ITO - 16(2)(2), MUMBAI V. M/s. VAIBHAV GEMS, MUMBAI

ITA 1592/MUM/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1556 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 18-11-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 19-02-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJNISH ARVIND
• Assessee Lawyers: B V JHAVERI
• Keywords: Rejection of books of accounts; Transfer pricing; International transaction; Fair market value
• Section: 143(3); 92F; 80HHC; 145; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH: MUMBAI BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER ITA NO 1592/MUM/2007 (ASSESSMENT YEAR: 2003-04) INCOME TAX OFFICER 16(2)(2), MATRU MANDIR, MUMBAI -400 007 VS M/S VAIBHAV GEMS, 1305, CHANDANABALA, 3, RIDGE ROAD, WALKESHWAR, MUMBAI -400 006 PAN: AAAFV 1432 H APPELLANT RESPONDENT ITA NO 1737/MUM/2007 (ASSESSMENT YEAR: 2003-04) M/S VAIBHAV GEMS, 1305, CHANDANABALA, 3, RIDGE ROAD, WALKESHWAR, MUMBAI -400 006 PAN: AAAFV 1432 H VS INCOME TAX OFFICER 16(2)(2), MATRU MANDIR, MUMBAI -400 007 APPELLANT RESPONDENT ASSESSEE BY: SHRI B V JHAVERI REVENUE BY: SHRI RAJNISH ARVIND ORDER PER R.K. GUPTA, JUDICIAL MEMBER THESE ARE TWO APPEALS ONE EACH FILED BY THE ASSESSE E AND REVENUE RELATING TO ASSESSMENT YEAR 2003-04. 2. IN THE APPEAL OF THE ASSESSEE, GROUND NO 2 & 3 A RE NOT PRESSED AND THE SAME ARE DISMISSED AS NOT PRESSED. ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 2 3. GROUND NO 1 OF THE ASSESSEE RELATES TO CONFIRMIN G THE ADDITION TO THE EXTENT OF RS 3,71,673/- ON ACCOUNT OF VALUATION OF STOCK OF POLI SHED DIAMOND. 4. IN APPEAL OF THE REVENUE, GROUND 3 RELATES TO RE STRICTING THE ADDITION TO RS 3,71,673/- IN PLACE OF RS 77,88,183/- BEING THE ADD ITION MADE ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK. 5. THESE ISSUES INVOLVED IN BOTH THE APPEALS ARE CO MMON AND, THEREFORE, THE SAME ARE DISPOSED OFF TOGETHER. 6. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF EXPOR T OF DIAMONDS. THE ASSESSEE HAD DISCLOSED THE VALUE OF CLOSING STOCK OF POLISHED DI AMONDS OF 1481.77 CARATS AT RS 3,00,05,843/- AS PER WHICH, THE AVERAGE COST PER CA RAT COMES TO RS 20,250/-. THE WORKING OF THE VALUE OF CLOSING STOCK OF THE POLISH ED DIAMONDS WERE FILED BEFORE THE ASSESSING OFFICER. THE ASSESSING OFFICER AFTER ANA LYSING THE WORKING, FOUND THAT SAFETY COST OF CLOSING STOCK OF POLISHED DIAMONDS PER CARA T WAS AT RS 20,250/- AND AVERAGE COST OF PRODUCTION OF MANUFACTURED DIAMONDS AS PER CARAT WAS AT RS 27,517/-. AVERAGE VALUE OF POLISHED DIAMOND PER CARAT AFTER CONSIDERING THE VALUE OF OPENING STOCK OF POLISHED DIAMONDS AND COST OF PRODUCT OF MANUFACTURED POLISH ED DIAMOND WAS AT RS 25,506/-. IN VIEW OF THESE POINTS, THE ASSESSING OFFICER PROPOSE D TO VALUE OF CLOSING STOCK OF POLISHED DIAMOND AT RS 25,506/- PER CARAT INSTEAD OF RS 20,2 50/- PER CARAT SHOWN BY THE ASSESSEE. CONSEQUENTLY, ENHANCING THE VALUE OF CLO SING STOCK OF POLISHED DIAMONDS BY RS 77,88,183/- ON THE GROUND THAT THE ASSESSEE HAD UNDER-VALUED THE CLOSING STOCK OF POLISHED DIAMONDS. THE ASSESSING OFFICER ALSO PROP OSED TO REJECT THE BOOK RESULT FOR THE FOLLOWING REASONS: 6.3 A. THE STOCK BOOK IS NOT MAINTAINED ON LOT-WISE, H ENCE THE BASIS OF VALUATION OF STOCK IS NOT KNOWN. ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 3 B. THE AVERAGE PRICE OF THE CLOSING STOCK IS RS 25 ,506/- PER CTS AS PER AVERAGE CALCULATION, HOWEVER, THE CLOSING STOCK VALUED AT R S 20,250/- PER CTS WHICH IS LESS BY RS 5,256/- CTS. NO SOUND BASIS OF VALUATION OF CLOSING STOCK HAS BEEN FURNISHED. THE DIFFERENCE COMES TO RS 5,256/- PER CTS AND THE UNDER VALUATION WORKS OUT TO RS 77,88,934/- WHICH IS PROPOSED TO BE ADDED TO THE TOTAL INCOME. C. THE FALL OF GP RATIO EXCLUDING EXCHANGE DIFFERE NCE GAIN IS 0.80% IS COMPARISON TO EARLIER ASSESSMENT YEAR. 7. THE ASSESSEE SUBMITTED THE DETAILED REPLY VIDE L ETTER DATED 22.2.2006 BEFORE THE ASSESSING OFFICER. IT CLARIFIED THAT THERE WAS SHA RP INCREASE IN RAW MATERIAL COST AND INCREASE IN AVERAGE LABOUR PRICE AND SEVERE COMPETI TION IN MARKET AS AGAINST WHICH, AVERAGE SALE PRICE HAD NOT INCREASED COMMENSURATELY . SECONDLY, IT WAS POINTED OUT THAT IT HAD VALUED THE CLOSING STOCK OF POLISHED DIAMOND S ON NET REALISABLE VALUE METHOD WHICH WAS BEING EMPLOYED CONSISTENTLY. IN VIEW OF ABSENCE OF HOMOGENEITY OF THE DIAMONDS, VALUATION OF THE POLISHED DIAMOND AT A AV ERAGE COST WAS NOT POSSIBLE. THIRDLY, IT CLARIFIED THAT LOT-WISE STOCK VALUATION WAS NOT POSSIBLE AS WITH EVERY SALE AND NEW MANUFACTURING THE SIZE AND STRUCTURE OF THE LOT GOT CHANGED. DIAMONDS WERE NOT HOMOGENOUS AND FACTOR LIKE SIZE, SHAPE, COLOUR AND CLARITY AND THEIR VALUATION DEPEND ON COLOUR CLARITY, CUT AND CARAT FOR WHICH THE NET REA LISABLE VALUE METHOD WAS THE BEST AND PERFECT METHOD TO FOLLOW. FOURTHLY, THE APPELLANT ARGUED THAT IT HAD SUBMITTED THE METHOD OF AVERAGE VALUATION ONLY ON DEMAND BY THE A O BEFORE HIM. FIFTHLY, THE FALL IN GROSS PROFIT RATE AT 0.80% FROM AY 2002-03 WAS FOR T HE GENERAL FACTORS STATED EARLIER AND ITS GROSS PROFIT RATE AT 9% WAS EVEN MORE THAN THE G ROSS PROFIT RATE OF SOME OTHERS IN THE SAME BUSINESS. SIXTHLY, THE APPELLANT ADMITTED THA T IT DID NOT MAINTAIN STOCK REGISTER SHOWING CUT, COLOUR, SIZE AND QUALITY AS IT WAS NOT HUMANLY POSSIBLE TO MAINTAIN THE SAME IN DIAMOND TRADE, WHICH DEALS IN NON-HOMOGENOUS ITE MS. LASTLY, THE APPELLANT ALSO STATED THAT SOME SALES MADE OUT OF CLOSING STOCK OF POLISHED DIAMONDS AFTER AS LATE AS SEPTEMBER, 2003, THE PERIOD DURING WHICH NEWLY MANU FACTURED GOODS WERE NOT RECEIVED SHOWED AVERAGE VALUATION OF CLOSING STOCK. ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 4 8. HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT TH E ASSESSEES CONTENTION ON THE GROUND THAT IT HAD ITSELF ADMITTED IMPORTANCE OF MA INTENANCE OF RECORD ON CLOSING STOCK OF POLISHED DIAMONDS, NEED MAINTENANCE OF STOCK REG ISTER SHOWING CUT, POLISHED, SIZE AND QUALITY AND, THEREFORE, HE HELD THAT AVERAGE VALUE OF CLOSING STOCK OF POLISHED DIAMONDS AT RS 20,250/- PER CARAT AS ADOPTED BY THE ASSESSEE WAS WITHOUT ANY BASIS. HENCE, ASSESSING OFFICER APPLIED PROVISION OF SECTION 145( 3) REJECTED THE BOOKS OF AMOUNT AND VALUED CLOSING STOCK OF POLISHED DIAMONDS AT RS 25, 506/- PER CARAT RESULTING IN ADDITION OF RS 77,88,183/-. WHILE HOLDING SO, THE RELIANCE WAS PLACED BY ASSESSING OFFICER ON THE DECISION IN CASE OF SAMIT DIAMOND EXPORT (66 TTJ 74 ) (MUM) AND IN CASE OF VALLABHBHAI DHANJIBHAI (55 TTJ 424) AND IN CASE OF BRITISH PAIN TS (188 ITR 44). 9. THE ASSESSEE DISPUTED THE ABOVE ADDITIONS BEFORE THE CIT (A). IT WAS CONTENDED AND SUBMITTED THE DETAILS OF COMPARISON OF CLOSING STOCK OF POLISHED DIAMONDS SHOULD BE VALUED AT AVERAGE COST AND SUBMITTED THAT ASSESSING OFFICER HAD NO RIGHT TO CHANGE THE METHOD OF ACCOUNTING FOLLOWED BY IT CONSISTENTLY. IT WAS FURTHER SUBMITTED THAT IT HAD DISCLOSED THE GROSS PROFIT AT 9.97% FOR ASSESSMENT YEAR 2000-01, 10.34% FOR ASSESSMENT YEAR 2001-02, 10.10% FOR ASSESSMENT YEAR 2002-03, 9 .36% FOR ASSESSMENT YEAR 2003-04 AND 9.13% FOR ASSESSMENT YEAR 2004-05. IT WAS FURT HER SUBMITTED THAT ON THE BASIS CHANGED METHOD THE ADDITION OF RS 77 LAKHS OR SO WA S MADE TO THE VALUE OF CLOSING STOCK ON POLISHED DIAMONDS, THE GROSS PROFIT RATION WOULD RISE TO 25.67%, WHICH WOULD BE EXTREMELY HIGH AND NOT JUSTIFIABLE. IT WAS EXPLAINE D THAT CONSISTENTLY FOLLOWED NET REALISABLE METHOD AND EXPLAINING HOW CUT, COULOUR, CLARITY AND CARAT AFFECT THE VALUATION AND RATE ESTIMATION WHICH WAS INVOLVED IN THE VALUA TION. IT WAS POINTED OUT THAT IF YIELD FROM ROUGH DIAMOND WAS NOT ESTIMATED PROPERLY, THE FINISHED PRODUCTS DERIVED FROM THE SAME WOULD FETCH LOWER VALUE IN MARKET. IT WAS SUB MITTED THAT THE ASSESSEE WAS IMPORTER AND EXPORTER OF DIAMONDS. SINCE EVERY IMP ORT OF ROUGH DIAMOND AND EXPORT OF POLISHED DIAMOND WAS SUBJECT TO CLEARANCE OF CUSTOM AUTHORITIES IN INDIA, THERE WAS NO QUESTION OF UNDER VALUATION. THE ASSESSEE SUBMITTE D THAT DIAMONDS WERE KNOWN HOMOGENEOUS PRODUCT AND THEIR VALUATION BEING DEPEN DENT ON COLOUR CLARITY, CUT AND CARAT OF POLISHED DIAMOND ON STANDARD AVERAGE COST WAS INCORRECT METHOD. THE RELIANCE ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 5 WAS PLACED IN ITA 3833/B/97 IN WHICH ADDITION MADE ON ACCOUNT OF ENHANCING THE VALUE OF CLOSING STOCK ON ROUGH DIAMONDS AND VALUATION OF DIAMONDS ON THE GROUND OF NON- PRODUCTION OF EVIDENCE TO SHOW THAT DIAMONDS WERE V ALUED CORRECTLY, WAS DELETED BY THE TRIBUNAL. FURTHER RELIANCE WAS PLACED ON THE DECIS IONS IN CASE OF SANT RAM MANGAT RAM (275 ITR 312)(P&H), IN CASE OF UNITED COMMERCIAL BA NK (240 ITR 355)(SC) AND IN CASE OF KWALITY STEEL SUPPLIERS (271 ITR 40)(GUJ). ALTE RNATIVELY, IT WAS SUBMITTED THAT IF THE VALUE OF CLOSING STOCK IS ENHANCED, THE ASSESSEE WO ULD BE BENEFICIAL TO IT BEING TAXED AT LASER RATE DURING THE NEXT YEAR AND WOULD BE OPENIN G STOCK FOR THE NEXT YEAR AND HIGHER DEDUCTION U/S 80HHC WOULD BE ALLOWABLE. DETAIL OF IMPORTED ROUGH DIAMONDS IN EARLIER YEARS AND YIELD OF POLISHED DIAMONDS IN EARLIER YEA RS WERE ALSO FILED BEFORE THE CIT (A). DETAILED WRITTEN SUBMISSIONS SHOWING RESULT OF EARL IER YEAR WERE ALSO FILED. THE CIT (A) AFTER CONSIDERING THE SUBMISSION AND PERUSING THE M ATERIAL ON RECORD GAVE THIS FINDING IN PARAS 3.1 TO 3.7, WHICH ARE AS UNDER:- 3.1 SUBMISSIONS OF THE APPELLANT AND AVAILABLE FAC TS HAVE BEEN CAREFULLY CONSIDERED. THE AO HAS GIVEN A CATEGORICAL FINDING AT PARAGRAPH 6.8 OF THE ASSESSMENT ORDER THAT HE HAS REJECTED THE BOOKS OF ACCOUNTS BY APPLYING PROVISIONS OF SEC 145(3), ADOPTED VALUE OF POLISHED DIAMONDS AS ON 31.03.2003 AT RS 25,506/- PER CARAT AND ADDED RS 77,88,183/- TO T HE DECLARED INCOME OF THE APPELLANT. THUS, THE ADDITION OF RS 77,88,183/- HA S BEEN MADE ON ACCOUNT OF VALUATION OF CLOSING STOCK. IT IS UNDISPUTED FACT THAT THE AO HAS A DUTY TO EXAMINE THE CORRECTNESS OF METHOD OF VALUATION OF CLOSING S TOCK ADOPTED BY THE APPELLANT. BEFORE THE AO AND ALSO IN THIS PROCEEDINGS, THE APP ELLANT HAS SUBMITTED THAT IT HAD ADOPTED NET REALISABLE VALUE METHOD FOR VALUATION OF ITS CLOSING STOCK OF POLISHED DIAMONDS AND THIS METHOD HAS REMAINED UNCHANGED. TH E APPELLANT HAS ADMITTED ABSENCE OF MAINTENANCE OF STOCK REGISTER SHOWING CU T, COLOUR, CARAT AND CLARITY OF DIAMONDS ON THE GROUND OF NON-HOMOGENOUS NATURE OF THOSE. THIS CONTENTION HAS BEEN RIGHTLY REJECTED BY THE AO AS WITHOUT MAINTAIN ING SUCH DETAILS, IT IS NOT POSSIBLE FOR THE DIAMOND TRADER EVEN TO ISSUE ROUGH DIAMONDS TO KARIGARS FOR MANUFACTURING AND ASSORT AND ASSESS THE YIELD OF DI AMONDS RETURNED BY THEM. THUS, IT IS CLEAR THAT THE APPELLANT DID NOT HAVE C ORROBORATIVE EVIDENCES TO SUPPORT THE VALUE OF CLOSING STOCK OF POLISHED DIAMONDS. 3.2 APPELLANTS CONTENTION OF NET REALISABLE VALUE METHOD BEING SUPPORTED BY THE EXPORTS OF POLISHED DIAMONDS MADE IN THE FOLLOW ING PREVIOUS YEAR WHEREIN SALE VALUE OF POLISHED DIAMONDS CORRESPONDED TO THE VALU E OF THE CLOSING STOCK OF POLISHED DIAMONDS AS ON 31.3.2003 IS NOT AT ALL ACC EPTABLE FOR REASONS SIMILAR TO THOSE GIVEN EARLIER. ADDITIONALLY, APPELLANTS EFF ORT IN CO-RELATING THE CLOSING STOCK OF POLISHED DIAMONDS TO THE ROUGH DIAMONDS THAT WER E MANUFACTURED AND POLISHED ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 6 IN FY 2000-01 AND 2001-02 IS ALSO NOT ACCEPTABLE FO R SIMILAR REASONS OF ABSENCE OF DETAILS AND EVIDENCE OF STOCK DIAMONDS. IT IS NOT POSSIBLE TO ACCEPT THAT ROUGH DIAMONDS IMPORTED IN FY 2000-01 AND 2001-02 HAD REM AINED AFTER POLISHING FOR SUCH LONG TIME TO BE EXPORTED AFTER FY 2002-03. IN THE ABSENCE OF DETAILS AS TO THE CUT, COLOUR, CLARITY & CARAT OF LOT OF DIAMONDS IMPORTED, MANUFACTURED AND EXPORTED, IT IS NOT POSSIBLE TO HOLD THAT THE AVERA GE VALUE OF CLOSING STOCK OF POLISHED DIAMONDS WAS LOWER THAN THE AVERAGE VALUE OF DIAMONDS SOLD ONLY BECAUSE HIGH VALUE OF POLISHED DIAMONDS WERE SOLD D URING THE YEAR AND LOW VALUE DIAMONDS REMAINED IN CLOSING STOCK, WHICH IS ESSENT IALLY THE ARGUMENT OF THE APPELLANT. 3.3 AS REGARDS POSSIBILITY OF UNDERVALUATION BECAUSE OF EACH IMPORT OF ROUGH DIAMONDS AND EXPORT OF POLISHED DIAMOND PASSING THR OUGH THE CUSTOMS AUTHORITIES, A GOVERNMENT DEPARTMENT ASSESSING THE FAIR MARKET VALUE OF IMPORTS AND EXPORTS, IT HAS TO BE MENTIONED THAT THE PRESEN T ISSUE OF VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS HAS NO DIRECT AND IMMEDI ATE CONNECTION WITH CUSTOM DEPARTMENT. IF APPELLANTS CONTENTIONS ARE TAKEN I NTO LOGICAL CONCLUSION, THE LAW MAKERS WOULD NOT HAVE INCORPORATED SEC 92 TO 92F IN THE INCOME-TAX ACT, 1961 REGARDING INTERNATIONAL TRANSACTION HAVING REGARD T O ARMS LENGTH PRICE. HENCE, APPELLANTS REFERENCE TO FAIR MARKET VALUE OF ITS I MPORTS AND EXPORTS CONSIDERED BY CUSTOMS DEPARTMENT IS HELD AS OF NO RELEVANCE HERE. 3.4 THE CASE LAWS CITED BY THE APPELLANT ARE OF NO HELP AS THE NET REALISABLE VALUE METHOD OF VALUATION OF POLISHED DIAMONDS AS F OLLOWED BY THE APPELLANT IS BASED ON PERSONAL JUDGMENT OF THE PROPRIETOR IN THE CONTEXT OF ADMITTED NON- MAINTENANCE OF SUPPORTIVE EVIDENCES AND RECORDS AS STATED EARLIER. ARBITRARINESS AND ESTIMATION ARE, THUS, BUILT INTO SUCH METHOD. CONSISTENCY OF FOLLOWING SUCH METHOD WOULD NOT PREVENT THE AO FROM EXAMINING ITS CORRECTNESS. 3.5 IN VIEW OF THE AFORESAID DISCUSSION, IT IS HELD THAT THE AO WAS JUSTIFIED IN REJECTING THE CORRECTNESS OF BOOKS OF ACCOUNT AND T HE METHOD OF VALUATION OF CLOSING STOCK OF POLISHED DIAMOND AS ADOPTED BY THE APPELLANT FOR THE PURPOSE OF DETERMINATION OF TRUE PROFITS OF THE BUSINESS OF TH E APPELLANT FOR AY 2003-04. RELIANCE IS PLACED ON DCIT VS SAMIR DIAMONDS EXPORT S PVT LTD 66 TTJ (MUM) 74 AND ACIT VS VALLABHBHAI DHANJIBHAI 55 TTJ (AHD) 424 WHEREIN REJECTION OF BOOKS OF ACCOUNT BY APPLICATION OF PROVISIONS OF SEC 145 OF THE ACT WAS UPHELD. 3.6 THE NEXT ISSUE IS THE APPROPRIATENESS AND REASO NABLENESS OF THE METHOD ADOPTED BY THE AO FOR VALUATION OF THE CLOSING STOC K OF THE POLISHED DIAMONDS. THE AO HAS DETERMINED THE AVERAGE VALUE OF COST OF POLISHED DIAMONDS AT RS 25,506/- PER CARAT AS AGAINST RS 20,250/- PER CARAT OF CLOSING STOCK OF POLISHED DIAMONDS, ON THE BASIS OF INFORMATION GIVEN BY THE APPELLANT. WHEN THE METHOD OF VALUATION OF THE APPELLANT IS FOUND NOT CORRECT AND RELIABLE, THE DECISION IN THE CASE OF ACIT VS VALLABHAI DHANJIBHAI 55 TTJ (AHD) 4 24 CLEARLY SUPPORT ADOPTION OF ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 7 AVERAGE METHOD OF VALUATION AS ADOPTED BY THE AO. THE APPELLANT HAS REFERRED TO THE CASE OF DHARAMCHAND PARASCHAND EXPORTS VS ACIT AGAINST ADOPTION OF AVERAGE RATE. IN THE ABSENCE OF COPY OF THE ORDER, THE DEC ISION IN THE SAID CASE CANNOT BE APPRECIATED, MUCH LESS APPLIED TO THE FACTS OF THE APPELLANT. IN VIEW OF THIS, IT IS HELD THAT AVERAGE METHOD OF VALUATION OF CLOSING ST OCK OF POLISHED DIAMONDS AS DONE BY THE AO IS AN APPROPRIATE METHOD IN THE FACT S AND CIRCUMSTANCES OF THIS CASE. 3.7 IT IS, HOWEVER, FOUND THAT THE AVERAGE METHOD O F VALUATION GIVES VERY UNREASONABLE RESULT AS THE ADDITION OF RS 77,88,183 /- ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK OF POLISHED DIAMOND S AS IT RAISES THE GROSS PROFIT OF THE APPELLANT TO RS 1,24,64,619/- AND THE RATE OF G ROSS PROFIT TO 24.35% WHICH HIS MORE THAN TWICE THE GROSS PROFIT RATE DISCLOSED BY THE APPELLANT FOR EARLIER ASSESSMENT YEARS. IT HAS BEEN JUDICIALLY SETTLED T HAT IN BEST JUDGMENT ASSESSMENT ASSESSMENTS ARBITRARY ADDITIONS MUST BE AVOIDED. I N THE PRESENT CASE, THE AVERAGE METHOD OF VALUATION OF THE CLOSING STOCK OF POLISHED DIAMOND AS ADOPTED BY THE AO IS AS PER HIS BEST JUDGMENT AND IS ALSO F OUND TO BE APPROPRIATE THOUGH ITS OUTCOME IS FOUND UNREASONABLE. HENCE, THE SAID ADDITION NEEDS TO BE REDUCED TO A FAIR AND REASONABLE LEVEL. IT IS FOUND THAT A PPELLANTS PAST RECORD CAN BE A BETTER GUIDE WHEN COMPARABLE CASES ARE NOT AVAILABL E. IN THE CASE OF AJAY GOYAL VS ITO (2006) 99 TTJ (JD) 164 IT IS EVEN HELD THAT FOR THE PURPOSE OF ESTIMATION OF TRADING RESULT AFTER REJECTION OF BOOKS OF ACCOUNT THE PAST HISTORY OF THE ASSESSEE TAKES PREFERENCE OVER A COMPARABLE CASE. IT IS SEE N THAT APPELLANTS SALES FOR AY 2000-01 COMPARED WELL WITH THOSE FOR AY 2003-04 WHI LE THERE WAS DECLINE OF ABOUT 1% IN THE RATE OF GROSS PROFIT. KEEPING IN VI EW, IT IS HELD THAT GROSS PROFIT RATE OF 9.36% FOR AY 2003-04 CAN BE BROUGHT TO THE L EVEL OF 10.10%, AS DISCLOSED FOR AY 2001-02, WHICH WILL TRANSLATE TO GROSS PROFI T OF RS 50,48,109/- AS AGAINST ADMITTED GROSS PROFIT OF RS 46,76,436/-, MARKING AN INCREASE OF RS 3,71,673/-. THE AO IS DIRECTED TO SUBSTITUTE RS 3,71,673/- IN P LACE OF RS 77,88,183/- AS ADDED IN THE IMPUGNED ORDER. GROUND NO.2 IS ACCORDINGLY, PARTLY ALLOWED. 10. NOW, BOTH ARE IN APPEAL HERE BEFORE THE TRIBUNA L. THE LEARNED DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER TO THE EXTENT THAT THE ADDITIONS ARE DELETED BY THE CIT (A) AND PLACED RELIANCE ON THE ORDER OF CIT (A) TO THE EXTENT THAT THE ADDITIONS ARE SUSTAINED. ATTEN TION OF THE BENCH WAS DRAWN ON THE FINDING OF THE CIT (A) AT PAGE 10 OF HIS ORDER. TH E COUNSEL OF THE ASSESSEE, ON THE OTHER HAND, REITERATED THE CONTENTION RAISED BEFORE THE C IT (A). IT WAS EXPLAINED THAT THE ASSESSEE IS MAINTAINING CONSISTENT METHOD OF VALUAT ION ON THE BASIS OF NET REALISABLE VALUE. ASSESSEE IS 100% EXPORTER AND ELIGIBLE FOR D EDUCTION U/S 80HHC. ATTENTION OF THE ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 8 BENCH WAS DRAWN ON THE ORDER OF THE TRIBUNAL IN CAS E OF M/S HARSHIT EXPORTS, WHICH WAS DECIDED IN ITA 7003/MUM/2006 DATED 26.6.2009, COPY OF WHICH IS PLACED ON RECORD. IT WAS SUBMITTED THAT ON SIMILAR FACT, THE ASSESSING O FFICER HAS MADE AN ADDITION BY REJECTING THE VALUATION METHOD ADOPTED BY THE ASSES SEE. THE CIT (A) AFTER CONSIDERING THE FACTS IN DETAIL ALLOWED THE APPEAL OF THE ASSES SEE AND ON SECOND APPEAL BY DEPARTMENT THE TRIBUNAL HAS CONFIRMED THE ORDER OF CIT (A) BY DISMISSING THE APPEAL OF THE DEPARTMENT. ATTENTION OF THE BENCH WAS DRAWN O N PARA 5.2 TO 5.4 AT PAGES 5 TO 7 OF THE ORDER OF THE TRIBUNAL. IT WAS FURTHER SUBMITTE D THAT THE ASSESSMENT OF AY 2006-07 WHICH HAS BEEN COMPLETED U/S 143(3) IN CASE OF THE ASSESSEE AND HAS ACCEPTED THE METHOD OF VALUATION ON THE BASIS OF NET REALISABLE VALUE, THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN REJECTING THE CONSISTENT METHO D OF THE VALUATION AND CIT (A) WAS ALSO NOT JUSTIFIED IN SUSTAINING PART ADDITION. ATTENTI ON OF THE BENCH WAS ALSO DRAWN ON COMPARATIVE CHART, PLACED ON RECORD AT PAGE 4 OF TH E COMPILATION. FURTHER, RELIANCE WAS PLACED ON THE WRITTEN SUBMISSIONS FILED BEFORE CIT (A). COPY OF THE SAME IS PLACED ON RECORD. COPY OF ASSESSMENT ORDER FOR ASSESSMENT YE AR 2006-07 WAS ALSO FILED. 11. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THEM CAREFULLY. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD WE FOUND THAT THERE IS NO SUBSTANCE IN THE GROUND OF APPEAL OF THE DEPARTMENT. HOWEVER , THE ASSESSEE DESERVES TO SUCCEED IN ITS GROUND. WE NOTED THAT THE ASSESSEE IS MAINT AINING CONSISTENT METHOD OF VALUATION OF ITS STOCK ON THE BASIS OF NET REALISABLE VALUE. THE SAME IS ACCEPTED IN THE EARLIER YEAR AS WELL AS IN SUBSEQUENT YEAR. THE COPY OF THE ASS ESSMENT ORDER FOR ASSESSMENT YEAR 2006-07 PASSED U/S 143(3) IS PLACED ON RECORD. IT IS SEEN THAT THE CONSISTENT METHOD OF VALUATION ON THE BASIS OF NET REALISABLE VALUE HAS BEEN ACCEPTED BY THE ASSESSING OFFICER. IN THE YEAR UNDER CONSIDERATION THE GP RATE SHOWN B Y THE ASSESSEE IS SLIGHTLY LOWER BY ABOUT 0.80%, SMALL VARIATION IN SUCH TYPE OF BUSINE SS IS ALWAYS THERE, AN IN PAST ALSO IN SOME OF THE YEAR THE GP RATE SHOWN BY ASSESSEE VARI ES. IT IS SEEN THAT IN SOME YEAR THE GP RATE SHOWN BY ASSESSEE WAS 9.97% IN SOME YEAR IT WAS 10.34% OR 10.10%. THEREFORE, IT IS SEEN THAT SMALL VARIATION IN GP IN SUCH TYPE OF BUSINESS IS ALWAYS THERE. THEREFORE, ON THE BASIS OF SLIGHTLY LOWER GP RATE T HE REJECTION OF BOOKS OF ACCOUNTS, IN OUR ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 9 CONSIDERED OPINION WAS NOT JUSTIFIED AT ALL. ON SA ME SET OF FACTS, THE BOOK RESULT HAS BEEN ACCEPTED BY THE DEPARTMENT ITSELF. THEREFORE, NOT ACCEPTING THE BOOK RESULT, IN THE YEAR UNDER CONSIDERATION THAT TOO WITHOUT ANY MAJOR DEFECT IN THE BOOKS OF ACCOUNT WAS NOT JUSTIFIED. THEREFORE, IN VIEW OF THESE FACTS A ND CIRCUMSTANCES, WE HOLD THAT THE REJECTION OF BOOKS OF ACCOUNTS WAS NOT JUSTIFIED BY THE ASSESSING OFFICER. THE CIT (A) WAS ALSO NOT JUSTIFIED IN CONFIRMING THE REJECTION OF BOOKS OF ACCOUNT. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO ACCEPT THE BOOK RES ULT SHOWN BY ASSESSEE. HENCE, GROUND OF THE ASSESSEE IS ALLOWED AND THE GROUNDS OF DEPAR TMENT ARE DISMISSED. 12. THERE IS NO OTHER GROUND OF APPEAL FILED BY THE ASSESSEE. 13. GROUND 1 & 2 IN APPEAL OF THE DEPARTMENT IS AGA INST DIRECTING THE ASSESSING OFFICER TO INCLUDE THE EXCHANGE RATE GAIN DIFFERENC E OF RS 1,12,778/-. 14. THE ASSESSING OFFICER REDUCED THE AMOUNT PERTAI NING TO RATE GAIN DIFFERENCE RELATED TO EARLIER YEAR WHILE CALCULATING DEDUCTION U/S 80HHC. THE CIT (A) ALLOWED THE ISSUE IN FAVOUR OF THE ASSESSEE. 15. NOW, THIS ISSUE HAS BEEN DECIDED BY THE SPECIAL BENCH IN CASE OF PRAKASH L SHAH (115 ITD 167) WHEREBY IT HAS BEEN HELD THAT THE RAT E DIFFERENCE IN EXCHANGE GAIN OR LOSS WILL BE TAKEN INTO CONSIDERATION IN THE YEAR OF EXP ORT. THEREFORE, IN THE YEAR UNDER CONSIDERATION THIS ISSUE IS DECIDED IN FAVOUR OF TH E DEPARTMENT. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO TAKE INTO CONSIDERATION THE EXCHANGE RATE GAIN DIFFERENCE IN THE YEAR OF EXPORT. WE ORDER ACCORDINGLY. ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 10 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE AS WE LL AS OF THE DEPARTMENT ARE ALLOWED IN PART. ORDER PRONOUNCED ON 30TH DAY OF NOVEMBER 2009. SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER SD/- (R.K. GUPTA) JUDICIAL MEMBER MUMBAI, DATE: 30TH NOVEMBER 2009 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) XVI, MUMBAI. 4) THE CIT-CITY- XVI, MUMBAI. 5) THE D.R. K BENCH, ITAT, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR CHAVAN* I.T.A.T., MUMBAI ITA 1592/M/2007 ITA 1737/M/2007 VAIBHAV GEMS 11 SR.N. EPISODE OF AN ORDER DATE INITIALS CONCERNED 1 DRAFT DICTATED ON 18.11.09 SR.PS 2 DRAFT PLACED BEFORE AUTHOR 25.11.09 SR.PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.PS SR.PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS 7 FILE SENT TO THE BENCH CLERK SR.PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER