The ACIT,Range-9, Surat V. M/s. Jodhani Exports, Surat

ITA 3645/AHD/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 8946 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 23-09-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 07-09-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANDIP GARG
• Assessee Lawyers: SN SOPARKARAR
• Keywords: Gross profit estimation; Rejection of books of accounts; Capital asset; Depreciation; Set aside
• Section: 80HHC; 37(1); 143(1); 143(2); 145; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI BHAVNESH SAINI,JM & SHRI A N PAHUJA,AM ITA NO.3645/AHD/2007 (ASSESSMENT YEAR:-2004-05) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-9, ROOM NO. 423,AAYAKAR BHAVAN, MAJURA GATE,SURAT SURAT V/S M/S JODHANI EXPORTS, F-2 JAYBHAVANI KRUPA, BACHKANIWALA COMPOUND, HIRABAUG, KAPDARA CHAR RASTA,VARACHHA ROAD [PAN: AACFD 0272 B] [APPELLANT] [RESPONDENT] ITA NO.3536/AHD/2007 (ASSESSMENT YEAR:-2004-05) M/S JODHANI EXPORTS, F-2 JAYBHAVANI KRUPA, BACHKANIWALA COMPOUND, HIRABAUG, KAPDARA CHAR RASTA,VARACHHA ROAD, SURAT-395006 V/S ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE-9, ROOM NO. 402,AAYAKAR BHAVAN, MAJURA GATE,SURAT [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI SANDIP GARG, DR ASSESSEE BY:- SHRI S N SOPARKAR,AR O R D E R A N PAHUJA: THESE CROSS APPEALS DIRECTED AGAINST AN ORDER DAT ED 19-06-2007 OF THE LD. CIT(APPEALS)-V, SURAT, RAISE THE FOLLOWING GROUNDS:- ITA NO.3645/AHD/2007[REVENUE] 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE ID. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS .61,84,485/-ON ACCOUNT OF LOW G.P. WHICH WAS DONE THROUGH REJECTIO N OF BOOKS OF ACCOUNT U/S. 145(3) OF IT ACT FOR DELIBERATELY NOT SUBMITTING QUALITATIVE DETAILS OF PRODUCTION AND CLOSING STOCK DURING THE ASSESSMENT PROCEEDINGS. ITA NOS.3536 & 3645/A/07 2 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE ID. CIT(A), BY APPLYING THE PROVISIONS OF RULE 115 OF I .T. RULES, HAS ERRED IN DELETING THE DISALLOWANCE OF RS.9,22,698/- OUT OF TOTAL RS.13,59,427/- DISALLOWED OUT OF THE PROVISIONS KEP T FOR EXCHANGE RATE DIFFERENCE INSPITE OF THE FACT THAT THE VALUAT ION OF FOREIGN EXCHANGE WAS DONE AT LATER DATE WHILE FILING RETURN OF INCOME. 3. IT IS, THEREFORE, PRAYED THAT THE APPEAL ORDER P ASSED BY THE LEARNED CIT(A) BE SET ASIDE AND THAT THE ASSESSMENT ORDER P ASSED BY THE ASSESSING OFFICER U/S.143(3) DATED 29.12.2006 BE RE STORED. ITA NO.3536/AHD/2007[ ASSESSEE] 1 THE LEARNED CIT(A)-V, SURAT ERRED IN UPHOLDING T HE ADDITION OF RS.4,36,729/- MADE BY THE ASSESSING OFFICER BEING D IFFERENCE PROVISION KEPT FOR EXCHANGE RATE DIFFERENCE REJECTI NG THE CONTENTION OF THE ASSESSEE THAT THE EXCHANGE DIFFERENCE WORKED OUT BY TAKING PREVALENT RATE OF EXCHANGE AS ON 31-03-2004 IN RESP ECT OF EXPORT CREDIT FACILITY FROM ANDHRA BANK, MUMBAI AND OTHER. 2 THE APPELLANT CRAVES LEAVE TO ADD, ALTER AND VARY ANY GROUND OF APPEAL. 2 ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL OF T HE REVENUE, FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RE TURN DECLARING INCOME OF RS.1,13,72,140/- FILED ON 29-10-2004 BY T HE ASSESSEE, MANUFACTURING DIAMONDS, AFTER BEING PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS TH E ACT], WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ON 27-01-2005. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT T HE ASSESSEE HAD SHOWN GP @ 8.12% ON THE TURNOVER OF RS.47,97,25,2 87/- IN THE YEAR UNDER CONSIDERATION AS AGAINST GP OF 10.59% ON THE TURN OVER OF RS.45,50,61,944/- IN THE PRECEDING ASSESSMENT YEAR. THE TREND OF GP IN THE VARIOUS ASSESSMENT YEARS REVEALED AS UNDER: AY TURNOVER GP RATE OF GP 2001-02 RS.43,36,74,348 RS.5,18,44,181 11.95 % 2002-03 RS.42,56,89,858 RS.4,92,18,706 11.56 % 2003-04 RS.45,50,61,944 RS.4,82,29,113 10.59 % 2004-05 RS.47,97,25,287 RS.3,39,68,521 8.12 % 2005-06 RS.60,02,00,938 RS.4,64,87,938 7.75 % ITA NOS.3536 & 3645/A/07 3 2.1 THE AO FURTHER OBSERVED THAT THE G.P @ 11 .95% IN THE AY 2001-02 FELL TO 8.12% IN THE A.Y.2004-05 AND 7.75% IN THE A.Y.2 005-06. ACCORDING TO THE AO, THE ASSESSEE SYSTEMATICALLY AND IN A PLANNED WA Y BROUGHT DOWN THE G.P TO REDUCE THE TAX LIABILITY IN VIEW OF THE FACT THAT D EDUCTION U/S 80HHC OF THE ACT @ 100% WAS AVAILABLE IN THE AY 2001-02 WHILE IT WAS O NLY 30% IN THE A.Y. 2004-05 AND NIL IN THE AY 2005-06. 2.2 THE AO FURTHER MENTIONED THAT THOUGH THE ASSE SSEE MAINTAINED QUANTITATIVE INVENTORY OF CLOSING STOCK, IT FAILED TO FURNISH QU ALITATIVE DETAILS OF CLOSING STOCK NOR IT FURNISHED QUALITATIVE DETAILS OF PRODUCTION AS W ELL AS OPENING STOCK OF POLISHED DIAMONDS. SINCE PRICE OF DIAMONDS DEPENDS UPON QUAL ITY OF DIAMONDS, IN THE ABSENCE OF QUALITATIVE DETAILS, IT WAS NOT POSSIBLE TO ASCERTAIN AS TO WHETHER OR NOT THE VALUATION OF CLOSING STOCK OR SALES PRICE W AS CORRECT . WHILE EXPLAINING THE PROCESS OF MANUFACTURING DIAMONDS , THE AO OBSERVED THAT SINCE PRICE OF DIAMONDS DEPENDS UPON QUALITY I.E. CARAT, CUT, COLO UR, CLARITY AND ITS SIZE, IN THE ABSENCE OF QUALITATIVE DETAILS OF PRODUCTION OF DI AMOND FROM EACH LOT, IT WAS NOT ASCERTAINABLE AS TO WHICH TYPE OF DIAMOND WAS PRODU CED FROM A PARTICULAR LOT. SINCE THERE WAS STEEP FALL IN GP VIS--VIS PRECEDIN G YEARS , IN THE ABSENCE OF DETAILS, THE AO SHOWCAUSED THE ASSESSEE, PROPOSING TO REJECT THE BOOK RESULTS U/S 145(3) OF THE ACT. IN RESPONSE THE ASSESSEE SUB MITTED THAT THE BACKWARD VALUATION OF CLOSING STOCK SOUGHT TO BE AD OPTED ON THE BASIS OF THE SALES WAS NOT IN ACCORDANCE WITH THE ACCOUNTING STA NDARD, THE ASSESSEE HAVING VALUED THE POLISHED DIAMONDS AT COST OR NET REALIZA BLE MARKET VALUE, WHICHEVER WAS LOWER. SINCE THE SAID METHOD HAD BEEN FOLLOWE D CONSISTENTLY AND ACCEPTED BY THE AO IN THE SCRUTINY ASSESSMENTS OF THE PRECE DING YEARS WHILE THE GP DECLINED DUE TO RECESSION IN INTERNATIONAL MARKET, INTERNATIONAL COMPETITION, FLUCTUATION IN EXCHANGE RATE, INCREASE IN PURCHASE PRICE OF ROUGH DIAMONDS, DISPROPORTIONATE INCREASE IN SALES OF CUT AND POLIS HED DIAMONDS, INCREASE IN LABOUR CHARGES ETC., THE ASSESSEE PLEADED WHILE REL YING UPON A FEW JUDGMENTS THAT BOOK RESULTS MAY BE ACCEPTED. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE FOR WANT OF QUALITATIV E DETAILS OF STOCK AND IN THE ITA NOS.3536 & 3645/A/07 4 ABSENCE OF ANY CO-RELATION BETWEEN ROUGH DIAMONDS U SED IN PRODUCTION AND POLISHED DIAMONDS ,BE IT IN QUANTITY OR QUALITY. TH E AO OBSERVED THAT WITHOUT ANY CORRELATION BETWEEN ROUGH DIAMONDS USED IN PRODUCTI ON AND POLISHED ONES, IT WAS NOT POSSIBLE TO VERIFY WHAT QUALITY OF DIAMOND WAS PRODUCED AND WHAT QUALITY WAS SOLD AND WHAT QUALITY WAS AVAILABLE AS CLOSING STOCK. SINCE PURCHASE VALUE OF ROUGH DIAMONDS RANGED BETWEEN RS.302/- TO RS.4, 159/- PER CARAT WHILE SALE PRICE RANGED BETWEEN RS.1596/- TO RS.1,79,185/- PE R CARAT AND AVERAGE SALE PRICE WORKED OUT TO RS.6887/CARAT, IN THE ABSENCE O F INVENTORY WITH QUANTITY AND QUALITY, THE AO CONCLUDED THAT IT WAS JUST NOT POS SIBLE TO VALUE THE CLOSING STOCK CORRECTLY. ACCORDINGLY ,WHILE CITING INSTANCES OF P URCHASE AND SALE PRICE AND CONSIDERING THE FACT THAT THE ASSESSEE DECLINED TO PRODUCE THE RELEVANT RECORDS BASED ON QUALITY OF DIAMONDS MERELY ON THE GROUND T HAT THE REQUISITE RECORDS WERE NOT MAINTAINED, RELYING UPON THE DECISIONS I N THE CASE OF BRITISH PRINTS INDIA PVT. LTD., 188 ITR 44(SC)AND DCIT VS. SAMIR D IAMONDS EXPORT PVT. LTD., 71 ITD 75, THE AO REJECTED BOOK RESULTS HAVING RECOUR SE TO PROVISIONS OF SEC. 145(3) OF THE ACT AND ADDED AN AMOUNT OF RS.51,71,875/-. TOWARDS SUPPRESSION OF CLOSING STOCK BESIDES AN AMOUNT OF RS.61,84,485/- ON ACCOUNT OF DECLINE IN GP RATE FROM 10.59% SHOWN IN THE PRECEDING ASSESSMENT YEAR TO 8.12% IN THE YEAR UNDER CONSIDERATION, APPLYING THE GP RATE OF 8.37%. THE ADDITION TOWARDS CLOSING STOCK WAS TELESCOPED AGAINST THE ADDITION O N ACCOUNT OF LOW GP. 3. ON APPEAL, THE LEARNED CIT(A) DELETED THE A FORESAID ADDITIONS IN THE FOLLOWING TERMS:- AFTER ANALYZING THE DETAILS AS DISCUSSED BY THE A.O. IN ASSESSMENT ORDER AND ALSO KEEPING IN VIEW THE DETAILED SUBMISS ION AS MADE BY THE A.R., IT IS FOUND THAT THOUGH THE APPELLANT DID NOT MAINTAIN QUALITY-WISE DETAILS OF MANUFACTURED / POLISHED DIAMONDS, BUT AT THE SAME TIME, IT IS FOUND THAT IT HAD MAINTAINED THE DETAILS OF IMPOR T-WISE PRODUCTION OF DIAMONDS (LOTWISE) SHOWING THE QUANTITY AND THE LAB OUR CHARGES PAID. FURTHER, IT IS SEEN THAT THE AO DID NOT POINT OUT A NY SPECIFIC DEFECT IN ITS BOOKS OF ACCOUNTS AND SIMPLY REJECTED THE RESULTS B Y WORKING OUT THE SUPPRESSION IN THE VALUATION OF CLOSING STOCK BY AP PLYING A G.P. RATE OF 8.12% WHICH WAS DISCLOSED BY THE APPELLANT WITHOUT CONSIDERING THE EXCHANGE RATE DIFFERENCE RECEIPTS. IT IS SEEN THAT WHILE WORKING OUT THE SUPPRESSION IN THE VALUATION OF CLOSING STOCK, THE A.O., IN HIS WORKING AS MENTIONED ON PAGE NO. 12 OF THE ASSESSMENT ORDER HA D DEDUCTED THE ITA NOS.3536 & 3645/A/07 5 EXCHANGE RATE RECEIPTS OF RS.1,29,45,920/- AND FOUN D OUT THE SALES TURNOVER OF THE APPELLANT AND BY APPLYING THE G.P. RATE OF 8.12% ,HE FINALLY WORKED OUT THE COST OF SALES AT RS.42,88,76,882/- A ND AFTER DEDUCTING THE SAME, FROM THE TOTAL COST OF OPENING STOCK AND THE DIAMONDS MANUFACTURED DURING THE YEAR AT RS.58,72,85,401/- , HE FOUND OUT THE VALUE OF CLOSING STOCK AT RS.15,84,08,519/- AND FURTHER, AFTER DEDUC TING THE VALUE OF CLOSING STOCK AS SHOWN BY THE APPELLANT AT RS.15,32,36,644/ , HE FINALLY ARRIVED AT THE SUPPRESSION IN THE VALUATION OF CLOSING STOCK A T RS.51,71,875/- . IN THIS REGARD, ON THE OTHER HAND, IT HAS BEEN SUBMITTED BY THE A.R. ( AS MENTIONED ABOVE ) THAT IF THE RECEIPT ON ACCOUNT OF EXCHANGE RATE DIFFERENCE IS DEDUCTED FROM THE SALES TURNOVER OF T HE APPELLANT THEN THE ACTUAL SALE RECEIPT WORKED OUT AT RS.46,67,79,367/- (RS.47,97,25,287/- - RS.1,29,45,920/- EXCHANGE RATE DIFFERENCE RECEIPTS) AND WHEN THE GROSS PROFIT AMOUNT AS DISCLOSED BY IT IS DIVIDED BY THIS FIGURE THE G.P RATIO COMES TO 7% ( 3,26,74,555 / 46,67,79,367 X 100 ) AN D THE A.O. SHOULD HAVE APPLIED THE G.P. RATIO AT 7% INSTEAD OF 8.12% TO WORK OUT THE VALUE OF THE CLOSING STOCK. IT IS SEEN THAT THE APPELLANT HA D FILED ITS WORKING BY TAKING THE SAME FIGURE AS TAKEN UP BY THE A.O., ON PAGE 12 OF THE ASSESSMENT ORDER AND BY APPLYING THE G.P. RATIO AT 7% PROVED THAT THE VALUE OF THE CLOSING STOCK WAS 15,32,36,644/- WHICH WAS LOWER THAN THE VALUE AS SHOWN BY IT IN ITS BOOKS OF ACCOUNTS BY AN AMOUNT OF RS.56,613/- ( RS.15,32,36,644/- AS SHOWN IN THE BOOKS OF ACCOUN TS - RS.15,31,80,031/- AS WORKED OUT BY IT APPLYING THE G.P. RATIO AT 7% ) . IN THIS WAY, IT IS FOUND THAT THE METHOD OF VALUATION TO FIND OUT THE SUPPRE SSION IN THE VALUATION OF CLOSING STOCK AS ADOPTED BY THE A.O., WAS FULL OF E RRORS AND HENCE, THE SAME IS TREATED AS BAD IN LAW AND ACCORDINGLY, THE SUPPRESSED VALUE OF CLOSING STOCK AS WORKED OUT BY HIM IS DECLARED AS A BSURD . FURTHER, THE PLEA OF THE A.R., THAT THE A.O., HAD N OT POINTED OUT ANY DEFECT IN ITS BOOKS OF ACCOUNTS AND REJECTING OF ITS BOOK RESULTS BY HIM WITHOUT THAT WAS ARBITRARY IN NATURE IS ACCEPTABLE IN THE EYES O F LAW AS THE VARIOUS DECISIONS RELIED UPON BY HIM ( AS CITED ABOVE ) ARE FOUND FULLY APPLICABLE ON THIS ISSUE. I, THEREFORE, IN VIEW OF THE ABOVE D ISCUSSED FACTS AND BY KEEPING IN VIEW THE VARIOUS DECISIONS OF THE HON'BL E ITAT., AHMEDABAD SUCH AS IN THE CASE OF RAJESH TEA CO., VS. ITO., 35 TTJ 350 ( AHD) ; M/S. PUSHPANJALI DYEING AND PRINTING MILLS, VS. JT. CIT, 72TTJ, 886 ( AHD) AND M/S. SUREKHA BINDING WORKS, VS. ITO., 38TTJ350 ( AH D) AND FINALLY OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF M/S. VIKR AM PLASTICS VS. CIT., 239-ITR-161 (GUJ) HOLD THAT THE CONTENTION AS RAISE D BY THE A.R., THAT ADDITION ON ACCOUNT OF G.P. RATE WITHOUT POINTING O UT ANY SPECIFIC DEFECTS IN BOOKS OF ACCOUNTS, IS ILLEGAL AND HENCE, THE SAME I S DELETED. ACCORDINGLY, THESE GROUNDS OF APPEAL ARE ALLOWED. 4. THE REVENUE IS NOW IN APPEAL BEFORE US IN THEIR GROUND NO.1 AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A) IN DELETING THE ADDITION OF RS.61,84,485/- WITHOUT RAISING ANY DISP UTE IN RELATION TO DELETION OF ADDITION ON ACCOUNT OF CLOSING STOCK. T HE LEARNED DR ITA NOS.3536 & 3645/A/07 6 WHILE CARRYING US THROUGH THE IMPUGNED ORDER VEHEME NTLY SUPPORTED THE FINDINGS OF THE AO AND FURTHER CONTENDED THAT W HILE WORKING OUT THE GROSS PROFIT, THE ASSESSEE THOUGH EXCLUDED EXCH ANGE RATE DIFFERENCE FROM THE TURNOVER, IT DID NOT EXCLUDE EX CHANGE RATE FLUCTUATION FROM THE IMPORTS. SINCE THE ASSESSEE DI D NOT FURNISH QUALITATIVE DETAILS OF ITS PRODUCTION NOR THE DETAI LS REGARDING SIZE OR NUMBER OF DIAMONDS PRODUCED , THE AO WAS JUSTIFIED IN MAKING THE ADDITION. HE ADDED THAT THE FINDING OF THE LEARNED CIT(A) WAS RECORDED ON COMPLETELY WRONG FACTS. 5. ON THE OTHER HAND, THE LEARNED AR ON BEHALF OF THE ASSESSEE WHILE CARRYING US THROUGH PAGE 8, 9, 10, 13, 20-21, 28 TO 30 AND 224 OF THE PAPER BOOK CONTENDED THAT THE FINDING OF THE LEARNED CIT(A) WAS IN ACCORDANCE WITH THE FACTS ON RECORD. HE POIN TED OUT THAT THE REVENUE WAS NOT IN APPEAL AGAINST THE DELETION OF A DDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK WHILE NO OTHE R DEFECTS WERE POINTED OUT BY THE AO. THE ASSESSEE HAD FURNISHED QUANTITATIVE STATEMENT OF STOCK. AFTER EXCLUDING FOREIGN EXCHANG E DIFFERENCE FROM EXPORTS, THEIR GROSS PROFIT WORKS OUT TO 7% WHILE G ROSS PROFIT WORKED OUT TO 10.71% IF SUCH FLUCTUATION WAS INCLUDED IN E XPORTS BUT EXCLUDED FROM IMPORTS. THE AO COMPLETELY IGNORED TH E FACT THEIR GROSS PROFIT AFTER CONSIDERING THE EXCHANGE RATE FL UCTUATION WAS BETTER IN THE YEAR UNDER CONSIDERATION AS COMPARED TO THE PRECEDING YEAR. WHILE REFERRING TO PARA 4.2 OF THE ASSESSMENT ORDER, THE LEARNED AR CONTENDED THAT THE AO HAD ACCEPTED QUANT ITATIVE RECORDS WHILE IT WAS PRACTICALLY IMPOSSIBLE TO MAINTAIN QUA LITY WISE RECORD OF EACH POLISHED DIAMOND. LOT-WISE DETAILS OF IMPORT A ND PRODUCTION WERE DULY SUBMITTED TO THE AO AND THE AO DID NOT PO INT OUT ANY DEFECTS THEREIN. HE REITERATED THAT THOUGH THE AO M ADE TWO ADDITIONS; ONE ON ACCOUNT OF LOW GP AND THE OTHER ON ACCOUNT OF CLOSING STOCK, HOWEVER, HE TELESCOPED THE ADDITION OF STOCK AGAINST THE TRADING ADDITION. THE LEARNED CIT(A) DELETED BO TH THE ADDITIONS. THE REVENUE IS NOT IN APPEAL BEFORE THE TRIBUNAL IN RESPECT OF ITA NOS.3536 & 3645/A/07 7 DELETION OF THE ADDITION OF RS.51,71,875/- ON ACCOU NT OF STOCK. SINCE VALUATION OF STOCK HAS BEEN ACCEPTED BY THE REVENUE WHILE THERE ARE NO OTHER DEFECTS IN THE BOOKS OF ACCOUNT, THE L EARNED CIT(A) RIGHTLY DELETED THE ADDITION, THE LD. AR ADDED. 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. AS IS APPARENT FROM THE FACTS OF THE CASE AND AS OB SERVED BY THE LD. CIT(A), UNDISPUTEDLY, THE ASSESSEE DID NOT MAINTAIN QUALITY -WISE DETAILS OF MANUFACTURED / POLISHED DIAMONDS WHILE GP RATE ACCORDING TO THE AO DECLINED TO 8.12% IN THE YEAR UNDER CONSIDERATION VIS--VIS GP RATE OF 10.5 9% IN THE PRECEDING YEAR. THOUGH THE ASSESSEE CONTENDED THAT THEY MAINTAINED THE DETAILS OF IMPORT-WISE PRODUCTION OF DIAMONDS (LOTWISE) SHOWING THE QUANTI TY AND THE LABOUR CHARGES PAID, THE AO ,WITHOUT POINTING OUT ANY SPECIFIC DEF ECTS IN ITS BOOKS OF ACCOUNTS REJECTED THE BOOK RESULTS FOR WANT OF QUALITY WIS E RECORDS OF DIAMONDS AND ADDED AN AMOUNT OF RS.51,71,875/- TOWARDS SUPPRESSI ON IN THE CLOSING STOCK, COMPUTED BY APPLYING G.P. RATE OF 8.12%, DISCLOSED BY THE ASSESSEE, WITHOUT REDUCING THE EXCHANGE RATE DIFFERENCE FROM EXPORTS OR IMPORTS . THE LD. CIT(A) ACCEPTED THE WORKING OF THE ASSESSEE IN CALCULATIN G GP RATE OF 7% BY DEDUCTING EXCHANGE RATE DIFFERENCE FROM THE SALES AND ACCORDI NGLY, OBSERVED THAT THE VALUE OF THE CLOSING STOCK WAS LOWER THAN THE VALUE AS SH OWN BY THE ASSESSEE IN THEIR BOOKS AND THEREFORE, DELETED THE ADDITION. SINCE THE AO DID NOT POINT OUT ANY DEFECT IN ITS BOOKS OF ACCOUNTS RELYING ON VARIOUS DECISIONS , THE LD. CIT(A) DELETED THE ADDITION ON ACCOUNT OF LOW G.P. ALSO. THE ASSESSEE PLEADED BEFORE THE LOWER AUTHORITIES AND EVEN BEFORE US THAT THE STOCK OF POLISHED DIAMONDS HAS CONSISTENTLY BEEN VALUED AT COST OR NET REALIZ ABLE VALUE, WHICHEVER IS LOWER AND THE SAID METHOD OF ACCOUNTING HAS BEEN ACCEPTE D BY THE AO IN THE PRECEDING ASSESSMENT YEARS. THE REVENUE DID NOT DIS PUTE THIS PLEA ON BEHALF OF THE ASSESSEE AT ANY STAGE . INSTEAD OF FINDING ANY FLAW IN THE METHOD OF ACCOUNTING FOLLOWED REGULARLY BY THE ASSESSEE, THE AO WORKED OUT THE VALUE OF CLOSING INVENTORY OF CUT AND POLISHED DIAMONDS BACK WARDLY ON THE BASIS OF SALES MADE BY THE ASSSESSEE AND CONSIDERING THE COST OF GOODS SOLD AFTER DEDUCTING THE GROSS PROFIT. THE LD. CIT(A) DELETED THE ADD ITION SINCE APPROACH OF THE AO WAS NOT IN ACCORDANCE WITH LAW. WE ARE OF THE OPINION THAT T HE AO IS NOT ITA NOS.3536 & 3645/A/07 8 EMPOWERED TO CHANGE THE METHOD OF ACCOUNTING UNDER THE GUISE OF SUBSTITUTING THE VALUE OF CLOSING STOCK. IN THE CASE OF CIT VS. BRITISH PAINTS INDIA LTD.,188 ITR 44(SC), THE HONBLE APEX COURT ITSELF STATED THAT THE AO IS ENTITLED TO DISTURB THE VALUE PUT ON THE CLOSING STOCK WHEREIN THE COST PRI CE ADOPTED WAS NOT REFLECTING ALL THE EXPENSES WHICH WOULD GO TO MAKE UP THE COST . IN OTHER WORDS, THERE IS NO DEPARTURE FROM THE BASIC PRINCIPLE THAT IT IS THE O PTION OF THE ASSESSEE TO ADOPT A PARTICULAR METHOD OF VALUATION OF CLOSING STOCK, NA MELY, THE COST OR MARKET PRICE, WHICHEVER IS LOWER, AS PER SETTLED PRINCIPLES OF CO MMERCIAL ACCOUNTING. IN ANY CASE, THE ISSUE OF VALUATION OF CLOSING STOCK INVEN TORY AND RESULTANT ADDITION DELETED BY THE LD. CIT(A), IS NOT BEFORE US. THEREF ORE, WE REFRAIN FROM RECORDING ANY FINDINGS ON THIS ASPECT. 7. AS REGARDS TRADING ADDITION, UNDISPUTEDLY AND AS POINTED OUT BY THE LD. CIT(A), NO OTHER DEFECTS WERE POINTED OUT BY THE AO BEFORE REJECTING THE BOOK RESULTS . WE ARE OF THE OPINION THAT IT IS DIFFICU LT TO CATALOGUE VARIOUS TYPES OF DEFECTS IN THE ACCOUNT BOOKS OF AN ASSESSEE WHICH M AY RENDER REJECTION OF ACCOUNTS ON THE GROUND THAT ACCOUNTS ARE NOT COMPLE TE FROM WHICH THE CORRECT PROFIT CANNOT BE DEDUCED. MERELY BECAUSE QUALITATI VE DETAILS OF DIAMONDS WERE NOT MAINTAINED IN THE FORM EXPECTED BY THE AO, BOO K RESULTS CAN NOT BE DISCARDED ALTOGETHER. INDISPUTABLY, RECORDS WERE BE ING MAINTAINED IN THE SAME MANNER IN THE PRECEDING YEARS, WHEN BOOK RESULTS H AVE BEEN ACCEPTED BY THE AO. THE LD. DR APPEARING BEFORE US DID NOT REFER US TO ANY MATERIAL CONTROVERTING THE AFORESAID FINDINGS OF FACTS RECORDED BY THE LD. CIT(A). IN THE ABSENCE OF ANY DEFECTS WHATSOEVER, WE ARE OF THE OPINION THAT THER E WAS NO GROUND FOR REJECTING THE BOOK RESULTS AND MAKING ANY TRADING ADDITION. THOUGH THE AO POINTED OUT GP RATE DECLINED IN THE YEAR UNDER CONSIDERATION TO 8 .12% FROM 10.59% IN THE PRECEDING YEAR, THE AO DID NOT POINT OUT ANY DEFECT S IN THE BOOKS NOR DOUBTED THE GENUINENESS OF EXPENDITURE. HONBLE GAUHATI HIGH COURT IN ALUMINIUM INDUSTRIES (P) LTD. V. CIT (I.T.R. NO. 12 OF 1990) OBSERVED THAT A LOWER RATE OF GROSS PROFIT DECLARED BY THE ASSESSEE AS COMPARED T O THE PREVIOUS YEAR, WOULD NOT IN ITSELF BE SUFFICIENT TO JUSTIFY ANY ADDITION . THE MERE FACT THAT THE PERCENTAGE OF LOSS OR GROSS PROFIT IS HIGH OR LOW IN A PARTICU LAR YEAR DOES NOT NECESSARILY LEAD TO INFERENCE THAT THERE HAS BEEN SUPPRESSION. LOW P ROFIT IS NEITHER A CIRCUMSTANCE ITA NOS.3536 & 3645/A/07 9 NOR MATERIAL TO JUSTIFY ADDITION OF PROFITS. THE R ATIO OF THE JUDGMENTS IN DHAKESWARI COTTON MILLS LTD. V. CIT [1954] 26 ITR 775 (SC); RAGHUBIR MANDAL HARIHAR MANDAL V. STATE OF BIHAR [1957] 8 STC 770 (SC); STATE OF K ERALA V. C. VELUKUTTY [1966] 60 ITR 239 (SC); STATE OF ORISSA V. MAHARAJA SHRI B.P. SINGH DEO [1970] 76 ITR 690 (SC); BRIJ BHUSAN LAL PARDUMAN KUMAR V. CIT [1978] 115 ITR 524 (SC); CHOUTHMAL AGARWALLA V. CIT [1962] 46 ITR 262 (ASSAM); R.V.S. AND SONS DAIRY FARM V. CIT [2002] 257 ITR 764 (MAD); INTERNATIONAL FOREST CO. V. CIT [1975] 101 ITR 721 (J & K) ; M. DURAI RAJ V. CIT [1972] 83 ITR 484 (KER); RAMCHANDRA RAMNIVAS V. STATE OF ORISSA [1970] 25 STC 501 (ORIS SA); ACTION ELECTRICALS V. DEPUTY CIT [2002] 258 ITR 188 (DELHI) AND KAMAL KUMAR SAHARIA V. CIT [1995] 216 ITR 217 (GAUHATI) INDICATE THAT THE AO IS NOT FETTERED BY ANY TECHNICAL RULES OF EVIDENCE AND PLEADINGS, AND HE IS ENTITLED TO AC T ON MATERIAL WHICH ARE NOT ACCEPTABLE IN EVIDENCE IN A COURT OF LAW, BUT WHILE MAKING THE ASSESSMENT UNDER THE PRINCIPLES OF BEST JUDGMENT, THE INCOME-TAX OFF ICER IS NOT ENTITLED TO MAKE A PURE GUESS WITHOUT REFERENCE TO ANY EVIDENCE OR MAT ERIAL. THERE MUST BE SOMETHING MORE THAN A MERE SUSPICION TO SUPPORT THE ASSESSMENT. LOW PROFIT IN A PARTICULAR YEAR IN ITSELF CANNOT BE A GROUND FOR IN VOKING THE POWERS OF BEST JUDGMENT ASSESSMENT WITHOUT SUPPORT OF ANY MATERIAL ON RECORD. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. AMITBHAI GUNWANTBHAI, 129 ITR 573 HELD THAT IF THERE WAS NO CHALLENGE TO THE TRANSACT IONS REPRESENTED IN THE BOOKS THEN IT IS NOT OPEN TO REVENUE TO CONTEND THAT WHAT IS SHOWN BY THE ENTRIES IS NOT THE REAL STATE OF AFFAIRS. SECONDLY, EVEN IF FOR S OME REASON, THE BOOKS ARE REJECTED IT IS NOT OPEN TO THE AO TO MAKE ANY ADDIT ION ON ESTIMATE BASIS OR ON PURE GUESS WORK. NO SPECIFIC DISCREPANCIES OR DEFE CTS IN THE BOOKS OF ACCOUNT OF THE ASSESSEE HAVE BEEN POINTED OUT BEFORE US NOR WAS ANY MATERIAL BROUGHT TO OUR NOTICE TO ESTABLISH THAT PURCHASES WERE INFLAT ED OR RECEIPTS SUPPRESSED. IN THESE CIRCUMSTANCES , WE ARE OPINION THAT THAT THE RE WAS NO JUSTIFICATION IN INVOKING THE PROVISIONS OF SECTION 145 OF THE ACT [ VIKRAM PLASTICS,239 ITR 161(GUJ)]. THE BURDEN OF SHOWING THAT THE APPARENT STATE OF AFFAIRS IS NOT THE REAL ONE IS VERY HEAVY ON THE DEPARTMENT [BEDI & CO. PVT . LTD. VS. CIT,144 ITR 352(KARN) AFFIRMED BY HONBLE SUPREME COURT IN 230 ITR 580] WHILE NO OTHER MATERIAL HAS BEEN PLACED BEFORE US TO DOUBT THE NA TURE OF THE TRANSACTIONS RECORDED IN THE BOOKS. IF THERE WAS NO CHALLENGE TO THE TRANSACTIONS REPRE SENTED ITA NOS.3536 & 3645/A/07 10 IN THE BOOKS, THEN IT IS NOT OPEN TO REVENUE TO CON TEND THAT WHAT IS SHOWN BY THE ENTRIES IS NOT THE REAL STATE OF AFFAIRS. IN THE LI GHT OF THESE OBSERVATIONS OF THE HONBLE JURISDICTIONAL HIGH COURT, WE HAVE NO HESIT ATION IN UPHOLDING THE FINDINGS OF THE LD. CIT(A). THEREFORE, GROUND NO.1 IN THE A PPEAL OF THE REVENUE IS DISMISSED. 8. GROUND NO.2 IN THE APPEAL OF THE REVENUE RELATE S TO DELETION OF DISALLOWANCE OF RS.9,22,698/- OUT OF TOTAL DISAL LOWANCE OF RS.13,59,427/- ATTRIBUTABLE TO PROVISION FOR FOREIG N EXCHANGE RATE DIFFERENCE WHILE GROUND NO.1 RAISED BY THE ASSESSEE RELATES TO UPHOLDING OF DISALLOWANCE TO THE EXTENT OF RS.4,36, 729/-. THE AO NOTICED THAT THE ASSESSEE MADE A PROVISION FOR RS.6 9,29,968/- AS ON 31-03-2004 ON ACCOUNT OF FLUCTUATION IN EXCHANGE RA TE IN RESPECT OF SUNDRY DEBTORS AND RS.55,70,541/- ON ACCOUNT OF SUN DRY CREDITORS. SINCE THE PROVISIONS WERE MADE AFTER THE YEAR END THAT IS AT THE TIME OF FILING OF RETURN, THE AO DISALLOWED THE CLA IM FOR LOSS IN EXCHANGE RATE VARIATION TO THE EXTENT OF RS.13,59,4 27/-. 9. ON APPEAL, THE LEARNED CIT(A) ALLOWED THE RELIE F OF RS.9,22,698/- WITH THE FOLLOWING OBSERVATIONS:- 5. WHILE GOING THROUGH THE CONTENTS OF GROUND OF A PPEAL NO.4, IT IS FOUND THAT THE APPELLANT HAS AGITATED AGAINST THE D ISALLOWANCE OF EXCHANGE RATE DIFFERENCE RECEIPTS ON SUNDRY DEBTORS AND CRED ITORS AS ON 31/03/2004 BY THE A.O., AMOUNTING TO RS.13,59,427/- BY HOLDING THAT THE SAME WAS CLAIMED AFTER THE CLOSURE OF BOOKS OF ACCOUNTS WHIC H WAS NOT PERMISSIBLE AS PER LAW. WHILE GOING THROUGH THE ASSESSMENT ORDE R, IT IS FOUND THAT THE APPELLANT ON ACCOUNT OF FLUCTUATION IN EXCHANGE RAT ES HAD MADE A PROVISION FOR RS.69,29,968/- AS ON 31/03/2004 FOR S UNDRY DEBTORS AND RS.55,70,541/- ON SUNDRY CREDITORS. ACCORDING TO TH E A.O., THE PROVISIONS WAS MADE ON VALUATION OF FOREIGN EXCHANGE RATES AFT ER THE YEAR AND I.E. AT THE TIME OF FILING OF RETURN OF INCOME. FURTHER, AC CORDING TO THE A.O., THE APPELLANT HAD CLAIMED EXCHANGE LOSS TO THE EXTENT O F DIFFERENCE OF THE TWO PROVISIONS AT RS.13,59,427/- WHICH WAS NOT IN ORDER AS ACCORDING TO HIM, BOOK RESULTS COULD NOT BE CHANGED AFTER 31/03/2004 AND HENCE, HE DISALLOWED THE SAID AMOUNT AND ADDED THE SAME TO IT S TOTAL INCOME FOR TAX PURPOSES. ITA NOS.3536 & 3645/A/07 11 6. DURING THE APPELLATE PROCEEDINGS, IT HAS BEEN SU BMITTED BY THE A.R. THAT THE OBSERVATIONS OF THE A.O. WAS NOT CORRECT. ACCORDING TO HIM, THE AMOUNT OF EXCHANGE RATE DIFFERENCE RECEIPT / LOSS W AS WORKED OUT ON THE BASIS OF FOREIGN CURRENCY RATES PREVALENT ON 31/03/ 2004 KEEPING IN VIEW THE PROCEDURE AS LAID DOWN IN RULE115 OF THE I.T. R ULES, 1962 AND THEREFORE, THE SAME MAY BE ALLOWED. BESIDES ABOVE, THE A.R. HAS ALSO THE OUTSTANDING AMOUNT IN THE FORM OF FOREIGN EXCHANGE RATE DIFFERENCE ON 31/03/2004 WAS RS.55,70,541/- BUT HOWEVER, THE APPE LLANT HAD CLAIMED THE SAME AT RS.51,33,812/- AND IN THIS WAY, ITS INC OME WOULD GO UP BY RS.4,36,729/- BECAUSE THE SAID AMOUNT WAS NOT CONSI DERED BY IT FOR THE CLAIM OF DEDUCTION. IN SUPPORT OF HIS CONTENTION, I T IS SEEN THAT THE A.R. HAS FILED THE WORKING OF FOREIGN EXCHANGE DIFFERENCE RE CEIPT / LOSS AS ON 31/03/2004 ALSO. ACCORDING TO HIM, THIS WORKING WAS ALSO FILED BEFORE THE A.O., DURING THE ASSESSMENT PROCEEDINGS, BUT HE REF USED TO APPRECIATE THE SAME AND PROCEEDED TO MAKE IMPUGNED ADDITION. THUS, ON THE BASIS OF THE ABOVE DISCUSSED FACTS, IT HAS BEEN PLEADED BY T HE A.R., THAT THE ADDITION AS MADE BY THE A.O. MAY BE DELETED. 7. I HAVE PERUSED THE FACTS OF THE CASE AS DISCUSSE D BY THE A.O., AND ALSO CAREFULLY WENT THROUGH THE SUBMISSION MADE BY THE A.R. AFTER ANALYZING THE FACTS AND THE DETAILS AS SUBMITTED BY THE A.R., IT IS SEEN THAT THE APPELLANT HAD WORKED OUT THE AMOUNT OF EXCHANGE DIFFERENCE BY TAKING THE PREVALENT RATES OF FOREIGN CURRENCIES AS ON 31/ 03/2004 AND THEREFORE, THE FINDING OF THE A.O., THAT IT HAD WORKED OUT THE SAME AFTER THE CLOSURE OF BOOKS OF ACCOUNTS IS NOT ACCEPTABLE. FURTHER, IT IS SEEN THAT IN ITS DECISION THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V S. AMBA IMPEX, DTD. 20/02/2005 HAS OBSERVED THAT THE RECEIPT IN THE NAT URE OF EXCHANGE RATE DIFFERENCE QUALIFIES FOR DEDUCTION U/S. 80HHC OF TH E ACT. I, THEREFORE, KEEPING THE ABOVE DISCUSSED FACTS AND ALSO BY RELYI NG UPON THE FINDINGS OF GUJARAT HIGH COURT IN THE CASE OF M/S.AMBA IMPEX, ( SUPRA) HOLD THAT THE ADDITION AS MADE BY THE A.O., AMOUNTING TO RS.13,59 ,427/- WAS NOT JUSTIFIED AT ALL AND HENCE, THE SAME IS DELETED. HO WEVER, FOR THE AMOUNT OF RS.4,36,729/- WHICH WAS NOT CLAIMED BY IT AS PART O F ITS EXCHANGE RECEIPT, THE SAME IS LIABLE TO BE TAXED AND HENCE, ADDITION TO THIS EXTENT ( RS.4,36,729 ) IS HEREBY CONFIRMED . THUS, IN THIS W AY, THE APPELLANT GETS A RELIEF OF RS.9,22,698/-. ACCORDINGLY, THIS GROUND O F APPEAL IS PARTLY ALLOWED. 10 BOTH THE REVENUE AS WELL AS THE ASSESSEE ARE IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A) .THE LD. DR SUPPORTED THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASSESSEE CONTENDED THAT THEY HAVE VALUED THE SUNDRY DEBTORS AND SUNDRY CREDITORS AS ON 31-03-2004 IN ACCORDANCE WIT H RULE 115 OF THE IT RULES, 1962. WHILE RELYING UPON THE DECISION IN THE CASE OF ITA NOS.3536 & 3645/A/07 12 ONGC LTD. VS. CIT,322 ITR 380(SC), THE LEARNED AR C ONTENDED THAT THE AO WAS NOT JUSTIFIED IN MAKING THE ADDITION.. 11. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT THE LD. CIT(A) DELETED THE A DDITION OF RS.13,59,427/- ON THE GROUND THAT THE AMOUNT OF EX CHANGE RATE DIFFERENCE RECEIPT / LOSS WAS WORKED OUT ON THE BASIS OF FOREI GN CURRENCY RATES PREVALENT ON 31/03/2004 IN TERMS OF RULE 115 OF THE I.T. RULES, 1962. SINCE THE LD. AR ON BEHALF OF THE ASSESSEE ITSELF ADMITTED BEFORE THE LD. CIT(A) THAT OUTSTANDING AMOUNT IN THE FORM OF EXCHANGE RATE DIFFERENCE AS O N 31.3.2004 WAS RS.55,70,541/- WHILE THE ASSESSEE ADOPTED RS. 51,33 ,812/- AND THEREFORE, INCOME WOULD GO UP BY RS.4,36,729/- IN TERMS OF WOR KING FILED BEFORE THE LD. CIT(A), THE SAID RECEIPT OF RS.4,36,729/- WAS ,THE REFORE DIRECTED TO BE TAXED IN THE LIGHT OF THE DECISION IN CIT VS. AMBA IMPEX,282 ITR 144(GUJ) . WE FIND THAT THE HONBLE APEX COURT IN THEIR DECISION IN THE CAS E OF SUTLEJ COTTON MILLS LTD. VS. CIT 1978 CTR (SC) 155 (1979) 116 ITR 1 (SC) WHILE ADJUDICATING A SIMILAR ISSUE IN RELATION TO GAIN/LOSS ATTRIBUTABLE TO EXCHANGE R ATE DIFFERENCE OBSERVED AS UNDER: ' THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SET TLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANO THER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADING PROFIT OR LOSS I F THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASS ET OR AS A PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OT HER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUC H PROFIT OR LOSS WOULD BE OF CAPITAL NATURE. 12. FOLLOWING THE AFORESAID DECISION, HONBLE APE X COURT IN THE CASE OF CIT VS. WOODWARD GOVERNER INDIA PVT. LTD.,312 ITR 254(SC) H ELD THAT THE 'LOSS' SUFFERED BY THE ASSESSEE ON ACCOUNT OF THE EXCHANGE DIFFEREN CE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE UNDER S. 37 (1) OF THE 1961 ACT. HONBLE SUPREME COURT WHILE REFERRING TO THE AS-11 DEALIN G WITH ACCOUNTING TREATMENT FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE S LAID DOWN THE FOLLOWING PRINCIPLES IN ALLOWING THE EXPENDITURE IN THEIR AFO RECITED DECISION : ITA NOS.3536 & 3645/A/07 13 21. IN CONCLUSION, WE MAY STATE THAT IN ORDER TO F IND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCO UNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE S YSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS D UE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (II) WHETHER TH E SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CONSISTENT A ND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; ( V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE B OOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONAB LE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 13. APPLYING THE AFORESAID FACTORS, HONBLE AP EX COURT IN ONGC LTD.(SUPRA) HELD THAT THE 'LOSS' SUFFERED BY THE ASSESSEE, MAIN TAINING ACCOUNTS REGULARLY ON MERCANTILE SYSTEM AND FOLLOWING ACCOUNTING STANDAR DS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), ON ACCOUN T OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE-SHEET WA S AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE ACT, NOTWITHSTANDING THA T THE LIABILITY HAD NOT BEEN DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE OCCURRED. 14. IN THE INSTANT CASE, INDISPUTABLY, THE AMO UNT OF EXCHANGE GAIN/LOSS HAS BEEN WORKED OUT BY TAKING THE PREVALENT RATES OF FO REIGN CURRENCIES AS ON 31/03/2004 IN TERMS OF RULE 115 OF THE IT RULES,19 62 WHILE THE ASSESSEE ADMITTED BEFORE THE LD. CIT(A) THAT ITS INCOME WOUL D GO UP BY RS.4,36,729/-. NEITHER THE LD. DR NOR THE LD. AR ON BEHALF OF THE ASSESSEE PLACED ANY MATERIAL BEFORE US, CONTROVERTING THE AFORESAID FINDINGS OF FACTS RECORDED BY THE LD. CIT(A). IN THE LIGHT OF VIEW TAKEN BY THE HONBLE APEX COU RT IN THEIR AFORESAID DECISIONS AND IN THE ABSENCE OF ANY BASIS , WE ARE NOT INCLI NED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THEREFORE, GROUND NO.2 IN THE APPEAL OF THE REVENUE AND GROUND NO.1 IN THE APPEAL OF THE ASSESSEE ARE DISM ISSED. 15. GROUND NO.3 IN THE APPEAL OF THE REVENUE ,BEI NG MERE PRAYER, DOES NOT REQUIRE ANY SEPARATE ADJUDICATION WHILE N O ADDITIONAL ITA NOS.3536 & 3645/A/07 14 GROUND HAVING BEEN RAISED IN TERMS OF THE RESIDUARY GROUND NO.2 IN THE APPEAL OF THE ASSESSEE, BOTH THESE GROUNDS ARE DISMISSED. 16. IN THE RESULT, BOTH THESE APPEALS ARE DISMI SSED. ORDER PRONOUNCED IN THE COURT TODAY ON 31-12-2010 SD/- SD/- (BHAVNESH SAINI) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 31-12-2010 COPY OF THE ORDER FORWARDED TO: 1. M/S JODHANI EXPORTS, F-2 SAI BHAVANI KRUPA, NEAR KAPODARA CHAR RASTA, SURAT 2. ACIT, CIRCLE-9, SURAT 3. CIT CONCERNED 4. CIT(A)-V, SURAT 5. DR, BENCH-D, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD