M/s. Bhansali Diamonds, Surat V. The ACIT.,Circle-6, Surat

ITA 4065/AHD/2007

• Counselvise Citation: 406520514 RSA 2007
• Duration Of Justice: 4 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 24-01-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 07-11-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA
• Assessee Lawyers: KK SHAH
• Keywords: Rejection of books of accounts; Business income; Search and seizure; Valuation report
• Section: 143(3); 80HHC; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE SHRI D. K. TYAGI, JM AND SHRI A. MOHAN ALAN KAMONY, AM) ITA NO.4065/AHD/2007: A. Y.: 2004-05 M/S. BHANSALAI DIAMONDS, 201, RAJ CHAMBERS, HARIPURA, HAT FALIA, SURAT 395 003 PA NO. AACFB 4685 Q VS THE A. C. I. T., CIRCLE-6, ROOM NO.623, AAYAKAR BHAVAN, SURAT (APPELLANT) (RESPONDENT) APPELLANT BY SHRI K. K. SHAH, AR RESPONDENT BY SHRI S. K. GUPTA, CIT DR DATE OF HEARING: 02-05-2012 DATE OF PRONOUNCEMENT:18-05-2012 O R D E R PER A. MOHAN ALANKAMONY: THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY THE ORDER OF THE LEARNED CIT( A)-IV, SURAT IN APPEAL NO. CAS-IV/340/06-07 DATED 20-09-2007, FOR A SSESSMENT YEAR 2004-05. 2. AT THE TIME OF HEARING, THE ASSESSEE DID NOT PRE SS GROUNDS NO.3 AND 4 OF THE APPEAL AND HENCE THE SAME ARE DISPOSED OF AS NOT PRESSED. GROUND NO.5 OF THE APPEAL IS GENERAL IN NATURE AND DOES NOT SURVIVE FOR ADJUDICATION. GROUNDS NO.1 AND 2 TAKEN BY THE ASSES SEE IN ITS APPEAL ARE REPRODUCED HEREIN BELOW: ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 2 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(APPEALS) ERRED IN UPHOLDING THE ADDITION MADE B Y THE LEARNED ASSESSING OFFICER ON ACCOUNT OF REVALUATION OF CLOSING INVENTORY OF CUT & POLISHED DIAMONDS AT RS.1,17,84,127/- BY ADOPTING AVERAGE COST OF PRODUC TION. 2. THE LEARNED CIT(APPEALS) ERRED IN UPHOLDING THE REJECTION OF BOOKS BY THE ASSESSING OFFICER U/S 145 OF THE INCOM E TAX ACT WITHOUT TAKING INTO CONSIDERATION THAT VALUE A DOPTED BY THE APPELLANT WAS AS PER VALUE ARRIVED BY THE CERTI FIED GOVT. APPROVED VALUER. 3. THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING OF POLISHED DIAMONDS AND EXPORTING THE SAME. THE ASSESSEE FILED ITS RETURN ON 24-09-2004 DECLARING TOTAL INCO ME OF RS.37,62,186/- ALONG WITH FORM NO.3CB AND 3CD. SUBSEQUENTLY, THE C ASE WAS SELECTED FOR SCRUTINY AND ORDER U/S 143(3) OF THE ACT WAS PA SSED ON 30/11/2006. DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICE U/S 142 OF THE ACT DATED 18-05-2005 AND 01-09-2006 ALONG WITH DETAILED QUESTIONNAIRES WERE ISSUED TO THE ASSESSEE. THE ASSESSEE WAS ALSO REQUESTED TO FURNISH CERTAIN DETAILS. THE LD.AO OBSERVED FROM TH E VALUATION OF THE CLOSING STOCK OF POLISHED DIAMONDS THAT THE ASSESSE E HAD ADOPTED AVERAGE PRICE PER CARAT OF POLISHED DIAMOND AT RS.4 000/- BY TAKING LOWER COST OR NET REALIZABLE VALUE. THE ASSESSEE HAD SHOW N WORKING OF CLOSING STOCK OF POLISHED DIAMOND AS ON 31-03-2004 AS UNDER : SR. NO. PARTICULARS QUANTITY VALUE AVERAGE RATE PER CARAT 01 OPENING STOCK 3549.81 1,59,74,145 4500 02 COST OF MANUFACTURING 8530.95 6,69,41,159 7847 03 COST OF POLISHED DIAMOND 12080.76 8,29,15,304 6863 ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 3 SR. NO. PARTICULARS QUANTITY (CTS.) AMOUNT (RS.) 01 EXPORT & LOCAL SALE OF CUT & POLISHED DIAMOND 10363.31 8,57,88,210 02 LESS: GROSS PROFIT @ 11.35% -- 97,36,961 03 COST OF GOODS SOLD 10,363.31 7,60,51,249 SR. NO. PARTICULARS QUANTITY (CTS.) AMOUNT (RS.) 01 COST OF POLISHED DIAMONDS 12080.76 8,29,15,304 02 LESS: COST OF GOODS SOLD 10363.31 7,60,51,249 03 COST OF CLOSING STOCK OF POLISHED DIAMONDS 1717.45 68,64,055 04 AVERAGE VALUE PER CARAT -- 3997 THE LEARNED AO FURTHER OBSERVED THAT THE ASSESSEE D ID NOT MAINTAIN ANY QUALITY WISE DETAILS OF POLISHED DIAMONDS SUCH AS C LARITY, CUT AND COLOUR ETC., WHICH IS ESSENTIAL FOR DETERMINING THE MARKET VALUE OF POLISHED DIAMONDS AND THAT THE ASSESSEE HAD VALUED THE CLOSI NG STOCK OF POLISHED DIAMOND AT LOWER OF THE COST OR NET REALIZ ABLE VALUE I.E. MARKET VALUE WHICH IS LESS THAN ACTUAL AVERAGE COST. THE L EARNED AO THEREFORE ISSUED SHOW CAUSE AS TO WHY ACTUAL COST SHOULD NOT BE CONSIDERED FOR VALUATION OF THE CLOSING STOCK OF POLISHED DIAMONDS BY REJECTING THE BASIS OF VALUATION ADOPTED BY THE ASSESSEE. IN THE SHOW-C AUSE THE LEARNED AO HAS POINTED OUT THE FOLLOWING DEFICIENCIES IN THE V ALUATION METHOD ADOPTED BY THE ASSESSEE:- I) THE QUALITY-WISE DETAILS OF THE POLISHED DIAMON D WHICH HAVE BEEN MANUFACTURED/PURCHASED DURING THE RELEVANT F.Y . HAVE NOT BEEN MAINTAINED ON ACCOUNT OF IMPRACTICABILITY. THIS HAS CREATED DIFFICULTIES IN ACTUAL VALUATION OF THE CLO SING STOCK. ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 4 I) IT HAS BEEN FOUND THAT THE VALUE OF POLISHED DI AMOND ADOPTED IN THE CLOSING STOCK AT RS.4000/- IS LESS T HAN THE ACTUAL AVERAGE COST AS COMPUTED AT RS.6861/- PER CA RAT. II) THE VALUE OF POLISHED DIAMOND ADOPTED IN CLOSI NG STOCK AT RS.1040/- IS LESS THAN EXPORT VALUE OF RS.9,656.80/ - AS WELL AS LOCAL SALES VALUE OF RS.2541/- PER CARAT. III) THE REDUCTION OF QUANTITY AND SALE VALUE OF E XPORT MADE DURING THE YEAR FROM THE TOTAL QUANTITY AND TOTAL V ALUE OF POLISHED DIAMONDS AVAILABLE DURING THE YEAR IS WRON G IN ACCOUNTING PRACTICE, AS THERE APPEARS NO BASIS FOR REDUCING TOTAL VALUE OF EXPORT FROM THE TOTAL VALUE OF THE S TOCK AVAILABLE DURING THE YEAR. RATHER IT REPRESENTS A D ISTORTED PICTURE OF THE VALUATION OF CLOSING STOCK OF POLISH ED DIAMOND. IV) AS PER POINT NO.12(A) OF THE 3CD REPORT, THE ME THOD FOR VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS IS COST OR NET REALIZABLE VALUE WHICHEVER IS LOWER. ALSO THAT NO DOCUMENTARY EVIDENCES IN SUPPORT OF BASIS AND WORKI NG OF VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS WAS FURNISHED BY YOU. 3.1 IN RESPONSE TO THE ABOVE SHOW CAUSE NOTICE THE ASSESSEE SUBMITTED THE VALUATION OF THE INVENTORY AS UNDER: ROUGH DIAMONDS AT COST REJECTION DIAMONDS AT NET REALIZABLE VALUE POLISHED DIAMONDS LOWER OF COST OR NET REALIZABLE VALUE AND WORKED OUT AVERAGE VALUE PER CARAT AS EXTRACTED IN PARA 3 HEREINABOVE. THE ASSESSEE FURTHER CONTENDED THAT THAT IT IS PRAC TICALLY VERY DIFFICULT TO MAINTAIN QUALITY WISE INVENTORY OF POLISHED DIAMOND AND NOT POSSIBLE TO KEEP TRACK OF MOVEMENT OF DIAMOND AND THEREFORE, TH E ASSESSEE HAD DONE VALUATION OF THE CLOSING INVENTORY OF CUT AND POLISHED DIAMONDS OF 1717.45 CARATS AT RS.68,70,438/- WHICH COMES TO APP ROXIMATELY ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 5 RS.4000/- PER CARAT DONE THROUGH THE GOVERNMENT APP ROVED VALUER AS ON 31-03-2004 WHICH IS BASED ON MARKET RATE, COPY OF WHICH WAS ALSO FURNISHED BEFORE THE LEARNED AO. IT WAS ALSO FURTHE R SUBMITTED BY THE ASSESSEE BEFORE THE LEARNED AO THAT THE ASSESSEE MA INTAINED PROPER BOOKS OF ACCOUNTS WHICH WERE AUDITED U/S 44AB OF TH E ACT AND THERE WAS NO ADVERSE REMARK IN THE AUDIT REPORT. THE ASSE SSEE ALSO SUBMITTED THAT THE ASSESSEE HAD VALUED THE CLOSING STOCK AT H IGHER THAN AVERAGE COST OF POLISHED DIAMOND I.E. AT RS.4000/- PER CARA T AND THEREFORE, THERE WAS NO QUESTION OF UNDERVALUATION OF CLOSING STOCK OF CUT & POLISHED DIAMOND AND REJECTION OF BOOKS OF ACCOUNTS WAS NOT JUSTIFIED, SINCE THE VALUE OF CLOSING STOCK OF CUT & POLISHED DIAMONDS D ETERMINED AT RS.4000/- PER CARAT WAS AT PAR WITH AVERAGE COST AN D THE VALUE DETERMINED BY THE GOVERNMENT APPROVED VALUER. THE A SSESSEE ALSO FURTHER SUBMITTED THAT THE TOP AND MEDIUM QUALITY O F POLISHED DIAMONDS WERE EXPORTED AFTER RE-ASSORTED BY THE BUYERS AND R EMAINING LOW QUALITY DIAMONDS WERE SOLD IN THE LOCAL MARKET THAT RESULTE D VARIANCE BETWEEN AVERAGE PRICES OF POLISHED DIAMONDS EXPORTED AND SO LD IN THE LOCAL MARKET AND PRAYED THAT THE DIFFERENCE BETWEEN AVERA GE PRODUCTION COST AND VALUE OF CLOSING STOCK SHOULD NOT BE ADDED TO A SSESSEES TOTAL INCOME. 3.2 THE LEARNED AO CONSIDERATION THE REPLY TO THE S HOW CAUSE NOTICE AS WELL AS THE CONTENTIONS AND PLEAS TAKEN BY THE A SSESSEE, OBSERVED THAT THE SUBMISSIONS OF THE ASSESSEE AND THE METHOD OF DETERMINATION OF AVERAGE COST ADOPTED BY THE ASSESSEE WERE FLAWED AN D INCORRECT AND NOT ACCEPTABLE FOR THE FOLLOWING REASONS: 1. AVERAGE COST SHOULD BE BASED ON THE DIRECT COSTS OF MANUFACTURING AND NOT THE COST OF GOODS SOLD; ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 6 2. THE ASSESSEE HAS ADOPTED A PATENTLY WRONG APPROA CH BY FIRST FIXING ITS G.P. AND THEN WORKING OUT THE VALU E OF CLOSING STOCK ON THE BASIS OF THE CLAIMED COST OF GOODS SOL D. BY FIXING THE G. P. AT A LOWER RATE FROM THE BEGINNING , THE ASSESSEE HAS ENSURED THAT AVERAGE VALUE OF CLOSING STOCK IS ALSO KEPT LOW; 3. THE COST OF GOODS SOLD DETERMINES THE G. P. AND NOT THE OTHER WAY; 4. THE METHOD ADOPTED BY THE ASSESSEE IS BASED ON L OGIC OF REVERSE CALCULATION AND HENCE UNACCEPTABLE. FIRST I T HAS FIXED THE G. P. AT A VERY LOW RATE, THEN NATURALLY, THIS LOW VALUE OF G. P. BINDS THE VALUE OF CLOSING STOCK TO A LOWER V ALUE, IN ORDER TO PRESERVE THE ACCOUNTING IDENTITY. 5. THE FLAWED APPROACH TAKEN BY THE ASSESSEE UNRAVE LLED BELOW BY DISCUSSING THE DETAILS OF A TRADING ACCOUN T: TRADING ACCOUNT OPENING STOCK (OS) SALES (S) PURCHASES (P) CLOSING STOCK (CS) DIRECT COSTS OF MANUFACTURING (DC) G. P.= (OS+P+DC-S-CS) 3.3 THE LEARNED AO FURTHER OBSERVED THAT THE AS SESSEES CONTENTION THAT THE CLOSING STOCK VALUED AT RS.68,70,438/- WHI CH WORKS OUT TO RS.4000/- PER CARAT AS PER GOVERNMENT APPROVED VALU ERS VALUATION REPORT OF INVENTORY OF CUT & POLISHED DIAMONDS AS O N 31-03-2004 WAS NEITHER RELIABLE NOR ACCEPTABLE BECAUSE THE VALUATI ON REPORT DID NOT MENTION QUALITY WISE DETAILS OF THE STOCK EXCEPT ME NTIONING VALUE OF A BOX CONTAINING 53 PACKETS OF VARIOUS KIND OF CUT A ND POLISHED DIAMONDS OF DIFFERENT QUALITY AND SIZE. THE LEARNED AO ACCORDINGLY REJECTED THE BASIS OF VALUATION OF CLOSING STOCK AD OPTED BY THE ASSESSEE BY REJECTING THE BOOKS OF ACCOUNTS TO THE EXTENT OF VALUATION OF CLOSING ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 7 STOCK OF POLISHED DIAMOND AND DETERMINED THE UNDERV ALUATION OF THE CLOSING STOCK AT RS.49,13,699/- AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE WHICH RESULTED ADDITION OF GROSS P ROFIT OF THE ASSESSEE @17%.. 4. BEING AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEF ORE THE LEARNED CIT(A) AND IT WAS SUBMITTED BEFORE HIM THAT THE ASS ESSEE FIRM HAD SINCE BEEN DISSOLVED AND DISCONTINUED ITS BUSINESS ACTIVI TIES AND THE POLISHED DIAMONDS LYING WITH IT WERE EXPORTED AS PER PREVALE NT MARKET RATE. THE DIAMONDS WERE PHYSICALLY INSPECTED BY THE CUSTOMS V ALUER AFTER CONSIDERING A MARGIN AT RS.14,121/- AND THEREFORE V ALUE OF DIAMONDS WAS RIGHTLY STATED BY THE ASSESSEE WHO WAS REGULARL Y VALUING ITS CLOSING STOCK AT LOWER OF THE COST OR NET REALIZABLE VALUE. IT WAS FURTHER SUBMITTED THAT IF THE VALUE TAKEN BY THE AO WAS ADOPTED, THE OPENING STOCK OF NEXT YEAR WOULD BE HIGHER THAN THE NET REALIZABLE VALUE AND THEREFORE, ADDITION ON THIS ACCOUNT WAS NOT CORRECT. THE ASSES SEE ALSO SUBMITTED THAT DUE TO RECESSION IN INTERNATIONAL MARKET AND I NCREASE IN PURCHASE PRICE OF ROUGH DIAMONDS THERE WAS A FALL IN GROSS P ROFIT DURING THE YEAR AND PRAYED FOR DELETION OF THE ADDITION BY CITING V ARIOUS CASE LAWS. 5. THE LEARNED CIT(A) CONSIDERING THE SUBMISSION OF THE ASSESSEE UPHELD THE ACTION OF THE LEARNED AO IN MAKING THE A BOVE ADDITION WITH THE FOLLOWING OBSERVATIONS: I HAVE CONSIDERED THE SUBMISSIONS. HOWEVER, I AM N OT INCLINED TO AGREE WITH THE APPELLANT ON THIS ACCOUNT. I DO NOT SEE AS TO HOW THE CASE LAWS CITED BY THE APPELLANT ARE OF ANY HELP TO IT SINCE NONE OF THE CASE LAWS ARE IN RESPECT OF VALUATION OF DIAMON DS. THE APPELLANT'S CONTENTION THAT ONLY LOWER QUALITY DIAM ONDS REMAINED IN THE CLOSING STOCK IS NOT SUPPORTED BY AM DOCUMENTAR Y EVIDENCE. THE APPROVED VALUER'S REPORT IS ALSO INCOMPLETE AND IS OF NO HELP TO THE, APPELLANT, SINCE IT IS A VERY GENERAL REPOR T AND DOES NOT GIVE ANY PIECE WISE DETAILS OR EXACT INFORMATION ABOUT T HE LOT OF ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 8 DIAMONDS AND SHOWS THE MARKET PRICE TO BE LESS THAN THE AVERAGE COST OF PRODUCTION. EVEN IN RESPECT OF SALE OF DIAM ONDS IN THE CLOSING STOCK NO EXPLANATION HAS BEEN OFFERED AND T HEREFORE THE METHOD OF VALUATION OF CLOSING STOCK OF POLISHED DI AMONDS HAS TO BE ON THE BASIS OF AVERAGE COST OF MANUFACTURING. F URTHER, THERE IS NO JUSTIFICATION FOR A SHARP FALL IN GP COMPARED TO LAST YEAR AND THE REASONS ADVANCED BY THE APPELLANT ARE VAGUE AND GEN ERAL. THERE IS NO DOUBT ABOUT THE FACT THAT THE APPELLANT HAS N OT MAINTAINED ANY QUALITY WISE DETAILS OF PRODUCTION AND CLOSING STOCK OF POLISHED DIAMOND. THAT WOULD MEAN THAT THE CLOSING STOCK HAS BEEN VALUED BY THE APPELLANT AS PER HIS CONVENIENCE. ALTHOUGH I AM INCLINED TO AGREE WITH THE APPELLANT THAT THE PRICE OF DIAMOND WOULD DEPEND UPON A NUMBER OF FACTORS BUT THE METHOD OF VALUATIO N ADOPTED BY THE APPELLANT IS NOT ACCEPTABLE SINCE IT WILL DEPEN D UPON THE APPELLANT'S WORD ONLY AND WOULD HAVE NO SCIENTIFIC OR MATHEMATICAL BASIS BEHIND IT. THE APPELLANT COULD VERY WELL VALU E A PIECE OF DIAMOND WHICH HAS A COST PRICE OF RS.L LAKH AT RS.1 0,000/- POINTING OUT A NUMBER OF FACTORS BUT THAT WOULD NOT BE ITS P RICE AS SUCH. IN ORDER TO ARRIVE AT A CORRECT PICTURE OF CLOSING STO CK, THE ONLY METHOD AVAILABLE WOULD BE THE AVERAGE COST PRICE WHICH HAS BEEN RIGHTLY ADOPTED BY THE AO, THEREFORE, THERE IS NO JUSTIFICA TION IN APPELLANT'S CLAIM THAT THE AVERAGE VALUE OF CLOSING STOCK SHOULD BE TAKEN AT RS.4000 PER CARAT. THE AO IN HIS ORDER HAS CORRECTLY WORKED OUT THE VALUE OF CLOSING STOCK ON THE BASIS OF WHICH HE HAS WORKED OUT THE AVERAGE PRICE OF POLISHED DIAMOND AT RS.6859 PER CARAT. THEREFORE, THE SUPPRESSION OF CLOSING STOCK WORKED OUT BY THE AO IS CORRECT AND ADDITION ON THIS ACCOUNT IS H EREBY CONFIRMED. THE NEXT GROUND OF APPEAL IS REGARDING REJECTION OF BOOKS OF ACCOUNTS, I DO NOT SEE AS TO WHY THIS GROUND HAS BE EN TAKEN SINCE THE BOOKS OF ACCOUNTS HAVE NOT BEEN REJECTED BY THE AO BUT HE HAS ONLY RE-VALUED THE CLOSING STOCK BY TAKING A RA TIONAL AND LOGICAL APPROACH, THIS GROUND THEREFORE FAILS. 6. BEING FURTHER AGGRIEVED BY THIS ACTION OF THE LE ARNED CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. THE LEARNED AR FO R THE ASSESSEE SUBMITTED THAT THE LEARNED AO HAD CHANGED THE METHO D OF VALUATION OF STOCK AND ADOPTED AVERAGE COST METHOD INSTEAD OF CO ST OR NET REALIZABLE VALUE WHICH WAS ADOPTED BY THE ASSESSEE YEAR AFTER YEAR AND THE SAME WAS SCRUTINIZED AND ACCEPTED BY THE REVENUE IN EARL IER YEARS. IT WAS ALSO SUBMITTED THAT THE METHOD OF VALUATION WAS CHANGED BY THE LEARNED AO ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 9 WITHOUT ANY BASIS OF MATERIAL EVIDENCE TO SHOW THAT THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE WAS INCORRECT AND THAT IT WAS THE BURDEN OF THE REVENUE TO SHOW THAT ASSESSEES VALUA TION IS INCORRECT. IN THIS REGARD THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SHAKTI TRADING CO. VS CIT 250 ITR 871. IT WAS FURTHER SUBMITTED BY THE LEARNED AR THAT EVEN IF CH ANGE IN METHOD OF VALUATION OF STOCK IS ADOPTED SIMILAR CHANGE OUGHT TO BE ADOPTED TO ARRIVE AT THE CORRECT PROFIT FOR THE YEAR UNDER CON SIDERATION AS HELD IN THE CASE OF CIT VS MAHAVIR ALUMINIUM LTD., 297 ITR 77 ( DEL) WHICH WAS FURTHER FOLLOWED IN THE CASE OF DICT VS BECK INDIA LTD., 26 SOT 141. THE LEARNED AR ALSO SUBMITTED THAT THE VALUATION OF STOCK WAS JUSTIFIED BY COST ARRIVED AT SALES MINUS GP METHOD AND THIS M ETHOD WAS ACCEPTED BY ITAT AHMEDABAD BENCH IN THE FOLLOWING C ASES: (I) RAVI DIAMONDS VS ACIT ITA NO.416 & 4103/AHD/ 2007 (II) ACIT VS GAMI EXPORTS ITA NO. 3146/AHD/2007 AND (III) ACIT VS B. SURESHKUMAR & CO. ITA NO.4599/A HD/2007 IT WAS FURTHER SUBMITTED THAT IF SIMILAR METHOD OF VALUATION IS ADOPTED FOR THE OPENING STOCK, THEN THERE WOULD BE HIGHER VALUA TION OF OPENING STOCK BY RS.1,07,45,275/-. SINCE THE ASSESSEE ENTITLED TO DEDUCTION U/S 80 HHC OF THE ACT SUCH HIGHER VALUATION OF STOCK WOULD BE ALLOWABLE AS COST AS OPENING STOCK IN THE NEXT YEAR AND AS THERE IS NO DEDUCTION U/S 80HHC OF THE ACT IN THAT YEAR, THE CHANGE OF METHOD OF VALUATION WOULD RESULT IN LOSS OF REVENUE. THE AVERAGE GROSS PROFIT OF THE ASSESSEE DURING THE PRECEDING YEARS WAS RANGING FROM 10% TO 13% AND HENCE ADOPTING GROSS PROFIT AT 17% WAS NOT JUSTIFIED. IN ALTERNATE CONTENTIONS, THE ASSESSEE PRAYED THAT IN CASE THE ADDITION IS UP HELD, THEN THE SAME AMOUNT MAY BE ALLOWED AS VALUE OF OPENING STOCK IN THE YEAR 2004-05. THE LEARNED DR ON THE OTHER HAND, SUPPORTED THE ORD ERS OF THE ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 10 AUTHORITIES BELOW AND CONTENDED THAT THE LEARNED CI T(A) WAS CORRECT IN CONFIRMING THE ADDITION MADE ON ACCOUNT OF VALUATI ON OF CLOSING STOCK. THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE VALUA TION OF THE CLOSING STOCK WAS IN ACCORDANCE WITH THE METHOD OF ACCOUNTI NG REGULARLY ADOPTED BY IT. IN THE ABSENCE OF THIS, THE AO WAS C ORRECT TO VALUE THE ROUGH DIAMONDS ON THE BASIS OF AVERAGE COST. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, GONE THROUG H THE ORDERS OF THE AUTHORITIES BELOW AND CAREFULLY CONSIDERED THE MATERIALS ON RECORD INCLUDING THE PAPER BOOK SUBMITTED BY THE LEARNED A R. IN THIS CASE, BEFORE US, THE LEARNED AO HAS REJECTED THE VALUATIO N OF CLOSING STOCK SHOWN BY THE ASSESSEE AND HAS WORKED OUT THE STOCK AS PER THE AVERAGE COST METHOD AND AN ADDITION WAS MADE FOR RS .47,13,689/-. THE ASSESSEE HAD VALUED THE CLOSING STOCK ONLY BASED ON THE VALUATION REPORT SUBMITTED BY APPROVED VALUER. THE ASSESSEE H AS NOT MAINTAINED STOCK RECORDS AND OTHER BOOKS IN ORDER TO ASCERTAIN THE COST OF CLOSING STOCK. THEREFORE, ACTUAL COST INCURRED BY THE ASSES SEE WITH RESPECT TO THE CLOSING STOCK IS NOT AVAILABLE FOR CONSIDERATIO N. THE ASSESSEE HAS SIMPLY CLAIMED TO BE IN POSSESSION OF SOME STOCK AN D VALUED THE SAME ARRIVED AT CLOSING STOCK FIGURE AF RS.68,79,438/- W HICH IN ANY PARLANCE IS NOT ACCEPTABLE. FROM THE VARIOUS DECISIONS OF THE H ONBLE APEX COURT IT IS UNDISPUTED THAT THE VALUE OF THE CLOSING STOCK I S TO BE ARRIVED AT THE COST OR MARKET PRICE WHICHEVER IS LOWER. IN THIS GI VEN CASE BEFORE US, THE ACTUAL COST OF CLOSING STOCK OR THE PHYSICAL QUANTI TY AVAILABLE WITH THE APPELLANT HAS NOT BEEN SUBSTANTIATED BY MAINTAINING PROPER BOOKS OF ACCOUNTS OR RECORDS. FURTHER, THE LEARNED AO HAS ST ATED VARIOUS FACTORS TO DISREGARD THE VALUATION REPORT SUBMITTED BY THE ASSESSEE, AND THEY ARE REPRODUCED HEREIN BELOW: ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 11 1. THE FACT THAT THE DIAMONDS AT THE DISPOSAL OF T HE ASSESSEE INCLUDED IN THE CLOSING STOCK HAD ACTUALLY BEEN OFF ERED FOR VALUATION IS NOT SUBSTANTIATED AS THERE HAS NEITHER BEEN ANY QUALITY DETAILS MAINTAINED BY THE ASSESSEE NOR ANY QUALITATIVE DETAILS HAVE BEEN REPORTED BY THE VALUE R, 2. THE VALUERS REPORT IS INCOMPLETE AND LACKS FOUN DATION AS IT DOES NOT GIVE ANY DETAILS REGARDING NUMBER OF PIECE S INCLUDED IN THE CLOSING STOCK. THE VALUE OF DIAMOND S DEPENDS UPON THE NUMBER OF PIECES INCLUDED IN THE L OT. IN THE ABSENCE OF PIECEWISE DETAILS, THE VALUERS REPORT I S UNACCEPTABLE; 3. THE VALUERS REPORT IS ACCEPTABLE DURING PROCEDU RES WHERE THE PIECEWISE DETAILS AND THE EXACT INFORMATION ABO UT THE LOT OF DIAMONDS ARE AVAILABLE WITH THE DEPARTMENT LIKE THAT OF SEIZED DIAMONDS DURING SEARCH AND SEIZURE OPERATION S. BUT IN THE INSTANT CASE, WHEN THE EXACT QUALITY, PIECE, OR LOT-WISE DETAILS ARE NOT AVAILABLE WITH THE DEPARTMENT, THE VALUERS REPORT BECOMES VAGUE AND UNACCEPTABLE. 4. THE VALUERS REPORT IS INCOMPLETE AS IT DOES NOT GIVE ANY DETAILS REGARDING QUALITY; 5. THE VALUERS REPORT IS PERVERSE AND IS BASED ON PATENT DEFECT IN TERMS OF VALUING THE CLOSING STOCK AT LES S THAT THE AVERAGE COST OF MANUFACTURING; 6. THE VALUERS REPORT HAS SHOWN THE MARKET PRICE T O BE LESS THAN THE AVERAGE COST OF PRODUCTION, WITHOUT PUTTIN G ANY EVIDENCE REGARDING RULING MARKET PRICE, SUCH AS SUB JECTIVE AND INCOMPLETE DOCUMENT IS NOT A VALID PIECE OF EVI DENCE AND IS NOT ACCEPTABLE. 7. THE ASSESSEE HAS CLAIMED THAT IT HAS VALUED CLOS ING STOCK AT AVERAGE COST, BUT HAS SUBSEQUENTLY ADOPTED A FLAWED AND BIASED METHOD TO JUSTIFY ITS VALUATION. THE PERVERS ITY OF THE COMPUTATION OF AVERAGE COST IS DISCUSSED IN DETAIL ABOVE. 8. THE ASSESSEE HAS ACCEPTED THAT THE CLOSING STOCK SHOULD BE VALUED AT AVERAGE COST OR MANUFACTURING, BUT HAS FA ILED TO WORK OUT THE PROPER VALUE OF CLOSING STOCK ON ACCOU NT OF WRONG METHOD ADOPTED. 9. THE ASSESSEE ITSELF HAS APPROVED THE VALUATION O F CLOSING STOCK AT AVERAGE COST OF PRODUCTION. HENCE, THE SAM E IS ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 12 CALCULATED PROPERLY AND THE TRUE INCOME OF THE ASSE SSEE IS DETERMINED AS UNDER. 7.1 THE ASSESSEE IS IN THE BUSINESS OF IMPORT AND E XPORT AND MANUFACTURING OF DIAMONDS. FOR MANUFACTURING OF DIA MONDS, IT IS VERY ESSENTIAL TO MAINTAIN COMPLETE RECORDS WITH RESPECT TO OPENING STOCK, PURCHASES, LABOUR COST, PROCESSING COST, STOCK MOVE MENT REGISTERS ETC. IN ORDER TO DETERMINE THE CORRECT PROFIT AND STOCK. IN THE ABSENCE OF SUCH RECORDS IT IS NOT POSSIBLE TO ARRIVE AT THE CORRECT VALUE OF THE CLOSING STOCK. IN SUCH CIRCUMSTANCES IN THE PRESENT CASE, T HE LEARNED AO HAS RIGHTLY REJECTED THE BOOKS OF ACCOUNTS WITH RESPECT TO THE QUANTIFICATION AND VALUATION OF THE CLOSING STOCK. FURTHER EXAMINI NG THE FACTS, IT IS APPARENT THAT THE LEARNED AO HAS VALUED THE STOCK I N SUCH A WAY THAT THE GROSS PROFIT OF THE ASSESSEE WOULD FALL AROUND 17%. AT THE SAME TIME, IT IS PERTINENT TO NOTE THAT THE GROSS PROFIT OF THE ASSESSEE DURING THE PRECEDING YEARS WAS RANGING BETWEEN10% TO 13%. IN THE ALTERNATE SUBMISSION, THE ASSESSEE ITSELF HAD AGREED FOR THE ADDITION OF RS.12,11,001/- BASED ON THE FOLLOWING WORKING: AVERAGE GROSS PROFIT (AS PER WORKING ON PAGE NO.34 OF THE PAPER BOOK) 12.62 LESS: GP OF THE CURRENT YEAR 10.21 2.41 LESS: FALL IN GP TO THE EXTENT OF 1% CONSIDERED AS REASONABLE 1.00 1.41 VALUATION OF STOCK TO BE INCREASED TO THE EXTENT OF FALL IN GP ONLY TOTAL SALES 8,58,86,604 AT 1.41% 12,11,001 ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 13 CONSIDERING THE ALTERNATE SUBMISSION OF THE ASSESSE E AND THE FACT THAT THE ASSESSEE WAS EARNING GROSS PROFIT OF 10% TO 13% IN THE PRECEDING YEARS, IT WOULD BE APPROPRIATE TO ADOPT THE AVERAGE PROFIT OF 12.62% IN DETERMINING THE CLOSING STOCK. THEREFORE, WITH THE FOLLOWING WORKING, WE HOLD THAT THE CLOSING STOCK OF THE APPELLANT TO BE RS.84,92,157/- AGAINST RS.68,70,436/- ADOPTED BY THE APPELLANT. COMPUTATION OF CLOSING STOCK:- CLOSING STOCK DECLARED BY THE APPELLANT X AVERAGE G ROSS PROFIT OF THE APPELLANT DURING THE PRECEDING YEARS BY GROSS PRO FIT OF THE CURRENT YEAR I.E. RS.68,70,438/- X 12.62 10.21 = RS.84,92,157/ -. ACCORDINGLY, WE SUSTAIN AN ADDITION OF RS.16,21,719 /- (RS.84,92,157 RS.68,70,438). 7.2 WITH RESPECT TO THE PRAYER OF THE LEARNED AR TH AT IF THE VALUE OF CLOSING STOCK IS HELD TO BE AT RS.1,17,84,127/-, TH EN THE SAME MAY BE TAKEN AS OPENING STOCK FOR THE SUBSEQUENT YEAR, WE ARE OF THE CONSIDERED VIEW THAT ONCE THE CLOSING STOCK IS DETE RMINED TO BE OF CERTAIN VALUE THEN THE SAME FIGURE SHOULD BE TAKEN AS OPENING STOCK FOR THE SUBSEQUENT YEAR. THEREFORE, THIS STAND OF THE A SSESSEE IS ACCEPTED AND THE REVENUE IS DIRECTED TO ADOPT VALUE OF OPENI NG STOCK FOR THE SUBSEQUENT YEAR AT RS.84,92,157/- WHICH IS THE VALU E OF THE CLOSING STOCK RECOGNISED FOR THE PRECEDING YEAR. LAST, BUT NOT THE LEAST, WE STRONGLY ADVISE THE ASSESSEE TO MAINTAIN PROPER BOO KS OF ACCOUNTS AS OBSERVED ABOVE IN ORDER TO AVOID LITIGATIONS AND CO MPLICATION KEEPING IN ITANO.4065/AHD/2007(AY2004-05): M/S. BHANSALI DIAMOND VS ACIT, CIR-6, SURAT 14 NATURE OF THE HIGH PROFILE BUSINESS VIZ MANUFACTURI NG OF POLISHED DIAMONDS. ACCORDINGLY BOTH THE GROUNDS RAISED BY TH E ASSESSEE ARE DISPOSED OFF. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18-05-2012 SD/- SD/- (D. K. TYAGI) JUDICIAL MEMBER (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER LAKSHMIKANT DEKA/ LAKSHMIKANT DEKA/ LAKSHMIKANT DEKA/ LAKSHMIKANT DEKA/- -- - COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DY. REGISTRAR, ITAT, AHMEDABAD