M/s. Darrk Diamonds, Surat V. The Income tax Officer,Ward-9(1), Surat

ITA 168/AHD/2010

• Counselvise Citation: 16820514 RSA 2010
• Duration Of Justice: 2 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 12-01-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 19-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J P SHAH
• Section: 234B

Judgement Text

-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI D K TYAGI - JM AND SHRI A MOHAN ALANKAMONY - AM ITA NO.168/AHD/2010 (ASSESSMENT YEAR:-2006-07) M/S DARRK DIAMONDS, 308, NAVRATNA CHAMBERS, SARDAR CHOWK, VARACHHA ROAD, SURAT V/S THE INCOME-TAX OFFICER, WARD-9(1), SURAT PAN: AACFD 5315 M [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI J P SHAH, AR REVENUE BY:- SHRI VINOD TANWANI, SR. DR DATE OF HEARING:- 13-01-2012 DATE OF PRONOUNCEMENT:- 25-01-2012 O R D E R PER D K TYAGI (JM) :- THIS IS ASSESSEES APPEAL AGAINST THE ORDER DATED 21-10-2009 PASSED BY THE LEARNED CIT(A) -V, SURAT FOR ASSESSMENT YEAR 2006-07. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS UNDER:- (I) REJECTION OF BOOK RESULT:- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFI RMING REJECTION OF THE BOOK RESULT WHEN THE APPELLANT HAD MAINTAINED COMPLETE QUANTITATIVE DETAILS IN RESPECT OF DIAMOND S DEALT WITH BY IT. 2 (2) THE APPELLANT SUBMITS THAT THOUGH COPY OF THE J UDGEMENT OF AHMEDABAD TRIBUNAL IN CASE OF B. SURESH KUMAR WAS F URNISHED THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FA ILED TO TAKE THAT INTO CONSIDERATION NOR DEALT WITH IT. (3) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE BOOK RESULT OUGHT TO HAVE BEEN ACCEPTED. (II) ADDITION TO VALUATION OF CLOSING STOCK OF ROUG H DIAMONDS :- (1) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN SUSTAINING ADDITION OF RS.52,32,680/- TO THE VALUAT ION OF CLOSING STOCK OF ROUGH DIAMONDS WHEN THE APPELLANT HAD VALU ED THE CLOSING STOCK ACCORDING TO THE ACCEPTED ACCOUNTING PRINCIPLES AND AS PER THE METHOD OF VALUATION CONSISTENTLY ADO PTED AND ACCEPTED BY THE DEPARTMENT MADE IN THE PAST. (2) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) FAILED TO APPRECIATE THAT THE HUGE ADDITION MADE GAVE A DISTO RTED VERSION OF THE INCOME EARNED BY THE APPELLANT AND, THEREFOR E, THE ADDITION OUGHT TO HAVE BEEN DELETED. (3) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) HAS ERRED IN SUSTAINING ADDITION ON THE GROUND OF APPELLANT N OT HAVING MAINTAINED QUALITATIVE ACCOUNTS OF DIAMONDS WHEN AS HELD BY THE INCOME-TAX APPELLATE TRIBUNAL, AHMEDABAD, IN CA SE OF B. SURESH KUMAR & CO. THAT IT WAS NOT POSSIBLE TO MAIN TAIN QUALITATIVE DETAILS OF DIAMONDS. (4) THE APPELLANT FURTHER SUBMITS THAT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS NOT BEEN ABLE TO APPRECIAT E THE DIFFERENCE BETWEEN THE VALUATION OF ROUGH DIAMONDS AND VALUATION OF ROUGH REJECTED DIAMONDS. (5) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ADDITION IS REQUIRED TO BE DELETED. (III) MISCELLANEOUS:- (1) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) OUGHT TO HAVE DELETED INTEREST CHARGED U/S. 234A OF THE ACT. 3 (2) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) OUGHT TO HAVE DELETED INTEREST CHARGED U/S. 234B OF THE ACT. (3) THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR VAR Y ANY OF THE GROUNDS OF APPEAL. 2 THE ASSESSEE ALSO RAISED THE FOLLOWING ADDITIONAL GROUND; IN CASE THE HONBLE TRIBUNAL UPHOLDS THE REVALUAT ION OF THE CLOSING STOCK OF ROUGH DIAMONDS THEN THE OPENING STOCK OF R OUGH DIAMONDS ALSO MUST BE ORDERED TO BE VALUED ON IDENTICAL BASI S AS OF THE VALUATION OF THE CLOSING STOCK. BUT THE SAME WAS NOT PRESSED AT THE TIME OF HEARING . 3 THE FACTS OF THE CASE AS NOTED BY THE LEARNED CIT (A) IN HIS ORDER ARE AS UNDER:- 4. THE FACTS OF THE CASE ARE THAT THE ASSESSEE CAR RIES ON THE BUSINESS OF IMPORT, MANUFACTURING AND EXPORT OF DIAMONDS. IT FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 DECLARING TO TAL INCOME OF RS.3,30,528/-. DURING THE COURSE OF ASSESSMENT PROC EEDINGS, THE ASSESSING OFFICER OBSERVED DEFECTS IN THE VALUATION OF CLOSING STOCK OF ROUGH DIAMONDS AND, THEREFORE, ASKED THE ASSESSEE T O SUBMIT DETAILS OF LOT WISE MOVEMENT OF GOODS FROM OPENING STOCK, PURC HASES, SALES AND CLOSING STOCK. THE ASSESSEE WAS ALSO, ASKED TO FURN ISH COMPLETE DETAILS OF THE OPENING AND THE CLOSING STOCK IN TERMS OF QU ALITY AND QUANTITY OF DIAMONDS AND THE BASIS OF THEIR VALUATION. THE ASSE SSEE FURNISHED A CERTIFICATE IN RESPECT OF OPENING AND CLOSING STOCK VALUATION WHICH ONLY MENTIONED THE GROSS WEIGHT IN CARATS AND TOTAL VALUE IN RESPECT OF ROUGH DIAMONDS. THE ASSESSING OFFICER OBSERVED THAT FROM THE BOOKS OF ACCOUNTS PRODUCED FOR VERIFICATION, IT WAS NOT P OSSIBLE TO IDENTIFY LOT WISE GOODS MOVEMENT AS TO WHICH PARTICULAR DIAM OND WAS PURCHASED OUT OF WHICH LOT OF ROUGH DIAMOND AND SOL D TO WHOM AND WHICH PART REMAINED IN THE CLOSING STOCK. THE ASSES SING OFFICER OBSERVED FROM THE DETAILS PRODUCED THAT THE ASSESSE E VALUED ITS CLOSING STOCK OF DIAMOND AT RS.479.24 PER CARAT. AS THE- RA TE OF OPENING STOCK AS WELL AS PURCHASES MADE DURING THE YEAR WAS VERY HIGH, HE OBSERVED THAT THE RATE AT WHICH THE CLOSING STOCK HAS BEEN V ALUED IS NOT JUSTIFIED. 4 ACCORDINGLY, A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE WHICH FINDS PLACE IN PAGE 3 AND 4 OF THE ASSESSMENT ORDER . THE SAME IS REPRODUCED FOR SAKE OF CLARITY. 'PLEASE REFER TO ASSESSMENT PROCEEDINGS GOING IN YO UR CASE AS WELL AS VARIOUS SUBMISSIONS MADE BY YOU. VARIOUS IS SUES HAVE BEEN DISCUSSED ON DIFFERENT DATES OF HEARINGS. YOUR LD. COUNSEL HAS APPEARED WITH BOOKS OF ACCOUNTS AND BILLS OF SA FES AND PURCHASES AS WELL AS DETAILS OF VALUATION OF CLOSIN G STOCK HAVE BEEN FURNISHED. IT HAS BEEN OBSERVED THAT QUALITY W ISE DETAILS OF DIAMONDS HAVE NOT BEEN MAINTAINED BY YOU. SUCH DETA ILS OF QUALITY OF DIAMOND HAVE NOT BEEN MAINTAINED EITHER FOR OR FOR OPENING/CLOSING STOCK. YOU HAVE SHOWN CLOSING STOCK OF ROUGH DIAMONDS OF 2 0802.21 CARATS WHICH IS VALUED BY YOU AT RS.99,69,305/-. THUS PER CARAT RATE OF CLOSING STOCK OF ROUGH DIAMOND COMES TO RS.479.24/- . YOU WERE REQUIRED TO SHOW QUALITY WISE DETAILS AND BASIS OF VALUATION OF CLOSING STOCK. HOWEVER, YOU HAVE FAILED TO SUBMIT ANY SUCH DETAILS. NOTHING IN THIS REGARD COULD BE FOUND FROM YOUR BOOKS OF ACCOU NT. AN ANALYSIS OF MOVEMENT OF DIAMONDS WAS PREPARED ON THE BASIS OF O PENING STOCK DETAILS, PURCHASE BILLS, SALE BILLS AND CLOSING STO CK DETAILS PROVIDED BY YOU. THE SUMMARY IS AS PER TABLE BELOW: SR. NO. OPENING STOCK, PURCHASES & CLOSING STOCK ISSUED FOR MANUFACTURING DATE CRT RATE VALUE DATE CRT 1. OPENING STOCK 19908,19 551.03 10970186 2. 05.04 1702.29 3. 05.05 286.9 4. 04.06 286.25 5. 05.07 301.410 6. 11.07 2091.49 740.15 1548020 5 7. 04.08 369.82 8. 05.09 377.33 9. 05.10 373.19 10. 10.12 374.14 11. 20.12 2210.22 2307.61 4638813 12. 21.12 2021.78 926.86 1873923 13. 03.01 372.6 14. 04.02 507.63 15. 04.03 508.19- 16. CLOSING STOCK 20802.21 479.24 9969305 IT CAN BE SEEN FROM THE ABOVE DETAILS THAT YOUR OPE NING STOCK WAS OF 19903.19 CARATS VALUED AT RS.551,03 PER CARAT. YOUR CHASE DURING THE YEAR WERE @ RS.740.15, RS.2,307.61 AND RS.926.86 PE R CARAT. FURTHER, FIRST FOUR ENTRIES OF ISSUE OF ROUGH FOR MANUFACTUR ING SHOWN AT SR. NO. 2 TO 5 OF THE TABLE CAN BE OUT OF THE OPENING STOCK O NLY WHICH WAS VALUED BY YOU @ RS.551.03 PER-CARAT. AS AGAINST THE ABOVE FACT YOU HAVE SHOWN YOUR CLOSI NG STOCK OF ROUGH DIAMOND AT RS.479.24 PER CARAT WHICH IS NOT JUSTIFI ED BY ANY MEANS. PLEASE EXPLAIN THE BASIS OF ADOPTING SUCH RATE AND VALUE ALONG WITH DOCUMENTARY EVIDENCES. IN CASE OF FAILURE TO JUSTIF Y YOUR CLAIM WITH EVIDENCE, PLEASE SHOW CAUSE AS TO WHY THE RATE SHOW ING BY YOU MAY NOT BE REJECTED AND VALUE OF CLOSING STOCK BE WORKE D OUT ON THE BASIS OF THE FIGURES OF ISSUE AND PURCHASE GIVEN ABOVE, B ASED ON ACCEPTABLE AND SCIENTIFIC METHOD. IN ADDITION TO THE ABOVE YOU ARE ALSO REQUESTED TO FURNISH PHOTOCOPIES OF ALL THE SALE AND PURCHASE BILLS FOR ROUGH AS WEL L AS POLISHED 6 DIAMONDS IN CHRONOLOGICAL ORDER FOR THE F.Y. 2003-0 4 AND 2004-05 AND COMPLETE BIFURCATION WITH RATE AND QUANTITY OF OPENING STOCK AS ON 01.04.2003 AND 01.04.2004'. 5. IN REPLY TO THE SHOW CAUSE NOTICE I.E. 30TH DECE MBER, 2008, THE ASSESSEE SUBMITTED THAT THEY HAVE ADOPTED THE PRACT ICE OF VALUATION OF CLOSING STOCK AT AVERAGE OF THE PURCHASE PRICES WIT H VALUE OF OPENING STOCK AND ADOPTED AS PER PRESCRIBED STANDARD OF SYS TEM. IT WAS ARGUED THAT SINCE THE METHOD HAS BEEN CONSISTENTLY ADOPTED AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT NO INTERFERENCE IS CALLED FOR. THE ASSESSEE AGAIN SUBMITTED THAT ONLY ROUGH AND POLISH ED DIAMONDS HAVE BEEN CONSIDERED AND REJECTED DIAMONDS HAVE BEEN IGN ORED. ACCORDING TO THE ASSESSEE, FROM THE LOTS PURCHASED, THERE ARE CERTAIN DIAMONDS WHICH ARE REJECTED HAVING NIL OR MEAGER VALUE AFFEC TING THE VALUE OF THE CLOSING STOCK. THE RELEVANT EXTRACT OF THE SUBM ISSION IS REPRODUCED FOR SAKE OF CLARITY. 'IN THIS REGARD WE HAVE TO STATE THAT OUR ASSESSEE HAS ADOPTED THE SYSTEM OF VALUING STOCK AT THE AVERAGE RATE AND ACC ORDINGLY SAME HAVE BEEN VALUED FROM THE INCEPTION OF THE BUSINESS AND STOCK STATEMENT IS ALL READY BEEN SUBMITTED. IT IS FURTHER SUBMITTED T HAT YOUR GOODSELF HAVE CONSIDERED ONLY ROUGH AND POLISHED DIAMOND BUT NOT CONSIDERED THE REJECTION GOODS. FROM THE LOT PURCHASE THERE AR E CERTAIN QUALITY WHICH IS REJECTED GOODS WHICH HAS EITHER NIL VALUE OR VERY' MIGRE VALUE WHICH EFFECT THE VALUE OF OUR STOCK-(TH OUGH THE QUANTITY IS INCLUSIVE IN CLOSING STOCK). IN YOUR LETTER YOUR GOODSELF HAVE GIVEN THE WORKING IN WHICH ENTIRE STOCK IS VALUED AT AVERAGE RATE OF PURCHASES DURING THE YEAR. BUT OLD STOCK CANNOT BE VALUED AT THAT COST BECAUSE THE STO CK IS SUCH THAT IT IS NOT IN DEMAND IN MARKET AND HENCE IT IS LYING SINCE LONG. IT IS FURTHER SUBMITTED THAT YOUR GOODSELF HAVE PRO POSED TO ENHANCE THE VALUE OF CLOSING STOCK BY ADOPTING THE AVERAGE COST OF PURCHASE DURING THE YEAR AND THAT IS ALSO YOU HAVE INTERFERED ONLY WITH THE CLOSING STOCK WHILE ADDING TO ITS VALUE BUT IN FACTS SAME P RINCIPAL IS APPLICABLE TO BOTH TO THE OPENING STOCK AND TO THE CLOSING STO CK AND RECAST THE VALUE ON THE BASIS OF SUCH ADJUSTMENT OF OPENING AN D CLOSING STOCK. IN YOUR CASE AS WE ARE FOLLOWING THE ACCOUNTING SYS TEM CONSISTENTLY MORE RADICAL ISSUE IS THAT THE CLOSING STOCK DOES N OT ADMIT OF INTERFERENCE IN THE MANNER IT HAS BEEN MADE. THE ME THOD OF VALUATION 7 OF STOCK IS COST OR MARKET PRICE WHICH EVER IS LESS AND WE HAVE ADOPTED THE COST METHOD BY ARRIVING THE AVERAGE COST THROUG HOUT THE INCEPTION OF BUSINESS. HENCE IN OUR CASE PROPOSITIONS THAT AN ADDITION OR ARBITRARY AT AVERAGE COST OF PURCHASES DURING THE Y EAR HAS TO BE MADE TO THE STOCK HAS NO PLACE.' THE GRANTED PRINCIPAL I S THAT AS A HYPOTHESIS THAT SUCH ADDITION IS PERMISSIBLE THE SAME ADDITION BY ANALOGY SHALL AS WELL AS THE OPENING STOCK OTHERWISE THERE IS DISTOR TION OF THE PROFIT BY INFLATION RELIANCE IS PLACE ON THE DECISION OF THE PRIVY COUNSEL IN CIT VS. AHMEDABAD NEW COTTON MILL CO. LTD. AIR 1930 PC 56 WHICH SAYS THAT ADDITION TO CLOSING STOCK VALUE WITHOUT A DJUSTMENT TO OPENING STOCK ON THE SAME IS ABSURD. HENCE IT WILL NOT BE JUSTIFICATION IF AN ADDITION I S MADE ON THE BASIS OF REVALUING OF CLOSING STOCK ON ACCOUNT OF AVERAGE CO ST OF PURCHASE DURING THE YEAR. HENCE WE REQUEST YOUR HONOUR NOT T O MAKE ANY ADDITION ON THIS GROUND.' 6. ON CAREFUL CONSIDERATION OF ASSESSEE'S REPLY TO THE SHOW CAUSE NOTICE, THE ASSESSING OFFICER DID NOT FIND ANY MERI T IN THE CONTENTION OF THE ASSESSEE. REGARDING THE METHOD OF VALUATION OF STOCK, THE ASSESSING OFFICER DREW ATTENTION TO THE TAX AUDIT REPORT WHER EIN IT IS CLEARLY MENTIONED THAT THE METHOD OF VALUATION OF CLOSING S TOCK IS AT COST. THEREFORE,, THE ASSESSING OFFICER HELD THAT THE STO CK WAS TO BE VALUED ACCORDING TO THE PURCHASE BILLS. ACCORDING TO THE A SSESSING OFFICER, DIAMONDS BEING PRECIOUS ITEMS, THE ASSESSEE IS REQU IRED TO KEEP STOCK MOVEMENT REGISTER, LOT TO LOT DETAILS, ISSUE AND DI SPATCH REGISTER AND ACCORDINGLY HAS TO PREPARE DETAILED INVENTORY OF CL OSING STOCK. ACCORDING TO HIM ASSESSEE FAILED TO FILE ANY DOCUME NTARY EVIDENCES REGARDING REJECTED GOODS AND QUALITY WISE DETAILS O F GOODS THAT REMAINED IN CLOSING STOCK. FROM THE SALE AND PURCHA SE BILLS SUBMITTED THE ASSESSING OFFICER CARRIED OUT AN ANALYSIS TO AR RIVE AT TTIE VALUE OF CLOSING STOCK. THE SAME IS REPRODUCED AS UNDER:- 3.6 FROM THE SALE AND PURCHASE BILLS SUBMITTED BY T HE ASSESSEE FOR THE F.Y. 2003-04 AND 2004-05, AN ANALY SIS WAS CARRIED OUT. THE ASSESSEE HAS MADE FOLLOWING PURCHA SES OF ROUGH DIAMOND: 8 S.NO. DATE QUANTITY PRICE PER AT IN RS. 1. 4-FEB-05 2094.26 1764 2A 6-SEP-04 1005.51 374 3 27-AUG-04 1067.66 2.226 4 20-JAN-04 94.71 1493 5 20-JAN-04 2017.22 1532 6 17-DEC-03 912.71 2277 7 17-DEC-03 163.66 2365 3.7 ON PERUSAL OF THE ABOVE TABLE IT IS NOTICED THA T AVERAGE PURCHASE PRICE OF ROUGH DIAMOND FOR THE F.Y. 2003-04 AS WELL AS FOR F.Y. 2004- 05 WAS VERY HIGH. THIS CLEARLY INDICATES THAT THE A SSESSEE HAS NOT VALUED THE DOSING STOCK AS DESCRIED IN THE AUDIT RE PORT AT COST PRICE. ON FURTHER PERUSAL OF THE ABOVE ANALYSIS IT WAS NOTICE THAT ONLY ONE PURCHASE, THAT TOO OF 1005.51 CARATS ONLY WAS PURCH ASED AT LOW RATE BEING RS.374/- PER CARAT. THE ASSESSEE HAS NOT SUBM ITTED ANY LOT WISE DETAILS OR MOVEMENT REGISTER IN RESPECT OF EVERY PA RT OF PURCHASE. EVEN IF IT PRESUME THAT LOWER RATE GOODS WERE INCLUDED I N THE CLOSING STOCK, THE VALUATION OF CLOSING STOCK WAS NOT CORRECT SINC E IT ;IS OF VERY LESS QUANTITY AND THERE IS NO PROOF WHETHER THIS WAS INC LUDED IN THE CLOSING STOCK. 3.8 IN VIEW OF THE ABOVE DISCUSSION AND THE ANALYSI S MADE, THE VALUE OF THE CLOSING STOCK HAS BEEN WORKED OUT ON T HE BASIS OF ISSUE AND RECEIPT DETAILS OF ROUGH DIAMONDS GIVEN BY THE ASSESSEE. 9 OPENING ISSUED REMAINING RATE VALUE OF REMAINING STOCK 19908.19 2605.56 17302.63 551.03 9534268.21 2091.49 1494.48 597.01 740.15 441876.95 2010.22 2010.22 2307.61 4638803.77 2021.78 1388.42 633.36 926.86 587036.05 26033.68 5488.46 20543.22 740.00 15201984.98 7. HAVING ARRIVED AT THE VALUE OF CLOSING STOCK AT RS.1,52,01,984/- AS AGAINST. RS.99,69,305/- SHOWN IN THE BOOKS, THE DIFFERENCE OF RS.52,32,680/- HAS BEEN ADDED TO THE INCOME OF THE ASSESSEE. 8. THE A.R. OF THE APPELLANT BEING AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER MADE THE DETAILED SUBMISSION ON 9 TH MAY, 2009, THE RELEVANT EXTRACT OF WHICH IS REPRODUCED AS UNDER:- '(I) ROUGH DIAMONDS ARE OBTAINED AND ISSUED TO THE CONTRACTORS FOR MANUFACTURE OF POLISHED DIAMONDS BUT THESE ROUGH DI AMONDS ALSO INCLUDE DIAMONDS FROM WHICH POLISHED DIAMONDS ARE N OT MAKEABLE AND ARE NOT ISSUED AND THEY REMAIN IN STOCK AND ARE REFERRED TO AS REJECTED ROUGH DIAMONDS. SINCE THEIR ESSENTIAL CHAR ACTER IS OF ROUGH DIAMONDS THEY ARE ALWAYS GROUPED WITH ROUGH DIAMOND S THOUGH IN VIEW OF THE FACT THAT THEY CANNOT BE PROCESSED, THE IR VALUE IS ABSOLUTELY NEGLIGIBLE. (II) THEREFORE, WHEN THE ROUGH DIAMONDS AND REJECTE D ROUGH DIAMONDS ARE SHOWN TOGETHER, ROUGH DIAMONDS HAVING VERY LOW VALUE, THE OVERALL VALUATION OF ALL ROUGH DIAMOND GOES DOW N CONSIDERABLY. THESE ROUGH DIAMONDS ARE EVENTUALLY SOLD WHENEVER A BUYER COMES BUT THEY HARDLY FETCH ANY VALUE. THE ASSESSEE IS HA VING SIGNIFICANT QUANTITY OF REJECTED DIAMONDS IN TOTAL ROUGH DIAMON DS SINCE LONG AND WHILE SOME REJECTED DIAMONDS WERE ADDED IN A.Y. 200 5-06, MOST OF THEM WERE SOLD IN A.Y. 2007-08. 10 (III FURTHER, EVERY YEAR IN ANNEXURE II OF AUDIT RE PORT U/S 44AB BEING ITEM NO. 28 OF FORM 3CD, THE APPELLANT HAS BE EN SHOWING ROUGH DIAMONDS INCLUDING REJECTION DIAMONDS WHICH HAS BEE N ACCEPTED BY DEPARTMENT. (IV) THE DETAILED STATEMENT OF SUCH REJECTED ROUGH DIAMONDS IS ENCLOSED ALONG WITH SALE BILL (PAGE 1-5). THESE STA TEMENTS SHOW THE PARTICULARS AS UNDER:- REJECTED ROUGH DIAMONDS CTS. OPENING STOCK 31.03.2004 12,431.34 FURTHER ADDITION DURING 31.03.2005 2,110.00 REJECTED ROUGH DIAMONDS ON 31.03.2005 14,541.34 FURTHER ADDITION DURING 31.03.2006 2,500.00 REJECTED ROUGH DIAMONDS ON 31.03.2006 17,041.34 SOLD DURING 31.03.2007 14,541.34 (V) THE APPELLANT ENCLOSES A DAILY QUANTITATIVE REG ISTER OF ROUGH DIAMONDS (PAGE.6) ALONGWITH THE VALUE AS ALSO A CON SOLIDATED STATEMENT OF PARTICULARS OF ROUGH AND REJECTED DIAM ONDS (PAGE.7) FOR THE YEAR ENDING 31.03.2006 TO SHOW THAT IN THE TOTA L ROUGH DIAMONDS SHOWN IN THE CLOSING STOCK 20,294.02 CTS, THE ROUGH REJECTION QUANTITY WAS 17,041.34 CTS AND QUANTITY OF MAKEABLE ROUGH WA S ONLY 3,252.68 CTS. WHICH TAKES THE AVERAGE VALUE OF ROUGH AT RSW. 1488. A SEPARATE STATEMENT FOR THE EARLIER YEAR OF MONTHWISE RECORDS OF ROUGH DIAMONDS WITHOUT REJECTION IS ENCLOSED (PAGE 8-9). 7) AS CAN BE SEEN FROM THE STATEMENT, 20,294.02 CAR AT OF ROUGH DIAMOND WHICH WAS SHOWN AT VALUE OF RS.92,12,949/-C ONSISTED OF ROUGH DIAMONDS OF 3,252.68 WITH VALUE OF RS.48,41,5 95/- AND 17,041.34 BEING ROUGH REJECTED OF VALUE OF RS.43,71 ,354/-. 8) NOW WHAT THE ASSESSING OFFICER HAS DONE IN PARA 3.8 IS TAKING THE VALUE OF ENTIRE 20,543.22 AT THE RATE OF RS.740 /- PER CARAT WHEN IT 11 INCLUDED ROUGH REJECTION OF 17,041.34 WHERE THE AVE RAGE RATE WOULD BE RS.256.51/- THE AVERAGE RATE OF ROUGH DIAMONDS EXCL UDING REJECTED DIAMONDS COMES TO RS.1488/-. 9) THE ADDITION WAS MADE AS THE ASSESSING OFFICER D ID NOT HAVE THE BENEFIT OF ALL THESE DETAILS AS THIS ISSUE WAS RAISED AT THE LAST MOMENT. BUT ONCE THESE DETAILS ARE CONSIDERED YOU W ILL KINDLY APPRECIATE THAT THE ADDITION HAS BEEN WRONGLY MADE BY AVERAGING OUT BOTH THE ROUGH AND THE ROUGH REJECTION AS THE ASSES SEE DID NOT HAVE THE OPPORTUNITY TO PUT ALL THESE FIGURES BEFORE THE ASS ESSING OFFICER.' 9. I HAVE CAREFULLY GONE THROUGH THE FINDINGS OF TH E ASSESSING OFFICER AS WELL AS SUBMISSIONS OF THE APPELLANT. TH E ISSUE AT STAKE IS THE VALUATION OF CLOSING STOCK OF ROUGH DIAMONDS. AS EX PLAINED BY THE APPELLANT, ROUGH DIAMONDS ARE PURCHASED AND THEN IS SUED TO THE CONTRACTORS FOR MANUFACTURING OF POLISHED DIAMONDS. THESE ROUGH DIAMONDS ALSO INCLUDE DIAMONDS FROM WHICH POLISHED DIAMONDS ARE NOT MAKEBLE AND ARE NOT ISSUED AND THEY REMAIN IN S TOCK AND ARE REFERRED TO AS REJECTED ROUGH DIAMONDS WHICH HAVE N EGLIGIBLE VALUE. IT HAS ALSO BEEN ARGUED THAT THE ROUGH DIAMONDS AND RE JECTED DIAMONDS ARE SHOWN TOGETHER AND BECAUSE OF HIGH PROPORTION O F REJECTED DIAMONDS, VALUATION GOES DOWN CONSIDERABLY. THE APP ELLANT, HOWEVER, HAS FAILED TO SUBMIT THE QUALITY WISE DETAILS OF OP ENING STOCK AND CLOSING STOCK AND THEIR RESPECTIVE VALUES AT THE TI ME OF ASSESSMENT WHICH WAS SPECIFICALLY REQUIRED BY THE ASSESSING OF FICER. THE ASSESSING OFFICER HAS OBSERVED THAT 'FROM THE BOOKS OF ACCOUN T PRODUCED FOR VERIFICATION IT WAS NOT POSSIBLE TO IDENTIFY LOT WI SE GOODS MOVEMENT AS TO WHICH PARTICULAR DIAMOND WAS PRODUCED OUT OF WHI CH LOT OF ROUGH AND SOLD TO WHOM AND WHICH PARTS REMAINED IN CLOSIN G STOCK. SIMILARLY DETAILS OF RECEIPTS OF ROUGH DIAMONDS, IS SUED FOR MANUFACTURING AND REMAINDER IN CLOSING STOCK WERE N OT AVAILABLE IN RESPECT OF SEPARATE LOTS'. 10. ACCORDING TO THE APPELLANT THE OPENING STOCK AS ON 31.03.2005 INCLUDES -EJECTED ROUGH DIAMONDS OF 14,541.34 CARAT S WHICH HAS VERY LOW VALUE. IT IS 2RTANT TO MENTION THAT THIS QUANTI TATIVE FIGURE WAS NOT SUBMITTED BEFORE THE ASSESSING OFFICER. FROM THE DE TAILS FILED AND BOOKS PRODUCED IN ASSESSMENT, INFORMATION REGARDING QUANTITATIVE DETAILS OF REJECTED DIAMONDS ARE NEITHER AVAILABLE NOR ASCERTAINABLE. THE MAIN THRUST OF THE ARGUMENT IS THAT THE STOCKS, BOTH OPENING AND CLOSING, CONTAIN REJECTED DIAMONDS, AS A RESULT OF WHICH THEIR VALUE HAS GONE DOWN. THIS ARGUMENT IS NOT CONVINCING. THE ROU GH DIAMONDS 12 INCLUSIVE OF REJECTED DIAMONDS HAVE BEEN VALUED AT AVERAGE RATES, BOTH IN THE OPENING AS WELL AS CLOSING STOCK. THE AVERAG E RATE TAKES INTO ACCOUNT THE QUANTITY OF ROUGH AS WELL AS REJECTED D IAMONDS. THE OPENING STOCK HAS BEEN VALUED BY THE ASSESSEE AT TH E RATE OF RS.551.03 PER CARAT WHICH IS NOT DISPUTED BY THE ASSESSING OF FICER. THEREFORE, THE COMPOSITION OF OPENING STOCK IS IMMATERIAL WHEN THE SAME HAS BEEN VALUED AT A PARTICULAR RATE BY THE ASSESSEE AND ACC EPTED BY THE ASSESSING OFFICER. AS REGARDS PURCHASES, THEIR RATE S ARE AVAILABLE IN PURCHASE BILLS. THE ASSESSING OFFICER HAS NOT DISPU TED THE PURCHASE RATES OF ROUGH DIAMONDS SHOWN BY THE APPELLANT. THE ISSUE REMAINS IS VALUATION OF CLOSING STOCK. DURING THE YEAR, THERE ARE 4 ENTRIES OF PURCHASES AND 11 ENTRIES OF ISSUE OF DIAMONDS FOR M ANUFACTURING. IT IS FOR THE ASSESSEE TO CORRELATE THE DATE WISE ENTRIES OF ISSUE WITH THEIR RESPECTIVE SOURCES (OPENING STOCK OR PURCHASE). THI S INFORMATION HAS NOT BEEN FURNISHED BY THE APPELLANT. THEREFORE, THE ASSESSING OFFICER WAS LEFT WITH NO OPTION BUT TO ARRIVE AT THE VALUE OF CLOSING STOCK BY ADOPTING A SCIENTIFIC METHOD. HIS OBSERVATION THAT 1ST FOUR ENTRIES OF ISSUE OF ROUGH DIAMONDS FOR MANUFACTURING CAN ONLY BE OUT OF THE OPENING STOCK IS AN UNDISPUTED FINDING. REGARDING OTHER ENTRIES OF ISSUES OF ROUGH DIAMONDS HE HAS FOLLOWED THE METHOD OF LAST IN FIRST OUT (LIFO) I.E. ENTRIES OF ISSUE ARE CORRELAT ED WITH IMMEDIATE PRECEDING PURCHASES AND ACCORDINGLY, THE CLOSING ST OCK OF DIAMONDS HAS BEEN VALUED AT RS.740/- PER CARAT INSTEAD OF RS .479.24 SHOWN IN THE BOOKS. THE ASSESSING OFFICER COULD HAVE ADOPTED AN ALTERNATIVE METHOD OF FIRST IN FIRST OUT (FIFO) CORRELATING THE ENTRIES OF ISSUE FOR MANUFACTURING TO THE OPENING STOCK AND EA RLIEST PURCHASES THAT COULD HAVE POSSIBLY RESULTED IN HIGHER VALUATI ON OF CLOSING STOCK. THE ASSESSING OFFICER HAS ADOPTED A FAIR, REASONABL E AND SCIENTIFIC APPROACH IN DETERMINING THE VALUATION OF CLOSING ST OCK. 11 THE A.R. HAS SUBMITTED QUANTITATIVE DETAILS OF R OUGH DIAMONDS ALONG WITH THE VALUE AND CONSOLIDATED DETAILS OF RO UGH AND POLISHED DIAMONDS. IT IS PERTINENT TO MENTION THAT THIS INFO RMATION HAS NOT BEEN SUBMITTED BEFORE THE ASSESSING OFFICER. FURTHER, FR OM THE COPIES OF PURCHASE BILLS AND SALE BILLS ALONG WITH THE PURCHA SE AND SALES REGISTER SUCH INFORMATION IS NOT AVAILABLE. THEREFORE, IT IS NOT KNOWN AS TO HOW THIS INFORMATION HAS BEEN PREPARED. UNDER THESE CIR CUMSTANCES, I AM NOT INCLINED TO ATTACH ANY CREDENCE TO SUCH SELF SE RVING UNSUPPORTED INFORMATION FURNISHED AT THIS STAGE IN APPEAL. 12 THE A.R. HAS FURTHER ARGUED THAT REVALUATION OF CLOSING STOCK BY THE ASSESSING OFFICER WOULD RESULT IN SUBSTANTIAL I NCREASE IN GROSS PROFIT 13 WHICH IS NOT POSSIBLE. THIS ARGUMENT IS ADVANCED TO GLOSS OVER THE ISSUE OF UNDER VALUATION OF CLOSING STOCK. IT CANNO T BE DENIED THAT THE CLOSING STOCK HAS TO BE VALUED PROPERLY, ACCURATELY AND ACCORDING TO THE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE. IN THE INSTANT CASE, CONSIDERING THE LIMITED SCALE OF TRAN SACTIONS DURING THE WHOLE YEAR, PROPER RECORDS COULD HAVE BEEN MAINTAIN ED WITH ABSOLUTE ACCURACY. IT IS THE DUTY OF THE ASSESSEE TO MAINTAI N THESE RECORDS IN A MANNER THAT CLARIFIES AND CORROBORATES ITS CLAIM IN ASSESSMENT. IF THE ASSESSEE FAILS TO SATISFACTORILY EXPLAIN THE VALUAT ION OF CLOSING STOCK, WHICH IS THE CASE HERE UNDER REFERENCE, THE CONSEQU ENCES FOR SUCH FAILURE OBVIOUSLY IMPACT ITS OWN ASSESSABLE INCOME. THIS ALSO IMPACTS THE GROSS PROFIT FOR, THE YEAR UNDER REFERENCE. THA T IS AN INEVITABLE AND INESCAPABLE CONSEQUENCE WHICH THE ASSESSEE CANNOT A VOID. THEREFORE, I AM NOT INCLINED TO ACCEPT THE ARGUMENT OF HIGH G. P. TO GIVE RELIEF FOR THE VALUATION OF CLOSING STOCK. IN VIEW OF THIS, AD DITION MADE ON ACCOUNT OF VALUATION OF CLOSING STOCK BY THE ASSESS ING OFFICER IS CONFIRMED. 4 AGGRIEVED BY THIS ORDER OF THE LEARNED CIT(A), TH E ASSESSEE IS IN APPEAL BEFORE US. 5 AFTER HEARING BOTH THE PARTIES AND GOING THROUGH THE RECORD, WE FIND THAT THE AO RAISED THE ISSUE OF VALUATION O F CLOSING STOCK ON 24-12-2008 BY ISSUING A SHOW CAUSE NOTICE TO THE ASSESSEE AND PASSED THE ORDER ON 31-12-2008. THUS, THE ASSESSEE WAS PREVENTED TO FILE THE REQUISITE DETAILS IN SUPPORT OF ITS VALUATION OF CLOSING STOCK, TO THE AO. THE SAME WERE FILED BE FORE THE LEARNED CIT(A) BUT IT APPEARS THAT HE HAS ALSO NOT PROPERLY APPRECIATED THE SAME. SINCE THE DETAILS FILED BEFOR E THE LEARNED CIT(A) WERE SUCH THAT REQUIRED VERIFICATION AT THE END OF THE AO, WE DEEM IT PROPER THAT THE MATTER BE RESTORED TO TH E FILE OF THE AO FOR FRESH ADJUDICATION IN THE LIGHT OF THE DETAI LS AND SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE LEARNED CIT(A). WE ORDER ACCORDINGLY. 14 6 IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED F OR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE COURT TODAY ON 25-01-2012 SD/- SD/- (A MOHAN ALANKAMONY) ACCOUNTANT MEMBER (D K TYAGI) JUDICIAL MEMBER DATE : 25-01-2012 COPY OF THE ORDER FORWARDED TO: 1. M/S DARRK DIAMONDS, 308, NAVRATNA CHAMBERS, SARD AR CHOWK, VARACHHA ROAD, SURAT 2. THE INCOME-TAX OFFICER, WARD-9(1), SURAT 3. CIT CONCERNED 4. CIT(A)-V, SURAT 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD