M/s. Bhojal Gems, Surat V. The ACIT, Range-9, Surat

ITA 2845/AHD/2007

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6453 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 31-01-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 02-07-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P BATHEJA
• Assessee Lawyers: R N VEPARI
• Keywords: Rejection of books of accounts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, C BENCH (BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER) ITA NO.2845/AHD/2007 [ASSTT. YEAR : 2004-2005] M/S. BHOJAL GEMS 8-13, SHANKAR INDUSTRIAL ESTATE NR. HAKIM CHICHI GALI KAPODARA, SURAT. VS. ACIT, CIR.9 SURAT. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.N. VEPARI REVENUE BY : SHRI O.P. BATHEJA O R D E R PER G.D. AGARWAL, VICE-PRESIDENT : THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME TAX(APPEALS)- V, SURAT DATED 04.06.2007 ARISING OUT OF THE ORDER OF THE ASSESSING OFFICER PASSED UNDER SECTION 143(3) OF THE INCOME T AX ACT, 1961. 2. THE GROUND NOS.1, 2 AND 3 OF THE ASSESSEES APPE AL READ AS UNDER: I. THE LD.CIT(A) ERRED IN CONFIRMING REJECTION OF BOOK RESULT ON THE GROUND THAT THE APPELLANT DID NOT MAINTAIN QUAL ITATIVE DETAILS WITH REGARD TO DIAMONDS WHEN THAT IS AN IMPOSSIBILI TY. II. THE LD.CIT(A) WAS NOT JUSTIFIED IN SUSTAINING ADDITION IN VALUATION OF CLOSING STOCK POLISHED DIAMONDS TO THE EXTENT OF RS.4,00,000/- III. THE LD.CIT(A) ERRED IN SUSTAINING ADDITION OF ESTIMATE OF GP AT 11.22% FROM 10.97% SHOWN. 3. AT THE TIME OF HEARING BEFORE US, IT IS STATED B Y THE LEARNED COUNSEL THAT THE ASSESSEE DERIVES INCOME FROM PURCHASE, PRO CESSING AND SELLING OF DIAMONDS. THE AO REJECTED THE ASSESSEES BOOKS OF ACCOUNTS AND ALLOWED ITA NO.2845/AHD/2007 -2- GP RATE OF 11.22% AS AGAINST GP DISCLOSED BY THE AS SESSEE AT 10.97% WHICH RESULTED IN ADDITION OF RS.6,68,813/-. HE AL SO MADE ADDITION OF RS.5,38,980/- FOR UNDER VALUATION OF THE CLOSING ST OCK. ON APPEAL, THE CIT(A) SUSTAINED THE GP ADDITION BUT REDUCED THE AD DITION TO THE CLOSING TO RS.4 LAKHS. HE HAS STATED THAT THE FACTS OF THE ASSESSEES CASE ARE IDENTICAL WITH THE FACTS IN THE CASE OF M/S.DHAMI BROTHERS VS. ACIT, IN ITA NO.2309/AHD/2008 DATED 6-8-2010. IN THAT CASE ALSO THE AO HAS REJECTED THE BOOKS OF ACCOUNTS IN THE CASE OF DIAMO ND PROCESSOR MAINLY ON THE GROUND THAT THE ASSESSEE HAS NOT MAINTAINED QUALITATIVE DETAILS OF THE STOCK. ON THE SIMILAR GROUND, THE TRADING RESU LTS HAVE BEEN REJECTED IN THE CASE OF THE ASSESSEE. THAT THE ITAT IN THE CAS E OF DHAMI BROTHERS (SUPRA) HELD THAT THE REJECTION OF THE BOOKS OF ACC OUNTS CANNOT BE MADE MERELY BECAUSE THE ASSESSEE HAS NOT MAINTAINED QUAL ITY-WISE DETAILS OF THE DIAMONDS. THAT IN THE ABOVE CASE, THE ITAT SUSTAIN ED THE ADDITION TO THE UNDER VALUATION OF THE CLOSING STOCK. HE HOWEVER S UBMITTED THAT IN THE CASE OF THE ASSESSEE, THERE IS NO UNDER VALUATION O F THE CLOSING STOCK, BUT ON THE OTHER HAND, THE STOCK VALUED BY THE ASSESSEE IS MORE THAN THE AVERAGE COST OF THE CLOSING STOCK. HE REFERRED TO PAGE NO.12 OF THE ASSESSMENT ORDER WHEREIN THE AO HAS WORKED OUT THE VALUE OF THE CLOSING STOCK. THE AO IN THE PROCESS OF DETERMINING THE VA LUE OF THE CLOSING STOCK AT COST REDUCED THE EXCHANGE DIFFERENCE ON EX PORT FROM SALES. HE POINTED OUT THAT THE EXCHANGE DIFFERENCE IS INTEGRA L PART OF THE ASSESSEES BUSINESS. IN FACT WHEN THE RAW-MATERIAL IS IMPORTE D, THEN ALSO THERE IS EXCHANGE DIFFERENCE. THERE WAS NO QUESTION OF REDU CTION OF THE EXCHANGE DIFFERENCE FROM THE SALES. HE ALSO STATED THAT IF THE AO WAS TO DETERMINE THE VALUE OF THE CLOSING STOCK AT COST PRICE, HE SH OULD HAVE SIMPLY WORKED OUT THE VALUE OF THE CLOSING STOCK AT THE AVERAGE O F THE OPENING STOCK AND ITA NO.2845/AHD/2007 -3- PRODUCTION. IF THIS METHOD WOULD HAVE BEEN ADOPTED , THE VALUE OF THE CLOSING STOCK DISCLOSED BY THE ASSESSEE IS MORE. 4. THE LEARNED DR RELIED UPON THE ORDERS OF THE AUT HORITIES. 5. WE HAVE CONSIDERED THE ARGUMENTS OF THE BOTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THAT ITAT, AHMEDABAD C BENCH HAS CONSIDERED IDENTICAL ISSUE IN THE CAS E OF M/S.DHAMI BROTHERS (SUPRA) WHEREIN THE ITAT HELD AS UNDER: 8. FROM THE ABOVE, IT IS EVIDENT THAT IF THE AO IS NOT SATISFIED ABOUT THE CORRECTNESS OR THE COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, HE MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SE CTION 144. IN THIS CASE, THERE IS NO DISPUTE ABOUT THE CORRECTNESS OF THE ASSESSEES ACCOUNTS. AS PER THE AO FOR WANT OF QUALITATIVE DE TAILS OF THE PROCESSING OF DIAMONDS, THE ACCOUNTS OF THE ASSESSEE CANNOT BE SAID TO BE COMPLETE. WE ARE UNABLE TO AGREE WITH THE ABOVE VIEWS OF THE AO. SECTION 44AA PROVIDES FOR MAINTENANCE OF THE BOOKS OF ACCOUNTS. AS PER THE SUB- SECTION (2), EVERY PERSON CARRYING ON BUSINESS OR P ROFESSION IS REQUIRED TO KEEP AND MAINTAIN SUCH BOOKS OF ACCOUNTS AND OTH ER DOCUMENTS AS MAY ENABLE TO THE AO TO COMPUTE THE TOTAL INCOME OF ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT. SUB-SE CTION (3) OF SECTION 44AA EMPOWERS THE CENTRAL BOARD OF DIRECT TAX TO PR ESCRIBE BY RULES THE BOOKS AND OTHER DOCUMENTS TO BE KEPT AND MAINTA INED BY THE ASSESSEE. THE CBDT AS PER RULE 6F HAS PRESCRIBED T HE BOOKS OF ACCOUNTS AND OTHER DOCUMENTS TO BE KEPT AND MAINTAI NED BY THE PERSONS CARRYING ON CERTAIN SPECIFIC PROFESSION. HOWEVER, NO BOOKS OF ACCOUNTS ARE PRESCRIBED FOR THE PERSON CARRYING ON BUSINESS. THUS, THE ASSESSEES CARRYING ON BUSINESS ARE REQUIRED MAINTAIN SUCH BOO KS OF ACCOUNTS AS WILL ENABLE THE AO TO COMPUTE THE INCOME OF THE ASS ESSEE. THE PRESENT ASSESSEE HAS MAINTAINED THE REGULAR BOOKS OF ACCOUN TS WHICH WERE DULY AUDITED. THE SALE AND PURCHASE OF THE ASSESSEE IS VOUCHED AND VERIFIABLE. THE ASSESSEE HAS ALSO MAINTAINED QUANT ITATIVE DETAILS IN RESPECT OF DIAMONDS PURCHASED AND SOLD BY IT AS WEL L AS FOR PROCESSING OF DIAMOND. THERE IS NO ADVERSE COMMENT FROM THE AUDITOR THAT THE PROFIT CANNOT BE COMPUTED FROM THE BOOKS OF ACCOUNT S MAINTAINED BY THE ASSESSEE. IN OUR OPINION, THE QUALITATIVE DETAILS OF EACH PIECE OF DIAMOND IS NOT NECESSARY FOR COMPUTATION OF THE INC OME OF THE ASSESSEE. INCOME OF THE ASSESSEE CAN BE VERY WELL COMPUTED ON THE BASIS OF ACCOUNTS ALREADY MAINTAINED BY THE ASSESSEE. IN VI EW OF THE ABOVE, WE ARE UNABLE TO AGREE WITH THE AO THAT THERE IS DEFEC T IN THE SYSTEM OF ITA NO.2845/AHD/2007 -4- METHOD OF ACCOUNTING OF THE ASSESSEE WHICH REQUIRES REJECTION OF THE BOOK RESULTS UNDER SECTION 145(3) OF THE ACT AND ES TIMATION OF THE GP. 9. NOW WE COME TO THE VALUATION OF THE CLOSING STOC K. THE ASSESSEE HAS SHOWN THE CLOSING STOCK OF POLISHED DIAMOND AMO UNTING TO RS.54,23,81,050/-. HOWEVER, NO DETAILS WITH REGARD TO THE VALUATION OF THE CLOSING STOCK OF THE POLISHED DIAMOND ARE FURNI SHED BEFORE US. IT SEEMS THAT NO SUCH DETAILS WAS FURNISHED BEFORE THE AO OR CIT(A). IN THE ABSENCE OF ANY DETAILS OF THE CLOSING STOCK AND VALUATION THEREOF, THE AO CANNOT VERIFY THE CORRECTNESS OF THE VALUATION O F CLOSING STOCK. IN SUCH CIRCUMSTANCES, THE AO HAS WORKED OUT THE VALUA TION OF CLOSING STOCK OF POLISHED DIAMOND IN THE FOLLOWING MANNER: COST OF PRODUCTION ROUGH DIAMOND WEIGHT IN CARAT VALUE OPENING STOCK OF ROUGH DIAMOND 31,260.38 RS.5,07,64,125 PURCHASE OF ROUGH DIAMOND 5,26,599.94 RS.83,50,69,208 (-)EXCHANGE RATE DIFFERENCE RS.4,88,64,619 LESS: REJECTION OF ROUGH DIAMOND 2,44,040.73 RS.14,64,244 LESS: CLOSING STOCK OF ROUGH DIAMOND 41,797.32 RS.2,76,75,407 CONSUMPTION OF ROUGH DIAMOND RS.80,78,29,063 ADD: MANUFACTURING EXPS. LABOUR RS.7,47,46,302 WAGES RS.85,23,662 ELECTRICITY RS.44,42,262 SALARY 70% OF RS.45,28,976 RS.31,70,283 RS.9,08,82,509/- TOTAL 95,834.68 RS.89,78,05,777/- OPENING STOCK OF POLISHED DIAMOND 38,151.91 RS.37,16,79,847 PRODUCTION OF POLISHED DIAMOND 95,834.68 RS.89,78,05,777 1,33,986.59 RS.126,94,85,624 LESS: SALES OF POLISHED DIAMOND 89,687.49 RS.79,88,83,175 LESS: EXCHANGE DIFFERENCE ON EXPORT RS.2,32,75,007 RS.77,56,18,168 LESS: COST OF SALE (NET OF GP) (6.85%) RS.72,24,88,323 THEREFORE CLOSING STOCK 44,299.10 RS.54,69,97,301 CLOSING STOCK AS PER BOOK 44,299.10 RS.54,23,81,050 THEREFORE SUPPRESSION OF CLOSING STOCK RS.46,16,251 ITA NO.2845/AHD/2007 -5- 10. AT THE TIME OF HEARING BEFORE US, THE LEARNED C OUNSEL FOR THE ASSESSEE COULD NOT POINT OUT ANY MISTAKE IN THE ABO VE WORKING OF THE VALUATION OF THE CLOSING STOCK BY THE AO. A SPECIF IC QUESTION WAS ALSO ASKED TO HIM THAT IN THE ABSENCE OF DETAILS OF THE VALUATION OF THE CLOSING STOCK BY THE ASSESSEE, HOW THE VALUE SHOWN BY THE A SSESSEE CAN BE VERIFIED? THE LEARNED COUNSEL FOR THE ASSESSEE WAS UNABLE TO REPLY TO SUCH QUESTION, AND MADE AN ALTERNATE REQUEST THAT I F THE VALUE OF THE CLOSING STOCK OF THIS YEAR IS INCREASED, THEN THE D IRECTION SHOULD BE GIVEN THAT THE OPENING STOCK OF THE NEXT SHOULD ALSO BE I NCREASED BY THE SUM OF RS.46,16,251/-. THE LEARNED DR HAD NO OBJECTION TO THE ABOVE REQUEST OF THE LEARNED COUNSEL. IT IS A SETTLED LAW THAT T HE CLOSING STOCK OF ONE YEAR WOULD BE THE OPENING STOCK OF NEXT YEAR. THER EFORE, IF THE AO INCREASED THE VALUE OF CLOSING STOCK IN THIS YEAR, AUTOMATICALLY, THE OPENING STOCK OF THE NEXT YEAR IS TO BE INCREASED. AFTER CONSIDERING THE ARGUMENTS OF BOTH THE SIDES AND THE FACTS OF THE CA SE, WE ARE OF THE OPINION THAT SINCE THE ASSESSEE WAS UNABLE TO FURNI SH THE DETAILS OF THE CLOSING STOCK AND VALUATION THEREOF, THE AO WAS JUS TIFIED IN WORKING OUT THE VALUE OF CLOSING STOCK. NO MISTAKE IN THE VALU ATION OF THE CLOSING STOCK BY THE AO WAS POINTED OUT BY THE LEARNED COUN SEL. WE THEREFORE ACCEPT THE VALUE OF THE CLOSING STOCK DETERMINED BY THE AO. HOWEVER, ACCEPTING THE ALTERNATE PLEA OF THE LEARNED COUNSEL , WE DIRECT THAT THE VALUE OF THE CLOSING STOCK WILL BE TAKEN AS VALUE O F OPENING STOCK OF THE NEXT YEAR. THUS, THE ADDITION OF RS.46,16,251/- MADE BY THE AO TO THE VALUATION OF THE CLOSING STOCK IS UPHELD. THE DIRE CTION OF THE CIT(A) TO MAKE THE ADDITION BY WORKING OUT THE NET PROFIT AT THE RATE OF 4% IS HEREBY QUASHED. 6. FROM THE ABOVE, WE FIND THAT ON BOTH THE GROUNDS , THE ISSUE IS COVERED BY THE ABOVE DECISION OF THE ITAT. THE ASS ESSEE HIMSELF HAS ADMITTED THAT THE FACT OF THE ASSESSEES CASE IS ID ENTICAL WITH THE ABOVE DECISION OF THE ITAT. WE THEREFORE, RESPECTFULLY F OLLOWING THE ABOVE DECISION OF THE ITAT DELETE THE ADDITION OF RS.6,68 ,813/- TO THE TRADING RESULT. HOWEVER, THE ADDITION OF RS.4 LAKHS TO THE CLOSING STOCK IS SUSTAINED AND THE AO IS DIRECTED THAT THE VALUE OF THE OPENING STOCK OF THE NEXT YEAR WOULD BE MODIFIED ACCORDINGLY. 7. NEXT GROUND OF THE ASSESSEE IS AGAINST THE DISAL LOWANCE OF RS.32,000/- OUT OF FOREIGN TRAVEL EXPENSES. IT WAS STATED BY THE LEARNED ITA NO.2845/AHD/2007 -6- COUNSEL THAT THE ASSESSEE IS A PROCESSOR AND EXPORT ER OF THE DIAMONDS WHOSE TURNOVER IS MORE THAN RS.26 CRORES. DURING T HE YEAR UNDER CONSIDERATION, THE ASSESSEE INCURRED TOTAL TRAVELLI NG EXPENDITURE OF RS.32,000/- WHICH IS FULLY VOUCHED AND VERIFIABLE. THEREFORE, THERE IS NO JUSTIFICATION FOR AD HOC DISALLOWANCE OF 10%. 8. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON T HE ORDER OF THE AO. 9. AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES CA SE AND ARGUMENTS OF BOTH THE SIDES, WE FIND NO JUSTIFICATION IN SUST AINING 10% AD HOC DISALLOWANCE OUT OF TRAVELLING EXPENSES. THE EXPOR T TURNOVER OF THE ASSESSEE IS MORE THAN RS.26 CRORES. THE TOTAL TRAV ELLING EXPENSES IS ONLY RS.3,26,000/-. THE AO HAS NOT POINTED OUT ANY TRIP WHICH IS NOT FOR THE PURPOSE OF BUSINESS. IN VIEW OF THE ABOVE, THE DIS ALLOWANCE OF RS.32,000/- IS DELETED. 10. NEXT GROUND OF THE APPEAL IS AGAINST CONFIRMATI ON OF DISALLOWANCE OF 10% OF THE TELEPHONE EXPENSES AMOUNTING TO RS.44 ,000/-. THE ASSESSEE INCURRED TELEPHONE EXPENSES OF RS.4,42,108 /-. THE AO DISALLOWED 10% OUT OF SUCH EXPENDITURE. IT WAS STA TED BY THE LEARNED COUNSEL THAT CONSIDERING THE NATURE OF THE ASSESSEE S EXPORT BUSINESS, THE INCURRING OF TELEPHONE EXPENSES IS MUST AND THEREFO RE THE TOTAL EXPENDITURE OF RS.4,42,108/- CANNOT BE SAID TO BE E XCESSIVE OR UNREASONABLE. 11. WE HAVE CAREFULLY CONSIDERED ARGUMENTS OF BOTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE. IT IS TRUE THA T IN EXPORT BUSINESS THERE WOULD BE EXPENDITURE ON TELEPHONE EXPENDITURE. AT THE SAME TIME, PERSONAL USER OF THE TELEPHONE CANNOT BE RULED OUT. WE THEREFORE, WE ITA NO.2845/AHD/2007 -7- UPHOLD THE ORDER OF THE CIT(A) ON THIS POINT AND RE JECT GROUND NO.4 OF THE ASSESSEES APPEAL. 12. IN RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 10 TH JUNE, 2011 SD/- SD/- (MUKUL KR. SHRAWAT) JUDICIAL MEMBER (G.D. AGARWAL) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 10-06-2011 C OPY OF THE ORDER FORWARDED TO: 1) : APPELLANT 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD