M/s. A.S. ENTERPRISES, MUMBAI V. ACIT - 16(2), MUMBAI

ITA 2012/MUM/2007

• Counselvise Citation: 201219914 RSA 2007
• Duration Of Justice: 4 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 26-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 08-03-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K GOPAL

Judgement Text

1 . ITA NO.2012 & 2580/MUM/2007 (ASST YEAR 2003-04) IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI H HH H BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY, AM & , AM & , AM & , AM & SHRI SHRI SHRI SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM ITA NO. ITA NO. ITA NO. ITA NO.2012/MUM/20 2012/MUM/20 2012/MUM/20 2012/MUM/200 00 07 7 7 7 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2003 2003 2003 2003- -- -04 0404 04) )) ) A S ENTERPRISES 505 RADHE VALLABH CHS NEAR FRENCH BRIDGE OPERA HOUSE MUMBAI 40 004 VS THE ASST COMMR OF INCOME TAX 16(2), MUMBAI ( (( (APPELLANT APPELLANT APPELLANT APPELLANT) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AAAFA6752B AAAFA6752B AAAFA6752B AAAFA6752B ITA NO. ITA NO. ITA NO. ITA NO.2580/MUM/20 2580/MUM/20 2580/MUM/20 2580/MUM/200 00 07 7 7 7 (ASST YEAR 2003 (ASST YEAR 2003 (ASST YEAR 2003 (ASST YEAR 2003- -- -04) 04) 04) 04) THE ASST COMMR OF INCOME TAX 16(2), MUMBAI VS A S ENTERPRISES 505 RADHE VALLABH CHS NEAR FRENCH BRIDGE OPERA HOUSE MUMBAI 40 004 (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) A SSESSEE BY SHRI K GOPAL REVENUE BY SHRI V V SHASHI PER PER PER PER VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO, , , , JM JMJM JM THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE REV ENUE AND ARE DIRECTED AGAINST THE ORDER DATED 3.1.207 OF THE CIT(A) FOR T HE AY 2003-04. 2 COMMON ISSUE ARISES IN BOTH THESE APPEALS OF THE ASSESSEE AS WELL AS THE REVENUE AS TO WHETHER IN THE FACTS AND CIRCUMSTANCE S OF THE CASE, THE CIT(A) IS JUSTIFIED IN CONFIRMING THE ADDITION OF RS. 45,30,7 63/- AND DELETING THE BALANCE OUT OF THE TOTAL ADDITION OF RS. 70 LACS MADE BY TH E ASSESSING OFFICER ON ACCOUNT OF FALL IN GROSS PROFIT RATE. 2 . ITA NO.2012 & 2580/MUM/2007 (ASST YEAR 2003-04) 2.1 THE AO NOTED THAT THE GP RATE OF THE ASSESSEE H AS FALLEN FOR THE ASSESSMENT YEAR UNDER CONSIDERATION FROM 7.43% IN T HE AY 2002-03 TO5.02%. AFTER CONSIDERING THE EXPLANATIONS AND SUBMISSIONS OF THE ASSESSEE, THE ASSESSING OFFICER HELD THAT SINCE THE ASSESSEE HAS NOT MAINTAINED SEPARATE QUALITY WISE STOCK OF DIAMONDS AND EVERY PURCHASE G OT MERGED IN THE OPENING STOCK; THEREFORE, NO SEPARATE IDENTIFICATION OF THE LOT CAN BE MADE AND SUBSEQUENTLY, THERE CAN BE NO LINKAGE OF LOT OF DIA MONDS GIVEN FOR PROCESSING. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESS EE HAS NOT MAINTAINED SEPARATE ACCOUNT OF LOT WISE AND SIMILARLY, THE POL ISHED DIAMONDS RECEIVED FROM KARIKARS (WORKERS) ARE ALSO MIXED TOGETHER WITH THE STOCK REGISTER. ACCORDINGLY, THE ASSESSING OFFICER HELD THAT AS A RESULT OF THE DEFICIENT SYSTEM OF MAINTAINING THE STOCK REGISTER, NO RATIONAL COMPUTATION OF COST OF FINISHED GOODS OR COST OF ROUGH DIAMONDS IN STOCK IS POSSIBLE. THE ASSESSING OFFICER WORKOUT THE VALUE OF THE CLOSING STOCK AS PER THE AVERAGE METHOD FOR POL ISHED AS WELL AS ROUGH DIAMONDS AND ACCORDINGLY AN ADDITION OF RS. 70 LACS WAS MADE ON ACCOUNT OF FALL IN GP RATE WORKED OUT AT 2.31% OF THE TOTAL TURNOVE R. 2.2 ON APPEAL, THE CIT(A) REDUCED THE ADDITION FROM 3.2% TO 1.50% OF THE TOTAL TURNOVER RESULTING CONFIRMATION TO THE EXTEN T OF RS. 45,30,763/- OUT OF RS. 70 LACS AND DIRECTED THE ASSESSING OFFICER TO REDU CE THE ADDITION FROM 2.31% TO 1.5% OF THE TOTAL TURNOVER. 2.3 BOTH THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US CHALLENGING THE IMPUGNED ORDER OF THE CIT(A). THE A SSESSEE AGGRIEVED BY THE 3 . ITA NO.2012 & 2580/MUM/2007 (ASST YEAR 2003-04) ADDITION CONFIRMED TO THE EXTENT OF RS. 45,30,763/- WHEREAS THE REVENUE IS AGGRIEVED BY REDUCTION OF ADDITION. 3 BEFORE US, THE LD AR HAS SUBMITTED THAT THE ASSES SEE IS AN EXPORTER OF DIAMONDS. IT WAS SUBMITTED THAT THE ROUGH DIAMONDS PURCHASED BY THE ASSESSEE GOT MERGED WITH THE OPENING STOCK OF THE ROUGH DIAM ONDS ON THAT PARTICULAR DAY AND THEN THE ROUGH DIAMONDS WERE GIVEN TO THE KARIG ARS FOR DOING NECESSARY CUTTING, POLISHING AND OTHER PROCESSING AS PER THE REQUIREMENT AND INSTRUCTIONS GIVEN TO THEM. IT IS VERY DIFFICULT TO MAINTAIN THE STOCK OF THE ROUGH DIAMONDS AND POLISHED DIAMONDS LOT WISE AS THERE ARE MORE THAN 3 50 TYPES OF ROUGH DIAMONDS FROM WHICH THE FINISHED DIAMONDS ARE MADE AND ALSO THEY VARIES IN CARETS, COLOURS AND WEIGHT. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE IS REGULARLY VALUING THE CLOSING STOCK OF ROUGH DIAMONDS AT COST AS PER FIFO METHOD AND POLISHED DIAMONDS AT COST OR MARKET PRICE WHICHEVER IS LESS AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT FOR EARLIER SO MANY YEARS. 3.1 IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD FURNISHED THE COMPLETE DETAILS OF PURCHASE INVOICES AND SALE INVOICES AND ALSO THE AUDITED BOOKS OF ACCOUNT AND THE AO HAS NOT FOUND ANY DEFECT IN THE SAME. FURTHER, THE ADDITION MADE BY THE ASSESSING OFFICER BY REJECTING THE BOO KS OF ACCOUNT OF THE ASSESSEE AND BY ESTIMATING THE GROSS PROFIT BY APPLYING AVER AGE METHOD OF ACCOUNTING IS UNJUSTIFIED AND WITHOUT ANY BASIS. HE HAS RELIED U PON CERTAIN CASE LAWS I.E. IN THE CASE OF HONBLE SUPREME COURT IN THE CASE OF CHAINR UP SAMPATRAM VS CIT REPORTED IN 24 ITR 481 (SC); THE DECISION OF THE TR IBUNAL IN THE CASE OF DCIT VS KUMUDCHANDRA D MEHTA IN ITA NO.4398/MUM/07 DT 11.2. 2009, COPY OF WHICH IS 4 . ITA NO.2012 & 2580/MUM/2007 (ASST YEAR 2003-04) FILED ON RECORD AND THE DECISION OF THE HONBLE PUN JAB & HARYANA IN THE CASE OF CIT VS OM OVERSEAS REPORTED IN 173 TAXMAN 185 AND T HE DECISION IN THE CASE OF PUNDIT BROTHERS VS CIT REPORTED IN 26 ITR 159. THE LD AR OF THE ASSESSEE HAS FURTHER POINTED OUT THAT FOR THE AY 2008-09, THE AO HAS ACCEPTED THE GP @ 5.81% WHILE PASSING THE ASSESSMENT U/S 143(3). THER EFORE, THERE IS NO MATERIAL CHANGE IN THE GP RATE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION IN COMPARISON TO THE AVERAGE GP OF THE OTHER YEARS. IT WAS CONTENDED THAT EVEN IT IS ASSUMED THAT THE VALUATION OF THE CLOSING STOCK HAS NOT BEEN PROPERLY RECORDED BY THE ASSESSEE BECAUSE THE ASSESSEE HAS N OT MAINTAINED THE STOCK REGISTER LOT WISE, IT WOULD NOT BE A CASE OF UNDERS TATEMENT OF INCOME BECAUSE, THE COUNTER EFFECT OF THE VALUATION BEING THE OPENI NG STOCK OF THE NEXT YEAR WOULD NEUTRALIZED THE EFFECT OF ANY SUCH REVALUATIO N. THUS, HE HAS SUBMITTED THAT THE BOOKS OF ACCOUNT CANNOT BE REJECTED MERELY BECAUSE THERE IS A FALL IN GP RATE IN COMPARISON OF EARLIER YEARS AND THEREFORE, NO ADDITION CAN BE MADE ON THIS ACCOUNT. 3.2 THE LD DR ON THE OTHER HAND, RELIED ON THE ORDE R OF THE ASSESSING OFFICER AND SUBMITTED THAT THE ASSESSEE MIXED UP ROUGH DIAM ONDS AS WELL AS POLISHED DIAMOND STOCK AND NO SEPARATE IDENTIFICATION OF LOT WAS KEPT BY THE ASSESSEE. THEREFORE, IT WAS NOT POSSIBLE TO ASCERTAIN FROM TH E OPENING STOCK OF EACH DATE AND WHICH QUANTITY WAS ISSUED TO THE KARIKARS FOR P OLISHING AND PROCESSING. THUS, IT COULD NOT BE POSSIBLE TO ESTABLISH THE LIN KAGE BETWEEN THE QUALITY OF DIAMONDS GIVEN TO THE KARIKARS AND THE QUALITY OF P OLISHED DIAMONDS RETURNED BY THE KARIKARS AS WELL AS THE ROUGH DIAMONDS OF LESSE R QUALITY(AS WASTAGE IN PROCESS OF POLISHING AND FINISHING OF THE DIAMONDS) . DUE TO MIXING OF THE LOTS, IT WAS NOT POSSIBLE TO VERIFY THE REASONABLENESS OF T HE YIELD DISCLOSED. WHEN THE 5 . ITA NO.2012 & 2580/MUM/2007 (ASST YEAR 2003-04) ASSESSEE HAS NOT MAINTAINED PROPER STOCK REGISTER T O SHOW THE SEPARATE LOTS PURCHASED BY THE ASSESSEE THEN QUALITY WISE CONSUMP TION OF THE DIAMONDS IN THE PROCESS OF POLISHING LOST THE IDENTITY AND THEREFOR E, THE EXACT COST OF ROUGH DIAMOND CONSUMED IS NOT ASCERTAINABLE. AS A RESULT THE YIELD DISCLOSED IS ALSO NOT POSSIBLE TO BE VERIFIED. IN THESE CIRCUMSTANC ES, THE ASSESSING OFFICER IS JUSTIFIED IN ESTIMATING THE GP RATE ON THE BASIS OF EARLIER YEARS. 4 WE HAVE CONSIDERED THE RIVAL CONTENTION AND RELEV ANT MATERIAL ON RECORD. THOUGH THE ASSESSEE IS NOT MAINTAINING THE STOCK OF THE DIAMONDS SEPARATELY LOT WISE AND DAY-TO-DAY WISE; THEREFORE, IT COULD BE IDENTIFIED THE STOCK ON THE BASIS OF DAY-TO-DAY WISE PURCHASES AND CONSUMPTION FOR PROCESSING AND POLISHING; HOWEVER, IT IS NOT THE CASE OF THE REVEN UE THAT BY MAINTAINING THE STOCK IN THE MIXING LOTS, THE ASSESSEE UNDERSTATED OR UNDERVALUED THE CLOSING STOCK. EVEN IT IS NOT THE CASE OF THE REVENUE THAT THE QUANTITY OF THE STOCK WAS NOT PROPERLY VERIFIABLE ANY DISCREPANCY IN PHYSICAL STOCK DUE TO MISSING OF ALL THE LOTS OF PURCHASES. THE ASSESSING OFFICER ESTIMATED THE GP RATE BY TAKING INTO CONSIDERATION ONLY THE PREVIOUS YEAR GP RATE I.E. A SSESSMENT YEAR 2002-03. IT IS TO B NOTED THAT WHEN THE ASSESSEE IS FOLLOWING THE SAME METHOD OF MAINTENANCE OF STOCK REGISTER CONSISTENTLY SINCE LONG TIME AS W ELL AS IN THE SUBSEQUENT YEARS THEN, EVEN IF THE EXACT COST OF THE CLOSING STOCK I S NOT ASCERTAINABLE, THE SAME WOULD NOT AFFECT THE YIELD BECAUSE THE CLOSING STOC K HAS TO BE TAKEN AS OPENING STOCK FOR THE NEXT YEAR AND ANY SUCH EFFECT WOULD B E AUTOMATICALLY BE NEUTRALISED IN THIS PROCESS. MOREOVER, THE ASSESSI NG OFFICER RE-VALUED THE CLOSING STOCK ON THE GROUND THAT THE SAME HAS BEEN UNDERVAL UED BUT HE HAS CALCULATED THE GP RATE BY ADOPTING THE GP RATE ADMITTED BY THE ASSESSEE FOR THE AY 2002-03. 6 . ITA NO.2012 & 2580/MUM/2007 (ASST YEAR 2003-04) 4.1 AS PER THE CHART FILED BY THE LD AR OF THE ASSE SSEE, THE ADMITTED GP RATE FOR VARIOUS YEARS ARE AS UNDER: ASST YEAR ASST YEAR ASST YEAR ASST YEAR OPENING STOCK OPENING STOCK OPENING STOCK OPENING STOCK PURCHASE PURCHASE PURCHASE PURCHASE SALES SALES SALES SALES GP % GP % GP % GP % INCLUDING ERF INCLUDING ERF INCLUDING ERF INCLUDING ERF DIFFERENCE IN DIFFERENCE IN DIFFERENCE IN DIFFERENCE IN P&L A/C P&L A/C P&L A/C P&L A/C GP % GP % GP % GP % EXCLUDING EXCLUDING EXCLUDING EXCLUDING ERD ERD ERD ERD DIFFERENCE IN DIFFERENCE IN DIFFERENCE IN DIFFERENCE IN P&L A/C P&L A/C P&L A/C P&L A/C 2001-02 49,616,112 261,668,039 288,798,732 5.58% 6. 26% 2002-03 59,782,175 159,191,150 208,511,945 7.43% 5. 76% 2003-04 45,910,355 312,081,945 302,050,888 5.02% 5. 06% 2004-05 37,909,200 207,147,848 248,347,231 5.50% 6. 12% 2005-06 37,455,750 259,885,585 296,580,743 5.43% 4. 96% 2006-07 367,22,474 28,51,24,940 338,491,358 5.39% 1 .43% 2007-08 532,16,092 34,44,67,876 447,838,985 5.08% 1 .64% 2008-09 663,68,784 41,20,78,803 518,312,615 5.81% 1 .43% 4.2 THUS, IT IS CLEAR THAT EXCEPT FOR ASSESSMENT Y EAR 2002-03 FOR ALL OTHER ASSESSMENT YEARS, THE GP RATE IS ALMOST IDENTICAL A ND SOMETHING MORE THAN 5%. THEREFORE, IF THE AVERAGE OF THE GP IS TAKEN INTO C ONSIDERATION THEN IT CANNOT BE SAID THAT THE GP RATE ADMITTED AND OFFERED BY THE A SSESSEE FOR THIS YEAR IS SUBSTANTIALLY LESS THAN OTHER YEARS. ACCORDINGLY, IN THE ABSENCE OF ANY MATERIAL TO SHOW THAT THE ASSESSEE HAS UNDERSTATED THE INCOM E BY ADOPTING ANY MISCHIEVOUS METHOD OF ACCOUNTING, NO ADDITION IS JU STIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. HENCE, WE DELETE THE ADD ITION MADE BY THE LOWER AUTHORITIES ON ACCOUNT OF GP ESTIMATE. 5 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED WHEREAS THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THE 31 ST DAY OF MAY 2011. SD/- SD/- ( (( ( J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 31 ST MAY 2011 RAJ* COPY FORWARDED TO: 7 . ITA NO.2012 & 2580/MUM/2007 (ASST YEAR 2003-04) 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI