TaxTMI 
TaxTMI 
2016 (12) TMI 1241
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....) read as under:- "1. The learned Commissioner of Income Tax (Appeals) Central VI, Mumbai, erred in confirming the penalty of Rs. 11,95,050/ - u/s. 271 (1)( c) levied by the learned A.O. without appreciating the fact that your appellant has not concealed any particulars of income. 1.1 Your appellant submits that the learned A.O. made the following additions. a) On account of loss of gold on mfg. Rs. 58,558/- b) On account of valuation of diamonds Rs.22,76,454/- Total Rs. 23,25,012 1.2 Your appellant submits that any addition made to the closing stock will become the opening stock of next year and hence the profit of the next year will reduce to that extent. 1.3 Your appellant submits that your appellant has maintained quantity -wise stock and there is no difference in the stock. The learned A.O. while passing the order has adopted the average rate of stock and purchase price without giving technical or commercial reason. 1.4 Your appellant submits that the value shown by your appellant is correct, however the learned A.O. while passing order enhance the value of the stock and made the addition. 1.5 The learned CIT(A) oug....
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....e has valued the closing stock at the rates lower than the purchase price or opening stock. It is also noted that the diamonds issued for manufacture of jewellery is valued at a substantially high rates compared to the cost of opening stock and purchases made during the year. For example, the opening stock of diamonds is valued at the rate of Rs. 3892.97 pet carat and the purchases are made at the rate of Rs. 6936.18 carats, whereas the diamonds issued for jewellery is valued at Rs. 12128.50 per carat. In the whole process, the assessee has increased the manufacturing cost of jewellery manufactured out of the issued diamonds, as also the valuation of closing stock of diamonds is valued less to that extent thereby reducing the profit. The discrepancy found as tabled above was shown to the assessee and requested for explanation for higher rate of diamonds issued for manufacturing and a lower rate adopted for valuation of closing stock. In response; the assessee vide letter dated 09.01.2006 submitted as under:- "We have opening stock of diamonds 951.10 cts. amounting to Rs. 37,02,605/- and we have purchased during the year the diamonds of 335.02 cts. amounting to Rs.....
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....k register. As given above, the assessee has increased the cost of production of jewellery by increasing the value of diamonds utilized in such jewellery. Also, the valuation of closing stock of diamonds has been done at the cost lower than the cost to the assessee. This has been done for no obvious reason. It is required to be noted that the assessee has valued the diamonds per carat irrespective of the quality of diamonds. Further, the assessee also knows the quality and quantity of diamonds lying in the opening stock, values of which are known to him. As mentioned above, the assessee is not maintaining the proper stock register in respect of such a valuable item of jewellery. By not maintaining the proper stock register which will give the details of quality, quantity, rates and values of diamonds lying in the stock, it is open to the assessee to manipulate the things by assigning the values of diamond as per its wish and will and as convenient to it to the diamonds lying in the closing stock. Without prejudice to the above discussion, it was very essential on the part of the assessee to show that the value of diamonds, which is a costly raw material of the assessee, issue....
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....at neither the assessee has furnished inaccurate particulars of income nor concealed any income. It was submitted that during the course of assessment proceedings , the assessee submitted the following particulars in respect of diamonds:- Stock Carat Value(in Rs) Rate per carat(Rs.) Opening stock 951.100 37,02,605 3892.97 Purchases 335.02 2,32,23,760 6936.18 Issued for jewellery manufacturing 199.44 24,18,909 12128.50 Closing stock 1086.68 36,07,456 3319.70 It was submitted that there is no dispute in respect of quantitative records of opening stock, purchases, issued for Jewellery manufacturing and closing stock . It was submitted that all the quantitative figures submitted by the assessee were accepted by the A.O. and hence no inaccurate particulars were furnished by the assessee. It was submitted that valuation of the cut and polished diamonds is highly complex and the value is assigned item-wise while the A.O. adopted the average rate of opening stock and purchase price without giving any technical or commercial reasons. It was submitted that the rate per carat of diamond varies and the average rate adopte....
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....ied even if the assessed income is negative. Thus, the A.O. concluded that the assessee concealed the particulars of income by furnishing inaccurate particulars of income in respect of valuation of closing stock whereby the AO levied penalty u/s 271(1)(c) of the Act of 150% of the amount of tax sought to be evaded by the assessee which comes to Rs. 11,95,050/- , vide penalty order dated 28-10- 2009 . 4. Aggrieved by the penalty order u/s 271(1)(c) of the Act dated 28.10.2009 passed by the A.O. , the assessee filed its first appeal before the ld. CIT(A). 5. Before the ld. CIT(A), the assessee reiterated the submissions which were made before the A.O.. The A.O took the view that in the absence of proper stock register detailing the value of such highly priced items , it was not possible to ascertain the quality, quantity, rates and values of diamonds lying in stock , it is open for the assessee to easily manipulate the value of the diamonds by assigning values as per its whim and fancy. The assessee contended that any addition made to the closing stock would become the opening stock of the next year and as such it has got no effect on the tax. It was contended that there are di....
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.... of the assessee and observed that from the details of the quantitative particulars of stock as furnished by the assessee, the A.O. had observed that there was a clear discrepancy in the manner in which the stock was being valued especially when it could be clearly seen that the closing stock was valued at an abnormally low rate vis-a-vis the cost of opening stock/purchase price/items of diamonds issued for manufacture. There appears to be a case for under valuation of closing stock thereby leading to under-statement of profit for the year. For the year under consideration, the rate per carat was shown at Rs. 3319.70 as against the average rate of Rs. 12,128.50 per carat in respect of' diamonds issued for manufacture of jewellery. At the same time, the average rate of purchase of diamonds during the year was at Rs. 6936.18 per carat. The learned CIT(A) observed that only explanation coming from the assessee is that the diamonds were purchased in mixed lots, the stock as held contains lower quality diamonds and that the purchase bills do not contained the detailed particulars such as the quality, rate etc. of the items , but only the total weight and the total value and hence no....
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....and also did not continue the litigation. The additions were although not accepted by the assessee in quantum proceedings , but the same were accepted by the assessee under the above circumstances. It was submitted that the increase in the valuation of closing stock in one year is neutralized in the immediate next year by an higher opening stock by equivalent amount and does not result ultimately in the increase in profits, so there is no concealment of income. It is submitted that the assessee had purchased diamonds in lots which were mixed / assorted diamonds and after buying the diamonds, the assessee assort diamonds from the packets into different quality and sizes and the diamonds are issued from these assortments to make a particular piece of jewellery, hence, the value of the diamonds is determined as per cost or market price whichever is lower. The A.O. has applied average rate which is not correct and the additions have been made arbitrarily. The ld. Counsel submitted that all the details were submitted before the authorities below of the various jewelleries made out of the diamonds. The ld. Counsel drew our attention to the replies submitted before the authorities below w....
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....nd also perused the material available on record including the case laws relied upon. We have observed that the assessee is engaged in the business of diamonds whereby the assessee purchases assorted diamonds depending upon size, shape, cut, clarity , look etc. which is stated to be a normal business practice followed by the assessee. The assessee has produced the relevant records before the authorities below for reconciling the quantities of diamond dealt with. It is also stated that there are 6000-8000 grades of diamonds depending upon size, shape, cut, clarity , look etc. and it is stated by the assessee that it is not possible and practicable to keep detailed separate records of each grade/variety of diamond. The assessee has stated that from the assorted diamonds so purchased wherein in the purchase invoice, there are no separate mention of different assorted diamonds , the assessee issues diamond of higher grades first and applies estimated rates for issue based on valuation , while the stock left in the closing stock is of inferior quality which is valued at lower rates. The Revenue has rejected this contention of the assessee but has made any enquiry to bring on record any ....