The ACIT, Circle-9, Surat V. M/s. Hansal Diam, Surat

ITA 3089/AHD/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57075 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 13-12-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 16-07-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: M K PATEL
• Keywords: Gross profit estimation; Rejection of books of accounts; Capital asset converted into stock in trade; Business income
• Section: 145

Judgement Text

-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI D K TYAGI - JM AND SHRI A K GARODIA - AM ITA NO.3089/AHD/2007 A N D ITA NO.2585/AHD/2009 (ASSESSMENT YEARS:-2004-05 & 2005-06) THE ASSISTANT / DEPUTY COMMISSIONER OF INCOME- TAX, CIRCLE-9, SURAT V/S M/S HANSAL DIAM, 65, SHIV SHANKAR PARVATI SOCIETY, VARACHHA ROAD, SURAT PAN: AACFJ 0091 J [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI VINOD TANWANI, SR. DR ASSESSEE BY:- SHRI M K PATEL, AR DATE OF HEARING:- 13-12-2011 DATE OF PRONOUNCEMENT:- O R D E R PER D K TYAGI (JM) :- THESE TWO APPEALS HAVE BEEN FILED BY THE REVENUE AGAINST TWO SEPARATE ORDERS DATED 09-04 -2007 AND 30-06-2009 PASSED BY THE LEARNED COMMISSIONER OF IN COME-TAX (APPEALS)-V, SURAT [LEARNED CIT(A)] FOR ASSESSMEN T YEARS (AY) 2004-05 AND 2005-06 RESPECTIVELY. 2 IN BOTH THE APPEALS, THE REVENUE HAS CHALLENGED T HE ORDERS OF THE LEARNED CIT(A) ON THE GROUND THAT THE LEARNE D CIT(A) HAS ERRED IN DELETING THE ADDITIONS MADE BY THE AO IN R ESPECT OF LOW GROSS PROFIT. SINCE IN BOTH THE APPEALS, THE ISSUE IS SAME, WE ARE 2 DISPOSING OF THESE TWO APPEALS BY THIS CONSOLIDATED ORDER, BY TAKING THE FACTS OF ASSESSMENT YEAR 2004-05. ITA NO.3089/AHD/2007 FOR AY 2004-05 :- 3 IN THIS APPEAL FILED BY THE REVENUE, THE ONLY GRO UND RAISED RELATES TO DELETION OF AN ADDITION OF RS.28,49,884/ - MADE BY THE AO IN RESPECT OF LOW GROSS PROFIT. THE AO HAS DEALT WITH THE ISSUE AS UNDER:- 2 THE ASSESSEE, A PARTNERSHIP FIRM, IS ENGAGED IN THE BUSINESS OF JOB WORK OF DIAMOND AND EXPORT OF DIAMOND. DURING T HE YEAR THE ASSESSEE HAS SHOWN GROSS PROFIT OF RS.1,01,82,895/- @ 13.81% ON TOTAL TURN OVER OF RS.7,37,47,135/- AS AGAINST GROS S PROFIT OF RS.1,07,26,776/- @ 20% ON GROSS RECEIPTS OF RS.5,36 ,39,699/- IN THE IMMEDIATELY PRECEDING YEAR. THUS, THERE IS A FALL I N THE GROSS PROFIT RATIO IN THE YEAR UNDER CONSIDERATION. 3 AS NOTED IN THE PRECEDING PARAS THAT THE ASSESSEE HAD SHOWN GP @ 13.81% AS COMPARED TO GP OF 20% IN THE IMMEDIATEL Y PRECEDING ASSESSMENT YEAR. THUS THERE WAS A FALL IN GROSS PRO FIT OF 6.19%. HERE IT WOULD BE PERTINENT TO MENTION FURTHER SCANNING OF T RADING OF ACCOUNT REVEALED THAT THE ASSESSEE HAD CARRIED OUT EXPORT T RADING ACTIVITY FROM ITS BRANCH OFFICE SITUATED AT MUMBAI AND THE JOB WO RK FROM ITS HEAD OFFICE AT SURAT. IN THIS CONTEXT THE ASSESSEE VIDE THIS OFFICE QUERY LETTER DATED 19.7.2005 ALONGWITH NOTICE U/S. 142(1), THE A SSESSEE WAS CATEGORICALLY ASKED TO EXPLAIN THE FALL IN GROSS PR OFIT. BEFORE GOING INTO THE DISCUSSION ON THE FALL IN G.P. THE NATURE OF BU SINESS OF THE ASSESSEE IS DISCUSSED TO EMPHASIS THE IMPORTANCE OF MAINTENA NCE OF QUALITY DETAILS FOR ARRIVING AT CORRECT RESULTS. DISCUSSION ON PECULIAR NATURE OF THE BUSINESS 4 THE ASSESSEE USED TO IMPORT ROUGH DIAMONDS IN LOT S. THE PRICE OF THESE LOTS VARIES FROM LOT TO LOT, DEPENDING UPO N THE QUALITY OF THE ROUGH DIAMONDS CONTAINED IN THE LOTS. AFTER THE REC EIPT OF THE LOTS, THE ASSESSEE IN ORDER TO GET POLISHED DIAMONDS ASSORT T HE LOT, FOR THE PURPOSE OF SEGREGATING THE ROUGH DIAMONDS INTO TWO PARTS I.E. THE ROUGH DIAMONDS FROM WHICH POLISHED DIAMONDS CAN BE MADE AND THE 3 OTHERS FROM WHICH NO POLISHED DIAMONDS OR DIAMONDS OF LOWER QUALITY CAN BE MADE. THE IDENTIFIED ROUGH DIAMONDS ARE FURT HER SEGREGATED INTO DIFFERENT CATEGORIES DEPENDING UPON THE QUALIT Y OF ROUGH DIAMONDS. THESE ARE THEN GIVEN TO THE LABOURERS IN PACKETS FOR FURTHER PROCESS OF CLEAVING AND POLISHING. IT WOULD BE NECE SSARY TO MENTION THAT SOMETIMES THE QUANTITY OF ROUGH DIAMONDS IN A PACKET RANGES FROM ONE TO FIFTY. SOMETIMES, THE UPPER LIMIT MAY F URTHER BE EXTENDED TO ANY LIMIT. THUS, FOR A PRUDENT BUSINESS MAN, IT BECOMES NECESSARY TO HAVE A RECORD OF BOTH THE QUANTITY IN TERMS OF CARA TS AS WELL AS QUALITY OF ROUGH DIAMONDS GIVEN TO EACH LABOUR CONTRACTOR O R TO EACH LABOURER, AS IT IS ONLY FROM THESE PACKETS, THE POLISHED DIAM ONDS WOULD COME OUT. THE LABOURERS / CONTRACTORS AFTER DOING THE EX ERCISE OF CLEAVING AND POLISHING, RETURN THE POLISHED DIAMONDS ALONG W ITH THE RESIDUAL TO THE BUSINESS MAN BOTH IN WEIGHT AND PIECES. THE ASS ESSEE, AFTER SEGREGATING THEM QUALITY WISE, FIX THE SALE PRICE. THIS WOULD MEAN, THE ASSESSEE IS IN FULL KNOWLEDGE OF THE QUALITY OF EAC H AND EVERY DIAMOND MANUFACTURED OUT OF THE ROUGH DIAMONDS. THIS PARTIC ULAR KNOWLEDGE OF THE QUALITY OF THE DIAMOND IS NECESSITATED FROM THE FACT THE VALUE OF POLISHED DIAMONDS VARIES FROM RS.1,000/- PER CARAT TO RS.1,00,000/- PER CARAT OR EVEN MORE. NEEDLESS TO SAY, IT IS A KN OWN FACT THAT THE PRICE OF DIAMONDS DEPEND UPON 4 CS. THEY ARE (I) CA RAT (II) CUT (III) COLOUR AND (IV) CLARITY. 4.1 THIS ASPECT MAY BE ELABORATED BY TAKING EACH FA CTOR INTO ACCOUNT SEPARATELY. THUS, IF THE PRICE OF 0.10 CARA T OR 10 CENTS AS IT MAY BE CALLED IN THE DIAMOND TRADE, IS RS.5,000, TH E PRICE OF A DIAMOND HAVING ALL OTHER SIMILAR QUALITIES BUT WEIG HING .20 CARAT OR 20 CENTS, WOULD NOT BE RS.10,000/- (I.E 5,000 X 2) BUT MAY BE RS.15,000 AND THE PRICE OF A DIAMOND OF ONE CARAT OF THE SAME QUALITY, I.E., SIMILAR CUT, COLOUR AND CLARITY WOULD NOT BE RS.50, 000 I.E. (5000 X 10) BUT MAY BE AROUND RS.1 LAC OR MORE. SIMILARLY, THE PRICE OF A .05 CARAT OR 5 CENTS MAY BE AROUND RS.400 INSTEAD OF RS.2,500 . THE SUM AND SUBSTANCE OF THIS IS THAT AS THE SIZE OF THE DIAMON D INCREASES, THE INCREASE IN ITS PRICE IS FAR MORE THAN THE PROPORTI ON OF INCREASE IN THE WEIGHT OF SAME QUALITY OF DIAMOND. SAME CRITERIA WO ULD APPLY IN THE CASE OF CUT, I.E. IF A DIAMOND IS WEIGHING 10 CENTS BUT WITH INFERIOR QUALITY OF CUTS COSTS RS.2,000, A DIAMOND OF SUPERI OR CUT BUT OF SAME WEIGHT, I.E., CARAT, COLOUR AND CLARITY MAY COST RS .3,000. SIMILAR CONSIDERATIONS APPLY TO THE OTHER FACTORS, VIZ., CO LOUR AND QUALITY. THE LESS COLOUR A DIAMOND HAS OR IN OTHER WORDS, THE MO RE IT IS ON WHITER SIDE, FOR THE SAME CARATAGE, CUT CLARITY, THE HIGHE R WOULD BE ITS PRICE. THE SAME CAN BE STATED ABOUT THE CLARITY OF DIAMOND S. 4 5 IN VIEW OF THE PECULIARITY OF THE BUSINESS, IT BE COMES NECESSARY TO ASCERTAIN THE PRODUCTION OF THE DIAMONDS BOTH IN TERMS OF QUALITY AND QUANTITY. IN THIS BACKDROP, ON EXAMINATION OF A UDIT REPORT IN FORM BCD FURNISHED ALONG WITH THE RETURN IT WAS SEEN THA T THE ASSESSEE HAD GIVEN PARTICULARS OF ITEMS FORMING PART OF OPENING AND CLOSING STOCK IN TERMS OF QUANTITY AND VALUE. THE DETAILS GIVEN IN T HE SCHEDULE ARE AS UNDER:- ITEM OPENING (CARATS) VALUE (RS.) CLOSING (CARATS) VALUE (RS.) ROUGH DIAMONDS 519.97 33,88,371 4,244.48 2,46,33,334 POLISHED DIAMONDS 1,174.34 1,67,76,583 321.39 83,36,970 REJECTED DIAMOND 2,571.41 51,428 2,571.41 51,428 5.1 ACCORDINGLY, VIDE ORDER SHEET ENTRY DATED 29.8. 2006 THE ASSESSEE WAS REQUESTED TO INTIMATE WHETHER SEPARATE RECORDS OF POLISHED DIAMONDS SHOWING THEIR QUALITY (I.E. VARIE TY) AND QUALITY WISE PRODUCE AND SALES THEREOF WERE MAINTAINED. IF MAINT AINED, THE ASSESSEE WAS ASKED TO PRODUCE THEM FOR EXAMINATION. HOWEVER, THE ASSESSEE HAS NOT PRODUCED ANY SUCH DETAILS. REJECTION OF BOOKS OF ACOCUNTS 6 IT WOULD BE NECESSARY TO MENTION THAT AS PER THE PROVISIONS OF SECTION 44AA OF THE I.T. ACT, EVERY PERSON CARRYING ON BUSINESS IS COMPULSORILY REQUIRED TO KEEP AND MAINTAIN SUCH BOO KS OF ACCOUNTS AND OTHER DOCUMENTS AS MAY ENABLE THE ASSESSING OFF ICER TO COMPUTE THE ASSESSEE'S TOTAL INCOME IN ACCORDANCE WITH THE PROVISIONS OF THE I.T. ACT. FROM THIS, IT FOLLOWS THAT THE PURPOSE AN D INTENTION OF LEGISLATURE IN ENACTING THE PROVISIONS OF SECTION O F 44AA OF THE ACT IS TO PUT AN OBLIGATION ON THE ASSESSEE TO MAINTAIN AN D KEEP PRIMARY RECORDS ON THE BASIS OF WHICH THE TAX AUTHORITIES A RE ABLE TO ASCERTAIN AND COMPUTE THE ASSESSEE'S CORRECT INCOME. FROM THI S IT ALSO FOLLOWS 5 THAT IT IS NOT ALWAYS THE PREROGATIVE OF THE ASSESS EE TO MAINTAIN THE RECORDS THE MANNER IN WHICH IT LIKES. HOWEVER, AS N OTICED IN THE PRECEDING PARAS THE ASSESSEE DID NOT MAINTAIN THE B OOKS OF ACCOUNTS AND DOCUMENTS ON THE BASIS OF WHICH THE INCOME DECL ARED IN THE RETURN COULD BE ASCERTAINED. IF THE PRIMARY RECORDS WERE M AINTAINED BY THE ASSESSEE THEY WERE NOT PRODUCED BEFORE THE UNDERSIG NED FOR EXAMINATION AND TO COMPUTE THE CORRECT INCOME. 6.1 HERE IT WOULD BE PERTINENT TO MENTION THAT THE ASSESSEE HAD SHOWN CLOSING STOCK OF POLISHED DIAMONDS OF THE QUA NTITY OF 321.39CTS. AT RS.83,36,970/-. THE DETAILED INVENTOR Y OF THE STOCK IN TERMS OF QUALITY WAS CALLED FOR. HOWEVER, THE ASSES SEE HAS NOT PRODUCED ANY SUCH DETAILS. THEREFORE, IN ABSENCE OF DETAILS IN TERMS OF QUALITY WISE PRODUCTION OF DIAMONDS FROM EACH LOT I T IS NOT ASCERTAINABLE WHICH TYPE OF DIAMONDS WAS PRODUCED F ROM A PARTICULAR LOT IN ORDER TO DETERMINE THE VALUE. THEREFORE, IN VIEW OF THIS, IT WOULD RATHER BE CORRECT TO SAY THAT THE VALUATION OF STOC K IS NOT VERIFIABLE. HERE, IT WOULD BE PERTINENT TO MENTION THAT THE HON 'BLE SUPREME COURT IN THE CASE OF BRITISH PRINTS INDIA PVT. LTD. REPOR TED IN 188 ITR 44, HAS BEEN HELD THAT WHERE THE ACCOUNTS ARE PREPARED WITH OUT DISCLOSING THE REAL COST OF THE STOCK IN TRADE ALBEIT ON SOUND EXP ERT ADVISE IN THE INTEREST OF EFFICIENT ADMINISTRATION OF BUSINESS, I T IS THE DUTY OF THE ASSESSING OFFICER TO DETERMINE THE TAXABLE INCOME B Y MAKING SUCH COMPUTATION AS HE THINKS FIT. THEREFORE, THE CLAIM OF THE ASSESSEE THAT IT IS ASSESSEE'S OPTION TO MAINTAIN THE BOOKS OF AC COUNTS IN THE MANNER THAT SUITS TO IT CAN NO LONGER BE ACCEPTED AND HAS TO BE REJECTED. IN THIS CONTEXT, RELIANCE IS ALSO PLACED UPON THE MUMBAI IT AT'S DECISION IN THE CASE OF DCIT VS. SAMIR DIAMONDS EXPORT PVT. LTD . REPORTED IN 71 ITD 75. FALL IN GROSS PROFIT 7 AS ALREADY DISCUSSED IN PARA-3 ABOVE, THERE IS A FALL IN GROSS PROFIT RATIO 6.19% DURING THE YEAR UNDER CONSIDERAT ION AS COMPARED TO THE G.P. RATIO OF IMMEDIATELY PRECEDING ASSESSMENT YEAR. IN THIS CONTEXT, THE ASSESSEE VIDE ITS LETTER DATED 17.7.20 06 HAD MADE ITS SUBMISSION WHICH IS REPRODUCED HEREUNDER: 'WE KINDLY STATE YOU THAT THE ANY SUM FALL IN G.P. COMPARE TO LAST YEAR DUE TO TURNOVER. THE TURNOVER IS INCREASED FROM THE LAST YEAR. FURTHER IN DIAMOND IMPORTS/ EXPORTS BUSINESS AS SUCH ONE CA NNOT EXPECT G.P. RATE REMAIN CONSTANT LEVEL. AS REGARDS G.P. RATE, M ANY FACTOR AFFECTING 6 TO PROFIT, SUCH AS VERY NECK TO NECK BUSINESS COMPE TITION, NEW ENTRANTS TO THIS BUSINESS, DAY BY DAY INCREASING IN COST OF ROUGH DIAMONDS AND DECREASING IN COST OF POLISHED DIAMONDS COMPARATIVE LY, VOLATILE FOREX MARKET, MONEY CRISIS IN WHOLE BUSINESS, CHANGING IN GOVT. IMPORTS/EXPORTS POLICY AND ABOVE AN ALL RECESSION I N WHOLE ECONOMY. ALL THIS PUT THE ASSESSEE'S G.P. RATE UNDER MARGINA L PRESSURE. UNDER COMPETITIVE MARKET ASSESSEE HAS TO OFFER COMPETITIV E SALE RATE AND ITS EFFECT TO GROSS PROFIT MARGIN'. 7.1 I HAVE CAREFULLY GONE THROUGH THE ASSESSEE'S AF ORESAID SUBMISSION. FROM THE SUBMISSION IT APPEARS THAT IN RESPECT OF THE EXPORT OF POLISHED DIAMONDS THE ASSESSEE HAD SHOWN GROSS PROFIT OF RS.1,01,82,895/- ON GROSS TURN OVER OF RS.7,37, 47, 135/- @ 13.81% AS COMPARED TO GROSS PROFIT OF RS.1,07,26,776/- ON GRO SS TURNOVER OF RS.5,36,39,699/- @ 20.%. 7.2 IN VIEW OF THE ABOVE, VIDE THIS OFFICE LETTER 3 0.10.2006, THE ASSESSEE WAS GIVEN ONE MORE OPPORTUNITY TO EXPLAIN THE FALL IN GROSS PROFIT RATIO. THE RELEVANT PORTION OF THE SHOW CAUS E NOTICE IS REPRODUCED AS UNDER: 'IT IS SEEN THAT THERE IS A SHARP FALL IN THE GROSS PROFIT RATE FROM 20% LAST YEAR TO 13.81% OF EXPORT DIVISION THIS YEAR. YOU HAVE, IN YOUR SUBMISSION, HAS ATTRIBUTED THE FA LL IN G.P. DUE TO THE BUSINESS COMPETITION, INCREASE IN COST OF ROUGH AND DECREASE IN RATE OF POLISHED DIAMOND, MONEY CRISIS IN DIAMOND BUSINESS, CHANGE IN GOVT. EXIM POLICY AND RECESSION IN WHOLE ECONOMY. THE REA SON CITED BY YOU FOR FALL IN G.P. MARGIN FROM 20% OF THE LAST YEAR T O 13.81% DURING THE YEAR UNDER CONSIDERATION, DOES NOT SEEM TO BE CONVI NCING AS ANY BUSINESS COMPETITION WILL NOT RESULT IN DECREASE IN BUSINESS PROFIT MARGIN BY 6.19%, SINCE EVEN 0.10% MARGIN MAY RESULT IN LOSS OF LAKHS OF RUPEES. A FLUCTUATION IN MARGIN OF 0.5% PLUS OR MINUS CAN BE THERE IN BUSINESS OF PRECIOUS COMMODITIES, BUT BY ANY STR ETCH OF IMAGINATION IT CANNOT BE 6.19%. THE REASON FOR DECREASE IN MARG IN DUE TO MONEY CRISIS ALSO DOES NOT SEEM TO BE CONVINCING SINCE YO U HAVE AVAILED BANK LOANS DURING THE YEAR UNDER CONSIDERATION. FURTHER THE FINANCIAL CHARGES DECREASE THE NET PROFIT AND NOT THE GROSS P ROFIT. ANOTHER REASON CITED BY YOU IS RECESSION IN WHOLE ECONOMY WHICH IS ALSO NOT CONVINCING SINCE THE ECONOMY IN F.Y. 03-04 WAS ON B OOM AND NOT ON 7 RECESSION. THE GDP GROWTH RATE DURING F.Y.03-04 HAS INCREASED FROM AROUND 5% TO 8.2%. THUS, THE REASONS CITED BY YOU IS GENERAL IN NATURE ARE NOT CONVINCING. SO YOU ARE ASKED TO SHOW CAUSE AS TO WHY YOUR BOOK RESULT SHOULD NOT BE REJECTED AND THE GROSS PROFIT SHOULD NOT BE ENHA NCED TO THAT OF LAST YEAR I.E. 20% AND THE DIFFERENCE SHOULD NOT BE ADDE D TO YOUR TOTAL INCOME'. 7.3 IN RESPONSE TO THE ABOVE, THE ASSESSEE VIDE ITS LETTER DATED 16.11.2006 HAS STATED AS UNDER: DURING THE YEAR UNDER CONSIDERATION THERE IS A FALL IN G.P. AS COMPARE TO LAST YEAR IN THIS CONNECTION, WE HAVE GI VEN OUR REASON, BUT YOU HAVE STATED THAT REASON CITED BY US IS GENERAL IN NATURE. IN THIS CONNECTION WE HAVE FURTHER TO STATE THAT IN LAST YEAR WE HAVE SOLD DIAMOND AT RS.13,030/- PER CTS. W HILE IN THE YEAR UNDER CONSIDERATION THE SAME IS RS.12,771/- PE R CTS. AS AGAIN COST OF POLISH DIAMOND IS RS.70,4257-AND RS.7 7,0077- RESPECTIVELY. SO WE EARN PROFIT OF RS.26057- PER CT S. IN A.Y.2003-04 AS AGAINST RS.77637- EARN IN A.Y.2004-0 5. SO IN A.Y. 2004-05, WE EARN LESS PROFIT BY RS.8427- PER C TS. IF THIS AMOUNT IS TAKEN IN TO CONSIDERATION THAN OUR G.P.IS COMES TO APPROXIMATELY 20 %. AS PER DEMAND IN MARKET WE HAVE TO SOLD THE DIAMOND. THERE IS NO FIXED RATE FOR SALE OF DIA MOND. AS BUYERS SEEN THE QUALITY OF DIAMOND AND FIXED THE RA TE FOR PURCHASE THE SAME. SOME TIME THE QUALITY OF DIAMOND IS NOT UP TO MARK WE GAT LESS PRICE AND THEREFORE THERE IS A FALL IN G.P. MOREOVER IN OUR LINE OF BUSINESS IT IS NOT POSSIBLE TO MAINTAIN G.P. EVERY YEAR SAME. WE ATTACHED HEREWITH CHART FOR COST OF POLISH DIAMO ND AND AVERAGE SALE PRICE OF POLISH DIAMOND FOR CURRENT YE AR AND FOR LAST YEAR, FOR YOUR READY REFERENCE AS PER ANNEXURE -1. ON THE FACTS STATED ABOVE WE REQUEST YOU TO PLEASE NOT TO MAKE ANY ADDITION ON THIS ACCOUNT. AS VARIOUS COURTS HAV E ALSO HELD THAT IT IS NOT POSSIBLE TO A BUSINESSMAN TO MAINTAI N G.P. EVERY YEAR SAME. 8 IT IS NOT POSSIBLE TO GIVE QUALITY OF DIAMOND MANUF ACTURE BY US IT IS DEPEND OF QUALITY OF ROUGH, SKILL OF KARIGAR ETC. JOB WORK ON COMMISSION BASIS WHATEVER ROUGH IS RECEIVED FROM THE PARTY WE HANDED OVER TO LABOUR PARTIES FOR MANUFACTURING AND AFTER MANUFACTURING, WE RECEIVED POLISHED DIAMOND FROM LA BOUR PARTIES, SAME WE RETURN TO THE ORIGINAL PARTY. WE H AVE CONCERN ONLY FOR COMMISSION. IN OUR OWN MANUFACTURE WE REQUIRE QUALITY OF DIAMON D BECAUSE WE HAVE TO EXPORT IT AND THEREOF WE WANT PERFECT CU TTING, SHAPE, WEIGHT ETC. AND THEREFORE WE PAID MORE LABOUR CHARG E TO GET GOOD QUALITY OF DIAMOND SO WE CAN SOLD IN A MARKET WITH A REASONABLE PRICE'. 7.3 A PLAIN READING OF THE SUBMISSION OF THE ASSESS EE SHOWS THAT THE ASSESSEE HIMSELF GIVES CONTRADICTORY STATEMENTS. AT ONE PLACE, THE ASSESSEE STATES THAT IT IS NOT POSSIBLE TO GIVE QUA LITY OF DIAMOND MANUFACTURED BY IT AND IT DEPENDS UPON THE QUALITY OF ROUGH, ETC. ON OTHER HAND IT IS STATED THAT IN THEIR OWN MANUFACTU RE THEY REQUIRE QUALITY OF DIAMOND AS THEY HAVE TO EXPORT GOOD QUAL ITY OF DIAMOND. FURTHER, FOR THE QUERY RAISED ON ACCOUNT OF EXCESS LABOUR PAYMENT PER CARAT ON OWN MANUFACTURE WHEN COMPARED TO THE JOB W ORK MANUFACTURING, THE ASSESSEE HAS STATED THAT FOR THE IR OWN MANUFACTURE THEY HAVE TO GET GOOD QUALITY OF DIAMOND IN SHAPE, COLOUR AND CLARITY FOR THAT THEY REQUIRE SKILL WORKERS AND THE LABOUR PAYMENT IS MORE. WHILE FOR THE JOB WORK THEY DO NOT HAVE TO LOOK INT O CLARITY, CUT, SHAPE, WEIGHT, ETC. FOR POLISHED DIAMOND. SO THERE WAS DIFFERENCE IN RATE OF LABOUR CHARGES FOR OWN MANUFACTURE AND JOB WORK MANUFACTURE. THIS CLEARLY SHOWS THAT THE ASSESSEE HIMSELF DEPEND S UPON THE QUALITY FOR LABOUR PAYMENT, BUT THEY HAVE NOT FURNISHED SUC H QUALITY DETAILS, EVEN THOUGH, IT WAS SPECIFICALLY CALLED FOR. 7.4 THUS, IN VIEW OF THE ABOVE FACTS, IT IS APPAREN T THAT THE ASSESSEE HAD THE RECORD OF PRODUCTION OF POLISHED DIAMONDS O N THE BASIS OF QUALITY. OTHERWISE, TAKING INTO ACCOUNT THE QUANTIT Y OF POLISHED DIAMONDS SOLD, IT WOULD BECOME. IMPOSSIBLE FOR THE ASSESSEE TO HAVE A CONTROL OVER THE TRADING ACTIVITY. HOWEVER, F THE A SSESSEE HAD DECLINED TO FURNISH SUCH RECORDS MERELY ON THE GROUND THAT T HE REQUISITE RECORDS WERE NOT MAINTAINED. THE VERY FACT THAT THE ASSESSE E HAD ADMITTED THAT AFTER THE CUT AND POLISHED DIAMONDS RECEIVED BACK F ROM THE LABOUR 9 PARTIES THEY WERE SORTED BY THE ASSESSEE IN DIFFERE NT LOTS, SIZES, QUALITY ETC. WOULD INDICATE THAT THE ASSESSEE HAD BEEN SORT ING THEM OUT ON PIECE BY PIECE BASIS. 7.5 AS REGARDS THE ASSESSEE'S SUBMISSION THAT IN TH E LAST YEAR THE PER CARAT COST OF DIAMOND SOLD WAS RS.13,030/- PER CARA T WHILE IN THE YEAR UNDER CONSIDERATION THE SAME IS RS.12,771/- PER CAR AT. AS AGAINST THE COST OF POLISHED DIAMOND IS RS.10,425/- AND RS.11,0 07/- SO THAT EARNED A PROFIT OF RS.2,605/- PER CARAT AS AGAINST RS.1,76 3/- EARNED IN THE ASSESSMENT YEAR UNDER CONSIDERATION. THIS CANNOT B E CONSIDERED TO BE CORRECT UNLESS AND UNTIL THE FULL F QUALITY DETAILS OF THE DIAMOND MANUFACTURED AND LYING IN THE STOCK IS MADE L AVAIL ABLE SO AS TO DETERMINE THE CORRECT VALUE OF THE CLOSING STOCK AN D TO ARRIVE AT THE CORRECT GROSS PROFIT. IT MAY HAPPEN THAT THE DIA MOND OF GOOD QUALITY ARE STILL LYING IN THE STOCK WHEREAS THE POLISHED D IAMOND SOLD MAY NOT BE OF SIMILAR KIND. BUT IN THE ABSENCE OF ANY Q UALITATIVE DETAILS PROVIDED THIS OFFICE IS FORCED TO REJECT THE CLAIM OF THE ASSESSEE AND WORK OUT THE G. P. ON AN ESTIMATE BASIS. 7.6 AS REGARDS THE ASSESSEE'S ARGUMENT THAT THERE W AS AN INCREASE IN COST PRICE OF ROUGH DIAMONDS IN THE YEAR UNDER CO NSIDERATION TO THAT OF THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, IT WO ULD BE SUFFICE TO SAY THAT IN VIEW OF THE FACT THAT THE ASSESSEE HAD NOT MAINTAINED THE RECORDS OF PRODUCTION IN TERMS OF QUALITY FROM THE ROUGH DIAMONDS AND THEIR SUBSEQUENT SALES, THE ASSESSEE'S DECLARA TION OF CLOSING STOCK OF POLISHED DIAMONDS CANNOT BE VERIFIED AS THE ASSE SSEE HAD NOT FURNISHED THE DETAILED INVENTORY OF CLOSING STOCK . HENCE, ASSESSEE'S CLAIM OF INCREASE IN COST PRICE AND ALSO THE REDUCT ION IN SALES PRICE PER CARAT AFFECTING THE OVERALL GP, REMAINED UNVERIFIAB LE ON ACCOUNT OF NON-MAINTENANCE OF PRODUCTION OF POLISHED DIAMONDS IN TERMS OF QUALITY. 7.7 HOWEVER, TAKING INTO ACCOUNT THE DEFECTS IN THE BOOKS OF ACCOUNTS, IT IS EVIDENT THAT THE CORRECT PROFIT THE RE FROM CANNOT BE DEDUCED AT. I, THEREFORE, IN VIEW OF THE DEFECTS IN THE SYSTEM OF METHOD OF ACCOUNTING, REJECT THE BOOKS OF ACCOUNTS OF THE ASSESSEE UNDER SECTION 145(3) OF THE I.T. ACT AND PROCEED TO ESTIM ATE THE GROSS PROFIT AS UNDER:- 7.8 HERE, IT WOULD BE REITERATED THAT DURING THE YE AR UNDER REVIEW, THE ASSESSEE HAD SHOWN THE FALL IN GP OF 6.91% IN T HE EXPORT ACTIVITY 10 OF DIAMONDS. HOWEVER, TAKING INTO ACCOUNT THE DIFFE RENCE IN EXCHANGE RATE AND ALSO THE REASONS PUT FORTH BY THE ASSESSEE ESPECIALLY THE INCREASE IN THE COST OF ROUGH DIAMONDS AND REDUCTIO N IN SALES PRICE OF POLISHED DIAMONDS IT WOULD BE QUIT REASONABLE AND J USTIFIABLE TO ENHANCE THE GROSS PROFIT BY 4% OF THE TOTAL TURNOVE R OF RS.7,37,47,135/- ON AN ESTIMATED BASIS. I, THEREFOR E, ADD A SUM O RS.28,49,884/- TO THE TOTAL INCOME OF THE ASSESSEE. 4 AGGRIEVED BY THIS ORDER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. BEFORE THE LEARNED CIT(A), THE ASSESSEES CONTENTION WAS THAT THE ADDI TION ON ACCOUNT OF LOW GROSS PROFIT MADE BY THE ASSESSING O FFICER WAS TOTALLY UNCALLED FOR AS IT WAS BASED ON HER GUESS W ORK AND SURMISES. ACCORDING TO THE AR OF THE ASSESSEE, DUE TO CERTAIN ADVERSE FACTORS SUCH AS RISE IN THE COST OF POLISHE D DIAMONDS AND REDUCTION IN THE PROFIT EARNED ON SALE (EXPORT) ON PER CARAT BASIS DURING THE YEAR IN COMPARISON TO IMMEDIATE PRECEDIN G ASSESSMENT YEAR, ITS PROFIT HAD GONE DOWN. TO FURTHER ELABORAT E THE ABOVE REFERRED SUBMISSION, IT WAS STATED BY THE AR, THAT DURING YEAR, THE COST OF EXPORTED POLISHED DIAMONDS OF 5774.38 C ARATS WAS RS.6,35,64,240/- I.E. ON AN AVERAGE IT WAS RS.11,00 7.98 PER CARAT AND AGAINST THAT ITS REALIZED AVERAGE SALE PRICE WA S RS.L2,771.44 PER CARAT WHICH RESULTED INTO A PROFIT OF RS.1,763. 46 PER CARAT AND AS AGAINST THAT THE PROFIT-OF-THE ASSESSEE IN THE I MMEDIATE PRECEDING ASSESSMENT YEAR WAS RS.2,695.91 PER CARAT AND ACCORDINGLY, DURING THE YEAR, IT HAD RECEIVED LESS PROFIT BY RS.842.95 PER CARAT [RS.2,605.91 RS.1,763.46] AND THIS FINALLY RESULTED INTO A FALL IN ITS GROSS PROFIT RATIO. THE AR FILED A CHART SHOWING THE WORKING OF GROSS PROFITS IN VIEW OF THE ABOVE FACTS AND FIGURES, WHICH ARE AS UNDER:- 11 ROUGH CTS AMOUNT AVERAGE (RS.) RATE FOR CTS. OPENING STOCK 740.11 3388371 PURCHASE (IMPORT 14678.85 72013353 PURCHASE (LOCAL) TOTAL NIL ------------ 15418.96 NIL --------------- 75401724 LESS: CLOSING STOCK 4880.45 ------------- 24633334 --------------- ROUGH FOR MFG. 10538.51 50768390 ADD: (1) LABOUR CHARGES 4201623 (2) CLEAVING CHARGES ------------- 154614 -------------- COST OF MFG. POLISH DIAMOND 4921.43 55124627 11200.94 CTS. AMOUNT AVERAGE (RS.) O/S OF POLISH DIAMONDS 1174.30 16776583 COST OF MFG. OF POLISH DIAMOND 4921.43 -------------- 55124627 -------------- TOTAL COST OF POLISH DIAMOND 6095.46 71901210 LESS: CLOSING STOCK 321.39 -------------- 8336970 --------------- COST OF POLISH DIAMOND EXPORT 5774.38 63564240 I.E. RS.11007.98 PER CARAT SALE PRICE OF DIAMOND EXPORTED DURING THE YEAR 5774.36 73747135 I.E. RS.12,771.44 PER CARAT SALE PRICE OF POLISH DIAMOND PER CTS. 12771.74 LESS: COST PRICE OF POLISH DIAMOND PER CTS. 11007.98 ---------------- PROFIT PER CTS. 1176.46 --------------- IN AY 2003-04 PROFIT PER CTS. IS RS. 2605.91 LESS:PROFIT IN AY 04-05 PER CTS. IS RS. 1763.46 --------------- 842.45 ---------------- TOTAL SALES (EXPORT) OF POLISH DIAMOND CTS. 5574.36 X LESS PROFIT EARNED PER CTS. AS COMPARED TO LAST YEAR 842.45 ---------------- 12 4864609 =========== TOTAL SALES (RS.) G P SHOWN PERCENTAGE 73,747.135 10,182,895 13.81% ADD: AMOUNT OF LESS RECEIVED AS COMPARED TO AY 03-04 4,864.609 -------------- --------------- 15,047,504 20.40% 5 THUS, ON THE BASIS OF THE ABOVE REFERRED FACTS AN D FIGURES, THE AR PLEADED THAT IF THE COST AS WELL AS SALE FAC TORS ARE TAKEN INTO CONSIDERATION (AS DISCUSSED ABOVE,) THEN THERE WAS NO FALL IN GROSS PROFIT RATIO AT ALL. FURTHER, ACCORDING TO TH E AR, IF THE GROSS PROFIT RATIO FOR THE YEAR UNDER CONSIDERATION WAS C OMPARED BY THE ASSESSING OFFICER ON THE BASIS OF GROSS PROFIT RATI O DISCLOSED BY THE ASSESSEE-FIRM IN THE IMMEDIATE PRECEDING ASSESS MENT YEAR, THE FACTORS RESPONSIBLE FOR DOWN FALL IN GROSS PROF IT RATIO SHOULD NECESSARILY BE TAKEN INTO ACCOUNT, ONLY THEN THE CO MPARISON CAN BE JUSTIFIED. 6 IN SUPPORT OF HIS ABOVE REFERRED SUBMISSIONS, THE AR RELIED ON THE DECISION OF THE ITAT, AHMEDBAD 'C' BENCH IN THE CASE OF LADAKKCHAND JIVRAJ & SONS V/S. I.T.O. - 35 TTJ (AHD .) 512. IN ADDITION TO THE ABOVE, THE AR FURTHER RELIED UPON T HE FINDINGS OF THE ITAT 'D' BENCH IN THE CASE OF KEYSTONE INDIA (P ) LTD. V/S. DCITJ (2006) 99 TTJ (AHD.) 386 WHEREIN, ACCORDING T O HIM, ON SIMILAR ISSUE AS THAT IN THE CASE OF THE ASSESSEE-F IRM, THE ITAT HAS HELD THAT THE REJECTION OF BOOKS OF ACCOUNTS DU E TO FALL IN GROSS PROFIT RATIO AND NOT BEING SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND ADOPTING THE GROSS PROFIT RATIO OF THE PRECEDING 13 YEAR AND MAKING ADDITION ACCORDINGLY WAS NOT JUSTIF IED IN THE EYES OF LAW. ACCORDING TO THE AR, THE TRIBUNAL HAS FURTHER POINTED OUT THAT THE ASSESSING OFFICER HAD NOT POIN TED OUT ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNTS OF THE ASS ESSEE, THEREFORE, THE REJECTION OF BOOK RESULTS ONLY ON TH E GROUND OF FLUCTUATION IN GROSS PROFIT RATIO IS NOT TENABLE AN D THUS, UPHELD THE DECISION OF THE C.I.T.(A) WHO DELETED THE ADDIT ION. 7 BESIDES ABOVE REFERRED DETAILS, THE AR ALSO POINT ED BEFORE THE LEARNED CIT(A) THAT THE FINDINGS OF THE HON'BLE SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. (SUP RA) AS MENTIONED BY THE ASSESSING OFFICER IS NOT APPLICABL E ON THE ISSUE INVOLVED IN THE CASE OF THE ASSESSEE AS WHILE ARRIV ING AT THE VALUATION OF CLOSING STOCK, THE ASSESSEE FIRM HAD T AKEN ALL THE OVERHEADS/EXPENSES UNDER CONSIDERATION WHEREAS IN T HE SAID CASE I.E. BRITISH PAINTS INDIA LTD., THE OPERATIVE PORTI ON OF THE EXPENSES WERE NOT TAKEN INTO CONSIDERATION WHILE AR RIVING AT THE VALUE OF CLOSING STOCK. THUS, ON THE BASIS OF ABOVE DISCUSSED FACTS, THE AR PLEADED THAT THE ADDITION AS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF LOW GROSS PROFIT AFTER REJECT ING ITS BOOKS OF ACCOUNTS MAY BE DELETED. 8 TAKING INTO CONSIDERATION THE ABOVE SUBMISSIONS M ADE BY THE AR OF THE ASSESSEE, THE LEARNED CIT(A) GAVE REL IEF TO THE ASSESSEE BY OBSERVING AS UNDER:- 6.1 I HAVE PERUSED THE FACTS OF THE CASE AND WENT THROUGH THE CASE LAWS AS RELIED UPON BY THE ASSESSING OFFICER. SIMIL ARLY, I HAVE ALSO GONE THROUGH THE SUBMISSION AS MADE BY THE A. R. AN D THE VARIOUS 14 JUDICIAL PRONOUNCEMENTS RELIED UPON BY HIM IN SUPPO RT OF HIS CONTENTIONS. AFTER ANALYZING THE FACTS AND STATISTI CS WITH REGARD TO THE COST OF POLISHED DIAMONDS AND THE SALE RECEIPTS AGA INST THESE DIAMONDS ON PER CARAT BASIS FOR THE YEAR UNDER CONSIDERATION AS WELL AS FOR THE IMMEDIATE PRECEDING ASSESSMENT YEAR, IT IS NOTICED THAT THE A. R. HAS PROPERLY EXPLAINED THE FALL IN GROSS PROFIT RATIO D URING THE YEAR UNDER CONSIDERATION IN COMPARISON THE GROSS PROFIT RATIO REFLECTED BY IT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR. IT IS ALSO A F ACT THAT SUCH DETAILS WERE SUBMITTED BEFORE THE ASSESSING OFFICER ALSO DU RING THE COURSE OF ASSESSMENT PROCEEDINGS BUT THESE WERE NOT TAKEN INT O CONSIDERATION AT ALL AND NO FINDINGS IN THIS REGARD HAS BEEN GIVEN. IN MY CONSIDERED OPINION, IF THE FALL IN GROSS PROFIT RATIO HAS BEEN EXPLAINED SATISFACTORILY AND NO SPECIFIC DEFECTS WERE POINTED OUT IN THE BOOKS OF ACCOUNTS BY THE ASSESSING OFFICER, THEN THE FINDING S OF THE VARIOUS COURTS AS REFERRED TO ABOVE HAVE BEEN FOUND APPLICA BLE TO THE ISSUE INVOLVED IN THE CASE OF THE APPELLANT. FURTHER, AFT ER GOING THROUGH THE FINDINGS OF THE HON'BLE SUPREME COURT OF INDIA IN T HE CASE OF BRITISH PAINTS (INDIA) LTD. (SUPRA), IT IS FOUND THAT THE H ON'BLE COURT HAS HELD THAT THAT THE FINDINGS OF THE ASSESSING OFFICER WAS JUSTIFIED IN THE SAID CASE BECAUSE WHILE VALUING THE CLOSING STOCK, THE A SSESSEE I.E. BRITISH PAINTS (INDIA) LTD. DID NOT CONSIDER THE MAJOR PORT ION OF THE OPERATIVE EXPENSES WHILE VALUING THE SAME. IN THE CASE OF THE APPELLANT, ON THE CONTRARY, AFTER GOING THROUGH THE DETAILS AND METHO D OF VALUATION OF CLOSING STOCK AS REFLECTED IN ITS BOOKS OF ACCOUNTS , IT IS NOTICED THAT IT HAD CONSIDERED ALL THE EXPENSES WHILE VALUING THE C LOSING STOCK. I AM, THEREFORE, OF THE OPINION THAT THE FINDINGS IN THE CASE OF BRITISH PAINTS (INDIA) PVT. LTD. IS NOT APPLICABLE TO THE ISSUE IN VOLVED IN THE CASE OF THE APPELLANT. I, THEREFORE, KEEPING THE ABOVE DISC USSED FACTS AND DECISIONS IN VIEW, HOLD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED AT ALL IN REJECTING ITS BOOKS OF ACCOUNTS UNDER SEC.14 5(3) OF THE ACT AND MAKING THE ADDITION ON ACCOUNT OF LOW GROSS PROFIT IN THE CASE OF THE APPELLANT-FIRM AND, THEREFORE, THE SAME IS DELETED. ACCORDINGLY, THIS GROUND OF APPEAL IS ALLOWED. 9 AGGRIEVED BY THIS ORDER, NOW THE REVENUE IS IN AP PEAL BEFORE US. AT THE TIME OF HEARING, THE LEARNED DR S UBMITTED THAT THE LEARNED CIT(A) HAS DELETED THE ENTIRE ADDITION ON THE GROUND THAT THE ASSESSEE HAS PROPERLY EXPLAINED THE FALL I N GP RATIO AND NO SPECIFIC DEFECTS WERE POINTED OUT IN THE BOOKS O F ACCOUNT BY 15 THE AO. THE AO HAS REJECTED THE BOOKS OF ACCOUNT OF THE ASSESSEE AS THE BASIC DATA OF THE BUSINESS FROM WHICH CORREC T PROFIT COULD BE DEDUCED WERE NOT PROPERLY MAINTAINED BY THE ASSE SSEE AND IF AT ALL THEY WERE MAINTAINED, THE SAME WERE NOT PROD UCED FOR VERIFICATION BEFORE THE AO AT THE TIME OF ASSESSMEN T PROCEEDINGS. THE ASSESSEE ALSO FAILED TO SUBSTANTIATE THAT FALL IN GP WAS DUE TO INCREASE IN THE COST OF ROUGH DIAMONDS AND REDUCTIO N IN SALE PRICE OF POLISHED DIAMONDS. THEREFORE, THE ENHANCEMENT OF GP WAS QUITE JUSTIFIED AND REASONABLE AND SUPPORTED BY THE SPECIFIC DEFECTS OF NON MAINTENANCE OF QUALITATIVE AND QUANT ITATIVE DETAILS OF STOCK. THE LEARNED CIT(A) WHILE GIVING RELIEF TO THE ASSESSEE HAS PLACED RELIANCE ON THE TWO DECISIONS OF ITAT TH E FACTS OF WHICH WERE QUITE DISTINGUISHABLE FROM THE FACTS OF THIS CASE. THE LEARNED DR PLACED RELIANCE ON THE DECISION OF THE I TAT MUMBAI BENCH-C IN THE CASE OF DCIT VS. SAMIR DIAMONDS EXPO RTS (P) LTD. (1999) 71 ITD 75 WHEREIN ON IDENTICAL FACTS TH E REJECTION OF BOOKS OF ACCOUNT WAS UPHELD AND ESTIMATION OF INCOM E AFTER REJECTION OF BOOKS OF ACCOUNT. FURTHER RELIANCE WAS PLACED ON THE DECISION OF THE ITAT AHMEDABAD BENCH-D IN THE CASE OF BALAR EXPORTS. CONCLUDING HIS ARGUMENT, THE LEARNED DR SU BMITTED THAT THE ORDER PASSED BY THE LEARNED CIT(A) MAY KINDLY B E SET ASIDE AND THAT OF THE AO BE UPHELD. 10 THE LEARNED COUNSEL OF THE ASSESSEE, ON THE OTHE R HAND, REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A) AND FURTHER SUBMITTED THAT THE ACCOUNTS OF THE ASSESSEE ARE AUDITED AND ONLY QUANTITY WISE DETAILS WERE NOT AVAILABLE W ITH THE ASSESSEE WHICH CANNOT BE THE REASON FOR REJECTING T HE BOOK RESULTS 16 SHOWN BY THE ASSESSEE. HE ALSO RELIED ON THE DETAIL ED REPLY GIVEN BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS W HICH IS ALSO A PART OF OUR ORDER. PLACING RELIANCE ON THE DECISI ONS OF THE TRIBUNAL IN THE CASES OF LADAKCHAND JIVRAJ AND SONS VS. ITO 35 TTJ 35 AND KEYSTONE INDIA PVT. LTD. VS. DCIT (2006) 99 TTJ (AHD) 386, HE CONCLUDED HIS ARGUMENTS BY PRAYING TH AT THE ORDER PASSED BY THE LEARNED CIT(A) MAY KINDLY BE UPHELD. 11 IN REPLY, THE LEARNED DR SUBMITTED THAT THE DECI SION OF THE TRIBUNAL IN THE CASE OF BALAR EXPORTS (SUPRA) IS TH E LATEST DECISION ON THE ISSUE AND THE SAME MAY KINDLY BE FO LLOWED INSTEAD OF EARLIER DECISION OF THE TRIBUNAL RELIED UPON BY THE ASSESSEE. 12 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ECORDS AND FIND THAT DURING THE ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO THAT THERE WAS FALL IN GP RATE BY 6.19% AS COMPA RED TO LAST YEAR. ASSESSEES EXPLANATION WAS SOUGHT BY HIM FOR THIS SHARP DECLINE IN GP RATIO. THE ASSESSEES EXPLANATION WAS NOT FOUND SATISFACTORY BY THE AO. ACCORDING TO THE AO, THE AS SESSEE DID NOT MAINTAIN THE STOCK IN TERMS OF QUANTITY AND QUALITY . HE WAS OF THE VIEW THAT AS PER THE PROVISIONS OF SECTION 44AA OF THE ACT, THE ASSESSEE IS REQUIRED TO KEEP AND MAINTAIN SUCH BOOK S OF ACCOUNT AND OTHER DOCUMENTS AS MAY ENABLE HIM TO COMPUTE TH E ASSESSEES INCOME IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. THE INTENTION OF THE LEGISLATURE IN ENACTING SECTIO N 44AA WAS TO PUT AN OBLIGATION ON THE ASSESSEE TO MAINTAIN AND K EEP PRIMARY RECORDS ON THE BASIS OF WHICH THE TAX AUTHORITIES C AN ASCERTAIN 17 AND COMPUTE THE CORRECT INCOME. THEREFORE, IT WAS N OT THE PREROGATIVE OF THE ASSESSEE TO MAINTAIN THE RECORDS IN THE MANNER IN WHICH IT LIKES. THE ASSESSEE DID NOT MAINTAIN TH E BOOKS OF ACCOUNT AND DOCUMENTS AS PER THE PROVISIONS ON THE BASIS OF WHICH THE CORRECTNESS OF THE INCOME DECLARED IN THE RETURN COULD BE DEDUCED AT. THE AO FURTHER OBSERVED THAT IF THES E PRIMARY RECORDS WERE MAINTAINED BY THE ASSESSEE, THEY WERE NOT PRODUCED FOR EXAMINATION BEFORE HIM. THEREFORE, HE FOUND THE ASSESSEES METHOD OF ACCOUNTING AS DEFECTIVE AND REJECTED THE BOOKS OF ACCOUNT OF THE ASSESSEE U/S 145(3) OF THE ACT AND E NHANCED THE GROSS PROFIT BY 4%. IN APPEAL, THE LEARNED CIT(A) DELETED THE ENTIRE ADDITION. WHILE DELETING THE ADDITION, THE L EARNED CIT(A) OBSERVED THAT THE AO HAS NOT BROUGHT ANY DEFICIENCY IN THE BOOKS OF ACCOUNT OR THE METHOD OF ACCOUNTING OF THE ASSES SEE AND ONLY REASON FOR REJECTING THE BOOKS OF ACCOUNT WAS THAT THERE WAS FALL IN GP. WE DO NOT FIND THIS OBSERVATION OF THE LEARN ED CIT(A) TO BE CORRECT AS THE AO HAD GIVEN IN DETAILS THE REASO NS FOR HIS ACTION OF REJECTING THE BOOKS OF ACCOUNT THAT THE A SSESSEE HAD FAILED TO PRODUCE PROPER BOOKS OF ACCOUNT LIKE LABO UR PAYMENT REGISTER, VOUCHERS, ETC. AND EXPLAIN THE METHOD OF VALUING THE CLOSING STOCK DESPITE CLAIMING TO HAVE NOT MAINTAIN ED THE QUALITY-WISE AND PIECE-WISE STOCK OF DIAMONDS, ETC. THE AO HAS ALSO EXPLAINED IN DETAIL THE PRACTICE IN THE DIAMON D INDUSTRY THAT THE MANUFACTURER HAS TO MAINTAIN PIECE-WISE DETAILS TO MONITOR THE YIELD AND PROFIT OF ITS BUSINESS. WE FURTHER FI ND THAT THE LEARNED CIT(A) HAS ALSO COMMENTED IN HIS ORDER THAT THERE WAS ONLY A MARGINAL FALL IN GP WHEREAS THE AO HAS SHOWN THROUGH A DETAILED CHART SPANNING A PERIOD OF FOUR YEARS THAT THE GROSS 18 PROFIT OF THE ASSESSEE HAD REDUCED DESPITE THE FACT THAT HE HAD BEEN PURCHASING QUALITY DIAMOND AND HENCE ALSO GETT ING BETTER YIELD. THE DETAILED ANALYSIS OF THE FIGURES BRING O UT THE IMPORTANCE OF PIECE-WISE OR QUALITY-WISE RECORDS MA INTENANCE WHICH THE ASSESSEE CLAIMED NOT TO HAVE MAINTAINED. IT WAS, THEREFORE, INFERRED, BY THE AO THAT THE ASSESSEE DI D NOT DISCLOSE THE CORRECT PROFITS. THIS IS CLEAR FROM PARA 7.3 AN D 7.4 OF THE ASSESSMENT ORDER. 13 WE FURTHER FIND THAT THE LEARNED CIT(A) WHILE GI VING RELIEF TO THE ASSESSEE, HAS RELIED ON THE DECISION OF THE ITAT AHMEDABAD IN THE CASE OF LADAKCHAND JIVRAJ AND SONS VS. ITO 35 TTJ (AHD) 512 WHICH IS ACCORDING TO US IS NOT APPLI CABLE TO THE FACTS OF THIS CASE. IN THE CASE OF LADAKCHAND JIVRA J AND SONS (SUPRA), THE ASSESSEE WAS A WHOLESALE DEALER IN TEA WHO SUBMITTED DETAILS CHESTWISE INSTEAD OF KILOGRAMWISE AS ASKED BY THE AO. AS A RESULT, THE AO MADE A GP ADDITION. THIS WAS DELET ED BY THE TRIBUNAL SAYING THAT THE AO DID NOT BRING ANYTHING ON RECORD TO JUSTIFY THAT THERE WAS ANY QUANTITY OF GOODS NOT A CCOUNTED FOR OR THE RATES OF SALES WERE NOT RELIABLE OR THE PURCHAS ES WERE INFLATED. THIS CASE OF TEA CAN HARDLY BE COMPARED WITH THAT OF DIAMOND. A GRAIN OF TEA AND A GRAIN OF DIAMOND VARY NOT ONLY IN VALUE BUT ALSO IN RESPECT OF THE QUALITIES ATTACHED TO IT. THE AO HAS SPECIFICALLY BROUGHT OUT THE NUANCES OF DIAMOND INDUSTRY IN PARA 4.1 OF THE ORDER WHICH READS AS UNDER:- 4.1 - - - -- 19 IF THE PRICE OF 0.10 CARAT OR 10 CENTS AS IT MAY BE CALLED IN THE DIAMOND TRADE, IS RS.5,000, THE PRICE OF A DIAMOND HAVING A LL OTHER SIMILAR QUALITIES BUT WEIGHING .20 CARAT OR 20 CENTS, WOULD NOT BE RS.10,000/- (I.E 5,000 X 2) BUT MAY BE RS.15,000 AND THE PRICE OF A DIAMOND OF ONE CARAT OF THE SAME QUALITY, I.E., SIMILAR CUT, COLOU R AND CLARITY WOULD NOT BE RS.50,000 I.E. (5000 X 10) BUT MAY BE AROUND RS. 1 LAC OR MORE. SIMILARLY, THE PRICE OF A .05 CARAT OR 5 CENTS MAY BE AROUND RS.400 INSTEAD OF RS.2,500. THE SUM AND SUBSTANCE OF THIS IS THAT AS THE SIZE OF THE DIAMOND INCREASES, THE INCREASE IN ITS PRICE IS FAR MORE THAN THE PROPORTION OF INCREASE IN THE WEIGHT OF SAME QUALIT Y OF DIAMOND. . THE AO HAS ALSO DESCRIBED IN DETAIL HOW THE QUALITI ES OF A DIAMOND IN RESPECT OF CUT, CLARITY AND COLOUR ALSO AFFECT ITS PRICE. THEREFORE, IT IS NOT PROPER TO COMPARE THE ABOVE DE CISION OF THE TRIBUNAL WITH THE CASE OF THE ASSESSEE. 14 FURTHER RELIANCE WAS ALSO PLACED BY THE LEARNED CIT(A) ON THE DECISION OF THE ITAT AHMEDABAD BENCH IN THE CAS E OF KEYSTONE INDIA PVT. LTD. VS. DCIT (2006) 99 TTJ (AH D) 386. IN THAT CASE WHILE DELETING THE GP ADDITION, THE TRIBU NAL STATED THAT THE AO HAS NOT POINTED OUT ANY SPECIFIC DEFECTS IN THE MAINTENANCE OF BOOKS OF ACCOUNT, IN THE ABSENCE WHE REOF, BOOK RESULTS CANNOT BE REJECTED. THE AO HAS NOT BEEN ABL E TO ESTABLISH THAT THE ASSESSEE MADE PURCHASES AT HIGHER COST FRO M THE GROUP CONCERNS OR MADE SALES TO THEM AT LOWER PRICES. REJ ECTION OF BOOK RESULTS ONLY ON THE GROUND OF FLUCTUATION IN G P IS NOT TENABLE. IN THE CASE OF THE ASSESSEE, THE AO WAS P REVENTED TO DETERMINE THE CORRECT PROFITS BY THE ASSESSEE BY NO T PRODUCING QUALITY-WISE STOCK OF THE DIAMONDS. THE LEARNED CIT (A), THEREFORE, WAS NOT CORRECT IN APPLYING THE ABOVE DE CISION AS THE AO HAS NOTED THAT THE NATURE OF THE BUSINESS OF THE ASSESSEE WAS 20 SUCH THAT THE CORRECT PROFIT CANNOT BE DETERMINED W ITHOUT OBTAINING THE QUALITY-WISE STOCK AND CONSUMPTION. 15 THUS, WE SEE THAT THE FACTS OF THE ABOVE TWO CAS ES ON WHICH THE LEARNED CIT(A) PLACED RELIANCE WHILE DELETING T HE ADDITIONS, ARE DISTINGUISHABLE ON FACTS AND, THEREFORE, THE RA TIO AS LAID DOWN IN THOSE CASES WERE NOT APPLICABLE TO THE FACTS OF THIS CASE. 16 THE LEARNED COUNSEL OF THE ASSESSEE PLACED RELIA NCE ON THE DECISION OF THE ITAT AHMEDABAD BENCH IN THE CASE OF ACIT VS. M/S JODHANI EXPORTS [ITA NO.3645/AHD/2007 & ITA NO.3536/AHD/2007, ORDER DATED 31-12-2010] AND IN TH E CASE OF M/S DHAMI BROTHERS VS. ACIT [ITA NO. 2309/AHD/2008, ORDER DATED 06-08-2010] FOR THE PROPOSITION THAT EVEN IF THE QUALITY- WISE DETAILS OF STOCK WERE NOT PRODUCED BEFORE THE AO, THE BOOK RESULTS CANNOT BE REJECTED IN THE CASES OF M/S JODH ANI EXPORTS AND M/S DHAMI BROTHERS (SUPRA), THERE WAS NO DISPUT E ABOUT THE FACT THAT THE ASSESSEE DID NOT MAINTAIN QUALITY-WIS E DETAILS OF CLOSING STOCK. WHILE IN THE ASSESSEES CASE, THE AO AFTER DISCUSSING THE ISSUE IN DETAIL, HAS HELD CLEARLY TH AT THOUGH THE ASSESSEE WAS MAINTAINING QUALITY-WISE AND QUANTITY- WISE DETAILS OF ITS STOCK BUT THE SAME WERE NOT PRODUCED BEFORE THE AO. THE RELEVANT PARAS 7.3 AND 7.4 OF THE ASSESSMENT ORDER, AT THE COST OF REPETITION, ARE REPRODUCED BELOW:- 7.3 A PLAIN READING OF THE SUBMISSION OF THE ASSES SEE SHOWS THAT THE ASSESSEE HIMSELF GIVES CONTRADICTORY STATEMENTS. AT ONE PLACE, THE ASSESSEE STATES THAT IT IS NOT POSSIBLE TO GIVE QUA LITY OF DIAMOND MANUFACTURED BY IT AND IT DEPENDS UPON THE QUALITY OF ROUGH, ETC. ON 21 OTHER HAND IT IS STATED THAT IN THEIR OWN MANUFACTU RE THEY REQUIRE QUALITY OF DIAMOND AS THEY HAVE TO EXPORT GOOD QUAL ITY OF DIAMOND. FURTHER, FOR THE QUERY RAISED ON ACCOUNT OF EXCESS LABOUR PAYMENT PER CARAT ON OWN MANUFACTURE WHEN COMPARED TO THE JOB W ORK MANUFACTURING, THE ASSESSEE HAS STATED THAT FOR THE IR OWN MANUFACTURE THEY HAVE TO GET GOOD QUALITY OF DIAMOND IN SHAPE, COLOUR AND CLARITY FOR THAT THEY REQUIRE SKILL WORKERS AND THE LABOUR PAYMENT IS MORE. WHILE FOR THE JOB WORK THEY DO NOT HAVE TO LOOK INT O CLARITY, CUT, SHAPE, WEIGHT, ETC. FOR POLISHED DIAMOND. SO THERE WAS DIFFERENCE IN RATE OF LABOUR CHARGES FOR OWN MANUFACTURE AND JOB WORK MANUFACTURE. THIS CLEARLY SHOWS THAT THE ASSESSEE HIMSELF DEPEND S UPON THE QUALITY FOR LABOUR PAYMENT, BUT THEY HAVE NOT FURNISHED SUC H QUALITY DETAILS, EVEN THOUGH, IT WAS SPECIFICALLY CALLED FOR. 7.4 THUS, IN VIEW OF THE ABOVE FACTS, IT IS APPAREN T THAT THE ASSESSEE HAD THE RECORD OF PRODUCTION OF POLISHED DIAMONDS O N THE BASIS OF QUALITY. OTHERWISE, TAKING INTO ACCOUNT THE QUANTIT Y OF POLISHED DIAMONDS SOLD, IT WOULD BECOME. IMPOSSIBLE FOR THE ASSESSEE TO HAVE A CONTROL OVER THE TRADING ACTIVITY. HOWEVER, F THE A SSESSEE HAD DECLINED TO FURNISH SUCH RECORDS MERELY ON THE GROUND THAT T HE REQUISITE RECORDS WERE NOT MAINTAINED. THE VERY FACT THAT THE ASSESSE E HAD ADMITTED THAT AFTER THE CUT AND POLISHED DIAMONDS RECEIVED BACK F ROM THE LABOUR PARTIES THEY WERE SORTED BY THE ASSESSEE IN DIFFERE NT LOTS, SIZES, QUALITY ETC. WOULD INDICATE THAT THE ASSESSEE HAD BEEN SORT ING THEM OUT ON PIECE BY PIECE BASIS. IN VIEW OF THE ABOVE, WE FIND THAT THE FACTS IN BOT H THE CASES RELIED UPON BY THE LEARNED COUNSEL OF THE ASSESSEE ARE DIFFERENT AND, THEREFORE, THE RATIO AS LAID DOWN IN THOSE CAS ES IS NOT APPLICABLE TO THE FACTS OF THIS CASE. 17 ON THE OTHER HAND, WE FIND THAT THE FACTS IN THI S CASE ARE IDENTICAL TO THE FACTS OF THE CASE BEFORE THE ITAT MUMBAI BENCH IN THE CASE OF DCIT VS. SAMIR DIAMONDS EXPORTS (P) LTD. (1999) 71 ITD 75 (MUM). THE RELEVANT PORTION OF THIS CASE READ AS UNDER:- 22 SECTION 145 OF THE INCOME-TAX ACT, 1961 - METHOD O F ACCOUNTING - ESTIMATE OF PROFITS - ASSESSMENT YEAR 1987-88 - ASS ESSEE WAS DIAMOND EXPORTER - IT IMPORTED ROUGH DIAMONDS AND A FTER CUTTING, POLISHING, ETC., EXPORTED FINAL PRODUCT - ASSESSEE ADMITTED BEFORE ASSESSING OFFICER THAT IT DID NOT MAINTAIN DETAILS OF POLISHED DIAMONDS ON BASIS OF WEIGHT, CUT, CLARITY, SHAPE AND NUMBER OF PIECES - ASSESSEE ALSO DID NOT FURNISH DETAILS REGARDING ISSUING OF L OTS OF ROUGH DIAMOND TO LABOUR PARTIES FOR CUTTING, POLISHING, ETC., AND ACTUAL YIELD THEREFROM AS THEY WERE SAID TO HAVE BEEN DESTROYED AFTER GOOD S WERE RECEIVED BACK - ASSESSING OFFICER FURTHER FOUND THAT ASSESSE E HAD SHOWN A UNIFORM YIELD BETWEEN 25 PER CENT TO 26 PER CENT OF POLISHED DIAMONDS FROM ALL SORTS OF ROUGH DIAMONDS, GOOD OR BAD, WHIL E NUMBER OF YIELD VARIED FROM 4 PIECES TO 200 PIECES PER CARAT - HE A LSO FOUND THAT LABOUR CHARGES WERE ALSO SHOWN TO HAVE BEEN PAID AT UNIFORM RATE IRRESPECTIVE OF QUALITY OF DIAMOND WHICH WAS INCONC EIVABLE - HE, THEREFORE, CONCLUDED THAT IN ABSENCE OF VITAL DETAI LS AND IN VIEW OF INCOMPLETENESS OF BOOKS OF ACCOUNT BOOK RESULTS COU LD NOT BE ACCEPTED AND ON BASIS OF ASSESSEE'S OWN RECORD AND RESULTS D ISCLOSED BY SISTER CONCERNS, MADE FLAT ADDITION AT 5 PER CENT OF DISCL OSED SALES - WHETHER AN ASSESSEE CAN CLAIM THAT SINCE HIS BOOKS OF ACCOU NT WERE FOUND TO BE CORRECT AND COMPLETE IN PRECEDING YEARS, IT IS A CO NCLUSIVE PROOF OF FACT THAT THEY ARE CORRECT AND COMPLETE FOR SUBSEQU ENT YEAR ALSO - HELD, NO - WHETHER, THEREFORE, ASSESSEE'S CLAIM THAT IT W AS ITS PREROGATIVE TO MAINTAIN BOOKS OF ACCOUNT IN A MANNER THAT IT LIKED AND THAT ASSESSING OFFICER COULD NOT REJECT THEM BECAUSE THEY HAD BEEN ACCEPTING IN PAST, COULD NOT BE ACCEPTED - HELD, YES - WHETHER, IN INS TANT CASE, ASSESSING OFFICER WAS CORRECT IN COMING TO CONCLUSION THAT AC COUNTS WERE NOT CORRECT AND COMPLETE BECAUSE CORROBORATIVE AND CONT EMPORANEOUS EVIDENCE HAD BEEN ADMITTEDLY DESTROYED AND WAS, THE REFORE, JUSTIFIED IN INVOKING PROVISIONS OF SECTION 145(2) - HELD, YE S - WHETHER, SINCE ASSESSEE DID NOT FURNISH ANY EXPLANATION FOR A SHAR P DECLINE IN GROSS PROFIT RATE FROM 11.7 PER CENT IN IMMEDIATELY PRECE DING YEAR TO ONLY 5.99 PER CENT IN ASSESSMENT YEAR CONSIDERATION, ASS ESSING OFFICER WAS JUSTIFIED IN MAKING FLAT ADDITION PER CENT OF DISCL OSED SALES - HELD, YES FACTS THE ASSESSEE, A DIAMOND EXPORTER, IMPORTED ROUGH DI AMONDS AND AFTER SHAPING, CUTTING, POLISHING AND SORTING THEM, EXPOR TED THE CUT AND POLISHED DIAMONDS. IT WAS A SISTER CONCERN OF OTHER TWO CONCERNS IN THE TRADE. THE GROUP WAS CONTROLLING THE DIAMOND TRADE. DURING THE 23 ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 1987 -88, THE ASSESSING ASKED THE ASSESSEE TO FURNISH SPECIFIC DE TAILS OF COLOUR, CLARITY AND NUMBER OF PIECES PER CARAT IN RESPECT O F LOTS OF ROUGHS ISSUED FOR CUTTING AND POLISHING AND RECEIVED BACK SO THAT LOTS OF ROUGHS IMPORTED COULD BE CORRELATED WITH LOTS OF CU T AND POLISHED DIAMONDS EXPORTED. THE ASSESSEE DID NOT PROVIDE THE SAID DETAILS STATING THAT IT DID NOT MAINTAIN DE POLISHED DIAMON DS ON THE BASIS OF WEIGHT, CUT, CLARITY, SHAPE AND NUMBER OF PIECES. T HEREAFTER, THE ASSESSING OFFICER EXAMINED THE LABOUR CHARGES AND F OUND THAT A SUBSTANTIAL AMOUNT WAS PAID TO SISTER CONCERN ASSES SEE ALSO COULD NOT FURNISH THE DETAILS REGARDING ISSUING OF ROUGH LOTS GIVEN FOR CUTTING AND POLISHING, ETC., THE EXPECTED AND ACTUAL YIELD FROM . IT STATED THAT SUCH RECORDS WERE DESTROYED AFTER GOODS WERE RECEIVED BA CK. THEREFORE, THE ASSESSING OFFICER INFERRED THAT THE ASSORTMENT OF R OUGH AND OF CUT AND POLISHED DIAMONDS WAS DONE AND RECORDED BUT THE SAM E WERE NOT FURNISHED TO HIM. HE ALSO NOTICED THAT ALMOST INVAR IABLY UNIFORM RATE OF LABOUR CHARGES PER CARAT WERE SHOWN TO HAVE BEEN PAID WHICH WAS INCONCEIVABLE. HE ALSO NOTICED THAT THE DIAMONDS EX PORTED, VARIED FROM US $ 41 TO US $ 850 PER CARAT. THE ASSESSING O FFICER, THEREFORE, CAME TO THE CONCLUSION THAT THE BOOK RESULTS NOT BE ACCEPTED AND THAT ON ACCOUNT OF THE DEFECTS ENUMERATED BY HE HAD TO A SSESS THE INCOME OF THE ASSESSEE ACCORDING TO THE PROVIISIONS OF SEC TION 145. CONSIDERING THE RESULTS IN THE CASES OF THE ASSESSE E'S GROUP AND THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 1989-90 , THE GP RATE SHOWN AT 5.61 PER CENT AS AGAINST 15.50 PER CENT AR ID PER CENT IN THE CASES OF THE ASSESSEE'S OWN SISTER CONCERNS FOR THE ASSESSMENT YEAR 1989-90, HE MADE FLAT ADDITION @ 5 PER CENT ON DISC LOSED OF RS.7,75,00,985. ON APPEAL, THE COMMISSIONER (APPEAL S) ACCEPTED FIGURES SUBMITTED BY THE ASSESSEE AS ALSO THE EXPLA NATION REGARDING GROSS PROFIT RATE IN THE ASSESSMENT YEAR 1989-90, A ND DELETED THE ADDITION. ON REVENUE'S APPEAL: THE COMMISSIONER (APPEALS) DECIDED THE APPEAL MEREL Y ON THE BASIS OF THE SUBMISSIONS MADE BY OR ON BEHALF OF THE ASSE SSEE WITHOUT CONSIDERING THE FACTS DISCUSSED IN THE ASSESSMENT O RDER AND TAKING CARE TO CHECK EVEN SUPERFICIALLY THE VERACITY OF THE ARG UMENTS AND THE FACTS AS WELL AS LAW SUBMITTED BEFORE HIM. THE PRICE OF D IAMOND DEPENDS ON FOUR CS. THEY ARE AT (I) CARAT (II) CUT (III) COLOU R AND FIVE CLARITY WHICH THE ASSESSING OFFICER TOOK INTO CONSIDERATION BUT T HE COMMISSIONER (APPEAL) DID NOT EXAMINE. THE EXPLANATION OF THE AS SESSEE BEFORE THE 24 BENCH THAT THE DIAMONDS IN WHICH ASSESSEE DEALT, BE ING VERY SMALL IN SIZE, IT WAS NOT POSSIBLE TO KEEP ACCOUNT OF EACH P IECE AND, HENCE, THEY WERE SOLD IN PACKETS AND THE MANNER IN WHICH ACCOUN TS WERE TO BE KEPT WAS THE PREROGATIVE OF THE ASSESSEE, WAS SATIS FACTORY AT ALL BECAUSE IT WAS OBVIOUS, THAT THE ASSESSEE HAD NOT B EEN DEALING ONLY IN THAT PARTICULAR QUALITY OF DIAMONDS WHICH WAS SHOWN TO THE BENCH. THE ASSESSING OFFICER WHO HAD A REASONABLY GOOD KNO WLEDGE ABOUT THESE FACTORS AND WHO DISTINGUISHED HIMSELF FROM HI S PREDECESSORS IN THIS REGARD, HAD BROUGHT OUT THIS POINT VERY ELABOR ATELY AND CLEARLY AND GIVEN ILLUSTRATIONS FROM THE COMPILATION FILED BEFO RE HIM BY THE ASSESSEE ITSELF. THE ILLUSTRATIONS SHOWED THAT THE ASSESSEE HAD BEEN DEALING DIAMONDS, PRICES OF WHICH RANGED FROM US $ 41 PER CARAT TO US $850 PER CARAT. IT COULD NOT BE TRUE THAT THE AS SESSEE SHOULD NOT HAVE BEEN MAINTAINING QUALITY-WISE RECORD OF THE DI AMONDS. IF WHAT THE ASSESSEE SAID WAS IT COULD NOT HAVE SOLD LOTS O F DIAMONDS AT DIFFERENT PRICES WHICH RANGED FROM RS.615 TO 12,750 PER CARAT. THEREFORE, THE ASSESSING OFFICER WAS ABSOLUTELY JUS TIFIED IN COMING TO THE CONCLUSION THAT THE ASSESSEE WAS NOT DISCLOSING THE TRUTH BEFORE HIM AND THAT THE COMMISSIONERS (APPEALS), WHO WAS P ERHAPS NOT AWARE OF THESE NICETIES AND FACTORS APPLICABLE TO T HE DIAMOND BUSINESS, WAS TOO CREDULOUS TO ACCEPT THE ASSESSEE'S VERSION MERELY BECAUSE THE ASSESSEE'S ACCOUNTS HAD BEEN ACCEPTED IN THE PAST. FURTHER, THE DETAILS FURNISHED BY THE ASSESSEE IN S CHEDULE 'O' OF ITS ACCOUNTS SHOWED OPENING STOCK OF POLISHED DIAMONDS AT 154 CARATS VALUED AT RS.5,81,962, PRODUCT POLISHED DIAMONDS AT 29087 CARATS VALUED AT RS.7,74,18,469, ROUGH DIAMONDS CONSUMED 1 ,14,104 CARATS VALUED AT RS.5,86,51,949. KEEPING IN MIND THE RELEV ANT FACTORS DISCUSSED IN DETAIL THE ASSESSING OFFICER IN HIS OR DER, NOTHING COULD BE GATHERED ABOUT THE CORRECTNESS AND COMPLETENESS OF THE ASSESSEE'S ACCOUNTS AND ABOUT QUANTA WISE AND QUALITY-WISE STO CK POSITION AND THE SALES. THIS WAS AN ATTEMPT BY THE ASSESSEE TO H OODWINK THE ASSESSING OFFICER, IN WHICH IT FAILED BUT IT APPEAR ED TO HAVE SUCCEEDED BEFORE THE COMMISSIONER (APPEALS). FURTHERMORE, THE VERY FACT THAT THE ASSESSEE HAD BE EN ISSUING ROUGH DIAMONDS AND THE EXPECTED YIELD WAS NOTED ON THE PA CKETS AND THOSE DETAILS WERE VERIFIED BY THE ASSESSEE OR ITS REPRES ENTATIVE WHEN CUT AND POLISHED DIAMONDS WERE RECEIVED FROM LABOURERS, SHO WED THAT THE ASSESSEE COULD NOT RUN ITS BUSINESS WITHOUT GETTING ACCOUNT OF EACH AND EVERY PIECE OF DIAMOND, YET, IT WAS STATED THAT THO SE PACKETS HAD BEEN DESTROYED WOULD MEAN THAT THE ASSESSING OFFICER WAS CORRECT IN 25 COMING CONCLUSION THAT THE ACCOUNTS WERE NOT CORREC T AND COMPLETE BECAUSE THE CORROBORATIVE AND CONTEMPORANEOUS EVIDE NCE HAD BEEN ADMITTEDLY DESTROYED BY THE ASSESSEE. THUS, THE WAY IN WHICH THE ASSESSEE SHOULD HAVE ACT UALLY MAINTAINED LOTS OF ITS DIAMONDS, AS ADMITTED BEFORE THE COMMIS SIONER (APPEALS) WOULD ONLY CONFIRM THAT THE ASSESSEE HAD BEEN, IN F ACT, NOTING DOWN AND MAINTAINING THE DETAILS REQUIRED BY THE ASSESSI NG OFFICER WHEN IT RECEIVED BACK THE CUT AND POLISHED DIAMONDS FROM TH E LABOUR PARTIES AND WHEN IT WAS SORTING THEM IN DIFFERENT LOTS, SIZ ES, QUALITY, ETC. FROM THIS ALSO TO BE INFERRED THAT THE ASSESSEE HAD WITH HELD THE COMPLETE AND CORRECT DETAILS REGARDING ITS ACCOUNTS FROM THE ASS ESSING OFFICER AND, HENCE, THE ACCOUNTS WHICH THE ASSESSING OFFICER WAS ALLOWED TO EXAMINE WERE NOT CORRECT AND COMPLETE AND, HENCE, H E WAS JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 145(2). EVEN IF IN THE PAST, FROM YEAR TO YEAR, THE DEPARTM ENT HAS TAKEN THE VIEW THAT THE BOOKS OF ACCOUNT MAINTAINED IN A PART ICULAR MANNER ARE TO BE TREATED AS CORRECT AND COMPLETE, A SUCCEEDING ASSESSING OFFICER CAN POINT OUT THAT LOOKING TO THE FACTS OF THAT CAS E AND INVESTIGATION DONE BY HIM CANNOT BE TREATED AS CORRECT AND COMPLE TE. THAT IS WHAT THE ASSESSING OFFICER WHO FRAMED THE ASSESSMENT IN THE INSTANT CASE HAD DONE, ASSESSEE CAN CLAIM THAT SINCE ITS BOOKS O F ACCOUNT WERE FOUND TO BE COT AND COMPLETE IN A PRECEDING YEAR, I T IS A CONCLUSIVE PROOF OF THE FACT THAT THE BOOKS OF ACCOUNT FOR SUB SEQUENT YEAR OR YEARS ARE ALSO COMPLETE AND THAT NO ASSESSING OFFICER CAN EITHER QUESTION THE ASSESSEE ON THIS ISSUE OR EVEN AFTER QUESTIONING TA KE THE VIEW THAT THE BOOKS OF ACCOUNT FOR THAT SUBSEQUENT YEAR ARE NOT C ORRECT AND COMPLETE. AS PER THE DECISION OF THE SUPREME COURT IN THE CAS E OF CIT V. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 44/54 TAXMAN 499 W HERE THE ACCOUNTS PREPARED WITHOUT DISCLOSING THE REAL COST OF THE STOCK-IN-TRADE ALBEIT ON SOUND EXPERT ADVISE IN THE INTEREST OF EF FICIENT ADMINISTRATION OF BUSINESS, IT WOULD BE THE DUTY OF THE ASSESSING OFFICER TO DETERMINE THE TAXABLE INCOME BY MAKING SUCH COMPUTATION AS HE THINKS FIT. THEREFORE, THE CLAIM OF THE ASSESSEE THAT IT WAS TH E ASSESSEE'S PREROGATIVE TO MAINTAIN THE BOOKS IN THE MANNER IT LIKED AND THAT THE ASSESSING OFFICER COULD NOT LONGER REJECT THEM BECA USE THEY HAD BEEN ACCEPTED IN THE PAST, COULD NOT LONGER BE ACCEPTED AND HAD TO BE REJECTED. 26 REGARDING THE QUESTION AS TO WHETHER THE ASSESSING OFFICER WAS JUSTIFIED IN REJECT TING THE BOOKS OF ACCOUNT, THE ASSESSING OFFICER'S DUTY IS TO ASCERTAIN THE CORRECT PROFITS FROM THE B OOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE AND IF THE BOOKS OF ACCO UNT ARE NOT CORRECT AND COMPLETE, THE FACT THAT ALL OTHER ASSESSEES IN THAT TRADE ARE MAINTAINING SIMILAR ACCOUNTS, CANNOT BE A BASIS FOR SUPERSEDING THE DECISION OF THE ASSESSING OFFICER WHEREBY HE HAD RE JECTED THE ASSESSEE'S BOOKS OF ACCOUNT. SECONDLY, NEITHER BEFO RE THE ASSESSING OFFICER, NOR BEFORE THE COMMISSIONER (APPEALS), NOR BEFORE THE TRIBUNAL ANY EVIDENCE HAD BEEN ADDUCED TO CORROBORA TE THE CLAIM OF THE ASSESSEE THAT THE DETAILS REQUIRED BY THE ASSES SING OFFICER WERE NOT MAINTAINED IN THE TRADE IN WHICH THE ASSERTION WAS ENGAGED. AT BEST, IT COULD BE SAID TO BE A SELF-SERVING ASSOCIATION MADE BY THE ASSESSEE AND ACCEPTED BY THE COMMISSIONER (APPEALS) WITHOUT ANY EVIDENCE OR MATERIAL IN SUPPORT OF THIS ASSERTION. IT HAD, THER EFORE, TO BE IGNORED. AS REGARDS OBSERVATIONS OF THE COMMISSIONER (APPEAL S) THAT NO SPECIFIC DEFECTS HAD BEEN POINTED OUT BY THE ASSESS ING OFFICER IN THE ASSESSEE'S ACCOUNTS, THE FACT THAT RELEVANT PAPERS CONTAINING DETAILS REGARDING ROUGH DIAMONDS GIVEN FOR CUTTING, SHAPING , ETC., AND RECEIVING THEM BACK FROM LABOUR PARTIES HAD BEEN DE STROYED, WAS SUFFICIENT TO SHOW THAT WHEN THE PRIMARY AND ORIGIN AL DOCUMENTS WHICH SHOULD HAVE CORROBORATED THE ENTRIES IN THE B OOKS OF ACCOUNT HAD BEEN DESTROYED, THE ENTRIES MADE IN THE BOOKS O F ACCOUNT COULD NOT BE VERIFIED AND, CONSEQUENTLY, THE ASSESSING OFFICE R WAS ENTITLED TO HOLD THAT THE BOOKS OF ACCOUNT WERE NOT CORRECT AND COMPLETE. EVEN THE ASSESSEE'S OWN EXPORT BILLS RECORDED THE N UMBER OF PIECES PER CARAT, FROM JUST FOUR PIECES PER CARAT TO AS MANY A S 200 PIECES PER CARAT AND, YET, IT WAS CLAIMED BEFORE THE ASSESSING OFFIC ER THAT NO PIECE- WISE DETAILS WERE MAINTAINED BY THE ASSESSEE. THE A SSESSING OFFICER HAD ALSO POINTED OUT THAT LABOUR CHARGES WERE ALSO NOT PROVED AND WERE INFLATED AND NON-GENUINE. HE HAD ALSO POINTED OUT THAT THE LABOUR CHARGES WERE DETERMINED ON THE BASIS OF ROUGH DIAMO NDS PER CARAT AND NUMBER OF PIECES PER CARAT', BUT NO SUCH DETAILS WE RE STATED TO HAVE BEEN MAINTAINED ON THE PLEA THAT IT WAS A HERCULEAN TASK. FOR THIS REASON ALSO, THE BOOKS OF ACCOUNT COULD NOT BE SAID TO BE CORRECT AND COMPLETE. THE ASSESSEE HAD SHOWN ALMOST A UNIFORM Y IELD BETWEEN 25 PER CENT TO 26 PER CENT OF POLISHED DIAMONDS FROM T HE ROUGH DIAMONDS. IN THE ABSENCE OF DETAILS MAINTAINED BY T HE ASSESSEE FOR SUCH A COSTLY COMMODITY AS DIAMONDS, IT COULD NOT B E SAID THAT THE YIELD IN RESPECT OF EACH ROUGH STONE HAD BEEN CORRE CTLY RECORDED IN THE 27 BOOKS OF ACCOUNT. EVEN OTHERWISE, AS POINTED OUT BY THE ASSESSING OFFICER IN HIS ORDER, WHEN THE DIAMONDS OBTAINED BY THE ASSESSEE AFTER CUTTING AND POLISHING, RANGED FROM 4 PIECES PER CAR AT TO 200 PIECES PER C. PRUDENT HUMAN BEING HAVING ORDINARY COMMONSENSE WOULD BELIEVE THE YIELD OF CUT AND POLISHED DIAMONDS WOULD BE UNI FORM AT 25 PER 26 PER CENT ONLY. THUS, ON THE BASIS OF PREPONDERANCE OF PROBABILITY ALSO IT WAS TO BE HELD THAT THE INFERENCE OF THE ASSESSI NG OFFICER TO THE EFFECT THAT THE CORRECT RECORD OF THE ASSESSEE'S BU SINESS HAD EITHER NOT BEEN MAINTAINED OR EVEN IF MAINTAINED, WAS REFUSED TO BE PRODUCED BEFORE THE ASSESSING OFFICER, WAS CONCERNED, WAS CO RRECT. THEREFORE, SO FAR AS THE ASSESSING OFFICER WAS CONCERNED, THE BOOKS OF ACCOUNT PRODUCED BEFORE HIM WERE NOT CORRECT AND COMPLETE. ANOTHER DEFECT WHICH HE POINTED OUT WAS THAT THERE WAS NO RE CORRELATE AS TO WHETHER THE SAME QUALITY OF DIAMONDS HAD BEEN RECEIVED AFTER CUTTING AND POLISHING OF WHICH THE ROUGH WAS GIVEN. THE DIAMONDS MAY VARY SUBSTANTIALLY ON THE BASIS OF ITS COLOUR A ND CLARITY AND CARAT. HENCE, NO ASSESSEE DEALING IN DIAMONDS CAN LEAVE IT TO THE SWEET WILL OF THE LABOUR PARTY TO TAKE ROUGH OF HIGHER QUALITY AND HIGHER WEIGHT FROM THE ASSESSEE AND GIVE BACK THE CUT AND POLISHE D DIAMONDS OF INFERIOR QUALITY AND LESSER WEIGHT PER PIECE. THE A SSESSEE ITSELF HAD CONCEDED THAT WHEN THE ROUGH DIAMONDS WERE GIVEN FO R CUTTING AND POLISHING EXPECTED YIELD WAS NOTED ON THE PACKETS A ND WHEN THE CUT AND POLISHED DIAMONDS WERE RECEIVED BACK FROM THE L ABOUR PARTIES, THEY WERE ASI,Z INTO DIFFERENT LOTS, SIZES AND QUAL ITY-WISE AND THEY WERE THEREAFTER OFFERED FOR SALE TO CUSTOMERS. FURTHER, THERE WAS NO SUCH RECORD TO SHOW N SPECIAL INSTRUCTIONS WERE GIVEN TO THE AGENT TO HAVE PARTICULAR ROUST BE CUT IN A PARTICULAR MANNER. NO SUCH DETAILS HAD BEEN PRODUCED ON THE GROUND THAT THEY COULD NOT BE MAINT AINED. EVEN IF IT IS TRUE, WHILE IT MAY BE IGNORED IN THE BUSINESS OF RI CE, REFERRED TO BY THE ASSESSEE, OR OTHER FOOD GRAINS OR OTHER COMMODITIES INVOLVING BULK DEALINGS, IT CAN IN NO CIRCUMSTANCES BE IGNORED IN THE BUSINESS OF DIAMONDS WHERE EACH AND EVERY PIECE, WHETHER SMALLE ST OR BIGGER ONE, CARRIES SUBSTANTIAL MOM VALUE AND NO DIAMOND DEALER CAN SWEEP AWAY THE DIAMONDS WITHOUT COUNTING EACH PIECE AS MIGHT B E DONE BY THE TRADERS IN RICE BUSINESS. THEREFORE, NON-MAINTENANC E OF THESE DETAILS OR NON-PRODUCTION OF THESE DETAILS IN DIAMOND BUSINESS , JUSTIFIED THE ASSESSING OFFICER TO COME TO THE CONCLUSION THAT TH E BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE WERE NOT CORRECT AND COM PLETE. TAKING ALL THESE FACTORS IN TO ACCOUNT, THE OBSERVA TION OF THE COMMISSIONER (APPEALS) THAT NO SPECIFIC DEFECTS HAD BEEN POINTED OUT 28 BY THE ASSESSING OFFICER WAS NOT FACTUALLY CORRECT AND THAT THE ASSESSING OFFICER AFTER HAVING POINTED OUT VARIOUS DEFECTS REGARDING INCORRECTNESS AND INCOMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE WAS JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 145 (2). AS REGARDS ADDITION AT FLAT RATE OF 5 PER CENT OF D ISCLOSED TURNOVER, IN THIS YEAR THERE WAS A STEEP FALL IN THE ASSESSEE'S GP AND NET PROFIT RATE. IN VIEW OF HAVING FOUND OUT THAT THE ASSESSEE WAS C APABLE OF FURNISHING INACCURATE PARTICULARS AND ADVANCING WRO NG ARGUMENTS BEFORE THE FIRST APPELLATE AUTHORITY WHO VERY INNOC ENTLY AND IN GOOD FAITH ACCEPTED IT, THE SAME COULD NOT BE FOLLOWED. IT WAS, THEREFORE, CLEAR THAT WHEREAS THE ASSESSEE GAVE AN EXPLANATION BEFORE THE ASSESSING OFFICER AS WELL AS THE COMMISSIONER (APPE ALS) FOR THE GROSS PROFIT RATES GOING SUBSTANTIALLY HIGH IN THE ASSESS MENT YEAR 1989-90 AND ARGUED THAT ONLY PAST YEAR'S RESULT AND NOT THE SUBSEQUENT YEARS RESULTS SHOULD BE CONSIDERED, FURNISHED NO EXPLANAT ION BEFORE THE ASSESSING OFFICER OR THE COMMISSIONER (APPEALS) FOR A SHARP DECLINE IN THE GP RATE FROM 11.70 PER CENT IN THE IMMEDIATE LY PRECEDING ASSESSMENT YEAR 1986-87 TO ONLY 5.99 PER CENT IN TH E ASSESSMENT YEAR 1987-88. ACCEPTING THE ASSESSEES ARGUMENT THAT IT MIGHT NOT BE NECESSARY TO COMPARE THIS YEAR'S RESULTS WITH THE T RADING RESULTS OF THE ASSESSMENT YEAR 1989-90, BUT PAST YEARS RESULT SHO ULD BE CONSIDERED FOR COMPARISON, IN THE ABSENCE OF ANY JUSTIFICATION HAVING BEEN GIVEN FOR SHARP DECLINE IN THE TRADING RESULTS, THE ASSES SING OFFICER WAS MORE THAN REASONABLE IN MAKING AN ADDITION AT THE FLAT R ATE TO ONLY 10.99 PER CENT WHICH ON THE SALES. IT WAS OBVIOUS THAT THESE ADDITIONS RAISED THE GP RATE TO ONLY 10.99 PER CENT WHICH WAS STILL LOWE R THAN THE GP RATE OF 11.70 PER CENT IN THE IMMEDIATELY PRECEDING YEAR . SINCE IT HAD ALREADY BEEN HELD THAT THE ASSESSING OFFICER HAD RI GHTLY POINTED OUT THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE NOT CORRECT AND COMPLETE AND SINCE HE HAD SPECIFICALLY INVOKED HIS POWERS UNDER SECTION 145(2) ACCORDING TO THE PROVISIONS OF LAW, HE WAS JUSTIFIED IN MAKING AN ESTIMATED ADDITION BY APPLYING A FLAT RAT E OF PROFIT AT 5 PER CENT ON THE DISCLOSED SALES. THEREFORE, THE ORDER O F THE COMMISSIONER (APPEALS) IN THIS REGARD WAS TO BE REVERSED AND THE ADDITION WHICH HAD BEEN MADE BY THE ASSESSING OFFICER WAS TO BE RESTOR ED. 18 IN VIEW OF THE ABOVE, FOLLOWING THE AFORESAID DE CISION OF THE ITAT MUMBAI BENCH, WE SET ASIDE THE ORDERS OF T HE LEARNED CIT(A) AND RESTORE THAT OF THE AO. 29 19 IN THE RESULT, BOTH THE APPEALS ARE ALLOWED. ORDER PRONOUNCED IN THE COURT TODAY ON 31-01-2012 SD/- SD/- (A K GARODIA) ACCOUNTANT MEMBER (D K TYAGI) JUDICIAL MEMBER DATE : 31-01-2012 COPY OF THE ORDER FORWARDED TO: 1. M/S HANSAL DIAM, 65, SHIV SHANKAR PARVATI SOCIET Y, VARACHHA ROAD, SURAT 2. THE ASSISTANT / DEPUTY COMMISSIONER OF INCOME-TA X, CIRCLE-9, ROOM NO.423, AAYAKAR BHAVAN, MAJURA GATE, SURAT 3. CIT CONCERNED 4. CIT(A)-V, SURAT 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD