I.T.O.16(3)(2), MUMBAI V. R.K. DIAMONDS, MUMBAI

ITA 194/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2423 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 07-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 07-01-2013
• Court: TRIBUNAL
• Department Lawyers: R MURLIDHAR
• Assessee Lawyers: B S BIST
• Keywords: Business income; Transfer pricing; Cost of acquisition
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI JOGINDER SINGH (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACOUNTANT MEMBER) I.T.A. NO.7489/MUM/2012 (ASSESSMENT YEAR: 2009-10) M/S. R.K. DIAMONDS 306, PRASAD CHAMBER, OPERA HOUSE MUMBAI-400 004 VS ITO,WD.21(1)(4) MUMBAI PAN :AAKFR3605A (APPELLANT) (RESPONDENT) I.T.A. NO.194/MUM/2013 (ASSESSMENT YEAR : 2009-10) ITO,WD.21(1)(4) MUMBAI VS M/S. R.K. DIAMONDS 306, PRASAD CHAMBER, OPERA HOUSE MUMBAI-400 004 PAN :AAKFR3605A (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI R MURLIDHAR RESPONDENT BY SHRI B.S. BIST, SR DR DATE OF HEARING : 21-06-2016 DATE OF PRONOUNCEMENT : 22 -07-2016 O R D E R PER ASHWANI TANEJA, AM: THESE CROSS APPEALS HAVE BEEN FILED AGAINST THE ORD ER OF COMMISSIONER OF INCOME-TAX (APPEALS)-27, MUMBAI [HEREINAFTER CAL LED LD.CIT(A)] PASSED AGAINST THE ASSESSMENT ORDER DT 05-12-2011 U/S 143( 3) FOR THE ASSESSMENT YEAR 2009-10. 2 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 2. FIRST, WE SHALL TAKE UP THE REVENUES APPEAL IN I.T .A. NO.194/MUM/2013. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS 8,83,56,806/- ON ACCOUNT OF SUPPRESSION OF SAFES WHICH WAS BASED ON AUDITOR'S REPORT FILED BY THE ASSESSEE. 2. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS 1,85,83,340/- ON ACCOUNT OF UNACCOUNTED STOCK OF POLISHED DIAMONDS. 3. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS 2,14,67,740/- ON ACCOUNT OF UNACCOUNTED STOCK OF ROUGH DIAMONDS. 4. BOTH THE PARTIES MADE EXHAUSTIVE SUBMISSIONS ON THE RESPECTIVE GROUNDS. 5. IN GROUND NO.1, THE REVENUE HAS CHALLENGED THE ACTI ON OF LD. CIT(A) IN DELETING THE ADDITION OF RS.8.83 CRORES MADE BY THE AO ON ACCOUNT OF SUPPRESSION OF SALES. 6. THE BRIEF FACTS OF THE CASE AS CULLED OUT FROM THE ORDERS OF LOWER AUTHORITIES ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE A SSESSEE, A PARTNERSHIP FIRM WAS ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAM ONDS, MANUFACTURING, POLISHING AND EXPORT OF POLISHED DIAMONDS. THE IMP UGNED YEAR IS THE FIRST YEAR OF BUSINESS OF THE FIRM. THE AO IN THE ASSESSMENT ORDER PASSED U/S 143(3) MADE ASSESSMENT AT RS. 13,98,99,900/- AGAINST THE R ETURNED INCOME OF RS.16,12,060. IN THE ASSESSMENT ORDER, THE AO NOTE D FOLLOWING INFORMATION GATHERED FROM THE AUDIT REPORT FILED BY THE ASSESSE E IN FORM 3CD: 3 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 ROUGH DIAMOND QUANTITY VALUE RATE ( IN CARATS) (IN RS.) (IN RS.) PURCHASES 27,139.46 61993269 2284.25 SALES 00 00 00 USED IN MANUFACTURE 17,640.46 -- -- TRANSFER TO REJECTION 9,499.00 227976 24 ROUGH (TREATED AS CLOSING STOCK) POLISHED DIAMOND QUANTITY VALUE RATE (IN CARATS) (IN RS.) (IN RS.) PURCHASES 00 00 00 SALES 5013.59 51670565 1036.10 CLOSING STOCK 953.29 28408042 29800 THE YIELD OF POLISHED DIAMONDS 5,966.88 CARATS THE % OF YIELD 33.82% BEING AGGRIEVED, ASSESSEE FILED AN APPEAL BEFORE LD .CIT(A) WHEREIN DETAILED SUBMISSIONS WERE MADE AND IT WAS SUBMITTED THAT THE AO HAD MISUNDERSTOOD THE FACTS. THERE WAS NO BASIS TO SUBSTITUTE THE SA LE PRICE ON THE BASIS OF AVERAGE PRICE OF THE STOCK. IT WAS ALSO SUBMITTED THAT ASSESSEE WAS READY TO PRODUCE ALL THE BOOKS OF ACCOUNT, STOCK REGISTER, E TC. LD. CIT(A) CONSIDERED IN DETAIL THE SUBMISSIONS AND EVIDENCE PRODUCED BY THE ASSESSEE. HE PARTLY AGREED WITH THE FINDINGS OF THE AO AND ESTIMATED TH E SALES OF THE ASSESSEE BY 4 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 APPLYING GROSS PROFIT @3.9% ON THE SALE OF 2543 CTS OF DIAMONDS AT RS.10521 PER CARAT. THE FINDINGS RECORDED BY THE LD.CIT(A) ARE REPRODUCED HEREUNDER, FOR THE SAKE OF READY REFERENCE: 3.1. I HAVE CAREFULLY CONSIDERED THE CONTENTS OF THE ASSESSMENT ORDER AND THE APPELLANT'S SUBMISSIONS MADE BEFORE ME. AT THE OUTSET, THIS IS THE FIRST YE AR OF BUSINESS FOR THE APPELLANT FIRM, AND THEREFORE, THE RE IS NO OPENING STOCK OF EITHER ROUGH OR POLISHED DIAMON DS. APPELLANT HAS IMPORTED ROUGH DIAMONDS OF 27139.46 CARATS FROM ONE OF THE RELATED PARTIES COVERED U/S 40A(2) OF THE ACT AND THE IMPUGNED TRANSACTION WAS SUBJECTED TO SCRUTINY BY THE TRANSFER PRICING OFFIC ER (TPO) AND NO ADJUSTMENT WAS MADE THEREOF. IN OTHER WORDS, THE PURCHASE PRICE HAS BEEN ACCEPTED TO BE REASONABLE. SECONDLY, THE IMPORTS WERE ALSO SUBJECT ED TO CUSTOMS APPRAISAL AND THUS THERE IS NOTHING UNUS UAL TO SUSPECT ANYTHING ABOUT THE PURCHASES. NOW, ENTIRE S TOCK OF 27139.46 CARATS OF ROUGH DIAMONDS WAS PUT TO MANUFACTURING PROCESS, OUT OF WHICH, 9499 CARATS WE RE CONSIDERED AS NOT MAKEABLE ROUGH AND THUS REJECTED AT THE THRESHOLD LEVEL. THE BALANCE OF 17640.46 CARATS ROUGH DIAMONDS WERE WORKED UPON, WHICH RESULTED IN POLISHED DIAMONDS OF 5966.88 CARATS. THUS, THE REJECTION IN TERMS OF UNMARKETABLE ROUGH DIAMONDS W AS ABOUT 35% AND THE FINAL YIELD OF POLISHED DIAMONDS WAS OF 34%. THE RELEVANT INFORMATION WAS PLACED BEFORE THE AO, AND APPARENTLY THE AO, HAS NO COMPLAINT AGAINST THE SE YIELD RATIOS AND NO ADVERSE COMMENT THEREOF IS MADE ANYWHERE IN THE ASSESSMENT ORDER. THE ONLY OBSERVATION MADE BY THE AO IN THIS REGARD WAS THAT THE WASTAGE GENERATED IN THE PROCESS OF CUTTING, CL EAVING, SAWING AND POLISHING WILL HAVE CERTAIN MARKETABLE V ALUE, 5 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 WHICH REQUIRES A FURTHER ADDITION TO APPELLANT'S IN COME, AND HOWEVER, THE VERY FACT OF OCCURRING OF WASTAGE WAS NOT QUESTIONED AT ALL. THUS, THE FACTS ON RECORD RU LE OUT ANY UNDISCLOSED STOCKS DEALT OUTSIDE THE BOOKS RESU LTING IN ANY UNACCOUNTED SALES. THEREFORE, THE ONLY QUEST ION TO BE CONSIDERED IS WHETHER THERE IS ANY POSSIBILIT Y OF UNDERSTATEMENT OF SALE VALUE. APPARENTLY, AO HAS AP PLIED THE CLOSING STOCK VALUE OF POLISHED DIAMONDS TO THE ENTIRE SALES MADE BY THE APPELLANT, WITHOUT ASSIGNI NG ANY REASON THEREOF. IT IS A MATTER OF COMMON ,KNOWL EDGE THAT ALL MINERALS/STONES ARE FORMED NATURALLY, WHIC H INCLUDES DIAMONDS, THEREFORE ALL THE ROUGH DIAMONDS WILL NOT HAVE THE SAME QUALITIES AND IT IS ALSO NOT POSSIBLE TO ASSORT THE SAME BASED ON EXACT QUALITIES THAT TH EY CAN BE ASSUMED TO GIVE EQUAL QUALITY OF FINAL PRODUCT. IN FACT, AO HAS NO DISPUTE WITH THIS PROPOSITION WHILE ACCEP TING THE YIELD RATIOS. THE ONLY LOGICAL COROLLARY OF THI S FACT IS THAT THE POLISHED DIAMONDS SOLD WILL ALSO BE OF DIF FERENT SIZES AND DIFFERENT QUALITIES. IF THIS IS SO, THERE IS NO GOOD REASON FOR THE AO TO ARRIVE AT THE CONCLUSION THAT THE ENTIRE SALES ARE TO BE CONSIDERED AT THE CLOSING ST OCK VALUE. HOWEVER, FROM THE MATERIALS PLACED ON RECORD , I NOTE THAT THE ENTIRE PURCHASE COST THROUGH IMPORTS REMAINED UNPAID AT THE END OF THE YEAR REQUIRING TH E APPELLANT TO RECAST THE SUNDRY CREDITORS AS ON BALA NCE SHEET DATE AND THE APPELLANT HAS DEBITED AN AMOUNT OF RS. 11017829 TO ITS P&L A/C TOWARDS COST OF PURCHAS ES ON THIS COUNT. IF THIS AMOUNT IS ALSO TAKEN INTO AC COUNT, APPELLANT'S AVERAGE COST OF PRODUCTION WORKS OUT TO RS.10521 PER CARAT. AS AGAINST THIS, EXAMINATION OF THE SALES AFFECTED DURING THE YEAR REVEALS THAT AT 35 INSTANCES APPELLANT HAS SOLD STOCKS OF 2543 CARATS OUT OF TOTAL SALES OF 5013 CARATS, AT A VALUE LOWER THAN T HE 6 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 AVERAGE COST AND SUCH SALES AMOUNT TO RS.18431118 OUT OF THE TOTAL SALES OF RS51670565, WHICH IS APPROX.51% OF THE QUANTITY SOLD AND 36% OF THE TOTAL SATE VALUE. IN THIS REGARD, IT IS ALSO NOTED THAT THE GOODS SOLD BY THE APPELLANT ARE OF MULTIPLE GRADE AND VIDE VARIETY, AND NOT IDENTIFIED ON FIFO METHOD . IN SUCH A SITUATION WHERE GOODS ARE SOLD IN MIXED LOTS , ANY ORDINARY PRUDENT BUSINESS MAN WILL KEEP IN MIND THE AVERAGE COST INCURRED IN BRINGING THEM TO MARKET AN D WOULD LIKE TO AVOID ANY UNCERTAINTIES AND WOULD LIK E TO RECOVER THE COST AT MINIMUM WITH A DECENT PROFIT MA RGIN. IT IS ALSO PERTINENT TO NOTE THAT ALL THE SALES WER E MADE LOCALLY AND THERE WAS NO CONTROL ESTABLISHED BY ANY AUTHORITIES ON SALE PRICE UNLIKE IN THE CASE OF PURCHASES BY WAY OF CUSTOMS APPRAISAL OR THROUGH TRANSFER PRICING ADJUSTMENTS. IN MY CONSIDERED OPIN ION, THERE IS NO GOOD REASON FOR SELLING MORE THAN 50% O F THE STOCK AT A VALUE LOWER THAN ITS COST PRICE. DURING THE PROCEEDINGS BEFORE ME, DESPITE A SPECIFIC QUERY ON THIS ISSUE, APPELLANT FAILED TO OFFER ANY EXPLANATION FO R SALE BELOW THE COST PRICE, LEAVE ALONE A VALID ONE, IN T HIS BACKGROUND, I HOLD THAT THE POSSIBILITY OF UNDERSTA TING THE SALE VALUE CANNOT BE ENTIRELY RULED OUT AND THE REFORE THE BOOKS OF ACCOUNTS MAINTAINED BY APPELLANT ARE N OT RELIABLE AND TO BE REJECTED REQUIRING A CERTAIN POR TION OF THE ADDITION MADE BY THE AO TO BE UPHELD. HAVING SA ID SO, I HOLD THAT THE IMPUGNED SALE OF 2543 CARATS IS TO BE CONSIDERED AT AVERAGE COST PRICE OF RS.10521 AND TH E DIFFERENCE IN SALE NEEDS TO BE ADDED TO APPELLANT'S INCOME APART FROM A REASONABLE GP ADDITION. IN RESP ECT OF THE GP EARNED BY THE APPELLANT, I NOTE THAT BUT FOR THE COST OF PURCHASES AND THE FOREIGN EXCHANGE FLUCTUATION A DDED TO THE COST OF PURCHASES, THERE ARE NO OTHER MAJOR EXP ENSES 7 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 DEBITED TO P&L A/C. THESE TWO ITEMS STAND VERIFIED THROUGH TRANSFER PRICING SCRUTINY AND EXCHANGE RATE PREVAILING ON BALANCE SHEET DATE. LABOUR EXPENSES O F RS.5292138 WORKS OUT TO RS.300 PER CARAT OF ROUGH DIAMONDS WORKED UPON, WHICH APPEARS TO BE REASONABL E. THEREFORE, I NOTE THAT IT WOULD MEET THE ENDS OF JU STICE IF THE DECLARED GP OF 3.9% IS LOADED TO THE SALE OF 2543 C ARATS CONSIDERED AT THE SALE PRICE OF RS. 10521. IN SUCH A CASE THE ADDITION CONFIRMED IS WORKED OUT AS FOLLOWS : SALE OF 2543 CARATS AT RS. 10521 PER CARAT RS.26764 898 ADD: GP AT 3.9% THEREON RS. 1043831 TOTAL SALE VALUE OF 2543 CARATS RS. 27808729 LESS: SALES SHOWN IN BOOKS RS.18431118 ADDITION CONFIRMED RS. 9377611 3.1.5 ACCORDINGLY, I DIRECT THE AO TO ADOPT THE ADDITION OF RS.9377611 IN THE PLACE OF RS.97734417 THE HEAD SUPPRESSION IN SA LES. APPELLANT GETS PART RELIEF ON THIS ISSUE. 7. BEING AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), T HE ASSESSEE AS WELL AS THE REVENUE HAVE FILED APPEAL BEFORE THE TRIBUNAL. 8. DURING THE COURSE OF HEARING, IT HAS BEEN SUBMITTED BY THE LD. COUNSEL OF THE ASSESSEE THAT THERE WERE NO BASIS WITH THE LD. CIT(A) TO SUSTAIN ANY ADDITION. IT WAS SUBMITTED THAT CLOSING STOCK OF 9 53.29 CTS OF DIAMONDS HAS BEEN SOLD IN THE NEXT YEAR AT APPROPRIATE SALES PRI CE. THE DIAMONDS OF LOWER QUALITY WERE SOLD IN THE YEAR UNDER CONSIDERATION. THEREFORE, THE AVERAGE SALE PRICE OF THE SAME WAS RS.10306.10. IT WAS ALSO SUB MITTED BY THE LD. COUNSEL THAT IF THE METHODOLOGY ADOPTED BY THE CIT(A) IS IM PLEMENTED, THEN, IT RESULTS INTO AN EXORBITANT OVERALL GROSS PROFIT RATE OF 18. 87% WHICH IS NOT EXPECTED IN 8 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 THE INDUSTRY. THEREFORE, VIEWED IN ANY MANNER, THE ADDITION SUSTAINED BY THE LD. CIT(A) IS UNREASONABLE. 9. PER CONTRA, THE LD. DR SUBMITTED THAT THE ASSESSEE IS NOT MAINTAINING PROPER STOCK REGISTER. IT IS VERY DIFFICULT TO FIN D OUT QUALITY-WISE BREAK-UP OF THE DIAMONDS. THERE IS NO TRANSPARENCY IN THE SYSTEM F OLLOWED BY THE ASSESSEE. THE ASSESSEE IS ENJOYING LIBERTY TO VALUE THE CLOSI NG STOCK AS PER ITS CONVENIENCE AND ALSO ADJUST THE SALE PRICE AS PER ITS NEEDS SO AS TO MINIMIZE THE TAX BURDEN. UNDER THESE CIRCUMSTANCES, ADDITION MADE BY THE ASS ESSING OFFICER WAS JUSTIFIED AND, THEREFORE, ORDER OF LD. CIT(A) SHOUL D BE REVERSED AND ADDITION MADE BY THE ASSESSING OFFICER SHOULD BE UPHELD. 10. WE HAVE GONE THROUGH THE SUBMISSIONS MADE BY BOTH T HE SIDES CAREFULLY. FROM THE FACTS BROUGHT BEFORE US, WE AGREE WITH THE OBSERVATIONS MADE BY THE ASSESSING OFFICER AS WELL AS THE LD. CIT(A) THAT C OMPLETE RECORDS ARE NOT BEING MAINTAINED BY THE ASSESSEE SO AS TO MAINTAIN TRANSP ARENCY IN ITS BOOKS OF ACCOUNT ESPECIALLY WITH REGARD TO VALUATION OF ITS CLOSING STOCK. IN RESPONSE TO OUR QUERY, LD. COUNSEL WAS NOT ABLE TO DEMONSTRATE FROM ANY RECORD FROM WHERE ANY QUALITATIVE DETAILS OF THE INVENTORY OF D IAMONDS COULD BE OBTAINED. FURTHER THE STOCK REGISTERS WERE NEVER PRODUCED BEF ORE THE LOWER AUTHORITIES. THUS, UNDOUBTEDLY, THE ASSESSEE HAS NOT BEEN ABLE T O SUBSTANTIATE THAT THE VALUATION DONE BY THE ASSESSEE WITH REGARD TO ITS C LOSING STOCK IS CORRECT AS PER FACTS. ON THE OTHER HAND, WE ALSO AGREE WITH THE A SSESSEE THAT THE SALE PRICE OF THE DIAMONDS SOLD BY THE ASSESSEE DURING THE YEAR C ANNOT BE SUBSTITUTED WITHOUT ANY CONTRARY EVIDENCE AVAILABLE IN THE POSS ESSION OF THE REVENUE. WE ALSO AGREE WITH THE ARGUMENT OF THE LD. COUNSEL THA T THE APPROACH ADOPTED BY THE LD. CIT(A) FOR ARRIVING AT CORRECT AMOUNT OF PR OFIT BY COMPUTING THE 9 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 SUPPRESSED AMOUNT OF SALES IS NOT SHOWING REASONABL E AND ACCEPTABLE RESULTS. IT IS EVIDENT, ON THE BASIS OF A WORK SHEET SUBMITT ED BY THE ASSESSEE, THAT IF THE ORDER OF LD.CIT(A) IS IMPLEMENTED, THEN, IT WOULD G IVE AN OVERALL GROSS PROFIT RATE OF 18.87%, WHICH, ACCORDING TO THE ASSESSEE, I S QUITE IMPROBABLE IN THIS INDUSTRY. OUR ATTENTION WAS DRAWN ON THE GROSS PRO FIT RATES OF THE SUBSEQUENT YEARS, SINCE THE IMPUGNED YEAR IS THE FIRST YEAR OF BUSINESS OF THE ASSESSEE. IT IS FURTHER NOTICED BY US THAT THE ENTIRE CLOSING STOCK OF THE IMPUGNED YEAR I.E. 953 CARATS WAS OLD IN THE SUBSEQUENT YEAR, I.E. A.Y. 20 10-11. NO FRESH PURCHASES HAVE BEEN MADE IN A.Y. 2010-11 AS IS EVIDENT FROM T HE P&L ACCOUNT AND OTHER DETAILS SUBMITTED BEFORE US PERTAINING TO A.Y. 2010 -11. THE RATIO OF G.P. TO TURNOVER OF A.Y.2010-11 HAS BEEN REPORTED AT 10.58% . THUS, WITH A VIEW TO REDUCE THIS CONTROVERSY AND TO RENDER JUSTICE TO BO TH THE SIDES, WE DEEM IT APPROPRIATE TO ESTIMATE THE INCOME OF THE ASSESSEE FOR THE YEAR BEFORE US AT GROSS PROFIT RATE OF 10.58%. THE TOTAL SALES SHOWN BY THE ASSESSEE DURING THE YEAR FOR 5013.59 CTS IS AGGREGATING TO RS.5,16,70,5 65. THE ASSESSING OFFICER SHALL COMPUTE GROSS PROFIT @10.58% ON THIS AMOUNT W HICH SHALL BE FURTHER SUBJECTED TO CLAIM OF ALL OTHER EXPENSES AS HAVE BE EN CLAIMED BY THE ASSESSEE IN THE P&L ACCOUNT, AS ALLOWABLE UNDER THE LAW AND AS PER FACTS. THUS, THE ASSESSING OFFICER IS DIRECTED TO COMPUTE NET PROFIT OF THE ASSESSEE ACCORDINGLY. THE REMAINING AMOUNT OF ADDITION SHALL BE DELETED. THE ORDER OF LD. CIT(A) IS MODIFIED ACCORDINGLY. THE GROUND RAISED BY THE REV ENUE IS PARTLY ALLOWED. 11. GROUND 2 : IN THIS GROUND, THE REVENUE HAS CHALLENGED THE ACTI ON OF LD.CIT(A) IN DELETING ADDITION OF RS.1,85,83,340 ON ACCOUNT OF UNACCOUNTED STOCK OF POLISHED DIAMONDS. 10 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 12. THE BRIEF FACTS IN THIS CASE ARE THAT THE ASSESSEE IN ITS APPEAL BEFORE THE LD. CIT(A) HAD MADE EXHAUSTIVE SUBMISSIONS ON THE I SSUE THAT THE ASSESSEE HAD VALUED ITS CLOSING STOCK OF POLISHED DIAMONDS OF 95 3.29 CARATS AT RS.29800 PER CARAT AND CREDITED ITS P&L A/C WITH THE CLOSING STOCK VALUE OF RS.28408042. AO AT PAGE 4 OF HIS ORDER NOTED THAT THE CLOSING ST OCK WAS VALUED AT A PRICE HIGHER THAN THE SALE PRICE WHICH IS AGAINST THE PRI NCIPLE OF VALUATION OF INVENTORIES. IN THE OPINION OF THE AO, SALE PRICE O F POLISHED DIAMONDS WHICH REPRESENT THE MARKET RATE SHOULD HAVE BEEN AP PLIED BY THE APPELLANT FOR VALUING ITS CLOSING STOCK. ACCORDINGL Y, ON APPLYING THE SALE RATE, AO WORKED OUT THE CLOSING STOCK VALUE AT RS.9824702 AS AGAINST THE VALUE REPORTED BY THE ASSESSEE AT RS.28408042. THEREAFTER, THE AO TREATED THE DIFFERENCE AMOUNT OF RS. 18583340 AS VALUE OF UNACCOUNTED STOC K AND ADDED THE SAME TO ASSESSEES INCOME. 13. IT WAS ALSO SUBMITTED BY THE ASSESSEE BEFORE THE LD .CIT(A) THAT AFTER HOLDING THE VALUE OF CLOSING STOCK TO BE ON HIGHER SIDE, SURPRISINGLY THE AO HAS TAXED THE SAID DIFFERENCE AS INCOME (AS UNACCOUNTED STOCK OF POLISHED DIAMONDS) INSTEAD OF REDUCING THE SAME FROM THE INC OME. IT WAS ILLOGICAL FROM POINT OF VIEW OF AS WELL AS COMMON SENSE, AS TO HOW HIGHER STOCK VALUE CAN BE CONSIDERED AS UNACCOUNTED AND THE SALES RATE BE APPLIED TO CLOSING STOCK, ESPECIALLY WHEN FACTS ARE ON RECORD THAT THE SALES OUT OF THE CLOSING STOCK HAS BEEN MADE SUBSEQUENTLY AND THE ATTENTION OF THE AO WAS DRAWN THAT THESE VERY GOODS WERE SOLD FOR RS. 285,9 6,255/ - IN THE FINANCIAL YEAR 2010-11 FOR WHICH THE RETURN WAS ALREADY FILED ON 30-09-2010 I.E. MUCH PRIOR TO THE ASSESSMENT PROCEEDINGS AND ORDER DT. 0 5.1 2.2011. IF THIS ADDITION IS CONSIDERED INDEPENDENTLY AND AS A SOLE ITEM AND PROPER EFFECT GIVEN IT SHOULD RESULT IN THE REDUCTION OF THE RETURNED INC OME BY RS. 1,85,83,840/-. I 11 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 14. THE LD. CIT(A) CONSIDERED THE SUBMISSIONS OF THE AS SESSEE AND DELETED THE ADDITION WITH THE FOLLOWING OBSERVATIONS : 3.2.2. I HAVE CAREFULLY CONSIDERED THE APPELLANT'S SUBMISS IONS. IN THE NOTES TO THE ACCOUNTS ANNEXED TO THE AUDIT R EPORT, THE AUDITOR HAS STATED THAT THE APPELLANT VALUED THE CL OSING STOCK AT THE LOWER OF THE ESTIMATED COST BEING THE LIKELY SALE PRICE AS REDUCED BY GROSS PROFIT OR NET REALIZABLE VALUE, WH ICHEVER IS LOWER. ESTIMATED COST ARRIVED FOR THIS PURPOSE WAS SUBSTANTIATED BY THE SUBSEQUENT SALES OF THE IMPUGN ED STOCK AS REDUCED BY THE GROSS PROFIT. IN SUCH CIRCUMSTANCES, I FAIL TO UNDERSTAND THE LOGIC BEHIN D THE AO'S OBSERVATION THAT THE CLOSING STOCK SHOULD BE VALUED AT MARKET PRICE OF SOME OTHER ITEMS AND NOT THAT OF TH E IMPUGNED STOCK ITSELF. ON ONE HAND, AO MADE A HUGE ADDITION OF RS.9.77 CRS BY HOLDING THAT THE CLOSING STOCK VALUE SHOULD APPLIED TO THE SALES AFFECTED DURING T HE YEAR, AND ON THE OTHER HAND, HELD THAT THE CLOSING STOCK SHOULD BE VALUED AT THE SALE PRICE WHICH WAS DISCARDED BY HIM AS UNRELIABLE. IT IS LACK OF ANY ACCOUNTING KNOWLEDGE ON THE PART OF THE AO WHICH RESULTED IN THIS DICHOTOMY. FURTHER , EVEN FOR A MOMENT AO IS HELD TO BE CORRECT, SUCH A FINDING W ILL ONLY RESULT IN REDUCTION OF INCOME AND NOT AN ADDITION T O THE SAME. EVEN OTHERWISE, THERE IS NO MATERIAL BROUGHT ON RECORD TO SHOW THAT APPELLANT HAS INDULGED IN ANY T RANSACTIONS OUTSIDE THE BOOKS OF ACCOUNT RESULTING IN UNACCOUNT ED CLOSING STOCK. SECONDLY, EVEN IF SUCH PROPOSITION I S ACCEPTED TO BE TRUE, THE SAID VALUE HAVING BEEN INC LUDED IN THE BOOKS, NO FURTHER ADDITION IS WARRANTED. IN VIE W OF THE ABOVE DISCUSSION, I DO NOT FIND ANY MERIT WHATSOEVE R IN THE IMPUGNED ADDITION AND I HAVE NO HESITATION TO DELET E THE SAME APPELLANT SUCCEEDS ON THIS GROUND. 15. DURING THE COURSE OF HEARING BEFORE US, THE LD. LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE ASSESSI NG OFFICER WHEREAS LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT ADDITION WAS TOTALLY ILLEGAL AND, THEREFORE, IT WAS RIGHTLY DELETED BY THE LD. CIT(A) . 12 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 16. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH TH E SIDES. IT IS NOTED THAT CLOSING STOCK OF THIS YEAR HAS BEEN TAKEN AS O PENING STOCK OF THE SUBSEQUENT YEAR AND THE SAME HAS BEEN SET OFF AGAIN ST THE SALES OF THIS STOCK IN THE SUBSEQUENT YEAR. UNDER THESE CIRCUMSTANCES, WE DO NOT FIND ANY JUSTIFICATION TO MAKE REVALUATION OF THE CLOSING ST OCK AND MUCH LESS, THE WAY IT HAS BEEN DONE BY THE ASSESSING OFFICER. FURTHER, I N ANY CASE, THE GROSS PROFIT OF THE ASSESSEE HAS BEEN ESTIMATED ON THE BASIS OF GROSS PROFIT RATIO OF THE SUBSEQUENT YEAR. THUS, ANY POSSIBLE LEAKAGE OR VAR IATION IN THE NET PROFIT REPORTED BY THE ASSESSEE HAS ALREADY BEEN TAKEN CAR E OF. UNDER THESE CIRCUMSTANCES, WE DO NOT FIND ANY LOGIC OR JUSTIFIC ATION TO MAKE ANY ADDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK. THUS, WE FI ND THAT NO INTERFERENCE IS CALLED FOR IN THE ORDER OF LD.CIT(A) ON THIS GROUND . GROUND NO.2 OF THE REVENUES APPEAL IS DISMISSED. 17. GROUND 3 : IN THIS GROUND, THE REVENUE HAS CHALLENGED THE ACTI ON OF LD.CIT(A) IN DELETING THE ADDITION OF RS.2,14,67,7 40 ON ACCOUNT OF UNACCOUNTED STOCK OF ROUGH DIAMONDS. 18. BRIEF FACTS OF THIS CASE ARE THAT IT WAS NOTED BY T HE ASSESSING OFFICER THAT THE AO NOTED THAT APART FROM ROUGH REJECTION AT THR ESHOLD LEVEL, FURTHER WASTAGE OF ROUGH TAKES PLACE DURING THE MANUFACTURI NG PROCESS AS CAN BE OBSERVED FROM THE FACT THAT THE YIELD RATIO OF POLI SHED DIAMONDS (5966 CARATS) TO THE ROUGH ACTUALLY WORKED UPON (17 640 CARATS) IS OF 33%. AO FURTHER OBSERVED THAT IN THIS PROCESS SMALL PIECES OF DIAMONDS AND DUST ARE GENERATED WHICH ARE USED IN INDUSTRIAL BLADES AND O THER USES. AO WAS OF THE OPINION THAT OUT OF THE WASTAGE OF 11819 CARATS (17 640 - 5966) AT LEAST 50% OF THE WASTAGE WILL DEFINITELY HAVE CERTAIN USE AND HENCE ITS OWN VALUE, AO 13 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 ESTIMATED SUCH VALUE AT RS.24 PER CARAT AND ARRIVED AT A TOTAL AMOUNT OF RS 141828/-. 19. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE LD. C IT(A) AND MADE DETAILED SUBMISSIONS. IT WAS SUBMITTED THAT ROUGH DIAMONDS AS EXTRACTED FROM THE MINES ARE SOLD IN LOTS TO THE CUSTOMERS WH O ARE IN THE BUSINESS OF CUTTING AND POLISHING AND ONLY WHEN THEY ARE ANALYZ ED AT THE TIME OF CUTTING, THE POSSIBILITY OF MAKING A FINE DIAMOND IS KNOWN A ND FURTHER IT IS THE INDUSTRY PRACTICE TO SELL THE ROUGH DIAMONDS BY THE MINE OWNERS WITHOUT ANY DEEP ANALYSIS THEREOF. IT IS FURTHER EXPLAINED THAT NON MAKEABLE ROUGH REJECTION RANGES FROM 5% TO 35% DEPENDING ON THE SI ZE AND QUALITY OF ROUGH DIAMONDS AND THE MARKET VALUE OF SUCH REJECTION IS VERY NEGLIGIBLE THE AR FURTHER STATED THAT THE VALUE OF THE REJECTED ROUGH WAS ADOPTED ON THE BASIS OF ITS SUBSEQUENT SALE AT RS.30 PER CARAT, WH ICH FACTS ARE PLACED BEFORE THE ASSESSING OFFICER. 20. THE LD. CIT(A) CONSIDERED THE SUBMISSIONS OF THE AS SESSEE AND AGREED WITH THE SAME. ACCORDINGLY, HE DELETED THE ADDITIO N MADE BY THE ASSESSING OFFICER WITH THE FOLLOWING OBSERVATIONS: 3.3.2. I HAVE CAREFULLY CONSIDERED THE APPELLANTS SUBMISSIONS. THE FACT OF REJECTION OF ROUGH AT THE TIME OF CUTTING AND POLISHING IS NOT DISPUTED BY THE AO. ON CE THE ROUGH DIAMONDS ARE REJECTED AS NOT CAPABLE OF BEING MADE INTO A FINE DIAMOND, IT IS A MATTER OF COMMON SENSE THAT THEY CANNOT FETCH THE SAME VALUE AT WHICH THEY WERE PURCHASED. THUS, APPARENTLY, THERE IS A SELF- CONTR ADICTION IN THE STAND TAKEN BY THE AO. SECONDLY, THE FACT OF RO UGH REJECTION AND ITS VALUE BEING MARGINAL IS A FACT SU PPORTED BY THE INDUSTRY PRACTICE AND STANDARDS. THIRDLY, AP PELLANT HAS SUBSTANTIATED ITS VALUE BY WAY DATA RELATING TO ITS SUBSEQUENT SALE AT RS.30 PER CARAT AND THE CONSISTE NT 14 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 PRACTICE OF VALUING THE CLOSING STOCK AT ESTIMATED COST I.E., LIKELY SALE PRICE AS REDUCED BY PROFIT MARGIN. APPE LLANT ALSO PLACED ON RECORD DATA RELATING TO ITS SISTER CONCER N M/S RATNAKALA EXPORTS, ONE OF THE LARGEST FIRMS ENGAGED IN IMPORTS, CUTTING& POLISHING AND EXPORTS OF DIAMONDS , WHEREIN THE REJECTED ROUGH WAS AGAIN EXPORTED IN TH E PRICE RANGE OF RS 25 TO RS.35 PER CARAT TO BUTTRESS ITS S UBMISSION THAT THE VALUE OF REJECTED ROUGH IS MARGINAL. FURTH ER, AO HAS NOT BROUGHT ANY MATERIAL TO CONTRADICT THE APPELLAN T'S SUBMISSIONS MADE BEFORE HIM. AT ANY RATE, ENHANCING THE CLOSING STOCK VALUE WILL ONLY RESULT IN INCREASING THE OPENING STOCK VALUE FOR THE SUBSEQUENT YEAR, WHICH IS REVEN UE NEUTRAL. IN VIEW OF THE ABOVE DISCUSSION I HOLD THA T THERE IS NO JUSTIFICATION FOR VALUING THE REJECTED ROUGH AT THE PURCHASE PRICE. ACCORDINGLY, THE ADDITION MADE BY THE ASSES SING OFFICER IS DELETED. 21. DURING THE COURSE OF HEARING BEFORE US, IT WAS SUBM ITTED BY THE LD. DR THAT ASSESSING OFFICER HAD RIGHTLY MADE THE ADDI TION AND HIS ORDER SHOULD BE UPHELD. 22. PER CONTRA, THE LD. COUNSEL OF THE ASSESSEE REITERA TED ITS SUBMISSIONS AS WERE MADE WITH REGARD TO EARLIER GRO UNDS AND FURTHER SUBMITTED THAT THIS ADDITION WAS ABSOLUTELY INCORRE CT ON FACTS AND LAW AND, THEREFORE, THE SAME WAS RIGHTLY DELETED BY THE LD. CIT(A). IT IS NOTED BY US THAT THE LD. CIT(A) HAS CORRECTLY APPRECIATED THE F ACTS IN THIS CASE, AS WE HAVE OBSERVED IN RESPECT OF GROUND 2 ABOVE THAT THE RE WERE NO BASIS TO VALUE THE CLOSING STOCK AT A DIFFERENT RATE BY THE ASSESSING OFFICER. KEEPING IN VIEW THESE DEFECTS ONLY, WE HAVE ESTIMAT ED THE GROSS PROFIT OF THE ASSESSEE SO AS TO BURY ALL THE CONTROVERSIES. IN ANY CASE, ENHANCING THE CLOSING STOCK VALUE WILL ONLY RESULT IN INCREAS ING THE OPENING STOCK VALUE FOR THE SUBSEQUENT YEAR WHICH WOULD BE REVENU E NEUTRAL. WE FIND 15 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 THE ORDER OF THE LD. CIT(A) TO BE JUSTIFIED AND WEL L REASONED AND NO INTERFERENCE IS CALLED FOR THEREIN AND, THEREFORE, THE SAME IS UPHELD. THIS GROUND OF REVENUE IS DISMISSED. 23. NOW WE SHALL TAKE UP ASSESSEES APPEAL IN I.T.A. NO .7489/MUM/2012 FILED IS ON THE FOLLOWING GROUNDS: 1. THE LEARNED CIT(A) (A) ERRED IN UPHOLDING THE ACTION OF THE LEARNED ASSESSING OFFICER WHEREBY ADDITION WAS MADE ON ACCOUNT OF ALLEGED SUPPRESSION IN SALE. 2. WITHOUT PREJUDICE TO GROUND NO. 1, THE LEARNED C IT (A) ERRED IN DIRECTING THE LEARNED AO TO ADOPT THE SALE VALUE OF RS.2,78,08,729/- ON THE SALE OF 2543 CTS OF POLISHED DIAMONDS ON THE GROUND OF ALLEGED SUPPRESSION IN SALE/UNDERS TATING OF SALE INSTEAD OF ACTUAL SALES REALIZED OF RS. 1,84,3 1,118/-. 3. THE LEARNED CIT (A) ERRED IN CONFIRMING THE ADDITIO N MADE BY THE LEARNED AO OF RS. 1,41,828/- BEING THE AMOUNT W ORKED OUT AS VALUE OF 11,819 CTS OF ROUGH WASTAGE ALLEGEDLY G ENERATED DURING THE PROCESS OF CUTTING AND POLISHING, WHICH IS PURELY BASED ON SURMISES AND CONJECTURES. 24. GROUNDS 1 & 2 DEAL WITH THE ADDITION SUSTAINED BY THE LD. CIT(A) ON ACCOUNT OF SUPPRESSION IN SALE VALUE. THESE GROUND S HAVE ALREADY BEEN ADDRESSED BY US WHILE DISPOSING OF GROUND 1 OF REVE NUES APPEAL WHEREIN INCOME OF THE ASSESSEE HAS BEEN COMPUTED AT GROSS P ROFIT RATE OF 10.58% AND ORDER OF LD. CIT(A) HAS BEEN DIRECTED TO BE MODIFIE D ACCORDINGLY. UNDER THESE FACTS, WE FIND THAT GROUNDS 1&2 BECOME INFRUCTUOUS AND DISMISS AS SUCH. 25. GROUND 3 : IN THIS GROUND, THE ASSESSEE HAS CHALLENGED HE AC TION OF LD. CIT(A) IN CONFIRMING THE ADDITION MADE BY THE ASSES SING OFFICER OF RS.1,41,828 BEING THE AMOUNT WORKED OUT OF ROUGH WASTAGE GENERA TED DURING THE PROCESS OF CUTTING AND POLISHING. 16 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 26. THE BRIEF FACTS IN THIS REGARD ARE THAT THE AO NOTE D THAT APART FROM ROUGH REJECTION AT THRESHOLD LEVEL, FURTHER WASTAGE OF ROUGH TAKES PLACE DURING THE MANUFACTURING PROCESS AS CAN BE OBSERVED FROM THE FACT THAT THE YIELD RATIO OF POLISHED DIAMONDS (5966 CARATS) TO T HE ROUGH ACTUALLY WORKED UPON (17640 CARATS) IS OF 33%. AO FURTHER OBSERVED THAT IN THIS PROCESS SMALL PIECES OF DIAMONDS AND DUST ARE GENERATED WHICH ARE USED IN INDUSTRIAL BLADES AND OTHER USES. AO WAS OF THE OPINION THAT OUT OF T HE WASTAGE OF 11819 CARATS (17640 - 5966) AT LEAST 50% OF THE WASTAGE WILL DEF INITELY HAVE CERTAIN USE AND HENCE ITS OWN VALUE. ASSESSING OFFICER ESTIMATE D SUCH VALUE AT RS.24 PER CARAT AND ARRIVED AT A TOTAL AMOUNT OF RS. 141828/- . 27. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE L D.CIT(A) AND SUBMITTED THAT IT WAS A PURE ESTIMATE AND, THEREFO RE, COULD NOT BE TREATED AS INCOME OF THE ASSESSEE. LD. CIT(A) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE BUT DID NOT AGREE WITH THE SAME AND UPHELD THE ADDI TION MADE BY THE ASSESSING OFFICER WITH THE FOLLOWING OBSERVATIONS: I HAVE CAREFULLY CONSIDERED APPELLANT'S SUBMISSION S. IT IS A FACT THAT SMALL DIAMONDS OF A FEW CENTS AND DUST IS GENE RATED IN THE MANUFACTURING PROCESS AND IT HAS CERTAIN MARKET VAL UE. AS SEEN FROM THE STOCK STATEMENTS AND COMPUTATION OF INCOME, APP ELLANT HAS NOT ACCOUNTED FOR ANY INCOME FROM THIS SOURCE, HOWEVER SMALL IT MAY BE. EVEN THOUGH AO'S APPROACH OF VALUING IT AT RS.2 4 PER CARAT HAS NO VALID BASIS, NEVERTHELESS, CONSIDERING THE O VERALL VOLUME OF APPELLANTS BUSINESS AND THE FACT THAT CERTAIN MA RKETABLE WASTAGE IS GENERATED DURING THE MANUFACTURING PROCESS, I HOLD THAT THE ADDITION OF RS.141828 IS REASONABLE IN OVERALL TERMS. ACCORD INGLY, THE SAME IS CONFIRMED. 17 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 28. DURING THE COURSE OF HEARING BEFORE US, THE LD. COU NSEL OF THE ASSESSEE SUBMITTED THAT THIS ADDITION WAS PURELY ON ESTIMATE BASIS AND, THEREFORE, SHOULD BE DELETED. IT WAS FURTHER INFORMED THAT TH ERE MIGHT BE SOME GENERATION OF WASTAGE BUT THE SAME IS RETAINED BY T HE KARIGARS AND IS TAKEN CARE OF WHILE NEGOTIATING THE PRICING OF THE LABOUR CHARGES WITH THESE KARIGARS. IT IS BECAUSE OF THIS INCENTIVE THAT ASSESSEE IS AB LE TO GET THE LABOUR JOB DONE AT ECONOMICAL PRICING. IN ANY CASE, NOTHING WAS FOUND BY THE ASSESSING OFFICER SHOWING THAT IF SOME INCOME HAS BEEN EARNED BY THE ASSESSEE ON ACCOUNT OF SALE OF WASTAGE. 29. PER CONTRA, THE LD. DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES ON THIS ISSUE. 30. WE HAVE GONE THROUGH THE ORDERS OF LOWER AUTHORITIE S. IT IS NOTICED BY US THAT NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE LOWER AUTHORITIES INDICATING IF ANY WASTAGE HAS BEEN GENERATED WHICH HAS BEEN SOLD OR OTHERWISE GIVING RISE TO ANY INCOME WHICH IS ESCAPED FROM TAX . THE ADDITION HAS BEEN MADE ON PURELY ESTIMATE BASIS WITHOUT BRINGING ANY MATERIAL ON RECORD WHATSOEVER. IN OUR VIEW ADDITION CANNOT BE MADE ON PURE ESTIMATE AND, THEREFORE, THE SAME IS DIRECTED TO BE DELETED. GRO UND IS ALLOWED. 31. AS A RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED. ORDER PRONOUNCED IN THE COURT ON THIS __22 ND ______ DAY OF JULY, 2016. SD/- SD/- (JOGINDER SINGH) (ASHWANI TANEJA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT: 22 ND JULY, 2016 PK/- & PATEL 18 I.T.A. NO.7489 /MUM/2012 I.T.A. NO.194/MUM/2013 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE , D-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES