TaxTMI 
TaxTMI 
2015 (12) TMI 989
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....e addition of Rs. 23,08,633/- made by the A.O. on account of suppressed yield. (4) On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the AO. (5) It is, therefore, prayed that the appellate order of the CIT(A) may be cancelled and the order of the AO may be upheld. 3. Briefly stated facts are that the assessee firm is engaged in the business of manufacturing of polished diamonds. Return of income for Asst. Year was filed on 22.09.2008 declaring loss of (-) Rs. 3,31,547/-. Assessee's case was selected for scrutiny assessment. Notice under section 143(2) dated 26.08.2009 was duly served upon assessee on 01.09.2009. During the course of assessment proceedings Assessing Officer observed that assessee was not able to provide quality-wise and piece-wise details of goods, labour expenses were not properly supported as well as there was suppressed yield as the assessee has shown more wastage during the year and accordingly made additions to the income of the assessee and assessed the income at Rs. 52,01,560/-. 4. The first ground of Revenue relates CIT(A)'s allowing the appeal of assessee regarding invoking of provisions of sectio....
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....s and no defect in the same has been pointed out. Even as regards the valuation of closing stock, the Assessing Officer has failed to prove that there is any under valuation of closing stock. As assessee has consistently adopted the method to value closing stock on the basis of market price less average rate of margin, valuation of stock cannot be said to be defective. There are various methods for arriving at the cost of closing stock and above method is one of the accepted methods of valuation and the same has been consistently followed by assessee. As no significant defect has been pointed out in the books of accounts, the rejection of book results by invoking provisions of section 145(3) of the Act is held to be not valid." 7. Aggrieved, the Revenue is now in appeal before the Tribunal. The ld. DR vehemently supported the order of Assessing Officer. 8. On the other hand, ld. AR of the assessee submitted that assessee's books of accounts are audited under section 44AB of the Act, complete quantity-wise details have been maintained and certified by the auditors, GP rate for the year under appeal at 6.38% which is higher in comparison to the GP rate declared in immediately prece....
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.... the provisions of the I.T. Act. From this, it follows that the purpose and intention of the Legislature in enacting the provisions of section of 44AA of the Act is to put an obligation on the assessee to maintain and keep primary records on the basis of which the tax authorities are able to ascertain and compute the assessee's correct income. From this it also follows that it is not always the prerogative of the assessee to maintain the records the manner in which it likes. However, as noticed in the preceding paras the assessee has not maintained the books of accounts and documents on the basis of which the income declared in the return could be ascertained. If the primary records were maintained by the assessee they were not produced for examination to compute the correct income. 5.9 Here it would be pertinent to mention that the assessee has hown closing stock of polished diamonds of the quantity of 44299.10 cts. At Rs. 54,23,81,050/-. The detailed inventory of the stock in terms of quality is not furnished. Therefore, in absence of details in terms of quality wise production of diamonds from each lot it is not ascertainable which type of diamonds was produced from a particu....
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....ect the assessee's trading results and make the assessment in the manner provided under section 144 reads as under: "145. Method of accounting.--(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee (2) ....... (3) Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." 8. From the above, it is evident that if the AO is not satisfied about the correctness or the completeness of the accounts of the assessee, he may make an assessment in the manner provided in section 144. In this case, there is no dispute about the correctness of the assessee's accounts. As per the AO for want of qualitative details of the processing of diamonds, the accounts of the assessee cannot be said to be complete. We are unable to ....
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....action of the Assessing Officer cannot be held correct. However, assessee has its own way of doing business and preparation of books of accounts and there is no set bench mark that the quality wise or piece wise details of goods dealt has to be kept by each assessee. Therefore, applying the ratio of the decision of the co-ordinate Bench as discussed above and discussions made by us, we are of the view that Assessing Officer was not correct in invoking the provisions of section 145(3) of the Act and accordingly, we uphold the order of CIT(A) and reject this ground of Revenue. 11. The next ground relates to deletion of addition of Rs. 32,24,477/- on account of disallowance of excess labour expenses. The Assessing officer made disallowance of excess labour expenses of Rs. 32,24,477/- by observing as under :- "8.1 During the assessment proceedings, the assessee failed to produce basic books of accounts like proper labour register, or the labour contractors with their registers. The only support of labour expenses were the self made vouchers by the assessee itself which were then countersigned by the labour contractors. This leads one to believe that the labour expenses cannot be pro....
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....ing. In this context, I am of the opinion that reliance cannot be placed on the rate of labour charges paid by said entity firstly because complete details of said entity has not been supplied to assessee and secondly, the assessing officer has failed to prove that there is absolutely no difference in the quality of diamonds manufactured by said entity. It is further seen that in case of said entity also the rate of labour charges has increased to Rs. 236 per carat in the year under consideration whereas, the same was only Rs. 206 per carat for two consecutive assessment years viz. A.Y.2006-07 and AY 2007-08. Now when the rate of labour charges has increased in the year under consideration in case of alleged comparable instance relied upon by assessing officer himself, he is not justified in drawing adverse inference in assessee's case on the ground that the rate of labour charges should have reduced in assessee's case for the year under consideration due to glut in the diamond market. The most important fact is that there is no increase in the rate of labour charges for year under consideration and even though there is recession in diamond industry as per observation of assessing ....
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....factured, the rate of labour charges paid by other entity cannot be applied to the facts of instant case. 15. As assessee produced all the relevant records in support of labour charges the onus cast on assessee to prove genuineness of expenditure stands very much discharged. If Assessing Officer is still of the opinion that expenditure is inflated in that case it is very much imperative for him to bring cogent evidence on record to indicate the quantum of inflation. However, in the instant case, Assessing Officer has not brought even an iota of evidence on record & thus, the huge addition made by restricting the labour charges at the rate of Rs. 238 per carat is absolutely arbitrary. As addition is made totally on the basis of conjectures and surmises, the same is prayed to be deleted. 16. We have heard the rival contentions and perused the material on record. The Assessing Officer has tried to compare the business style of the assessee with other assessees engaged in similar type of business, wherein in some cases he may have observed that other assessees paid to the labourers on the basis of their bills and the labour charges vary on the basis of quality of goods whereas in the....
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....e case of assessee are similar to the facts discussed in the above referred decision and in absence of any contrary evidence placed on record by the Assessing Officer in terms of rate of labour charges paid as well as improved GP rate, we do not find any reason to differ from the view taken by the CIT(A) and accordingly uphold the same. This ground of Revenue is dismissed. 18. Next ground relates to deletion of addition of Rs. 23,08,633/- made by the A.O. on account of suppressed yield. During the year under appeal assessee has shown total consumption of 23197.68 carat of rough diamonds and yield of 29.25% was achieved thereby giving production of 6786.24 carat of finished/polished diamonds. In the production process assessee had shown 1.78% of rejection/wastage. Assessing Officer observed that in the immediately preceding financial year i.e. Asst. Year 2007-08 there was NIL rejection shown by the assessee; whereas rejection of 1.78 % has been shown this year and also the percentage of yield has fallen from 29.1% to 28.7%. The Assessing Officer was not satisfied with the quantitative details which were not provided to him qualitywise and piecewise and, therefore, raised doubt on t....
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....puting yield % on gross quantity of rough diamond i.e. without considering the rejection diamonds whereas, assessee has computed the yield at 29.25% as against 29.12% for immediately preceding year on the net quantity sent for manufacturing i.e. after considering rejection diamonds. Here, it is relevant to note that assessing officer himself discussed manufacturing process of cut & polished diamond in para 9.1 of his order and it is evident on perusal of the same that rejection diamond means the bits left over after cleaving and sawing process which cannot be manufactured due to some defects. As such rejection diamond cannot be taken into consideration for working out the ratio of yield as said quantity is never sent for manufacturing of cut and polished diamond. Hence, yield % is required to be computed only on the net quantity of rough diamond which is utilized for manufacturing of cut & polished diamonds and even assessing officer himself made addition at the rate of 1% on the net quantity of makeable rough diamond i.e. after deducting rejection quantity. It is thus, clear that there is increase in yield % for the year under consideration. Not only this, it is also seen that the....
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....f rough diamonds but also on various other factors viz. size of rough diamonds, purity required of polished diamonds, colour of diamond, shape of diamonds etc. If the thrust is on to obtain more yield in that case the quality/purity of polished diamonds will be lower & consequently its selling price will also be on the lower side. Further every unit has its own quality based on which they have their own customers & own market. It is because of this reason that addition on the ground of low yield cannot be made simply by computing yield of other entities. It is further relevant to mention here that assessee has used relatively inferior quality of rough diamond as compared to preceding year as is evident from the fact that there is fall in cost of rough diamond to Rs. 2337.02 per carat from Rs. 2792.62 per carat & as a result of the same there is rejection of nominal quantity of 413.85 carats which comes to just 1.68% of total purchases of rough diamond. 23. As regards AO's observation in para 9.4 of the order that there is variation in yield % within the same lot, it is relevant to point out that assessee gave cogent explanation for the same in his letter dated 21/12/2010 but the s....