TaxTMI 
TaxTMI 
2010 (12) TMI 1237
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....- out of total ₹ 13,59,427/- disallowed out of the provisions kept for exchange rate difference inspite of the fact that the valuation of foreign exchange was done at later date while filing return of income. 3. It is, therefore, prayed that the appeal order passed by the Learned CIT(A) be set aside and that the assessment order passed by the Assessing Officer u/s.143(3) dated 29.12.2006 be restored." ITA No.3536/Ahd/2007[ Assessee] 1 "The learned CIT(A)-V, Surat erred in upholding the addition of ₹ 4,36,729/- made by the Assessing Officer being difference provision kept for exchange rate difference rejecting the contention of the assessee that the exchange difference worked out by taking prevalent rate of exchange as on 31-03-2004 in respect of export credit facility from Andhra Bank, Mumbai and other. 2 The appellant craves leave to add, alter and vary any ground of appeal." 2 Adverting first to ground no.1 in the appeal of the Revenue, facts, in brief, as per relevant orders are that return declaring income of ₹ 1,13,72,140/- filed on 29-10-2004 by the assessee, manufacturing diamonds, after being processed u/s 143(1) of the Income-tax Act, 1961 [he....
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....lued the polished diamonds at cost or net realizable market value, whichever was lower. Since the said method had been followed consistently and accepted by the AO in the scrutiny assessments of the preceding years while the GP declined due to recession in international market, international competition, fluctuation in exchange rate, increase in purchase price of rough diamonds, disproportionate increase in sales of cut and polished diamonds, increase in labour charges etc., the assessee pleaded while relying upon a few judgments that book results may be accepted. However, the AO did not accept the submissions of the assessee for want of qualitative details of stock and in the absence of any co-relation between rough diamonds used in production and polished diamonds ,be it in quantity or quality. The AO observed that without any correlation between rough diamonds used in production and polished ones, it was not possible to verify what quality of diamond was produced and what quality was sold and what quality was available as closing stock. Since purchase value of rough diamonds ranged between ₹ 302/- to ₹ 4,159/- per carat while sale price ranged between ₹ 1596/- ....
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.... the year at ₹ 58,72,85,401/- , he found out the value of closing stock at ₹ 15,84,08,519/- and further, after deducting the value of closing stock as shown by the appellant at ₹ 15,32,36,644/, he finally arrived at the suppression in the valuation of closing stock at ₹ 51,71,875/- . In this regard, on the other hand, it has been submitted by the A.R. ( as mentioned above ) that if the receipt on account of exchange rate difference is deducted from the sales turnover of the appellant then the actual sale receipt worked out at ₹ 46,67,79,367/- (Rs.47,97,25,287/- - ₹ 1,29,45,920/- exchange rate difference receipts) and when the gross profit amount as disclosed by it is divided by this figure the G.P ratio comes to 7% ( 3,26,74,555 / 46,67,79,367 x 100 ) and the A.O. should have applied the G.P. ratio at 7% instead of 8.12% to work out the value of the closing stock. It is seen that the appellant had filed its working by taking the same figure as taken up by the A.O., on page 12 of the assessment order and by applying the G.P. ratio at 7% proved that the value of the closing stock was 15,32,36,644/- which was lower than the value as shown by it in i....
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....carrying us through page 8, 9, 10, 13, 20-21, 28 to 30 and 224 of the paper book contended that the finding of the learned CIT(A) was in accordance with the facts on record. He pointed out that the Revenue was not in appeal against the deletion of addition on account of valuation of closing stock while no other defects were pointed out by the AO. The assessee had furnished quantitative statement of stock. After excluding foreign exchange difference from exports, their gross profit works out to 7% while gross profit worked out to 10.71% if such fluctuation was included in exports but excluded from imports. The AO completely ignored the fact their gross profit after considering the exchange rate fluctuation was better in the year under consideration as compared to the preceding year. While referring to para 4.2 of the assessment order, the learned AR contended that the AO had accepted quantitative records while it was practically impossible to maintain quality wise record of each polished diamond. Lot-wise details of import and production were duly submitted to the AO and the AO did not point out any defects therein. He reiterated that though the AO made two additions; one on account....
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....iamonds backwardly on the basis of sales made by the asssessee and considering the cost of goods sold after deducting the gross profit. The ld. CIT(A) deleted the addition since approach of the AO was not in accordance with law. We are of the opinion that the AO is not empowered to change the method of accounting under the guise of substituting the value of closing stock. In the case of CIT vs. British Paints India Ltd.,188 ITR 44(SC), the Hon'ble Apex Court itself stated that the AO is entitled to disturb the value put on the closing stock wherein the cost price adopted was not reflecting all the expenses which would go to make up the cost. In other words, there is no departure from the basic principle that it is the option of the assessee to adopt a particular method of valuation of closing stock, namely, the cost or market price, whichever is lower, as per settled principles of commercial accounting. In any case, the issue of valuation of closing stock inventory and resultant addition deleted by the ld. CIT(A), is not before us. Therefore, we refrain from recording any findings on this aspect. 7. As regards trading addition, undisputedly and as pointed out by the ld. CIT(A), no....
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....ttered by any technical rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. Low profit in a particular year in itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The Hon'ble Gujarat High Court in the case of CIT Vs. Amitbhai Gunwantbhai, 129 ITR 573 held that if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the AO to make any addition on estimate basis or on pure guess work. No specific discrepancies or defects in the books of account of the assessee have been pointed out before us nor was any material brought to our notice to establish that purchases were inflated or receipts suppres....
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....made on valuation of foreign exchange rates after the year and i.e. at the time of filing of return of income. Further, according to the A.O., the appellant had claimed exchange loss to the extent of difference of the two provisions at ₹ 13,59,427/- which was not in order as according to him, book results could not be changed after 31/03/2004 and hence, he disallowed the said amount and added the same to its total income for tax purposes. 6. During the appellate proceedings, it has been submitted by the A.R. that the observations of the A.O. was not correct. According to him, the amount of exchange rate difference receipt / loss was worked out on the basis of foreign currency rates prevalent on 31/03/2004 keeping in view the procedure as laid down in Rule115 of the I.T. Rules, 1962 and therefore, the same may be allowed. Besides above, the A.R. has also the outstanding amount in the form of foreign exchange rate difference on 31/03/2004 was ₹ 55,70,541/- but however, the appellant had claimed the same at ₹ 51,33,812/- and in this way, its income would go up by ₹ 4,36,729/- because the said amount was not considered by it for the claim of deduction. In sup....
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....he ld. CIT(A) deleted the addition of ₹ 13,59,427/- on the ground that the amount of exchange rate difference receipt / loss was worked out on the basis of foreign currency rates prevalent on 31/03/2004 in terms of Rule 115 of the I.T. Rules, 1962. Since the ld. AR on behalf of the assessee itself admitted before the ld. CIT(A) that outstanding amount in the form of exchange rate difference as on 31.3.2004 was ₹ 55,70,541/- while the assessee adopted ₹ 51,33,812/- and therefore, income would go up by ₹ 4,36,729/- in terms of working filed before the ld. CIT(A), the said receipt of ₹ 4,36,729/- was, therefore directed to be taxed in the light of the decision in CIT Vs. Amba Impex,282 ITR 144(Guj) . We find that the Hon'ble Apex Court in their decision in the case of Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 (1979) 116 ITR 1 (SC) while adjudicating a similar issue in relation to gain/loss attributable to exchange rate difference observed as under: "The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, o....