M/s. KIRTI ORNAMENTS P. LTD., MUMBAI V. ACIT Rg. - 3(2), MUMBAI

ITA 122/MUM/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2622 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 19-11-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 05-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DAYA SHANKAR
• Assessee Lawyers: SAJJAN KUMAR TULSIYAN
• Keywords: Transfer pricing
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VP & SHRI R.K. PANDA, AM I.T.A. NO. 122/MUM/07 (ASSESSMENT YEAR 2003-04) M/S. KIRTI ORNAMENTS PVT. LTD. 710, RAHEJA CHAMBERS, 213, NARIMAN POINT, MUMBAI-400 021 PAN: AAACA9291N VS. ACIT RANGE 3(2) 6 TH FLOOR, AAYAKAR BHAVAN M.K. ROAD, MUMBAI-400 020 APPELLANT RESPONDENT APPELLANT BY: SHRI SAJJANKUMAR TULSIYAN AND SHRI SASHI TULSIYAN RESPONDENT BY: SHRI DAYA SHANKAR O R D E R DATE OF HEARING: 29.10.2009 DATE OF ORDER: 07.12.2009 PER R.K. PANDA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 15.11.2006 OF THE CIT(A)-III, MUMBAI RELATING TO ASSESSMENT YEAR 2003-04. 2. IN THE ORIGINAL GROUNDS OF APPEAL THE ASSESSEE HAS CHALLENGED THE ORDER OF THE CIT(A) IN UPHOLDING THE ADDITION TO TH E VALUE OF CLOSING STOCK OF RS.6,74,30,187. THE ASSESSEE SUBSEQUENTLY FILED THE REVISED GROUNDS OF APPEAL WHICH READ AS UNDER: 1. THAT THE LD. COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN UPHOLDING THE ADDITION OF RS.6,74,30,187 T O THE TRADING A/C. OF THE ASSESSEE FOR ASSESSMENT YEA R 2003-04 ON ACCOUNT OF REVALUATION OF ITS CLOSING ST OCK OF POLISHED DIAMONDS AS MADE BY THE LD. ASSESSING OFFICER. 1(A). THAT, WHILE REVALUING THE ASSESSEES CLOSING STOCK OF POLISHED DIAMONDS, BOTH THE LD. ASSESSING OFFICER A ND THE LD. CIT(A) FAILED TO GIVE A FINDING THAT THE VALUATION OF ITS CLOSING STOCK FOR THE ASSESSMENT Y EAR 2003-04 WAS NOT MADE ON THE SAME BASIS AS IN THE I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 2 EARLIER ASSESSMENT YEARS AND CONSEQUENTLY THEY WERE NOT JUSTIFIED IN REJECTING ITS VALUATION AND REVALU ING IT ON A DIFFERENT BASIS. 1(B) THAT, SINCE NEITHER THE LD. ASSESSING OFFICER NOR THE LD. CIT(A) HAD GIVEN A FINDING IN THEIR RESPECTIVE ORDE RS THAT BY FOLLOWING THE METHOD OF VALUATION OF CLOSIN G STOCK ADOPTED BY THE ASSESSEE, ITS TRUE AND CORRECT PROFIT FOR ASSESSMENT YEAR 2003-04 COULD NOT BE ARRIVED AT, THEY WERE NOT JUSTIFIED IN REJECTING TH E VALUATION AS MADE BY IT. 2. THAT, WITHOUT PREJUDICE TO GROUND NO. 1 ABOVE, W HILE REVALUING THE ASSESSEES CLOSING STOCK OF POLISHED DIAMONDS FOR ASSESSMENT YEAR 2003-04 ON THE BASIS O F AVERAGE COST PRICE, THE LD. ASSESSING OFFICER ERRED IN NOT VALUING ITS OPENING STOCK ALSO ON THE SAME BASI S AND ADDING ONLY THE RESULTANT NET AMOUNT INSTEAD OF RS.6,74,30,187 TO ITS TRADING A/C. 3. AFTER HEARING BOTH THE SIDES AND CONSIDERING THE FA CT THAT THE REVISED GROUNDS ARE PURELY LEGAL AND CONSIDERING TH AT ALL THE FACTS OF THE CASE ARE ON RECORD AND NO FRESH FACT IS REQUIRED TO BE EXAMINED, THEREFORE, THE REVISED GROUNDS RAISED BY THE ASSESSEE ARE ALLO WED FOR ADJUDICATION. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A MANUFACTURER AND EXPORTER OF CUT AND POLISHED DIAMONDS AND STUDD ED DIAMOND JEWELLERY. DURING THE YEAR THE ASSESSEE HAS ALSO I MPORTED ROUGH DIAMONDS AND HAS CLAIMED THAT IT HAS MANUFACTURED P OLISHED DIAMONDS THROUGH THIRD PARTIES ON LABOUR CHARGE BASIS. FROM THE DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER OBSERVED THA T THE ASSESSEE DURING THE YEAR HAS CLAIMED TO HAVE ISSUED 6850.69 CARATS (CTS) OF ROUGH DIAMONDS FOR MANUFACTURING AND POLISHING ON LABOUR CHARGES AS PER ITS REQUIREMENT AND HAS RECEIVED MANUFACTURED AND POLIS HED DIAMONDS OF 3,12,517.17 CTS FROM THESE LABOURERS. THE YIELD F ROM THE SAME IS DISCLOSED AT 45.93% ON WHICH THE GROSS PROFIT (GP) RATIO IS DISCLOSED @ 12.47%. THE TOTAL TURNOVER OF THE COMPANY WAS DISC LOSED AT RS.58.45 CRORES AS AGAINST RS.67.28 CRORES SHOWN IN THE IMME DIATELY PRECEDING YEAR. SIMILARLY THE CLOSING STOCK WAS DECLARED AT RS.21.56 CRORES AS I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 3 AGAINST RS.12.88 CRORES DECLARED IN THE PRECEDING Y EAR. ON SCRUTINY OF THE PROFIT AND LOSS A/C., BALANCE SHEET AND STOCK REGIS TER, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS VALUED ITS C LOSING STOCK OF POLISHED DIAMONDS LESS THAN THE COST. HE OBSERVED FROM SCHE DULE-VI TO THE BALANCE SHEET OF THE ASSESSEE THAT IT HAS FURNISHED IN A TABULAR FORM THE OPENING AND CLOSING STOCK ROUGH AND POLISHED DIAMON DS ACCORDING TO WHICH THE CLOSING STOCK OF DIAMONDS IS SHOWN AT 769 7.51 CTS VALUED AT RS.5,23,43,068. HOWEVER, NO QUANTITATIVE DETAILS O F CLOSING STOCK OF POLISHED DIAMONDS ARE SHOWN IN SCHEDULE-VI AS PER C ATEGORY OF DIAMONDS WHICH RUN INTO NUMBER OF CATEGORIES. THE ASSESSING OFFICER ASKED THE ASSESSEE TO SHOW AS TO HOW THE VALUE OF THE CLOSING STOCK OF DIAMONDS IS ARRIVED AT WITHOUT SPECIFYING THE CATEGORY OF THE P OLISHED DIAMONDS LYING IN THE CLOSING STOCK SINCE IT HAS MANUFACTURED DIAM ONDS IN DIFFERENT SHAPES, SIZES, CATEGORIES AND THE VALUATION OF THE SAME DEPENDS UPON THE SHAPE, SIZE AND CATEGORY. HE OBSERVED THAT THE ASS ESSEE DURING THE YEAR HAS SOLD ITS POLISHED DIAMONDS OF VARIOUS CATEGORIE S FOR VALUE RANGING FROM RS.1929 PER CT TO RS.67,406 PER CT. THEREFORE , THERE SHOULD BE SOME WAY FOR VALUING THE CLOSING STOCK OF POLISHED DIAMO NDS. THE ASSESSING OFFICER SCRUTINISED THE BOX FILE CONTAINING THE LOO SE SHEETS CALLED AS STOCK REGISTER OF THE ASSESSEE. THE SUMMARY OF CLOSING S TOCK IS PLACED IN THE BOX FILED (STOCK REGISTER) AND HE OBSERVED THAT THE STO CK REGISTER AS CLAIMED BY THE ASSESSEE IS NOTHING BUT A BUNCH OF LOOSE SHEETS GIVING QUANTITATIVE DETAILS OF THE STOCK WHICH ARE PUT TOGETHER IN THE BOX FILED. 5. ON FURTHER SCRUTINY OF THE ABOVE BOX FILE, HE OBSER VED THAT THE SAME DOES NOT SHOW THE CLEAR PICTURE OF STOCK OF PO LISHED DIAMONDS MANUFACTURED CATEGORY-WISE AGAINST THE CONSUMPTION OF RAW MATERIAL. HOWEVER, THE SALE BILLS OF THE ASSESSEE CLEARLY IND ICATE THE CATEGORY OF POLISHED DIAMONDS AND THEIR VALUATION. THEREFORE, HE RAISED DOUBT AS TO WHY THE ASSESSEE HAS NOT CATEGORISED POLISHED DIAMO NDS FOR THE PURPOSE OF VALUING THE CLOSING STOCK. HE ASKED THE ASSESSE E TO FURNISH THE MANUFACTURING COST AS WELL AS THE SELLING COST OF T HE POLISHED DIAMONDS AND VALUE OF THE CLOSING STOCK OF THE SAME CATEGORY -WISE AND WEIGHT WISE. I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 4 THE ASSESSEE IN ITS SUBMISSION REQUESTED THE ASSESS ING OFFICER TO ACCEPT THE METHOD ADOPTED BY IT FOR VALUING THE CLOSING ST OCK ON THE GROUND THAT THE GROSS PROFIT OF THE ASSESSEE IS 12.47% AS AGAIN ST 11.37% IN THE PREVIOUS YEAR. THE DIAMONDS ARE SORTED OUT AND REM IXED AS PER THE REQUIREMENT OF THE CUSTOMERS AND THERE IS ALSO SELE CTION AND REJECTION OF THE DIAMONDS BY THE CUSTOMERS. FURTHER THE CLOSING STOCK OF THE DIAMONDS ARE SOLD UNDER INVOICES OF THE NEXT YEAR A T DIFFERENT RATES AND LOTS. THE VALUE OF SUCH SALES AFTER REDUCING THE G ROSS MARGIN IS ALMOST EQUAL TO THE VALUE OF THE CLOSING STOCK. IT WAS SU BMITTED THAT AVERAGE VALUATION CAN BE APPLIED WHERE THE ITEMS ARE SIMILA R AND HOMOGENOUS AND WHERE THE PURCHASES CANNOT BE IDENTIFIED WITH T HE CLOSING STOCK DUE TO SIMILARITY OF STOCK. IT WAS SUBMITTED THAT THE CLOSING STOCK HAS BEEN VALUED ON THE BASIS OF ACCEPTED ACCOUNTING STANDARD AND THERE IS NO SUPPRESSION OF CLOSING STOCK. 6. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WI TH THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE. HE OBSERVED TH AT THE ASSESSEE ON ONE SIDE DISPUTES THE AVERAGE VALUE OF PRODUCTION COST AND ON THE OTHER SIDE IT IS SILENT ON THE METHOD ADOPTED FOR VALUING THE CLO SING STOCK. HE REJECTED THE LONG DRAWN STORY OF PRODUCTION PROCESS BY THE A SSESSEE. HE OBSERVED THAT ALTHOUGH THE ASSESSEE HAS STATED THAT THE CLOS ING STOCK HAS BEEN VALUED ON THE BASIS OF ACCEPTED ACCOUNTING STANDARD S, HOWEVER, THE BASIS OF SUCH ACCOUNTING STANDARD HAS NOT BEEN FURNISHED BY THE ASSESSEE. HE OBSERVED THAT IN ITS ANNEXURE-6 TO THE BALANCE SHEE T THE CLOSING STOCK OF POLISHED DIAMONDS HAS BEEN SHOWN AT RS.6800 PER CT BUT NO BASIS FOR THIS VALUATION IS SUBMITTED EVEN DURING THE COURSE OF A SSESSMENT PROCEEDINGS. ALTHOUGH THE ASSESSEE IS MAINTAINING THE RECORDS OF STOCK IN RESPECT OF PROCESS AND SELLING THE POLISHED DIAMONDS CATEGORY- WISE AND WEIGHT WISE BUT THE SAME IS NOT MAINTAINED FOR THE PURPOSE OF A RRIVING AT THE VALUE OF THE CLOSING STOCK. THUS THE ASSESSEE HAS ADOPTED T O DIFFERENT YARD STICKS ONE FOR ARRIVING AT THE VALUE OF PROCESS COST/SELLI NG COST AND THE OTHER FOR ARRIVING AT THE VALUE OF THE CLOSING STOCK. HE RE FERRED TO THE REMARK GIVEN BY THE AUDITORS FOR ARRIVING AT THE VALUE OF CLOSIN G STOCK ACCORDING TO I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 5 WHICH SINCE THE VALUATION OF RAW MATERIAL AND FINIS HED GOODS WHICH INVOLVES TECHNICAL APPRAISAL, CERTIFICATE ISSUED BY THE MANAGEMENT HAS BEEN RELIED UPON BY THEM. THE ASSESSING OFFICER WA S OF THE OPINION THAT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, THE CLOS ING STOCK IS REQUIRED TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS L OWER. HE OBSERVED THAT IN THE IMPUGNED CASE THE MARKET COST OF THE STOCK I S RS.18,464 PER CT AND THE PRODUCTION COST IF RS.15560 PER CT. HOWEVER, T HE ASSESSEE HAS ADOPTED THE VALUE OF CLOSING STOCK AT RS.6800 PER C T AND THE BASIS OF SUCH VALUATION HAS NOT BEEN FURNISHED BY THE ASSESSEE. HE OBSERVED THAT THE STOCK RECORDS ARE MAINTAINED IN THE LOOSE EXCEL SHE ETS AND ARE NOT CHRONOLOGICALLY NUMBERED. THESE SHEETS DO NOT INDI CATE ANY QUANTITATIVE DETAILS OF CLOSING STOCK OF POLISHED DIAMONDS, CATE GORY-WISE AND WEIGHT WISE. THEREFORE, ACCORDING TO THE ASSESSING OFFICE R THESE LOOSE SHEETS CANNOT BE TERMED AS STOCK REGISTER. SINCE THE ASSES SEE FAILED TO ESTABLISH THE CORRECTNESS OF THE VALUATION OF THE CLOSING STO CK IN SPITE OF AMPLE OPPORTUNITIES AND SINCE THERE IS NO UNIFORMITY OF S ALES OF POLISHED DIAMONDS THAT COMES GIVES RS.1929 TO RS.67408 AND I N ABSENCE OF CATEGORY WISE AND WEIGHT WISE VALUATION OF THE POLI SHED DIAMONDS, HE REJECTED THE REQUEST OF THE ASSESSEE TO ACCEPT THE BOOK RESULTS ON THE GROUND OF PROGRESSIVE GP RATIO. FINALLY THE ASSESS ING OFFICER DETERMINED THE AVERAGE VALUE OF PRODUCTION PER CT AT RS.15560 AND MADE AN ADDITION OF RS.6,74,30,187 ON 7697.51 CTS ON ACCOUNT OF UNDE R VALUATION OF CLOSING STOCK. 7. BEFORE THE CIT(A), THE ASSESSEE FURNISHED COMPLETE DETAILS OF THE INVENTORY HELD AS ON 31 ST MARCH, 2003 AND IDENTIFIED THE SAME WITH THE SALES EFFECTED. THE SALE BILLS ARE ALSO PRODUCED F OR VERIFICATION. IT WAS SUBMITTED THAT THE BASIS OF VALUATION ADOPTED BY TH E ASSESSEE WAS ESTIMATED COST BASED ON ESTIMATED REALISABLE VALUE AS REDUCED BY 10% GP. IT WAS SUBMITTED THAT THE ASSESSING OFFICER HAS VAL UED THE STOCK AT AVERAGE COST IGNORING THE QUALITY OF POLISHED DIAMO NDS FORMING PART OF THE CLOSING STOCK. THE ASSESSEE FURNISHED EXAMPLES OF CONCERNS LIKE CLASSIC LTD. AND M/S. ASIAN STAR CO. LTD. AND IT WA S SUBMITTED THAT THE I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 6 TRANSFER PRICING AUTHORITY HAS ACCEPTED AS PER TRAN SACTION NET MARGIN METHOD. RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPATRAM REPORTED IN 24 ITR 481, IT WAS A RGUED THAT THE BASICS OF STOCK VALUATION IN THE BOOKS WAS TO MATCH THE COST WITH REVENUE AND IT CANNOT BE CONSIDERED AS A SOURCE OF PROFIT. IT WAS SUBMITTED THAT THE POLISHED DIAMONDS COMPRISING THE INVENTORY AS O N 31 ST MARCH, 2003 WERE NOT HOMOGENOUS AND THEY WERE OF DIFFERENT VARI ETIES. IT WAS SUBMITTED THAT AS PER THE ACCOUNTING STANDARDS 2 DE ALING WITH THE VALUATION OF INVENTORY THE COST FORMULA HAS BEEN SP ECIFIED IN PARAGRAPHS 16 AND 17 ELABORATES FOR THE PURPOSE OF APPLICATION OF STANDARD ACCORDING TO WHICH THE INVENTORY HAS TO BE VALUED AT COST OR NET REALISABLE VALUE WHICHEVER IS LOWER. RELYING UPON THE DECISION OF T HE TRIBUNAL IN THE CASE OF SAW PIPES LTD. VS. ADDL. CIT, REPORTED IN 94 TTJ 103 IT WAS ARGUED THAT THE CORRECT METHOD FOR THE PURPOSE OF VALUATION PAR TICULARLY IN RESPECT OF DIFFERENT TYPES OF ITEMS OF INVENTORY CANNOT BE THE AVERAGE COST METHOD. IT WAS ARGUED THAT IF THE METHOD OF VALUATION APPLI ED BY THE ASSESSING OFFICER IS APPLIED IN THE NEXT YEAR, THE VALUE OF C LOSING STOCK IN THAT WOULD BE LOWER THAN WHAT IS SHOWN IN THE BOOKS. IT WAS F URTHER ARGUED THAT THE VALUATION WILL RESULT INTO AN ASTRONOMICAL GP RATE OF 24.06% WHICH IS IMPOSSIBLE IN THE DIAMOND TRADE. IT WAS FURTHER AR GUED THAT THE ASSESSING OFFICER SHOULD BE DIRECTED TO SUBSTITUTE THE VALUE OF OPENING STOCK IN THE IMMEDIATELY SUCCEEDING ASSESSMENT YEAR AND THEREAFT ER TO GIVE EFFECT TO THE METHOD ADOPTED BY HIM IN THE RESPECTIVE ASSESSM ENT YEARS AND GRANT REFUND TO THE ASSESSEE. 8. HOWEVER, VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE DID NOT SATISFY THE CIT(A). HE OBSERVED THAT THE WORK RELA TING TO PREPARATION OF CLOSING STOCK AND ITS VALUATION IS A TECHNICAL WORK . ALL THE ITEMS IN THE CLOSING STOCK HAVE BEEN PHYSICALLY EXAMINED AND THE N VALUED. THIS WORK IS NOT POSSIBLE WITHOUT PREPARING PHYSICAL INVENTOR Y OF EACH ITEM AVAILABLE IN THE STOCK. HOWEVER, NO SUCH LIST OF F INISHED GOODS WAS PRODUCED BY THE ASSESSEE EITHER BEFORE THE ASSESSIN G OFFICER OR BEFORE HIM. HE OBSERVED THAT VALUATION OF CLOSING STOCK @ RS.6800 PER CT IS ON I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 7 THE LOWER SIDE AND UNRELIABLE KEEPING IN VIEW THE F ACT THAT THE AVERAGE PRICE OF POLISHED DIAMONDS DURING THE YEAR WAS RS.1 5,560 AND AVERAGE COST OF MANUFACTURING OF POLISHED DIAMONDS IS COMPU TED BY THE ASSESSING OFFICER WAS RS.18464 PER CT. HE OBSERVED THAT THE ASSESSEE WAS ABLE TO GIVE SPECIFIC DESCRIPTION OF POLISHED DIAMONDS IN T HE BILLS. THEREFORE, THERE IS NO REASON AS TO WHY THE ASSESSEE DID NOT F ILE THE DESCRIPTION WISE DETAILS OF THE POLISHED DIAMONDS APPEARING IN THE C LOSING STOCK. HE HELD THAT THE CLAIM OF THE ASSESSEE THAT THE SALE PRICE OF POLISHED DIAMONDS APPEARING IN THE CLOSING STOCK SHOWN IN THE NEXT YE AR WILL COMMENSURATE WITH THEIR VALUE SHOWN IN THE CLOSING STOCK CAN BE VERIFIED ONLY IF THE DESCRIPTION WISE DETAILS OF THE CLOSING STOCK ARE A VAILABLE. IN ABSENCE OF SUCH DETAILS THE CORRELATION BETWEEN THE VALUE OF P OLISHED DIAMONDS SHOWN IN THE CLOSING STOCK WITH THEIR SALE PRICE SH OWN IN THE SUCCEEDING YEAR CANNOT BE ESTABLISHED. HE DISTINGUISHED THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPATRAM (SU PRA) AND OTHER VARIOUS DECISIONS CITED BEFORE HIM. RELYING ON THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. VALLABHAI DHANJIBHAI & CO., REPORTED IN 55 TTJ 425 AND A COUP LE OF OTHER DECISIONS, HE HELD THAT THE VALUATION OF CLOSING STOCK OF POLI SHED DIAMONDS AT AVERAGE COST OF PRODUCTION AS ADOPTED BY THE ASSESS ING OFFICER IS CORRECT. HE ACCORDINGLY UPHELD THE ADDITION OF RS.6,74,30,18 7. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 9. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE VALUES CLOSING STOCK OF POLISHED DIAMONDS ON ESTIMA TED COST OR REALISABLE VALUE WHICHEVER IS LOWER. HE SUBMITTED THAT THE AS SESSEE IS CONSISTENTLY FOLLOWING THIS METHOD AND THE SAME HAS BEEN ACCEPTE D BY THE REVENUE IN THE PAST. HE SUBMITTED THAT THERE ARE 16000 VARIET IES OF DIAMONDS IN WHICH THE ASSESSEE DEALS WITH AND THERE ARE DIFFERE NT VALUES FOR EACH PIECE OF DIAMONDS. IT IS THE SIZE OF THE DIAMOND W HICH DECIDES THE PRICE. REFERRING TO THE CERTIFICATE OF GEM & JEWELLERY EXP ORT COUNCIL REGARDING VALUATION POLICY FOR POLISHED DIAMONDS, A COPY OF W HICH IS PLACED AT PAPER BOOK PAGE 22, HE SUBMITTED THAT IN CASE OF VALUATIO N OF CUT AND POLISHED I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 8 DIAMONDS AT THE END OF THE YEAR FOR THE PURPOSE OF CLOSING STOCK, THE INVENTORY IS FIRST VALUED ON ESTIMATED SALE PRICE B ASED ON A TECHNICAL APPRAISAL BY THE MANAGEMENT. FROM THE SALE PRICE T HE APPROXIMATE PROFIT MARGIN AND SELLING EXPENSES ARE REDUCED SO AS TO AR RIVE AT THE APPROXIMATE COST. REFERRING TO THE ICAI EXPERTS AD VISORY COMMITTEE OPINION ON VALUATION OF POLISHED DIAMONDS, A COPY O F WHICH IS PLACED AT PAGE PAGES 23 TO 25, HE SUBMITTED THAT NET REALISAB LE VALUE IS THE ESTIMATED SELLING PRICE IN THE ORDINARY COURSE OF B USINESS LESS THE ESTIMATED COST OF COMPLETION AND THE ESTIMATED COST NECESSARY TO MAKE THE SAME. REFERRING TO PAGES 26 29 OF THE PAPER BO OK HE DREW THE ATTENTION OF THE BENCH TO THE STATEMENT OF VALUATIO N OF POLISHED DIAMONDS AND SUBSEQUENT DISPOSAL THEREOF. HE SUBMITTED THAT SUCH INVENTORY SOLD IN SUBSEQUENT YEARS WERE SHOWN TO THE ASSESSING OFF ICER ACCORDING TO WHICH A MARGIN OF 10 TO 11% WAS REALISED AND THEREF ORE, THE AVERAGE VALUE ADOPTED BY THE ASSESSING OFFICER WHICH IS WIT HOUT ANY BASIS IS NOT AT ALL JUSTIFIED. REFERRING TO PAGES 30 TO 43 OF THE PAPER BOOK, HE DREW THE ATTENTION OF THE BENCH TO THE BREAK UP OF STOCK OF POLISHED DIAMONDS AND ABSTRACT OF STOCK REGISTER. REFERRING TO PAGE 44 O F THE PAPER BOOK WHICH CONTAINS THE WORKING OF GROSS PROFIT MARGIN, HE SUB MITTED THAT THE GP MARGIN DURING THE A.Y. 2001-02 WAS AT 9.47%, FOR 20 02-03 AT 11.37%, FOR 2003-04 AT 12.47%, 2004-05 AT 11.94% AND 2005-06 AT 12.88%. REFERRING TO PAGES 45 TO 144 OF THE PAPER BOOK, HE DREW THE ATTENTION OF THE BENCH TO THE COPY OF ACCOUNTS OF OTHER COMPANIE S VIZ., CLASSIC DIAMONDS (INDIA) LTD., DIMEXON DIAMONDS LTD., SUASH ISH DIAMONDS LTD. SHOWING THE ACCOUNTING POLISHED FOLLOWED FOR VALUIN G THE POLISHED DIAMONDS. REFERRING TO THE COPY OF THE ASSESSMENT ORDER FOR THE A.Y. 2001-02 PLACED AT PAPER BOOK PAGE 141-142, HE SUBMI TTED THAT THERE WAS NO SUCH ADDITION BY THE DEPARTMENT ON ACCOUNT OF SU CH VALUATION OF STOCK IN THE ORDER PASSED U/S. 143(3). REFERRING TO THE COPY OF THE ORDER PASSED BY THE TRANSFER PRICING AUTHORITY (TPA) FOR THE A.Y . 2003-04, A COPY OF WHICH IS PLACED AT PAPER BOOK PAGE 149, HE SUBMITTE D THAT THE TPA HAS ACCEPTED THE MARGIN AS PER TRANSACTIONAL NET MARGIN METHOD AND THE TPA I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 9 HAS NOT DISTURBED THE ARMS LENGTH PRICE OF TRANSACT ION REPORTED BY THE ASSESSEE. 10. HE SUBMITTED THAT SECTION 145 SPEAKS OF METHOD OF A CCOUNTING. SIMILARLY SECTION 145A SPEAKS OF METHOD OF VALUATIO N OF INVENTORY. HE SUBMITTED THAT THE ASSESSEE IS CONSISTENTLY FOLLOWI NG THE METHOD OF VALUATION OF POLISHED DIAMONDS YEAR AFTER YEAR AND THE ASSESSING OFFICER WITHOUT INVOKING THE PROVISIONS OF SECTION 145C(3) WITHOUT REJECTING THE BOOK RESULTS COULD NOT HAVE DISTURBED THE VALUATION . REFERRING TO THE PROVISIONS OF SECTION 145A AGAIN, HE SUBMITTED THAT THE ASSESSEE IS DUTY BOUND TO MAINTAIN ITS ACCOUNTS REGULARLY FOLLOWED B Y IT IN RESPECT OF POLISHED DIAMONDS. HE SUBMITTED THAT IF THE METHOD ADOPTED BY THE ASSESSING OFFICER ACCEPTED THE ASSESSEE IS GOING TO GET HUGE REFUNDS IN SUBSEQUENT YEARS SINCE THE CLOSING STOCK OF THIS YE AR WILL BE THE OPENING STOCK OF SUBSEQUENT YEARS AND SO ON AND THERE WILL BE GREAT LOSS TO THE REVENUE. HE SUBMITTED THAT WITHOUT REJECTING THE B OOKS OF ACCOUNT AND WITHOUT INVOKING THE PROVISIONS OF SECTION 145(3) A ND IN ABSENCE OF ANY REPORT OBTAINED FROM THE EXPORT FOR VALUATION OF CL OSING STOCK OF POLISHED DIAMONDS, THE REVENUE CANNOT REJECT THE VALUATION A DOPTED BY THE ASSESSEE ON MERE SURMISES. HE SUBMITTED THAT THE R OUGH DIAMONDS COMING OUT OF THE PROCESS IS A PART OF THE PRODUCTI ON OF THE ASSESSEE AND THE SIZE, CLARITY, NATURE AND SHAPE OF DIAMONDS DET ERMINE THE VALUE OF THE SAME. OBJECTING TO THE AVERAGE VALUE METHOD ADOPTE D BY THE ASSESSING OFFICER, HE SUBMITTED THAT AVERAGE VALUE CAN BE ADO PTED ON LIKE GOODS ONLY. HE SUBMITTED THAT THE ASSESSING OFFICER HIMS ELF HAS ACCEPTED THAT THE PRICE OF DIAMONDS PER CT TAKES FROM RS.1929 TO RS.67,000. THEREFORE, IN ABSENCE OF ANY ALLEGATION AGAINST THE ASSESSEE F OR SALE OF DIAMONDS AT HIGHER PRICE OR CONNECTED PURCHASE OUTSIDE THE BOOK S OF ACCOUNT AND IN ABSENCE OF ANY OTHER DEFECTS IN THE BOOKS OF ACCOUN T THE REVENUE AUTHORITIES ARE NOT JUSTIFIED IN DISTURBING THE VAL UATION ADOPTED BY THE ASSESSEE AND GOING FOR HUGE ADDITION. HE SUBMITTED THAT IF THE AVERAGE PRICE METHOD AS ADOPTED BY THE ASSESSING OFFICER AN D CONFIRMED BY THE CIT(A), THE GP RATIO WILL GO UP WHICH GIVES AN ABSU RD FIGURE. REFERRING TO I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 10 PAGES 27 AND 28 OF THE PAPER BOOK WHICH SHOWS THE S TATEMENT DISPOSAL OF OPENING STOCK OF POLISHED DIAMONDS INVENTORY AS ON 31.3.2003 AND ITS SUBSEQUENT SALES MADE DURING THE FINANCIAL YEAR 200 3-04, HE DREW THE ATTENTION OF THE BENCH TO THE ESTIMATED COST VALUE AS ON 31.3.2003 AND ITS SUBSEQUENT SALE THEREAFTER. HE SUBMITTED THAT THE ASSESSEE HAS CONSIDERED THE EVENTS OCCURRED AFTER THE VALUATION DATE AND THE ASSESSEE HAD A FAIR IDEA ABOUT THE ESTIMATED VALUE BASED ON WHICH VALUATION OF POLISHED DIAMONDS AS ON 31.3.2003 HAS BEEN ADOPTED BY THE ASSESSEE. REFERRING TO THE ORDER OF THE TRIBUNAL IN THE CASE OF M/S. DHARAMCHAND PARASCHAND EXPORTS VIDE I.T.A. NO. 3833/BOM/91 ORDE R DATED 12 TH FEBRUARY, 1999, HE SUBMITTED THAT THE TRIBUNAL IN T HE SAID DECISION FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. SAMIR DIAMONDS MANUFACTURING VIDE I.T.A. NO. 9445 AND 9467/BOM/91 ORDER DATED 29 TH MAY, 2000 HAD DELETED THE ADDITION MADE BY THE ASSE SSING OFFICER AND UPHELD THE ORDER OF THE CIT(A). IN THE SAID DECISI ON IT WAS HELD BY THE TRIBUNAL THAT IT IS NOT POSSIBLE IN THE LINE OF TRA DE OF DIAMONDS TO MAINTAIN QUALITY WISE STOCK REGISTER. SINCE THE QUANTITY IN CARATS OF ROUGH AND CUT AND POLISHED DIAMONDS WAS NOT DOUBTED BY THE REVENU E AND THE PURCHASES AND SALES WERE FULLY VOUCHED. HENCE THE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE TRIBUNAL WAS DELETED BY THE TRIBUNAL. REFERRING TO THE ORDER OF THE TRIBUNAL I N THE CASE OF SAMIR DIAMONDS VIDE I.T.A. NO. 9445/BOM/91 AND I.T.A. NO. 9467/BOM/91 ORDER DATED 29 TH MAY, 2000 HAS DISMISSED THE APPEAL FILED BY THE RE VENUE WHERE THE CIT(A) HAS DELETED THE ADDITION MADE BY T HE ASSESSING OFFICER AND WHERE THE ASSESSEE DID NOT MAINTAIN DAY TO DAY STOCK REGISTER AND DETAILS OF COLOUR, QUALITY, SIZE, ETC., OF DIAMONDS . REFERRING TO THE LETTER DATED 28 TH MARCH, 2006 ADDRESSED TO THE ASSESSING OFFICER WHI CH WAS RECEIVED BY HIS OFFICE ON 30 TH MARCH, 2006, HE SUBMITTED THAT THE ASSESSEE IN THE SAID LETTER HAS MENTIONED THAT IF AVERAGE CO ST METHOD OF VALUATION OF CLOSING STOCK IS TO BE ADOPTED THEN THE OPENING STOCK FOR THE A.Y. 2004- 05 WOULD BE ENHANCED BY RS.6,77,38,088 AND THE CLOS ING STOCK WOULD STAND AT RS.8,58,42,367 AS AGAINST RS.9,34,99,320 D ISCLOSED BY THE I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 11 ASSESSEE. AS A RESULT OF THIS IMPACT THE INCOME FO R THE A.Y. 2004-05 WOULD RESULT IN A TAXABLE LOSS OF RS.4,23,23,078 AS AGAIN ST RETURNED PROFIT OF RS.3,30,71,963. THE COMPANY WOULD BE ENTITLED TO R EFUND OF TAX PAID OF RS.99,10,476 AND WOULD HAVE ENTITLEMENT OF TAX SET OFF TO THE TUNE OF RS.1,39,66,616 BEING 33% OF THE VALUE OF TAXABLE LO SS. THUS THE COMPANY WOULD BE ENTITLED TO OVERALL TAX BENEFIT OF RS.2,38 ,77,092. 11. REFERRING TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAHAVIR ALUMINIUM LTD. REPORTED IN 297 ITR 77, HE SUBMITTED THAT IF THE REVENUE WANTS TO CHANGE THE METHOD OF VALUAT ION OF CLOSING STOCK THEN THE SAME PRINCIPLE SHALL BE APPLICABLE TO THE OPENING STOCK ALSO. HOWEVER, THE REVENUE AUTHORITIES HAVE IGNORED TO VA LUE THE OPENING STOCK ON AVERAGE PRICE WHICH HAS BEEN APPLIED FOR V ALUATION OF THE CLOSING STOCK. REFERRING TO THE DECISIONS REPORTED IN 311 ITR 161 (DEL), 240 ITR 355, 261 ITR 275 AND 145 TAXMAN 373, HE SUBMITTED T HAT CONSISTENCY SHOULD BE FOLLOWED REGARDING THE METHOD OF VALUATIO N OF CLOSING STOCK REGULARLY EMPLOYED BY THE ASSESSEE. 12. THE LEARNED DR, ON THE OTHER HAND, WHILE SUPPORTING THE ORDER OF THE CIT(A) SUBMITTED THAT IT IS A SIMPLE CASE OF VA LUATION OF CLOSING STOCK. THE STOCK CAN BE VALUED AT COST OR MARKET PRICE, WH ICHEVER IS LESS. IN THE INSTANT CASE THE VALUATION HAS NOT BEEN DONE BY THE ASSESSEE AT ACTUAL COST OR SELLING PRICE. IN THE INSTANT CASE THE SELLING PRICE IS MUCH HIGHER. THE ADOPTION OF ESTIMATED COST BY THE ASSESSEE IS UNREL IABLE. HE SUBMITTED THAT THE VALUATION OF THE CLOSING STOCK CANNOT BE L EFT TO A THIRD PARTY. DISTINGUISHING THE DECISION OF THE TRIBUNAL CITED B Y THE LEARNED COUNSEL FOR THE ASSESSEE, HE SUBMITTED THAT THE TRIBUNAL HA S NOT CONSIDERED THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF VALLABBHAI DHANJIBHAI & CO. (SUPRA). REFERRING TO PAGE 27 OF THE PAPER BOOK, HE SUBMITTED THAT WHEN THE ASSESSEE HIMSELF IS ACCEPTI NG THE AVERAGE SIZE OF DIAMONDS WHERE IS THE QUESTION OF NOT ACCEPTING THE AVERAGE COST ADOPTED BY THE ASSESSING OFFICER AND THE CIT(A). REFERRING TO PAGES 30 TO 32 OF THE PAPER BOOK WHICH SHOWS THE OPENING STOCK AS WELL AS CLOSING STOCK OF I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 12 POLISHED DIAMONDS, ROUGH DIAMONDS AND DIAMOND STUDD ED GOLD JEWELLERY, HE SUBMITTED THAT IT DOES NOT GIVE THE ACTUAL DETAI LS OF QUANTITY AND QUALITY. THEREFORE, IT CANNOT BE TREATED AS A PART OF INVENTORY. REFERRING TO THE LETTER ISSUED BY THE GEM AND JEWELLERY EXPOR T PROMOTION COUNCIL AND THE EXPERT OPINION OF THE ICAI HE SUBMITTED THA T THESE ARE ONLY OPINIONS AND NOT GUIDELINES AND, THEREFORE, IT HAS NO FORCE OF LAW. AS REGARDS THE SUBMISSION OF THE LEARNED COUNSEL FOR T HE ASSESSEE THAT THE OPENING STOCK WAS NOT REVALUED ON THE SAME METHOD W HICH HAS BEEN ADOPTED FOR THE VALUATION OF THE CLOSING STOCK, HE SUBMITTED THAT THE CHAIN REACTION WILL FOLLOW IF OPENING STOCK IS DISTURBED. FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF MELMOULD CORPORATION. 13. THE LEARNED COUNSEL FOR THE ASSESSEE IN HIS REJOIND ER SUBMITTED THAT IT IS UNIVERSAL TRUTH THAT VALUATION OF CLOSIN G STOCK HAS TO BE DONE EITHER ON COST OR MARKET PRICE, WHICHEVER IS LESS. IN THE CASE OF THE ASSESSEE THE COST OF DIAMOND PER CT VARIES FROM RS. 1900 TO 67400. HE SUBMITTED THAT THERE IS NO EVIDENCE ON RECORD WITH THE REVENUE AUTHORITIES THAT THE ASSESSEE HAS NOT FOLLOWED ACTU AL COST METHOD. HE SUBMITTED THAT HOW A COMMODITY LIKE DIAMOND WHERE T HERE IS HUGE DIFFERENCE IN COST CAN BE VALUED AT AVERAGE METHOD WHICH GIVES AN ABSURD RESULT. HE SUBMITTED THAT THE ASSESSEE HAS SUBMITT ED QUALITY WISE DETAILS AND INVOICE WISE DETAILS. SUBSEQUENT SALE OF THE C LOSING STOCK GIVES A MARGIN OF ABOUT 11% WHICH IS VERY NEAR TO THE VALUE OF THE CLOSING STOCK DECLARED BY THE ASSESSEE. BOOKS OF ACCOUNT HAVE NO T BEEN REJECTED IN SUBSEQUENT YEARS. HE SUBMITTED THAT THE LOTS CONTA INING POLISHED DIAMONDS HAVE BEEN KEPT SEPARATELY AND SOLD SEPARAT ELY. AS REGARDS THE DECISION OF AHMEDABAD BENCH OF THE TRIBUNAL RELIED ON BY THE LEARNED DR, HE SUBMITTED THAT THE DECISION IS DISTINGUISHABLE O N FACTS. IN THAT CASE THE ASSESSEE VALUED ITS CLOSING STOCK OF CUT AND PO LISHED DIAMONDS ON THE BASIS OF SALE BILLS AS WELL AS ON THE BILL OF THE S Y 2043 ANOTHER BILL OF SALE SY 2044 BUT SUCH BILLS DID NOT GIVE THE DETAILS BUT ONLY MENTION ONE POCKET OF DIAMONDS. THE VALUATION OF CLOSING STOCK IN THAT CASE WAS BASED I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 13 ON SOME WAGES BILL. FURTHER IN THE CASE OF THE ASS ESSEE THE VALUATION OF THE STOCK OF THE POLISHED DIAMONDS WAS ON THE BASIS OF THE ESTIMATED COST BASIS AND ON THE BASIS OF WAGE BILL. THE ASSESSEE HAS PRODUCED DETAILED WORKING ON ESTIMATED COST OF INVENTORY IN RESPECT O F VALUATION. COPIES OF SUBSEQUENT SALE BILLS AND COPY OF THE EXPORT REGIST ER WHEREIN THE INVENTORY HELD ON 31 ST MARCH, 2003 WAS CATEGORIES AND IDENTIFIED WITH SALES EFFECTED IN SUBSEQUENT FINANCIAL YEAR. THE R EVENUE AUTHORITIES COULD NOT PIN POINT ANY DEFECT IN SUCH DETAILS. THE ASSE SSEES VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS WAS CORROBORATED WITH ADEQUATE EVIDENCE AND SUBSEQUENT SALES BILLS, THEREFORE, AVE RAGE COST BASIS CANNOT BE ADOPTED IN ASSESSEES CASE. AS REGARDS THE CER TIFICATE ISSUED BY THE GEM & JEWELLERY EXPORT PROMOTION COUNCIL AND THE OP INION OF THE EXPERT ADVISORY COMMITTEE OF ICAI, HE SUBMITTED THAT THEY ARE AUTHORITIES/ EXPERTS, THEREFORE, THEIR OPINIONS CANNOT BE SIMPLY BE IGNORED IN ABSENCE OF ANY CONTRARY MATERIAL. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS CASE DECISIONS CITED BEFORE US. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND CIT (A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THE ONLY DISPUTE IN THE IMPUGNED APPEAL IS REGARDING THE VALUATION OF CLOSING STOCK OF POLISHE D DIAMONDS. ACCORDING TO THE ASSESSEE, THE VALUE SO ADOPTED IS RS.52,343, 068/- WHEREAS THE ASSESSING OFFICER HAS DETERMINED SUCH VALUE AT RS.1 1,97,73,255/- AND MADE AN ADDITION OF RS.6,74,30,187/- ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS. WE FIND THE ASS ESSING OFFICER REJECTED THE VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS BY THE ASSESSEE WHICH WAS ESTIMATED COST BASED ON ESTIMATED REALISABLE VA LUE AS REDUCED BY GROSS PROFIT MARGIN OF 10%. WE FIND THE ASSESSING O FFICER REJECTED THE I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 14 ABOVE METHOD OF VALUATION ADOPTED BY THE ASSESSEE O N THE GROUND THAT THE ASSESSEE DID NOT FILE THE DETAILS OF CLOSING STOCK, THAT THE ASSESSEE MAINTAINS ITS STOCK OF POLISHED DIAMONDS IN LOOSE S HEETS WHICH WERE KEPT IN A BOX FILE WHICH CONTAINED ONLY QUANTITATIVE DET AILS OF STOCK OF POLISHED DIAMONDS AND THAT THE LOOSE SHEETS DID NOT SHOW THE CATEGORY WISE AND WEIGHT WISE VALUE OF DIAMONDS. FURTHER, THE ASSESS EE HAD SHOWN THE AVERAGE VALUE OF POLISHED DIAMONDS IN THE CLOSING S TOCK AT RS.6800, WHEREAS THE AVERAGE VALUE OF POLISHED DIAMONDS IN THE OPENING STOCK WAS SHOWN AT RS.7500/- PER CT., THE AVERAGE COST O F PURCHASE OF DIAMOND DURING THE YEAR COMES TO RS.15,560/- PER CT. AND TH E AVERAGE COST OF POLISHED DIAMONDS MANUFACTURED DURING THE YEAR COM ES TO 18,467/-. ACCORDINGLY, WE FIND THE ASSESSING OFFICER ADOPTED AVERAGE VALUE OF POLISHED DIAMONDS @ RS.15,560/- PER CT. AS AGAINST RS.6800/- PER CT. SHOWN BY THE ASSESSEE AND MADE THE ADDITION OF RS.6 ,47,30,187/- WHICH HAS BEEN UPHELD BY THE CIT(A). 16. WE FIND IT IS THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE BOOKS WERE NOT REJECTED BY THE ASSESSING O FFICER U/S.143(3) AND THEREFORE, HE COULD NOT HAVE DISTURBED THE VALUATIO N OF CLOSING STOCK AND MADE HUGE ADDITION WHICH GIVES AN ABSURD G.P. RATIO . HOWEVER, WE DO NOT FIND ANY MERIT IN THE ARGUMENT ADVANCED BY THE LEAR NED COUNSEL FOR THE ASSESSEE. THE ASSESSING OFFICER HAS MADE SPECIFIC ADDITION ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK. THEREFORE, REJECTI ON OF BOOKS U/S. 145(3), IN OUR OPINION, IS NOT A PRECONDITION FOR MAKING AD DITION ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK. 17. WE ALSO DO NOT FIND MERIT IN THE PROPOSITION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE COMPANY IS CONSI STENTLY FOLLOWING SUCH METHOD OF VALUATION OF POLISHED DIAMONDS WHICH HAS BEEN ACCEPTED BY THE REVENUE AND THEREFORE, FOLLOWING THE RULE OF CO NSISTENCY THE SAME METHOD SHOULD HAVE BEEN ACCEPTED. WE FIND IN MOST O F THE YEARS THE ASSESSMENTS HAVE BEEN COMPLETED UNDER SECTION 143(1 ) AND IN THE ORDER PASSED U/S.143(3) FOR THE ASSESSMENT YEAR 2001-02, THERE IS NO SUCH I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 15 DISCUSSION. FURTHER, IT IS THE SETTLED POSITION OF LAW THAT THE PRINCIPLES OF RES JUDICATA DO NOT APPLY TO INCOME-TAX PROCEEDING S. THEREFORE, MERELY BECAUSE SOME WRONG/ERRONEOUS METHOD WAS ACCEPTED IN THE PAST, THE SAME CANNOT BE LEGALIZED. 18. THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSES SEE THAT VALUATION OF CLOSING STOCK AT THE AVERAGE PRICE ADO PTED BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A) GIVES AN ABSURD G. P. RATIO AS AGAINST THE PRECEDING AND SUCCEEDING ASSESSMENT YEARS IN THE CA SE OF THE ASSESSEE AS WELL AS IN COMPARABLE CASES IN THE INDUSTRY IS ALSO WITHOUT ANY MERIT. IN OUR OPINION, THE ACCOUNTS OF THE ASSESSEE SHOULD BE MAINTAINED IN SUCH A MANNER SO AS TO ENABLE THE ASSESSING OFFICER TO COM PUTE THE CORRECT INCOME. IF THE ASSESSEE DOES NOT MAINTAIN PROPER RE CORDS SO AS TO ENABLE THE ASSESSING OFFICER TO DETERMINE THE CORRECT INCO ME AND WHEN THE METHOD ADOPTED BY THE ASSESSING OFFICER IS NOT FAUL TY, THEN MERELY BECAUSE IT WILL LEAD TO HIGHER ADDITION, IN OUR OPI NION, CANNOT BE A GROUND TO REJECT THE METHOD ADOPTED BY THE ASSESSING OFFIC ER. 19. THE FURTHER SUBMISSION OF THE LEARNED COUNSEL FOR T HE ASSESSEE THAT SINCE THE AVERAGE PRICE METHOD ADOPTED BY THE ASSES SING OFFICER FOR VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS SHO ULD HAVE BEEN ADOPTED BY THE ASSESSING OFFICER FOR VALUING THE OPENING ST OCK OF THE IMPUGNED ASSESSMENT YEAR IS ALSO WITHOUT ANY FORCE. IF SUC H A THING IS ADOPTED THEN THERE WILL BE NO END TO IT AND AS RIGHTLY POINTED O UT BY THE LEARNED D.R., IT WILL HAVE CHAIN REACTION SINCE ONE HAS TO GO TO TH E PRECEDING ASSESSMENT YEARS CHRONOLOGICALLY. THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAHAVIR ALUMINIUM (SUPRA) AS RELIED ON BY T HE LEARNED COUNSEL FOR THE ASSESSEE IS IN THE CONTEXT OF MODVAT CREDIT AND NOT FOR UNDERVALUATION OF CLOSING STOCK. 20. WE ALSO DO NOT FIND MUCH FORCE IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT WHEN THE CLOSING STOC K OF POLISHED DIAMONDS AS DETERMINED BY THE ASSESSING OFFICER ON THE BASIS OF AVERAGE PRICE I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 16 METHOD IS ACCEPTED, THEN THE CLOSING STOCK BECOMES THE OPENING STOCK FOR THE NEXT YEAR AND IN THE PROCESS, THE RETURNED INCO ME OF THE ASSESSEE DECLARING POSITIVE INCOME FOR THE SUBSEQUENT YEARS BECOMES LOSS AND THE ASSESSEE HAS TO GET HUGE REFUND AND THERE WILL BE L OSS TO THE REVENUE. IN OUR OPINION, IT IS IMMATERIAL FOR THE ASSESSEE IF B Y ADOPTING THE METHOD OF VALUATION AS ADOPTED BY THE ASSESSING OFFICER, THER E WILL BE INCREASE IN THE INCOME FOR ONE YEAR AND THERE WILL BE LOSS IN THE S UBSEQUENT YEAR DUE TO SUCH INCREASE IN THE VALUATION OF THE CLOSING STOCK . THE ASSESSEE CANNOT PLEAD TO LEGALIZE AN ERRONEOUS METHOD OF VALUATION ON THE GROUND THAT THERE WILL BE LOSS TO THE REVENUE IN THE SUBSEQUENT YEAR. THEREFORE, IN OUR OPINION, IF THERE IS INCREASE IN THE VALUE OF CLOSI NG STOCK OF POLISHED DIAMONDS IN THE IMPUGNED ASSESSMENT YEAR, THE VALUE OF CLOSING STOCK OF POLISHED DIAMONDS SO ARRIVED AT HAS TO BECOME THE O PENING STOCK OF THE SUBSEQUENT YEAR AND THE ASSESSING OFFICER HAS TO GI VE EFFECT TO IRRESPECTIVE OF LOSS OR GAIN TO THE REVENUE OR THE ASSESSEE, AS THE CASE MAY BE. 21. HOWEVER, WE FIND MERIT IN THE SUBMISSION OF THE LEA RNED COUNSEL FOR THE ASSESSEE THAT THE AVERAGE RATE AS ADOPTED B Y THE ASSESSING OFFICER IS ERRONEOUS AND NOT A SCIENTIFIC ONE. WE FIND THER E IS NO DISPUTE TO THE FACT THAT THE AVERAGE VALUE OF THE CLOSING STOCK AS WORKED OUT BY THE ASSESSEE COMES TO RS.6800/- PER CT. THERE IS ALSO N O DISPUTE TO THE FACT THAT THE ASSESSING OFFICER HIMSELF IN THE ASSESSMEN T ORDER ACCEPTED THAT THE VALUE PER CARAT OF A POLISHED DIAMOND IN THE AS SESSEES CASE VARIES BETWEEN RS.1900/- TO RS.69000 PER CT. THERE IS ALS O NO DISPUTE TO THE FACT THAT BOTH SIDES ARE OF THE VIEW THAT THE VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS SHOULD BE AT COST OR MARKET PRICE WHICH EVEN IS LESS. ACCORDING TO THE ASSESSING OFFICER THE AVERAGE PURC HASE COST PER CT. IS RS.15,560/- AND AVERAGE SALE PRICE IS RS.18,464/-. WE FIND MERIT IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE CLOSING STOCK OF POLISHED DIAMONDS AS ON 31.3.2003 ARE NOT HOMOGE NOUS AND ARE OF DIFFERENT VARIETIES. FURTHER, WE FIND THE INVENTOR IES HELD ON 31.3.2003 WAS CATEGORIZED AND IDENTIFIED WITH SALES EFFECTED IN THE SUBSEQUENT I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 17 FINANCIAL YEAR, THE DETAILS OF WHICH ARE PLACED IN THE PAPER BOOK AT PAGES 27 TO 29 AND WHICH WERE ALSO PRODUCED BEFORE THE LO WER AUTHORITIES. WE FIND THE ASSESSING OFFICER HAD REJECTED THE VALUE O F INVENTORY OF POLISHED DIAMONDS AS ON 31.3.2003 ON THE GROUND THAT THE ASS ESSEE MAINTAINS THE STOCK OF POLISHED DIAMONDS IN LOOSE SHEETS WHICH WE RE KEPT IN A BOX FILE WHICH CONTAIN ONLY QUANTITATIVE DETAILS OF STOCK BU T DID NOT SHOW THE CATEGORY-WISE AND WEIGHT-WISE VALUE OF DIAMONDS. H OWEVER, WE FIND FROM THE PAPER BOOK PAGES 27 TO 29 THAT THE SUBSEQU ENT SALE OF SUCH DIAMONDS WHICH FORMED PART OF THE CLOSING STOCK AS ON 31.3.2003 AND THE DETAILS OF WHICH WERE FILED BEFORE THE LOWER AUTHOR ITIES WERE IGNORED BY THEM. IN OUR OPINION, THE SUBSEQUENT SALE OF THE IT EMS FORMING PART OF THE INVENTORY AFTER THE BALANCE SHEET DATE CANNOT BE IG NORED TO ARRIVE AT THE MARKET PRICE ESPECIALLY WHEN THERE IS HUGE DIFFEREN CE BETWEEN A CARAT OF DIAMOND AND WHICH ACCORDING TO THE REVENUE AUTHORIT IES VARIES FROM RS.1900/- TO RS.69000 PER CT. IN OUR OPINION, THE AVERAGE PRICE AS ADOPTED BY THE ASSESSING OFFICER AND CONFIRMED BY T HE CIT(A) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE CANNOT BE A SCI ENTIFIC ONE ESPECIALLY WHEN THE SUBSEQUENT SALE PRICE OF THE ITEMS APPEARI NG IN THE CLOSING INVENTORY IS AVAILABLE AND THE ASSESSEE CAN CORRELA TE SUCH INVENTORY WITH THE SALE PRICE. 22. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE, WE DEEM IT PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE ASSES SING OFFICER DIRECTING HIM TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO CORRELATE THE SALE OF CLOSING STOCK OF POLISHED DIAMONDS APPEARING IN THE BALANCE SHEET WITH ITS SUBSEQUENT SALE WHICH ACCORDING TO THE ASSESSEE HAS A PROFIT MARGIN OF 10% TO 12% AND WHICH IS ALMOST AT PAR WITH THE AVERAGE G.P. RA TIO OF THE ASSESSEE IN THE PRECEDING AND SUBSEQUENT ASSESSMENT YEARS AS WE LL AS THE STANDARD OF G.P. IN THE COMPARABLE CASES IN THE INDUSTRY. THE A SSESSING OFFICER UPON SATISFACTION OF CORRELATION OF SUCH SUBSEQUENT SALE PRICE OF THE POLISHED DIAMONDS AS APPEARING IN THE CLOSING STOCK OF THE I NVENTORY SHALL ACCEPT THE VALUE ADOPTED BY THE ASSESSEE AS THE MARKET PRI CE AND TREAT THE SAME AS THE VALUE OF THE POLISHED DIAMONDS AS ON 31.3.20 03 SINCE THE ASSESSEES I.T.A. NO. 122/MUM/07 M/S. KIRTI ORNAMENTS PVT. LTD. ===================== 18 COST PRICE IS MORE THAN THE MARKET PRICE AND THE VA LUE TO BE ADOPTED BEING COST OR MARKET PRICE, WHICHEVER IS LESS. HOWEVER, I N CASE THE SAME IS NOT ACCEPTED BEING NOT PROVED BY THE ASSESSEE, THE VALU E OF CLOSING STOCK OF THE INVENTORY AS DETERMINED BY THE ASSESSING OFFICE R SHALL BE THE OPENING STOCK OF THE SUBSEQUENT YEAR AND THE ASSESSING OFFI CER SHALL PASS APPROPRIATE ORDERS AS PER LAW. WE HOLD AND DIRECT A CCORDINGLY. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLO WED FOR STATISTICAL PURPOSES. 23. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 7 TH DECEMBER, 2009. SD/- (D. MANMOHAN) VICE PRESIDENT SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI, DATED 7 TH DECEMBER , 2009 COPY TO: (1) THE APPELLANT, (2) THE RESPONDENT, (3) THE CIT(A)-III, MUMBAI, (4) THE CIT, MC-III, MUMBAI, (5) THE DR, A BENCH, ITAT, MUMBAI. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI TPRAO