The ACIT, Circle-9, Surat V. M/s. Pavasia Exports, Surat

ITA 4010/AHD/2008

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 72893 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 13-08-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 11-12-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: O P VAISHNAV
• Assessee Lawyers: RN VEPARIAR
• Keywords: Gross profit estimation; Rejection of books of accounts; Depreciation; Opportunity of being heard; Fair market value
• Section: 80HHC; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMADABAD , , , , BEFORE SHRI D.K.TYAGI , JUDICIAL MEMBER AND .., SHRI T.R. MEENA, ACCOUNTANT MEMBER .. , ! ! ! ! ITA NO. 2310/AHD/2008 ASSESSMENT YEAR : 2004-05 M/S. PAVASIA EXPORTS, 405-412, SUPER DIAMOND MARKET, VARACHHA ROAD, SURAT V/S . THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-9, SURAT PAN NO. AA DFP5297P (APPELLANT) .. (RESPONDENT) ITA NO. 4010/AHD/2008 ASSESSMENT YEAR : 2005-06 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-9, SURAT V/S . M/S. PAVASIA EXPORTS, 405-412, SUPER DIAMOND MARKET, VARACHHA ROAD, SURAT (APPELLANT) .. (RESPONDENT) '# $ % BY REVENUE SHRI O. P. VAISHNAV, CIT.D.R. # $ % /BY ASSESSEE SHRI R. N. VEPARI, A.R. &'#( $ ) /DATE OF HEARING 21.01.2014 *+, $ ) /DATE OF PRONOUNCEMENT 24.01.2014 O R D E R PER : SHRI T.R.MEENA, ACCOUNTANT MEMBER THESE TWO APPEALS ARE FILED BY THE ASSESSEE AND REV ENUE. THESE APPEALS ARE EMANATED FROM THE ORDER OF THE LD. CIT( APPEALS)-V, SURAT, ORDER ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 2 DATED 10.03.2008 FOR A.Y. 2004-05 IN ASSESSEES APP EAL AND ORDER DATED 22.09.2008 FOR A.Y. 2005-06 IN REVENUES APPEAL.. BOTH APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS C OMMON ORDER FOR THE SAKE OF CONVENIENCE. THE EFFECTIVE GROUNDS OF BOTH APPE ALS ARE AS UNDER: GROUNDS OF ITA NO. 2310/AHD/2008 (ASSESSESS APPEAL FOR A.Y. 04-05) (I) REJECTION OF BOOK_RESULT:- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFI RMING REJECTION OF BOOK RESULT MADE BY THE ASSESSING OFFI CER. (2) THE APPELLANT SUBMITS THAT THE LEARNED COMMISSI ONER OF INCOME-TAX (APPEALS) FAILED TO APPRECIATE THE NATUR E OF DIAMOND BUSINESS AND ALSO THE FACT THAT IT IS IMPOSSIBLE TO HAVE QUALITATIVE DETAILS IN CASE OF DIAMONDS AS THERE AR E NO QUALITIES OF DIAMONDS AS EACH DIAMOND IS QUALITY BY ITSELF. (II) ENHANCEMENT OF INCOME:- (1) WHILE THE ASSESSING OFFICER HAS MADE ADDITION O F 1% GROSS PROFIT, THE LEARNED COMMISSIONER OF INCOME-TAX (APP EALS) HAS ENHANCED INCOME TO 4.5% OF THE NET PROFIT. (2) THE APPELLANT SUBMITS THAT THE LEARNED COMMISSI ONER OF INCOME-TAX (APPEALS) WAS NOT JUSTIFIED IN ENHANCING INCOME BY ESTIMATING NET PROFIT OF 4.5% WHEN THE ASSESSING OF FICER HAD ENHANCED IT BY GROSS PROFIT OF 1%. (3) THE APPELLANT SUBMITS THAT ON THE FACTS AND CIR CUMSTANCES OF THE CASE, THE GROSS PROFIT ADDITION MADE BY THE ASSESSI NG OFFICER AND ENHANCEMENT BY THE LEARNED COMMISSIONER OF INCO ME-TAX (APPEALS) OF 4.5% WAS NOT JUSTIFIED. (4) WITHOUT PREJUDICE TO THE ABOVE, THE LEARN ED COMMISSIONER OF INCOME-TAX (APPEALS) OUGHT TO HAVE TAKEN INTO CO NSIDERATION THE COMPARABLE RATES OF PROFIT SHOWN BY SEVERAL CO NCERNS MENTIONED BY HIM ON PAGE 27 OF HIS ORDER. (5) THE APPELLANT FURTHER SUBMITS THAT THERE WAS NO BASIS TO COMPARE THE CASE OF RAVJIBHAI DHAMELIYA WHO WAS MER ELY PROCESSOR OF DIAMONDS AND THE APPELLANT IS NOT AWAR E OF THE PARTICULARS OF OTHER THREE CASES MENTIONED BY HIM. ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 3 (6) THE APPELLANT SUBMITS THAT THE ESTIMATE OF NET PROFIT AT 4.5% IS ARBITRARY AND HIGHLY EXCESSIVE. (7) THE APPELLANT SUBMITS THAT BASED ON THE A BOVE, THE LEARNED CIT(A) HAS INCORRECTLY WORKED OUT NET PROFIT OF RS .1,37,04,301 ON TURNOVER OF RS.30,45,40,026 WITHOUT CONSIDERING IMPACT OF EXCHANGE FLUCTUATION DIFFERENCE. (III) DEDUCTION U/S. 80HHC- (1) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) HAS NOT DEALT WITH GROUND NO. III IN RESPECT OF DEDUCTION U /S. 80HHC OF THE ACT. GROUND OF ITA NO. 4010/AHD/2008 (REVENUES APPEAL) 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A), HAS ERRED IN DELETING THE ADDITION ON ACCOU NT OF ESTIMATION GROSS PROFIT OF RS.70,81,679/- MADE BY THE A.O. BY REJECTING THE BOOK RESULT OF THE ASSESSEE, WITHOUT APPRECIATING THE FA CTS OF THE CASE THAT THE ASSESSEE FAILED TO SUBSTANTIATE THE GROSS PROFI T SHOWN BY IT. 2. THE FIRST GROUND OF ASSESSEES APPEAL IS AGAINST REJECTION OF BOOK RESULT U/S.145(3) OF THE IT ACT AND ENHANCEMENT OF INCOME. THE ASSESSEE IS A PARTNERSHIP FIRM, IS ENGAGED IN THE BUSINESS OF IMP ORT AND EXPORT OF DIAMONDS DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE HAD SHOWN GROSS PROFIT OF RS.2,06,41,100% @ 6.78% ON TOTAL TURNOVER OF RS.30, 45,40,026/-. AS AGAINST THIS, IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, THE ASSESSEE HAD SHOWN GROSS PROFIT OF RS.2,16,60,649/- ON THE GROSS SALES OF RS.26,89,27,570/- @ 8.04%. THUS, THERE IS A FALL IN THE GROSS PROFIT R ATIO DURING THE YEAR UNDER CONSIDERATION BY 1.26%. BEFORE GOING INTO THE DETA ILED DISCUSSION OF VALUATION OF CLOSING STOCK AS WELL AS GROSS PROFIT RATIO, THE LD. A.O. ANALYZED THE IMPORTANCE OF MAINTENANCE OF QUALITY DETAILS FOR AR RIVING AT CORRECT BOOK RESULT. ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 4 DISCUSSION ON THE PECULIAR NATURE OF DIAMOND BUSINE SS 2(I). THE ASSESSEE USED TO IMPORT ROUGH DIAMONDS IN LOTS. THE PRICE OF THESE LOTS VARIES FROM LOT TO LOT, DEPENDING UPON THE QUA LITY OF THE ROUGH DIAMONDS CONTAINED IN THE LOTS. AFTER THE, RECEIPT OF THE L OTS, THE ASSESSEE IN ORDER TO GET POLISHED DIAMONDS ASSORT THE LOT, FOR THE PURPOSE O F SEGREGATING THE ROUGH DIAMONDS INTO TWO PARTS I.E. THE ROUGH DIAMONDS FRO M WHICH POLISHED DIAMONDS CAN BE MADE AND THE OTHERS FROM WHICH NO P OLISHED DIAMONDS OR DIAMONDS OF LOWER QUALITY CAN BE MADE. THE IDENTIFI ED ROUGH DIAMONDS ARE FURTHER SEGREGATED INTO DIFFERENT CATEGORIES DEPEND ING UPON THE QUALITY OF ROUGH DIAMONDS THESE ARE THEN GIVEN TO THE LABOURER S IN PACKETS FOR FURTHER PROCESS OF CLEAVING AND POLISHING. IT WOULD BE NEC ESSARY TO MENTION THAT SOMETIMES THE QUANTITY OF ROUGH DIAMONDS IN A PACKE T RANGES FROM ONE TO FIFTY. SOMETIMES, THE UPPER LIMIT MAY FURTHER BE EX TENDED TO ANY LIMIT. THUS, FOR A PRUDENT BUSINESS MAN, IT BECOMES NECESSARY TO HAV E A RECORD OF BOTH THE QUANTITY IN TERMS OF CARATS AS WELL AS QUALITY OF R OUGH DIAMONDS GIVEN TO EACH LABOUR CONTRACTOR OR TO EACH LABOURER, AS IT IS ONL Y FROM THESE PACKETS, THE POLISHED DIAMONDS WOULD COME OUT. THE LABOURERS / C ONTRACTORS AFTER DOING THE EXERCISE OF CLEAVING AND POLISHING, RETURN THE POLISHED DIAMONDS ALONG WITH THE RESIDUAL TO THE BUSINESS MAN BOTH IN WEIGH T AND PIECES. THE ASSESSEE, AFTER SEGREGATING THEM QUALITY WISE, FIX THE SALE PRICE. THIS WOULD MEAN, THE ASSESSEE IS IN FULL KNOWLEDGE OF THE QUAL ITY OF EACH AND EVERY DIAMOND MANUFACTURED OUT OF THE ROUGH DIAMONDS. THI S PARTICULAR KNOWLEDGE OF THE QUALITY OF THE DIAMOND IS NECESSITATED FROM THE FACT THE VALUE OF ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 5 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 KNOWN FACT THAT THE PRICE OF DIAMONDS DEPEND UPON 4 CS. THEY ARE (I) CARAT (II) CUT (III) COLOUR AND (IV) CLARITY. 2(II). THIS ASPECT MAY BE ELABORATED BY TAKING EACH FACTOR INTO ACCOUNT SEPARATELY. THUS, 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 DIA MOND HAVING ALL 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, IE., SIMILAR CUT, COLOUR AND CLAR ITY WOULD NOT BE RS. 50,000 IE. (5000 X 10) BUT MAY BE AROUND RS. 1 LAC OR MORE, SI MILARLY, THE PRICE OF A .05 CARAT OR 5 CENTS MAY BE AROUND RS, 400 INSTEAD OF R S. 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 PROPORTION OF INCREA SE IN THE WEIGHT OF SAME QUALITY OF DIAMOND. SAME CRITERIA WOULD APPLY IN TH E CASE OF CUT, I.E. IF A DIAMOND IS WEIGHING 10 CENTS BUT WITH INFERIOR QUAL ITY OF CUTS COSTS RS. 2,000, A DIAMOND OF SUPER OR CUT BUT OF SAME WEIGHT, IE,, CARAT, COLOUR AND CLARITY MAY COST RS. 3,000. SIMILAR CONSIDERATIONS APPLY TO THE OTHER FACTORS, VIZ., COLOUR AND QUALITY. THE LESS COLOUR A DIAMOND HAS OR IN O THER WORDS, THE MORE IT IS ON WHITER SIDE, FOR THE SAME CARAT, CUT CLARITY, THE H IGHER WOULD BE ITS PRICE. THE SAME CAN BE STATED ABOUT THE CLARITY OF DIAMONDS. 2(III). IN VIEW OF THE PECULIARITY OF THE BUSINESS, IT BECOMES NECESSARY TO ASCERTAIN THE PRODUCTION OF THE DIAMONDS BOTH IN TE RMS OF QUALITY AND QUANTITY. ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 6 IN THIS BACKDROP, ON EXAMINATION OF AUDIT REPORT IN FORM 3CD FURNISHED ALONG WITH THE RETURN IT WAS SEEN THAT THE ASSESSEE HAD G IVEN PARTICULARS OF ITEMS FORMING PART OF OPENING AND CLOSING STOCK IN TERMS OF QUANTITY AND VALUE. THE DETAILS GIVEN IN THE SCHEDULE ARE AS UNDER:- ITEM OPENING (CARATS) VALUE (RS.) CLOSING (CARATS) VALUE (RS.) ROUGH DIAMONDS 25,170 3,75,76,768 57,534 6,21,64,051 POLISHED DIAMONDS 18,139.03 6,78, 64,250 16,500 6,79,82,113 REJECTED DIAMOND 12,312 21,417 THE A.O. GAVE REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE. THE ASSESSEE HAD NOT PROVIDED QUALITY-WISE DETAILS ALON GWITH THE ABOVE. SAID EXPLANATION FOR VALUATION OF CLOSING STOCK, WHICH W AS REPEATEDLY WAS CALLED FOR BY THE A.O. AT THE TIME OF ASSESSMENT. THE ASSESSE E SUBMITTED REPLY, WHICH WAS CONSIDERED BY THE A.O. AFTER CONSIDERING THE A SSESSEES REPLY, THE A.O. OBSERVED AS UNDER: 6.5 I HAVE CAREFULLY GONE THROUGH THE SUBMISSIONS OF THE ASSESSEE. THE ASSESSEE HAS SAID THAT THE VALUATION OF THE CLO SING STOCK OF POLISHED DIAMONDS IS BASED ON 4CS VIZ. CUT, COLOUR, CLARITY AND CARAT. FURTHER, THERE ARE AT LEAST 12 GRADING ATTRIBUTES VIZ. LUSTE R, COLOUR, HUE, FLUORESCENCE, FLUORESCENCE COLOUR, POLISH SYMMET RY, TABLE INCLUSION, BLACK INCLUSION, OPEN INCLUSION, INCLUSION NATTER, INTERNAL GRAINING AND CULET. BUT THE ASSESSEE HAS NOT FURNISHED EVEN THE DETAILS OF 4 CS AS WELL AS NUMBER O F PIECES PER CARAT. FURTHER, THE ASSES SEE HAS SAID THAT IT IS NOT POSSIBLE TO KEEP RECORDS OF THE QUALITY OF THE DIAMOND; THEREFORE, REJECTION OF BOOKS OF ACCOUNTS ON THE GROUND THAT Q UALITATIVE DETAILS ARE NOT MAINTAINED IS NOT CORRECT SINCE THE COMPLETE QUANTI TATIVE INFORMATION IS CERTIFIED BY THE AUDITOR U/S.44AB OF THE INCOME-TAX ACT. THE ASSESSEE HAS ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 7 FURNISHED THE STATEMENT OF SALES REALIZATION MADE P ER CARAT WHICH IS AT THE RATE OF 7775.48 WHEREAS THE OPENING STOCK IS OF RS. 3731.23 THAT MEANS THAT THE OPENING STOCK WAS OF LOWER VALUE WHEREAS T HE COST OF PRODUCTION COMES TO RS.6601 PER CARAT. THE GOODS WERE MAINLY SOLD FROM THE MANUFACTURED STOCK AND NOT FROM THE OPENING HENCE T HE CLOSING STOCK OF THE POLISHED DIAMOND CONTAINED STOCK OF LOWER VAL UE. THE ASSESSEE'S REPLY IN THIS REGARD IS INCORRECT SINCE THE COST OF PRODUCTION COMES TO 7920.23 PER CARAT AND NOT 6601 PER CARAT AS IS GIVE N BY THE ASSESSEE. FURTHER, THE ASSESSEE HAS PROVIDED DETAILS OF CLOSI NG STOCK OF POLISHED DIAMONDS AS ON 31.3.2004 WHICH IS HAVING DESCRIPTIO N CUT, COLOUR, CARAT AND RATE. THE ASSESSEE HAS NOT FURNISHED ANY DETAI LS ABOUT THE NUMBER OF PIECES PER CARAT. THE IMPORTANCE OF NUMBER OF PIEC ES PER CARAT AS ALREADY BEEN DISCUSSED ELABORATELY. FURTHER, THE EX PORT INVOICES ALSO INDICATES THE DESCRIPTION OF NUMBER OF PIECES PER C ARAT. SO THE VALUATION AS GIVEN BY THE ASSESSEE IS NOT ACCEPTABLE. EVEN T HE ASSESSEE'S PLEA THAT THE CLOSING STOCK MOSTLY CONSISTS OF THE STOCK WHICH WAS LYING IN THE BEGINNING OF THE YEAR IS WITHOUT ANY SUBSTANTIAL EV IDENCE. IN THE BACKDROP OF THE ABOVE DISCUSSION IT IS SURE THAT THE VALUATI ON GIVEN BY THE ASSESSEE IS NOT RELIABLE HENCE, THE BOOKS RESULTS ARE ALSO N OT CORRECT. REJECTION OF BOOKS U/S. 145 OF THE ACT 7. IN THE BACK DROP OF THE ABOVE DISCUSSION, IT WOU LD BE NECESSARY TO MENTION THAT AS PER THE PROVISIONS OF SECTION 44AA OF THE I.T. ACT, EVERY PERSON CARRYING ON BUSINESS IS COMPULSORILY REQUIRE D TO KEEP AND MAINTAIN SUCH BOOKS OF ACCOUNTS AND OTHER DOCUMENTS AS MAY E NABLE THE ASSESSING OFFICER TO COMPUTE THE ASSESSEE'S TOTAL I NCOME IN ACCORDANCE WITH THE PROVISIONS OF THE I.T. ACT. FROM THIS, IT FOLLOWS THAT THE PURPOSE AND INTENTION OF LEGISLATURE IN ENACTING THE PROVIS IONS OF SECTION OF 44AA OF THE ACT IS TO PUT AN OBLIGATION ON THE ASSESSEE TO MAINTAIN AND KEEP PRIMARY RECORDS ON THE BASIS OF WHICH THE TAX AUTHO RITIES ARE ABLE TO ASCERTAIN AND COMPUTE THE ASSESSEE'S CORRECT INCOME . FROM THIS IT ALSO FOLLOWS THAT IT IS NOT ALWAYS THE PREROGATIVE OF TH E ASSESSEE TO MAINTAIN THE RECORDS THE MANNER IN WHICH IT LIKES. HOWEVER, AS N OTICED IN THE PRECEDING ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 8 PARAS THE ASSESSEE DID NOT MAINTAIN THE BOOKS OF AC COUNTS AND DOCUMENTS ON THE BASIS OF WHICH THE INCOME DECLARED IN THE RETURN COULD BE ASCERTAINED. IF THE PRIMARY RECORDS WERE MAINTAI NED BY THE ASSESSEE THEY WERE NOT PRODUCED BEFORE THE UNDERSIGNED FOR E XAMINATION AND TO COMPUTE THE CORRECT INCOME. 7.1 HERE IT WOULD BE PERTINENT TO MENTION THAT THE ASSESSEE HAD SHOWN CLOSING STOCK OF POLISHED DIAMONDS OF THE QUANTITY OF 16,500.3 CTS. OF RS.6,77,62,109/-. THE DETAILED INVENTORY OF THE STO CK IN TERMS OF QUALITY WAS CALLED FOR. HOWEVER, THE ASSESSEE HAS NOT PRODU CED THE COMPLETE DETAILS. THEREFORE, IN ABSENCE OF DETAILS IN TERMS OF QUALITY WISE PRODUCTION OF DIAMONDS FROM EACH LOT IT IS NOT ASCERTAINABLE W HICH TYPE OF DIAMONDS WAS PRODUCED FROM A PARTICULAR LOT IN ORDER TO DETE RMINE THE VALUE. THEREFORE, IN VIEW OF THIS, IT WOULD BE CORRECT TO SAY THAT THE VALUATION OF STOCK IS NOT VERIFIABLE. 7.2 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 160 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 ADVICE IN THE INTEREST OF EFFICIENT ADMINISTRATION OF BUSINESS, IT IS THE DUTY OF THE ASSESSING OFFICER TO DETERMINE THE TAXABLE INCOME BY MAKING S UCH COMPUTATION AS HE THINK FIT. THEREFORE, THE CLAIM OF THE ASSESSRE THAT IT IS ASSESSEE'S OPTION TO MAINTAIN THE BOOKS OF ACCOUNTS IN THE MAN NER THAT SUITS TO IT CAN NO LONGER BE ACCEPTED AND HAS TO BE REJECTED. IN TH IS CONTEXT, RELIANCE IS ALSO PLACED UPON THE MUMBAI ITAT'S DECISION IN THE CASE OF DCIT VS. SAMIR DIAMONDS EXPORT PVT. LTD. REPORTED IN 71 ITD 75. 7.3. THUS, TAKING INTO ACCOUNT THE DEFECTS IN THE B OOKS OF ACCOUNTS, IT IS EVIDENT THAT THE CORRECT PROFIT THERE FROM CANNOT B E 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 IT. ACT. THE LD. A.O. GAVE REASONABLE OPPORTUNITY OF BEING H EARD ON JUSTIFYING THE GROSS PROFIT RATE. THE ASSESSEE HAD FURNISHED BEFOR E THE A.O. ONLY ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 9 COMPARATIVE CHART OF GROSS PROFIT AND NO REASONS FO R DECLINE OF GROSS PROFIT WAS GIVEN. AGAIN THE A.O. ASKED TO FURNISH THE REA SONS FOR FALL IN GROSS PROFIT FROM 8.04% LAST YEAR TO 6.78% IN THE YEAR UNDER CON SIDERATION. THE ASSESSEE GAVE REASONS AS UNDER FOR FALL OF GP RATE: 1. THERE IS DECREASE IN SALE REALIZATION PER CARAT FROM RS.8711.16 DURING F.Y. 2002-03 TO RS.7775.48 DURING F.Y. 2003- 04 2. COST OF SALES PER CARAT DURING F.Y. 2002-03 IS R S.8025.91 AS COMPARED TO RS.7255.35 DURING F.Y. 2003-04 3. THE COST OF SALES PER CARAT AS A % OF SALES REAL IZATION PER CARAT DURING F.Y. 2003-04 IS 93.31% AS COMPARED TO 92.30% DURING F.Y. 2002-03 4. THE COST OF SALES PER CARAT AS A % OF SALES REAL IZATION PER CARAT DURING F.Y.2003-04 HAS INCREASED BECAUSE OF INCREAS E IN COST OF MANUFACTURE OF POLISHED DIAMOND AS COMPARED TO SALE S REALIZATION. 5. THE COST OF MANUFACTURE OF POLISHED DIAMOND HAS INCREASED BECAUSE OF INCREASE IN LABOUR COST. THE LABOUR COS T PER CARAT OF POLISHED DIAMOND DURING F.Y. 2003-04 IS RS.1156.94 AS COMPARED TO RS.794.11 DURING F.Y. 2002-03 THE COST OF LABOUR COST PER CARAT OF MAKE ABLE DIA MOND IN CASE OF LABOUR CONTRACTOR WAS RS.300/- DURING F.Y. 2002-03 AND THE COST OF THE SAME DURING THE F.Y. 2003-04 IS RS.400/- PER CA RAT. THE COST OF FACTORY LABOUR COST PER CARAT OF MAKE ABLE DIAMOND WAS RS.266.51 DURING F.Y. 2002-03 AND COST FOR THE SAME DURING F. Y.2003-04 IS RS.344.91 THE A.O. ANALYZED THE REASONS GIVEN BY THE ASSESSEE FOR DECLINE IN GP, WHICH WERE NOT FOUND ACCEPTABLE BY HER ON THE GROUN D THAT PER CARAT RATE OF SALE OF TWO YEARS ARE NOT COMPARABLE IN ABSENCE OF QUALITY DETAILS OF CLOSING STOCK AND NUMBERS OF PIECES PER CARAT IN THE STOCK IN A.Y. 04-05, THE PER CARAT RATE FOR SAME HAD REALIZED BY 1.1% HIGHER DURING TH E YEAR UNDER ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 10 CONSIDERATION. THE COST OF LABOUR HAS INCREASED. THERE WERE NO REASONS GIVEN BY THE APPELLANT THAT WHY SALES REALIZATION P ER CARAT WAS LESS DURING THE YEAR. APART FROM THE MANUFACTURING EXPENSES VALUAT ION OF THE CLOSING STOCK ALSO FORMS ONE OF THE MAJOR PART IN DECIDING THE GR OSS PROFIT RATIO. CONSIDERING ALL THE FACTS NARRATED IN THE ORDER OF THE A.O. REL ATED TO THE VALUATION OF THE CLOSING STOCK OF POLISHED DIAMOND BELOW COST OF THE PRODUCTION AS WELL AS BELOW AVERAGE COST OF THE OPENING AND PRODUCTION AN D IT WAS QUITE REASONABLE AND JUSTIFIABLE TO ENHANCE THE GP BY 1% OF THE TOTA L TURNOVER OF RS.30,38,26,174/- ON ESTIMATED BASIS. SHE, THEREFO RE, ADDED A SUM OF RS.30,38,261/- TO THE TOTAL INCOME OF THE ASSESSEE. THE SIMILAR ADDITION WAS MADE BY THE A.O. AT RS.70,81,679/- IN A.Y. 05-06. 3. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A ) WHO HAD ENHANCED INCOME IN A.Y. 04-05 AND DELETED THE ADDITION IN A. Y.05-06. LD. A.R. FILED WRITTEN REPLY AS WELL AS ARGUED BEFORE THE CIT(A). THE CIT(A) ALSO ANALYZED THE SECTION 145 OF THE IT ACT ON METHOD OF ACCOUNTI NG AND TO DEDUCE THE CORRECT PROFIT IN ABSENCE OF STOCK REGISTER COUPLED WITH OTHER MATERIALS AND HE RELIED UPON AND OBSERVED AS UNDER: PLAIN READING OF THE PROVISIONS OF SECTION 145 MAK ES IT DEAR THAT THE AO CAN RESORT TO PROVISIONS OF THIS SECTION EVE N IF THE ASSESSE HAS REGULARLY EMPLOYED A METHOD OF ACCOUNTING, IF IT DO ES NOT SHOW CORRECT PROFITS OF THE YEAR. THIS VIEW IS AFFIRMED BY VARIO US JUDICIAL PRONOUNCEMENTS WHERE IT HAS BEEN HELD THAT, IF AFTE R TAKING INTO ACCOUNT THE ABSENCE OF STOCK REGISTER COUPLED WITH OTHER MA TERIALS, THE AO FEELS THAT CORRECT PROFITS CANNOT BE DEDUCED FROM THE ACC OUNTS, HE CAN RESORT TO THE SAID PROVISO. .N. NAMASIVAYAM CHETTIAR VS. CIT (1960) 38 ITR 579 (SC) ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 11 SIMILARLY IN CASE OF CHHABILDAS TRIBHUVANDAS SHAH V . CIT [1966] 59 ITR 733, 731) IT IS HELD THAT 'THE QUESTION TO BE DETERMINE D BY THE ASSESSING OFFICER IN EXERCISE OF HIS POWER UNDER THIS PROVISI ON IS WHETHER OR NOT INCOME CAN PROPERLY BE DEDUCED FROM THE ACCOUNTS MA INTAINED BY THE ASSESSEE, EVEN IF THE ACCOUNTS ARE CORRECT AND COMP LETE TO THE SATISFACTION OF THE OFFICER AND THE INCOME HAS BEEN COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. WHAT IS TO BE DETERMINED BY THE OFFICER I N EXERCISE OF HIS POWER IS A QUESTION OF FACT, I.E., WHETHER OR NOT INCOME CHARGEABLE UNDER THE ACT CAN PROPERLY BE DEDUCED FROM THE BOOKS OF ACCOUNT, AND HE MUST DECIDE THE QUESTION WITH REFERENCE TO THE RELEVANT MATERIA L AND IN ACCORDANCE WITH THE CORRECT PRINCIPLES. IN THE WORDS OF VISCOUNT HA LDANE, 'IT IS PLAIN THAT THE QUESTION OF WHAT IS OR IS NOT PROFIT OR GAIN MUST P RIMARILY BE ONE OF FACT, AND OF FACT TO BE ASCERTAINED BY THE TESTS APPLIED IN ORDINARY BUSINESS' (SUN INSURANCE OFFICE V. CLARK 19121 AC 443, 455 (H L). REFERRING TO SECTION 13 OF THE INDIAN INCOME-TAX ACT, 1922, WHIC H CORRESPONDS TO SECTION 145 OF THE INCOME-TAX ACT, 1961,' THE WORDS 'IN THE OPINION OF THE ITO' IN THE PROVIS O TO SEC. 13 OF THE OLD ACT DO NOT CONFER MERE DISCRETIONARY POWER BUT IN THEIR CONTEXT IMPOSE A STATUTORY DUTY ON THE ITO TO EXAMINE IN EACH CASE THE METHOD OF ACCOUNTING EMPLOYED TO SEE (I) WHETHER IT IS REGULA RLY EMPLOYED; AND (II) TO DETERMINE WHETHER THE INCOME, PROFITS, AND GAINS OF THE ASSESSEE CAN PROPERLY BE DEDUCED THERE FROM. SIMILAR RATIO IN CI T VS. BRITISH PAINTS (INDIA) LTD. (1991) 188 ITR 44(SC). CIT VS. MC MILL AN & CO. (1958) 33 ITR 182 (SC) ITO REJECTED THE FIGURES DISCLOSED IN THE BOOKS OF ACCOUNT BECAUSE THEY DID NOT INCLUDE SALES KEPT OUT OF THE ACCOUNTS AND SECONDLY THE GROSS PROFIT DISCLOSED BY OTHER DEALERS IN THE SAME BUSIN ESS. APEX COURT CONFIRMED THE FINDINGS OF IT AUTHORITIES AND HELD T HAT ON THE FACTS FOUND IT WAS OPEN TO THE ITO TO ESTIMATE GROSS PROFIT AT A R ATE AT WHICH PROFIT WAS EARNED IN SIMILAR BUSINESS BY OTHER MERCHANTS. CIT VS. K.Y. PILLIAH AND SONS 63 ITR 411(SC) ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 12 VALUATION OF CLOSING STOCK HAS TO BE MADE AS ON THE LAST DAY OF ACCOUNTING YEAR. WHERE MARKET RATE BECOMES RELEVANT EITHER BEC AUSE THE ASSESSEE FOLLOWS VALUATION AT COST OR MARKET RATE WHICHEVER IS LOWER, THE MARKET RATE PREVAILING ON THE LAST DAY OF ACCOUNTING YEAR HAS T O BE TAKEN IN CASE (CIT V/S TAMIL NADU SUGAR CORPORATION LTD(2004)265 JTR 4 66(MAD) WHERE A MANUFACTURER DOES NOT MAINTAIN A MANUFACTUR ING ACCOUNT, HIS ACCOUNTS ARE VULNERABLE, SINCE THE CORRECTNESS OF SUCH ACCOUNT IS NOT CAPABLE OF BEING VERIFIED BY THE ASSESSING OFFICER. MANUFACTURE IS DIFFERENT FROM TRADING, SO THAT THE PRECEDENTS APPLICABLE TO TRADERS WILL NOT HELP A MANUFACTURER AS WAS POINTED OUT IN OMAX SHOE FACTOR Y V/S CIT (2006)281 ITR 268(ALL) THE TRIBUNAL HAD POINTED OUT THAT THE ABSENCE OF CONSUMPTION REGISTER OF RAW MATERIALS AND DAY TO DA Y RECORD OF PRODUCTION, BESIDES LACK OF PROPER ACCOUNT RELATING TO PAYMENT OF WAGES WOULD JUSTIFY REJECTION OF ACCOUNTS. IT WAS THIS CONCLUSION WHICH WAS UPHELD BY THE HIGH COURT. SUPREME COURT HAS HELD LACK OF STOCK STATEMENT A MA JOR REASON FOR MAKING A BEST JUDGMENT ORDER. THE LAW WOULD EXPECT STOCK RECONCILIATION AS A BASIC REQUIREMENT FOR INFERENCE OF ACCEPTABILI TY. (KACHWALA GEMS V/S CIT 2007 288 ITR 10 (SC) IN BIMAL KUMAR ANANT KUMAR V/S CIT (2007)288 ITR 27 8 (ALL), IT WAS HELD THAT, WHERE PROFITS ARE MUCH LOWER THAN IN SIMILAR OTHER BUSINESS AND ASSSESSEE DOES NOT MAINTAIN STOCK REGISTER, REJ ECTION OF ACCOUNTS AND ESTIMATE OF INCOME CAN NOT BE AVOIDED. ACCOUNTING DOES NOT CONSIST MERELY OF TALLY OF SUCH CASH TRANSACTIONS. THERE SHOULD BE A SIMILAR TALLY OF GOODS HANDLED IN THE BUSINESS. IF THE GOODS IN THE OPENING STOCK AND PURCHASES DO NOT MAT CH THE AGGREGATE OF SALES AND CLOSING STOCK, THERE IS NEED FOR EXPLANAT ION. IT IS FOR THIS REASON, THAT THE ASSESSING OFFICER WOULD INSIST UPON STOCK ACCOUNT TO ENABLE VERIFICATION AS TO WHETHER THERE IS A TALLY. IT WIL L NOT BE POSSIBLE IN CERTAIN LINES OF TRADE LIKE RETAIL GROCERY OR HARDWARE TO K EEP ITEMWISE STOCK ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 13 ACCOUNT, SO THAT FINANCIAL RESULT IS NOT CAPABLE OF VERIFICATION. BUT THEN IF THE GROSS PROFIT IS REASONABLE IN COMPARISON WITH S IMILAR OTHER TRADE, THE BOOKS WILL STILL BE ACCEPTABLE. WHERE IT IS NOT SO COMPARABLE, THE DISCREPANCY MAY WELL BE ADDED OR INCOME ESTIMATED B Y WAY OF ADDITIONAL GROSS PROFIT AT COMPARABLE RATE EITHER ON PURCHASES OR SALES WHICH MAY AGAIN BE ESTIMATED UNLESS PROVEN. SUCH COMPUTATION IS GENERALLY DESCRIBED AS BEST JUDGEMENT ASSESSMENT. THE LAW IN THIS REGARD IS WELL ESTABLISHED. THE SUPREME COURT HAS CLARIFIED THAT METHOD SHOULD BE SUCH WHICH IS RECOGNIZED AND DOES NOT DISTORT THE INCOME. NOW AFTER GOING THROUGH VARIOUS PROPOSITION IT IS A BUNDANTLY CLEAR THAT VALUATION OF STOCK AT THE YEAR END IS AN IMPOR TANT ASPECT FOR DETERMINATION OF PROFIT OF THE YEAR, MORE SO SINCE THE VALUATION OF STOCK IS MADE AND CREDITED TO PROFIT AND LOSS ACCOUNT TO NUL LIFY THE EFFECT OF PURCHASES DEBITED IN PROFIT AND LOSS ACCOUNT SUCH T HAT TRUE PROFIT CAN BE DETERMINED AND IN ABSENCE OF VALUE OF SUCH STOCK BE ING SO CREDITED IT WOULD REVEAL THE DISTORTED PICTURE OF PROFIT FOR TH E YEAR. AS PER THE PRUDENT COMMERCIAL PRACTICE THE VALUATION OF STOCK IS MADE EITHER AT COST OR MARKET VALUE WHICHEVER IS LESSER. IN A DIAMOND BUSINESS QUALITY IS INHERENTLY LINKED TO PRICE OF THE PRODUCT. DIAMONDS ARE MADE AND POLISHED IN VARIOUS SHAPES AND SIZES AND THEIR CUT AND LUSTER VARIES RESULTING IN VARIAT ION IN PRICES. THEREFORE ASSORTMENT IS A CONTINUOUS PROCESS OF BOTH MANUFACT URING AND TRADING. SEGREGATION OF POLISHED DIAMONDS ON QUALITY LINES I S A MUST BEFORE UNDERTAKING ANY SALE. THIS HAS TO BE INCORPORATED E ITHER IN THE STOCK REGISTER OR A SEPARATE QUALITY REGISTER. VERIFICATI ON OF SALE AND CLOSING STOCK VALUATION BOTH ARE VERY CRUCIALLY DEPENDENT ON QUAL ITY WISE ACCOUNT OF PRODUCTION. HOWEVER THE REVENUE HAS NO ACCESS TO TH IS INFORMATION. THE STATUTE CASTS SPECIFIC OBLIGATION ON THE ASSESSEE T O DISCLOSE THIS INFORMATION WHICH OTHERWISE IS IN HIS SPECIAL KNOWL EDGE. BY NOT MAKING THIS INFORMATION AVAILABLE TO REVENUE THE ASSESSEE HAS SERIOUSLY ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 14 HAMPERED VERIFIABILLTY OF ITS CLAIMS OF SALE AND ST OCK VALUATION. THE BASIC DUTY AND RIGHT OF ASSESSING OFFICER AS LAID DOWN IN BRITISH PAINTS'S DECISION BY APEX COURT ARE TO ASCERTAIN CORRECT STOCK VALUAT ION TO REACH CORRECT TAXABLE INCOME. THE AO IS DUTY BOUND AS WELL AS EMP OWERED TO DETERMINE THE PROFITS AND GAINS OF A COMMERCIAL ADVENTURE ACC ORDING TO THE NATURE OF THE BUSINESS AND ITS SPECIAL CHARACTER, ALLOW CERTA IN ADJUSTMENTS BUT HIS PRIMARY PURPOSE AND DUTY IS TO DEDUCE THE CORRECT I NCOME, PROFITS AND GAINS, AND THIS HE CAN NOT DO WITHOUT TAKING IN TO ACCOUNT THE VALUE OF THE STOCK IN TRADE AT THE BEGINNING AND AT THE END OF T HE YEAR BY ASCERTAINING THE DIFFERENCE BETWEEN THEM. IN THE INSTANT CASE FA ILURE TO MAINTAIN OR FURNISH QUALITY WISE PRODUCTION OR SALE RECORDS RAI SES A SERIOUS DOUBT ABOUT THE CORRECTNESS AND COMPLETION OF BOOKS OF AC COUNTS. HON'ABLE SUPREME COURT HAS HELD THAT EVEN A REGULARLY EMPLOY ED METHOD OF ACCOUNTING CAN BE DISCARDED IF CORRECT PROFITS OF THE YEAR ARE NOT SHOWN. WHETHER THE PROFITS ARE CORRECT CAN NOT BE ASCERTAI NED BECAUSE OF NON ACCESS TO QUALITY WISE RECORDS OF PRODUCTION AND SA LE OF DIAMONDS. INABILITY OF VERIFICATION QUALITY OF DIAMONDS SERIO USLY HANDICAPS THE VERIFIABILITY OF AVERAGE MARGIN OF PROFITS AS HOLD IN CIT VS PAREKH BROS.(1987) 167 ITR 344(PAT).IMPROPER VALUATION IS HELD TO BE A JUSTIFIABLE GROUND FOR REJECTION OF BOOKS OR ACCOUN TS BY MADRAS HIGH COURT IN CIT V/S SRI VISWESARDAS GOKULDAS 14 ITR 110. NON MENTION OF QUALITY WOULD ALSO SERIOUSLY ERODE THE CREDIBILITY OF DAY T O DAY MANUFACTURING AND PRODUCTION ACCOUNTS THEMSELVES. DIAMONDS QUALITY AS PER TRADE PRACTICE IS DEPENDENT ON CUT, CLARITY, COLOUR AND CARAT(WEIGHT) . THE CUT DETERMINES THE PROPORTIONS OF THE DIAMOND AS WELL AS ITS SHAPE AND FINISH. A WELL-CUT DIAMOND WILL DISPLAY MAXIMUM BRILLIANCE AND FIRE. CONSIDERED ONE OF THE MOST IMPORTANT QUALITIES OF A DIAMOND, A WELL-CUT S TONE CAN COMPENSATE FOR LOW COLOR OR POOR CLARITY. CLARITY DESCRIBES A DIAMOND'S PHYSICAL PURENESS: ITS CLEANL INESS, SO TO SPEAK. IT ALSO REFERS TO THE PRESENCE, AMOUNT AND G RAVITY OF INCLUSIONS. CONTRARY TO POPULAR BELIEF, A DIAMOND APPEARS NOT O NLY IN THE TYPICAL COLORLESS OR NEAR COLORLESS FORM, BUT ACTUALLY VARI ES FROM 'WHITE' TO A 'LIGHT YELLOW' COLOR. GRADED ON AN ALPHABETICAL SCALE, THE COLOR GRADE BEGINS AT ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 15 D AND ENDS AT Z. HOWEVER, FANCY COLORED DIAMONDS AR E GRADED ON A COMPLETELY DIFFERENT SCALE. A DIAMOND'S WEIGHT IS EXPRESSED IN CARATS. ORIGINATING FROM THE CAROB SEED, A CARAT IS EQUIVALENT TO 200 MILLIGRAMS . ONE CARAT CAN ALSO BE DIVIDED INTO 100 POINTS. A .80 CARAT DIAMOND IS THE SAME AS 80 POINTS. ONE SHOULD UNDERSTAND THAT A 1-CARAT DIAMOND IS NOT HAL F THE PRICE OF A 2-CARAT DIAMOND NOR IS A 2-CARAT DIAMOND TWICE THE PRICE OF A 1-CARAT STONE. SINCE 2-CARAT DIAMONDS ARE FOUND LESS OFTEN IN NATURE, TH EY ARE WORTH MORE THAN 1-CARAT DIAMONDS. THE CUT AND MOUNTING CAN MAKE A D IAMOND APPEAR LARGER OR SMALLER THAN ITS ACTUAL WEIGHT. ANOTHER IMPORTANT THING TO CONSIDER IN PURCHASING O R SELLING A DIAMOND IS THE DIAMOND CERTIFICATE. IT IS A VITAL DOCUMENT THAT PROVES THE AUTHENTICITY AND QUALITY OF THE DIAMOND BEING BOUGH T OR SOLD. A HIGHLY TRAINED DIAMOND GRADER EVALUATES AND SPECIFIES THE ATTRIBUTES OF THE DIAMOND. WHEN A DIAMOND IS FIRST MINED, IT DOES NOT NATIVELY EXHIBIT THE ESSENCE OF BRILLIANCE AND BEAUTY. INSTEAD, IT HAS T O BE CUT AND POLISHED TO DISPLAY SUCH. THE CUT OF THE DIAMOND ENTAILS HOW WE LL OR POORLY A DIAMOND HAS BEEN FACETED, POLISHED AND PROPORTIONED. CONSID ERED AS THE MOST IMPORTANT C AMONG THE REST, IT HAS THE GREATEST EFF ECT ON HOW LIGHT REFLECTS AND TRAVELS THROUGH A DIAMOND. A DIAMOND'S SHAPE IS ALSO DETERMINED BY ITS CUT AND IS AN INDICATOR OF THE QUALITY OF THE S TONE'S CRAFTSMANSHIP. A DIAMOND'S SHAPE SHOULD NOT BE CONFUSED WITH ITS C UT. ITS SHAPE REFERS TO THE OUTWARD PHYSICAL APPEARANCE, SUCH AS ROUND BRILLIANT, PRINCESS, OVAL, HEART, PEAR AND OTHERS. A STONE'S C UT, HOWEVER, ALLUDES TO THE DIAMOND'S REFLECTIVE TRAITS. IT IS VERY IMPORTA NT FOR A STONE TO BE WELL CUT BECAUSE THE CUT IS RESPONSIBLE FOR THE AMOUNT OF LI GHT REFLECTED BACK TO THE VIEWER'S EYES. THE MORE LIGHT REFLECTED, THE MORE B RILLIANT A DIAMOND BECOMES. THE FIRE OF A DIAMOND IS IN REFERENCE TO T HE EVENNESS OF LIGHT DISPERSION WITHIN THE STONE. THE FIRE AND BRILLIANC E, THEREFORE, ARE PRIME FACTORS IN DETERMINING THE DIAMOND'S BEAUTY. ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 16 AN IDEAL CUT IS THE BEST THERE IS AS IT AMPLIFIES T HE LIGHT DISPERSION WITHIN THE STONE AND THE DISTRIBUTION OF LIGHT PASS ING THROUGH THE STONE. THE NEXT LEVEL OF QUALITY IS GAUGED AS VERY GOOD TO EXC ELLENT. THESE CUTS ARE BETTER THAN AVERAGE AND FETCH A RATHER HIGH PRICE. A GOOD CUT DISPLAYS PROPER BALANCE OF LIGHT A DISPERSION AND BRILLIANCE , BUT CANNOT COMPARE WITH AN IDEALLY CUT DIAMOND. A FAIR CUT DEPARTS FRO M THE FAVORED PROPORTIONS WHILE A POOR CUT INDICATES WEAK DISPERSION OF LIGHT AND SECOND-RATE WORKMANSHIP. THE FOLLOWING IS UNDERSTOOD TO BE INDICATERS OF A D IAMOND'S QUALITY. DIAMETER. THE WIDTH OF THE DIAMOND AS MEASURED THROUGH THE GI RDLE. TABLE. THE LARGEST FACET OF A GEMSTONE. CROWN. THE TOP PORTION OF 5 DIAMOND EXTENDING FROM THE GIR DLE TO THE TABLE. PAVILION. THE BOTTOM PORTION OF A DIAMOND EXTENDING FROM THE GIRDLE TO THE CULET. CULET. THE FACET AT THE TIP OF A GEMSTONE. THE PREFERRED C ULET IS NOT VISIBLE WITH THE UNAIDED EYE (GRADED 'SMALL' OR 'NONE') DEPTH. THE HEIGHT OF A GEMSTONE MEASURED FROM THE CULET TO THE TABLE. IDEALLY, DIAMONDS SHOULD BE CLEAR AND FREE FROM ANY BLEMISHES. HOWEVER, MOST DIAMONDS THAT ARE MINED HAVE NATURALL Y OCCURRING BLEMISHES THAT CAN DETRACT FROM THE PURE BEAUTY OF THE DIAMOND. CLARITY REFERS COLLECTIVELY TO THE SIZE, NUMBER, NATURE, SH ADE AND POSITION OF THE IMPERFECTION PRESENT OR ABSENT IN A DIAMOND. THERE ARE TWO CATEGORIES OF IMPERFECTIONS- INCLUSIO NS (INTERNAL) AND BLEMISHES (EXTERNAL). CLARITY IS GRADED USING A VER Y PRECISE AND COMPLEX METHOD OF EVALUATING THE SIZE, LOCATION, AND VISIBI LITY OF INCLUSIONS. THE ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 17 CLEARER THE DIAMOND, THE MORE VALUABLE IT IS. THE T ERMS USUALLY USED IN REFERRING TO THE CLARITY OF A DIAMOND ARE 10X MAGNI FICATION (LOUPE) AND THE NAKED OR UNAIDED EYE. FLAWLESS (FL) SHOWS NO INCLUSIONS OR BLEMISHES OF ANY SORT UNDER 10X MAGNIFICATION WHEN OBSERVED BY AN EXPERIENCED GRADE R. INTERNALLY FLAWLESS (IF) HAS NO INCLUSION WHEN EXAMINED BY AN EXPERIENCED GRADER USING LOX MAGNIFICATION, BUT WIL L HAVE SOME MINOR BLEMISHES. VERY VERY SLIGHTLY INCLUDED (VVS1-VVS2) CONTAINS MINUTE INCLUSIONS THAT ARE DIFFICULT EVEN FOR EXPERIENCED GRADERS TO SEE UNDER 10X MAGNIFICATION. VERY SLIGHTLY INCLUDED (VS1-VS2) CONTAINS MINUTE INCLUSIONS SUCH AS CRYSTALS, CLOUDS, OR FEATHERS WHEN OBSERVED WITH EFFORT UNDER 10X MAGNIFICATION. SLIGHTLY INCLUDED (SI1-SI3) CONTAINS INCLUSIONS (CLOUDS, INCLUDED CRYSTALS, KNOTS, CAVITIES, AND FEATHERS) THAT ARE N OTICEABLE TO AN EXPERIENCED GRADER UNDER 10X MAGNIFICATION. INCLUDED (I1-I3) CONTAINS INCLUSIONS (POSSIBLY LARGE FEATHERS OR LAR GE INCLUDED CRYSTALS) THAT ARE OBVIOUS UNDER 10X MAGNI FICATION AND WILL BE SEEN WITH THE NAKED EYE. THIS MAY AFFECT TRANSPAREN CY AND BRILLIANCE. DIAMONDS USUALLY COME IN A COLORLESS OR NEAR COLORL ESS FORM, OFTEN THEY HAVE A SLIGHT YELLOW COLOR TO THEM. COLORLESS DIAMO NDS ARE HIGHLY VALUABLE AND SOUGHT AFTER. THE FOLLOWING DESCRIBES THE COLOR GRADING SYSTEM DESIGNED BY THE GEMOLOGICAL INSTITUTE OF AMERICA (G IA) AND IS THE STANDARD THAT DIAMONDS ARE HELD TO: D : THIS IS THE HIGHEST COLOR GRADE AND IS COMPLETE LY COLORLESS, MAKING A D COLORED STONE VERY RARE. ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 18 E / F : E AND F COLORED STONES ARE STILL CONSIDERED COLORLESS, BUT THERE IS A VERY SLIGHT TINGE TO IT WHICH CAN BE DETECTED BY AN EXPERT GEMOLOGIST, THOUGH NOT OBVIOUS TO LAYPEOPLE. G / H : STONES IN THIS COLOR GRADE ARE NEAR COLORLE SS AND THE DIFFERENCE BETWEEN THESE AND STONES OF A HIGHER COLOR GRADE AR E NOTICEABLE ONLY WHEN COMPARED TO EACH OTHER. I / J : THESE STONES ARE ALSO NEAR COLORLESS, BUT T HERE IS A TRACE OF COLORING TO THEM COMPARED TO STONES OF A HIGHER COLOR GRADE. K / M : STONES IN THIS COLOR GRADE HAVE A FAINT YEL LOW TINGE TO THEM AND IT IS BEST TO SET THEM IN YELLOW GOLD. N / Z : STONES IN THIS COLOR GRADE HAVE A LIGHT YEL LOW TINGE TO THEM AND IT IS ALSO BEST TO SET THEM IN YELLOW GOLD. FANCY COLORED DIAMOND ONLY ONE OUT OF 10,000 NATURAL DIAMONDS ARE CONSIDE RED TO BE A FANCY COLORED DIAMOND, MAKING FANCY COLORS EXTREMEL Y RARE AND EXTREMELY VALUABLE. FANCY COLORED DIAMONDS COMMAND PREMIER PR ICES ALTHOUGH MOST ARE UNDER ONE CARAT. ALSO, FANCY COLORED DIAMO NDS ARE MORE EXPENSIVE THAN THEIR COLORLESS COUNTERPARTS,A DIAMO ND CERTIFICATE DESCRIBES THE DIAMOND'S FAIR MARKET VALUE AS WELL A S SPECIFICATIONS AND IS ALSO KNOWN AS DIAMOND GRADING REPORT OR AS A DIAMON D QUALITY REPORT AS IT PROVIDES INFORMATION OF DIAMOND'S CHARACTERISTICS. I THEREFORE AGREE WITH THE AO THAT IN THE INSTANT C ASE BOOKS OF ACCOUNTS DESERVE TO BE REJECTED AS THEY ARE NOT COR RECT AND COMPLETE SO MUCH SO ANY WORTHWHILE VERIFICATION OF PRODUCTION, CORRESPONDING SALES /STOCK VALUATION AND AVERAGE MARGIN OF PROFITS CAN NOT BE VERIFIED OR ASCERTAINED IN ABSENCE OF QUALITY OF DIAMONDS MANUF ACTURED. NATURE AND SPECIAL CHARACTER OF DIAMOND BUSINESS GIVE UTMOST I MPORTANCE TO QUALITY AS THE SALE PRICE IS CRUCIALLY DEPENDENT ON THE SAM E. THEREFORE AO REJECTION OF BOOKS OF ACCOUNTS IS CONFIRMED. ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 19 3(I). IN A.Y. 05-06, G.P RATE WAS BETTER COMPARED T O PRECEDING YEAR I.E. 8.95% AGAINST 6.95%. THE GROUND OF REJECTION OF BO OKS OF ACCOUNT MADE BY THE A.O. WAS SIMILAR TO A.Y. 04-05. THE LD. A.O. ALSO FOUND LABOUR COST INCREASED WITH COMPARED TO M/S. BARAR EXPORTS. THE REFORE, EXCESS LABOUR CHARGE PER CARAT ONLY RS.40/- WAS THE BASIS OF REJE CTION OF BOOK RESULT AND ENHANCEMENT OF THE GP RATE. AS REGARDS, THE VALUAT ION OF CLOSING STOCK OF POLISHED DIAMOND, THE REPLY OF THE ASSESSEE WAS ACC EPTED BY THE LD. CIT(A), WHICH WAS AVERAGE RATE OF CLOSING STOCK OF POLISHED DIAMOND. THE APPELLANT ALSO PLACED RELIANCE ON THE DECISION OF AHMADABAD B ENCH IN CASE OF ITO VS. M/S. B. SURESHKUMAR & CO. IN ITA NO. 2632/AHD/03 FOR A.Y. 2000-01 ORDER DATED 19.12.2007 WAS CONSIDERED BY THE LD. CIT(A), WHEREIN IT WAS HELD THAT THE ASSESSEE HAD FURNISHED QUANTITYWISE AND RATEWIS E DETAILS ON CLOSING STOCK ON FINISHED DIAMOND, THERE WAS NO QUESTION FOR THE ASSESSING OFFICER TO ARRIVE AT THE CONCLUSION THAT THE ASSESSEE INFLATED THE VA LUATION OF COST PRICE WITHOUT BRINGING ANY EVIDENCE TO SHOW THAT THE RATE DEDUCT ED BY THE ASSESSEE FOR EVERY QUALITY OF DIAMOND WAS MORE THAN COST PRICE O R MARKET PRICE. THE OTHER CASES WERE CONSIDERED BY THE LD. CIT(A) IN A.Y. 05- 06 ARE AS UNDER: (I) ACIT VS. KHAMBHATA FAMILY TRUST (1998) 67 ITD 411 (AHD) (II) MD. UMER VS. CIT (1975) 101 ITR 525 (PAT), WHICH WERE BASED ON QUANT ITY DETAIL MAINTAINED AND NO BASIS OF REJECTION OF BOOKS. AFTER CONSIDERING THE ASSESSEES REPLY, CIT(A) DECIDED AS UNDER IN A.Y. 05-06 :- I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE VIEW TAKEN BY THE AO AND THE SUBMISSIONS AS MODE BY THE APPELLANT . IN THE PRESENT ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 20 CASE, THE AO HAS REJECTED THE BOOK RESULTS BY FIRST LY HOLDING THAT THE CLOSING STOCK OF POLISHED DIAMONDS HAS BEEN UNDER V ALUED. THE AO REJECTED THE BASIS OF VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS AS ADOPTED BY THE APPELLANT AND OBSERVED THAT THE CLOS ING STOCK SHOULD HAVE BEEN VALUED AT LEAST THE AVERAGE VALUE OF THE OPENI NG STOCK OF POLISHED DIAMONDS. AS AGAINST THE SAID ACTION OF THE AO THE APPELLANT HAS BEEN ABLE TO SHOW THAT IT HAS BEEN ITS CONSISTENT POLICY TO VALUE ITS CLOSING STOCK OF MIXED POLISHED DIAMONDS AT MARKET VALUE LESS EXP ECTED G.P. MARGIN BY FURNISHING THE DETAILS OF QUALITY-WISE ITEMS OF CLO SING STOCK AND DOCUMENTARY EVIDENCE IN THE FORM OF EXPORT INVOICES OF THE SAID ITEMS SOLD IN THE SUBSEQUENT YEAR. ON COMPARISON, THE MARKET V ALUE AS ON 31-3- 2005 WAS COMMENSURATE WITH THE MARKET VALUE IN THE SUBSEQUENT YEAR, WITH LITTLE VARIATION DUE TO MARKET FORCES. THUS, I AM INCLINED TO AGREE WITH THE APPELLANT THAT IT HAS PROPERLY VALUED ITS CLOSI NG STOCK OF POLISHED DIAMONDS AND THE AO HAS NOT BEEN ABLE TO JUSTIFY AS TO HOW THE SAME IS INCORRECT AND AS TO HOW THE CLOSING STOCK COULD BE VALUED AT THE AVERAGE RATE OF THE OPENING STOCK, WHEN THE CLOSING STOCK W AS A MIXED LOT AND NOT CONSISTED ONLY OF THE ITEMS OF OPENING STOCK. EVEN THE AHMEDABAD ITAT IN THE CASE OF M/S. B. SURESHKUMAR & CO. IN ITA NO. 2632/AHD/2003 FOR A.Y. 2000-01, VIDE ORDER DATED 19-12-2007 HAS HELD THAT WHEN THE ASSESSEE HAS FURNISHED THE QUANTITY-WISE AND RATE-W ISE DETAILS OF CLOSING STOCK OF FINISHED DIAMONDS, THORN WAS NO QUESTION F OR THE AO TO ARRIVE AT THE CONCLUSION THAT THE ASSESSEE INFLATED THE VALUE OF COST PRICE, WITHOUT BRINGING ANY EVIDENCE TO SHOW THAT THE RATE ADOPTED BY THE ASSESSEE WAS NOT CORRECT. HENCE, I HOLD THAT, THE REJECTION OF B OOKS OF ACCOUNTS AND ESTIMATION OF G.P. ON THE GROUND OF UNDERVALUATION OF CLOSING STOCK IS INCORRECT. THE ACTION OF THE AO IN HOLDING THAT THE LABOUR EXP ENSES ARE EXCESSIVE BY RS. 40/- PER CARAT MERELY ON THE GROUN D THAT OTHER ASSESSEE IN SIMILAR LINE OF BUSINESS HAD PAID RS. 40/- LESS TOWARDS LABOUR CHARGES IS ALSO INCORRECT WHEN THE AO IS NOT ABLE TO BRING ANY EVIDENCE ON RECORD TO SHOW THAT THE LABOUR EXPENSES WERE EITHER NON-VERIF IABLE, IN-GENUINE OR ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 21 PAID TO SISTER CONCERNS OF THE APPELLANT. THUS, THE G.P. ADDITION ON THIS GROUND IS ALSO NOT WARRANTED FOR. I ALSO AGREE WITH THE APPELLANT THAT IN THE EVENT O F COMPLETE QUANTITATIVE DETAILS MAINTAINED BY IT AND NO DEFECT S BEING POINTED OUT THEREIN BY THE AO, THE REJECTION OF BOOKS OF ACCOUN TS ON THE GROUND OF NON-MAINTENANCE OF PIECE-WISE QUANTITATIVE DETAILS IS ALSO UNCALLED FOR. FURTHER, THE AO HAS ALSO IGNORED THE FACT THAT THE GP OF THE APPELLANT HAS INCREASED CONSIDERABLY TO RS. 2.46 CR ORES IN THE CURRENT YEAR @ 6.95% FROM RS. 2.06 CRORES IN THE EARLIER YE AR @ 6.78% AND THEREFORE, ALSO IN VIEW OF THE FACT THAT THE BOOK R ESULTS OF THE APPELLANT HAVE IMPROVED IN THE CURRENT YEAR AS COMPARED TO TH E EARLIER YEAR AND THERE BEING NO CONCRETE MATERIAL ON RECORD TO SUGGE ST SUPPRESSION, I HOLD THAT THE AO WAS NOT JUSTIFIED IN INCREASING THE G.P . BY 2% AND MAKING ADDITION OF RS. 70,81,679/- ALLEGING LOW G.P. HENCE, THE ACTION OF THE AO IN REJECTING THE BOOK R ESULTS AND MAKING AN ADDITION OF RS. 70,81,679/- ON ACCOUNT OF LOW G.P. IS HEREBY HELD TO BE ERRONEOUS AND THUS, DELETED. 3(II). IN A.Y. 04-05, THE LD. CIT(A) CONSIDERED THE WRITTEN REPLY SUBMITTED BY THE APPELLANT FOR DECLARING IN GP RATE , WHICH WERE AS UNDER: THE SUBSTANCE OF DEFENCE ADVANCED BY THE AR IS AS BELOW, 1. TURNOVER OF THE APPELLANT SUBSTANTIALLY MORE THA N THE CASES CITED BY UNDERSIGNED. THE PROFITS OF SMALL TURNOVER GIVE HI GHER MARGINS. 2. DURING ASSESSMENT YEAR 2004-05 THE VALUE OF RUPE E HAD STABLISED AGAINST DOLLAR WHILE IN EARLIER YEARS VALUE OF RUPE E WAS CONTINUOUSLY FALLING. SO BETTER RESULTS SHOWN IN EARLIER YEARS IN THE CITED CASES ARE NOT STRICTLY COMPARABLE. 3. THE APPELLANT HAS BORROWED HUGE FUNDS AND SO HEA VY INTEREST BURDEN HAS ADVERSELY AFFECTED NET PROFIT OF APPELLA NT. 4. NET PROFIT CAN NOT BE COMPARED BECAUSE A BIGGER SET UP WITH LARGER INVESTMENTS WILL HAVE A BIGGER DEPRECIATION CHARGE. SO ONLY GP IS COMPARABLE. ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 22 5. THE APPELLANT HAS SHOWN THE CERTAIN COMPARABLE C ASES WHERE LOWER NET PROFIT RETURNED BY CERTAIN CASES HAVE BEE N ASSESSED. 6. ENTIRE CASE OF REJECTION OF BOOKS OF ACCOUNTS IS BASED ON FALL IN GP AND CLOSING STOCK VALUATION BEING LOWER. 7. REFERENCE TO ACCOUNTING STANDARD 2(AS2) HAS BEEN MADE WITH EMPHASIS ON PRUDENCE. IT IS ARGUED THAT COST SHOUL D BE ASSIGNED BY SPECIFIC IDENTIFICATION IN RESPECT OF ITEMS THAT ARE NOT ORDINARILY INTERCHANGEABLE. 8. THE APPELLANT HAS FOLLOWED THE ABOVE PRINCIPLE F OR WORKING OUT NET REALIZABLE VALUE OF STOCK. 9. ARGUMENT OF THE ASSESSING OFFICER ON THIS POINT IS AGAINST THE ABOVE PRINCIPLE. 10. FALL IN GP CAN NOT BE ON THE ONLY GROUND OF REJ ECTION OF BOOKS OF ACCOUNTS. THE ASSESSEE ALSO GAVE COMPARABLE CASES BEFORE THE LD. CIT(A) IN A.Y. 04-05 WHICH ARE AS UNDER: 1. JAY IMPEX-.041% ON A TURNOVER OF RS.5,1319065 2. PANKAJ DIAMOND 1.35% ON A TURNOVER OF RS.155,31, 62,053 3. D.SUBHASH CHANDRA & CO 1.22% ON A TURNOVER OF RS .11,49,63,898 4. STAR RAYS 4.42% ON A TURNOVER OF RS.89,99,69,901 5. PARVATI GEMS 2.73% ON A TURNOVER OF RS.7,49,81,0 00 6. BHOJAL GEMS 3.08% ON A TURNOVER OF RS.26,63,43,4 60 REVENUE HAD ALSO BROUGHT COMPARABLE CASES AS UNDER: 1. RAVJIBHAI DHAMELIA GP OF 3.94% ON A TURNOVER OF RS.29,22,55,627 2. BALAR EXPORT GP OF 13.51% AND NP OF 7.34% ON A T URNOVER OF RS.40,49,93,450 3. D.NITIN & CO GP OF 9.17% AND NP OF 3.03% ON A TU RNOVER OF RS.85,07,33,384 4. JODHANI EXPORTS GP OF 7.08% AND NP OF 3.37% ON A TURNOVER OF RS.47,97,25,387 ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 23 LD. CIT(A) FOUND NET PROFIT RATE OF 4.5% REASONABLE AFTER CONSIDERING BOTH SIDES COMPARABLE CASES AND FURTHER OBSERVED THAT I T IS EVEN LESS THAN NET PROFIT DISCLOSED BY BALAR EXPORTS AT 7.34%, WHICH W AS MARGINALLY HIGHER THAN RAVJI DHAMELIA AT 3.94%. THE COMPARABLE CASE REFER RED BY THE APPELLANT MUCH LOWER TURNOVER. PANKAJ DIAMOND HAD ALMOST 5 T IMES OF THE APPELLANTS TURNOVER AND YET FINALLY ASSESSED INCOME STANDS SUB STANTIALLY ENHANCED RAISING THE NET PROFIT RATIO AROUND 3%. BHOJAL GEM S WAS HAVING NET PROFIT @ 3.08%, WHICH WAS FOUND COMPARABLE. THUS, LD. CIT(A ) FOUND REASONABLE NET PROFIT RATE @ 4.5% AND ENHANCED THE INCOME AT RS.1, 37,04,301/-. HOWEVER, TELESCOPIC BENEFIT OF ADDITION UNDER THE HEAD, TELE PHONE AND PAGER, FOREIGN TRAVEL AND CONVEYANCE AND GP ADDITION MADE BY THE A .O. AT RS.30,38,261/- WAS ALLOWED BY THE LD. CIT(A). 4. NOW THE ASSESSEE IN A.Y. 04-05 AND REVENUE IN A. Y. 05-06 ARE BEFORE US. LD. COUNSEL FOR THE APPELLANT REITERATED THE A RGUMENTS PUT FORTH BEFORE THE LD. CIT(A) FOR REJECTION OF BOOK RESULT AND ARGUED THAT THE ASSESSEE HAD MAINTAINED BOOKS OF ACCOUNT REQUIRED U/S. 44AA OF T HE IT ACT. THE LD. A.O. HAD ACCEPTED THE PECULIAR NATURE OF THE DIAMOND BUS INESS. HE ACCEPTED THE FACT THAT THE VALUE OF POLISHED DIAMONDS VARIES FRO M RS.1000/- PER CARAT TO RS.1 LAC PER CARAT OR EVEN MORE. THE PRICE OF DIAM OND DEPEND UPON 4 C I.E. CARAT, CUT, COLOUR & CLARITY. SHE ASKED TO FURNISH THE QUALITY WISE DETAILS OF DIAMOND ARE IMPOSSIBILITY TO COMPLIANCE AND NO DIAM OND MANUFACTURER CAN GIVE SUCH DETAILS. BUT NON FURNISHING OF QUALITATI VE STOCK SHOULD NOT RESULT IN DISTURBING THE BOOKS RESULT. EVEN ASSESSEE FURNISH ED THE QUALITATIVE STOCK AS ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 24 PER 4 C, THERE WOULD BE INNUMERABLE SUB-CLASSIFIC ATIONS WITH COLOUR RANGING IN TERMS OF ALPHABETS AND CLARITY IN INNUMERABLE. SIMILARLY, THERE NUMBER OF TYPES OF CUTS. TOTAL IMPACT OF ALL THESE CAN RESUL T IN VAST NUMBER OF VARIETIES. THE ASSESSEE HAD WORKED OUT VALUATION OF CLOSING ST OCK OF INVENTORY METHOD AND WITH THE HELP OF ASSORTER WORKED OUT THE MARKET RATE OR THE RATE ON WHICH THEY COULD NOT BE SOLD AND DEDUCTED AVERAGE RATE OF MARGINE. IN FACT, IT IS IN ACCORDANCE WITH ACCOUNTING STANDARD BUT LD. A.O. DI D NOT FIND VALUATION AS PER ACCOUNTING STANDARD BUT DURING THE COURSE OF ASSESS MENT PROCEEDING, THE LD. A.O. HAD WORKED OUT THE AVERAGE COST OF POLISHED DI AMOND AS 7920.23 CARAT BY ADDING LABOUR AND MANUFACTURING CHARGE. THEN, S HE HAS POINTED OUT THAT AVERAGE OPENING STOCK WAS AT 3731 CARATS AND AVERAG E OF OPENING AND CLOSING PRODUCT IS 6387.52 CARATS. SHE STATED THAT SINCE THE DIAMOND HAD BEEN VALUED @ RS.4120/- PER CARAT AND THERE WAS UND ER VALUATION TO THE EXTENT OF RS.2150/- PER CARAT. THE LD. A.R. FURTHE R SUBMITTED THAT HONBLE SUPREME COURT DECISION IN CASE OF BRITISH PRINTS INDIA PVT. LTD. REPORTED IN 160 ITR 44 WAS CONSIDERED WITH ADDITION OF MANUFACTURING AND O THER EXPENSES ON WORK-IN-PROGRESS/ CLOSING STOCK WHEN SUCH EXPENSES WERE DEBITED IN THE P&L ACCOUNT AND CLAIMED AS DEDUCTION. NON DISCLOSING R EAL COST OF STOCK MENTIONED IN JUDGMENT HAS TO BE READ IN THAT CONTEX T. IN CASE OF MUMBAI TRIBUNAL JUDGMENT IN 71 ITD 75, THE ASSESSEE HAD DE STROYED CERTAIN PRIMARY RECORDS. THEREFORE, BOTH THE DECISIONS ARE NOT APP LICABLE IN CASE OF APPELLANT. THE REASONS FOR DECLARATION IN SALE FOR A.Y. 04-05, FIVE REASONS WERE GIVEN BEFORE THE A.O. AT THE TIME OF ASSESSMENT PROCEEDIN G AS WELL AS BEFORE THE ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 25 CIT(A) DURING THE APPELLATE PROCEEDING. THE LD. A. O. OBSERVED THAT WHEN COST PRICE INCREASES, AUTOMATICALLY THE SALE PRICE OF PR ODUCT INCREASES. LD. COUNSEL FOR THE APPELLANT OBJECTED THIS ARGUMENT AN D SUBMITTED THAT IT CAN ONLY BE POSSIBLE IN CASE OF MONOPOLY BUT IN DIAMOND S TRADE LARGE NUMBER OF COMPETITORS ARE THERE. THE APPELLANT SUBMITTED REP LY ON REJECTION OF BOOK AND GP VIDE LETTER DATED 17.11.2006 7 25.12.2006. HE F URTHER RELIED UPON THE ORDER OF HONBLE ITAT, AHMADABAD IN CASE OF M/S. PANKAJ DIAMOND VS. ACIT IN ITA NO. 555/AHD/2008 FOR A.Y. 04-05, WHEREIN BOOK RESULT WAS REJECTED BY THE LD. A.O. ON THE GROUND THAT QUALITYWISE DETAIL S OF DIAMOND WERE NOT KEPT BY THE ASSESSEE AND ESTIMATED ADDITION WAS MADE BY THE A.O. AND HONBLE ITAT D BENCH HAD DELETED THE ADDITION ON ACCOUNT OF GP ADDITION AS WELL AS ENHANCEMENT MADE BY THE LD. CIT(A). THE LD. A.R. F URTHER RELIED UPON IN CASE OF DHAMI BROTHERS VS. ACIT, CIRCLE-9, SURAT IN ITA NO. 2309/AHD/2008 FOR A.Y. 04-05, WHEREIN ADDITION ON ACCOUNT OF VALUATION AND ENHANC EMENT THE GP WAS MADE. HONBLE ITAT C BENCH CONFIRMED THE ADDITI ON MADE BY THE A.O. ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK BUT DEL ETED THE ENHANCEMENT MADE BY THE LD. CIT(A) IN GP ADDITION. HONBLE ITA T B BENCH IN CASE OF B. SURESHKUMAR & CO. IN ITA NO.2632/AHD/2003 FOR A.Y. 2000-01, WHEREIN ADDITION WAS MADE BY THE LD. A.O. ON OVER ESTIMATIO N OF PROFIT AND CLAIMING HIGHER DEDUCTION U/S. 80HHC AND IT WAS HELD THAT IN THIS LINE OF DIAMOND BUSINESS, NO PARTY MAINTAINED QUALITY DETAILS OF DI AMOND. IN CASE OF GAMI EXPORTS IN ITA NO. 3146/AHD/2007 FOR A.Y. 04-05, THE ADDITION MADE BY THE LD. A.O. ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK OF THE POLISHED DIAMOND ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 26 AND ROUGH DIAMOND. IT WAS HELD THAT IF ASSESSEE OV ER VALUED THE DIAMOND, IT WOULD INCREASE THE DEDUCTION U/S. 80HHC AND REDUCE THE PROFIT IN THE SUBSEQUENT YEAR. ON GP, LD. A.R. ARGUED THAT IT IS TRUE THAT SLIGHTLY GP HAS GONE DOWN DURING THE YEAR BUT IT DEPENDS ON VARIOUS FACTORS OF THE MARKET OF DIAMOND INDUSTRY. EVEN SIMILAR BUSINESS SHOWN BY T HE SAME SET OF FACILITIES, IT WAS NOT SURE THAT ASSESSEE WOULD GET SAME GP. IT W AS ARGUED THAT IN A.Y. 04-05 GP WAS 6.78% WHICH HAS BEEN INCREASED IN A.Y. 05-06 AT 6.95% WHEREAS NP IN A.Y. 04-05 WAS 2.61% HAD BEEN DECLINE D AND IN A.Y. 05-06 @ 1.71%. THE LD. A.O. MADE ADDITION IN A.Y. 04-05 IN GP @ 1% WHEREAS LD. CIT(A) MADE ADDITION IN GP 4.51% AND RESULTANT GP W OULD BE WORKED OUT 8.67%. BUT IN A.Y. 05-06, ADDITION MADE BY THE A.O . WHICH HAD BEEN DELETED BY THE LD. CIT(A). THEREFORE, HE REQUESTED TO DELE TE THE ADDITION IN A.Y. 04-05 AND CONFIRMED THE ORDER OF LD. CIT(A) FOR A.Y. 05-0 6. 4(I). AT THE OUTSET, LD. SR. D.R. VEHEMENTLY RELIED UPON THE ORDER OF THE A.O. AND CIT(A) IN A.Y. 04-05 AND ARGUED THAT ASSESSEE D ID NOT PRODUCE THE QUALITATIVE DETAIL OF DIAMONDS, WHICH WAS VERY BASI C ELEMENT TO DETERMINE THE PRICE OF OPENING, PURCHASE, SALE AND CLOSING STOCK AND ALSO TO DEDUCE THE PROFIT. SECTION 44AA PRESCRIBED THE BOOKS OF ACCOU NT TO BE MAINTAINED IN ACCORDANCE WITH THE NATURE OF BUSINESS OR MANUFACTU RE DONE BY THE ASSESSEE. AS LD. CIT(A) HAS THOROUGHLY DISCUSSED THE MANUFACT URING ACTIVITY FROM ROUGH DIAMOND TO FINISH AND EMPHASIZED HOW QUALITY STOCK IS ESSENTIAL NOT ONLY CONTROL THE BUSINESS OF THE ASSESSEE BUT TO KNOW TH E REAL VALUE OF THE DIAMOND PRODUCED ON WHICH ACCORDINGLY LABOUR CHARGE IS PAID. THE APPELLANT ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 27 HAD SOLD DIAMOND AS PER NUMBER OF PIECES AND CARAT AND ALSO DETERMINED THE SALE PRICE ON THE BASIS OF QUALITY. IT VARIES BILL TO BILL AND ONE PIECE DIAMOND TO ANOTHER PIECE. IT MEANS THE QUALITY IS DIFFERENT. HE FURTHER RELIED UPON IN CASE OF BRITISH PRINTS INDIA PVT. LTD. REPORTED IN 160 ITR 44 (SC), COMMISSIONER OF INCOME-TAX V. MCMILLAN & CO., (1958) 33 ITR 182, WHEREIN THE HONBLE SUPREME COURTS EMPHASIS WAS ON ACCOUNTS MAINTAINED BY THE ASSESSEE AND CAN PROPERLY DEDUCE THE PROFIT AND GAIN OF THE ASSE SSEE. THE ITO REJECTED THE BOOKS ACCOUNTS BECAUSE THEY DID NOT INCLUDE SALE KE PT OUT OF THE BOOK ACCOUNTS AND CONSEQUENTIALLY, GROSS PROFIT DISCLOSE D BY THE DEALERS IN THE SAME BUSINESS. HE FURTHER ARGUED THAT IN CASE OF COMMISSIONER OF INCOME- TAX VS. TAMIL NADU SUGAR CORPN. LTD. 2004 (265) IT R 466 (MAD), THE MARKET RATE IS RELEVANT FOR THE VALUATION OF CLOSING STOCK ON LAST DATE OF ACCOUNTING YEAR, WHERE A MANUFACTURER DOES NOT MAINTAIN A MANU FACTURING ACCOUNT AS ACCOUNTS ARE VULNERABLE, SINCE THE CORRECTNESS OF S UCH ACCOUNT IS NOT CAPABLE OF BEING VERIFIED BY THE ASSESSING OFFICER. MANUFA CTURING AND TRADING ARE SEPARATE AND IN MANUFACTURING CONSUMPTION REGISTER OF RAW MATERIAL AND DAY TO DAY RECORD ON PRODUCTION, THE PAYMENTS OF WAGES ARE THE REAL FACTORS TO DETERMINE THE INCOME OF THE ASSESSEE. HONBLE SUPR EME COURT IN CASE OF KACHWALA GEMS VS JCIT (SC) 288 ITR 10, HELD THAT IN ABSENCE OF STOCK STATEMENT, THE A.O. CAN MAKE BEST JUDGMENT AND DECI DE THE INCOME. WHERE GP IS LESS AND DO NOT MAINTAIN STOCK REGISTER. THE REJECTION OF BOOKS OF ACCOUNTS IS HELD JUSTIFIABLE IN CASE OF BIMAL KUMAR ANANT KUMAR V/S CIT (2007)288 ITR 278 (ALL). HE FURTHER HAS DRAWN OUR ATTENTION ON LATEST ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 28 DECISIONS OF THE HONBLE ITAT C BENCH IN CASE OF THE ASSISTANT/DEPUTY CIT VS. M/S HANSAL DIAM IN ITA NO. 3089/AHD/07 & 2585/A HD/09 FOR A.Y. 04-05 & 05-06, WHEREIN ON SIMILAR DEFECTS, THE GP ADDITION AS WELL AS ENHANCEMENT ON ACCOUNT OF NON MAINTAINING OF QUALITY AND QUANTITY WISE DETAILS OF STOCK HELD JUSTIFIED. THEREFORE, HE REQUESTED TO CONFIRM THE ORDER OF THE CIT(A) IN A.Y. 04-05 AND REVERSE THE ORDER OF LD. CIT(A) IN A.Y. 0 5-06. HE FURTHER RELIED UPON IN CASE OF M/S. BALAR EXPORTS VS. DCIT IN ITA NO. 3010/AHD/201 0 FOR A.Y. 07- 08, WHEREIN IDENTICAL ISSUE OF REJECTION OF BOOKS OF A CCOUNT U/S. 145 AND UNDER VALUATION OF CLOSING STOCK WAS CONSIDERED BY THE HO NBLE B BENCH, AHMADABAD AND ASSESSEES APPEAL IS DISMISSED. LD. SR. D.R. PLACED RELIANCE ON THE DECISION OF ITAT C BENCH IN CASE OF SAMIR DIAMONDS EXPORTS LTD. (1999) 71 ITD 75, WHEREIN ON IDENTICAL FACTS THE REJECTION ON BOOKS OF ACCOUNT WAS UPHELD AND THE A.O. CAN ESTIMATE THE INCOME OF ASSESSEE. HE ALSO RELIED UPON IN CASE OF CHAMPA LAL CHOUDHARY (2012) 24 TAXMANN.COM 308 (JAIPUR), WHEREIN REJECTION OF BOOKS OF ACCOUNT HELD JUSTIFI ED WHERE NO QUALITATIVE AND QUANTITATIVE DETAILS OF GOODS IS MA INTAINED IN CASE OF MANUFACTURING AND TRADING OF PRECIOUS AND SEMI PREC IOUS STONE INCLUDING THEIR EXPORT. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND FIND THAT DURING THE ASSESSMENT PROCEEDING, IT WAS NOTICED BY THE A.O. THAT THERE WAS A FALL IN THE GP RATE BY 1.26% AS CO MPARE TO LAST YEAR. THE ASSESSEES EXPLANATION WAS SOUGHT BY THE A.O. FOR T HE DECLINE IN GP RATIO. THE ASSESSEES EXPLANATION WAS NOT FOUND SATISFACTO RY BY THE A.O. ACCORDING ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 29 TO THE A.O., THE ASSESSEE DID NOT MAINTAIN THE STOC K IN TERMS OF QUALITY. HE WAS OF THE VIEW THAT AS PER THE PROVISIONS OF SECTI ON 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 ASSESSEES I NCOME IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. THE INTENTION OF T HE LEGISLATURE ENACTING SECTION 44AA WAS TO PUT AN OBLIGATION ON THE ASSESSEE TO MA INTAIN AND KEEP PRIMARY RECORD ON THE BASIS OF WHICH TAX AUTHORITY CAN ASCE RTAIN AND COMPUTE THE CORRECT INCOME. THEREFORE, IT WAS NOT PREROGATIVE OF THE ASSESSEE TO MAINTAIN THE RECORD IN THE MANNER IN WHICH IT LIKES. THE AS SESSEE DID NOT MAINTAIN THE BOOKS OF ACCOUNT AND DOCUMENT AS PER THE PROVISIONS ON THE BASIS OF WHICH THE CORRECTNESS OF THE INCOME DECLARED IN THE RETUR N COULD BE DEDUCED AT. THE A.O. FURTHER OBSERVED THAT IF THESE PRIMARY RECORDS WERE MAINTAINED BY THE ASSESSEE, THEY WERE NOT PRODUCED FOR EXAMINATION BE FORE THE ASSESSING OFFICER. THEREFORE, THEY FOUND THE ASSESSEES METH OD OF ACCOUNTING IS DEFECTIVE AND REJECTED THE BOOKS OF ACCOUNT OF THE ASSESSEE U/S.145(3) OF THE IT ACT AND ENHANCED THE GROSS PROFIT BY 1% IN A.Y. 04-05, WHICH WAS FURTHER ENHANCED BY THE LD. CIT(A) .89% BUT OTHER DISALLOWA NCES WERE TELESCOPIC ALLOWED TO BE SET OUT AND 2% IN A.Y. 05-06 BY THE A .O. IN APPEAL, LD. CIT(A) DELETED THE ENTIRE ADDITIONS IN A.Y. 05-06. WHILE DELETING THE ADDITION, THE LD. CIT(A) OBSERVED THAT THE A.O. HAD NOT BROUGHT ANY D EFICIENCY IN THE BOOKS OF ACCOUNT FOR THE METHOD OF ACCOUNTING OF THE ASSESSE E AND ONLY REASONS FOR REJECTING THE BOOKS OF ACCOUNT WAS THAT THERE WAS N O QUALITATIVE VALUATION OF PURCHASE, SALE AND CLOSING STOCK WAS PRODUCED BY TH E ASSESSEE. WE DO NOT ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 30 FIND THESE OBSERVATIONS OF THE LD. CIT(A) TO BE COR RECT AS A.O. HAD GIVEN DETAILED REASONS FOR THEIR ACTION OF REJECTING THE BOOKS OF ACCOUNT THAT THE ASSESSEE HAD FAILED TO PRODUCE PROPER BOOKS OF ACCO UNT WHICH INCLUDES QUANTITATIVE RECORD FOR PURCHASE, SALE AND CLOSING STOCK INCREASED IN LABOUR CHARGES AND EXPLAINING THE METHOD OF VALUING CLOSIN G STOCK. THE A.O. HAS ALSO EXPLAINED IN DETAIL OF PRACTICE IN THE DIAMOND INDUSTRY IS THAT THE MANUFACTURER HAS TO MAINTAIN PIECE WISE DETAIL TO M ONITOR THE YIELD AND PROFIT OF ITS BUSINESS. THE DETAIL ANALYSIS OF THE FIGURE S BRING OUT THE IMPORTANCE OF PEACE WISE OR QUALITY WISE RECORD MAINTAINED WHICH THE ASSESSEE CLAIMED NOT TO HAVE MAINTAINED. IT WAS, THEREFORE, INFERRED BY THE A.O. THAT THE ASSESSEE DID NOT DISCLOSE THE CORRECT PROFIT. THIS IS CLEAR FROM THE ASSESSMENT ORDER. 5(I). WE FURTHER FIND THAT THE LD. CIT(A) WHILE GIV ING RELIEF TO THE ASSESSEE IN A.Y. 05-06 HAS RELIED UPON THE DECISION OF ITAT, AH MADABAD IN CASE OF M/S. B. SURESHKUMAR & CO. IN ITA NO. 2632/AHD/2003 FOR A .Y. 2000-01, ORDER DATED 19.12.2007 WHICH IS ACCORDING TO US IS NOT AP PLICABLE TO THE FACT OF THIS CASE, WHICH WAS DELETED BY THE ITAT SAYING THAT THE A.O. DID NOT BRING ANYTHING ON RECORD TO JUSTIFY THAT THE RATE ADOPTED BY THE ASSESSEE WAS NOT CORRECT. THE A.O. HAS SPECIFICALLY BROUGHT OUT THE NUANCES OF DIAMOND INDUSTRY IN THE ASSESSMENT ORDER WHICH HAS ALREADY BEEN DISCUSSED IN PRECEDING PARAS OF THIS ORDER. THE A.O. HAS ALSO D ESCRIBED IN DETAIL HOW THE QUALITY OF A DIAMOND IN RESPECT OF CUT, CLARITY AND COLOUR ALSO AFFECT ITS PRICE. THEREFORE, IT IS NOT PROPER TO COMPARE THE DECISION OF THE TRIBUNAL WITH THE CASE OF ASSESSEE. IN THE CASE OF ASSESSEE, THE A.O . WAS PREVENTED TO ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 31 DETERMINE THE CORRECT PROFIT BY THE ASSESSEE BY NOT PRODUCING QUALITY WISE STOCK OF THE DIAMOND. LD. CIT(A), THEREFORE, WAS N OT CORRECT IN APPLYING THE ABOVE DECISION AS A.O. HAS NOTED THAT THE NATURE OF THE BUSINESS OF THE ASSESSEE WAS SUCH THAT THE CORRECT PROFIT CANNOT BE DETERMINED WITHOUT OBTAINING THE QUALITY WISE STOCK AND CONSUMPTION. 5(II). LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF ITAT, AHMEDABAD BENCH IN CASE OF M/S. DHAMI BROTHERS (SUP RA) WITH A PROPOSITION THAT EVEN IF THE QUALITY WISE DETAILS OF THE STOCK WERE NOT PRODUCED BEFORE THE A.O. THE BOOK RESULT CANNOT BE REJECTED. THERE WA S NO DISPUTE ABOUT THE FACT THAT ASSESSEE HAD NOT MAINTAINED QUALITY WISE DETAI LS OF THE CLOSING STOCK IN CASE OF DHAMI BROTHERS. WHILE IN THE ASSESSEES CA SE, THE A.O. AFTER DISCUSSING THE ISSUE IN DETAIL HAS ALREADY HELD THA T THOUGH THE ASSESSEE WAS MAINTAINING QUALITY WISE AND QUANTITY WISE DETAIL O F ITS STOCK BUT THE SAME WERE NOT PRODUCED BEFORE THE A.O. IN VIEW OF THE ABOVE, WE FIND THAT THE FACTS IN THE ABOVE CASE RELIED UPON BY THE LD. COUN SEL FOR THE ASSESSEE ARE DIFFERENT AND THEREFORE, THE RATIO AS LAID DOWN IN THIS CASE, IS NOT APPLICABLE TO THE FACT OF THIS CASE. THE CO-ORDINATE C BENCH, AHMEDABAD IN ITA NO. 3089/AHD/07 & ITA NO. 2585/AHD/09 FOR A.Y. 04-05 & 05-06 IN CASE OF HANSAL DIAM, SURAT, HAD ALLOWED THE APPEAL OF THE REVENUE ON IDENTICAL ISSUE BY FOLLOWING THE ITAT, MUMBAI BENCH DECISION IN CASE O F SAMIR DIAMONDS EXPORTS LTD. (1999) 71 ITD 75 (MUM.), WHEREIN THE BOOKS RESULT WERE REJECTED U/S. 145(3) OF THE IT ACT ON THE BASIS OF LOW GP AS WELL AS VARIOUS DEFECTS POINTED OUT BY THE A.O. IN MANUFACTURING OF DIAMOND INCLUDING NOT SUBMISSION ITA NOS. 2310 & 4010/AHD/2008, A.Y. 04-05 & 05-06 PAGE 32 OF QUALITATIVE DETAILS OF OPENING STOCK, PURCHASE, PRODUCTION, SALE & CLOSING BALANCE OF STOCK TO THE A.O. THE ITAT, JAIPUR A BENCH HELD IN CASE OF CHAMPA LAL CHOUDHARY (2012) 24 TAXMANN.COM 308 (JAI PUR), THAT QUALITATIVE AND QUANTITATIVE DETAILS ARE REQUIRED TO MAINTAIN F OR DEDUCING THE CORRECT INCOME. THEREFORE, WE HAVE CONSIDERED VIEW THAT CI T(A) WAS RIGHT IN ENHANCING THE INCOME IN A.Y. 04-05 AND REVERSING TH E ORDER OF THE CIT(A) IN A.Y. 05-06 BECAUSE IN BOTH THE YEARS, THE FACTS OF THE ASSESSEE ARE IDENTICAL. 6. IN THE RESULT, THE ASSESSEES APPEAL IN A.Y. 04- 05 IS DISMISSED AND REVENUES APPEAL IN A.Y. 05-06 IS ALLOWED. THESE ORDERS PRONOUNCED IN OPEN COURT ON 24.01.2014 SD/- SD/- ( D.K.TYAGI) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY S.K.SINHA - - - - $ $$ $ .)/ .)/ .)/ .)/ 0/,) 0/,) 0/,) 0/,) / COPY OF ORDER FORWARDED TO:- 1. '# / REVENUE 2. # / ASSESSEE 3. 44 ) &5 / CONCERNED CIT 4. &5- / CIT (A) 5. /#9 .)' , , / DR, ITAT, AHMEDABAD 6. ; <= / GUARD FILE. BY ORDER/ - , >/ 4' , !