The Income-tax Officer, Amritsar. V. M/s. Mali Ram Jewellery House, Amritsar.

ITA 364/ASR/2011

• Counselvise Citation: 36420914 RSA 2011
• Duration Of Justice: 1 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 03-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 15-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRIK CHAND
• Keywords: Business income
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. B.P.JAIN, ACCOUNTANT MEMBER I.T.A. NO.364(ASR)/2011 ASSESSMENT YEAR:2007-08 PAN :AANFM5546L THE INCOME TAX OFFICER, VS. M/S. MALLI RAM JEWELLE RY HOUSE, WARD 5(3), AMRITSAR. AMRITSAR. (APPELLANT) (RESPONDENT) APPELLANT BY:SH. AMRIK CHAND, DR RESPONDENT BY:SH. ANIL PURI, ADVOCATE DATE OF HEARING:03/09/2012 DATE OF PRONOUNCEMENT:11/09/2012 ORDER PER BENCH ; THIS APPEAL OF THE REVENUE ARISES FROM THE ORDER O F THE CIT(A), AMRITSAR, DATED 07.04.2011 FOR THE ASSESSMENT YEAR 2007-08. 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE CIT(APPEALS), AMRITSAR WAS JUSTIFIED IN DELETING TH E ENTIRE ADDITION OF RS.37,64,534/- MADE BY THE AO TO THE RE TURNED INCOME, BY APPLYING A NET PROFIT RATE OF 25% ON TOT AL TURNOVER AFTER REJECTING THE BOOK VERSION OF THE ASSESSEE WH EN THE ASSESSEE HAD FAILED TO PROVE THAT THE CLOSING STOCK WAS VALUED PROPERTY IN ACCORDANCE WITH ACCOUNTING STANDARDS, P ARTICULARLY 2 ITEM 16 OF THE ACCOUNTING STANDARD-2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS. IN FACT, THE ASSESSEE HAD CL AIMED TO HAE VALUED THE CLOSING STOCK AT AVERAGE COST BASIS IN STEAD OF THE REQUIREMENT OF WEIGHTED ADVERAGE COST FORMULA. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(APPEALS), AMRITSAR WAS JUSTIFIED IN ACCEPTING THE METHOD OF VALUATION OF CLOSING STOCK BY DIVIDING IT IN TYP E 1, TYPE 2 AND TYPE 3 WHICH WAS WITHOUT ANY RECOGNIZED/ACCEPTE D METHOD OF VALUATION OF CLOSING STOCK AND WAS IMPLY FOR ITS OWN CONVENIENCE. 3. THE APPELLANT CRAVES LEAVE TO AMEND OR ADD ANY O R MORE GROUNDS OF APPEAL. 3. THE BRIEF FACTS OF THE CASE ARISING FROM THE ORD ER OF THE AO ARE THAT THE ASSESSEE FIRM IS ENGAGED IN MANUFACTURING AND T RADING IN DIAMOND AND GOLD ORNAMENTS. THE TOTAL SALES AMOUNTING TO RS.3.0 65 CRORES ON WHICH GROSS PROFIT OF RS.38.99 LACS HAD BEEN DECLARED YIELDIN G A GROSS PROFIT RATE OF 12.80% AS AGAINST LAST YEAR GP RATE OF 21.40% ON S ALES OF RS.10087660/-. DURING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE WAS NOT MAINTAINING THE DETAILS OF QUANTITATIVE AND QUA LITATIVE PURCHASE AND SALE AND THE CLOSING STOCK WITH SPECIFIC DESCRIPTION OF THE DETAIL OF THE DIAMOND, WHICH IN FACT IS CATEGORIZED ACCORDING TO 4CS I.E. CUT, CARAT, CLARITY AND COLOUR AND DESCRIPTION, TAG ALONGWITH A WARRANTY CA RD IS ALWAYS KEPT BY THE DEALER OF THE DIAMOND. WHEREAS THE ASSESSEE HAD ENT ERED THE DIAMONDS STUDDED JEWELLERY IN THE STOCK REGISTER ON THE BAS IS OF CARAT AND SHOWN THE SALE OF THE SAME ON THE CARAT BASE ALSO. THE ASSESS EE HAD NOT VALUED 3 INVENTORIES IN ACCORDANCE WITH THE ACCOUNTING STAND ARD ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS AND NOTIFIED BY CBDT. THE ASSESSEE HAS NOT FOLLOWED THE VALUATION OF THE CLOSING STOCK ON THE BASIS OF COST OR MARKET VALUE WHICHEVER IS LOWER , WHICH IS WELL ESTABLISH ED METHOD OF ACCOUNTING, IN VIEW OF THE DECISION OF THE HONBLE SUPREME COUR T IN THE CASE OF CHAINRUP SAMPATRAM VS. CIT 24 ITR 481. MOREOVER, TH E ASSESSEE HAS NOT MENTIONED ANY DESCRIPTION OF THE ITEMS SOLD OR QUAL ITATIVE DETAIL OF THE DIAMOND STUDDED JEWELLERY. THE ASSESSEE HAD MENTIO NED ONLY WEIGHT OF THE GOLD AND DIAMOND IN CARATS AND SALE CONSIDERATION I S MADE ON THE BASIS OF WEIGHT OF DIAMOND ONLY. IT WAS OBSERVED BY THE AO T HAT THE ASSESSEE HAD NOT PRODUCED THE ACTUAL QUANTITATIVE AND QUALITATIVE RE GISTER MAINTAINED BY IT. SH. VIJAY KAPOOR FATHER OF THE PARTNER SH. AJAY KAPOOR, WAS EXAMINED WHO STATED THAT HE IS LOOKING AFTER THE BUSINESS OF THE FIRM AND WAS DULY AUTHORIZED TO REPRESENT THE CASE OF THE ASSESSEE-FI RM. DURING THE COURSE OF STATEMENT, WHICH IS AVAILABLE AT PAGES 3 TO 6 OF AO S ORDER, HAS STATED THAT THE VALUATION OF DIAMOND IS MADE ON THE BASIS OF SE LECTION MADE ON ITEM BASIS AND AFTER SETTLEMENT OF RATE. THERE IS A PRIC E DIFFERENCE OF DIFFERENT DIAMOND BASED ON QUALITY AND WEIGHT. ON SPECIFICALL Y ASKED ABOUT THE SPECIFIC ITEM, HE HAD SHOWN HIS INABILITY TO TELL T HE PURCHASE PRICE OF EACH ITEM WITH RESPECT TO THE QUALITY AND RATE SINCE IT WAS NOT POSSIBLE TO TELL THE 4 PURCHASE PRICE OF THE EACH ITEM. IT WAS FURTHER STA TED THAT IT IS NOT POSSIBLE IN THEIR TRADE TO MAINTAIN ITEM-WISE DETAILS NOR ANY Q UANTITATIVE STOCK IS MAINTAINED ON THE BASIS OF ITEMS PURCHASED AND NO SUCH DESCRIPTION IS AVAILABLE ON THE SALE BILLS. THEY ARE MAINTAINING T HE STOCK REGISTER ONLY ON QUANTITATIVE BASIS AND THE PRICE /AMOUNT IS ENTERED ON THE BILL AMOUNT AND NO SEPARATE ITEM OF THE DIAMOND CAN BE INFERRED. IT WA S ALSO STATED THAT CATEGORIZATION OF THE DIAMOND STUDDED JEWELLERY I.E . TYPE I, II & III BASED ON THE PRICE OF THE DIAMOND HAS BEEN MADE. 4. THE AO OBSERVED THAT THE ASSESSEE FOR HIS OWN C ONVENIENCE HAD CATEGORIZED THE DIAMOND STUDDED JEWELLERY BUT NO DESCRIPTION OR DETAIL OR ANY IDENTIFICATION CAN BE MADE FROM THE PURCHASE AN D SALE BILLS PRODUCED BEFORE THE AO EXCEPT TYPE III. THE ASSESSEE HAD PRO VIDED THE COPY OF THE DESCRIPTION, DETAILS AND CODE NO. OF THE DIAMOND. I T WAS FURTHER OBSERVED THAT THE ASSESSEE HAD FAILED TO FURNISH THE REQUIS ITE DETAILS I.E. DESCRIPTION OF THE ITEMS PURCHASED AND SOLD ALONGWITH QUANTITATIVE DETAILS , PRICE OF EACH ITEMS OF THE PURCHASE BILL, DESCRIPTION OF THE DIAM OND STUDDED ON THE JEWELLERY, DISTINCT CODE NO. NO ADDRESS OF THE BUYE R OF THE MACHINERY IS AVAILABLE TO FIND OUT THE GENUINENESS OF THE SALE S HOWN BY THE ASSESSEE. THEREFORE, IT WAS OBSERVED THAT THE BOOKS OF ACCOUN T OF THE ASSESSEE ARE NOT CORRECT AND COMPLETE AND AFTER GIVING SHOW CAUSE A ND CONSIDERING THE REPLY 5 OF THE ASSESSEE REJECTED THE BOOKS OF ACCOUNT U/S 1 45(3) OF THE ACT. THE AO ESTIMATED THE GP RATE AT 25% AND MADE THE ADDITION OF RS.37,64,534. 5. BEFORE THE LD. CIT(A), THE ASSESSEE SUBMITTED WR ITTEN SUBMISSIONS, WHICH ARE AVAILABLE IN PARA 5 AT PAGE 4 TO 24. THER EAFTER, IN PARA 6, THE LD. CIT(A) HAS REFERRED TO AOS ORDER AND THE ARGUMENTS OF THE ASSESSEE AND AT PAGES 30 TO 32, THE LD. CIT(A) ACCEPTED THE EXPLANA TION OF THE ASSESSEE. FOR THE SAKE OF CLARITY, THE SAME IS REPRODUCED AS UNDE R: MY FINDINGS WOULD BE BASED ON THE FOLLOWING CONCL USIONS: [A] THAT THE A.O. APPEARS TO BE NOT FULLY CONVERSANT WI TH THE FACTS AND GROUNDS REALITIES OF THE CASE WHEN HE IS TAKIN G APPELLANTS LAST YEARS GROSS PROFIT RATE OF 21.40% ON SALE OF RS. 1 0087660/-, WHEREAS AS PER RECORD AND VIDE COL.7(B) OF AUDITORS REPOR T ON FORM NO. 3 CD, IT IS THE FIRST YEAR OF THE BUSINESS. PERHAPS, MIS CONCEPTION OF THIS VERY FACT HAS LED THE A.O. TO MAKE FURTHER ENQUIRIE S TO FIND OUT THE TRUE TAXABLE INCOME OF THE APPELLANT. [B] THAT THE A.O. IS INSISTING UPON THE STOCK TALL Y OF DIAMONDS AS PER 4CS PARAMETERS [ I.E. CARAT, COLOR, CLARITY & C OST], WHEREAS THE APPELLANT IS NOT DEALING IN LOOSE DIAMONDS BUT ENGA GED IN THE TRADE OF DIAMOND-STUDDED GOLD JEWELLERY ] DEALING IN ITS DIF FERENT VERITIES, DESIGNS, SIZES, QUALITIES BASED ON THE DAY-TO DAY C USTOMERS REQUIREMENTS, TRENDS & TENDENCIES OF THE MARKET. O N THE CONTRARY, THE APPELLANTS CASE IS THAT IT HAS APPLIED STANDARD ME THOD OF VALUATION OF CLOSING STOCK WHICH ARE ALSO GENERALLY APPLIED BY I DENTICAL BUSINESS HOUSE ENGAGED IN THIS LINE OF BUSINESS OF DIAMOND-S TUDDED GOLD JEWELLERY ( BOTH BRANDED AND /OR UNBRANDED] SUPPORT ED BY THE PURCHASE INVOICES ALREADY PROVIDED TO THE AO ALONG WITH PARTY-WISE, DATE-WISE DETAILS OF PURCHASE AND SALES. [C] THAT THE A.O. IS REITERATING THE APPELLANTS F AILURE TO FURNISH QUANTITATIVE AND QUALITATIVE DETAILS OF VARIOUS ITE MS OF ITS CLOSING STOCK, BECAUSE ACCORDING TO HIM THE APPELLANT HAS F AILED TO MAINTAIN 6 STOCK INVENTORIES IN ACCORDANCE WITH ITEM NO. 14 OF AS2, WHICH IS STATED TO BE CORRECT METHOD OF VALUATION AS LAID DO WN IN THE PRESCRIBED AS2 ISSUED BY THE ICIA. ON THE OTHER HAND, IT IS S EEN THAT THE APPELLANT HAS PREPARED STOCK INVENTORIES OF DIFFERE NT ITEMS OF JEWELLERY SHOWING THEIR RESPECTIVE G.P. RATES RANGI NG FROM 10.63% TO 25% [ THEREBY DISCLOSING AVERAGE GP RATE OF 12.75% ON GROSS TURN OVER] AS HAS BEEN DISCUSSED IN ABOVE PARA. 4 DISCUS SING BRIEF FACTS OF THE CASE. (D) THAT THE AO INSTEAD OF TAKING EXPERT OPINION/AS SISTANCE OF ANY OF THE APPROVED GOLD VALUERS AUTHORIZED BY THE WORT HY CCIT, AMRITSAR, BUT HAS OPTED TO APPLY ADHOC G.P. RATE ON FLAT BASIS; [E] THAT THE A.O. INSTEAD OF MAKING PLAUSIBLE COMPA RISON OF APPELLANTS BOOK RESULTS WITH THAT OF OTHER PROMINE NT AND LEADING LOCAL JEWELERS ENGAGED IN THE IDENTICAL LINE OF BUSINESS OF READY MADE JEWELLERY, IS MISLED BY HIS OWN ARBITRARY VALUATION METHOD WHICH ULTIMATELY FORCED HIM TO RESORT TO APPLY ADHOC G.P. RATE ON FLAT BASIS INSTEAD OF WORKING VALUATION OF C/STOCK ON ACTUAL C OST AFTER RESORTING TO VERIFY MAJOR PURCHASE/SALE BILLS U/S. 133[6]; [F] THAT THE A.O. HAS ALSO FAILED TO SEEK DIRECTION S OF HIS HIGHER AUTHORITIES FOR CONDUCTING SPECIAL AUDIT U/S. 142[2 A] HIGHLIGHTING THE PECULIAR FACTS/CIRCUMSTANCES OF THE CASE AND HAS OP TED TO ARRIVE AT HIS HALF-BAKED/ IMPRACTICAL CONCLUSIONS WITHOUT APPLYIN G THE FUNDAMENTAL METHOD OF STOCK VALUATION OTHER THAN APPLIED BY THE APPELLANT FIRM AND IN PRACTICE IN THE GOLD MARKET IN GENERAL; [G] THAT THE A.O. FAILS TO BRING ON RECORD AS TO ON WHAT MATERIAL/INFORMATION IN HIS POSSESSION/DOCUMENTARY EVIDENCE ON THE BASIS OF WHICH THE WAS BOUND TO REJECT THE APPELLAN TS BOOKS OF ACCOUNTS BY INVOKING THE PROVISION OF SECTION 145 A ND ULTIMATELY MAKING EX-PARTE ASSESSMENT UNILATORY. [H] THE A.O. HAS DISCUSSED IN DETAIL DISCREPANCIES, IN THE DIAMOND STUDDED JEWELLERY WITH REGARD TO INVENTORY OF THESE ITEMS. ON THIS BASIS, HE REJECTED THE BOOKS OF ACCOUNT OF THE APPE LLANT AND APPLIED G.P. RATE OF 25% ON THE ENTIRE SALES OF THE APPELLA NT BUT WITHOUT ANY DISCUSSIONS MADE IN THE BODY OF THE ASSESSMENT ORD ER IN RESPECT OF DISCREPANCIES PERTAINING GOLD JEWELLERY WHICH COMPR ISES 79% PART OF 7 THE TOTAL SALES ON WHICH THE APPELLANT HAS DISCLOSE D G.P. RATES RANGING FROM 10% TO 22%. FURTHER, IN ORDER TO JUSTIFY HIS A CTION OF APPLYING THE ESTIMATED GP RATE OF 25% BY COMPARING THE CURRE NT YEARS BOOK- RESULTS WITH LAST YEARS GROSS PROFIT RATE OF 21.40 % ON SALES OF RS. 1,00,87,660/- [ 1 ST PG., PARA.2 A.OS ASSTT. ORDER REFERS]. HOWEVER, IT IS NOT CLEAR FROM RECORD AS TO HOW THE A.O. HAS WOR KED OUT THE GP RATE OF 21.40% ON SALES OF RS. 1,00,87,660/- FOR THE LAS T YEAR I.E. ASSTT. YEAR 2006-07. WHEREAS THIS IS THE FIRST YEAR OF APPELLANTS BUSINESS. THIS FACT IS CERTIFIED BY THE APPELLANT S AUDITORS AGAINST COL.7(B), PAGE 1 OF THEIR REPORT ON FORM NO. 3CD. IT APPEARS THAT THE A.O. HAS NOT FULLY GONE THROUGH THE AUDIT REPORT FU RNISHED BY THE APPELLANT AND ITS ANNEXURE ATTACHED HEREWITH BEFORE ESTIMATING THE GROSS PROFIT RATE OF THE APPELLANT. COMPARATIVE BA SIS ADOPTED OF THE LAST YEARS G.P. ON WHICH THE ADDITION HAS BEEN JUS TIFIED BY THE A.O. IS NOT ON RECORD. (I) IN THIS WAY, THE A.O. IS NOT JUSTIFIED IN DERIV ING ADVERSE INFERENCE BY COMPARING WITH THE INCOMPARABLE. 6.2 IT HAS BEEN VEHEMENTLY CONTENDED THAT THE APPEL LANT IS DEALING IN VARIOUS OF ITEMS AND IT IS NOT FEASIBLE TO MAINT AIN ITEM-WISE QUALITATIVE AND QUANTITATIVE STOCK TALLY AND THEREF ORE, THE APPELLANT HAS BEEN VALUING ITS STOCK VALUATION ON THE BASIS OF AV ERAGE COST PRICE. BY DISAPPROVING THE APPELLANTS METHOD OF STOCK VALUAT ION AND BY REJECTING THE APPELLANTS BOOKS RESULTS, IT IS INCU MBENT UPON THE A.O. TO HIMSELF WORK OUT THE DIFFERENCE/ VARIATION IN ST OCK VALUATION BY APPLYING A PLAUSIBLE METHOD OF STOCK VALUATION, HOL DING IT AS ONE OF THE APPROVED AND AUTHENTIC PRINCIPLES OF STOCK VALU ATION IN THIS LINE OF BUSINESS AS PER PRUDENT COMMERCIAL ETHICS PREVAILIN G IN THE RELEVANT POINT OF TIME. ON THE CONTRARY, THE A.O. HAS ALSO R ESORTED TO DETERMINE THE NET ASSESSABLE PROFIT BY APPLYING FLAT RATE OF G.P. OF 25% AS HAS BEEN SHOWN BY THE APPELLANT IN RESPECT OF SALE OF I TS BRANDED JEWELLERY BUSINESS AND BY GIVING BLANKET COVERAGE ON ALL ITEM S OTHER THAN BRANDED JEWELLERY ITEMS. IN THE ABSENCE OF PIN-POIN TING ANY SPECIFIC INSTANCES OF INFIRMITY/IRREGULARITIES/GLARING MISTA KES IN ACCOUNTING PRINCIPLES BY THE A.O., I AM OF THE CONSIDERED OPIN ION THAT A.O. APPEARS TO BE NOT JUSTIFIED IN MAKING ADHOC TRADING ADDITION OF RUPEES, 37,64,534/- APPLYING THE AVERAGE G.P. RATE OF 25% ON DIFFERENT ITEMS OF JEWELLERY DEALT BY THE APPELLANT . THUS, THE APPELLANT-FIRM WOULD BE ENTITLED TO TOTAL RELIEF OF RS.37,64,534/-. 8 GROUNDS NO. 2. 7 AS FAR AS THE APPELLANTS ABOVE GROUND OF APPEAL CHALLENGING A.O.S ACTION OF INVOKING PROVISIONS OF SECTION 145 AND FRAMING ASSESSMENT U/S. 144 IS CONCERNED, AFTER GIVING THOU GHTFUL CONSIDERATION TO THE APPELLANTS SUBMISSION AS WEL L AS AOS FINDING GIVEN IN CONCLUDING PARA. OF HIS ASSESSMENT ORDER, I AM OF THE VIEW THAT THE A.O. HAS FAILED TO MAKE OUT ANY CASE FOR I NVOKING THE PROVISIONS OF SECTION 145 AND RESORTING TO FRAMING THE ASSESSMENT U/S. 144 AND ACCORDINGLY. I AM INCLINED TO AGREE WITH T HE APPELLANT THAT THE A.O. IS NOT JUSTIFIED IN HIS ACTION BY DOING SO. S INCE ON MERITS I HAVE ALREADY DELETED THE ENTIRE ADDITION OF RS. 37,64,63 4/-, I FEEL THAT NOW NO FURTHER COMMENTS ARE REQUIRED ON GR. NO. 2. 6. THE LD. DR, SH. AMRIK CHAND FILED WRITTEN SUBMIS SIONS AND ALSO READ THE SAME DURING THE COURSE OF APPELLATE PROCEEDINGS , WHICH FOR THE SAKE OF CLARITY ARE REPRODUCED AS UNDER: SUB: APPEAL NO.364/ASR/2011 M/S MALI RAM JEWELLE RY, HOUSE, THE MALL, AMRITSAR- WRITTEN SUBMISSIONS REGARDING -. 1) THE ASSESSEE ENGAGED IN TRADING IN DIAMOND A ND GOLD ORNAMENTS. THIS YEAR THE ASSESSEE HAS SHOWN GROSS PROFIT OF RS. 38. 99 LACS ON TOTAL SALE OF RS. 3.065 CRORES YIELDING A GROSS PROFIT RATE OF 12.80 % AS A GAINST GROSS PROFIT OF RS. 21.40% ON SALE OF RS. 1, 00, 87,660/-CRORE OF THE PROCEEDING YEAR. THE GP RATE DECLARED BY THE ASSESSEE THIS YEAR IS MUCH LESS THAN THE PRECEDING YEAR. 2) SALE BILLS FURNISHED BY THE ASSESSEE REVEALED NO DESCRIPTION OF THE ITEM AS WELL AS QUALITATIVE DETAIL OF THE DIAMOND STUDDED J EWELLERY. THE ASSESSEE HAD MENTIONED ONLY THE WEIGHT OF THE GOLD AND DIAMOND I N CARATS AND SALE CONSIDERATION IS MADE ON THE BASIS OF WEIGHT OF THE DIAMOND ONLY. THE ASSESSEE HAD PRODUCED MERE SUMMARY OF PURCHASE AND SALE BILLS THAT TOO NOT SUB STANTIATED WITH ANY DESCRIPTION OF ITEMS OR THEIR QUALITATIVE DETAILS IN THE ABSENCE O F WHICH THE ASSESSEES METHOD OF ACCOUNTING COULD NOT BE RELIED UPON AS WELL AS EXAC T PROFIT COULD NOT BE DERIVED. 3) STATEMENT OF SHRI VIJAY KAPOOR FATHE R OF SHRI AJAY KAPOOR PARTNER WHICH TOO CONFIRM THAT THE ASSESSEE HAS ADOPTED HIS OWN ACCOUNTING PROCEDURE OF MAINTAINING THE PURCHASE/SALE AND STOCKING OF THE D IAMOND ON THE CARAT BASIS THAT TOO CLUBBING THE DIAMOND IN A POOL OF QUANTITY BASED BI FURCATION AND AS SUCH NO TRUE PROFIT CAN BE ASCERTAINED IN THE ABSENCE OF THE DES CRIPTION AND QUALITATIVE DETAIL OF THE 9 ITEMS MAINTAINED BY THE ASSESSEE IN RESPECT OF PURC HASE/ SALE ON THE TRADING OF THE DIAMOND STUDDED JEWELLERY. 4) THE ASSESSEE FURNISHE D FURTHER CATEGORIZATION/BIFURCATION OF THE DIAMOND STUDDED JEWELLARY I.E. TYPE (I) RELATES TO DIAMOND VALUE RANGING BETWEEN 4500-8000, (II) RELATES TO DIAMOND VALUE RANGING BET WEEN 8000-10000 AND TYPE-III RELATES TO DIAMOND ABOVE RS.10,000/- BASED ON THE PR ICE OF THE DIAMOND. THOUGH THE ASSESSEE FOR HIS CONVENIENCE HAD CATEGORIZED THE ST UDDED JEWELLARY YET NO INFERENCE OF ANY DESCRIPTION DETAIL OR ANY IDENTIFICATION OF THE ITEMS COULD BE MADE FROM THE PURCHASE AND SALE BILL. EXCEPT CATEGORY (III) ITEM S WHERE THE ASSESSEE HAD PROVIDED THE DESCRIPTION, DETAILS AND CODE NO. OF THE DIAMOND. T HIS PRACTICE AN INCIDENTAL AND OBLIGATORY IN THE NATURE TO THE ASSESSEES NEED AS IN THE THESE CASES THE ASSESSEE WAS UNDER OBLIGATION TO SELL THE ITEMS ON M.R.P PRICES OR THE COST PRICES OF THE ITEMS AS LATER ON THE ASSESSEE WAS ENTITLED FOR TRADE DISCOU NT OF 25% ON THESE TYPES OF ITEMS. PURCHASE/SALE/STOCK BILLS ARE MAINTAINED IN A PROPE R WAY BY WHICH THE PROFIT COULD BE DERIVED PROPERLY. THERE IS A CLEAR DESCRIPTION OF T HE ITEMS PURCHASED AND SALE OF THE DIAMOND STUDDED JEWELLERY WITH A DISTINCT CODE NUMB ER AND OTHER DETAILS OF THE ITEMS GIVEN IN THE ANNEXURE TO PURCHASE BILL AND SUCH A D ETAIL WAS ALSO AVAILABLE IN THE SALE BILLS. 5) IN RESPECT OF OTHER JEWELLERY/OTHER CATEG ORIES OF STUDDED JEWELRY, THE ASSESSEE HAS FAILED TO FURNISH REQUISITE DETAILS I.E. DESCR IPTION OF THE ITEMS, QUALITATIVE DETAIL, PRICE OF EACH ITEM OF THE PURCHASE BILL, DESCRIPTION OF THE DIAMOND STUDDED ON THE JEWELLARY, DISTINCT CODE NO AS PER PURCHASE BILL. MO REOVER ,ON PERUSAL OF THE SALE BILLS FURNISHED REVEALED THAT ALMOST ALL THE SALE IS M ADE BY CASH WITH THE GENERAL DESCRIPTION ON THE SALE BILL I.E. GOLD ORNAMENTS WI TH WEIGHT OR DIAMOND WITH THE WEIGHT IN CARAT AND NO NAME AND COMPLETE ADDRESS OF THE CUSTOMERS IS GIVEN. IN THE ABSENCE OF NAME AND COMPLETE ADDRESS OF THE PARTIES TO WHOM THE SALE WAS MADE IT WAS NOT POSSIBLE TO ASCERTAIN OR VERIFY THE GENUINE NESS OF THE SALE OR THE PRICE OF THE SAME. THE ONUS LIE ON THE ASSESSEE TO PROVIDE & PRO VE THE CORRECTNESS OF THE SALE MADE BY HIM. 6) THE ASSESSEE WAS REFERRED PARA 7 OF HIS R EPLY WHEREBY HE FURNISHED PHOTO COPIES OF THE PURCHASE VOUCHERS IN SUPPORT OF HIS CLAIM OF ENTERING QUALITATIVE DETAIL. ON PERUSAL OF INVOICE NO. 6 ISSUED BY M.R.K. JEWELLER DATED 17.10.2006(RELATING TO TYPE I CATEGORY) THE DESCRIPTION OF THE ITEMS OF THE AR TICLES IS AS :- NEW ORNAMENT 18 CT. 741.220(GROSS WEIGHT)/ 683.220 (NET WEIGHT) 5,12,415 DIAMOND 290CT 14,50,000 7) THE ASSESSEE HAD ENTERED THE VALUATION OF THE 290 C T. DIAMOND IN LUMP-SUM POOL OF THE DIAMOND BASE INVENTORY AND THE VALUE OF THE ONE CARAT OF DIAMOND IS ARRIVED AT BY DIVIDING THE GROSS AMOUNT OF THE DIAMOND BY TOTAL N O. OF CARATS. HOWEVER, NO DESCRIPTION OF ANY ITEMS, NO. OF DIAMONDS ON THE PUR CHASE BILL DESCRIPTION OF ITEMS ALONG WITH EMBEDDED DIAMONDS IS GIVEN ON THE ABOVE PURCHASE BILLS. HENCE, NO 10 INFERENCE OF ANY PURCHASE AMOUNT OF ANY ITEMS OF DI AMOND STUDDED JEWELLERY COULD BE ARRIVED AT. THE ASSESSEES METHOD OF VALUATION BASE D ON THE SAME WEIGHT OF DIAMOND OF SAME QUALITY OR PRESENT IN THE PURCHASE BILLS IS BA SE LESS AND UNJUSTIFIABLE. THE ASSESSEE IN THE REPLY AGAIN AND AGAIN RETREATED THE SAME FACTS WHICH ARE NOT RELEVANT TO THE MAIN ISSUE AND TRED TO JUSTIFY HIS CLAIM OF VALUATION OF DIAMOND STUDDED JEWELLERY ON CARAT BASIS WITHOUT ANY CONCRETE EVIDE NCE. 8. IN THE ABSENCE OF THE INFORMATION ABOUT TH E QUALITY OF THE PURCHASE/SALES AND CLOSING STOCK VALUATION, THE ASSESSEE HAS MADE SALE AT VARYING PRICES AND THEREFORE, IT WAS UNVERIFIABLE AS SUCH INFORMATION WAS NOT AVA ILABLE WITH THE ASSESSEE. IT IS OBSERVED THAT THOUGH THE ASSESSEE HAS SUCH RECORDS OF QUALITY OF DIAMONDS, THE SAME WAS CONSCIOUSLY NOT PRODUCED. 9. IT IS FACT THAT IN THE DIAMOND BUSINESS , QUALITY IS INHERENTLY LINKED TO THE PRICE OF THE PRODUCT. DIAMONDS STUDDED ON THE JEWEL LERY ARE MADE AND POLISHED IN VARIOUS SHAPES AND SIZES AND THEIR CUT AND JESTER V ARIES RESULTING IN VARIATION IN PRICE. THEREFORE, ASSORTMENT IS A CONTINUOUS PROCESS OF MANUFACTURING AND TRADING. SEGREGATION OF POLISHED DIAMOND AND STUDDI NG THEM ON THE JEWELLARY ON QUALITY LINES IS A MUST BEFORE UNDERTAKING ANY SALE . THIS HAS TO BE INCORPORATED EITHER IN THE STOCK REGISTER OR A SEPARATE QUALITY REGISTER. VERIFICATION OF SALE AND CLOSING STOCK VALUATION BOTH ARE VERY CRUCIALLY DEP ENDENT ON QUALITY WISE ACCOUNT OF TRADING. HOWEVER, IN THE CASE OF THE ASSESSEE, THE AO HAD NO ACCESS TO THIS INFORMATION. 10. IN THE BACKGROUND OF THE FACTS DISCUSSE D IN THE FOREGOING PARES, IT CAN EASILY BE OBSERVED THAT THE ASSESSEE HAS NOT MAINTA INED DAY TO DAY STOCK TALLY QUALITATIVELY, QUANTITATIVELY WITH VALUE OF EACH ITE M, PROPER DETAIL OF CLOSING STOCK AND NO PROPER PURCHASE/SALE BILLS AND THAT THE BOO KS OF ACCOUNT WERE NOT CORRECT & COMPLETE TO THE EXTENT THAT THE EXACT PROFIT COUL D NOT DERIVED FROM THE SAME. THEREFORE, PROVISIONS OF SECTION 145(3)INVOKED, BOOK S OF ACCOUNTS REJECTED AND ESTIMATED THE PROFIT AT RS.76, 63,880/- BY APPLYING G P RATE OF 25% ON SALE OF 3.065 CRORE BEING REASONABLE AND JUSTIFIABLE AS THE ASSESSEE HIMSELF DECLARED IN RESPECT OF SALE OF CATEGORY-III ITEMS , AFTER ALLOWI NG ALL THE EXPENSES CLAIMED BY THE ASSESSEE IN HIS P&L ACCOUNT AND AFTER GOING THROUGH AND CONSIDERING THE EXPLANATION FURNISHED BY THE ASSESSEE. THUS, MADE AN ADDITION OF RS. 3764534/-. 11. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE W ENT IN APPEAL BEFORE THE LEARNED CIT(A) WHO DELETED THE ADDITION OF RS.37,64,5 34/- CONSIDERING AND ACCEPTING THE SUBMISSIONS MADE BY THE ASSESSEE. I T IS HELD THAT IN THE ABSENCE OF PIN-POINTING ANY SPECIFIC INSTANCES OF INFIRMITY/IR REGULARITIES/GLARING MISTAKES IN ACCOUNTING PRINCIPLES BY THE AO HE IS OF THE CONSID ERED OPINION THAT THE AO APPEARS TO BE NOT JUSTIFIED IN MAKING ADHOC TRADING ADDITION OF RS.37,64,534/-. 12. AS DISCUSSED IN THE FOREGOING PARAS AND IN THE CONCLUDING PARA-10 THE METHOD OF ACCOUNTING OF THE ASSESSEE DOES NOT SHOW TRUE PICTURE OF PROFIT AS IT HAS ALSO NOT MAINTAINED DAY TO DAY STOCK TALLY, QUALITAT IVELY, QUANTITATIVELY WITH VALUE OF EACH ITEM OR STOCK REGISTER AND DETAIL OF CLOSIN G STOCK ACCORDINGLY AND NO PROPER PURCHASE/SALE BILLS. IN THE CASE OF CIT VS.BRITISH PAINTS INDIA LTD.(1991). 188 ITR-44(SC), HELD THAT ITO IS NOT BOUND TO ACCE PT SYSTEM OF 11 ACCOUNTING. IT IS NOT ONLY THE RIGHT BUT THE DUTY OF THE AO TO CONSIDER WHETHER OR NOT THE BOOKS DISCLOSE THE TRUE STATE OF ACCOUNTING AND THE CORRECT INCOME CAN BE DEDUCED THERE FROM. IT IS IN CORRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE, THE CORRECTNESS OF WHICH HAD NOT BEEN QUESTIONED IN THE PAST. THERE IS NO ESTOPPELS IN THESE MATTERS, AND THE OFFI CER IS NOT BOUND BY THE METHOD FOLLOWED TO THE EARLIER YEAR.: THUS, THIS DECISION OF THE HONBLE SUPREME COURT SUPPORT THE CASE OF REVENUE. IN THE CASE OF SANJEEV WOOLLEN MILLS VS. CIT MUMBAI (2006) ITR 29(PAGE-1), IT IS HELD BY THE HONBLE SUPREME COURT THAT IF THE METHOD OF ACCOUNTING ADOPTED DOES NOT AFFORD TRUE PICTURE OF PROFIT, IT WOULD BE REJECTED BY THE AO PROVIDED THERE IS COGENT EVIDENC E BROUGHT ON RECORD BY THE AO. THIS JUDGEMENT OF THE HONBLE SUPREME COU RT ALSO SUPPORT THE CASE OF REVENUE. WHAT ARE THE COGENT EVIDENCE AS A LREADY DISCUSSED IN PARA-10. 13 THUS, THE LEARNED CIT(A) HAS ERRED IN DELE TING THE ADDITION MADE BY THE AO. IT IS, THEREFORE, PRAYED THAT THE ORDER OF T HE LEARNED CIT(A) MAY KINDLY BE SET-ASIDE. YOURS FAITHFULLY, (AMRIK CHAND), DCIT(DR), AMRITSAR. 7. THE LD. COUNSEL FOR THE ASSESSEE, MR. ANIL PURI, ADVOCATE, RELIED UPON THE SUBMISSIONS PLACED BEFORE THE LD. CIT(A), AVAI LABLE AT PARA 5 OF THE FINDINGS OF THE LD. CIT(A). HE FURTHER ARGUED THAT THESE EXPLANATIONS PLACED BEFORE THE LD. CIT(A) WERE ALSO AVAILABLE BEFORE T HE AO AND HE HAS NOT TAKEN THE SAID EXPLANATIONS IN THE RIGHT SPIRIT. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. IT WAS OBSERVED BY THE LD. CIT(A) AT PAGE 30 THAT THE IMPUGNED YEAR IS THE FIRST YEAR OF BUSINESS WHEREAS THE AO HAD MENTIONED ABOUT THE LAST YEARS GP RATE ON THE SALES. IT WAS OBSERVED BY THE LD. C IT(A) THAT PERHAPS, MISCONCEPTION OF THIS VERY FACT HAS LED THE AO TO M AKE FURTHER ENQUIRIES TO 12 FIND OUT THE TRUE TAXABLE INCOME OF THE ASSESSEE. W E HAVE PERUSED THE ORDER OF THE AO WHERE THE AO HAD MENTIONED ABOUT LAST YEA RS GP RATE AT 21.40% AND THE SALES AT RS.10087660/- AS MENTIONED IN THE PRECEDING PARAS. THERE IS CONTROVERSY IN THE FACTS NOTED BY BOTH THE AUTHOR ITIES WHICH REQUIRES A VERIFICATION AND EXAMINATION OF THE RECORD AT THE L EVEL OF THE A.O. THE LD. CIT(A) HAD MADE SUCH OBSERVATIONS WITHOUT GIVING AN Y OPPORTUNITY TO THE AO AND WITHOUT TAKING FOR ANY REMAND REPORT FROM THE AO. 8.1. IT WAS ALSO ARGUED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE IS NOT MANUFACTURER OF DIAMONDS AND GOLD ORNAMENTS BUT IS A TRADER. IT IS ALSO MENTIONED BY THE LD. CIT(A) AT PAGE 30 THAT TH E ASSESSEE IS ENGAGED IN THE TRADING OF DIAMOND STUDDED GOLD JEWELLERY. THE RE IS ALSO CONTROVERSY IN THE FACTS NOTED BY BOTH THE AUTHORITIES BELOW WHICH REQUIRES EXAMINATION OF THE RECORD AT AOS LEVEL. THE LD. CIT(A) HAD COME TO THE CONCLUSION WITHOUT GIVING ANY OPPORTUNITY TO THE AO AND WITHOU T CALLING THE REMAND REPORT FROM THE AO. THE LD. CIT(A) HAD OBSERVED THA T THE ASSESSEE HAD APPLIED STANDARD METHOD OF VALUATION OF CLOSING STO CK WHICH IS ALSO GENERALLY APPLIED BY IDENTICAL BUSINESS HOUSES ENGA GED IN THIS LINE OF BUSINESS. THIS OBSERVATION OF THE LD. CIT(A) IS AGA IN CONTROVERSIAL TO THE FACTS NOTED BY THE AO AND WITHOUT CALLING FOR ANY R EMAND REPORT FROM THE AO. 13 8.2. AT PAGE 30, THE LD. CIT(A) OBSERVED THAT THE A SSESSEE HAD PREPARED STOCK INVENTORIES OF DIFFERENT ITEMS OF JEWELLERY S HOWING THEIR RESPECTIVE GP RATES RANGING FROM 10.63% TO 25%. WHEREAS THE AOS OBSERVATIONS ARE THAT THE ASSESSEE IS NOT MAINTAINING ITEM-WISE DESCRIPTI ON OF EACH DIAMOND STUDDED GOLD JEWELLERY WITH DISTINCT CODE NO. AS RE GARDS THE PURCHASE AND SALE AND CLOSING STOCK IS CONCERNED. AS PER AO, TH E ASSESSEE IS MAINTAINING THE SAID DESCRIPTION OF EACH ITEM SOLD TO THE CUSTO MERS AND HAS NOT LINKED THE SAME WITH PURCHASE VIS--VIS THE STOCK REGISTER IN WHICH SUCH DETAIL IS NOT MAINTAINED WITHOUT WHICH IT IS NOT POSSIBLE TO WORK OUT OR COMPUTE THE EXACT QUANTITY W.R.T. QUALITY, THE DETAILS OF THE STOCK A ND VALUATION CANNOT BE MADE. THE AO HAS OBSERVED THAT THE ASSESSEE HAD CATEGORIZ ED THE DIAMOND STUDDED GOLD JEWELRY IN THE CATEGORY OF TYPE 1, TYPE II AN D TYPE III AS PER HIS CONVENIENCE AND WHICH IS NOT THE METHOD OF KEEPING THE STOCK AND IS NOT A RECOGNIZED METHOD. IN FACT, THE LD. CIT(A) IN THE PRESENT APPEAL, HAD ACCEPTED THE SAID METHOD OF KEEPING THE STOCK FOR T HE REASONS BEST KNOWN TO HIM. THE LD. CIT(A) HAS ALSO MENTIONED AT PAGE 30 T HAT THE AO HAS NOT TAKEN EXPERTS OPINION OR ASSISTANCE OF THE APPROV ED GOLD VALUERS. IN THIS REGARD, WE ARE OF THE VIEW THAT THE CLOSING STOCK AT THE CLOSE OF THE YEAR IS NOT AVAILABLE AT THE TIME OF THE ASSESSMENT AND, TH EREFORE, IT IS NOT POSSIBLE FOR THE AO TO GET THE VALUATION DONE FROM THE APPRO VED VALUER. THE 14 VALUATION IS POSSIBLE ONLY AT THE TIME OF SURVEY OR SEARCH IS MADE ON THE ASSESSEE AND THE FACTS ARE BROUGHT ON RECORD, WHICH IS NOT PRESENT CASE BEFORE US. 8.3. IT WAS ALSO ALLEGED BY THE LD. CIT(A) THAT TH E AO HAS NOT MADE THE COMPARISON WITH OTHER PROMINENT AND LEADING LOCAL J EWELERS AND HAD RESORTED TO APPLY ADHOC G.P. RATE. IN THIS REGARD, WE ARE OF THE VIEW THAT WHEN THE ASSESSEE HAS NOT MAINTAINED PURCHASES, S ALES AND THE CLOSING STOCK WITH RESPECT TO EACH AND EVERY ITEM THEN IT IS NOT POSSIBLE FOR THE AO TO KNOW AND COMPUTE THE EXACT QUANTITY OF THE PURCHAS E AND SALES AND THE CLOSING STOCK AND THEREFORE, IT MAY NOT BE POSSIBLE TO MAKE COMPARISON WITH OTHER JEWELERS AT THIS MOMENT. 8.4. IT WAS ALSO ALLEGED BY THE LD. CIT(A) THAT SPE CIAL AUDIT UNDER SECTION 142(2A) SHOULD HAVE BEEN OPTED BY THE AO. ALSO IT W AS ALLEGED THAT THE AO HAS NOT BROUGHT ON RECORD ANY DOCUMENTARY EVIDENCE TO REJECT THE BOOKS OF ACCOUNT. IN THIS REGARD, WE ARE OF THE VIEW THAT TH OUGH THERE WAS SUFFICIENT MATERIAL WITH THE AO TO REJECT THE BOOKS OF ACCOUNT , BUT OVER-ALL FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, AS DISCUSSED HE REINABOVE, THERE ARE LOT OF CONTROVERSIES IN THE ORDERS OF THE LD. CIT(A) AND THE A.O., WHICH REQUIRES EXAMINATION AND VERIFICATION AT THE LEVEL OF THE A. O. IT WILL BE IN THE INTEREST OF JUSTICE, IF THE MATTER IS RESTORED TO THE FILE O F THE AO WHO WILL DECIDE THE ISSUE DENOVO BUT BY AFFORDING AN OPPORTUNITY OF BE ING HEARD TO THE ASSESSEE 15 AND KEEPING INTO CONSIDERATION THE SUBMISSIONS PLAC ED BEFORE THE LD. CIT(A) IN PARA 5 OF CIT(A)S ORDER AT PAGES 4 TO 25. THUS, ALL THE GROUNDS OF THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11TH SEPTEMBER, 2012. SD/- SD/- (H.S. SIDHU) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 11TH SEPTEMBER, 2012 /SKR/ COPY OF THE ORDER FORWARDED TO: 1. THE ASSESSEE: M/S. MALLI RAM JEWELLERY HOUSE, AMRIT SAR. 2. THE ITO WARD V(3), AMRITSAR. 3. THE CIT(A),ASR. 4. THE CIT, ASR. 5. THE SR DR, ITAT, AMRITSAR. TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH: AMRITSAR.