M/s. Balar Gems, Surat V. The Income tax Officer,Ward-9(1), Surat

ITA 3086/AHD/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 50603 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 07-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 17-11-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S S JHA
• Assessee Lawyers: J P SHAH
• Keywords: Income from undisclosed sources
• Section: 143(3); 12A; 143(2)

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE S/SHRI D.K. TYAGI, JM AND A.K. GARODIA, A.M . M/S BALAR GEMS, 329-30, KRINK TOWER, SARDAR CHOWK, VARACHHA ROAD SURAT. INCOME-TAX OFFICER, WARD 9(1), SURAT. APPELLANT VS. RESPONDENT APPELLANT BY :- SHRI J. P. SHAH, AR RESPONDENT BY:- SHRI S. S. JHA, SR.DR DATE OF HEARING 7/9/2011 DATE OF PRONOUNCEMENT -16/9/2011. O R D E R PER D.K. TYAGI, JUDICIAL MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF LD. CIT(A) DATED 30.9.2009. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL :- I. ADDITION TO VALUATION OF CLOSING STOCK OF POLISH ED DIAMONDS RS.33,53,384/-. II. DISALLOWANCE OF 1/5 TH OF TELEPHONE EXPENSES. ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 2 ADDITIONAL GROUND : IN CASE THE HONBLE TRIBUNAL UPHOLDS THE REVALUATIO N OF THE CLOSING STOCK OF POLISHED DIAMONDS THEN THE OPENING STOCK O F POLISHED DIAMONDS ALSO MUST BE ORDERED TO BE VALUED ON IDENT ICAL BASIS AS OF THE VALUATION OF THE CLOSING STOCK 2. AT THE TIME OF HEARING THE ADDITIONAL GROUND WAS NOT PRESSED HENCE THE SAME IS DISMISSED AS NOT PRESSED. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS E NGAGED IN THE BUSINESS OF PURCHASE AND SALES OF DIAMONDS. IT FILE D ITS RETURN OF INCOME FOR ASST. YEAR 2006-07 ON 29.12.2006 BY SHOWING TOT AL INCOME OF RS.43,969/-. THE CASE WAS SELECTED FOR SCRUTINY AND A NOTICE U/S 143(2) OF THE IT ACT WAS ISSUED ON 20.12.2007 WHICH WAS DULY SERVED ON 26.12.2007. THE ASSESSMENT WAS COMPLETED U/S 143(3) ON A TOTAL INCOME OF RS.34,03,924/- VIDE ORDER DATED 31.12.2008. WHIL E FINALIZING THE ASSESSMENT ON PERUSAL OF THE DETAILS OF OPENING AND CLOSING STOCK FILED ALONG WITH RETURN OF INCOME AND FURTHER DETAILS SUB MITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THA T THERE WAS DIFFERENCES IN THE PER CARAT OF POLISHED DIAMONDS I N RESPECT OF OPENING STOCK AND CLOSING STOCK. 4. THE ASSESSEE WAS REQUIRED TO SUBMIT DETAILS OF L OT-WISE MOVEMENT OF GOODS FROM OPENING STOCK TO PURCHASES TO SAL ES AND CLOSING STOCK. THE AR OF THE ASSESSEE FURNISHED A CERTIFICATE IN R ESPECT OF OPENING AND CLOSING STOCK VALUATION. THE AO NOTICED THAT THE CE RTIFICATE STATED ABOUT A SINGLE ENTRY OF WEIGHT IN CARATS AND TOTAL VALUE IN RESPECT OF POLISHED DIAMONDS. IT WAS EXPLAINED BY HIM THAT QUALITY WISE DETAILS WERE NOT MAINTAINED. FROM THE BOOKS OF ACCOUNT PRODUCED FOR VERIFICATION IT WAS NOT POSSIBLE TO IDENTIFY LOT-WISE GOODS MOVEMENT AS TO WHICH PARTICULAR ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 3 DIAMOND WAS PRODUCED OUT OF WHICH LOT OF ROUGH AND SOLD TO WHOM AND WHICH PART REMAINED IN CLOSING STOCK. SIMILARLY, DE TAILS OF RECEIPTS OF POLISHED DIAMONDS, SOLD OUT OF IT AND REMAINDER IN CLOSING STOCK WERE NOT AVAILABLE IN RESPECT OF SEPARATE LOTS. FROM THE DET AILS PRODUCED IT WAS OBSERVED THAT THE ASSESSEE HAS VALUED ITS CLOSING S TOCK OF POLISHED DIAMOND @ RS.1981.64 PER CARAT. HOWEVER, RATE OF PU RCHASES MADE DURING THE YEAR WAS VERY HIGH. THERE WERE SOME SALE S WHICH WERE POSSIBLE ONLY OUT OF OPENING STOCK. THUS, THE RATE OF CLOSING STOCK WAS NOT JUSTIFIED BY ANY MEANS. ON 24.12.2008, THE LD. AR A PPEARED AND THE ANALYSIS OF CLOSING STOCK OF POLISH DIAMOND WAS BRO UGHT TO HIS KNOWLEDGE AND HE WAS REQUESTED TO SHOW CAUSE AS TO WHY THE DI FFERENCE OF RS.80,39,318/- SHOULD NOT BE ADDED AS DIFFERENCE IN VALUATION OF CLOSING STOCK. ON REQUEST OF THE LD. AR OF ASSESSEE, A SHOW CAUSE NOTICE WAS ISSUED IN WRITING ON THE SAME DAY AND DULY SERVED U PON HIM. THE SAID SHOW CAUSE NOTICE READS AS UNDER: PLEASE REFER TO ASSESSMENT PROCEEDINGS GOING ON IN YOUR CASE AS WELL AS VARIOUS SUBMISSIONS MADE BY YOU. VARIOUS ISSUES HAV E BEEN DISCUSSED ON DIFFERENT DATES OF HEARINGS. YOUR LD. COUNSEL HAS A PPEARED WITH BOOKS OF ACCOUNT AND BILLS OF SALES AND PURCHASES AS WELL AS DETAILS OF VALUATION OF CLOSING STOCK HAVE BEEN FURNISHED. IT HAS BEEN OBSE RVED THAT QUALITY WISE DETAILS OF DIAMONDS HAVE NOT BEEN MAINTAINED BY YOU . SUCH DETAILS OF QUALITY OF DIAMOND HAS NOT BEEN MAINTAINED EITHER F OR PURCHASES/SALES OR FOR OPENING/CLOSING STOCK. YOU HAVE SHOWN CLOSING S TOCK OF POLISHED DIAMONDS OF 2364.67 CARATS WHICH IS VALUED BY YOU A T RS.46,85,934/-. PER CARAT RATE COMES TO RS.1,981.64. YOU WERE REQUIRED TO SHOW QUALITYWISE DETAILS AND BASIS OF VALUATION OF CLOSING STOCK. HO WEVER, YOU HAVE FAILED TO SUBMIT ANY SUCH DETAILS. NOTHING IN THIS REGARD COULD BE FOUND FROM YOUR BOOKS OF ACCOUNT. AN ANALYSIS OF MOVEMENT OF P OLISHED DIAMONDS WAS PREPARED ON THE BASIS OF OPENING STOCK DETAILS, PURCHASE BILLS, SALE BILLS AND CLOSING STOCK DETAILS PROVIDED BY YOU. TH E SUMMERY IS AS PER TABLE BELOW- OPENING STOCK, PURCHASES & CLOSING STOCK SALES DATE CRT RATE VALUE DATE CRT RATE VALUE 1. OPENING 1875.44 809.99 1519187 ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 4 STOCK 2. 03.05 86.16 13331.91 1148678 3 18.05 232.25 4500 1045125 4. 04.07 207.78 5400 1132401 5. 04.02.06 101.23 15000 1516450 6. 13.02.06 117.31 22283 2614096 7. 20.02.06 151.34 19750 2988965 8. CLOSING STOCK 2364.67 1981.64 4685934 2. IT CAN BE SEEN FROM THE ABOVE DETAILS THAT YOUR OPENING STOCK WAS OF 1875.99 CARATS VALUED AT RS.809.99 PER CARAT. YO UR PURCHASE DURING THE YEAR WERE @ RS.4,500/-, RS.5,400/- RS.15,000/- AND RS.19,750/- PER CARAT. FURTHER, THE LAST PURCHASE AT SR. NO.7 OF TH E TABLE IS COMPULSORILY INCLUDED INTO THE CLOSING STOCK WHICH WAS PURCHASED @ 19,750/- PER CARAT. ON THE OTHER HAND THE FIRST SALE SHOWN AT SR .NO.2 OF THE TABLE CAN BE OUT OF THE OPENING STOCK ONLY WHICH WAS VALUED BY Y OU @ 809.99 PER CARAT. 3. AS AGAINST THE ABOVE FACTS YOU HAVE SHOWN YOUR C LOSING STOCK OF POLISHED DIAMOND AT RS.1981.64 PER CARAT WHICH IS N OT JUSTIFIED BY ANY MEANS. PLEASE EXPLAIN THE BASIS OF ADOPTING SUCH RA TE AND VALUE ALONG WITH DOCUMENTARY EVIDENCES. IN CASE OF FAILURE TO J USTIFY YOUR CLAIM WITH EVIDENCE, PLEASE SHOW CAUSE AS TO WHY THE RATE SHOW ING BY YOU MAY NOT BE REJECTED AND VALUE OF CLOSING STOCK BE WORKED OU T ON THE BASIS OF THE FIGURES OF SALE AND PURCHASE GIVEN ABOVE, BASED ON ACCEPTABLE AND SCIENTIFIC METHOD. 4. IN ADDITION TO THE ABOVE YOU ARE ALSO REQUESTED TO FURNISH PHOTOCOPIES OF ALL THE SALE AND PURCHASE BILLS FOR ROUGH AS WELL AS POLISHED DIAMONDS IN CHRONOLOGICAL ORDER FOR THE FY 2003-04 AND 2004- 05 AND COMPLETE BIFURCATION WITH RATE & QUANTITY OF OPENING STOCK AS ON 01.04.2003 AND 01.04.2004. 5. IN RESPONSE TO THE ABOVE SHOW CAUSE NOTICE ISSUE D BY THE AO NO REPLY WAS RECEIVED ON THE SCHEDULED DATE I.E.26.12. 2008. HOWEVER, A WRITTEN SUBMISSION WAS RECEIVED ON 30.12.2008 IS UN DER : PLEASE REFER TO YOUR ABOVE MENTION LETTER BY WHICH IT IS PROPOSED TO MAKE AN ADDITION ON THE BASIS OF REVALUATION OF STO CK. WE HAVE GOT ALL OBJECTION TO YOUR PROPOSAL. IN THIS REGARD WE HAVE TO STATE THAT YOUR ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 5 APPELLANT HAS A PRACTICE TO VALUE THE STOCK AT AVER AGE PRICE OF THE PURCHASE PRICE WITH VALUE OF OPENING STOCK AND THAT IS ADOPTED AS PER THE PRESCRIBED STANDARD OF ACCOUNTING SYSTEM. THERE ARE ALSO DECISION IN SO MANY CASE WHERE IN RA TIO LAID DOWN THAT WHEN THE ASSESSEE HAS BEEN CONSISTENTLY ADOPTED ONE METHOD SINCE THE INCEPTION OF ITS BUSINESS VALUING ITS STOCK BOTH OP ENING AND CLOSING THE VALUE DISCLOSED BY THE ASSESSEE HAVE BEEN ACCEPTED BY THE DEPARTMENT. YOUR GOODSELF HAVE PROPOSED TO ADOPT THE VALUE OF C LOSING STOCK FOR WHICH IN YOUR LETTER IT IS STATED THAT. IT CAN BE SEEN FROM THE DETAILS THAT YOUR OPENING S TOCK OF 1875.99 CARATS VALUED AT RS.809.99 PER CARAT. YOUR PURCHASE S DURING THE YEAR WERE @ RS.4500/-, RS.5400/-, RS.15,000/- AND RS.197 50/- PER CARAT, FURTHER THE LAST PURCHASE AT SL.NO.7 OF THE TABLE I S COMPULSORILY INCLUDED IN THE CLOSING STOCK WHICH WAS PURCHASES OF RS.19750/- PER CARAT. ON THE OTHER HAND THE FIRST SALE SHOWN AT SL. NO.2 OF THE TABLE CAN BE OUT OF THE OPENING STOCK ONLY. WHICH WAS VALUED BY YOU @ RS.80 9.99 PER CARAT. AS AGAINST THE ABOVE FACTS YOU HAVE SHOWN YOUR CLOS ING STOCK OF POLISHED DIAMOND AT RS.1981.64 PER CARAT WHICH IS N OT JUSTIFIED BY ANY MEANS. PLEASE EXPLAIN THE BASIS OF ADOPTING SUCH RA TE AND VALUE ALONG WITH DOCUMENTARY EVIDENCES. IN THIS REGARD WE HAVE TO STATE THAT OUR ASSESSEE HAS ADOPTED THE SYSTEM OF VALUING STOCK AT THE AVERAGE RATE AND ACC ORDINGLY SAME HAVE BEEN VALUED FROM THE INCEPTION OF THE BUSINESS AND STOCK STATEMENT IS ALL READY BEEN SUBMITTED. IT IS FURTHER SUBMITTED THAT YOUR GOODSELF HAVE CONSIDERED ONLY ROUGH AND POLISHED DIAMOND BUT NOT CONSIDERED THE REJECTION GOODS. FROM THE LOT PURCHASE THERE ARE CE RTAIN QUALITY WHICH IS A REJECTED GOODS WHICH HAS EITHER NIL VALUE OR VERY MEAGRE VALUE WHICH EFFECT THE VALUE OF OUR STOCK (THOUGH THE QUANTITY IN INCLUSIVE IN CLOSING STOCK). IN YOUR LETTER YOUR GOODSELF HAVE GIVEN THE WORKING IN WHICH ENTIRE STOCK IS VALUED AT AVERAGE RATE OF PURCHASES DURING THE YEAR. BUT OLD STOCK CANNOT BE VALUED AT THAT COST BECAUSE THE STOCK IS SUCH THAT IT IS NOT IN DEMAND IN MARKET AND HENCE IT IS LYING SINCE LONG. IT IS FURTHER SUBMITTED THAT YOUR GOODSELF HAVE PR OPOSED TO ENHANCE THE VALUE OF CLOSING STOCK BY ADOPTING THE AVERAGE COST OF PURCHASE DURING THE YEAR AND THAT IS ALSO YOU HAVE INTERFERE D ONLY WITH THE CLOSING STOCK WHILE ADDING TO ITS VALUE BUT IN FACTS SAME P RINCIPAL IS APPLICABLE TO BOTH TO THE OPENING STOCK AND TO THE CLOSING STOCK AND RECAST THE VALUE ON THE BASIS OF SUCH ADJUSTMENT OF OPENING AND CLOSING STOCK. ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 6 IN OUR CASE AS WE ARE FOLLOWING THE ACCOUNTING SYS TEM CONSISTENTLY MORE RADICAL ISSUE IS THAT THE CLOSING STOCK DOES N OT ADMIT OF INTERFERENCE IN THE MANNER IT HAS BEEN MADE. THE METHOD OF VALUA TION OF STOCK IS COST OR MARKET PRICE WHICHEVER IS LESS AND WE HAVE ADOPT ED THE COST METHOD BY ARRIVING THE AVERAGE COST THROUGH OUT THE INCEPT ION OF BUSINESS. HENCE IN OUR CASE A PROPOSITION THAT AN ADDITION OR ARBIT RARY AT AVERAGE COST OF PURCHASES DURING THE YEAR HAS TO BE MADE TO THE STO CK HAS NO PLACE. THE GRANTED PRINCIPAL IT THAT AS A HYPOTHESIS THAT SUCH ADDITION IS PERMISSIBLE THE SAME ADDITION BY ANALOGY SHALL AS W ELL TO THE OPENING STOCK OTHERWISE THERE IS DISTORTION OF THE PROFIT B Y INFLATION RELIANCE IS PLACE ON THE DECISION OF THE PRIVY COUNCIL IN CIT V S. AHMEDABAD NEW COTTON MILL CO. LTD. AIR 1930 PC 56 WHICH SAYS THAT ADDITION TO CLOSING STOCK VALUE WITHOUT ADJUSTMENT TO OPENING STOCK ON THE SAME IS ABSURD. HENCE IT WILL NOT BE JUSTIFICATION IF AN ADDITION I S MADE ON THE BASIS OF REVALUING OF CLOSING STOCK ON ACCOUNT OF AVERAGE CO ST OF PURCHASE DURING THE YEAR. HENCE WE REQUEST YOUR HONOUR NOT TO MAKE ANY ADDITION ON THIS GROUND. 6. THE AO REQUESTED THE ASSESSEE TO SHOW SEPARATE Q UANTITY OF REJECTION AND ITS VALUE IN THE CLOSING STOCK. HE EX PLAINED THAT REJECTION IS NOT SHOWN SEPARATELY AND HAS BEEN INCLUDED IN CLOSI NG STOCK. FURTHER, THE ASSESSEE HAS CLAIMED THAT ALL STOCK CANNOT BE VALUE D AT THAT COST. HE WAS REQUESTED TO SHOW DETAILS OF SUCH STOCK IN THE OPEN ING AS WELL AS CLOSING STOCK OF PARTICULAR YEAR. HOWEVER, THE SAME COULD N OT BE DONE AS THE OPENING AS WELL AS CLOSING STOCK HAS BEEN SHOWN AS A SINGLE ENTRY. AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS OF ASSESS EE THE AO OBSERVED AS UNDER :- 3.4 I HAVE CAREFULLY GONE THROUGH THE SUBMISSION M ADE BY THE ASSESSEE AND THE SAME HAS NOT BEEN FOUND TO BE ACCEPTABLE. T HE ASSESSEE, IN ITS SUBMISSION, HAS ONLY RELIED UPON THE ARGUMENT THAT IT HAD ADOPTED THE SYSTEM OF VALUING STOCK AT THE AVERAGE RATE AND THE SAME HAS BEEN VALUED FROM INCEPTION OF THE BUSINESS. THIS ARGUMENT OF TH E ASSESSEE IS NOT SATISFACTORY. INSTEAD OF PROVIDING DETAILED INVENTO RY OF OPENING AND CLOSING STOCK, THE ASSESSEE HAS REPEATED THE THINGS WHICH WERE ALREADY ON RECORD. FURTHER, ASSESSEE HAS ARGUED THAT IN THE LO T PURCHASED, THERE WERE ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 7 CERTAIN QUALITY WHICH WAS REJECTED GOODS HAVING EIT HER NIL VALUE OR MEAGRE VALUE WHICH EFFECTS THE VALUE OF STOCK OF TH E ASSESSEE. THIS ARGUMENT OF THE ASSESSEE IS SQUARELY REJECTED. IN T HE TRADE OF DIAMOND BUSINESS WHEN A LOT OF ROUGH DIAMONDS IS PURCHASED, THAT IS ASSORTED AND THE; REJECTED GOODS ARE OR TAKEN OUT. FURTHER THE Y IELD OF FINISHED GOODS IS VERY LOW AND COMES TO AN AVERAGE OF 30%. FURTHER, A SSESSEE HAS ARGUED THAT THE STOCK WAS VALUED AT THE RATE CT AVERAGE PU RCHASE PRICE BUT THE OLD STOCK CAN NOT BE VALUED AT THAT COST BECAUSE THE ST OCK WAS SUCH THAT SAME COULD NOT BE IN DEMAND IN MARKET. THIS ARGUMENT OF THE ASSESSEE IS AGAINST THE METHOD OF VALUATION OF STOCK DESCRIED I N CLAUSE 12A OF 3CD REPORT WHICH WAS DESCRIED AS 'AT COST', SINCE THE M ETHOD OF VALUATION OF THE ASSESSES WAS AT COST, THEREFORE THE SAME IS TO BE VALUED ACCORDING TO THE PURCHASE BILLS. THE DIAMOND IS VERY PRECIOUS IT EM AND EVEN A PIECE OF ONE CENT HAS SOME VALUE. THEREFORE, IN DAY TO DAY B USINESS, THE ASSESSEE HAS TO KEEP STOCK MOVEMENT REGISTER, LOT TO LOT DET AILS, ISSUE AND DISPATCH REGISTER AND ACCORDINGLY HE HAS TO PREPARE DETAILED INVENTORY OF OPENING AND CLOSING STOCK. THE ASSESSEE HAS FAILED TO FILE ANY DOCUMENTARY EVIDENCES REGARDING THE REJECTED GOODS OR THE GOODS REMAINED IN THE CLOSING STOCK. IN FACT ALL OF SUCH DETAILS ARE PRAC TICALLY MAINTAINED BY THE DIAMOND BUSINESS PERSON WITHOUT WHICH THEY WILL NEV ER KNOW THEIR ACTUAL PROFITS. HOWEVER, THE ASSESSEE HAS OPTED NOT SUBMIT COMPLETE DETAILS. THE ANALYSIS SHOWN IN THE SHOW CAUSE LETTER DATED 24.12 .2008 WAS PREPARED SCIENTIFICALLY AND SAME IS TO BE ACCEPTED UNLESS AN D UNTIL OTHER WISE PROVED BY THE ASSESSEE. 3.5 FURTHER THE ANALYSIS OF CLOSING STOCK OF RO UGH AND POLISH DIAMONDS FOR DIFFERENT YEARS WAS MADE IN THE FOLLOWING TABLE : DATE PARTICULAR CLOSING STOCK OF ROUGH CLOSINGSTOCK OF POLISH 31/03/2003 QTY. 27638.89 2409.12 RATE 575.00 7000.00 AMOUNT 15892361.00 16863840.00 PURCHASE 27791.18 1197.28 RATE 645.67 3246.80 SOLD/ISSUE 4132,20 3027.15 31/03/2004 QTY. 51297.87 579.25 RATE 376.50 2990.00 AMOUNT 19313739.00 1731957.00 31/03/2005 QTY. 19314.30 1875.54 ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 8 RATE 181.78 810.00 AMOUNT 3510938.00 1519187.00 31/03/2006 QTY. 15941.57 2364.67 RATE 466.20 1981.64 AMOUNT 7431895.00 4685934.00 FROM THE ANALYSIS MADE IN THE ABOVE TABLE IT IS NOT ICED THAT THERE WAS NO CONSISTENCY OF VALUATION ADOPTED BY THE ASSESSEE FO R ROUGH AS WELL AS POLISH DIAMOND. IN CASE OF ROUGH DIAMONDS THE ASSES SEE HAS SHOWN CLOSING STOCK AS ON 31.3.2003 @ RS.575/- AND DURING THE YEAR 2003-04 PURCHASES OF THE ROUGH WERE MADE AT THE RATE OF @ RS. 645.67, HOWEVER THE CLOSING STOCK WAS VALUED ON 31.03.2004 @ RS. 37 6.50. FURTHER, NO ROUGH WAS PURCHASED IN THE YEAR 2004-05. DESPITE TH IS, THE RATE OF CLOSING STOCK OF ROUGH AS ON 31.3.2005 WAS SHOWN AT 181.78 AND FURTHER, WITHOUT ANY RECEIPTS DURING 2005-06, CLOSING STOCK OF ROUGH WAS VALUED AT RS. 466.20. 3.6 IN CASE OF POLISHED DIAMONDS CLOSING STOCK AS O N 31.3.2003 WAS WORKED OUT @ 7000/-. THE PURCHASES MADE DURING THE F.Y. 2003-04 WERE @ RS. 3246.80. THE VALUATION OF CLOSING STOCK AS ON 31.3.2004 WAS MADE @ 2990.00 AND WITHOUT ANY PURCHASES OF POLISHED DIA MOND DURING FY 2004-05, VALUATION OF CLOSING STOCK WAS RS, 810/-ON LY. 3.7 THIS CLEARLY INDICATES THAT THE CLOSING STOCK W AS NOT VALUED AS THE METHOD IN THE AUDIT REPORT I.E. 'AT COST' BUT THE S AME WAS VALUED BY THE PARTNERS OF FIRM AT THEIR WILL OR ACCORDING TO THE ADJUSTMENT OF G.P. RATIO. FURTHER, THE VALUATION OF THE STOCK CERTIFI ED BY THE PARTNERS AND REPORTED IN THE 3CD REPORTS WAS ALSO DIFFERENT. THE REFORE, TO FIND OUT CORRECT VALUE OF CLOSING STOCK OF POLISHED DIAMONDS , A FURTHER ANALYSIS WAS MADE OF THE TRANSACTIONS OF POLISHED DIAMOND WH ICH IS IN BELOW TABLE: A) ASSUMING THAT SALE OF POLISHED DIAMOND ON 13. 2.2006 WAS OUT OF OPENING STOCK: DATE OF PURCHASE QUANTITY RATE AMOUNT 18.5.2005 232.25 4500 1045125 4.7.2005 207.78 5400 1132401 4.2.2006 101.23 15000 1518450 20.2.2006 151,34 19750 2988965 ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 9 OPENING 167207 809.99 1354377 TOTAL 8039318 B) ASSUME THAT SALE OF POLISH DIAMOND ON 13.2.20 06 WAS OUT OF PURCHASES MADE DURING THE YEAR: DATE OF PURCHASE QUANTITY RATE AMOUNT OPENING 1789.38 1449398 20.2.2006 151.34 19750 2988965 BALANCE PURCHASE 423.95 3129599 IN VIEW OF THE ABOVE DISCUSSION, MATERIAL AVAILABLE ON THE RECORD, CONSIDERING THE EXPLANATION GIVEN BY THE ASSESSEE A ND THE ANALYSIS MADE IN THE SHOW CAUSE NOTICE DATED 24.12,2008 AS WELL A S IN THE ABOVE TABLE, IT IS CONCLUDED THAT VALUATION OF THE STOCK WAS NOT MA DE AS PRESCRIBED IN THE AUDIT REPORT AND ACCORDINGLY THE VALUE OF THE FINIS HED DIAMONDS AS WORKED OUT IN THE AFORESAID TABLE NO. A' AMOUNTIN G TO RS. 80.39.318/- IS CONSIDERED AS FINAL. 4. THUS, VALUE OF CLOSING STOCK OF THE ASSESSEE FOR POLISHED DIAMOND SHOULD BE AT LEAST RS.80,3.318/- AS AGAINST WHICH T HE ASSESSEE HAS SHOWN VALUE OF CLOSING STOCK AT RS.46,85,934/- ONLY. ACCO RDINGLY THE DIFFERENCE IN THE VALUATION IN THE CLOSING STOCK OF RS.33,53,3 84/- (8039318 - 4685934) IS ADDED BACK TO THE TOTAL INCOME OF THE A SSESSEE AS INCOME FROM UNDISCLOSED SOURCES. I AM SATISFIED THAT THE A SSESSEE HAS CONCEALED ITS INCOME BY FURNISHING INACCURATE PARTICULARS AND HENCE PENALTY PROCEEDINGS U/S 271(1)C OF THE ACT ARE BEING INITIA TED. 7. IN APPEAL, THE LD. CIT(A) CONFIRMED THE ACTION O F THE AO. AGGRIEVED WITH THIS ORDER OF LD. CIT(A) THE ASSESSE E IS IN APPEAL BEFORE US. 8. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE A SSESSEE WAS FAIR ENOUGH TO ACCEPT THAT VALUATION OF STOCK OF POLISHE D DIAMONDS DONE BY THE ASSESSEE BY ADOPTING THE SYSTEM OF VALUING THE STOCK AT THE AVERAGE RATE WAS NOT GIVING TRUE PICTURE OF THE AFFAIRS OF THE ASSESSEE. HOWEVER, IN THE SAME BREATH HE SUBMITTED THAT REVENUE WAS ALSO NOT JUSTIFIED IN ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 10 VALUING THE STOCK BY ADOPTING FIFO METHOD OF VALUIN G THE STOCK. HE FURTHER SUBMITTED THAT THERE ARE FOUR PURCHASES AND TWO SALES DURING THE YEAR UNDER APPEAL AND THERE IS NO DISPUTE ABOUT THE OPENING STOCK DETAILS, PURCHASE BILLS AND SALE BILLS OF THE ASSESSEE DURIN G THE YEAR. THE ONLY DISPUTE IS ABOUT THE CLOSING STOCK. ACCORDING TO TH E ASSESSEE THE CLOSING STOCK OF THE ASSESSEE WAS OF RS.46,85,934/- WHILE A CCORDING TO THE CALCULATION OF THE REVENUE THE CLOSING STOCK VALUAT ION COMES TO RS.80,39,318/-. EXPLAINING THE CLOSING STOCK DETAIL S GIVEN BY THE ASSESSEE DURING ASSESSMENT PROCEEDINGS IN THE FORM OF FOLLOW ING TABLE : OPENING STOCK, PURCHASES & CLOSING STOCK SALES DATE CRT RATE VALUE DATE CRT RATE VALUE 1. OPENING STOCK 1875.44 809.99 1519187 2. 03.05 86.16 13331.91 1148678 3 18.05 232.25 4500 1045125 4. 04.07 207.78 5400 1132401 5. 04.02.06 101.23 15000 1516450 6. 13.02.06 117.31 22283 2614096 7. 20.02.06 151.34 19750 2988965 8. CLOSING STOCK 2364.67 1981.64 4685934 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT WOULD BE REASONABLE IF THE FOLLOWING VALUATION OF CLOSING STOCK IS TAKEN I NTO CONSIDERATION :- STEP 1 OPENING STOCK IS 1875.44 CARATS VALUED AT RS.8Q9.99 PER CARAT. FROM THIS STOCK, 86.16 CARAT HAS BEEN SOLD. THEREFORE, THE BALANCE STOCK WILL BE 1789.28 CARATS, THE VALUE OF WHICH @ RS. 809.99 A CARAT. RS,14,49 I 298.90 STEP 2: ITEM 3 BEING 232.25 CARATS @ RS.4,500/- VALUED AT RS,10,45,125/- IS IN THE CLOSING STOCK. RS,10,45,125.00 STEP 3; FROM 4 TH ITEM BEING 207.78 CARATS PURCHASED AT RS.5400/- PER CARAT, 16.08 CARATS SEEM TO HAVE BEEN SOLD ON 13.02.2006. THEREFORE, THE BALANCE SURVIVING IN THE CLOSING STOCK IS ., RS.10,41,681.00 ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 11 STEP 4: ITEM 5 HAS BEEN SOLD OFF AS ON 13.02.2006. THEREFORE, NOT IN CLOSING STOCK. -- STEP 5: ITEM 7 IS IN THE CLOSING STOCK - 151.34 CARAT @ RS.19,750/- A CARAT RS.29,88,965.00 TOTAL: RS.65,25,069.00 LESS: CLOSING STOCK VALUATION BY ASSESSEE. RS.46,85,934.00 DIFFERENCE: RS.18,39,135.00 CONCLUDING HIS ARGUMENT, THE LD. COUNSEL FOR THE AS SESSEE SUBMITTED THAT IF THE ABOVE VALUATION OF CLOSING STOCK IS ACCEPTED THE DIFFERENCE BETWEEN THE CLOSING STOCK SHOWN BY THE ASSESSEE AND THE ABO VE VALUATION REMAINS AT RS.18,39,135/- AND, THEREFORE, THE ADDITION MAY BE RESTRICTED TO THIS AMOUNT ONLY. 9. THE LD. DR ON THE OTHER HAND VEHEMENTLY SUPPORTI NG THE ORDER OF AO SUBMITTED THAT SINCE ASSESSEE HAS FAILED TO GIVE QUALITY DETAILS AND LOT WISE DETAILS OF THE CLOSING STOCK NO RELIEF BE GIVE N TO THE ASSESSEE ON THE BASIS OF SUBMISSIONS NOW MADE AND THE ORDERS PASSED BY THE LOWER AUTHORITIES MAY KINDLY BE UPHELD. 10. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT THE AO HAS MADE AN ADDITION OF RS.33,53,384/- IN TH E VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS AS PER PARA 3.6 OF THE A SSESSMENT ORDER WHERE HE HAD WORKED OUT THE DIFFERENCE TAKING INTO CONSID ERATION THE TOTAL VALUE OF PURCHASE PLUS THE VALUE SHOWN IN THE OPENING STO CK AFTER DEDUCTING THERE-FROM THE SALE THAT HAS TAKEN PLACE DURING THE YEAR, AS UNDER:- PARTICULARS QUANTITY RATE VALUE OPENING STOCK 1875.44 809.99 15,19,187 ADD: PURCHASE MADE DATE QUANTITY 18.05.05 232.25 4500 04.07.05 207.78 5400 04.02.06 101.23 15000 20.02.06 151.34 692.60 19750 66,84,941 TOTAL OF OPENING STOCK AND PURCHASES 82,04,128 ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 12 LESS SALES MADE 03.05.05 86.16 809.99 13.02.06 117.31 203.47 809.99 164810 CLOSING STOCK 2364.67 80,39,318 IT IS CLEAR FROM THE ABOVE THAT AO HAS FOLLOWED FIF O METHOD ASSUMING THAT THE SALES HAVE TAKEN PLACE ON THE BASIS OF GOO DS THAT WERE RECEIVED. THUS HE WORKED OUT THE TOTAL VALUE OF OPENING STOCK PLUS PURCHASE AT RS.82,04,128/- AND HE CONSIDERED THAT ENTIRE SALE O F 203.47 CARATS IS OUT OF OPENING STOCK AND HENCE BY REDUCING THE VALUE OF OP ENING STOCK FOR THIS SALE QUANTITY, HE WORKED OUT VALUE OF CLOSING STOCK AT RS.80,39,318/- AND DEDUCTED THERE-FROM VALUE OF CLOSING STOCK SHOWN BY THE ASSESSEE AT RS.46,85,934/- AND MADE ADDITION OF RS.33,53,384/-. ON THE OTHER HAND, ASSESSEES VALUATION OF CLOSING STOCK BEFORE THE LO WER AUTHORITIES WAS AS UNDER :- OPENING STOCK, PURCHASES & CLOSING STOCK SALES DATE CRT RATE VALUE DATE CRT RATE VALUE 1. OPENING STOCK 1875.44 809.99 1519187 2. 03.05 86.16 13331.91 1148678 3 18.05 232.25 4500 1045125 4. 04.07 207.78 5400 1132401 5. 04.02.06 101.23 15000 1516450 6. 13.02.06 117.31 22283 2614096 7. 20.02.06 151.34 19750 2988965 8. CLOSING STOCK 2364.67 1981.64 4685934 BEFORE US, THE ASSESSEE HAS PLACED RELIANCE ON THE TABLE ALREADY MENTIONED IN PARA 8 ABOVE ACCORDING TO WHICH THE CL OSING STOCK OF THE ASSESSEE COMES TO RS.65,25,069.00. THE ASSESSEES C ONTENTION HAD BEEN THAT ADMITTEDLY THE FIRST SALE BY THE ASSESSEE WAS FROM THE OPENING STOCK. THE ONLY CONTROVERSY IS IN RESPECT OF SECOND SALE M ADE BY THE ASSESSEE ON 13.02.2006. THE AO HAS TAKEN THE SALE OUT OF OPENIN G STOCK WHILE THE ASSESSEES CASE BEFORE US IS THAT THIS SALE HAS BEE N MADE OUT OF PURCHASE ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 13 MADE ON 4.2.2006 AND 4.7.2005. THOUGH THE ASSESSEE HAS NO CLINCHING EVIDENCE IN RESPECT OF THIS CONTENTION, BUT AT THE SAME TIME WE FIND THAT REVENUE HAS ALSO BROUGHT NOTHING ON RECORD TO SHOW THAT THIS CONTENTION OF ASSESSEE IS FALSE. FURTHER WE ALSO FIND THAT REV ENUE ALSO DOES NOT HAVE ANY BASIS FOR HOLDING THAT SECOND SALE I.E. MADE BY THE ASSESSEE ON 13.02.2006 WAS ALSO MADE OUT OF OPENING STOCK. UNDE R THESE CIRCUMSTANCES, WE ARE INCLINED TO GIVE BENEFIT OF D OUBT TO THE ASSESSEE AND ACCEPT HIS CONTENTION. IN VIEW OF ABOVE, THE AD DITION MADE BY THE AO AND SUSTAINED BY THE LD. CIT(A) IS HEREBY RESTRICTE D TO RS.18,39,135/-. THIS GROUND OF ASSESSEE IS PARTLY ALLOWED. 11. THE SECOND GROUND OF THE APPEAL RELATES TO DISA LLOWANCE OF 1/5 TH OF TELEPHONE EXPENSES. THE AO HAS DISALLOWED 1/5 TH OF TELEPHONE EXPENSES TREATING THE SAME AS NON BUSINESS PURPOSES AND PERS ONAL USE. DURING THE APPELLATE PROCEEDINGS, THE AR HAD NOT PRESSED THIS GROUND. THE LD. CIT(A) CONFIRMED THE SAME. 12. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RECORD, WE ARE OF THE VIEW THAT THERE IS NO INFIRMITY IN THE O RDER OF LD. CIT(A) WHEREIN HE HAS CONFIRMED THE 1/5 TH DISALLOWANCE OF TELEPHONE EXPENSES AS THE GROUND WAS NOT PRESSED BEFORE HIM. WE CONFIRM T HE SAME. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 16/9/2011. SD/- SD/- (A. K. GARODIA) (D.K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED : 16/9/2011. ITA NO.3086/AHD/2009 ASST. YEAR 2006-07 14 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 7/9/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 8/9/11. /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 DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..