The ACIT, Central Circle-2, Surat V. M/s. R. Vipul & Co., Surat

ITA 2242/AHD/2007

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76899 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 07-02-2014
• Assessment Year: 2002-2003
• Appeal Filed On: 28-05-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K C MATHEWS
• Assessee Lawyers: ASHWIN PAREKH
• Keywords: Additional evidence; Cost of acquisition; Competent authority
• Section: 80HHC; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER ITA NO.2242/AHD/2007 A.YS. 2002-03 THE ASSISTANT COMMISSIONER OF INCOME- TAX, CENTRAL CIRCLE-2, SURAT. VS M/S. R. VIPUL & CO., FIRST FLOOR, J.K. CHAMBERS, OPP. KOHINOOR SOCIETY, VARACHHA ROAD, SURAT. (APPELLANT) (RESPONDENT) ITA NO.941/AHD/2008 A.YS. 2003-04 M/S. R. VIPUL & CO., FIRST FLOOR, J.K. CHAMBERS, OPP. KOHINOOR SOCIETY, VARACHHA ROAD, SURAT. VS THE ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2, SURAT. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI K.C. MATHEWS, SR.D.R., ASSESSEE(S) BY : MR. ASHWIN PAREKH / DATE OF HEARING : 07/02/2014 & 16/05/2014 / DATE OF PRONOUNCEMENT : 30/06/2014 / O R D E R PER SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER THE REVENUE AS WELL AS THE ASSESSEE, BOTH ARE IN AP PEAL RESPECTFULLY FOR ASSESSMENT YEARS 2002-03 AND 2003- 04 EMANATING FROM THE ORDERS OF LEARNED CIT(A)-III, SURAT, DATED 23.0 3.2007 AND CIT(A)-II AHMEDABAD, ORDER DATED 09.01.2008. THESE TWO APPEAL S ARE HEREBY DECIDED BY THIS COMMON ORDER. ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 2 - A. REVENUES APPEAL (ITA NO.2242/AHD/2007) 2. GROUND NO.1 AND GROUND NO.6 ARE IN RESPECT OF SI NGLE ISSUE OF DISALLOWANCE OF LABOUR CHARGES REPRODUCED BELOW: 1. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTI NG TO RESTRICT THE DISALLOWANCE OF RS.34,21,248/- TO RS.5,00,000/- MAD E BY THE A.O. ON ACCOUNT OF LABOUR CHARGES. 6. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRE CTING TO RESTRICT THE DISALLOWANCE RS.34,21.248/- TO RS.2,00,000/- MADE B Y THE A.O. ON ACCOUNT OF LABOUR CHARGES. 3. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S.144 R.W.S. 145(3), DATED 29.03.2005 THE ASSESSEE FIRM IS STATED TO BE IN THE BUSINESS OF PURCHASE OF ROUGH DIAMONDS AND MANUFACTURE THE POLISHED DIAMONDS AND EXPORT THE DIAMONDS. THE FIRM IS ALSO DOING CUTTING AND POLISHING OF DIAMONDS ON JOB WORK BASIS . IT WAS NOTED BY THE AO THAT THERE WAS DECLINE IN THE GP RATE AS PER THE FOLLOWING CHART: A.Y. TURNOVER G.P. G.P.(%) REMARKS 2002-03 37,87,34,766 3,07,09,622 8.10% INCLUDES GP IN JOB WORK AND EOU ACCOUNT 2001-02 24,21,85,414 2,94,79,804 12.17% INCLUDES GP IN EOU ACCOUNT 2000-01 42,99,44,243 3,79,82,902 8.83% --- 1999-00 40,09,99,987 4,41,30,557 11.00% --- 3.1 BECAUSE OF THE DECLINE IN THE GP, THE AO HAS AS KED FOR CERTAIN DETAILS. IN RESPECT OF THE BOOKS OF ACCOUNT, THE OB SERVATION OF THE AO WAS THAT ONLY LEDGER, CASH BOOK AND BANK ACCOUNTS WERE PRODUCED; HOWEVER, THE PRODUCTION RECORD, DATE-WISE DETAILS OF DIAMOND RECEIVED AND DIAMOND GIVEN TO JOB WORKERS, ETC. WERE NOT PRODUCE D. FURTHER, LABOUR EXPENSES REGISTER, PRODUCTION REGISTER, INVENTORY O F STOCK REGISTER, ETC. HAVE ALSO NOT BEEN PRODUCED. IT HAS ALSO BEEN NOTED BY THE AO THAT JANGHADS HAVE ALSO NOT BEEN PRODUCED. ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 3 - 3.2 ON THE OTHER HAND FROM THE SIDE OF THE ASSESSEE , IT WAS INFORMED THAT SEPARATE ACCOUNTS HAVE BEEN MAINTAINED IN RESP ECT OF THE DIFFERENT ACTIVITIES CARRIED BY THE ASSESSEE. THE POSITION OF THE GROSS PROFIT IS AVAILABLE IN RESPECT OF DIFFERENT ACTIVITIES AS FOL LOWS: NAME OF THE ACCOUNT ACTIVITY AS SEEN FROM TRADING AND P & L ACCOUNT TURNOVER G.P. G.P. % REMARKS M/S. R. VIPUL & CO. PURCHASE, MFG. AND SALE OF DIAMOND (EXPORT) 360827005 30273843 8.39% --- M/S. R. VIPUL & CO.(JOB) JOB WORK OF MFG. DIAMOND 17113607 369317 2.16% SEPARATE TRADING AND P & L ACCOUNT PREPARED BUT NO SEPARATE BALANCE SHEET PREPARED AND NO SEPARATE REPORT IN F. NO. 3CB AND 3CD FILED. M/S. R. VIPUL & CO. (EOU) PURCHASE & SALE OF DIAMOND (EXPORTS) 794154 66462 8.37% NET PROFIT OF RS.66462/- TAKEN TO M/S. R. VIPUL & C90. SEPARATE BALANCE SHEET PREPARED BUT NO SEPARATE REPORT IN F.NO. 3CB AND 3CD AND 10CCAC FILED. 3.3 THEREAFTER, THE AO HAS DISCUSSED THE ACTIVITIES IN RESPECT OF EACH UNIT CARRIED OUT BY THE ASSESSEE. IN RESPECT OF THE ACTIVITY OF JOB WORK CARRIED OUT BY THE UNIT M/S. R. VIPUL & CO., THE AO HAS MENTIONED THAT M/S. R. VIPUL & CO. (JOB) HAD SHOWN NET PROFIT OF R S.3,69,317/- ON LABOUR RECEIPTS OF RS.1,71,13,607/-, WHICH WORKED O UT TO 2.16%. IT IS GLARING FROM PROFIT & LOSS ACCOUNT THAT DESPITE THE TURNOVER OF RS.1,71,13,607/- THE ASSESSEE HAS NOT SHOWN INCIDEN TAL EXPENSES. ACCORDING TO AO, ANGADIA EXPENSES OUGHT TO HAVE BEE N INCURRED BECAUSE THE ASSESSEE HAD IMPORTED ROUGH DIAMONDS FROM ANTW ERP AND SENT TO SURAT FROM MUMBAI BY THE AGENCY OF ANGADIAS. SIMILA RLY, ASSESSEE SHOULD HAVE INCURRED ASSORTMENT EXPENSES FOR THE PURPOSE OF GRADATION ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 4 - OF ROUGH DIAMONDS. THERE WAS NO SEPARATE BALANCE SH EET IN RESPECT OF THESE UNITS. THE AO HAS RAISED SEVERAL DOUBTS THAT HOW A UNIFORM EQUAL AMOUNT OF COMMISSION WAS EARNED. THE AO HAS ALSO IS SUED SUMMONS TO VARIOUS JOB WORKERS BUT MOST OF THE SUMMONS COULD N OT BE SERVED. HE HAS ALSO MENTIONED THAT THERE WAS A SEARCH ON THE A SSESSEE FIRM ON 07.01.1999 AND ON THAT OCCASION A FLOPPY WAS FOUND WHICH WAS THROWN BY ONE PERSON AND A CRIMINAL COMPLAINT HAD ALSO BEE N WRITTEN. ALTHOUGH, ASSESSEE HAD CLAIMED LABOUR EXPENSES OF RS.1,67,44, 290/- BUT ACCORDING TO AO THERE WAS NOT EVEN AN IOTA OF EVIDENCE TO PRO VE THE LABOUR EXPENSES. ON THAT BASIS, THE AO HAD INVOKED THE PRO VISIONS OF SECTION 145 OF IT ACT AND THE BOOKS RESULTS WERE REJECTED. 3.4 ANOTHER POINT HAS ALSO BEEN NOTICED BY THE AO T HAT IN ONE UNIT THE LABOUR CHARGES WERE SHOWN AT RS.1,71,06.420/-; BUT AT THE END OF THE YEAR LIABILITY TOWARDS LABOUR CHARGES WAS SHOWN AT RS.2, 60,15,327/-. ACCORDING TO AO, IT WAS HIGHLY IMPROBABLE AND BEYON D IMAGINATION THAT LABOUR CHARGES WERE NOT PAID TO THE LABOURERS AND R EMAINED UNPAID FOR MORE THAN ONE YEAR. IN HIS OPINION, IT WAS BEYOND I MAGINATION TO ACCEPT THAT THE FIRM WAS DOING JOB WORK OF RS.1,71,13,607/ - AND FOR WHICH NOT INCURRED ANY EXPENDITURE EXCEPT LABOUR EXPENSES OF RS.1,67,44,290/-. THEREFORE, ABOUT LABOUR EXPENSES CLAIMED FOR THE RE SPECTIVE UNITS OF RS.1,71,06,420/- AND RS.1,67,44,290/- THE AO HAS RA ISED SERIOUS DOUBTS AND PROCEEDED TO DISALLOW THE SAME. AN INSPECTOR WA S DEPUTED TO SUBMIT HIS REPORT AND NOTED THAT INCORRECT INFORMATION ABO UT THE LABOURERS WERE FURNISHED BY THE ASSESSEE. THE LABOURERS WERE NOT H AVING THEIR OWN PLANT AND MACHINERY. CERTAIN SERIOUS DOUBTS HAVE BEEN RAI SED ABOUT THE PAYMENT OF LABOUR CHARGES AT FLAT RATE OF RS.300 PE R CARAT IN ALL CASES OF ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 5 - THE GROUP. HE HAS COMPARED THE PAYMENT OF LABOUR CH ARGES FROM THE RATES OF PAYMENT MADE IN THE PAST YEARS. AS PER A COMPARA TIVE CHART, THERE WAS INCREASE IN PAYMENT OF LABOUR CHARGES PER CARAT DUR ING THE YEAR UNDER CONSIDERATION. IN A.Y. 2001-02, THE ASSESSEE HAD PA ID RS.267 PER CARAT HOWEVER FOR THE YEAR UNDER CONSIDERATION IT WAS RS. 300, THEREFORE, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE LABOUR CHARGES PAYMENTS TO THE EXTENT OF RS.60 PER CARAT BE NOT DISALLOWED. IN THE ABSENCE OF ANY SATISFACTORY EXPLANATION, THE AO HAD DISALLOWED THE LABOUR EXPENSES AS UNDER: IN VIEW OF DETAILED DISCUSSION ON LABOUR EXPENSES AND APPLICABILITY OF THE PROVISIONS OF SECTION 145(3) OF THE ACT IN THE EARL IER PARAS, IT IS CLEAR THAT THE ASSESSEE HAS FAILED TO EXPLAIN THE GENUINENESS OF T HE LABOUR EXPENSES AND TO SUBSTANTIATE INCREASE IN THE RATE OF LABOUR CHARGES FROM AVERAGE LABOUR CHARGE AT THE RATE OF RS.240/- PER CARAT IN EARLIER ASSESSMENT YEARS TO RS.300/- PER CARAT. CONSIDERING THE ABOVE FINDINGS DIAMOND LABOUR CHARGES AT THE RATE OF RS.60/- PER CARAT FOR 57021.40 CARATS O F DIAMONDS WHICH WORK OUT TO RS.34,21,284/- ARE DISALLOWED. 3.5 FURTHER, IT WAS NOTED BY THE AO THAT THE ASSESS EE HAD NOT FURNISHED DETAILS OF LABOUR EXPENSES OF RS.1,67,44,290/- DEBI TED IN M/S. R. VIPUL & CO. (JOB). AFTER ASSIGNING THOSE VERY REASONS AS ST ATED ABOVE THE AO HAS DISALLOWED 10% OF THE LABOUR EXPENSES, I.E., RS.16, 74,429/- PERTAINING TO UNIT OF M/S. R. VIPUL AND CO. (JOB). THOSE ADDITION S HAVE BEEN CHALLENGED. 4. IN RESPECT OF THE DISALLOWANCE OF LABOUR EXPENSE S TO THE EXTENT OF RS.34,21,284/-, LEARNED CIT(A) HAS RESTRICTED A TOK EN DISALLOWANCE OF RS.5 LAC AND BALANCE WAS DELETED AS FOLLOWS: I HAVE GONE THROUGH THE DETAILS AND FIND THAT THE APP ELLANT WAS PAYING JOB WORK CHARGES AT A RATE OF RS.247/- TO RS.267/- PER CARAT IN EARLIER YEARS. THIS WAS INCREASED TO RS.300/- PER CARAT IN THE YEAR UNDER CONSIDERATION AND IS IN THE NORMAL COURSE OF BUSINESS. THE AO HAS NOT BROUGHT ON RECORD ANY INSTANCE THAT THE JOB WORKER DENIED TO HAVE RECEIVE D THIS AMOUNT PER CARAT ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 6 - FROM THE APPELLANT. IT IS FURTHER SEEN THAT THE CHART OF JOB WORKERS DRAWN BY THE AO ON PAGE-22 AND 23 OF THE ASSESSMENT ORDER IS EXACTLY THE SAME AS IN THE CASE OF M/S. M. KANTILAL EXPORTS FOR AY 2002-03. IT IS NOT UNDERSTOOD AS TO HOW THE SAME JOB WORKERS WOULD BE WORKING IN TWO DIFFERENT UNITS AT THE SAME TIME AND THE AO'S INFERENCE ON THIS ACCOUNT APPEARS TO BE ERRONEOUS. I AM INCLINED TO AGREE WITH THE APPELLANT, THERE WOULD BE NO CO-RELATION BETWEEN THE ELECTRICITY EXPENSES AND WAGES PAID TO THE JOB WORKERS. IT IS ALSO NOT MATERIAL, IF THE ADDRESSES OF THE JOB WORKERS WERE THEIR RESIDENTIAL ADDRESSES. SINCE ALL THESE PEOPLE WERE WORKING IN FIVE FACTORY PREMISES OF THE APPELLANT GROUP WITH COMMON ELECTRICITY CONNECTION. IT IS ALS O SEEN THAT THESE JOB WORKERS WERE KIND OF LABOUR CONTRACTORS AND THEREFO RE IT IS NOT VERY SURPRISING THAT A FAIR PERCENTAGE OF LABOUR CHARGES REMAINED O UTSTANDING AT THE END OF THE YEAR. SINCE THE AO HAS NOT BROUGHT ANY ADVERSE FINDINGS ON RECORD TO SUPPORT THAT THE JOB CHARGES PAID WERE BOGUS OR HIG HLY INITIATED, DISALLOWANCE ON THIS ACCOUNT CANNOT BE SUSTAINED. HOWEVER, SINCE COMPLETE RECORDS OF SUCH LABOUR CHARGES WERE NOT PRODUCED AND A FEW PERSONS TO WHOM SUMMONS WERE ISSUED DID NOT APPEAR BEFORE THE AO, IT IS NOT IMPR OBABLE THAT SOME PART OF THE LABOUR PAYMENT IS EXCESSIVE. 1 AM THEREFORE OF THE CONSIDERED VIEW THAT A TOKEN DISALLOWANCE OF RS.5 LACS OUT OF LABOUR CHARG ES PAID WILL SERVE THE INTEREST OF JUSTICE AND THE BALANCE DISALLOWANCE OF RS.29,21,284/- IS DIRECTED TO BE DELETED. 4.1 REGARDING DISALLOWANCE OF LABOUR EXPENSES OF RS .16,74,429/-, LEARNED CIT(A) HAS GRANTED PART RELIEF AND RESTRICT ED TO RS.2 LAC ONLY AND BALANCE WAS DELETED IN THE FOLLOWING MANNER: I HAVE CONSIDERED THE SUBMISSIONS AND FIND THAT AS PER THE SHOW CAUSE NOTICE ISSUED BY AO, IT WAS MENTIONED THAT PROFIT OF 4 TO 5% WOULD BE THERE IN THIS KIND OF BUSINESS WHILE THE APPELLANT HAS SHOWN PROF IT OF ONLY 2%. IF 10% OF SUCH LABOUR PAYMENTS ARC DISALLOWED, THE PROFIT WOU LD WORK OUT TO 12% AGAINST 4% PROPOSED IN THE NOTICE. HOWEVER, IT IS A LSO SEEN THAT THE APPELLANT'S CONTENTION THAT IT WAS EARNING ONLY 2% COMMISSION ONLY IS ALSO NOT TRUE & CORRECT, SINCE BY ITS OWN ADMISSION AND DETAILS FURNISHED, THE COMMISSION WORKED OUT TO 2.08% TO 2.21%. SINCE, THE APPELLANT IS CONTRADICTING ITSELF ON THIS ISSUE, 1 AM OF THE CON SIDERED VIEW THAT IT WOULD BE FAIR & REASONABLE, IF A PART OF THE LABOUR PAYMENT IS DISALLOWED FOR WANT OF COMPLETE INFORMATION. IT WOULD SERVE THE INTEREST O F JUSTICE, IF THE DISALLOWANCE IS RESTRICTED TO RS.2 LACS ONLY. THE APPELLANT GETS A RELIEF OF RS.14,74,429 /- ON THIS ACCOUNT. 5. WITH THIS BRIEF BACKGROUND, WE HAVE HEARD BOTH T HE SIDES. AT THE OUTSET, WE HAVE NOTED THAT THE REASON GIVEN FOR THE DISALLOWANCE OF LABOUR EXPENSES, AS WELL AS THE REASON GIVEN BY LEARNED CI T(A) WHILE GIVING PART RELIEF TO THIS ASSESSEE; WERE EXACTLY THE SAME WITH THE FACTS OF AN ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 7 - ANOTHER CASE OF THE GROUP, NAMELY, M/S. M. KANTILAL EXPORTS (ITA NO.3379/AHD/2007, A.Y. 2002-03). IN THAT CASE BY AN ORDER OF EVEN DATE WE HAVE GRANTED PART RELIEF IN RESPECT OF THIS ISSU E IN THE FOLLOWING MANNER: 5.3 INSTEAD OF GRANTING ADHOC RELIEF, WE ARE OF THE VIEW, THAT A REASONABLE RATE SHOULD HAVE BEEN APPLIED BY LEARNED CIT(A). TO COVER UP ALL THE POINTS OR OBJECTIONS RAISED BY THE REVENUE DEPARTMENT AS A LSO TO GIVE JUSTICE TO THE RESPONDENT ASSESSEE WE HEREBY HOLD THAT IT WOULD BE FAIR AND REASONABLE TO ALLOW LABOUR CHARGES @ RS.270 PER CARAT, INSTEAD OF RS.300 PER CARAT AS CLAIMED BY THE ASSESSEE. IN THIS MANNER THE SHORT C OMINGS OF THE ASSESSEE SHALL ALSO BE ADDRESSED. THE OUTCOME OF THIS DIRECT ION SHOULD BE THAT THE LABOUR CHARGES PAYMENT TO THE EXTENT OF RS.300 PER CARAT, AS CLAIMED BY THE ASSESSEE, IS NOW TO BE DISALLOWED AND SIDE BY SIDE THE RATE OF RS. 240/- AS ADOPTED BY THE A.O.IS ALSO NOT APPROVED. ACCORDING TO US TO SETTLE THE ISSUE BEING VERY OLD IT IS APPROPRIATE TO ADOPT AN AVERAG E RATE WHICH COMES TO RS.270/- PER CARAT. THIS RATE CAN BE APPLIED ON THE TOTAL DIAMONDS IN CARATS MEANT FOR THE LABOUR CHARGES. THE A.O. HAD APPLIED THE RATE ON THE DIAMOND WEIGHING 320088.22 CARATES. NOW ON THIS WEIGHT IF A PPLY THE RATE OF EXCESS PAYMENT OF RS.30/-, AS DECIDED BY US, THEN THE DISA LLOWANCE SHALL BE OF RS. 96,02,640/-. WE HOLD ACCORDINGLY. IN THIS MANNER, THE GROUND RAISED BY THE REVENUE IS HEREBY PARTLY ALLOWED. 5.1 BY APPLYING THE SAME LOGIC, WE HEREBY HOLD THAT AN AVERAGE RATE OF RS.270 PER CARAT CAN BE ALLOWED INSTEAD OF RS.300 A S CLAIMED BY THE ASSESSEE. WE HEREBY REVERSE THE FINDING OF LEARNED CIT(A) IN RESPECT OF AN ADHOC DISALLOWANCE OF RS.5 LAC AND RS.2 LAC, RES PECTIVELY AND DIRECT THE AO TO RE-COMPUTE THE DISALLOWANCE AFTER ADOPTIN G THE RATE AS SETTLED BY US. ACCORDINGLY, THIS GROUND OF THE REVENUE IS P ARTLY ALLOWED. 6. GROUND NOS.2 AND 3 ARE REPRODUCED BELOW: THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECT ING TO DELETE THE ADDITION OF RS.1,02,53,498/- MADE BY THE AO ON ACCOUNT OF UN DER VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS. 6.1 THE AO HAS PREPARED A LIST OF MONTH-WISE SALE O F POLISHED DIAMONDS AND COMPARED THE SAME WITH THE PURCHASE OF THE DIAMONDS. IT ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 8 - WAS FOUND THAT THE AVERAGE SALE PRICE OF THE POLISH ED DIAMOND DURING THE MONTH OF MARCH, 2002 WAS RS.7,741 PER CARAT. WHEREA S THE AVERAGE SALE PRICE FOR THE WHOLE YEAR WAS RS.10,862/-. THE AO HA S FOUND CERTAIN DEFECTS IN THE VALUATION AND THEREUPON HE HAS COMPU TED THE VALUATION OF THE CLOSING STOCK OF THE POLISHED DIAMOND AS FOLLOW S: THE CLOSING STOCK IS TO BE VALUED AT COST OR REALI ZABLE VALUE WHICHEVER IS LOWER. IF THE BASIC PRINCIPLE OF VALUATION IS ADOPT ED, THE VALUATION OF CLOSING STOCK CAN NEVER BE LESS THAN COST AND REALIZABLE VA LUE OF THE POLISHED DIAMOND IS DETERMINABLE FORM SALE INSTANCES. CONSIDERING SA LE INSTANCES OF DIAMONDS AS AT THE END OF THE YEAR, THERE IS NO LOGICAL REAS ON AS TO WHY THE VALUE OF CLOSING STOCK OF DIAMONDS SHOULD NOT BE ADOPTED AT RS.7741.34 AS AGAINST AVERAGE SALE PRICE FOR THE WHOLE YEAR AT RS.10,862/ - PER CARAT. THE INCORRECT METHOD EVEN IF FOLLOWED OVER THE YEARS HAS TO BE RE JECTED IF NO CORRECT INCOME CAN BE DEDUCTED FROM IT. IN FACTS AND CIRCUMSTANCES , I AM CONVINCED THAT THIS IS A GLARING CASE OF UNDER VALUATION OF CLOSING STO CK OF POLISHED DIAMOND. I ACCORDINGLY AFTER CONSIDERING THE ASSESSEES SUBMIS SION IN THIS REGARD, MAKE AN ADDITION OF RS.4,64,36,371/- TO THE BLOCK RESULT S AS WORKED OUT AS UNDER: CLOSING STOCK OF POLISHED DIAMONDS 1785.91 CTS X RS.7741.34) AS DISCLOSED RS.1,38,25 ,337/- LESS: VALUE OF CLOSING STOCK SHOWN RS. 35,71,82 0/- UNACCOUNTED CLOSING STOCK OF POLISHED DIAMONDS: R S.1,02,53,517/- PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT FOR CO NCEALMENT OF INCOME ARE INITIATED. 7. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APP ELLATE AUTHORITY, LEARNED CIT(A) HAS DELETED THE ADDITION IN THE FOLL OWING MANNER: REGARDING ADDITION ON ACCOUNT OF CLOSING STOCK OF POLISHED DIAMONDS AT RS.1,02,53,498/-, IT WAS SUBMITTED TH AT THE AO ON ONE HAND REJECTED BOOKS OF ACCOUNTS AND AGAIN MADE ADDITION FOR CLOSING STOCK OF POLISHED DIAMONDS BY REFERRING TO SAME BOOKS OF ACC OUNTS AS WAS HELD BY THE IT AT IN THE CASE OF CIT VS. SAMIR DIAMOND MANUFACT URING CO. 71 ITD 75. VARIOUS CASE LAWS WERE REFERRED TO BY THE AR, WHERE IN IT WAS HELD THAT THE STOCK WAS TO BE VALUED AT COST OR MARKET PRICE WHIC HEVER WAS LOWER AND THAT BOTH OPENING AND CLOSING STOCK SHOULD BE VALUED AT UNIFORM METHOD. IT WAS SUBMITTED THAT ITEM WISE LIST OF CLOSING STOCK OF P OLISHED DIAMONDS WAS FILED BEFORE THE AO AND THE METHOD OF VALUATION WAS CONSI STENTLY FOLLOWED WHICH WAS ACCEPTED BY THE DEPARTMENT IN EARLIER YEARS. IF THE CLOSING STOCK WAS TAKEN AT A HIGHER VALUE, IT SHOULD BE ALLOWED AS A DEDUCTION AS OPENING STOCK OF THE NEXT YEAR OR THE OPENING STOCK OF THE CURREN T YEAR SHOULD ALSO BE VALUED AT THE SAME METHOD. IF AN ADDITION WAS MADE BY THE AO FOR UNDER VALUATION OF ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 9 - CLOSING STOCK, THE REAL PROFITS OF BUSINESS COULD N OT BE ASCERTAINED WITHOUT INCREASING THE VALUE OF OPENING STOCK FOR THAT YEAR . 1 HAVE GONE THROUGH THE DETAILS AND FIND THAT THE S TOCK OF POLISHED DIAMONDS OF 1,785.91 CARATS WAS OUT OF MANUFACTURING BILL OF 11.1.2002. A PERUSAL OF DETAILED FILED BY THE APPELLANT SHOWS THAT IT MANUF ACTURED 8,706.45 CARATS OUT OF THIS. THE COST OF LABOUR ON THIS WAS RS.86,77,52 4/- BY USING 9,6430.08 CARATS. FURTHER, THERE WAS A HEAVY REJECTION OF 67, 505 CARATS OUT OF THESE DIAMONDS AND THE TOTAL COST OF MANUFACTURE WAS RS.3 ,00,69,398/- A PERUSAL OF DETAILS ALSO SHOWS THAT THE APPELLANT SOLD 6,920 CA RATS FROM POLISHED DIAMONDS AT AN AVERAGE COST OF RS.3,829 PER CARAT A S WAS EVIDENCED BY THE COPIES OF SALE INVOICES. IF THE SAID AMOUNTS ARE DE DUCTED FROM THE TOTAL COST OF MANUFACTURING, THE AVERAGE COST OF CLOSING STOCK WO ULD WORK OUT AT RS. 2,000 PER CARAT. IT IS ALSO SEEN THAT THE SAME METHOD OF VALUATION WAS FOLLOWED BY THE APPELLANT IN EARLIER YEARS ALSO AND THEREFORE, THE AO HAD NO JUSTIFICATION IN CHANGING THE METHOD OF VALUATION WITHOUT HAVING A STRONG REASON FOR IT. THE AO IN THIS CASE HAS MADE ADDITIONS AND DISALLOWANCE S WITHOUT BRINGING ANY ADVERSE MATERIAL ON RECORD AND HAS GONE BY CONJECTU RES & SURMISES ONLY. THEREFORE, I AM OF THE VIEW THAT THE METHOD OF VALU ATION OF CLOSING STOCK IN RESPECT OF POLISHED DIAMONDS IS NOT CORRECT AND THI S KIND OF AN ADDITION IS NOT SUSTAINABLE. 1 AM ALSO INCLINED TO AGREE WITH THE A PPELLANT THAT A CLOSING STOCK IS VALUED AT A HIGHER PRICE, THE OPENING STOCK FOR THE CURRENT YEAR AS WELL AS THE NEXT YEAR WOULD ALSO HAVE TO BE VALUED BY THE S AME METHOD WHICH WOULD IN A FACT RESULT IN LOWER PROFIT FOR THE YEAR UNDER CONSIDERATION. ADDITION ON THIS ACCOUNT IS, THEREFORE, DIRECTED TO BE DELETED. 8. WE HAVE HEARD BOTH THE SIDES. WE HAVE PERUSED TH E MATERIAL PLACED BEFORE US. IT IS WORTH TO MENTION THAT WE AR E NOT IN AGREEMENT WITH THE REASONS GIVEN BY LEARNED CIT(A). THIS VERY ISSU E HAS ALREADY BEEN DISCUSSED BY US IN ONE OF THE GROUP CASE REFERRED A BOVE, NAMELY, M/S. KANTILAL EXPORT (SUPRA) AND THEREIN IN RESPECT OF U NDER VALUATION OF THE CLOSING STOCK OF POLISHED DIAMONDS WE HAVE EXPRESSE D OUR VIEW IN PARAGRAPH 9, PARAGRAPH 9.1 AS FOLLOWS: 9. WE HAVE HEARD BOTH THE SIDES AND EXAMINED THE FACTS OF THE CASE. THE FACTS OF THE CASE HAVE REVEALED THAT THE OPENING STOCK OF 39438 CARAT OF POLISHED DIAMONDS WAS VALUED AT RS.21,51,04,188/- D EPICTING AN AVERAGE RATE OF 5497 PER CARAT . THE ASSESSEE ON ONE HAND HAS STATED THAT THE QUA LITY WISE STOCK MAINTENANCE WAS NOT POSSIBLE, BUT ON TH E OTHER HAND AN EXPLANATION WAS OFFERED BEFORE LEARNED CIT(A) THAT THE TOTAL STOCK MANUFACTURED HAD TWO TYPES OF DIAMOND, ONE WAS HAVING HIGHER RATE OF SALES AND OTHER TYPE HAD LOW RATE OF SALES OF THE DIAMOND. FURTHER, IN RESPECT OF VALUATION OF DIAMONDS, THE ASSESSEE HAS FURNISHED A LIST OF SUPERIOR QUALITY ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 10 - DIAMOND SOLD DURING THE YEAR. IF THAT LIST COULD BE PREPARED BY THE ASSESSEE THEN WHY THE COMPLETE LIST WITH QUALITY AND QUANTIT Y OF DIAMOND COULD ALSO NOT FURNISHED BEFORE THE AO? LEARNED CIT(A) HAS SIMPLY SAID THAT THE ADDITION WAS MERELY ON HYPOTHETICAL BASIS, BUT ACCO RDING TO US IT WAS AN INCORRECT OBSERVATION. WHAT THE AO HAS ADOPTED WAS IN FACT BASED UPON THE MATERIAL ON RECORD, I.E., DETAILS OF THE SALES MADE IN THE MONTH OF MARCH, 2002 AND LIKEWISE THE SALES OF FEW OTHER MONTHS OF THE F INANCIAL UNDER CONSIDERATION. ACCORDING TO THE SAID DETAILS A SUM OF RS.8,247/- PER CARAT WAS FOUND TO BE THE AVERAGE SALE PRICE FOR THE MONTH OF MARCH, 2002. IN A SITUATION WHEN THERE WAS NO OTHER CONVINCING FACTOR TO DETERMINE THE EXACT VALUATION OF THE POLISHED DIAMOND AS FURNISHED BY T HE ASSESSEE; WE ARE OF THE VIEW THAT THE VALUATION OF THE POLISHED DIAMOND COU LD HAVE BEEN MADE BY ADOPTING THE BASIS OF THE SALE OF THE LAST MONTH OF THE ACCOUNTING PERIOD. THIS FIGURE CAN THUS BE A STARTING POINT FOR THE CALCULA TION. HENCE, BY COMPARING THE SALE PRICE OF THE LAST MONTH A REASONABLE VIEW CAN BE ADOPTED ABOUT THE EXACT POSITION OF THE VALUATION OF THE CLOSING STOC K. THE ASSESSEE HAD ADOPTED THE AVERAGE VALUE OF THE POLISHED DIAMOND IN THE CL OSING STOCK AT RS.4,650/- HOWEVER THE VALUE PER CARAT OF THE DIAMOND IN THE M ONTH OF MARCH, 2002 WAS RS.8,247/-. WE THEREFORE COMMENT THAT THE AVERAGE P RICE AT RS.4,650/- PER CARAT WAS TOWARDS LOWER SIDE. TO RESOLVE THE ISSUE A MID PATH CAN BE ADOPTED. 9.1 AS A GENERAL RULE, A PROFIT OF A BUSINESS CAN ONLY BE DETERMINED BY TAKING INTO ACCOUNT THE VALUATION OF THE STOCK. THERE HAS TO BE A COMPARISON AT THE OPENING WITH THE CLOSING OF THE ACCOUNTING YEAR. SO AS A NORMAL RULE, A PROFIT IS TO BE ASCERTAINED BY VALUING STOCK-IN-TRADE AT T HE BEGINNING AS ALSO AT THE CLOSE OF THE ACCOUNTING YEAR. THERE IS ONE MORE WEL L ACCEPTED RULE THAT THE VALUATION CAN BE ADOPTED BY TAKING INTO ACCOUNT THE COST PRICE OR THE MARKET PRICE WHICHEVER IS LOWER. NORMALLY, ACCORDING TO TH IS SYSTEM, ON THE FIRST OCCASION, THE STOCK IS BROUGHT IN AT COST PRICE. IF ANY PORTION THEREOF IS LEFT UNSOLD AT THE CLOSE OF THE YEAR, THE VALUE TO BE EN TERED THEREFOR, ACCORDING TO THIS SYSTEM OF ACCOUNTING, IS ITS MARKET PRICE. IF IT IS FOUND THAT SUCH MARKET PRICE IS BELOW COST, VALUED ACCORDINGLY BUT THAT WO ULD BE THE VALUATION OF THE OPENING STOCK OF THE SUBSEQUENT YEAR. THIS METHOD O F WRITING UP ACCOUNTS WOULD RESULT IN DEPRESSING THE PROFITS EARNED DURIN G THE YEAR, SINCE IT WOULD SET OFF AN UNREALIZED LOSS AGAINST THE REALIZED PRO FITS OF THE YEAR. NATURALLY, SUCH METHOD RUNS COUNTER TO THE CARDINAL PRINCIPLE OF REVENUE LAW THAT NO LOSS SHOULD BE ENTERED IN THE YEAR OF ACCOUNT, UNLE SS THE LOSS HAS BEEN ACTUALLY REALIZED AND SUFFERED. THE JUSTIFICATION G IVEN FROM THE COURTS UPHOLDING THIS PRACTICE IS THAT ANY PROVISION WHICH MIGHT BE MADE FOR AN ESTIMATED LOSS, BY ADOPTING THE LOWER MARKET VALUAT ION, WOULD BE ERASED AND SET OFF, IF THE MARKET IMPROVED IN THE SUBSEQUENT Y EAR OR BY THE TIME THE GOODS WERE ACTUALLY SOLD. SO, THE METHOD OF ACCOUNTING AT THE LOWER MARKET VALUE WHEN IT IS BELOW COST, IS IN ORDER TO ENABLE THE TR ADER TO DISTRIBUTE HIS LOSS MORE EVENLY, WHENEVER THERE IS LOSS. THEN THE JUSTI FICATION OF STOCK HAS TO BE SEEN AS PER EITHER LIFO OR FIFO METHOD. BUT IN A PE RIOD OF RISING PRICES OF THE RAW MATERIAL, THE PRICE OF THE FINISHED PRODUCT WOULD GO UP. IN SUCH A CASE, UNLESS THE RAW MATERIAL USED UP IN THE MANUFACTURE IS IDENTIFIED WITH ITS PURCHASES AT A PARTICULAR PRICE, IT COULD BE DI FFICULT TO STRIKE THE PROFIT OF ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 11 - THE BUSINESS CORRECTLY. IT IS SIMPLE IN A SITUATION, WHERE THE QUALITY OF T HE RAW MATERIAL IS THE SAME WITH THE QUALITY OF THE FI NISHED GOODS. BUT IN THOSE CIRCUMSTANCES WHERE THE QUALITY OF THE RAW MATERIAL CHANGES DRASTICALLY AND VALUE IS ALSO INCREASED DRASTICALLY THEN BECAUSE OF THE VALUE ENHANCEMENT DUE TO QUALITY ENHANCEMENT THE VALUATION OF THE CLO SING STOCK HAS TO BE ADOPTED AT A REASONABLE PRICE. FROM THE RECORDS, IT IS NOT CLEAR WHETHER LIFO METHOD WAS CONSISTENTLY FOLLOWED OR NOT. IT IS ALSO NOT CLEAR WHETHER IN THIS PARTICULAR YEAR THE ASSESSEE HAD ADOPTED FIFO METHO D BECAUSE ONE OF THE ARGUMENT IS THAT THE OLD STOCK REMAINED UNSOLD. IT IS FOR THE AO, AFTER EXAMINING THE FACTS, TO CONSIDER WHETHER IT WOULD B E FAIRER AND MORE APPROPRIATE TO APPLY THE RATE WHICH IS RELEVANT TO ASCERTAIN THE VALUE OF THE CLOSING STOCK. NATURALLY THE VALUE OF THE STOCK PRE VAILING ON THE LAST DAY OF THE ACCOUNTING PERIOD IS RELEVANT, HOWEVER, THE VALUE P REVAILING ON THE FIRST DAY OF THE ACCOUNTING PERIOD IS NOT AT ALL RELEVANT IN THE PRESENT SITUATION, ESPECIALLY, WHEN THE ASSESSEE HAS FAILED TO BRING A NY MATERIAL NECESSITATING FOR MAKING ANY CORRESPONDING CHANGES IN THE VALUE O F THE OPENING STOCK. IN THE PRESENT CASE, DUE TO LACK OF INFORMATION ABOUT THE QUALITY OF THE DIAMONDS, THE AO WAS IN DIFFICULTY TO CORRECTLY ASSESS THE VA LUATION. THEREFORE, IT IS CORRECT TO DISTURB THE VALUATION AT LEAST FOR THE Y EAR UNDER CONSIDERATION SO THAT THE DISCREPANCY AS NOTED IN RESPECT OF THE QUA LITY OF THE DIAMOND CAN TO SOME EXTENT BE RECTIFIED. WE, THEREFORE, HOLD THAT THIS YEAR CAN BE TREATED AS A DEMARCATING YEAR FROM THE PAST YEARS; HENCE, WITHOUT DISTURBING THE VALUE OF THE OPENING STOCK, THE AO IS AUTHORIZED TO CHANGE T HE METHOD OF VALUATION FOR VALUING THE CLOSING STOCK. WITH THIS THEORY IN MIND , WE HEREBY HOLD THAT AN AVERAGE OF THE TWO VALUATIONS IS THE RIGHT SOLUTION . THE AVERAGE OF THE TWO VALUATIONS IS 6448/-. TO RESOLVE THIS LONG PENDING ISSUE, ACCORDING TO US, IS A REASONABLE AND FAIR APPROACH TO COMPUTE THE VALUE O F THE STOCK OF THE POLISHED DIAMOND AT RS.6448/- PER CARAT AS AN AVERA GE VALUE OF THE CLOSING STOCK. CLOSING STOCK OF THE DIAMOND WAS 12909.74 CT . AND BY APPLYING THE RATE OF RS. 6,448/- THE VALUE TO BE WORKED OUT IS R S.8,32,42,003/-, OUT WHICH THE VALUE DECLARED AS PER ASSESSEE IS TO BE REDUCED OF RS. 6,00,30,337/; THUS THE BALANCE COMES TO RS. 2,32,11,666/-. WE, THEREFO RE, DO NOT APPROVE THE TOTAL DELETION OF THE IMPUGNED ADDITION, AND RESTRI CT THE ADDITION TO THIS EXTENT ONLY. IN THIS MANNER, THIS GROUND OF THE REVENUE MA Y BE TREATED AS PARTLY ALLOWED . 8.1 APPLYING THE SAME RATIO AS HELD ABOVE, WE HEREB Y DIRECT THE AO TO RE-CALCULATE THE VALUATION OF THE POLISHED DIAMOND BY ADOPTING THE AVERAGE RATE OF THE TWO FIGURES AND ACCORDINGLY COM PUTE THE UNDER VALUATION OF THE POLISHED DIAMONDS. ACCORDINGLY, TH IS GROUND OF THE REVENUE IS PARTLY ALLOWED. 9. GROUND NOS.4 AND 5 ARE REPRODUCED BELOW: ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 12 - 4. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT DIRECTING TO DELETE THE ADDITION OF RS.1,10,00,414/- MADE BY THE AO ON ACCO UNT OF UNDER VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS. 5. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT CONSIDERING THE FACT THAT THE VALUATION MADE BY THE ASSESSEE IS WITHOUT ANY M ETHOD WHEREAS THE AO HAS VALUED THE SAME AT THE AVERAGE RATE OF LAST PURCHAS ES. 10. IT IS WORTH TO MENTION THAT THE IMPUGNED ADDITI ON OF RS.1,10,00,414/- WAS MADE BY THE AO ON THE ACCOUNT UNDER VALUATION OF THE CLOSING STOCK OF ROUGH DIAMONDS. THEREFORE, I T IS WORTH TO MENTION THAT IN THE GROUNDS RAISED BY THE REVENUE INADVERTE NTLY IT WAS MENTIONED AS THE UNDER VALUATION OF CLOSING STOCK OF POLISHE D DIAMONDS. KEEPING THIS RECTIFICATION IN MIND, WE HAVE DISCUSSED THE I SSUE AND HAVE NOTED THAT THE AO HAD MADE THE ADDITION AS FOLLOWS: THE ASSESSEE HAS CLOSING STOCK OF 54406.32 CARATS OF ROUGH DIAMONDS. THE CLOSING STOCK OF ROUGH DIAMONDS WOULD CONSISTS OF 5 8138.88 CARATS OF ROUGH DIAMONDS PURCHASED IN LAST THREE MONTHS OF THE YEAR . HOWEVER, THE ASSESSEE HAS VALUED THE CLOSING STOCK OF ROUGH DIAMOND AT RS .1125.84 PER CARAT AS AGAINST AVERAGE OF 1328.03 PER CARAT FOR 3 MONTHS. THIS HAS RESULTED IN UNDER VALUATION OF CLOSING STOCK OF ROUGH DIAMOND TO THE EXTENT OF RS.1,10,00,414/- (1328.03 1125.84 = 202.19 X 54406.32 CARATS) THE SAID ADDITION IS WARRANTED DUE TO THE FOLLOWING FACTS :- 11. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST AP PELLATE AUTHORITY, LEARNED CIT(A) HAS DELETED THE ADDITION AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS AND HAVE GONE TH ROUGH THE DETAILS FURNISHED. IT IS SEEN THAT AS PER BILL DATED 5.03.2 002, 1533 CARATS OF ROUGH DIAMONDS PURCHASED ON 6.02.2002 WERE ISSUED TO JOB WORKERS ON 14.02.2002, ROUGH DIAMONDS WEIGHING 1,641.97 CARATS PURCHASED O N 13.2.2002 WERE ISSUED ON 18.02.2002 WHILE 557.42 CARATS PURCHASED ON 18.01.2002 WERE ISSUED ON 25.01.2002 TO JOB WORKERS FOR MANUFACTURE . IT IS ONLY THE DIAMONDS WHICH WERE PURCHASED AFTER 13.02.2002 WHICH WOULD F OUND PART OF CLOSING STOCK OF ROUGH DIAMONDS THERE IS NO JUSTIFICATION W HATSOEVER FOR IGNORING THE BILLS OF THE APPELLANT AND TAKING INTO ACCOUNT THE ROUGH DIAMONDS WHICH WERE ALREADY ISSUED FOR JOB WORK FOR VALUATION OF CLOSIN G STOCK. SUCH INVOICES EVIDENCING THE PURCHASE OF ROUGH DIAMONDS ON 19.02. 2002 TILL DECEMBER, 2003 WERE FURNISHED BEFORE THE A.O ALSO AND THEREFO RE SHOULD HAVE BEEN ACCEPTED SINCE THE EXACT QUANTITY AND VALUE OF SUCH ROUGH DIAMONDS WAS AVAILABLE. THE ADDITION HAS BEEN MADE WITHOUT APPRE CIATING THE APPELLANT'S SUBMISSIONS AND TOTALLY IGNORING THE APPELLANT DOCU MENTARY EVIDENCE ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 13 - AVAILABLE AND THEREFORE SUCH ADDITION IS NOT SUSTAI NABLE AND IS DIRECTED TO BE DELETED. FURTHER, I AM ALSO DECLINED TO AGREE WITH THE APPELLANT THAT IF THIS ADDITION IS SUSTAINED, IT WOULD RESULT IN INCREASED OPENING STOCK BY THE SAME AMOUNT IN THE NEXT ASSESSMENT YEAR WHICH WOULD REDU CE THE PROFIT FOR THAT YEAR TO THIS EXTENT AND THEREFORE WOULD BE REVENUE NEUTRAL. THE APPELLANT THEREFORE GETS A RELIEF OF RS.1,10,00,414/- ON THIS ACCOUNT. 12. HEARD BOTH THE SIDES. THE ISSUE OF UNDER VALUAT ION OF CLOSING STOCK OF ROUGH DIAMONDS HAS ALSO BEEN DISCUSSED BY US IN THE CASE OF M/S. M. KANTILAL EXPORTS (SUPRA), WHEREIN WE HAVE ADOPTED A N AVERAGE RATE BY ASSIGNING THE FOLLOWING REASONS: 13. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE SIDE S. WE HAVE PERUSED THE MATERIAL PLACED BEFORE US AS ALSO THE ARGUMENTS OF BOTH THE SIDES. THE ASSESSEE HAD VALUED THE CLOSING STOCK OF ROUGH DIAM OND @ RS.734 PER CARAT; HOWEVER AO HAS COMPUTED THE AVERAGE COST OF FOUR MO NTHS @ RS.872.17 PER CARAT. THE AVERAGE OF THE TWO COMES TO RS.803 PER CARAT. ONE OF THE SETTLED VIEW IS THAT THE VALUATION OF THE STOCK IS TO BE MA DE AT THE MARKET PRICE OR THE COST PRICE, WHICHEVER IS LOWER. BUT IN A SITUATION, AS IN THE CASE OF THE ASSESSEE, WHEN THE COMPLETE INFORMATION ABOUT THE Q UALITY OF THE STOCK IS NOT MADE AVAILABLE THEN TO RESOLVE THE ISSUE A MIDDLE P ATH IS TO BE ADOPTED. THEREFORE, CONSIDERING THE TOTALITY OF THE CIRCUMST ANCES AND THE FACTS NARRATED THAT THE ASSESSEE WAS IN POSSESSION OF THE ROUGH DI AMOND; HENCE, THE DIFFERENCE OF THE TWO, I.E., PURCHASE COST (- MINUS ) SALE COST IS THE CORRECT METHOD FOR DETERMINING THE VALUATION OF THE ROUGH D IAMOND. THE AVERAGE OF THE TWO IS RS.803 PER CARAT , WHICH ACCORDING TO US IS REQUIRED TO BE ADOPTED BY REPLACING THE CLOSING STOCK OF DIAMONDS CALCULAT ED BY ADOPTING THE AVERAGE RATE AT RS.734.73 PER CARAT. IN THIS MANNER , THIS GROUND OF THE REVENUE IS ALSO PARTLY ALLOWED. 12.1 ONCE A VIEW HAS ALREADY BEEN TAKEN ON IDENTICA L FACTS THEREFORE FOR THIS APPEAL AS WELL WE HEREBY ADOPT THE SAME REASON AND DIRECT THE AO TO RE-COMPUTE THE VALUATION OF THE CLOSING STOCK OF TH E ROUGH DIAMONDS BY ADOPTING AN AVERAGE RATE ON THE SAME GUIDELINES AS REPRODUCED ABOVE. RESULTANTLY, THIS GROUND OF THE REVENUE IS PARTLY A LLOWED. 13. GROUND NOS. 7 AND 8 ARE REPRODUCED BELOW: 7. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN ADM ITTING ADDITIONAL EVIDENCE WITHOUT REPORTING IT TO THE ASSESSING OFFI CER AND DIRECTING TO ALLOW ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 14 - THE DEDUCTION U/S.80HHC OF THE ACT ON EXPORT REALIZ ATION DURING THE EXTENDED PERIOD. 8. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT CONSIDERING THE FACT THAT THE ASSESSEE WAS NOT IN POSSESSION OF APPROVAL OF EXTENDED PERIOD FROM THE COMPETENT AUTHORITY TILL THE DATE OF ASSESSMENT ORDER. 14. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE FIND NO FORCE IN THIS GROUND OF THE REVENUE BECAUSE LEARNED CIT(A ) HAS EXAMINED THE REQUISITE APPROVALS AND THEREAFTER DIRECTED THE AO TO RECOMPUTE THE DEDUCTION OF 80HHC IN THE FOLLOWING MANNER: THE OTHER GROUND OF APPEAL IS REGARDING DISALLOWAN CE OF DEDUCTION U/S 80 HHC OF THE IT ACT ON EXPORT REALISATION OF RS 3,87, 77,445/-. THIS DISALLOWANCE WAS MADE BY THE AO ON ACCOUNT OF THE F ACT THAT THE CERTIFICATE FROM THE C.A. SHOWS THAT THE APPELLANT HAD NOT REAL ISED THIS AMOUNT AND HAD APPLIED FOR R.B.I. PERMISSION AND THE EXTENSION WAS GRANTED BY R.B.I. THE AO HELD THAT NO SUCH PERMISSION WAS OBTAINED BY THE AP PELLANT, SINCE ONLY THE BRANCH MANAGER OF STATE BANK OF SAURASHTRA HAD RECO MMENDED THE SAID EXTENSION. IN THIS CONNECTION, IT WAS SUBMITTED THA T THE APPELLANT HAD SUBMITTED PERMISSION FROM R.B.I. IN ACCORDANCE WITH PROVISIONS OF SECTION 80 HHC (2)(A) OF THE ACT FOR REALISATION OF THE SAID A MOUNT. THE STATE BANK OF SAURASHTRA WAS AUTHORISED FOR COLLECTION AND GRANTE D THE PERMISSION FOR LATE REALIZATION. THE SAME ISSUE AROSE IN AY 1999-2000 A LSO AND THE NON- ALLOWANCE WAS DELETED BY THE APPELLATE AUTHORITIES. 1 HAVE CONSIDERED THE SUBMISSIONS AND HAVE GONE THR OUGH THE CERTIFICATE FROM STALE BANK OF SAURASHTRA AND THE R.B.I. PERMITTING THE APPELLANT, EXTENSION OF TIME FOR REALISATION OF SUCH EXPORT PROCEEDS. I ALS O FIND THAT IN AY 1999-2000, THE CIT (APPEAL) VIDE HIS ORDER DATED 5.9.2002 ALLO WED RELIEF ON THIS ACCOUNT ON SAME GROUNDS. SINCE, THE APPELLANT HAS RECEIVED APPROVAL FROM THE R.B.I, AND THE REALISING BANK FOR EXTENSION OF PERIOD FOR REALISATION IN TERMS OF SECTION 80 HHC (2)(A) OF THE ACT, I FIND NO REASONS FOR NOT ALLOWING DEDUCTION U/S 80 HHC OF THE ACT ON THIS REALISATION. THE AO I S DIRECTED TO INCLUDE THE SAID LATE REALISATION IN EXPORT SALE PROCEEDS AND A LLOW DEDUCTION U/S 80 HHC OF THE ACT ON THIS AMOUNT ALSO. 14.1 RESULTANTLY, THESE GROUNDS OF THE REVENUE ARE DISMISSED. 15. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED. ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 15 - B. ASSESSEES APPEAL (A.Y. 2003-04) 16. GROUNDS RAISED BY THE ASSESSEE ARE HEREBY DECID ED AS FOLLOWS: 1. THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ORDER U/S.144 R.W.S. 145(3) OF THE A CT DISREGARDING THE FACTS OF NO DEFECT IN THE BOOKS OF ACCOUNTS AND COMPLIANCE O F ALL NOTICES U/S.143(2)/142(1) OF THE ACT. THE LEARNED CIT(A) FA ILED TO APPRECIATE THAT PROVISIONS OF SECTION 145(3) OF THE ACT CANNOT BE I NVOKED FOR (I) DISALLOWING LABOUR / ELECTRICITY EXPENSES. (II) CHANGING BASIS OF VALUATION OF CLOSING STOCK AND (III) DISALLOWING DEDUCTION U/S. 80HHC(3) OF TH E ACT. THE ASSESSMENT U/S.144 R.W.S. 145(3) BE HELD INVALID IN LAW. 16.1 ON ACCOUNT OF INCOMPLETE BOOKS OF ACCOUNT, THE AO HAD INVOKED THE PROVISIONS OF SECTION 145(3) OF IT ACT AND THAT ACTION OF THE AO WAS AFFIRMED BY LEARNED CIT(A) PRELIMINARY ON THE GROUN D THAT THE LABOUR PAYMENTS WAS NOT VERIFIABLE, DAY TO DAY CONSUMPTION RECORD WAS NOT AVAILABLE AND PRODUCTION OF RECORD IN RESPECT OF QU ALITY OF DIAMOND WAS NOT MAINTAINED; HENCE, THE AO WAS JUSTIFIED IN APPL YING THE PROVISIONS OF SECTION 145(3) OF IT ACT. ON REJECTION OF THIS GROU ND, THE ASSESSEE IS NOW IN APPEAL. 16.2 THIS ISSUE WAS DISCUSSED BY US IN THE CASE OF M/S. M. KANTILAL EXPORTS (SUPRA) AND AFTER HAVING DETAILED DISCUSSIO N WE HAVE APPROVED THE REJECTION OF BOOKS OF ACCOUNT BY THE REVENUE AU THORITIES. ON THE SAME LINES, THIS GROUND OF THE ASSESSEE IS HEREBY D ISMISSED. 17. GROUND NOS. 2 AND 3 ARE REPRODUCED BELOW: 2. THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF LABOUR EXPENSES AT RS.60 PER CARAT AMOUNTING TO RS.27,64,847/- WITHOUT FINDING ANY DEFECTS IN LABOU R PAYMENT MADE AT MARKET RATE OF RS.300 PER CARAT ALLOWED IN A.Y. 2001/02. T HE ADDITION OF RS.27,64,847/- SHOULD BE DELETED. 3. THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN LAW A ND ON FACTS IN CONFIRMING DISALLOWANCE OF LABOUR EXPENSES OF RS.7, 44,120/- AT 10% OF RS.74,41,206/- PAID TO JOB WORKERS IN CASE OF COMMI SSION BASED LABOUR ACTIVITY WITHOUT APPRECIATING THE FACTS OF 2.12% FI XED COMMISSION RECEIVED BY ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 16 - APPELLANT PER THE TERMS OF WORK. THE ADDITION OF RS .7,44,120/- SHOULD BE DELETED. 17.1 IN RESPECT OF LABOUR EXPENSES, IN THE ABSENCE OF VERIFICATION OF THE WORKERS AND THE DISPARITY IN THE OUTSTANDING LABOUR EXPENSES AO HAS HELD THAT THE LABOUR CHARGES TO THE EXTENT OF RS.240 WOU LD BE ALLOWABLE PER CARAT AS AGAINST RS.300 PER CARAT CLAIMED, ACCORDIN GLY WORKED OUT A DISALLOWANCE OF RS.27,64,847/-. 18. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST AP PELLATE AUTHORITY, LEARNED CIT(A) HAS CONFIRMED THE ACTION OF THE AO A S FOLLOWS: 5.2 I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE ABOVE SUBMISSIONS ON THIS ISSUE. I FIND THAT THE APPELLANT HAS FROM YEAR TO YEAR RAISED THE AMOUNT OF JOB WORK CHARGES. IT IS ALSO FOUND THAT IT IS NOT I N DISPUTE THAT THE JOB WORKERS ARE NOT HAVING ANY INFRASTRUCTURE FACILITY OF THEIR OWN LIKE MACHINERY, THEIR OWN PREMISES OR THEIR OWN ELECTRICITY CONNECTION. E VEN THE APPELLANT HAS ACCEPTED THIS FACT IN THE SUBMISSIONS MADE BEFORE M E. IT IS ALSO NOTICED THAT ALL THE JOB WORKERS ARE HAVING PLACE OF BUSINESS, R EGISTERED AT THE PREMISES OF THE APPELLANT GROUP. IT IS IN VIEW OF THIS FACT THA T THE A.O. HAS NOT ACCEPTED THE GENUINENESS OF PAYMENT. AT THE SAME TIME IT IS ALSO NOTICED THAT OUT OF 21 PERSONS, ONLY 6 PERSONS HAD REMAINED PRESENT, 6 PERSONS WERE NOT AVAILABLE AT THEIR GIVEN ADDRESS AND THAT THE APPELLANT COULD NOT PRODUCE THEM FOR VERIFICATION. THE APPELLANT'S EXPLANATION IS ALSO C ONTRADICTORY IN AS MUCH AS IT IS STATED BY THE JOB WORKERS THAT THEY ARE SHARING THE ELECTRICITY EXPENSES AND AGAINST THIS EXPLANATION IN THE APPELLANT'S SUBMISS ION IN PARA 6 ON PAGE 8, IT IS SPECIFICALLY ACCEPTED THAT ELECTRICITY CHARGES A RE BORNE BY THE APPELLANT. IN THE CIRCUMSTANCES, THOUGH THE JOB WORKERS HAVE BEEN FILING THEIR INCOME TAX RETURNS, THE PAYMENT MADE TO THEM IS NOT ACCEPTED B Y THE A.O. ON THE GROUND THAT IT IS ONLY IN ORDER TO ADJUST THE PROFIT OFF T HE APPELLANT. IF THE INFRASTRUCTURE FACILITY IS PROVIDED BY THE APPELLAN T, THERE IS NO REASON FOR INCREASING THE JOB WORK CHARGES FROM YEAR TO YEAR, THAT TOO WITHOUT ANY BASIS. CONSIDERING ALL THESE ASPECTS, I CONFIRM THE ADDITI ON MADE BY THE A.O. ON THIS GROUND. THE ASSESSING OFFICER HAS DISALLOWED THE PA YMENT TO THE EXTENT OF THE HIGHER PAYMENT AT RS.60/- WHICH IS INCREASE IN THE YEAR UNDER CONSIDERATION AND THIS DISALLOWANCE IS MOST REASONABLE. THIS FIRS T GROUND OF APPEAL IS, THEREFORE, DISMISSED AND ADDITION OF RS.27,64,847/- MADE BY THE ASSESSING OFFICER IS CONFIRMED. 19. HEARD BOTH THE SIDES. WHILE DECIDING THE APPEAL OF M/S. KANTILAL EXPORTS (SUPRA), WE HAVE TAKEN A MIDDLE PATH AND HE LD THAT TO RESOLVE THE ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 17 - ISSUE AN AVERAGE OF THE TWO CAN BE ADOPTED TO WORK OUT A REASONABLE LABOUR CHARGES; RELEVANT PARAGRAPH 23 IS REPRODUCED BELOW: 23. WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR A.Y. 2002-03, WE HAVE DEALT WITH THIS ISSUE WHEREIN WE HAVE NOTED THAT ON E OF THE ADMITTED FACT WAS THE LABOUR CHARGES ARE DIFFERENT FROM LOT TO LOT DE PENDING UPON THE QUALITY OF THE DIAMOND MANUFACTURED. WE HAVE ALSO NOTED THAT W HILE EXPLAINING THE CORRECTNESS OF THE VALUATION OF THE STOCK IN THE PA ST YEAR, THE ASSESSEE HIMSELF HAD TAKEN A PLEA THAT THE DIAMONDS ARE OF TWO QUALI TIES, A SUPERIOR QUALITY AND INFERIOR QUALITY; HENCE, THE VALUATION OF SUCH TYPE OF DIAMONDS EFFECT THE OVER ALL VALUATION OF THE CLOSING STOCK. THEREFORE, WE HAVE OPINED THAT IT WAS IMPRACTICAL TO PAY AN IDENTICAL RATE OF JOB CHARGES TO ALL THE JOB WORKERS. CERTAIN OTHER DOUBTS HAVE ALSO BEEN RAISED SUCH AS A HUGE AMOUNT OF LABOUR CHARGES REMAIN OUTSTANDING AT THE END OF THE FINANC IAL YEAR. FACTS OF THE YEAR UNDER CONSIDERATION ARE IDENTICAL WITH THE FACTS AS DISCUSSED ABOVE FOR A.Y.2002-03. FOR A.Y. 2003-04, AS WELL, THE AO HAD ALLOWED RS.240 PER CARAT LABOUR CHARGES AS AGAINST THE CLAIM OF THE ASSESSEE OF RS.300 PER CARAT. TO RECOVER UP ALL THE POINTS AND THE OBJECTIONS RAISED FROM BOTH THE SIDES IT WAS DECIDED SUPRA THAT IT WOULD BE FAIR AND REASONABLE TO ALLOW LABOUR CHARGES @ RS.270 PER CARAT. WE HOLD ACCORDINGLY AND THE AO IS DIRECTED TO RE-COMPUTE THE DISALLOWANCE. RESULTANTLY, THIS GROUND OF THE A SSESSEE IS PARTLY ALLOWED. 19.1 HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES , WE HEREBY HOLD THAT ON THE SAME LINES FOR THIS APPELLANT AS WELL A N AVERAGE IS TO BE TAKEN FOR THE PURPOSE OF DISALLOWANCE OF LABOUR EXPENSES. THE AO IS DIRECTED ACCORDINGLY HENCE BOTH THE GROUNDS OF THE ASSESSEE MAY BE TREATED AS PARTLY ALLOWED. 20. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. 21. THE COMBINED RESULT IS THAT BOTH THE ABOVE APPE ALS ARE PARTLY ALLOWED. SD/- SD/- (ANIL CHATURVEDI) ( MUKUL KR. SHRAWAT) ACCOUNTANT MEMBER JUD ICIAL MEMBER AHMEDABAD; DATED 30/06/2014 PRABHAT KR. KESARWANI, SR. P.S. ITA NO.2242/AHD/2007 & ITA NO.941/AHD/2008 ACIT, CENTRAL CIRCLE-2, SURAT VS. M/S. R. VIPUL & C O. A.YS.2002-03 & 2003-04 - 18 - / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A)-III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE. / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD