DIVINE ORNAMENTS P LTD., Jaipur V. ITO, Jaipur

ITA 297/JPR/2013

• Counselvise Citation: 29723114 RSA 2013
• Duration Of Justice: 2 year(s) 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 20-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PUROSHOTTAM KASHYAP JCIT DHK
• Assessee Lawyers: MUZAFFAR IQBAL S
• Keywords: Rejection of books of accounts
• Section: 143(3)

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH VKJ-IH-RKSYKUH] U;KF;D LNL; ,OA JH VH-VKJ-EHUK] YS[KK LNL; DS LE{K BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM VK;DJ VIHY LA-@ ITA NO. 297/JP/2013 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., 10, GANPATI DARSHAN, GOVIND MARG, TEEN MURTI CIRCLE, JAIPUR. CUKE VS. THE INCOME-TAX OFFICER, WARD-2(2), JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ L A- @ PAN/GIR NO.: AACCD 3161 E VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY : SHRI SIDHARTH RANKA & SHRI MUZAFFAR IQBAL (ADVOCATES) JKTLO DH VKSJ LS@ REVENUE BY : SHRI PUROSHOTTAM KASHYAP (JCIT) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 15/07/2015 MN?KKS'K .KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 11/08/2015 VKNS'K@ ORDER PER SHRI T.R. MEENA, A.M. THIS IS AN APPEAL BY THE ASSESSEE EMANATING FROM TH E ORDER OF LD.CIT(A)-I, JAIPUR DATED 28.01.2013 FOR THE ASSESSMENT YEAR 200 8-09. THE EFFECTIVE GROUNDS RAISED ARE AS UNDER :- (1) THAT THE LD. LOWER AUTHORITIES HAVE ERRED IN LAW A ND ON THE FACTS IN REJECTING THE BOOKS OF ACCOUNTS U/S 145(3) OF THE I NCOME-TAX ACT, 1961. 2 ITA NO. 297/JP/2013 A.Y. 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., JAIPUR. (2) THAT THE LD. COMMISSIONER OF INCOME-TAX (APPEALS ) HAS ERRED IN LAW AND ON THE FACTS IN APPLYING GP RATE OF 20.00% AS A GAINST 19.20% DECLARED BY THE ASSESSEE AND THEREBY CONFIRMING AN ADDITION OF RS. 2,09,854/-. 2. GROUND NO. 1 FOR REJECTION OF BOOKS OF ACCOUNT U NDER SECTION 145(3) IS NOT PRESSED BY THE ASSESSEE. THEREFORE, THE SAME IS DISM ISSED AS NOT PRESSED. 3. GROUND NO. 1.1 IS AGAINST CONFIRMING THE ADDITIO N BY APPLYING GP RATE AT 20% AS AGAINST 19.20% DECLARED BY THE ASSESSEE AND CONFIRMING THE ADDITION OF RS. 2,09,854/- BY LD. CIT (A). THE ASSESSEE IS IN TH E BUSINESS OF MANUFACTURING AND TRADING OF GOLD AND SEMI-PRECIOUS JEWELLERY. RE TURN OF INCOME WAS FILED BY THE ASSESSEE ON 30.09.2008 AT NIL INCOME. THE CASE WA S SCRUTINIZED UNDER SECTION 143(3) OF THE IT ACT. THE ASSESSEE HAS DECL ARED GROSS PROFIT OF RS. 50,07,297/- ON TOTAL TURNOVER OF RS. 2,60,85,762/- WHICH YIELD GP AT 19.20% IN COMPARISON TO GP RATE SHOWN AT 24.5% ON TURNOVER OF RS. 1,24,43,975/- IN THE PRECEDING YEAR. THE AO FURTHER OBSERVED THAT ASSESS EE WAS ASKED TO PRODUCE BILLS AND VOUCHERS, STOCK REGISTER, BUT ASSESSEE DI D NOT MAINTAIN STOCK REGISTER. THE GP COMPARED TO PRECEDING YEAR HAD GONE DOWN. IN A BSENCE OF STOCK DETAILS, IT WAS NOT POSSIBLE TO VERIFY THE TRADING RESULT DEC LARED BY THE ASSESSEE. THEREFORE, AO GAVE REASONABLE OPPORTUNITY OF BEING H EARD TO THE ASSESSEE WHICH WAS AVAILED BY THE ASSESSEE AND SUBMITTED WRITTEN SUB MISSION, WHICH HAS BEEN REPRODUCED BY THE AO AT PAGES 2 TO 5 OF HIS ORDER. AFTER CONSIDERING THE 3 ITA NO. 297/JP/2013 A.Y. 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., JAIPUR. ASSESSEES REPLY, THE AO HELD THAT TO DECIDE THE CO RRECT INCOME FROM GEMS AND JEWELLERY BUSINESS IT IS NECESSARY TO VERIFY THE GOO DS CONSUMED AND STOCKS MAINTAINED BY THE ASSESSEE, WHICH WAS NOT AVAILABLE WITH THE ASSESSEE. WHATEVER DETAILS SUBMITTED BY THE ASSESSEE ARE SELF SERVING DOCUMENTS AND NO LOGICAL INFERENCE CAN BE DRAWN FROM THE DETAILS FILE D BY A THIRD PERSON, AND IN ABSENCE OF PROPER CLOSING STOCK, ASSESSEES INCOME CANNOT BE DEDUCED CORRECTLY. THEREFORE, AFTER REJECTING THE BOOK RESULT UNDER SEC TION 145(3), A LUMP SUM ADDITION OF RS. 5,00,000/- WAS MADE BY THE AO TO THE INCOME OF THE ASSESSEE. 4. BEING AGGRIEVED BY THE ORDER OF THE A.O., ASSESS EE CARRIED THE MATTER BEFORE LD. CIT (A) WHO HAS ALLOWED THE APPEAL PARTIAL LY BY OBSERVING AS UNDER :- 4.3. I HAVE CAREFULLY PERUSED THE ORDER OF THE AO AND THE SUBMISSIONS OF THE AR. THERE ARE FOUR FACTORS TO DE TERMINE THE CORRECT PROFIT OF ANY ASSESSEE, THE AUTHENTICIT Y OF THE PURCHASES AND SALES AND VERIFIABILITY OF THE CLOSIN G AND OPENING STOCK. IN THIS PARTICULAR CASE, THE AO HAS GIVEN A CATEGORICAL FINDING THAT THE ITEMS OR THEIR VALUE I N THE CLOSING STOCK COULD NOT BE VERIFIED AND ON THE BASIS OF THI S INFORMATION HE HAS REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESS EE BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE I. T. ACT. THE AR WHILE GIVING THE DETAILED JUSTIFICATION FOR N OT MAINTAINING THE STOCK REGISTER HAS NOT REBUTTED THI S FINDING OF 4 ITA NO. 297/JP/2013 A.Y. 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., JAIPUR. THE AO REGARDING NON VERIFIABILITY OF THE CLOSING S TOCK. SINCE, THE CLOSING STOCK COULD NOT BE VERIFIED THE DECISIO N OF THE AO TO REJECT THE BOOKS OF ACCOUNTS BY INVOKING THE PRO VISIONS OF SECTION 145(3) IS SUSTAINABLE. THE HONBLE ITAT HAS CONSTANTLY HELD THAT THE ASSESSE ES OWN CASE IS THE BEST GUIDE FOR ESTIMATION OF G.P. RATE ONCE BOOKS OF ACCOUNTS HAVE BE3EN REJECTED. IN THE CASE OF THE ASSESSEE, IT IS SEEN THAT WHILE THE TURNOVER HAS INCREASED BY 109.63% THE G.P. RATE HAS DECLINED BY 64.13%. IT IS A GENER ALLY ACCEPTED PRINCIPLE THAT THE G.P. RATE IN THE CASE O F MANUFACTURER DECLINES WITH THE INCREASE OF TURNOVER. GIVEN THE EXPONENTIAL INCREASE IN TURNOVER THE G.P. RATE IS E STIMATED AT 20% RESULTING IN A CONFIRMATION OF THE TRADING ADDI TION OF RS. 2,09,854/- 5. NOW THE ASSESSEE IS BEFORE US. THE LD. A/R SUBMI TTED THAT THE TURNOVER DURING THE YEAR IS MORE THAN DOUBLE. WHEN TURNOVER IS INCREASED THEN IT IS BOUND TO LEAD TO CERTAIN DOWNFALL IN THE GP. THE RESULTS A RE REASONABLE, FAIR, ADEQUATE AND IS, IN FACT, MUCH BETTER IN COMPARISON TO PAST YEAR. ALL THE PURCHASES WERE VOUCHED, DETAILED AND VERIFIABLE. SIMILARLY, ALL T HE SALES ARE VOUCHED AND VERIFIABLE. NOTHING ADVERSE HAS BEEN FOUND BY THE A O IN PURCHASES AND SALES. THE FALL IN GP RATE IS DEPENDENT ON VARIOUS FACTORS ENUMERATED BY THE AO AS UNDER :- 5 ITA NO. 297/JP/2013 A.Y. 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., JAIPUR. (A) THE VISION, KNOWLEDGE, EXPERIENCE OF THE MANAGEME NT AND ITS PERSONNEL WITH LONG TERM PLANNING IN MIND, ETC. IT H AS ALREADY BEEN HIGHLIGHTED THAT THIS IS THE SECOND YEAR OF OP ERATIONS OF THE ASSESSEES BUSINESS. (B) THE PRODUCT THE ASSESSEE IS DEALING IN IS A FASH ION PRODUCT WHICH IS SUSCEPTIBLE TO CHANGE VERY FAST. THUS TO CON DUCT THE BUSINESS WITH EXPECTATIONS OF EARNING MORE AND MORE MARGINS MAY LEAD THE CONSUMERS AWAY FROM THE ASSESSEE. (C) THE PRODUCT WHICH THE ASSESSEE DEALS IN IS OF COM PETITIVE IN NATURE AND THE CONSUMERS HAVE OPTIONS OF LOOKING AT NUMEROUS SHOW ROOMS IN THE JAIPUR CITY. (D) IT MAY BE APPRECIATED THAT THE THRUST OF THE MA NAGEMENT HAS BEEN ON GROWTH IN TURNOVER. TO MAINTAIN CUSTOMER LOYA LTY, ENTER INTO COMPETITIVE MARKET THE THRUST CANNOT BE ON THE GP%. HOWEVER AS SUBMITTED DUE TO AMOUNT INCURRED ON BRAND CREATION, MARKETING, ADVERTISEMENT, SPONSORSHIPS TH E ASSESSEE HAD TO INCUR NET LOSS. (E) ANOTHER IMPORTANT ASPECT TO BE CONSIDERED IS TH E EXPERIENCE OF THE MANAGEMENT IN THE SAME FIELD. AS SUBMITTED E ARLIER IT WAS FOR THE FIRST TIME THAT THE MANAGEMENT OF THE AS SESSEE ENTERED INTO JEWELLERY BUSINESS. THIS IS ONLY SECOND YEAR OF OPERATION. PAST EXPERIENCE WAS ONLY IN THE FIELD OF EXPORT & IMPORT OF GEM-STONES. (F) THE MARGINS ARE ALSO DEPENDENT ON PARTICULAR PER IODS DEMAND AND SUPPLY POSITION. THE ASSESSEE IS DEALING IN MANUFACTURING OF GOLD, DI AMOND AND KUNDAN JEWELLERY STUDDED WITH PRECIOUS AND SEMI PRECIOUS STONES. MAIN TENANCE OF STOCK REGISTER IS NOT POSSIBLE IN THIS LINE OF BUSINESS. THE CLOSING S TOCK WAS VALUED AT ESTIMATED 6 ITA NO. 297/JP/2013 A.Y. 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., JAIPUR. COST PRICE AS IN THE PAST. THERE IS NO CHANGE IN THE METHOD OR BASIS OF VALUATION. THE LD. A/R ALSO REFERRED VARIOUS DECISIONS OF HIGH COURT AS WELL AS ITAT WHEREIN FALL IN GP AND NON-MAINTENANCE OF STOCK REGISTER WAS HELD TO BE NOT OF SIGNIFICANCE FOR REJECTING THE BOOKS OF ACCOUNT. TH EREFORE, HE REQUESTED TO DELETE THE ADDITION CONFIRMED BY LD. CIT (A). 5.1. AT THE OUTSET, THE LD. D/R SUPPORTED THE ORDE R OF LD. CIT (A). 6. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESEE WAS DEALING IN GEMS AND JEWELLERY INCLUDING G OLD JEWELLERY. THE 24 CARAT GOLD IS CONVERTED INTO 22 CARAT, 20 CARAT, 18 CARAT AND 16 CARAT. SIMILARLY, VALUATION OF DIAMOND JEWELLERY DEPENDS ON CLARITY, S IZE OF DIAMOND, COLOUR. IT IS DIFFICULT TO MAINTAIN THE STOCK REGISTER IN THIS LI NE OF BUSINESS OF THE ASSESSEE. THE NUMBER OF DIAMOND PIECES IS ALSO DIFFERS ON SIZE TO SIZE AND ACCORDINGLY VALUATION OF DIAMOND JEWELLERY VARIES FROM ITEM TO I TEM. AS ARGUED BY THE LD. A/R THAT NUMBER OF DECISIONS ARE QUOTED BY HIM PART ICULARLY OF HONBLE RAJASTHAN HIGH COURT DECISION IN CASE OF MALANI RAMJIVAN JAGA NNATH VS. ACIT (207 CTR 19) AND ITAT JAIPUR BENCH DECISION ON FALL IN GP AND NON -MAINTENANCE OF STOCK REGISTER SUPPORT THE ASSESSEES CASE. THEREFORE, WE REVERSE THE ORDER OF LD. CIT (A). IT IS NOT NECESSARY THAT WHERE BOOKS WERE REJEC TED CERTAIN ADDITION IS REQUIRED TO BE MADE TO THE INCOME OF THE ASSESSEE A S HELD BY HONBLE RAJASTHAN 7 ITA NO. 297/JP/2013 A.Y. 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., JAIPUR. HIGH COURT IN CASE OF GOTTON LIME KHANIZ UDYOG, 256 ITR 243 (RAJ.). THEREFORE, WE ALLOW THE ASSESSEES APPEAL. 7. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED P ARTLY. ORDER PRONOUNCED IN THE OPEN COURT ON 11/8/2015. SD/- SD/- VKJ-IH-RKSYKUH VH-VKJ-EHUK (R.P.TOLANI) (T.R. MEENA) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 11 TH AUGUST, 2015 *DAS VKNS'K DH IZFRFYFI VXZSFKR @ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ @ THE APPELLANT- M/S. DIVINE ORNAMENTS PVT. LTD., JAIP UR. 2. IZR;FKHZ @ THE RESPONDENT- ITO WARD 2(2), JAIPUR. 3. VK;DJ VK;QDR @ CIT 4. VK;DJ VK;QDRVIHY @ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ @ DR, ITAT, JAIPUR 6. XKMZ QKBZY @ GUARD FILE (ITA 297/JP/2013) VKNS'KKUQLKJ @ BY ORDER, LGK;D IATHDKJ @ ASST. REGISTRAR 8 ITA NO. 297/JP/2013 A.Y. 2008-09 M/S. DIVINE ORNAMENTS PVT. LTD., JAIPUR.