profit had gone down. To further elaborate the above referred submission, it was stated by the AR, that during year, the cost of exported polished diamonds of 5774.38 carats was Rs.6,35,64,240/- i.e. on an average it was Rs.11,007.98 per carat and against that its realized average sale price was Rs.l2,771.44 per carat which resulted i....
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.... X Less Profit earned per Cts. as compared to last year 842.45 4864609 =========== Total Sales (Rs. ) G P Shown Percentage 73,747.135 10,182,895 13.81% Add: Amount of les s r eceived as compared to AY 03-04 4,864.609 15,047,504 20.40% 5. Thus, on the basis of the above referred facts and figures, the AR pleaded that if the cost as well as sale factors are taken into consideration (as discussed above,) then there was no fall in gross profit ratio at all. Further, according to the AR, if the gross profit ratio for the year under consideration was compared by the Assessing Officer on the basis of gross profit ratio disclosed by the assessee-firm in the immediate preceding assessment year, the factors responsible for down fall in gross profit ratio should necessarily be taken into account, only then the comparison can be justified. 6. In support of his above referred submissions, the AR relied on the decision of the ITAT, Ahmedbad 'C' Bench in the case of Ladakkchand Jivraj & Sons V/s. I.T.O. - 35 TTJ (Ahd.) 512. In addition to the abo....
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....io during the year under consideration in comparison the gross profit ratio reflected by it in the immediate preceding assessment year. It is also a fact that such details were submitted before the Assessing Officer also during the course of assessment proceedings but these were not taken into consideration at all and no findings in this regard has been given. In my considered opinion, if the fall in gross profit ratio has been explained satisfactorily and no specific defects were pointed out in the books of accounts by the Assessing Officer, then the findings of the various Courts as referred to above have been found applicable to the issue involved in the case of the appellant. Further, after going through the findings of the Hon'ble Supreme Court of India in the case of British Paints (India) Ltd. (supra), it is found that the Hon'ble Court has held that that the findings of the Assessing Officer was justified in the said case because while valuing the closing stock, the assessee i.e. British Paints (India) Ltd. did not consider the major portion of the operative expenses while valuing the same. In the case of the appellant, on the contrary, after going through the details and m....
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.... counsel of the assessee, on the other hand, reiterated the submissions made before the learned CIT(A) and further submitted that the accounts of the assessee are audited and only quantity wise details were not available with the assessee which cannot be the reason for rejecting the book results shown by the assessee. He also relied on the detailed reply given by the assessee during the assessment proceedings which is also a part of our order. Placing reliance on the decisions of the Tribunal in the cases of Ladakchand Jivraj and Sons vs. ITO 35 TTJ 35 and Keystone India Pvt. Ltd. vs. DCIT (2006) 99 TTJ (Ahd) 386, he concluded his arguments by praying that the order passed by the learned CIT(A) may kindly be upheld. 11. In reply, the learned DR submitted that the decision of the Tribunal in the case of Balar Exports (supra) is the latest decision on the issue and the same may kindly be followed instead of earlier decision of the Tribunal relied upon by the assessee. 12. We have heard both the parties and perused the records and find that during the assessment proceedings, it was noticed by the AO that there was fall in GP rate by 6.19% as compared to last year. Assessee's exp....
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....eriod of four years that the gross profit of the assessee had reduced despite the fact that he had been purchasing quality diamond and hence also getting better yield. The detailed analysis of the figures bring out the importance of piece-wise or quality-wise records maintenance which the assessee claimed not to have maintained. It was, therefore, inferred, by the AO that the assessee did not disclose the correct profits. This is clear from para 7.3 and 7.4 of the assessment order. 13. We further find that the learned CIT(A) while giving relief to the assessee, has relied on the decision of the ITAT Ahmedabad in the case of Ladakchand Jivraj and Sons vs. ITO 35 TTJ (Ahd) 512 which is according to us is not applicable to the facts of this case. In the case of Ladakchand Jivraj and Sons (supra), the assessee was a wholesale dealer in tea who submitted details chestwise instead of kilogramwise as asked by the AO. As a result, the AO made a GP addition. This was deleted by the Tribunal saying that the AO did not bring anything on record to justify that "there was any quantity of goods not accounted for or the rates of sales were not reliable or the purchases were inflated". This cas....
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....ile deleting the additions, are distinguishable on facts and, therefore, the ratio as laid down in those cases were not applicable to the facts of this case. 16. The learned counsel of the assessee placed reliance on the decision of the ITAT Ahmedabad Bench in the case of ACIT vs. M/s Jodhani Exports [ITA No.3645/Ahd/2007 & ITA No.3536/Ahd/2007, order dated 31-12-2010] and in the case of M/s Dhami Brothers vs. ACIT [ITA No. 2309/Ahd/2008, order dated 06-08-2010] for the proposition that even if the quality wise details of stock were not produced before the AO, the book results cannot be rejected In the cases of M/s Jodhani Exports and M/s Dhami Brothers (supra), there was no dispute about the fact that the assessee did not maintain quality-wise details of closing stock. While in the assessee's case, the AO after discussing the issue in detail, has held clearly that though the assessee was maintaining quality-wise and quantity-wise details of its stock but the same were not produced before the AO. The relevant paras 7.3 and 7.4 of the assessment order, at the cost of repetition, are reproduced below:- "7.3 A plain reading of the submission of the assessee shows that the assess....
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....see was diamond exporter - It Imported rough diamonds and after cutting, polishing, etc., exported final product - Assessee admitted before Assessing Officer that it did not maintain details of polished diamonds on basis of weight, cut, clarity, shape and number of pieces - Assessee also did not furnish details regarding issuing of lots of rough diamond to labour parties for cutting, polishing, etc., and actual yield therefrom as they were said to have been destroyed after goods were received back - Assessing Officer further found that assessee had shown a uniform yield between 25 per cent to 26 per cent of polished diamonds from all sorts of rough diamonds, good or bad, while number of yield varied from 4 pieces to 200 pieces per carat - He also found that labour charges were also shown to have been paid at uniform rate irrespective of quality of diamond which was inconceivable - He, therefore, concluded that in absence of vital details and in view of incompleteness of books of account book results could not be accepted and on basis of assessee's own record and results disclosed by sister concerns, made flat addition at 5 per cent of disclosed sales - Whether an assessee can claim....
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....abour charges per carat were shown to have been paid which was inconceivable. He also noticed that the diamonds exported, varied from US $ 41 to US $ 850 per carat. The Assessing Officer, therefore, came to the conclusion that the book results not be accepted and that on account of the defects enumerated by he had to assess the income of the assessee according to the proviisions of section 145. Considering the results in the cases of the assessee's group and the assessee's own case for the assessment year 1989-90, the GP rate shown at 5.61 per cent as against 15.50 per cent arid per cent in the cases of the assessee's own sister concerns for the assessment year 1989-90, he made flat addition @ 5 per cent on disclosed of Rs.7,75,00,985. On appeal, the Commissioner (Appeals) accepted figures submitted by the assessee as also the explanation regarding Gross Profit Rate in the assessment year 1989-90, and deleted the addition. On revenue's appeal: The Commissioner (Appeals) decided the appeal merely on the basis of the submissions made by or on behalf of the assessee without considering the facts discussed in the assessment order and taking care to check even superficially the....
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.... the Assessing Officer, in which it failed but it appeared to have succeeded before the Commissioner (Appeals). Furthermore, the very fact that the assessee had been issuing rough diamonds and the expected yield was noted on the packets and those details were verified by the assessee or its representative when cut and polished diamonds were received from labourers, showed that the assessee could not run its business without getting account of each and every piece of diamond, yet, it was stated that those packets had been destroyed would mean that the Assessing Officer was correct in coming conclusion that the accounts were not correct and complete because the corroborative and contemporaneous evidence had been admittedly destroyed by the assessee. Thus, the way in which the assessee should have actually maintained lots of its diamonds, as admitted before the Commissioner (Appeals) would only confirm that the assessee had been, in fact, noting down and maintaining the details required by the Assessing Officer when it received back the cut and polished diamonds from the labour parties and when it was sorting them in different lots, sizes, quality, etc. From this also to be infe....
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....efore the Commissioner (Appeals), nor before the Tribunal any evidence had been adduced to corroborate the claim of the assessee that the details required by the Assessing Officer were not maintained in the trade in which the assertion was engaged. At best, it could be said to be a self-serving association made by the assessee and accepted by the Commissioner (Appeals) without any evidence or material in support of this assertion. It had, therefore, to be ignored. As regards observations of the Commissioner (Appeals) that no specific defects had been pointed out by the Assessing Officer in the assessee's accounts, the fact that relevant papers containing details regarding rough diamonds given for cutting, shaping, etc., and receiving them back from labour parties had been destroyed, was sufficient to show that when the primary and original documents which should have corroborated the entries in the books of account had been destroyed, the entries made in the books of account could not be verified and, consequently, the Assessing Officer was entitled to hold that the books of account were not correct and complete. Even the assessee's own export bills recorded the number of pie....
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....ing expected yield was noted on the packets and when the cut and polished diamonds were received back from the labour parties, they were asi,z into different lots, sizes and quality-wise and they were thereafter offered for sale to customers. Further, there was no such record to show n special instructions were given to the agent to have particular roust be cut in a particular manner. No such details had been produced on the ground that they could not be maintained. Even if it is true, while it may be ignored in the business of rice, referred to by the assessee, or other food grains or other commodities involving bulk dealings, it can in no circumstances be ignored in the business of diamonds where each and every piece, whether smallest or bigger one, carries substantial mom value and no diamond dealer can sweep away the diamonds without counting each piece as might be done by the traders in rice business. Therefore, non-maintenance of these details or non-production of these details in diamond business, justified the Assessing Officer to come to the conclusion that the books of account maintained by the assessee were not correct and complete. Taking all these factors in to acco....