The ACIT,Range-6, Surat V. M/s. Om Anand Exports,

ITA 4303/AHD/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9744 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-09-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 05-08-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 05-12-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ALOK JOHRI
• Assessee Lawyers: RASESH SHAH
• Keywords: Business income; Depreciation; Permanent establishment; Bad and doubtful debts; Corroborative evidences; Revised return; Deduction Disallowance
• Section: 80HHC; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD B BENCH BEFORE SHRI G.D. AGARWAL, VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.4303 & 3897/AHD/2007 [ASSTT.YEAR:2004-05] ASSTT. COMMISSIONER OF INCOME-TAX -VS- M/S. OM AN AND EXPORTS, CIRCLE-6, SURAT, ROOM NO.623, 6/1271, BHUT SHERI , AAYAKAR BHAVAN, MAJURA GATE, MAHIDHARPUR A, SURAT SURAT PAN NO.AAAFO4473B M/S. OM ANAND EXPORTS, -VS- ADDL. COMMISSIONER OF INCOME 6/1271, BHAGWATI NIWAS, TAX, RANGE-6,SURAT MAHIDARPURA, BHAT SHERI SURAT (APPELLANT) (RESPONDENT) REVENUE BY : SHRI ALOK JOHRI, CIT-DR ASSESSEE BY:SHRI RASESH SHAH, AR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THESE CROSS APPEALS ONE BY REVENUE AND ANOTHER B Y ASSESSEE, ARE ARISING OUT OF ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS )-IV, SURAT IN APPEAL NOS.CAS- IV/349/06-07 DATED 10-09-2007. THE ASSESSMENT WAS F RAMED BY ACIT, RANGE-6, SURAT U/S143(3) OF THE INCOME-TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 15-12-2006 FOR THE ASSESSMENT YEAR 2004-05. 2. THE FIRST ISSUE IN REVENUES APPEAL IN ITA NO.4303/AHD/2007 IS AGAINST THE ORDER OF CIT(A) IN ACCEPTING THE BOOK RESULTS REJEC TED BY THE ASSESSING OFFICER U/S.145 OF THE ACT. FOR THIS, THE REVENUE HAS RAISE D THE FOLLOWING GROUND NO.1 :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-IV, SURAT HAS ERRED THAT NOT FIND ANY JUSTIF ICATION IN A.OS ACTION IN REJECTING THE BOOK RESULT U/S.145(3) OF THE ACT. ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 2 3. THE BRIEF FACTS ARE THAT THE RETURN OF INCOME WA S FILED BY ASSESSEE ON 26-10- 2004 DECLARING TOTAL INCOME OF RS.13,79,150/- ACCOM PANIED WITH AUDITED FINANCIAL STATEMENTS, AUDITORS REPORT IN FORM NO.3CB AND 3CD AS PER PROVISIONS OF SECTION 44AB OF THE ACT. THE ASSESSEE FILED REVISED RETURN OF INCOME ON 29-11-2004 DECLARING TOTAL INCOME OF RS.3,28,230/- ON THE GROU ND THAT SALES PROCEEDS HAVE BEEN FINALLY REALIZED AND EXCHANGE RATE DIFFERENCE HAS B EEN CALCULATED ALONG WITH REVISED CERTIFICATE U/S.80HHC OF THE ACT AND FIGURES OF GRO SS PROFIT, NET PROFIT AND TURNOVER OF LAST YEAR, CURRENT YEAR AND SUCCEEDING TWO YEARS AR E TABULATED AS UNDER:- A.Y. TURNOVER GROSS PROFIT GOSS PROFIT RATIO NET PROFIT NET PROFIT RATIO 2003-04 163500653 16779570 10.26 5553772 3.40 2004-05 263922935 26131232 9.90 1955616 0.74 2005-06 391716508 27715083 7.08 9610822 2.45 2006-07 6123897272 43750766 7.14 16068658 2.62 ACCORDING TO ASSESSEE, THERE WAS A BAD DEBT OF RS.1 ,06,87,888 IN ASSESSMENT YEAR 2004-05, SO NET PROFIT RATIO WITHOUT CONSIDERING TH E SAME WILL BE 4.79%. THE ASSESSEE-COMPANY FIRM IS ENGAGED IN THE BUSINESS OF PURCHASE OF ROUGH DIAMOND FROM ABROAD AND PARTLY FROM LOCAL MARKET, PROCESSIN G THE SAME AS A FINISHED DIAMOND AND SELLING IT ABROAD AS AN EXPORTER. THERE IS ONLY SLIGHT FALL IN GROSS PROFIT RATIO COMPARED TO LAST YEARS INCREASED TURNOVER BU T GROSS PROFIT RATIO IS MORE COMPARED TO SUCCEEDING TWO YEARS AND NET PROFIT IS ALSO HIGHEST AMONGST ABOVE FOUR YEARS WITHOUT CONSIDERING BAD DEBT IN THE YEAR UNDE R CONSIDERATION. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE WAS NOT MAINTAINING PROPER STOCK REGISTER, SINCE IT DID NOT CONTAIN DETAILS OF DIAMONDS IN TERMS OF QUALITY, SPECIFICATION ETC. THE CLOSING ST OCK OF POLISHED DIAMOND WAS SHOWN AT 837 CARAT BUT THERE WAS NO MENTION ABOUT THE GRA DATION, SPECIFICATION OR VALUE- WISE SEGREGATION OF SUCH STOCK. THE RECORD RELATED WITH MANUFACTURING OF DIAMONDS, PROCUREMENT OF POLISHED DIAMONDS, STOCK REGISTER OR ACCOUNT RELATED WITH DIAMOND MANUFACTURING AND TRADING WAS UNREALIZABLE, NON- GE NUINE AND INCOMPLETE. THEREFORE, THE AO REJECTED THE BOOK RESULT U/S.145( 3) OF THE ACT AND THE ASSESSMENT WAS FINALIZED ON THE BASIS OF MATERIAL FACTS, REFER ENTIAL EVIDENCES AND CIRCUMSTANCES EMBODIED IN THE SET OF FACTS. THE CIT(A) REJECTED T HE FINDINGS OF AO AND ACCEPTED THE BOOK RESULTS BY HOLDING AS UNDER:- ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 3 I HAVE CONSIDERED THE SUBMISSIONS AND GONE THROUGH THE DETAILS. I FIND THAT THE AO HAS REJECTED THE BOOK RESULTS ON THE BASIS O F THE FACT THAT THE STOCK REGISTER DID NOT GIVE COMPLETE INFORMATION REGARDIN G THE QUALITATIVE DETAILS OF POLISHED DIAMONDS. HE HAS ALSO POINTED OUT THE FACT THAT THE LABOUR REGISTER WAS NOT PROPERLY MAINTAINED AND THAT THE VALUATION OF CLOSING STOCK OF ROUGH AND POLISHED DIAMONDS WAS NOT IN ORDER. HERE, I AM INCLINED TO AGREE WITH THE APPELLANT THAT BECAUSE OF A VERY LARGE NUMBER OF PI ECES OF POLISHED DIAMONDS MANUFACTURED OUT OF ROUGH DIAMONDS AND BECAUSE OF T HE DIFFERENCES IN WEIGHT, CLARITY ETC. IT WOULD BE NOT POSSIBLE TO MA INTAIN THE REGISTER IN THE ESTABLISHED FIRM. WHEN THE POLISHED DIAMONDS ARE MA NUFACTURED, THERE WOULD BE A MIXING OF THESE DIAMONDS WITH THE EXISTING STO CK AND IT IS ONLY AFTER ASSORTING THESE DIAMONDS THAT THE EXPORTS ARE MADE AND IT IS ONLY AT THAT POINT OF TIME THAT THE POLISHED DIAMONDS WOULD BE IDENTIF IED. IT IS ALSO SEEN THAT DAY TO DAY STOCK REGISTER IS MAINTAINED ON QUANTITATIVE BASIS AND THE SAME METHOD HAS BEEN FOLLOWED BY THE APPELLANT YEAR AFTER YEAR. I ALSO DO NOT FIND ANY MERIT IN THE OBSERVATION OF THE AO THAT THE STOCK REGISTE R WAS ONLY A CALCULATION SHEET. THE STOCK REGISTER MAINTAINED BY THE APPELLA NT GIVES INFORMATION ABOUT DAY TO DAY STOCK OF ROUGH DIAMONDS WHICH FURTHER IS CATEGORIZED INTO STOCK UNDER CLEAVING, MAKEABLE STOCK AND STOCK IN UNDER M ANUFACTURING. I ALSO FIND MERIT IN THE SUBMISSIONS OF THE APPELLANT THAT WHEN ROUGH DIAMONDS ARE ISSUED TO LABOURERS FOR MANUFACTURE OF POLISHED DIA MONDS, LOT NOS ARE ALLOTTED AND THESE ARE ENTERED IN THE STOCK REGISTER. IT IS SEEN THAT THE PROPER RECORDS OF RECEIPT OF POLISHED DIAMONDS FROM LABOURERS IS B EING MAINTAINED AND THE LABOUR BILLS RAISED CONTAINS OF THE DETAILS. FURTHE R, THE AO HAS ALSO NOT EXAMINED ANY LABOUR OR LABOUR CONTRACTOR IN SUPPORT OF HIS ALLEGATION THAT THE LABOUR REGISTER AND LABOUR PAYMENT MADE WAS NON-GEN UINE. IN VIEW OF THIS, I DO NOT FIND ANY JUSTIFICATION IN ASSESSING OFFICER' S ACTION IN REJECTING THE BOOK RESULTS BY RESORTING TO PROVISIONS OF SECTION 145(3 ) OF THE IT ACT. THIS GROUND OF APPEAL THEREFORE IS DECIDED IN FAVOUR OF THE APP ELLANT. AGGRIEVED, REVENUE CAME IN APPEAL BEFORE US. 4. BEFORE US THE LD. CIT-DR, SHRI ALOK JOHRI, ARGUE D THAT THE CIT(A) HAS NOT ACCEPTED THE CONTENTIONS OF THE ASSESSING OFFICER D ESPITE THE FACT THAT HE HAD MADE DETAILED INQUIRY AND THE BOOKS OF ACCOUNT WERE RIGH TLY REJECTED U/S 145(3) OF THE ACT THE AO DURING THE COURSE OF ASSESSMENT. ACCORDING T O HIM, THE ASSESSEE WAS NOT MAINTAINING PROPER STOCK REGISTER AS IT DID NOT CON TAINS DETAILS OF DIAMONDS IN TERMS OF QUALITY OR SPECIFICATION, GRADATION, QUALITY, CO LOUR ETC. AND SUCH REGISTER WAS FOUND TO BE BOGUS. LD. CIT-DR STATED THAT THERE WAS ALSO NO MENTION ABOUT ANY SORT OF FURTHER BIFURCATION, GRADATION, SPECIFICATION OR VA LUE-WISE SEGREGATION OR OF SUCH STOCK AND THESE FACTS PROVE THAT THESE BOOKS ARE NOT REGI STER BUT THE CALCULATION SHEET HAVING ENTRIES OF PLUS MINUS AND OF THE FIGURES. HE STATED THAT THE POLISHED STOCK REGISTER WAS EXAMINED BY THE BY THE AO AND IT WAS F OUND THAT NOWHERE ANY QUALITY OR ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 4 GRADATION OF POLISHED DIAMONDS CLAIMED TO HAVE BEEN RECEIVED FROM THE FACTORY OR LABOURERS WERE NOT MENTIONED, AND ONLY QUALITY OF R ECEIPT HAD BEEN MENTIONED WITHOUT ANY CORROBORATION. HE STATED THAT THE ASSES SING OFFICER HAS SPECIFICALLY REQUIRED THE ASSESSEE TO EXPLAIN THE STOCK REGISTER BUT HE COULD NOT EXPLAIN THE SAME AND ACCORDINGLY, THE AO CAME TO THE CONCLUSION THAT THE ASSESSEE HAD NOT MAINTAINED RECORDS DELIBERATELY WITH A VIEW TO CONC EALING FULL FACTS OF THE CASE. THEREFORE, THE AO CONSIDERED THAT THE DEFECTIVE STO CK REGISTER CANNOT BE TAKEN AS GENUINE AND CORRECT RECORD REVEALING FULL TRUTH OF THE DIAMOND AND FURTHER WHILE SELLING THE DIAMONDS, THE ASSESSEE REVEALED THE QUA LITY, SPECIFICATION, CUTS, HOWEVER, THE SAME IS NOT MENTIONED IN THE STOCK REGISTER. AC CORDING TO LD. CIT-DR, THIS PROVES THAT MAINTENANCE OF RECORDS CLAIMED TO BE PREPARED DURING THE PROCESS, IS ACCORDING TO THE SWEET WILL OF THE ASSESSEE AND IS SUBJECTIVE LY WITH A VIEW TO MAKE THE QUANTITY AND HAD NOT BEEN MAINTAINED IN A SPONTANEOUS WAY AN D SUCH TYPE OF MAINTENANCE OF RECORDS COULD NOT BE TAKEN AS GENUINE AND RELIAB LE. THE AO DURING THE COURSE OF HEARING FOUND FROM THE EVIDENCES OF LABOUR BILLS OF SO CALLED OUTSIDERS, THE ASSESSEE HAD PRODUCED THE COMPUTERIZED PRINT OUT, THE CRITIC AL ANALYSIS OF SUCH LABOUR BILLS REVELS THAT IT HAD BEEN PREPARED BY THE ASSESSEE IN ITS COMPUTER AND ONLY SIGNATURE OF SOME PARTY OR SO-CALLED JOB WORKER HAD BEEN OBTA INED AND THAT TO THE INDICATION OF CROSS VERIFICATION AS TO WHERE SIGNATURE WAS TO BE OBTAINED OR PUT, SUCH LABOUR BILLS HAD BEEN PREPARED BY THE ASSESSEE HIMSELF AND BY SU CH OUTSIDERS THAT IS WHY AUTHENTICITY OF SUCH LABOUR BILL WAS NOT FOUND PROV ED. FURTHER, THE ASSESSEE HAD NOT PRODUCED ANY ATTENDANCE REGISTERS, ONLY PAYMENT REG ISTERS HAD BEEN PRODUCED, WHICH WERE NOT FOUND REASONABLE BECAUSE THERE WERE DIFFERENCES IN SIGNATURES, THE IMPRESSION OF INK OR ALL SUCH PAYMENT WERE FOUND TO BE DUBIOUS ONE. ACCORDING TO ASSESSING OFFICER, IT APPEARS THAT IN FEW SITTINGS SUCH REGISTER HAD BEEN PREPARED AND DURING THE VERIFICATION AND HEARING OF EVIDENCE S, FURTHER DISCREPANCIES WERE NOTED LIKE NO ATTENDANCE REGISTER, NO VOUCHERS FOR PAYMENT TO WORKERS OR EMPLOYEES CLAIMED TO BE AT OFFICE. THE LD. CIT-DR STATED THAT IN VIEW OF THESE FACTS, THE AO FOUND BEYOND DOUBT THAT RECORDS RELATED WITH MANUFA CTURING OF DIAMONDS, PROCUREMENT OF POLISHED DIAMONDS STOCK REGISTER OR ACCOUNT RELATED WITH DIAMOND MANUFACTURING AND TRADING IS UNRELIABLE, NON-GENUIN E, INCOMPLETE AND INCORRECT, THEREFORE THE AO HAD CORRECTLY REJECTED BOOKS OF AC COUNT OF THE ASSESSEE U/S145(3) OF THE ACT AND THE ORDER OF CIT(A) IN FAVOUR OF THE ASSESSEE IS NOT ACCEPTABLE. ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 5 5. BEFORE US LD. COUNSEL FOR THE ASSESSEE, SHRI RAS ESH SHAH MADE SUBMISSIONS THAT THERE IS NO DEFECT IN THE BOOKS OF ACCOUNT AND ASSESSEE HAS MAINTAINED PROPER STOCK REGISTER. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSE E HAS NOT MAINTAINED PROPER VOUCHERS IN RESPECT OF LABOUR CHARGES, RATHER THESE VOUCHERS ARE SELF-MADE VOUCHERS AND ACCORDINGLY THE EXPENSES CANNOT BE VER IFIED. EVEN THE CLOSING STOCK INVENTORY IS NOT PROPERLY MAINTAINED AND VALUED. TH E RECORD RELATED WITH MANUFACTURING OF DIAMONDS, PROCUREMENT OF POLISHED DIAMONDS, STOCK REGISTER OR ACCOUNTS RELATED WITH DIAMOND MANUFACTURING AND TRA DING WAS UNRELIABLE, NON- GENUINE AND INCOMPLETE. THEREFORE, THE AO HAS RIGHT LY REJECTED THE BOOK RESULTS U/S.145(3) OF THE ACT AND THE ASSESSMENT WAS FINALI ZED ON THE BASIS OF MATERIAL FACTS, REFERENTIAL EVIDENCES AND CIRCUMSTANCES. ACCORDINGL Y, THIS ISSUE OF THE REVENUES APPEAL IS ALLOWED. 7. THE NEXT COMMON ISSUE IN CROSS APPEALS IS AS REG ARDS TO THE ORDER OF CIT(A) IN RESTRICTING THE ADDITION MADE BY THE ASSESSING O FFICER ON ACCOUNT OF VALUATION OF CLOSING STOCK AT RS.2,83,184/- ON ACCOUNT OF ROUGH DIAMONDS AS AGAINST THE ADDITION MADE BY THE ASSESSING OFFICER AT RS.1,33,36,596/-. FOR THIS, BOTH ASSESSEE AND REVENUE HAVE RAISED THE FOLLOWING GROUND NO.1 AND GROUND NO.2 :- ASSESSEES APPEAL ITA NO.3897/AHD/2007 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.2,83,184 /- ON ACCOUNT OF CLOSING STOCK OF ROUGH DIAMOND. REVENUES APPEAL ITA NO.4303/AHD/2007 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-IV, SURAT HAS ERRED IN DELETING THE ADDITION MADE BY THE A.O., ON VALUATION OF CLOSING STOCK AMOUNTING TO RS.13336596 /-. 8. THE BRIEF FACTS LEADING TO THE ABOVE COMMON ISSU E ARE THAT THE ASSESSEE- COMPANY FIRM IS ENGAGED IN THE BUSINESS OF PURCHASE OF ROUGH DIAMOND FROM ABROAD AND PARTLY FROM LOCAL MARKET, PROCESSING THE SAME A S A FINISHED DIAMOND AND SELLING IT ABROAD AS AN EXPORTER. THERE IS FALL IN GROSS PR OFIT RATIO COMPARED TO LAST YEARS TURNOVER BUT TURNOVER INCREASED IN PROPORTION. THE ASSESSING OFFICER NOTICED THAT THE ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 6 ASSESSEE HAS SHOWN CLOSING STOCK OF ROUGH DIAMONDS AT RS.3,56,35,589/- AND POLISHED DIAMONDS AT RS.5,62,33,930/- AND REJECTED DIAMONDS AT RS.3.74 LAKH AND ACCORDING TO HIM THE ROUGH DIAMOND WAS TO BE VALUED AT COST BASIS AND THE FINISHED GOODS WAS TO BE VALUED AT REDUCED MARGIN OF PROFIT . THE ASSESSEE DID NOT ADOPT THIS METHOD FOR VALUING CLOSING STOCK AND ACCORDINGLY, T HE AO WORKED OUT THE COST OF MANUFACTURING OF POLISHED DIAMOND AT RS233,77,91,70 3/- BY ASSUMING 122814.34 CARAT OF ROUGH DIAMONDS AND WORKING OUT MANUFACTURI NG COST AT RS.7,770/- PER CARAT. THE ASSESSEE STATED THAT ROUGH DIAMOND WAS VALUED A S PER PURCHASED PRICE AND THE POLISHED DIAMOND WAS VALUED AT AS PER THE MARKET TR END BY TAKING LAST EXPORT AS WELL AS THE NEXT YEARS EXPORT. THE AO REQUIRED THE ASSE SSEE TO FURNISH THE DETAILS OF SELLING PRICE OF CLOSING STOCK OF ROUGH DIAMONDS IN ORDER TO ASCERTAIN THE NET RELIABLE VALUE LESS PROFIT MARGIN. THE ASSESSEE FURNISHED DE TAILS OF SALE PROCEEDS OF DIAMOND FOR THE MONTH OF APRIL AND MAY 04 FROM WHICH THE A O CALCULATED TOTAL SALES IN APRIL 04 AT RS.4093.07 PER CARAT AND VALUED CLOSING STOC K AT RS.3,57,85,966/- AND THE AVERAGE SALE PRICE WAS TAKEN AT RS.8,743/- PER CARA T, WHEREAS THE SALE OF MAY 04 WAS 1928.69 CARAT SOLD FOR RS.1,97,54,409/- AVERAGI NG RS.10,242/-. THE A.O WORKED OUT AVERAGE SELLING PRICE OF CLOSING STOCK AT RS.9, 223 PER CARAT AND AFTER REDUCING THE GROSS PROFIT AT 9.90% CALCULATED, NET REALIZABLE VA LUE AT RS.8309.90 PER CARAT. THE VALUE OF CLOSING STOCK DECLARED BY THE ASSESSEE WAS RS.6716.90 AND SUPPRESSION OF CLOSING STOCK AT RS.1,593/- PER CART WORKED OUT BY THE A.O. THE ASSESSEE HAS GOT THE STOCK OF POLISHED DIAMOND OF 8,372 CARATS, HENCE, T HE SUPPRESSIONS @ RS.1,593/- WORKED OUT TO RS.1,33,36,596/-. THE AO ADDED THIS A MOUNT TO TOTAL INCOME OF THE ASSESSEE AS THE VALUE OF SUPPRESSION OF CLOSING STO CK AT RS.1,33,36,596/-. THE CIT(A) DELETED ADDITION PARTLY AND CONFIRMED PARTLY VIDE PARA-6 AND 7 OF HIS APPELLATE ORDER AS UNDER:- I HAVE GONE THROUGH THE DETAILS AND COPIES OF EXPO RT INVOICES FILED BY THE APPELLANT. I HAVE ALSO GONE THROUGH THE LOT WISE DE TAILS OF CLOSING STOCK FILED BY THE APPELLANT. THE AO HAS PICKED UP SOME SALE BI LLS FOR THE MONTH OF APRIL AND MAY, 2004 AND HAS WORKED THE AVERAGE SELLING PR ICE OF DIAMONDS IN THE CLOSING STOCK IN THE SUBSEQUENT MONTHS. THE CLOSING STOCK OF DIAMONDS WOULD COMPRISE OF DIFFERENT QUALITIES AND THE VALUATION C OULD NOT BE MADE ON THE CONCEPT OF AVERAGE SELLING PRICE. I AM ALSO INCLINE D TO AGREE WITH THE APPELLANT THAT IT IS NOT NECESSARY THAT ONLY CLOSING STOCK OF POLISHED DIAMONDS WAS SOLD IN SUBSEQUENT MONTHS SINCE DIAMONDS MANUFACTURING I S A CONTINUOUS PROCESS AND EXPORT IN SUBSEQUENT MONTHS COULD BE OUT OF PRO DUCTION IN THESE MONTHS AND THEREFORE THE AVERAGE SELLING PRICE OF THE TWO MONTHS COULD NOT BE TAKEN AS THE BASE FOR ARRIVING AT THE VALUE OF CLOSING ST OCK. FURTHER, IT IS SEEN THAT THE QUALITIES OF THESE DIAMONDS WERE DIFFERENT AND THE MARKET VALUE OF SOME ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 7 OF THE QUALITY WAS AS HIGH AS RS.66,000/- PER CARAT . IT IS TO BE NOTED THAT AFTER PROCESSING THE ROUGH DIAMONDS AND CUTTING AND POLIS HING THE SAME, THE END PRODUCT IS OF A VARYING NATURE IN TERMS OF COLOUR, CLARITY, CUT AND CARAT, WHICH IS DULY ASSORTED IN TERMS OF QUALITY AND CARATS SO THA T THE MANUFACTURED DIAMONDS THAT WERE IMPORTED. THE ENTIRE STOCK OF PO LISHED DIAMONDS WITH A VIDE RANGE OF QUALITY AND CARATS ARE NOT CLEARLY ID ENTIFIABLE EITHER IN TERMS OF QUALITY OR VALUE. MOREOVER, THE SALES OF DIAMOND DE PEND ON SPECIFIC CHOICE AND SELECTION OF THE CUSTOMERS WHICH ARE SOLD IN PI ECES AND IN LOTS. THIS WOULD ALSO IMPLY THAT IT WOULD NOT BE POSSIBLE TO M AINTAIN DAY TO DAY STOCK REGISTER IN TERMS OF QUALITY AND QUANTITY. HOWEVER, THE AO BY OBSERVING THAT SINCE QUALITY WISE DETAILS OF PRODUCTION AND CLOSIN G STOCK OF POLISHED DIAMONDS HAD NOT BEEN MAINTAINED, IT MEANT THAT THE APPELLANT HAD VALUED THE CLOSING STOCK AS PER ITS CONVENIENCE IN ORDER TO JU STIFY THE ADDITION TO THE CLOSING STOCK WHICH HE WENT ON TO MAKE. FURTHER, AS PER ACCOUNTING STANDARDS, ITEMS OF INVENTORIES WHICH ARE NOT ORDIN ARILY INTERCHANGEABLE SHOULD BE ASSIGNED SPECIFIC IDENTIFICATION OF THEIR INDIVIDUAL COST. HOWEVER, WHERE THERE ARE LARGE NUMBERS OF ITEMS OF INVENTORY WHICH ARE ORDINARILY INTERCHANGEABLE, SPECIFIC IDENTIFICATION OF COST IS INAPPROPRIATE. THEREFORE, IN SUCH CASES THE COST IS TO BE ASSIGNED BY USING THE FIFO METHOD OR BY APPLYING THE WEIGHED AVERAGE COST FORMULA. IN THE I NSTANT CASE GIVEN THE PECULIAR NATURE AND CHARACTERISTICS OF THE DIAMONDS , THESE ARE NOT ORDINARILY INTERCHANGEABLE AND HENCE COULD NOT BE IDENTIFIED F OR ASSIGNING SPECIFIC COST. THIS MEANS THAT WHAT WAS TO BE APPLIED AS PER THE A CCOUNTING STANDARD WAS THE FIFO METHOD OR THE WEIGHTED AVERAGE COST FORMUL A. BECAUSE OF THE LARGE NUMBERS AND, SINCE THE DIAMONDS ARE PICKED, CHOSEN AND PURCHASED IN PIECES, THE FIFO METHOD COULD NOT BE APPLIED. THE W EIGHTED AVERAGE COST FORMULA CAN ALSO NOT BE APPLIED SINCE THE POLISHED DIAMONDS COULD NOT BE IDENTIFIED WITH OR RELATABLE TO THE ROUGH DIAMONDS WHICH ARE IN MINEAL FORM. THEREFORE, THE AVERAGE VALUE OF NEITHER THE OPENING STOCK OF ROUGH DIAMONDS NOR THE PURCHASES NOR THE MANUFACTURING COST CAN BE APPLIED TO THE LARGE NUMBER OF ITEMS IN THE CLOSING STOCK TO WORK OUT IT S VALUE. THE AVERAGE WEIGHTED FORMULA IF APPLIED TO SUCH A VIDE VARIETY OF ITEMS IN THE CLOSING STOCK WOULD DISTORT THE FINANCIAL RESULTS. THEREFORE, WHA T THE APPELLANT DID AND WHICH WAS AS PER THE ACCEPTED TRADE PRACTICE WAS TO PREPA RE A PHYSICAL INVENTORY AT THE END OF THE YEAR, AFTER SORTING THE DIAMONDS PRI MARILY IN TERMS OF CARATS AND THEN ASSIGNED AN APPROXIMATE VALUE WHICH WAS THE RE ALIZABLE VALUE I.E. THE VALUE IT WOULD FETCH IF SOLD IN THE MARKET. SUCH VA LUES WERE JUSTIFIED BY THE FACT THAT THE SE LOTS AT THE VALUE SHOWN IN THE CLOSING STOCK WERE SOLD IN THE SUBSEQUENT YEAR. THIS WAS SUPPORTED BY THE EXPORT I NVOICES WHICH WERE FURNISHED BEFORE THE AO ALSO AND WHICH HAVE BEEN PR ODUCED IN APPELLATE PROCEEDINGS AS WELL AS REGARDS THE ADDITION TO THE CLOSING STOCK OF THE POLISHED DIAMONDS, IT IS SEEN THAT THE APPELLANT HA D PREPARED A DETAILED INVENTORY WHERE VALUES TO DIFFERENT ITEMS WERE ASSI GNED ON THE BASIS OF REALIZED VALUE IN THE SUBSEQUENT YEAR REDUCED BY TH E APPROXIMATE GROSS PROFIT RATE DURING THE YEAR. NO AVERAGE VALUE WAS APPLIED. THE AVERAGE VALUE WAS WORKED OUT BY THE AO HIMSELF BY DIVIDING THE TOTAL VALUE OF THE CLOSING STOCK DISCLOSED BY THE APPELLANT BY THE CARATS OF THE DIA MONDS IN THE STOCK. THIS WAS THEREFORE, A MISNOMER WHICH WAS MIS-UTILISED BY THE AO TO FIRST REJECT THE BOOK AND THEN TO MAKE THE ADDITION. FROM THE CHART OF EXPORTS REPRODUCED AT PAGE-16 AND 17 OF THE ASSESSMENT ORDER, IT IS SEEN THAT THERE WERE HUGE ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 8 DIFFERENCE IN THE RATES OF VARIOUS QUALITIES OF DIA MONDS AND THEREFORE TAKING THE AVERAGE OF A NUMBER OF TOTALLY DIFFERENT VALUES IS NEITHER SCIENTIFIC NOR LOGICAL. THIS METHOD OF VALUATION ADOPTED BY THE AO BEING WITHOUT ANY LOGIC OR JUSTIFICATION IS NOT IN ORDER AND THE ADDITION ON T HIS ACCOUNT IS DIRECTED TO BE DELETED. HOWEVER, AS REGARDS THE VALUATION OF ROUGH DIAMONDS, IT IS SEEN THAT THE APPELLANT HAS VALUED THE CLOSING STOCK AT A PRI CE WHICH IS EVEN LESS THAN THE COST PRICE. THIS IS NOT ACCEPTABLE AND IS AGAIN ST ALL PRINCIPLES OF ACCOUNTING AND THEREFORE ADDITION ON ACCOUNT OF SUP PRESSION OF VALUE OF CLOSING STOCK OF ROUGH DIAMONDS IS HEREBY CONFIRMED . I HAVE CONSIDERED THE SUBMISSIONS AND FIND THAT TH E AO HAS MADE THIS ADDITION ONLY DON THE BASIS OF SURMISES AND CONJECT URES. THE APPELLANT FILED COPIES OF ACCOUNTS, COMPUTATION OF INCOME AND ACKNO WLEDGEMENT OF RETURN OF INCOME OF ALL THE JOB LABOURERS. IT IS NOT MATERIAL AS TO WHAT WAS THE RETURNED INCOME OF THE SAID JOB LABOURERS AND THE AO WAS NOT JUSTIFIED IN DRAWING AN ADVERSE INFERENCE, SINCE THE SAID LABOUR PAYMENTS W ERE CONFIRMED BY ALL THE PARTIES AND WAS DISCLOSED IN THE RETURN OF INCOME F ILED BY THESE JOB LABOURES. IT IS ALSO SEEN THAT THE PENALTY PROCEEDINGS FOR MA KING SUCH A DISALLOWANCE WOULD NOT BE RELEVANT, SINCE THE LABOUR PAYMENT WOU LD DEPEND UPON A NUMBER OF FACTORS LIKE THE QUALITY OF ROUGH STONE, QUALITY OF THE DIAMOND PRODUCED, QUANTUM OF WASTAGE, SKILL OF LABOUR. THES E FACTORS ARE NOT COMMON AMONGST VARIOUS UNITS AND THEREFORE NO COMPARISON I S POSSIBLE. IT IS ALSO SEEN THAT IN THE IMMEDIATELY PRECEDING YEAR ALSO, THE AS SESSMENT WAS FRAMED U/S.143(3) OF THE IT ACT AND NO SUCH DISALLOWANCE W AS MADE EVEN THOUGH THE PAYMENT WAS MADE AT THE SAME RATE. FURTHER THE ASSE SSING OFFICER'S CONTENTION THAT THE WAGES PAID TO LABOURERS IN APPE LLANTS OWN FACTORY WAS ONLY RS.201 PER CARAT WHEREAS PAYMENT TO OUTSIDERS WAS MADE AT RS.450 PER CARAT IS ALSO NOT BASED ON CORRECT APPRECIATION OF THE FACTS. THE APPELLANT IS USING ITS OWN MACHINERY ON WHICH HEAVY INVESTMENT H AS BEEN MADE AND OBVIOUSLY THE LABOURERS COULD BE PAID AT A LOWER RA TE COMPARED TO OUTSIDE PARTIES WHO THEMSELVES HAVE INVESTED IN MACHINERY A ND WOULD CHARGE A HIGHER AMOUNT. THEREFORE, ON THIS GROUND ALSO THE A O'S REASONING IS FAULTY. HOWEVER, IT IS SEEN THAT THERE IS A HUGE GAP BETWEE N THE PAYMENT MADE TO THE OUTSIDE PARTIES AND THE APPELLANTS OWN LABAOUR PARTIES WHICH MEANS THAT A PART OF THE EXPENDITURE CAN BE TREATED AS UNJUSTI FIED AND NOT CLEARLY RELATED TO THE BUSINESS NEED OF THE APPELLANT. THE ISSUE WA S DISCUSSED IN AND AFTER GOING THROUGH THE DETAILS, I AM OF THE VIEW THAT IT WOULD BE FAIR AND REASONABLE IF A TOKEN DISALLOWANCE OF RS.5 LACS IS MADE FROM O UT OF LABOUR CHARGES PAID TO OUTSIDE PARTIES ON GROUND OF POSSIBLE INFLATION OF EXPENDITURE. THE DISALLOWANCE IS THEREFORE, DIRECTED TO BE RESTRICTE D TO RS.5 LACS ONLY. 9. THE LD. CIT-DR AT THE OUTSET STATED THAT THE ORD ER OF CIT(A) IS NOT ACCEPTED ON THIS POINT AS IT CAN BE SEEN THAT THE ASSESSING OFFICER HAS ADOPTED THE CORRECT METHOD FOR VALUATION OF THE CLOSING STOCK AND WORKE D OUT THE CLOSING STOCK BY CALCULATING AVERAGE MANUFACTURING COST OF DIAMONDS PER CARAT AS WELL AS HE ALSO ADOPTED THE METHOD TO CALCULATE THE CLOSING STOCK F ROM THE SALE PROCEEDS OF CLOSING STOCK FOR THE MONTH OF APRIL AND MAY OF THE NEXT YE AR AND THEN ONLY HE HAD WORKED ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 9 OUT THE VALUE OF POLISHED DIAMONDS AT RS.9,223/- AS AGAINST RS.6,716.90 SHOWN BY THE ASSESSEE. ACCORDING TO HIM, THE AO IS JUSTIFIED IN MAKING THE ADDITION, AS DISCUSSED ABOVE IN DETAIL BUT THE FINDINGS OF CIT(A ) IS BASED MAINLY ON THE SUBMISSIONS OF LD. COUNSEL FOR ASSESSEE AND NOT ON THE FACTS AND FINDINGS OF THE ASSESSING OFFICER. 10. ON THE OTHER HAND LD. COUNSEL FOR ASSESSEE STAT ED THAT ASSESSEE HAS MAINTAINED DAY-TO-DAY STOCK REGISTER OF POLISHED DI AMOND AND SHOWING THE POLISHED DIAMOND RECEIVED FROM HIS OWN FACTORY OR OUTSIDE CO NTRACTORS AND SALES MADE AGAINST POLISHED STOCK MENTIONING THE LOT NUMBER. A CCORDING TO HIM, DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAS SHOWN CLOSING STO CK OF ROUGH DIAMOND OF RS.3,56,35,589/-, POLISHED DIAMOND OF RS.5,62,33,93 0/- AND REJECTED DIAMONDS OF RS.3.74 LAKH AND ASSESSEE MADE VALUATION OF ROUGH D IAMONDS AT COST PRICE OF WORK- IN-PROGRESS AT RAW MATERIAL COST, FINISHED GOODS AT MARKET VALUE LESS MARGIN OF PROFIT AND REJECTED GOODS AT REALIZABLE VALUE. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSI NG OFFICER HAS TABULATED THE DETAILS OF ROUGH, POLISHED AND REJECTED DIAMONDS AT PAGE NO.12-13 OF ASSESSMENT ORDER AND OBSERVED THAT ASSESSEE HAS SHOWN VALUATIO N @ RS.6716.90 PER CARAT OF POLISHED DIAMOND WHEREAS COST OF DIAMONDS CALCULATE D BY HIM COMES AT RS.7770 PER CARAT OF POLISHED DIAMONDS. AS THE AO REQUIRED ASSESSEE TO EXPLAIN UNDER VALUATION OF CLOSING STOCK AND ASSESSEE REPLIED IN DETAIL VIDE LETTER DATED 15-12- 2006, THE ASSESSING OFFICER REJECTED ASSESSEES REP LY AND REQUIRED TO FURNISH THE DETAILS OF SELLING PRICE OF THE CLOSING STOCK OF FI NISHED DIAMONDS. WE FIND THAT THE ASSESSEE SUBMITTED THE DETAILS OF SALES PROCEEDS OF CLOSING STOCK FOR THE MONTH OF APRIL AND MAY04 ALONG WITH XEROX COPY OF THE SALES BILLS AND THESE DETAILS OF SALES OF APRIL AND MAY04 ARE REPRODUCED BY ASSESSING OFFICE R AT BOTTOM OF PAGE NO.16 AND TOP OF PAGE NO.17 OF ASSESSMENT ORDER AND CALCULATE D THE NET RELEASABLE VALUE OF CLOSING STOCK OF FINISHED DIAMOND AT RS.8309.9 BY A VERAGING THE SALES PRICE OF APRIL AND MAY AND REDUCING GROSS PROFIT FROM IT. ACCORDIN GLY THE AO CALCULATED THE SALE VALUE OF POLISHED DIAMOND AT RS.9223 PER CARAT AND AFTER DEDUCING GROSS PROFIT AT 9.9%, NET REALIZABLE VALUE COMES AT RS.8309.9 PER C ARAT. WE FIND THAT THE ASSESSEE HAS SHOWN VALUE OF POLISHED DIAMOND AT RS.6716.9 PE R CARAT AND THE AO TREATED THE ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 10 DIFFERENCE OF RS.1593 (8309.9 6716.9) AS SUPPRESS ION IN VALUATION IN CLOSING STOCK OF POLISHED DIAMOND. IN VIEW OF THE ABOVE FACTS, WE FIND THAT THE AO MADE ADDITION OF RS.1,33,36,596/- I.E. ON ACCOUNT OF CLOSING STOCK O F POLISHED DIAMOND OF 8371 CARATS AT RS.1593 PER CARAT. WE FURTHER FIND FROM THE RECO RDS AND THE DETAILS FILED BEFORE US THAT THE ASSESSEE MADE THE VALUATION OF POLISHED DI AMOND AT RS.5,62,33,930/- FOR 8372 CARATS ON BASIS OF MARKET VALUE LESS MARGINAL PROFITS, SO AVERAGE OF THIS INVENTORY COMES TO RS.6747/- PER CARAT AND ACCORDIN GLY ASSESSEE MADE THE VALUATION CONSIDERING THE NET REALIZABLE VALUE AFTE R CONSIDERING 4C I.E. CUT, CLARITY, COLOUR AND CARAT AND DETAILED INVENTORY, WHICH CONT AINS14 QUALITIES OF DIAMONDS WITH DIFFERENT VALUES BUT THE AO ADOPTED THE AVERAGE VAL UES OF SALES MADE IN THE NEXT TWO MONTHS I.E. APRIL AND MAY04 AND HE TOOK INTO C ONSIDERATION 11 SALES BILLS OF THE MONTH OF APRIL AND MAY04 THROUGH WHICH 6021.70 CAR ATS WERE EXPORTED WITH AVERAGE VALUES OF 9223 PER CARAT. WE FIND THAT, IN FACT, TH ERE ARE NUMEROUS QUALITIES IN THESE ELEVEN INVOICES AND WITH MANY PACKET OF DIAMOND WIT H DIFFERENT SELLING PRICE BUT THE AO HAS TAKEN AVERAGE VALUE OF EACH INVOICE AND ALSO AVERAGE OF 11 BILLS. IN FACT ASSESSEE EXPORTED DIAMOND IN NEXT TWO MONTH WITH VA RYING VALUE AND LOWEST BEING RS.1,115/- PER CARAT. BEFORE ASSESSING OFFICER AND CIT(A) ASSESSEE PRODUCED EXPORTS BILL OF NOT ONLY NEXT TWO MONTHS BUT TILL A UG.04 AND ASSESSEE CORRELATED THE VALUATION WITH THE DIAMOND EXPORTED BY TICKING THE MARKING OF EXPORT MADE BY ASSESSEE IN SUBSEQUENT MONTHS HAVING SALE VALUE SIM ILAR WITH THE VALUATION MADE BY THE ASSESSEE. IT IS NOT NECESSARY THAT ONLY CLOSING STOCK OF POLISHED DIAMONDS OF THE YEAR UNDER CONSIDERATION IS SOLD IN SUBSEQUENT MONT HS, THIS IS SO, BECAUSE MANUFACTURING OF DIAMONDS IS VERY MUCH A CONTINUOUS PROCESS AND ACCORDINGLY IT IS QUITE LOGICAL THAT EXPORTS IN SUBSEQUENT MONTHS ARE MADE OUT OF PRODUCTION OF POLISHED DIAMONDS IN SAID MONTHS. THUS, AVERAGE SEL LING PRICE OF THESE TWO MONTHS I.E. RS.9223 PER CARAT CANNOT BE TAKEN AS BASE FOR ARRIVING AT THE COST OF CLOSING STOCK OF POLISHED DIAMONDS FOR THE YEAR UNDER CONSI DERATION. THE COSTING OF POLISHED DIAMOND MANUFACTURED DURING THE YEAR COMES TO RS.70 26 PER CARAT CONSIDERING THE REJECTED DIAMOND. AO TOOK THE VALUE AT RS.8309.90 P ER CARAT WHICH IS VERY MUCH HIGH COMPARED TO COSTING OF POLISHED DIAMOND MANUFA CTURED DURING THE YEAR OF RS.7026/- PER CARAT. ACCORDING TO US, IN VIEW OF TH E DATA PRODUCED BY THE ASSESSEE, THE AVERAGE COSTING METHOD, VALUATION OF CLOSING ST OCK REPRESENTS VALUE OF OPENING STOCK PLUS COST OF PRODUCTION LESS COST OF SALES AN D AS PER THIS METHOD THE VALUATION THE VALUE OF CLOSING STOCK COMES TO RS.6496/- PER C ARAT WHICH IS LESS THAN VALUE ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 11 TAKEN BY ASSESSEE AT RS.6717/- PER CARAT. FURTHER, METHOD OF VALUATION ADOPTED BY THE ASSESSEE FOR VALUATION OF POLISHED DIAMOND WAS BEING CONSISTENTLY FOLLOWED IN PAST AND SAME WAS ALSO ACCEPTED IN SCRUTINY ASSESSM ENT IN PAST. ACCORDINGLY, IT CLEARLY ESTABLISHES THAT VALUATION OF CLOSING STOCK MADE BY ASSESSEE IS VERY MUCH FAIR AND HENCE, THERE IS NO JUSTIFICATION IN DISTUR BING THE VALUATION OF CLOSING STOCK MADE BY ASSESSEE. ACCORDINGLY, EVEN THE PARTS SUSTE NANCE OF VALUATION OF CLOSING STOCK OF ROUGH DIAMONDS BY THE CIT(A) AMOUNTING TO RS.2,83,184/-IS WITHOUT ANY BASIS AND ACCORDINGLY THE ORDER OF CIT(A) TO THAT E XTENT IS REVERSED. THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED AND THAT OF REVENUE IS DISMISSED. 12. THE NEXT COMMON ISSUE IN THESE CROSS APPEALS OF REVENUE AS WELL AS ASSESSEE IS AS REGARDS TO THE ORDER OF CIT(A) IN RE STRICTING THE ADDITION AT RS.5 LAKH AS AGAINST THE DISALLOWANCE MADE BY ASSESSING OFFIC ER AT RS.64,22,001/-. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NO.3 :- 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-IV, SURAT HAS ERRED IN RESTRICTING THE ADDIT ION MADE BY THE A.O ON EXCESS LABOUR CHARGES TO RS. 5 LACS AS AGAINST DISA LLOWED BY THE A.O AMOUNTING TO RS.64,22,001/-. THUS, THE LEARNED CIT HAS GIVEN THE RELIEF OF RS.59,22,001/- TO THE ASSESSEE. AND ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.2 :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN PART LY CONFIRMING THE ADDITION OF RS.5,00,000/- OUT OF TOTAL ADDITION OF RS.64,22, 001/- MADE BY ASSESSING OFFICER FOR LABOUR CHARGES. 13. THE BRIEF FACTS LEAD TO THE ABOVE COMMON ISSUE ARE THAT THE ASSESSEE HAS DEBITED LABOUR CHARGES FOR CUTTING AND POLISHING OF DIAMONDS AT RS.450/- PER CARAT WHEREAS, IN A COMPARABLE CASE OF RINDIAM EXPORTS, T HE LABOUR PAYMENTS WAS AT RS.300/- PER CARAT. THEREFORE, THERE WAS INFLATION OF EXPENDITURE OF RS.150/- PER CARAT WHICH WAS NO HIGHER SIDE. WHEN REQUIRED TO EXPLAIN, THE ASSESSEE STATED THAT IT HAD PAID LABOUR CHARGES AT THE SAME RATE AS IN EARLIER YEARS AND ALL JOB LABOURS WERE ASSESSED TO TAX AND LABOUR CHARGES DEPENDENT UPON V ARIOUS FACTORS LIKE QUALITY OF ROUGH DIAMONDS AND THE FINISHED GOODS. THE EXPLANAT ION GIVEN BY THE ASSESSEE WAS NOT ACCEPTED BY THE AO AND ACCORDINGLY HE ISSUED NO TICE U/S.133(6) OF THE ACT TO THREE PERSONS WHICH REMAINED UN-SERVED. THE NON-AVA ILABILITY AND TRACEABILITY OR GENUINENESS OF THE TRANSACTION WAS CONFRONTED WITH THE ASSESSEE BY AO AS THEY ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 12 WERE AWARE THAT NO SUCH PARTIES WERE AVAILABLE AT T HEIR GIVEN ADDRESS HENCE, THE GENUINENESS AND CONTRACT WERE NOT PROVED. THE AR OF THE ASSESSEE SUBMITTED BEFORE THE AO COPIES OF RETURNS OF INCOME FILED BY THESE PERSONS BUT HAD FAILED TO PRODUCE THEM FOR EXAMINATION AND ON BEING ASKED BY AO ASSESSEE TO PRODUCE SUCH LABOUR CONTRACTORS WITH THEIR BOOKS OF ACCOUNT FOR EXAMINATION, THE ASSESSEE ALSO FAILED TO PRODUCE THE SAID LABOUR CONTRACTORS. THE AO FOUND FROM THE COPIES OF RETURNS OF INCOME FILED, THAT THE JOB LABOURERS WER E SHOWING VERY SMALL NET INCOME AFTER CLAIMING EXPENDITURE AND NONE OF THE SO-CALLE D JOB LABOURERS OF THE ASSESSEE HAD PAID ANY TAX. ACCORDING TO THE AO, THIS CLEARLY REVEALED THAT AFTER INFLATING THE EXPENDITURE THE ASSESSEE CREATED EVIDENCES TO CLAIM THIS BENEFIT. BUT THE ASSESSEE FAILED TO PRODUCE THEM AND ALSO FAILED TO ESTABLISH THE GENUINENESS OF THE CLAIM OF LABOUR CHARGES @ RS.450/- PER CARAT, WHEREAS COMPAR ABLE CASE OF M/S. RINDIAM EXPORTS OF THE SAME LOCALITY OF THE SAME AREA HAD S HOWN RS.300/- PER CARAT. THUS, THE ASSESSEE HAD INFLATED THE EXPENDITURE @ RS.150/ -. THEREFORE, THE AO TREATED THE DIFFERENCE OF RS.150/- AS INFLATED EXPENDITURE FOR THE TOTAL 42813.34 CARATS CONSUMED DURING THE YEAR AND HAS MADE THE ADDITION OF RS.64, 2,001/- ON ACCOUNT OF EXCESS LABOUR CHARGES AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE CIT(A) HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE PARTLY BY HOLDING AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS AND FIND THAT TH E AO HAS MADE THIS ADDITION ONLY ON THE BASIS OF SURMISES AND CONJECTU RES. THE APPELLANT FILED COPIES OF ACCOUNTS, COMPUTATION OF INCOME AND ACKNO WLEDGEMENT OF RETURN OF INCOME OF ALL THE JOB LABOURS. IT IS NOT MATERIAL A S TO WHAT WAS THE RETURNED INCOME OF THE SAID JOB LABOURS AND THE AO WAS NOT J USTIFIED DIN DRAWING AN ADVERSE INFERENCE, SINCE THE SAID LABOUR PAYMENTS W ERE CONFIRMED BY ALL THE PARTIES AND WAS DISCLOSED IN THE RETURN OF INCOME F ILED BY THESE JOB LABOURS. IT IS ALSO SEEN THAT THE APPELLANT HAS MADE PAYMENTS A T THE SAME RATE TO OUTSIDE PARTIES AS IN LAST YEAR AND THE COMPARABLE CASE OF M/S. RINDIAM EXPORTS CITED BY THE AO FOR MAKING SUCH A DISALLOWA NCE WOULD NOT BE RELEVANT, SINCE THE LABOUR PAYMENT WOULD DEPEND UPO N A NUMBER OF FACTORS LIKE THE QUALITY OF ROUGH STONE, QUALITY OF THE DIA MOND PRODUCED, QUANTUM OF WASTAGE, SKILL OF LABOURS. THESE FACTORS ARE NOT CO MMON AMONGST VARIOUS UNITS AND THEREFORE, NO COMPARISON IS POSSIBLE. IT IS ALSO SEEN THAT IN THE IMMEDIATELY PRECEDING YEAR ALSO, THE ASSESSMENT WAS FRAMED U/S.143(3) OF THE I.T. ACT AND NO SUCH DISALLOWANCE WAS MADE EVE N THOUGH THE PAYMENT WAS MADE AT THE SAME RATE. FURTHER, THE ASSESSING O FFICER'S CONTENTION THAT THE WAGES PAID TO LABOURERS IN APPELLANTS OWN FACT ORY WAS ONLY RS.201 PER CARAT, WHEREAS PAYMENT TO OUTSIDERS WAS MADE AT RS. 450 PER CARAT IS ALSO NOT BASED ON CORRECT APPRECIATION OF THE FACTS. THE APP ELLANT IS USING ITS OWN MACHINERY ON WHICH HEAVY INVESTMENT HAS BEEN MADE A ND OBVIOUSLY THE LABOURERS COULD BE PAID AT A LOWER RATE COMPARED TO OUTSIDE PARTIES WHO THEMSELVES HAVE INVESTED IN MACHINERY AND WOULD CHA RGE A HIGHER AMOUNT. ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 13 THEREFORE, ON THIS GROUND ALSO THE AO'S REASONING I S FAULTY. HOWEVER, IT IS SEEN THAT THERE IS A HUGE GAP BETWEEN THE PAYMENT M ADE TO THE OUTSIDE PARTIES AND THE APPELLANTS OWN LABOUR PARTIES WHIC H MEANS THAT A PART OF THE EXPENDITURE CAN BE TREATED AS UNJUSTIFIED AND NOT T OTALLY RELATED TO THE BUSINESS NEED OF THE APPELLANT. THE ISSUE WAS DISCU SSED IN DETAIL WITH THE LD. AUTHORIZED REPRESENTATIVE AND AFTER GOING THROUGH T HE DETAILS, I AM OF THE VIEW THAT IT WOULD BE FAIR AND REASONABLE IF A TOKE N DISALLOWANCE OF RS.5 LACS IS MADE FROM OUT OF LABOR CHARGES PAID TO OUTSIDE P ARTIES ON GROUND OF POSSIBLE INFLATION OF EXPENDITURE. THE DISALLOWANCE IS THEREFORE, DIRECTED TO BE RESTRICTED TO RS. 5 LACS ONLY. AGGRIEVED, BOTH CAME IN APPEAL BEFORE US. 14. BEFORE US THE LD. CIT-DR ARGUED THAT THE ORDER OF CIT(A) IS NOT ACCEPTABLE IN RESTRICTING THE ADDITION MADE BY ASSESSING OFFICER TO RS.5 LAKH FROM THE LABOUR CHARGES PAID TO OUTSIDE PARTIES. ACCORDING TO HIM, THE CIT(A) WOULD HAVE APPRECIATED THAT THE AO FOR MAKING THE ADDITION ON THIS ISSUE AS THE SAME IS BASED ON THE FIGURES REFLECTED IN THE COMPARATIVE CASE I. E. M/S RINDIAM EXPORTS WHICH HAS BUSINESS ACTIVITY OF THE SIMILAR NATURE AND MOREOVE R HE HAS PURELY ADOPTED THE MATHEMATICAL CALCULATION FOR ARRIVING AT THE CONCLU SION FOR MAKING ADDITION ON THIS ACCOUNT AND THERE IS NO SURMISE OR HYPOTHECATION. A CCORDING TO HIM, THE AO WAS THEREFORE JUSTIFIED IN MAKING THE ADDITION ON THIS GROUND AS WELL AS DISCUSSED ABOVE. THE FINDINGS OF THE CIT(A) IS BASED MAINLY ON THE S UBMISSIONS OF THE AR OF THE ASSESSEE AND NOT ON THE FACTS AND FINDINGS OF THE A O. 15. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUG H THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSE E HAS SHOWN LABOUR CHARGES OF CUT & POLISHED DIAMOND AT RS.450 PER CARAT AND ALL JOB LABOURERS ARE ASSESSED TO TAX AND THEY ARE FILING THEIR RETURN OF INCOME. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE HAS FILED COPIES OF ACCOUNTS, COMPUTATION OF INCOME AND ACKNOWLEDGEMENT OF RETURNS OF INCOME FOR ALL JOB LA BOURERS. ASSESSEE ENGAGED THE LABOURERS LOOKING TO THE MARKET SITUATION AND REQUI REMENTS AND THEY MAY NOT BE HAVING PERMANENT ESTABLISHMENT AND MAY HAVE DISCONT INUED IT. WE FIND THAT THE AO OBSERVED THAT THE LABOUR CHARGES SHOWN BY ASSESSEE ARE ON HIGHER SIDE COMPARED TO M/S. RINDIAMA EXPORTS, WHICH HAS SHOWN LABOUR PA YMENT AT RS.300 PER CARAT AND THE AO REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY C OMPARABLE CASE SHOULD NOT TAKEN FOR ADDITION BUT THE AO DID NOT SUPPLY THE DE TAILS OF THE COMPARABLE CASE TO THE ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 14 ASSESSEE. WE FURTHER FIND FROM THE RECORDS THAT THE AO SENT NOTICES U/D.133(6) OF THE ACT TO JOB CONTRACTORS NAMELY, SHRI BALLABHABHAI J RAMANI KISHORBHAI D KAYADA AND SHRI JAGDISHBHAI G KAYADA OF AHMEDABAD, WHICH WERE RETURNED UN-SERVED AND LD. COUNSEL FOR THE ASSESSEE SUBMITTED THE COPIES OF RE TURNS OF INCOME OF THESE THREE PERSONS, WHEREAS AO REQUIRED ASSESSEE TO PRODUCE TH E THREE PARTIES WITH THEIR BOOKS OF ACCOUNT. BUT ASSESSEE WAS NOT ABLE TO PROD UCE THE SAME AND TOOK THE LABOUR CHARGE OF RS.300/- PER CARAT AS SHOWN BY M/S . RINDIAM EXPORTS MADE THE ADDITION OF RS.64,22,001/- BEING DIFFERENCE OF RS.1 50/- PER CARAT FOR 42,813.34 CARATS OF CONSUMPTION DURING THE YEAR. WE FIND THAT IN THE CASE OF M/S.RIANDIAM EXPORTS CITED BY HIM IN ASSESSMENT ORDER, THE GROSS PROFIT RATIO OF ASSESSEE IS MUCH MORE AROUND 10%. WE FURTHER FIND FROM THE RECORDS THAT E VEN SIMILAR DISALLOWANCE WAS MADE ON ACCOUNT OF JOB CHARGES IN SUCCEEDING YEARS ALSO I.E. 2005-06 AND 2006-07, WHICH WERE TAKEN UNDER SCRUTINY AND NO SUCH KIND OF ADDITION WAS MADE. WE ARE OF THE VIEW THAT THE AO IS NOT JUSTIFIED IN DRAWING AD VERSE INFERENCE ON THIS GROUND SINCE IN THE INSTANT CASE, THE TRANSACTION RELATING TO LABOUR PAYMENTS IS NOT ONLY CONFIRMED BY VARIOUS PARTIES BUT EVEN THE SAME IS A LSO DISCLOSED IN THEIR RETURNS OF INCOME IF THE ASSESSEE HAS SHOWN MEAGER INCOME IN H IS RETURN OF INCOME AND ADVERSE VIEW CANNOT BE DRAWN IN ASSESSEES CASE AS REVENUE IS FREE TO TAKE ACTION IN CASE OF LABOUR PARTIES. THE CONTENTION OF AO THA T SINCE THEY HAVE SHOWN MEGRE INCOME AND CLAIMED REFUND IS THE REASON FOR DISBELI EVING THE CLAIM OF THE ASSESSEE. EVEN IN THE IMMEDIATELY PRECEDING YEAR ALSO, ASSESS EE MADE PAYMENT OF LABOUR CHARGES @ RS.450/- PER CARAT AND NO DISALLOWANCE WA S MADE IN THE SCRUTINY ASSESSMENT MADE FOR THAT YEAR AND ACCORDINGLY, THER E IS ABSOLUTELY NO REASON TO MAKE ANY ADDITION FOR THIS YEAR ON THE GROUND THAT OTHER ASSESSEE VIZ. M/S. RINDIAM EXPORTS MADE PAYMENT OF LABOUR CHARGES @ RS.300/- P ER CARAT. WE ARE OF THE VIEW THAT PAYMENT OF LABOUR CHARGES DEPENDS UPON VARIOUS FACTORS VIZ. QUALITY OF ROUGH DIAMOND, SKILL OF LABOURERS, TYPE OF MACHINERY USED FOR CUTTING AND POLISHING, CUT OF DIAMOND ETC AND THESE FACTORS CAN NEVER COMMON AMON GST VARIOUS UNITS AND THUS NO COMPARISON CAN BE MADE. FURTHER, THE PERSONS TO WHOM LABOUR CHARGES ARE PAID ARE OUTSIDERS AND NOT THE RELATIVES OR SISTER CONCE RN OF ASSESSEE WITHIN THE MEANING OF SECTION 40A(2)(B) OF THE ACT. BUT AS REGARDS TO PARTLY RESTRICTING OF THIS ADDITION OF LABOUR CHARGES, THE CIT(A) HELD THAT THERE IS A HUG E GAP BETWEEN THE PAYMENT MADE TO THE OUTSIDE PARTIES AND THE ASSESSEES OWN LABOU R PARTIES WHICH MEANS THAT A PART OF THE EXPENDITURE CAN BE TREATED AS UNJUSTIFIED AN D NOT TOTALLY RELATED TO THE ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 15 BUSINESS NEED. IN VIEW OF THE ABOVE, THE CIT(A) RES TRICTED THE DISALLOWANCE AT A FAIR AND REASONABLE TOKEN DISALLOWANCE OF RS.5 LACS, WHI CH IS MADE FROM OUT OF LABOR CHARGES PAID TO OUTSIDE PARTIES ON GROUND OF POSSIB LE INFLATION OF EXPENDITURE. ACCORDINGLY, WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY RESTRICTED THE DISALLOWANCE AT RS.5 LAKHS. ACCORDINGLY, THIS COMMON ISSUE OF BO TH THE APPEALS IS DISMISSED. 16. THE NEXT COMMON ISSUE IN THESE CROSS APPEALS OF REVENUE AS WELL AS ASSESSEE IS AS REGARDS TO THE ORDER OF CIT(A) IN RE STRICTING THE ADDITION MADE BY ASSESSING OFFICER ON ACCOUNT OF SALARY AND WAGES A T RS.2 LAKH AS AGAINST THE ADDITION AT RS.14,48,360/- MADE BY THE ASSESSING OF FICER. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NO.4 :- 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-IV, SURAT HAS ERRED IN RESTRICTING THE ADDIT ION MADE BY THE A.O. ON INFLATION OF SALARY AND WAGES TO RS.2 LACS AS AGAIN ST THE ADDITION OF RS.14,48,360/- MADE BY THE A.O. THUS, THE LEARNED C IT(A) HAS GIVEN THE RELIEF OF RS.12,48,360/- TO THE ASSESSEE. AND ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.3 :- 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN PART LY CONFIRMING THE DISALLOWANCE OF RS.2,00,000/- OUT OF TOTAL DISALLOW ANCE OF RS.14,48,360/- MADE BY ASSESSING OFFICER FOR SALARY AND WAGES. 17. THE BRIEF FACTS LEADING TO THE ABOVE COMMON ISS UE ARE THAT THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD CLAIMED SALARY AND WAGES IN THE NAME OF 50 EMPLOYEES. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS THE ASSESSEE SUBMITTED LIST OF THE SAME AND CLAIMED TO BE EMPLOYED AT CLEA VING, ASSORTMENT, LASER DEPARTMENT, OFFICE ATTENDANT, TELEPHONE OPERATOR, A CCOUNT DEPARTMENT AND SUPERVISOR. THE ASSESSING OFFICER WITH A VIEW TO KN OW THE TRUTHFULNESS OF THE CLAIM, REQUIRED THE ASSESSEE TO PRODUCE SOME OF THE EMPLOY EES. HOWEVER, THE ASSESSEE FAILED TO PRODUCE AND HE HAS NO EXPLANATION TO OFFE R. AGAIN THE AO ASKED THE ASSESSEE TO PRODUCE ANY OF THE EMPLOYEES WHO WERE W ORKING TILL DATE. THE ASSESSEE PRODUCED THREE PERSONS IN THIS REGARD AND THEY HAVE BEEN EXAMINED BY AO DURING THE ASSESSMENT PROCEEDINGS. THESE THREE EMPLOYEES A DMITTED THAT ONLY 25 TO 30 PERSONS WERE WORKING IN FINANCIAL YEAR 2003-04 IN C LEAVING, ASSORTMENT, LASER, ACCOUNT SECTION AND OFFICE ADMINISTRATION AND NOT M ORE THAN THAT. ALL THE THREE PERSONS STATED THAT UPTO 30 PERSONS WERE WORKING AT THAT TIME, WHEREAS THE ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 16 ASSESSEE HAD SHOWN EXPENDITURE IN THE NAME OF 50 PE RSONS. THE STATEMENT OF THREE EMPLOYEES OF THE ASSESSEE WAS GIVEN AT THE INSTANCE OF THE ASSESSEE IN THE PRESENCE OF ASSESSEES COUNSEL. THE AO HAS ALSO GIV EN OPPORTUNITY OF CROSS- EXAMINATION OF THE WITNESS, WHICH WAS ALSO ALLOWED TO THE AR BUT HE DID NOT WANT TO CROSS-EXAMINE THE SAID WITNESSES, HENCE, THE FACT O F THE STATEMENT GIVEN BY THE WITNESS HAD BECOME FINAL. THE ASSESSEE HAS SHOWN AM OUNT OF RS.36,20,900/- AS SALARY EXPENSES. THE AO DISALLOWED PROPORTIONATE SA LARY OF 20% AT RS.14,48,360/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. AGGR IEVED ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 18. THE CIT(A) PARTLY DELETED THE ADDITION BY OBSER VING AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS. I AM OF THE VIE W THAT ABSOLUTE RELIANCE COULD NOT BE PLACED ON THE GENERAL STATEMENT OF THE RE OF THE EMPLOYEES, SINCE THE QUESTION RELATED TO A PERIOD WHICH WAS MORE THA N TWO YEARS OLD. AN ILLITERATE EMPLOYEE COULD NOT COME OUT WITH THE EXA CT NUMBER OF PERSONS WORKING IN THE FACTORY AFTER SUCH A LONG TIME. THE PERSONS PRODUCED DURING THE COURSE OF ASSESSMENT WERE WORKING IN ASSORTING AND CLEAVING DEPARTMENT AND COULD NOT BE EXPECTED TO EXACTLY SATE AS TO HOW MAN Y PERSONS WERE WORKING IN ACCOUNTS OR ADMINISTRATION DEPARTMENTS. THE APPE LLANT HAS MAINTAINED REGULAR BOOKS OF ACCOUNTS AND THE ADDITION MADE BY HT AO ON PROPORTIONATE BASIS IS TOTALLY ARBITRARY. HOWEVER, SOME IMPORTANC E HAS TO BE GIVEN TO THE STATEMENT OF THE EMPLOYEES AND THE FACT THAT THE AP PELLANTS REPRESENTATIVE DID NOT CROSS-EXAMINE THESE WITNESS WHICH MEANS THA T POSSIBLY SOME OF THE CLAIMED EXPENDITURE ON THIS ACCOUNT HAS BEEN INFLAT ED AND IS NOT GENUINE. SINCE NO EXACT WORKING IN THIS RESPECT IS POSSIBLE, LUMPSUM DISALLOWANCE OF RS.2 LACS WOULD APPARENTLY BE IN ORDER. THE DISALLO WANCE IS THEREFORE, DIRECTED TO BE RESTRICTED TO THIS AMOUNT ONLY: AGGRIEVED, BOTH CAME IN APPEAL BEFORE US. 19. BEFORE US, LD. CIT-DR STATED THAT THE ORDER OF CIT(A) IS NOT ACCEPTABLE ON THIS ISSUE AS CAN BE SEEN FROM THE FINDINGS OF CIT(A),TH AT HE HAS ADMITTED THE POSSIBILITY OF INFLATION OF EXPENDITURE BUT HE IS NOT JUSTIFIED IN RESTRICTING THE INFLATED EXPENDITURE TO RS.2 LAKH AS AGAINST RS.12,48,360/-. THEREFORE T HE ASSESSING OFFICER IS JUSTIFIED IN MAKING THE ADDITION IN VIEW OF THE FINDINGS GIVEN I N THE ASSESSMENT ORDER. ACCORDING TO HIM, THE FINDINGS OF THE CIT(A) IS BASED MAINLY ON THE SUBMISSIONS OF THE AR OF THE ASSESSEE AND NOT ON THE FACTS AND FINDINGS OF T HE AO. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE STATED THAT DURING THE YEA R UNDER CONSIDERATION, ASSESSEE HAS SHOWN CLEAVING AND ASSORTMENT EXPENDITURE OF RS .21,26,400/- AND OFFICE STAFF ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 17 SALARY OF RS.14,94,500/-. ACCORDING TO HIM, THE ASS ESSEE WAS HAVING THE TOTAL STAFF OF 50 PERSONS DURING THE YEAR UNDER CONSIDERATION THE LIST OF WHICH IS GIVEN AT PAGE NO.23 OF ASSESSMENT ORDER. THE ASSESSING OFFICER RE QUIRED THE ASSESSEE TO PRODUCE ALL THE EMPLOYEES BUT ASSESSEE WAS NOT ABLE TO PROD UCE SAID PERSONS BUT COULD PRODUCE ONLY THREE PERSONS. THESE THREE PERSONS WER E EXAMINED AND THEIR STATEMENTS WERE RECORDED AND THE AO ON THE BASIS OF THEIR STATEMENTS OBSERVED THAT 30 PERSONS WERE EMPLOYED IN THE YEAR UNDER CONSIDER ATION AND DISALLOWED EXPENSES OF RS.14,48,360/- OUT OF TOTAL EXPENSE OF RS.36,20, 900/- AND TREATING THE SAME AS INFLATION OF EXPENSES CLAIMED BY ASSESSEE FOR 20 WO RKERS AND MADE THE ADDITION OF THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. ACCOR DING TO THE LD. COUNSEL THERE IS NO BASIS FOR MAKING ADDITION OR RETAINING THE PARTI AL DISALLOWANCE BY THE CIT(A). 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSI NG OFFICER IS NOT JUSTIFIED IN MAKING THE ADDITION BY PLACING UNDUE HEAVY RELIANCE ON A GENERAL STATEMENT OF THE EMPLOYEE THAT THERE WAS AROUND 25 TO 30 PERSONS WOR KING IN FINANCIAL YEAR 2003-04, WHEREAS AT THE SAME TIME IGNORING BOOKS OF ACCOUNT AND OTHER RECORDS PRODUCED IN SUPPORT OF GENUINENESS OF SALARY AND WAGES EXPENDIT URE. THE RELIANCE CANNOT BE PLACED ON THE GENERAL STATEMENT OF EMPLOYEE PRODUCE D IN THE COURSE OF ASSESSMENT PROCEEDINGS SINCE THE QUESTION RELATING TO NUMBER O F PERSONS EMPLOYED BY ASSESSEE RELATED TO A PERIOD WHICH IS MORE THAN A 2 YEAR O LD. THUS, IT IS HIGHLY ILLOGICAL TO PRESUME THAT AN EMPLOYEE OF ASSESSEE WILL COME OUT WITH EXACT NUMBERS AFTER SUBSTANTIAL PERIOD OF TIME. THE STATEMENT IS GIVEN ENTIRELY ON THE BASIS OF MEMORY AND THE SAME CANNOT BE RELIED UPON. IT IS ALSO PERT INENT TO POINT OUT THAT PERSONS PRODUCED IN THE COURSE OF ASSESSMENT PROCEEDINGS AR E WORKING IN ASSORTING AND CLEARING DEPARTMENT AND THUS, HOW IT IS POSSIBLE FO R THEM TO SATE EXACTLY AS TO HOW MUCH PERSONS WERE WORKING UNDER VARIOUS OTHER DIVIS IONS I.E. LASER, ACCOUNTS, OFFICE ADMINISTRATION ETC. AND THAT TOO ABOUT 2 YEARS A GO. THE CONTENTION OF AO THAT REPRESENTATIVE OF ASSESSEE DID NOT TOOK CROSS-EXAMI NATION AND HENCE THE FACT OF STATEMENT BECOMES FINAL IS ABSOLUTELY INCORRECT BEC AUSE THE CLAIM WHICH IS PROPERLY SUPPORTED BY BOOKS OF ACCOUNT AND OTHER RECORDS DOE S NOT BECOME INCORRECT MERELY ON THE BASIS OF A GENERAL STATEMENT GIVEN AFTER SUB STANTIAL LAPSE OF TIME AS EXPLAINED ABOVE AND STATEMENT OF EMPLOYEE DOES NOT GO ON THE ALTER THE REAL FACTS. IN THE COURSE OF ASSESSMENT PROCEEDINGS AND ASSESSEE GAVE COMPLETE LIST OF EMPLOYEES TO ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 18 WHOM SALARY AND WAGES WERE PAID AND ASSESSEE PRODUC ED BOOKS OF ACCOUNT AND REGISTERS IN SUPPORT OF GENUINENESS OF THE CLAIM. T HE EXPENDITURE OF SALARY AND WAGES ARE MOST REASONABLE AS COMPARED TO PRECEDING YEAR AS THERE IS NO ABNORMAL RISE. THE TOTAL OF 50 PERSONS EMPLOYED BY ASSESSEE IS MOST REASONABLE CONSIDERING THE TOTAL VOLUME OF ACTIVITY. ACCORDINGLY, WE ALLOW THIS EXPENDITURE IN ENTIRETY AND TO THAT EXTENT THE ORDER OF CIT(A) IS REVERSED. ACCORD INGLY, THIS ISSUE OF THE ASSESSEES APPEAL IS ALLOWED AND THAT OF THE REVENUE IS DISMIS SED. 21. THE NEXT COMMON ISSUE IN THESE CROSS-APPEALS OF REVENUE AS WELL AS ASSESSEE IS AS REGARDS TO ESTIMATE DISALLOWANCE OF MISCELLANEOUS AND GENERAL OFFICE AND MISCELLANEOUS EXPENSES FOR THE RESTRICTION OF M ISCELLANEOUS EXPENSES AT RS.50,785/- AS AGAINST THE DISALLOWANCE MADE BY ASS ESSING OFFICER AT RS.1,26,962/-. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NO.5 :- 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-IV, SURAT HAS ERRED IN RESTRICTING THE ADDIT ION MADE BY THE A.O OF MISC. EXPENSES TO RS.50,785/- AS AGAINST THE DISALLOWED B Y THE A.O TO RS.1,26,962/-. THUS, THE LEARNED CIT(A) HAS GIVEN T HE RELIEF OF RS.76,177/-. AND ASSESSEE HAS RAISED FOLLOWING GROUND NO.4 :- 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN PART LY CONFIRMING THE DISALLOWANCE OF RS.50,785/- OUT OF TOTAL DISALLOWAN CE OF RS.1,26,962/- MADE BY ASSESSING OFFICER FOR MISCELLANEOUS EXPENSES AND GENERAL OFFICE EXPENSES. 22. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE AO NOTI CED THAT THE ASSESSEE HAD DEBITED MISCELLANEOUS FACTORY EXPENDITURE OF RS.1,5 8,605/- IN ADDITION TO SO MANY OTHER EXPENDITURES. IN RESPECT OF GENUINENESS OF TH E EXPENDITURE, THE ASSESSEE WAS ASKED TO PRODUCE THE EVIDENCES AS TO HOW SUCH EXPEN DITURES WERE GENUINE ONE HAVING SUPPORTING EVIDENCES. IN RESPONSE TO THE REQ UIREMENT THE ASSESSEE HAD PRODUCED COMPUTER PRINTED BUNCH OF VOUCHERS WITHOUT ANY DESCRIPTION OR SIGNATURE OF THE RECIPIENT OR ANYBODY OR EVEN WITHOUT CHECKING B Y ACCOUNTANT OR RESPONSIBLE PERSONS. DURING THE COURSE OF HEARING BEFORE THE AS SESSING OFFICER, IT WAS EXPLAINED BY THE AR THAT IN THE FACTORY PREMISES SO MANY MISC ELLANEOUS EXPENSES ARE INCURRED WHICH ARE NOT HAVING ANY SUPPORTING BILLS OR VOUCHE RS BECAUSE PRACTICALLY IT WAS NOT ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 19 POSSIBLE. SIMILAR WAS THE POSITION IN RESPECT OF GE NERAL OFFICE EXPENDITURE AT SURAT AND MUMBAI AMOUNTING TO RS.3,49,241/-. CONSIDERING ALL THESE ISSUES, THE EXPENDITURE AT 25% WERE DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE WHICH WORKED OUT TO RS.1,26,962/-. AGGRIEVED, ASSES SEE PREFERRED APPEAL BEFORE CIT(A). THE CIT(A) PARTLY ALLOWED THE CLAIM OF THE ASSESSEE BY GIVING FOLLOWING FINDING:- I HAVE GONE THROUGH THE DETAILS AND FIND THAT THE AO'S OBSERVATION IS CORRECT. HOWEVER, PRINTED BILLS FOR EXPENDITURE LIKE TEA, CO FFEE, CONVEYANCE TO STAFF ETC. WOULD NOT BE PRACTICABLE AND THEREFORE, IT CALLS FO R ONLY A PART DISALLOWANCE OF THE TOTAL CLAIM. I AM OF THE VIEW THAT DISALLOWANCE OF 10% OF THE CLAIM WOULD BE REASONABLE AND THEREFORE, THE ADDITION IS DIRECT ED TO BE RESTRICTED TO RS.50,785/- ONLY 23. WE FIND THAT DURING THE YEAR UNDER CONSIDERATIO N, ASSESSEE HAS DEBITED MISCELLANEOUS FACTORY EXPENSES OF RS.1,58,605/- AND GENERAL OFFICE EXPENSES OF RS.3,49,241/- AND ASSESSING OFFICER ASKED THE ASSES SEE TO PRODUCE THE SUPPORTING EVIDENCES. ASSESSEE PRODUCED VOUCHERS FOR THE SAME BUT AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE IN THIS REGARD AND DISALLOWED 25% OF BOTH THE EXPENSES AMOUNTING TO RS.1,26,962/-. THE CIT(A) ALS O RESTRICTED THE DISALLOWANCE AT 10% OF THE FACTORY EXPENSES AND GENERAL EXPENSES AN D HE AS PER HIS FINDINGS AT PAGE-NO.13 OF HIS APPELLATE ORDER AFTER CONSIDERING DETAILED WRITTEN SUBMISSIONS FILED BY ASSESSEE. WE FIND THAT THE ASSESSEE IS ENGAGED I N EXPORT ACTIVITY RUNNING INTO CRORES OF RUPEES HAS TO INCUR SUCH MISCELLANEOUS FA CTORY AND OFFICE EXPENSES. THE EXPENDITURE CLAIMED BY ASSESSEE IS REASONABLE CONSI DERING THE TOTAL VOLUME OF ACTIVITY. BUT BY GOING THROUGH THE NATURE OF EVIDEN CE BEFORE THE ASSESSING OFFICER, THE ASSESSEE PRODUCED ONLY COMPUTER PRINTED VOUCHER S AND THAT ALSO NOT SINGED BY ANY PERSON TO WHOM PAYMENT WAS MADE. WE FIND THAT, IT WAS EXPLAINED BY THE AR THAT IN THE FACTORY PREMISES SO MANY MISCELLANEOUS EXPENSES ARE INCURRED WHICH ARE NOT HAVING ANY SUPPORTING BILLS OR VOUCHERS BECAUSE PRACTICALLY IT WAS NOT POSSIBLE. SIMILAR WAS THE POSITION IN RESPECT OF GENERAL OFFI CE EXPENDITURE AT SURAT AND MUMBAI AMOUNTING TO RS.3,49,241/-. CONSIDERING ALL THESE I SSUES, THE EXPENDITURE AT 25% WERE DISALLOWED AND ADDED TO THE TOTAL INCOME OF TH E ASSESSEE WHICH WORKED OUT TO RS.1,26,962/-. THE CIT(A) RESTRICTED THE DISALLOWAN CE AT 10%, GOING THROUGH THE NATURE OF EVIDENCE PRODUCED BY THE ASSESSEE, WE ARE OF THE VIEW THAT THE CIT(A) HAS REASONABLY RESTRICTED THE DISALLOWANCE AT 10% AND W E CONFIRM THE SAME. ACCORDINGLY, THIS COMMON ISSUE OF BOTH THE APPEALS IS DISMISSED. ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 20 24. THE NEXT TWO ISSUE IN ASSESSEES APPEAL IN ITA NO.3897/AHD/2007 IS AS REGARDS TO THE ORDER OF CIT(A) IN RESTRICTING THE D ISALLOWANCE AT 1/5 TH OF TELEPHONE EXPENSES, PETROL & DEPRECIATION. FOR THIS THE ASSES SEE HAS RAISED THE FOLLOWING GROUND NO.5 & 6 :- 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.52,0 77/- BEING 1/5 TH OF TELEPHONE EXPENSES. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.88,5 00/- BEING 1/5 TH OF PETROL EXPENSES AND DEPRECIATION OF CAR. 25. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE RECORDS. WE FIND THAT THE ASSESSING OFFICER AS WELL AS CIT(A) HAS RESTRICTED THE DISALLOWANCE OF TELEPHONE , CAR AND DEPRECIATION FOR THE POSSIBLE PERSONAL USE BY THE PARTNERS AND THEIR FAM ILY MEMBERS. ACCORDINGLY, WE DO NOT SEE ANY REASON TO INTERFERE IN THE CONCURRENT F INDINGS OF THE LOWER AUTHORITIES. ACCORDINGLY, THIS ISSUE OF THE ASSESSEES APPEAL IS DISMISSED. 26. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IN ITA NO.4303/AHD/2007 IS AS REGARDS TO THE ORDER OF CIT(A) IN DELETING THE ADDI TION OF BAD DEBTS. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NO.6 :- 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-IV, SURAT HAS ERRED IN DELETING THE ADDITION MADE BY THE A.O ON ACCOUNT OF DISALLOWANCES OF BAD DEBTS OF RS.1,06,8 7,888/-. 27. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSING OFFICER NOTICED TH AT THE ASSESSEE HAD CLAIMED BED DEBTS OF RS.1,05,87,888/- WHICH WAS SURPRISING BECAUSE OF THE REASON THAT SALE WAS SHOWN IN THE MONTH OF APRIL & MAY03 AND IN THE SAME FINANCIAL YEAR, IT HAS BEEN SHOWN TO HAVE BECOME BAD DEBTS HAVING FOUND THE IMM ATURITY OF THE CLAIM. THE ASSESSEE WAS ASKED TO OFFER THE EXPLANATION IN THIS REGARD. THE ASSESSEE STATED THAT THE DETAIL OF BAD DEBTS WRITTEN OFF DURING THE YEAR UNDER CONSIDERATION WAS SUBMITTED IN THE FORMAT ALONG WITH THE PROOF REGARDING BAD DE BTS. WHEN THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO EXPLAIN, THE ASSESSEE STAT ED THAT IT SOLD DIAMONDS TO ONE M/S.SONI DIAM OF BELGIUM VIDE TWO SALE BILLS DATED 21-04-2003 AND 12-05-2003 BUT ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 21 THE PARTY BECOME INSOLVENT AND THEREFORE, THE RECOV ERY OF THE SALE AMOUNT WAS NOT POSSIBLE. THE ASSESSEE FILED COPY OF CERTIFICATE OF THE CHARTERED ACCOUNTANT ISSUED TO MANAGER OF ANDHRA BANK FOR OBTAINING PERMISSIONS FOR WRITING OFF THE EXPORT PAYMENT AND COPIES OF NEWSPAPER CUTTINGS IN SUPPORT OF HIS CONTENTION. THE AO DID NOT ACCEPT THE EXPLANATION ON THE GROUND THAT THE L ETTER WRITTEN TO ANDHRA BANK AND THE CERTIFICATE FROM THE AUDITOR DID NOT REVEAL THE BASIS FOR WRITING OFF THE DEBT DURING THE YEAR ITSELF. THE NEWSPAPER REPORT WAS IN RESPEC T OF M/S.CHIRAG EXPORTS IN WHICH ONE SHRI MAHENDRABHAI BINDOO WAS REFERRED TO AS THE PERSONS RESPONSIBLE. THE NEWSPAPER CUTTINGS HAD NOTHING IN RESPECT OF M/S. S ONI DIAM OR THE ASSESSEE. THE PARTY M/S. CHIRAG EXPORTS REFERRED TO IN THE NEWSPA PER WAS HAVING OFFICES AT MUMBAI WHEREAS M/S. SONI DIAM IS A PARTY IN BELGIUM. THE A SSESSEE FURTHER STATED THAT M/S. SONI DIAM BELONGS TO M/S. CHIRAG EXPORTS WHICH WAS RUN BY MAHENDRABHAI AND HIS SONS AND THE SAID PARTY BECAME INSOLVENT AND THEREF ORE, THE ASSESSEE HAD WRITTEN OFF THE DEBT HAVING BECOME BAD. THE AO HELD THAT TH E ASSESSEE COULD NOT ESTABLISH ANY RELATION BETWEEN M/S. SONI DIAM AND M/S. CHIRAG EXPORTS AND CITING A NUMBER OF JUDICIAL PRONOUNCEMENTS CAME TO THE CONCLUSION THAT AS LONG AS THERE WAS ANY HOPE TO RECOVER THE DEBT, IT COULD NOT BE SAID TO HAVE B ECOME IRRECOVERABLE. HE ALSO HELD THAT THE GOODS WERE SENT THROUGH A BELGIUM BANK AND IT WAS THE DUTY OF THE BANK TO PAY THE SAID AMOUNT TO THE ASSESSEE. THE AO FURTHER OBSERVED THAT THERE WAS A NUMBER OF CASES WHERE THE PAYMENT WAS OUTSTANDING F OR A LONGTIME AND WHICH WAS SHOWN AS RECEIVABLE AT THE END OF THE YEAR AND THER EFORE, THE ASSESSEE COULD VERY WELL HAVE SHOWN IT AS RECEIVABLE IN THE BALANCE SHE ET AND APPEAR TO BE IN A HURRY TO WRITE OFF THE SAID DEBT WITHOUT ANY BASIS. THE A.O ALSO REPRODUCED THE MASTER CIRCULAR OF RBI DATED 01-07-2003 WHICH PROVIDED THE TERMS AND CONDITIONS OF WRITING OFF UNREALIZED EXPORT BILLS AND HELD THAT THE TERMS AND CONDITIONS OF WRITING OFF SUCH EXPORT PROCEEDS WAS NOT FULFILLED BY THE ASSESSEE A ND THEREFORE THE CLAIM OF BAD DEBTS COULD NOT BE ALLOWED AND AO HAS CONSIDERING T HE FULL FACTS AND CIRCUMSTANCES INHERENT TO THE CASE CLAIM OF THE BAD DEBT OF RS.1, 06,87,888/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVE D, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 28. THE CIT(A) HAS DECIDED THE ISSUE IN FAVOUR OF A SSESSEE BY OBSERVING AS UNDER:- ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 22 I HAVE CONSIDERED THE SUBMISSIONS AND HAVE GONE TH ROUGH THE COPIES OF VARIOUS CORRESPONDENCE WITH THE BANK AND THE CERTIF ICATE FROM THE AUDITOR. ALTHOUGH THE NEWSPAPER CUTTING DO NOT MENTION THE N AME OF THE PARTY M/S. SONI DIAM, THE APPELLANT COULD HAVE KNOWLEDGE THAT THE SAID FIRM BELONG TO M/S. CHIRAG DIAMOND RUN BY MAHENDRABHAI AND WOULD B E BONA FIDE BELIEF THAT IT WOULD NOT BE POSSIBLE TO RECOVER ANY AMOUNT FROM M/S.SONI DIAM. THE AO COULD HAVE MADE INDEPENDENT INQUIRIES TO REBUT THE APPELLANTS CLAIM THAT M/S. SONI DIAM WAS NOT CONNECTED TO M/S CHIRAG EXPORTS A ND THAT THE SAID PARTY WAS WILLING TO PAY THE DEBT. THE APPELLANT HAS ALSO FILED EVIDENCE IN THE FORM OF PERMISSION FROM THE BANK FOR WRITING OFF THE SAI D AMOUNT WHICH INDICATES THAT THE APPELLANTS DECISION TO TREAT THE AMOUNT A S BAD DEBT WAS APPROPRIATE. THE RBI NORMS REGARDING WRITE OFF OF EXPORT EARNING ARE VERY STRINGENT AND THE PERMISSION FOR WRITE OFF OF SUCH PROCEEDS IS SUBJEC TED TO DETAILED SCRUTINY. IN THE INSTANT CASE, SINCE EVEN THE BANK HAS PERMITTED SUCH WRITE OFF, THERE IS NO JUSTIFICATION IN DOUBTING THE GENUINENESS OF THE CL AIM. FURTHER, AS PER THE AMENDED PROVISION OF SECTION 36 (1) OF THE I.T. ACT, THE DEDUCTION DISALLOWANCE ALLOWABLE, IF ANY BAD DEBT O R PART THEREOF IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE APPELLANT. PRIOR TO THE AMENDMENT THE LANGUAGE OF THE SECTION WAS DIFFERENT AND THE APPEL LANT HAD TO ESTABLISH THAT A DEBT HAD BECOME BAD IN THE PREVIOUS YEAR. I ALSO FI ND THAT THE APPELLANTS CASE IS COVERED BY THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. GIRISH BHAGWAT PRASAD 256 ITR 772 WHEREIN IT HA S BEEN HELD THAT AS PER THE AMENDMENT PROVISION OF SECTION 36(1)(VII) OF TH E I.T. ACT, THE APPELLANT HAS MERELY TO SHOW THAT THE BAD DEBT WAS WRITTEN OFF AS IRRECOVERABLE. FURTHER, IN THE CASE OF SARANGPUR COTTON MFG. CO. VS. CIT 143 I TR 166, THE HONBLE GUJARAT HIGH COURT HAS AGAIN HELD THAT WHEN A BUSIN ESSMAN WRITES OFF AN AMOUNT AS IRRECOVERABLE, IT IS A PRIMA FACIE EVIDEN CE THAT THE AMOUNT WAS IRRECOVERABLE. IN THE INSTANT CASE ONE OF THE MAIN OBJECTIONS OF THE AO IS THAT AS TO WHY THE APPELLANT WAS IN A HURRY TO WRITE OFF THE DEBT IN THE SAME YEAR AND DID NOT MAKE ANY EFFORTS TO RECOVERY THE SAID D EBT. IT IS NOT AS IF THE AO DOUBTS THE GENUINENESS OF THE SALE OR EXPORT BY THE APPELLANT. I ALSO DO NOT UNDERSTAND AS TO WHAT THE AO IS TRYING TO IMPLY THA T WHEN THE GOODS WERE SENT THROUGH THE CONSIGNEE BANK IN BELGIUM, IT WAS THE D UTY OF THE BANK TO PAY THE AMOUNT TO THE APPELLANT. THERE IS ALSO NO DOUBT THA T IT WAS THE PERSONAL KNOWLEDGE OF THE APPELLANT THAT M/S. SONI DIAM WAS OWNED BY M/S. CHIRAG EXPORTS OF MUMBAI AND SINCE THE LATTER PARTY BECAME INSOLVENT, THE APPELLANT WAS CONVINCED THAT RECOVERY OF SALE PROCEEDS WAS NO T POSSIBLE. EVEN OTHERWISE, ONCE THE APPELLANT WRITES OFF A DEBT IN ITS BOOKS OF ACCOUNT\S WHICH HAS BECAME BAD OR WHICH HE CONSIDERS TO HAVE BECAME BAD, AS PER THE AMENDED PROVISIONS OF SECTION 36(1) OF THE I.T. ACT AND AS HELD BY THE JURISDICTIONAL HIGH COURT (SUPRA), HE DOES NOT HAVE TO PROVE THAT THE DEBT HAD BECAME BAD. IT HAS TO BE AN HONEST BELIEF OF THE AP PELLANT AT THE TIME WRITING OFF THE DEBTS THAT IT HAS POSTED ENTRIES IN P & L A CCOUNT AND THAT WOULD BE SUFFICIENT COMPLIANCE WITH THE PROVISIONS OF THE ST ATUTORY REQUIREMENTS FOR WRITING OFF AN IRRECOVERABLE THE CONCERNED DEBTS IN THE BOOKS OF THE APPELLANT. I ALSO INCLINED TO AGREE WITH THE APPELLANT THAT TH E SAME ENTRIES COULD HAVE BEEN WRITTEN OFF IN THE SUBSEQUENT YEAR ALSO AND TH E APPELLANT WOULD HAVE BENEFIT SINCE IT WOULD HAVE BEEN ENTITLED TO DEDUCT ION U/S.80HHC OF THE I.T. ACT ON PROFIT EARNED FROM THESE TRANSACTIONS ALSO I N THE YEAR UNDER APPEAL ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 23 WHICH WOULD NOT BE AVAILABLE TO IT IN THE NEXT ASSE SSMENT YEAR. IN VIEW OF THIS AND RESPECTFULLY FOLLOWING THE DECISION OF HONBLE GUJARAT HIGH COURT, THE ADDITION MADE BY THE AO ON THIS ACCOUNT IS DIRECTED TO BE DELETED. 29. AT THE OUTSET, LD. COUNSEL FOR ASSESSEE STATED THAT THIS ISSUE IS NOW SQUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVEN UE BY THE DECISION OF HONBLE SUPREME COURT IN CIVIL APPEAL NO.5293 OF 2003 IN THE CASE OF T.R.F. LTD. V. CIT, WHEREIN THE HONBLE APEX COURT HAS INTERPRETED THE PROVISIONS OF SECTION 36(1)(VII) OF THE ACT AS UNDER:- IN THESE APPEALS, WE ARE CONCERNED WITH ASSESSMENT YEAR 1990-1991 AND ASSESSMENT YEAR 1993-1994. PRIOR TO 1 ST APRIL, 1989, EVERY ASSESSEE HAD TO ESTABLISH, AS A MATTER OF FACT, THAT THE DEBT ADVAN CED BY THE ASSESSEE HAD, IN FACT, BECOME IRRECOVERABLE. THAT POSITION GOT ALTER ED BY DELETION OF THE WORD ESTABLISHED, WHICH EARLIER EXISTED IN SECTION 36( 1)(VII) OF THE INCOME TAX ACT, 1961 [ACT, FOR SHORT]. FOR THE SAKE OF CLARITY, WE RE-PRODUCE HEREINBELOW PROVISIONS OF SECTION 36(1)(VI) OF THE ACT, BOTH PRIOR TO 1 ST APRIL, 1989: PRE-1 ST APRIL, 1989: OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPU TING THE INCOME REFERRED TO IN SECTION 28 - - (I) TO (VI) XXX XXX XXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), THE AMOUNT OF ANY DEBT, OR PART THEREOF, WHICH IS ESTABLISHED TO HAVE BECOME A BAD DEBT IN THE PREVIOUS YEAR. POST-1 ST APRIL, 1989: OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPU TING THE INCOME REFERRED TO IN SECTION 28 (I) TO (VI) XXX XXX XXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS IN THE ACCOUNTS OF THE ASSESSEE FOR THE ASSESSEE FOR THE PREVIOUS YEAR. THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, H AS BECOME IRRECOVERABLE. IT IS ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 24 ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE. 30. WE FIND THAT THE ASSESSEE IN THE YEAR UNDER CON SIDERATION HAS WRITTEN OFF THE BAD DEBTS AND THIS FACT IS UNDISPUTED. IN VIEW OF T HE RATIO LAID DOWN BY THE HONBLE APEX COURT, WE FIND THAT THE ISSUE IS COVERED IN FA VOUR OF THE ASSESSEE. ACCORDINGLY, WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND THIS ISSUE OF REVENUES APPEAL IS DISMISSED. 31. THE ALTERNATIVE CONTENTION RAISED BY ASSESSEE I S THAT CIT(A) HAS NOT DEALT WITH GROUND RAISED AS AGAINST THE CLAIM OF ENHANCING DED UCTION U/S 80HHC OF THE ACT. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.7 & 8 :- 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS THE SUBJECT, THE LEARNED ASSESSING OFFICER HAS ERRED IN NOT ENHA NCING DEDUCTION U/S.80HHC OF THE ACT ON ACCOUNT OF ADDITIONS MADE B Y HIM. THE LD. CIT(A) HAS NOT DEALT WITH THIS GROUND RAISED BEFORE HIM. 8. IT IS THEREFORE PRAYED THAT THE ABOVE ADDITION/D ISALLOWANCE MADE BY ASSESSING OFFICER AND CONFIRMED BY CIT (APPEALS) MA Y PLEASE BE DELETED. IT IS ALSO PRAYED THAT DEDUCTION U/S.80HHC OF THE ACT MAY BE RECEIVED ON ACCOUNT OF ANY ADDITIONS THAT MAY BE SUSTAINED BY HOOURABLE TRIBUNAL OUT OF THE ADDITIONS MADE BY THE ASSESSING OFFICER. 32. THE LD. COUNSEL FOR THE ASSESSEE HAS NOT PRESSE D THIS ISSUE UNDER THE INSTRUCTIONS OF THE ASSESSEE AND ACCORDINGLY THE SA ME IS DISMISSED AS NOT PRESSED. 33. IN THE RESULT, BOTH THE APPEALS OF ASSESSEE AND THA T OF REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON THIS DAY OF 17 TH SEPT, 2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD, DATED : 17/09/2010 ITA NO.4303 & 3897/AHD/2007 A.Y.2004-05 ACIT, CIR-6, SRT V. M/S. OM ANAND EXPORTS PAGE 25 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-IV, SURAT 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD