The ACIT, Surat V. M/s. Surbhi Gems, Surat

ITA 224/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6315 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 08-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 23-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAV
• Assessee Lawyers: J P SHAH
• Keywords: Rejection of books of accounts; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI A.N. PAHUJA, ACCOUNTANT MEMBER DATE OF HEARING : 08/06/2011 DRAFTED ON: 10/06/ 2011 1. ITA NO.224/AHD/2009 A.Y. 2005-06 2 ITA NO.538/AHD/2009 A.Y. 2005-06 THE ASSTT.CIT CIRCLE-9, SURAT VS. M/S.SURBHI GEMS 50, NEW MOHAN NAGAR MATAWADI L.H.ROAD, SURAT-395 006 PAN/GIR NO. : ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI B.L. YADAV, SR. D.R. RESPONDENT BY: SHRI J.P.SHAH, A.R. O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : BOTH THESE APPEALS HAVE BEEN FILED BY THE REVENUE; ONE PERTAINED TO THE QUANTUM ADDITION AND THE OTHER PERTAINED TO THE LEVY OF PENALTY U/S.271(1)(C) OF THE I.T.ACT. SINCE THESE TWO APPE ALS HAVE COMMON FACTS, HENCE, CONSOLIDATED AND TO BE DECIDED BY THIS SINGL E ORDER. (A) ITA NO.224/AHD/2009 FOR ASSESSMENT YEAR 2005-06 2. IN THIS REVENUES APPEAL, ARISING FROM THE O RDER OF THE LEARNED CIT(APPEALS)-V, SURAT DATED 22/10/2008, THE FOLLO WING GROUND HAS BEEN RAISED:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. C.I.T. (A)-V, SURAT HAS ERRED IN DELETING THE ADDITION OF RS.30,76,248/- MADE BY THE A.O. ON ACCOUNT OF LOW G.P., BY REJECTING THE BOOKS OF ACCOUNT WITHOUT APPRECIATING THE FACTS OF THE CASE. ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 2 - 2.1. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDI NG ASSESSMENT ORDER PASSED U/S.143(3) OF THE I.T. ACT, 1961 DATED 1.11 .2007 WERE THAT THE ASSESSEE IS IN THE BUSINESS OF PURCHASE OF RAW-DIAM ONDS AND AFTER CUTTING AND POLISHING, ETC. MADE EXPORT OF POLISHED DIAMON DS. AS PER ASSESSING OFFICER, AVERAGE COST OF POLISHED DIAMOND WAS RS.9, 000/- PER CARAT, WHEREAS THE APPELLANT HAD SHOWN THE VALUATION OF TH E CLOSING STOCK OF POLISHED DIAMOND BELOW THE COST. A CHART WAS MADE BY THE ASSESSING OFFICER WHICH IS WORTH REPRODUCTION. A. AVG.COST OF OPENING STOCK (POLISHED) = RS.9435623/978.90 CTS = RS.9639 PER CT. B. VALUATION OF OPENING STOCK (REJECTION) = RS.175938 / 5864 CTS = RS.30 PER CT. C. VALUATION OF CLOSING STOCK (ROUGH) = RS.3847610 5 / 14485 CTS = RS.2656 PER CT. D. VALUATION OF CLOSING STOCK (POLISHED) = RS.23551110/4034.26 CTS = RS.5837 PER CT. 3. IT HAS ALSO BEEN OBSERVED BY THE ASSESSING OFFIC ER THAT THERE WAS DECLINE IN THE GROSS PROFIT RATIO AS PER THE FOLLOW ING CHART: A.Y. TURNOVER G.P. G.P.MARGIN % 2005-06 11,84,71,800/- 75,26,978/- 6.35 2004-05 9,48,54,642/- 84,91,097/- 8.95 2003-04 1,50,95,743/- 12,56,119/- 8.32 4. AFTER HAVING DISCUSSION ON THE METHOD OF ACCOUNT ING, FINALLY IT WAS CONCLUDED BY THE ASSESSING OFFICER THAT GROSS PROFI T @ 8.95% TO BE ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 3 - TAKEN TO ESTIMATE THE INCOME AND, ACCORDINGLY, THE IMPUGNED ADDITION WAS MADE VIDE FOLLOWING OBSERVATIONS:- 1, THEREFORE, IN VIEW OF THE DEFECTS IN THE SYSTEM OF METHOD OF ACCOUNTING, REJECT THE BOOKS OF ACCOUNTS OF THE ASS ESSEE UNDER SECTION 145(3) OF THE I.T. ACT AND PROCEED TO ESTIM ATE THE GROSS PROFIT AS UNDER:- AS VALUATION OF CLOSING STOCK WAS EFFECTING THE GRO SS PROFIT VERY BADLY BASING ON REASONABLE BASIS FROM THE BOOK RESU LTS OF ASSESSEE SHOWN BY HIM FROM TIME TO TIME IN THE EARLIER ASSES SMENT YEARS A.Y. 2004-05, GP OF 8.95% WAS TAKEN AS A BASE TO E STIMATE THE INCOME OF ASSESSEE AND ACCORDINGLY GROSS PROFIT FOR THE YEAR ESTIMATED TO RS.1,06,03,226/- AND THE DIFFERENCE OF IN GROSS PROFIT CALCULATED ABOVE AND AS SHOWN BY ASSESSEE IN HIS BO OKS OF ACCOUNT I.E. RS.30,76,248/- IS ADDED BACK TO HIS TOTAL INCO ME. 5. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APP ELLATE AUTHORITY, THE LEARNED CIT(APPEALS) HAS GIVEN A FINDING THAT THE R EJECTION OF BOOKS OF ACCOUNT WAS NOT JUSTIFIED. THE RELEVANT OBSERVATION OF LEARNED CIT(APPEALS) ARE REPRODUCED BELOW:- I HAVE GONE THROUGH THE CONTENTS OF THE ASSESSMENT ORDER AND ALSO CONSIDERED THE VARIOUS CONTENTIONS RAISED BY T HE APPELLANT. I FIND FROM THE ASSESSMENT ORDER THAT THE A.O. HAS NO T FOUND ANY DEFECT MUCH LESS ANY SERIOUS DEFECTS IN THE FINANCI AL AND THE QUANTITATIVE RECORD MAINTAINED BY THE APPELLANT ON DAILY BASIS TOGETHER WITH THE SUPPORTING DOCUMENTS IN THE FORM OF PURCHASE BILL, SALES BILL, BANK STATEMENT, ETC. THE A.O. RE JECTED THE BOOKS OF ACCOUNTS IN THE APPELLANTS CASE ON THE ONLY GROUND THAT THE CLOSING STOCK OF POLISHED DIAMONDS HAS BEEN VALUED AT PRICE WHICH IS LOWER THAN THE COST PRICE. SINCE THE A.O. HAS A CCEPTED THAT ON ACCOUNT OF CONSISTENTLY FOLLOWED METHOD OF VALUATIO N OF CLOSING STOCK OF POLISHED DIAMONDS, THE APPELLANT HAS AN OP TION TO VALUE ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 4 - THE CLOSING STOCK OF POLISHED DIAMONDS AT COST OR M ARKET PRICE WHICHEVER IS LOWER, THE ONLY ISSUE WHICH REMAINS TO BE EXAMINED IS WHETHER THE MARKET PRICE OF THE CLOSING STOCK OF FI NISHED GOODS WAS REALLY LOWER ON THE VALUATION DATE. WHILE IN SUPPO RT OF THE VALUATION MADE OF THE CLOSING STOCK OF POLISHED DIA MONDS AT RS.5,897/- PER CARAT, THE APPELLANT POINTED OUT THE RATE FOR LOWER QUALITY OF POLISHED DIAMONDS OF RS.5,397/- EXISTING IN THE MONTH OF MARCH 2005 ITSELF, THE A.O. HAS NOT BROUGHT ON RECO RD ANY MATERIAL OR EVIDENCE INDICATIVE OF THE FACT THAT TH E MARKET PRICE OF THE LOWER QUALITY OF POLISHED DIAMONDS AS ON 31 ST MARCH 2005 WAS NOT RS.5,837/- PER CARAT AS CONTENDED BY THE APPELL ANT. THE A.R. OF THE APPELLANT ALSO SUBMITTED DETAILED TABLE VIDE THE SUBMISSION FILED BEFORE ME CONTAINING THE DETAILS OF SALES RAT ES REALIZED BY THE APPELLANT IN THE SUBSEQUENT YEAR AGAINST SALE OF LO WER QUALITY DIAMONDS ON PAGE NO.5 OF THE PAGER BOOK. THE TABLE SUBMITTED BY THE A.R. SHOWS THAT THE LOWER QUALITY DIAMONDS WERE SOLD IN THE SUBSEQUENT YEAR AT A RATE OF RS.5,000/- PER CARAT O R AT SUCH RATE WHICH IS MUCH LESS THAN THE SAID RATE OF RS.5,000/- PER CARAT. I FIND FROM THE COPIES OF SALES BILLS FILED BEFORE ME BY THE A.R. VIDE WHICH THE LOWER QUALITY DIAMONDS WERE DISPOSED OFF IN THE SUBSEQUENT YEAR THAT AS DURING THE CURRENT YEAR, IN THE SUBSEQUENT YEAR ALSO, THE LOWER QUALITY DIAMONDS WERE SOLD TO BUYERS LOCATED IN COUNTRIES LIKE HONGKONG AND THAILAND WHERE THE D IAMONDS ARE MAINLY USED AS PARTS OF MACHINERY FOR MACHINERY MAN UFACTURING. AS AGAINST THE ABOVE FACTS, DETAILS AND EVIDENCES S UBMITTED BY THE APPELLANT EVEN DURING THE COURSE OF ASSESSMENT PROC EEDINGS, THE A.O. HAS MAINLY RELIED UPON THE ASSUMPTION THAT THE MARKET VALUE OF POLISHED DIAMONDS WOULD NOT FALL TO SUCH AN EXTE ND WHICH WOULD BRING THE MARKET VALUE BELOW THE COST OF FINISHED D IAMONDS. THE SUBMISSION OF THE APPELLANT THAT SINCE THERE WAS DE MAND FOR GOOD QUALITY DIAMONDS DURING THE YEAR WHICH ENABLED IT T O REALIZE RS.12,000/- AND ABOVE PER CARAT THOUGH THE COST OF POLISHED DIAMONDS WAS RS.9,000/- PER CARAT WHICH RESULTED IN TO ACCUMULATION OF LOWER QUALITY OF DIAMONDS IN THE ST OCK AS ON 31-03-2005 HAS ALSO NOT BEEN REJECTED BY THE A.O. B Y LEADING MATERIAL/EVIDENCES ON RECORD. ON THE CONTRARY, THE DETAILS OF SALES AFFECTED BY THE APPELLANT AS REPRODUCED BY THE A.O. IN THE TABLE ON PAGES NO.2 & 3 OF THE ASSESSMENT ORDER CONFIRM T HE SUBMISSION OF THE APPELLANT. ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 5 - FROM THE CONTENTS OF THE ASSESSMENT ORDER, IT CLEAR LY EMERGES THAT THE A.O. HAS NOT BEEN ABLE TO LEAD ANY MATERIAL WHI CH CONTRADICTS THE SUBMISSION OF THE APPELLANT THAT IT HAD LOWER Q UALITY DIAMONDS IN STOCK AT THE YEAR END AND THAT THE MARKET VALUE OF SUCH STOCK WAS RS.5,837/- PER CARAT. IN VIEW OF ABOVE AND RESPECTFULLY FOLLOWING THE JUD GMENTS IN THE CASES OF GIRISH M.MEHTA, PUSHPANJALEE DYEING & PRIN TING MILLS PRIVATE LIMITED, KIRAN CORPORATION AND HARLAL HEMRA J CITED SUPRA BY THE A.R. I HOLD THAT IN THE APPELLANTS CA SE, THE REJECTION OF BOOKS OF ACCOUNTS AND THE BOOK RESULTS IS NOT JU STIFIED. I, THEREFORE, QUASH THE ACTION OF THE A.O. OF REJECTIN G THE BOOKS OF ACCOUNTS AND THE BOOK RESULTS IN THE APPELLANTS CA SE. THE FIRST GROUND OF APPEAL IS THUS ALLOWED. 6. IT HAS ALSO BEEN OBSERVED BY THE LEARNED CIT(APP EALS) THAT THE SALES HAVE GONE UP FROM 9.50 CRORES OF THE PRECEDIN G YEAR, COMPARING THE SALES OF RS.12 CRORES PERTAINED TO THE YEAR UND ER CONSIDERATION. THERE WAS STATED TO BE INCREASE OF 25% IN THE SALES IN COMPARISON TO THE PRECEDING YEAR. IT WAS ALSO CONTESTED THAT PURCHAS E OF ROUGH DIAMONDS WERE FROM OTHER COUNTRIES AND AFTER POLISHING THE P OLISHED DIAMONDS WERE ALSO SOLD COUNTRIES ABROAD. IT WAS DEMONSTRA TED TO LEARNED CIT(APPEALS) THAT ALL THE PURCHASES AS WELL AS THE SALES WERE THROUGH OFFICIAL, AS WELL AS, THROUGH BANKING CHANNELS. I T WAS ALSO DEMONSTRATED THAT AVERAGE PURCHASE COST HAD GONE UP BECAUSE IN T HE PAST AVERAGE WAS RS.2253.62 PER CARAT, HOWEVER, DURING THE YEAR AVER AGE PURCHASE COST WAS RS.2,360.11 PER CARAT. IT WAS ALSO DEMONSTRATE D THAT LABOUR CHARGES PER CARAT OF DIAMOND WERE ALSO INCREASED FROM RS.27 6.80 TO RS.279.50; THE LABOUR CHARGES FOR THE YEAR UNDER CONSIDERATION . AFTER APPRECIATING THOSE FACTS, LEARNED CIT(APPEALS) HAS HELD THAT THE QUESTION OF ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 6 - ESTIMATION OF GROSS PROFIT BY THE ASSESSING OFFICER WAS NOT WARRANTED. HENCE, THE ADDITION WAS DELETED. 7. FROM THE SIDE OF THE REVENUE, LEARNED DEPARTMENT AL REPRESENTATIVE MR. B.L. YADAV AND FROM THE SIDE OF THE ASSESSEE LEARNED AUTHORISED REPRESENTATIVE MR.J.P.SHAH APPEARED AND RESPECTIVELY PLACED RELIANCE ON THE ORDERS OF THE ASSESSING OFFICER AND LEARNED CIT(APPEALS). 8. ON HEARING THE SUBMISSIONS OF BOTH THE SIDES, IT IS WORTH TO MENTION AT THE OUTSET THAT THE REVENUE HAS NOT CHA LLENGED ONE OF THE FINDINGS OF THE LEARNED CIT(APPEALS) WHICH WAS IN R ESPECT OF REJECTION OF BOOK RESULTS. THE LEARNED CIT(APPEALS) HAS FIR ST REVERSED THE FINDINGS OF THE A.O. ABOUT THE BOOKS OF ACCOUNT AND THEN AFFIRMED THE BOOK RESULTS OF THE ASSESSEE. STRANGE ENOUGH, THE REVENUE DEPARTMENT HAS CHOSEN NOT TO CHALLENGE THOSE FINDINGS. IF THE BOOK RESULTS WERE FOUND TO BE CORRECT, THEN THE CONSEQUENCE IS THAT T HERE SHOULD NOT BE ANY ADDITION IN RESPECT OF THE GROSS PROFIT DECLARED TH AT TOO MERELY ON ESTIMATION. THIS IS THE FIRST REASON FOR OUR DISMIS SAL OF REVENUES CONTENTION. OTHERWISE ALSO, THE LEARNED CIT(APPEAL S) HAS GIVEN CERTAIN SPECIFIC REASON IN RESPECT OF THE LOWER GROSS PROFI T AS DECLARED FOR THE YEAR UNDER CONSIDERATION. REASONS ASSIGNED WERE, I) THAT THERE WAS INCREASE IN TURNOVER BY ABOUT 25%, II) THAT INCREAS E IN AVERAGE PURCHASE PRICE OF ROUGH DIAMONDS; III) THAT INCREASE IN LABO UR CHARGES PER CARAT; IV) THAT PURCHASE & SALE BOTH BEING TRANSACTED OUT OF C OUNTRY HENCE VERIFIABLE, AND V) THAT NO SPECIFIC INSTANCE OF DEF ECT WAS NOTICED . ON THE BASIS OF THOSE FACTS AND FIGURES, LEARNED CIT(APPEA LS) HAS GIVEN A ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 7 - FACTUAL FINDINGS THAT THERE WAS NO OCCASION ON THE PART OF THE ASSESSING OFFICER TO DISTURB THE GROSS PROFIT AS DECLARED BY THE ASSESSEE. A SHORT COMPILATION FILED BEFORE US FROM THE SIDE OF THE AS SESSEE HAS ALSO DEMONSTRATED THAT THE ASSESSEE HAS MAINTAINED STOCK REGISTER OF THE DIAMONDS MANUFACTURED, AS ALSO THE PARTY-WISE SUMMA RY OF MANUFACTURING OF DIAMOND. IN THE ABSENCE OF CONTR ARY EVIDENCE OR MATERIAL FROM THE SIDE OF THE REVENUE, WE ARE NOT I NCLINED TO INTERFERE WITH THOSE FINDINGS OF THE FIRST APPELLATE AUTHORI TY, HENCE, HEREBY CONFIRM THE SAME. RESULTANTLY, GROUND OF THE REVENUE IS H EREBY DISMISSED. 10. IN THE RESULT, APPEAL OF THE REVENUE, I.E. ITA NO.224/AHD/2009 IS DISMISSED. (B) ITA NO.538/AHD/2009 FOR ASSESSMENT YEAR 2005-06 11. IN THIS REVENUES APPEAL, ARISING FROM THE O RDER OF THE LEARNED CIT(APPEALS)-V, SURAT DATED 26/11/2008, THE FOLLO WING GROUND HAS BEEN RAISED:- I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN DELETING THE PENALT Y U/S.271(1)(C) OF THE I.T. ACT OF RS.11.25 LACS, WIT HOUT APPRECIATING THE FACTS OF THE CASE. 11.1. THIS APPEAL OF THE REVENUE IS CONSEQUENTIAL I N NATURE PRIMARILY BECAUSE OF THE REASON THAT ONCE THE IMPUGNED ADDITI ON HAS ALREADY BEEN DELETED, THEREFORE, THERE WAS NO OCCASION TO LEVY CONCEALMENT PENALTY ON THE SAID AMOUNT WHICH WAS DELETED BY THE LEARNED CI T(APPEALS) AS FOLLOWS:- ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 8 - I HAVE GONE THROUGH THE CONTENTS OF THE PENALTY OR DER AND ALSO CONSIDERED THE VARIOUS CONTENTIONS RAISED BY THE AP PELLANT. VIDE MY APPELLATE ORDER DATED 22-10-2008 I HAVE HELD THA T IN THE APPELLANTS CASE, THE REJECTION OF BOOKS OF ACCOUNT S AND THE BOOK RESULTS IS NOT JUSTIFIED AND I HAVE ALSO DELETED TH E ADDITION MADE BY MAKING ESTIMATION OF G.P. BY THE A.O. TO THE TUNE O F RS.30,76,248/- ON THE BASIS OF DETAILED REASONING GIVEN IN MY SAID APPELLATE ORDER DATED 22-10-2008. 12. IN VIEW OF ABOVE, THIS GROUND OF THE REVENUE HA S NO FORCE, HENCE, DISMISSED. 13. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 24 TH JUNE, 2011. SD/- SD/- ( A.N. PAHUJA ) ( MU KUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD; DATED 24 / 6 /2011 T.C. NAIR, SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPARTMENT. 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-V 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD ITA NOS.224 & 538/AHD/20 09 ASST.CIT VS. M/S.SURBHI GEMS ASST.YEAR - 2005-06 - 9 - 1. DATE OF DICTATION..08/06/2011 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 10/06/2011 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S24.6.11 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 24.6.11 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER