TaxTMI 
TaxTMI 
2014 (7) TMI 819
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....of Rs. 1,08,83,214/- made by the Assessing Officer. 3. Facts in brief as emerged from the corresponding assessment order passed u/s.144 r.w.s. 145(3) of the IT Act dated 28.02.2005 were that a return declaring income of Rs. 1,52,97,743/- was filed accompanied by Tax Audit report. The assessee is a partnership firm engaged in the business of purchase of rough diamonds and after polishing exported the diamonds. The assessee has also done job work of diamond for cutting and polishing. The year-wise position of the sales and the GP was as under:- 3.1 The first remark of the AO was that the GP had fallen down by 3.48% although there was 60% increase in the turnover. The assessee has informed that for different units separate books of accounts have been maintained for different activities as under:- 3.2 However, AO has noticed certain discrepancies and therefore invoked the provisions of Section 145 of IT Act. It was observed by the AO that although the books of accounts have been produced but the basic requirement of "Production Record" was not maintained. It has also been noted by the AO that "jangads" i.e. receipts for transportation of rough and polished diamonds were not pr....
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....workers, but were employees of the group. Those employees must be getting small monthly basic salary. Even, the machinery/equipment used to cut the diamonds did not belong to the job workers, but belonged to M/s. M. Kantilal Group. Even, those job workers have given blank cheques signed by them to assessee so they had no control over their respective bank accounts. The AO has thus formed an opinion that there was no evidence in support of the claim of labour expenses of Rs. 10,88,32,149/-. The observation of the AO was as under: "During the year under reference, the assessee firm has claimed labour expenses of Rs. 10,88,32,149/- in respect of its job work account, however, not even an iota of evidence had been furnished for the labour expenses. The names of these job workers and their whereabouts have not been disclosed to the department till date. This has cast a shadow of doubt about the existence of these job workers. Similarly, the assessee firm could not furnish the necessary slips called "jhangad" for the movement of rough diamonds to alleged job workers. These are claimed to have been disposed off or destroyed by the assessee (order sheet entry dated 21.02.2005.) I fail t....
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....the payment was @ Rs. 239 per carat. According to AO, the average rate in earlier years was Rs. 240 only. An another logic has also given by AO that the average purchase price of rough diamond was Rs. 672 per carat and the sale price was of Rs. 7,290/- per carat, which was towards lower side than the price of the earlier years. According to AO, there was no logic to give average rate of Rs. 300/- per carat for labour charges for the year under consideration. 4. In the light of the above factual background, we have heard both the sides. From the sides of the appellant, learned DR, Mr. T.P, Krishna Kumar appeared and from the side of the respondent assessee learned AR Mr. Ashwin Parekh appeared. 5. After hearing the submissions of both the sides. One fact had come to our notice as noted in paragraph 8 of the assessment order that in Diamond Industry, the labour charges vary from lot to lot, depending upon the quality of diamond manufactured. Labour charges are also being paid depending upon the size of the diamond and other allied factors. Therefore, it was noted that there should not be any flat rate of labour charges for manufacturing / cutting / polishing of diamond. On acco....
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....ee has failed to explain the genuineness of the labour expenses and to substantiate increase in the rate of labour charges from average labour charge at the rate of Rs. 240/- per carat in earlier assessment years to Rs. 300/- per carat. Considering the above findings diamond labour charges at the rate of Rs. 60/- per carat for 320088.22 carats of diamonds which work out to Rs. 1,92,05,203/- are disallowed." 5.2 When the matter was carried before the First Appellate Authority an adhoc disallowance of Rs. 10 lac was sustained and the balance was deleted. 5.3 Instead of granting adhoc relief, we are of the view, that a reasonable rate should have been applied by learned CIT(A). To cover up all the points or objections raised by the Revenue Department as also to give justice to the respondent assessee we hereby hold that it would be fair and reasonable to allow labour charges @ Rs. 270 per carat, instead of Rs. 300 per carat as claimed by the assessee. In this manner the short comings of the assessee shall also be addressed. The outcome of this direction should be that the labour charges payment to the extent of Rs. 300 per carat, as claimed by the assessee, is now to be disallow....
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....lue whichever is lower. If the basic principle of valuation is adopted, the assessee's submission is self explanatory that there is definitely under valuation of closing stock. The valuation of closing stock can never be less than cost. And realizable value of the polished diamond is determinate from sale instances of succeeding assessment year. The assessee has itself submitted few sale instances at its convenience to show sale at lower rate made in succeeding assessment year. This is not reliable piece of evidence as it has not been correlated with the closing stock as at 31.03.2002. Otherwise also the submission goes against the assessee, if the assessee's point of view is accepted for the time being, in as much as as per the selective sale instances furnished by the assessee, also the sale price of polished diamond was upto Rs. 5894 per carat. Considering sale instances of diamonds as at the end of the year, there is no logical reason as to why the value of closing stock of diamonds should not be adopted at Rs. 8247/-. The average value of sale is Rs. 5635 per carat for the month of February 2002 and Rs. 6387 for the month of January 2002. The valuation of closing stock....
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....onds at the end of the year could be correct. In view of this, it appears that the AO has made the addition by adopting a higher average price for closing stock on the basis of conjectures and surmises only in total disregard of appellant's explanation. It is also seen that the invoices of export made in the next A.Y. show the average sale price at Rs. 4,650 per carat only and therefore it supports the appellant's contention of having valued the closing stock at Rs. 4650 per carat. I am also inclined to agree with the appellant that the anticipated sale value of this stock would be Rs. 6,65,22,980/- and since the gross profit during the year was 9.76%, the total cost of closing stock would be the same as declared by the appellant. I am also in agreement with the appellant that such an addition to closing stock would result in higher opening stock for the next year which would be a revenue neutral exercise. Further, the opening stock of the current year would also have to be amended, since the same method of valuation would have to be adopted for opening stock also. In view of this, such an addition made on hypothetical basis and without appreciating the submissions of the a....
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....valuation of the stock. There has to be a comparison at the opening with the closing of the accounting year. So as a normal rule, a profit is to be ascertained by valuing stock-in-trade at the beginning as also at the close of the accounting year. There is one more well accepted rule that the valuation can be adopted by taking into account the cost price or the market price whichever is lower. Normally, according to this system, on the first occasion, the stock is brought in at cost price. If any portion thereof is left unsold at the close of the year, the value to be entered therefor, according to this system of accounting, is its market price. If it is found that such market price is below cost, valued accordingly but that would be the valuation of the opening stock of the subsequent year. This method of writing up accounts would result in depressing the profits earned during the year, since it would set off an unrealized loss against the realized profits of the year. Naturally, such method runs counter to the cardinal principle of revenue law that no loss should be entered in the year of account, unless the loss has been actually realized and suffered. The justification given fr....
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....ng year from the past years; hence, without disturbing the value of the opening stock, the AO is authorized to change the method of valuation for valuing the closing stock. With this theory in mind, we hereby hold that an average of the two valuations is the right solution. The average of the two valuations is 6448/-. To resolve this long pending issue, according to us, is a reasonable and fair approach to compute the value of the stock of the polished diamond at Rs. 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 Rs. 6,448/- the value to be worked out is Rs. 8,32,42,003/-, out which the value declared as per assessee is to be reduced of Rs. 6,00,30,337/; thus the balance comes to Rs. 2,32,11,666/-. We, therefore, do not approve the total deletion of the impugned addition, and restrict the addition to this extent only. In this manner, this ground of the Revenue may be treated as partly allowed. 10. Ground Nos.4 and 5 are reproduced below: "4. The CIT(A) has erred on the facts and circumstances of the case and in deleting the addition of Rs. 4,30,07,818/- made by the Assessing Officer on accou....
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....luded, the purchases for the month of December, 2001 as also while finalizing the assessment order. There is no justification of including four months purchases just to increase the average cost of closing stock specially, in view of the fact that the purchases of the last three months would be sufficient to cover the closing stock. It is seen that the purchases in the months of January, February, March was 3,13,195.84 carats and this tock of rough diamonds at the end of the year was 3,11,650.86 carats. I am inclined to agree with the appellant that the rough diamonds purchased prior to this period would have been consumed for production of polished diamonds and I also see no justification in AO's action in including the purchases for December, 2001 also for working out the value of closing stock. Going by that logic, there was nothing to prevent the AO from considering the purchases of may be six or seven months before the close of accounting year to arrive at an average cost which would have resulted in a higher or lower value of closing stock. It appears that the AO has considered last four months purchases simply to arrive at a higher value of closing stock and therefore such a....
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....cording to AO, the bunch of "Janghads" could not explain the day to day production because there was a consumption of 4,81,710.91 carats of rough diamonds and there was production of 1,63,185.65 carats of polished diamonds. According to AO, there was lower gross profit rate in accordance with the following chart. A.Y. Turnover G.P. G.P (%) Remarks 2003-04 1,20,18,79,346 8,58,81,909 7.14% Includes GP in job work and EOU account 2002-03 1,06,21,19,900 9,50,38,614 8.95% Includes GP in job work and EOU account 2001-02 66,54,28,426 7,99,83,008 12.43% Includes GP in job work account 17. On the basis of the above chart, it was found that the gross profit had fallen by 1.81% as compared to the preceding year. It was also noted by the AO that there was increase of about 13% in the turnover. The assessee had pleaded that it had maintained separate books of account for different activities and for each activity the profit was separately calculated as per the following chart. 18. However, the AO was not convinced; hence, to verify the genuineness of the job work labour expenses; issued summons u/s.131 to different job workers. Summons could not served as rec....
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....e., design cutting were found. But the record for the earlier period was not available. Again the AO has commented that the firm had not maintained complete production record. Therefore, books of account is rejected which was challenged before learned CIT(A). 18.1 After considering the explanation of the assessee and the reasons given by the AO for rejection of books of account learned CIT(A) has held as under: "I have carefully considered the assessment order and the above submissions. The AO has given the reasons for not accepting the explanation of the assessee on account of the defects stated by him. It is a fact that the labour payment was not verifiable as stated in detail 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. Hence the assessing officer is justified in applying section 145(3) of the Act. The first ground of appeal is accordingly not accepted. It is observed that 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....
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....leged job worker appearing at Sr. No.8 & 9 as above. As stated earlier they have not furnished the requisite details called for in the summons. As such though some of the alleged job workers have attended in response to summons issued u/s.131 and the veracity established as such, there confirmation of having done labour job work of the assessee firm is preposterous and not believable to be true. The alleged job worker shown as such in the books of account and by filing their returns of income in their names under the management of M/s. M. Kantilal Group is nothing but distortion of facts to suit its convenience." 20.3 Therefore, it was noted by the AO that the alleged labourers did not own plant and machinery. There was disparity in electricity expenses. The job workers have not furnished the details of the payments received on completion of job workers. According to AO, it was a modus operandi of the assessee to diversify the profit by showing alleged expenditure to job workers. Further, an objection was raised by the AO that the assessee had shown labour charges at the flat rate of Rs. 300 per carat in all cases. On comparison, it was found that in A.Y. 1998-99 it was Rs. 245 ....
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....cepted-that electricity charges are borne by the appellant. In the circumstances, though the job workers have been filing their income tax returns, the payment made to them is not accepted by the A.O. on the ground that it is only in order to adjust the profit of the appellant. If the infrastructure facility is provided by the appellant, there is no reason for increasing the job work charges from year to year, that too without any basis. Considering all these aspects I confirm the addition made by the AO on this ground. The assessing officer has disallowed the payment to the extent of the higher payment at Rs. 60/- which is increase in the year under consideration and this disallowance is most reasonable. This ground of appeal is, therefore, dismissed." 21. From the side of the appellant, learned AR, Mr. Ashwin Parekh appeared and pleaded that the diamond industry is a labour oriented industry and therefore without the help of trained labourers the polishing as well as the cutting of diamond could not be possible. He has therefore pleaded that considering the huge turnover of the assessee of the polished diamonds it is justifiable to allow the labour expenses. 22. From the si....
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.... Rs. 7890/- was reasonable. The assessee has tried to explain that the polished diamonds of lower quality were remained in the closing stock. However, the AO was not convinced primarily on the ground that the assessee had failed to substantiate that explanation with support of any documentary evidence. Further, as per AO, the assessee had not furnished any detail about the manufacturing cost of the diamond. According to him, the valuation of the closing stock could never be less than the cost; however, the realizable value of the polished diamond can be determined from the sales instance of the succeeding year. The assessee has not submitted any sales instance of subsequent year to explain its stand. The AO has therefore computed the value of the closing stock as under: "Closing Stock of Polished diamonds (31945.14 ct. X Rs. 9966/-) as discussed Rs. 31,83,65,265/- Less: Value of closing stock shown Rs. 28,07,97,781/- Unaccounted closing stock of polished diamonds: Rs. 3,75,67,484/- 26. Against the said addition, the issue was carried before learned CIT(A). Through a chart, the assessee has tried to demonstrate the cost of the rough diamond consumed for production of ....
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..... How this figure is worked out is not known. Further, he has reduced the cost by sale price of rejection whereas working of stock of rejection he has adopted different figures of sale. There is no reconciliation of these figures. Hence the A.O. was justified in observing that the cost of polished diamond remaining in stock was not available. There is also no basis for value adopted at Rs. 8790/- by the appellant. The A.O. has, therefore, rightly adopted the sale price of March 2003 for the value of the stock. This ground of appeal is, therefore, rejected and addition made is confirmed." 27. We have heard both the sides. At the outset, it is worth to mention that while deciding assessee's appeal for A.Y. 2002-03 in foregoing paragraph we have dealt with this issue of valuation of the closing stock of polished diamond. As per the details available on record, the assessee was in possession of 31945.14 carat of polished diamonds in the closing stock. The assessee had valued the polished diamonds @ Rs. 8790 per carat, therefore, the total value of the closing stock was at Rs. 28,07,97,781/-. We have noted that there was contradiction in the explanation of the assessee. The assessee,....
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....but that quality might not match with the quality of the diamond remained as a stock. Therefore, we had no other basis but to adopt a middle path by calculating the average between two valuations, one given by the assessee and the other adopted by the Revenue Department. The assessee had adopted the average value of the polished diamond in the closing stock at Rs. 8,790/- per carat, however, the value as adopted by the AO was Rs. 9,966/- per carat as the average of the two is Rs. 9378/- per carat. According to us, 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 Rs. 9378/- per carat as an average value of the entire stock. We, therefore, direct to modify the value of the unaccounted closing stock of the polished diamond as determined by the AO to this extent and therefore this ground of the assessee is hereby partly allowed. 28. In the result, the Appeal of the assessee is partly allowed. 29. The combined result is that both the above appeals are partly allowed. ============= Document 1 A.Y. Turnover 2002-03 1,06,21,19,900 9,50,38,614 G.P. G.P.(%) Rema....