SYADVAD ENTERPRISES, MUMBAI V. ITO WD 20(3)(2), MUMBAI

ITA 4315/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2099 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2005-2006
• Appeal Filed On: 16-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NAVEEN GUPTA
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, E, MUMBAI BEFORE SHRI R V EASWAR, SENIOR VICE PRESIDENT AND SHRI R K PANDA, ACCOUNTANT MEMBER I T A NO: 4315/MUM/2009 (ASSESSMENT YEAR: 2005-06) M/S SYADVAD ENTERPRISES, MUMBAI APPELLANT (PAN: AAAFS8557Q) VS INCOME TAX OFFICER, WARD 20(3)(2), MUMBAI RESPOND ENT APPELLANT BY: SHRI SATISH MODY RESPONDENT BY: SHRI NAVEEN GUPTA O R D E R R V EASWAR, SENIOR VICE PRESIDENT: THIS IS AN APPEAL BY THE ASSESSEE FOR THE ASSESSME NT YEAR 2005-06 AND THE ONLY ISSUE IS WHETHER THE CIT(A) WA S JUSTIFIED IN SUSTAINING THE ADDITION OF RS.20,55,297/- MADE TO T HE GROSS PROFIT. 2. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN TH E BUSINESS OF IMPORT OF ROUGH DIAMONDS AND EXPORT OF CUT AND POLI SHED DIAMONDS, JEWELLERY, ETC. IN RESPECT OF THE YEAR UNDER APPEA L, IT DECLARED A GROSS PROFIT OF RS.7,66,862/- WHICH CAME TO 2.86% ON THE SALES. THE SALES CONSISTED OF RS.56,51,795/- AS EXPORT SALES AND RS. 2,11,44,279/- AS LOCAL SALES. THE NET PROFIT SHOWN WAS RS.13,142/- WHICH CAME TO 0.05% OF THE SALES. THE ASSESSING OFFICER WHILE CO MPLETING THE ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX A CT, OBSERVED THAT AS PER THE COMMENTS MADE BY THE AUDITOR IN THE TAX AUDIT REPORT THE ASSESSEE DID NOT MAINTAIN ANY STOCK REGISTER AND TH AT THE STOCK REGISTER WAS NOT MENTIONED AS ONE OF THE BOOKS OF ACCOUNT MA INTAINED BY THE 2 ASSESSEE IN COLUMN 9(B) OF THE REPORT. HE ALSO NOT ICED FROM THE RECORD THAT IN THE ASSESSMENT YEARS 2003-04 AND 2004-05 TH E ASSESSEE HAD SHOWN 10% AND 19.45% AS GROSS PROFIT. IN THIS BACK GROUND HE CONSIDERED THE GROSS PROFIT RATE OF 2.86% SHOWN FOR THE YEAR UNDER APPEAL TO BE TOO LOW AND, THEREFORE, ASKED FOR THE ASSESSEES EXPLANATION. THE ASSESSEE EXPLAINED, INTER ALIA, T HAT DUE TO FLUCTUATION OF RATES IN THE DIAMOND MARKET, WHICH IS DUE TO MIX ING OF PRECIOUS AND SEMI-PRECIOUS STONES OF MULTIPLE GRADES, RATES AND VAST VARIETY OF QUALITY WITH ATTENDANT LACK OF HOMOGENEITY, ITS BUS INESS SUFFERED IN THE YEAR RESULTING IN LOW GROSS AND NET PROFIT. THE AS SESSING OFFICER WAS NOT SATISFIED WITH THIS EXPLANATION AND REFERRING T O THE ABSENCE OF STOCK REGISTER AND THE PAST RECORD, PROCEEDED TO TAKE THE AVERAGE GROSS PROFIT OF THE THREE YEARS, WHICH CAME TO 10.94% AS THE GROSS PROFIT FOR THE YEAR UNDER APPEAL AND THIS RESULTED IN AN ADDIT ION OF RS.20,55,297/-. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) AND WOULD APPEAR TO HAVE MADE ELABORATE SUBMISSIONS IN WRITING AND WOULD ALSO APPEAR TO HAVE ENCLOSED ALL THE MATERIAL ON WHICH IT RELIED AS ANNEXURES TO THE WRITTEN SUBMISSIONS. IN PARTIC ULAR, IT WAS ARGUED BEFORE THE CIT(A) THAT IT IS NOT CORRECT TO STATE T HAT NO STOCK REGISTER WAS MAINTAINED AND THAT THE COMPLETE DETAILS OF THE STOCK FROM WHICH THE CLOSING STOCK COULD BE PROPERLY ASCERTAINED BOT H IN TERMS OF QUANTITY AND QUALITY WERE ADDUCED BEFORE THE ASSESS ING OFFICER, WHICH WERE ALL IGNORED BY HIM. IT WAS ALSO SUBMITTED THA T THE ASSESSING OFFICER WAS NOT JUSTIFIED IN IGNORING THE OPENING S TOCK FOR THE YEAR WHILE 3 COMING TO THE CONCLUSION THAT THE ASSESSEE HAS MADE SALES WITHOUT CORRESPONDING PURCHASES WHICH ARE VERY LESS. BY DE TAILED WRITTEN SUBMISSION MADE THROUGH LETTER DATED 16.03.2009, TH E ASSESSEE SOUGHT TO EXPLAIN WHY THE GROSS PROFIT FELL TO 2.86 % IN THE YEAR UNDER APPEAL. THE GIST OF THE EXPLANATION WAS THIS. THE ASSESSEE IMPORTED HUGE QUANTITY OF ROUGH DIAMONDS IN MARCH 2004 AND T HEY WERE TO BE IMPORTED ON CREDIT OF 89 DAYS. THE ASSESSEE HAD TO MAKE PAYMENT AMOUNTING TO MORE THAN RS.3.00 CRORES BEFORE JUNE 2 004. THE ASSESSEE DID NOT HAVE SUFFICIENT FUNDS TO MAKE THE PAYMENT BEFORE THE SAID DATE. MOREOVER, THE DEMAND FROM THE OVERSEAS BUYERS FOR CUT AND POLISHED DIAMONDS ALSO FELL. THE ASSESSEE IN O RDER TO MUSTER FUNDS FOR MAKING THE PAYMENT WAS THUS FORCED TO SEL L THE DIAMONDS IN THE LOCAL MARKET FOR WHATEVER PRICE THEY WOULD FETC H. IN ADDITION TO THIS PROBLEM, THE ASSESSEE ALSO FOUND THAT THE IMPORTED ROUGHS DID NOT MEET THE QUALITY STANDARD WHICH WAS EXPECTED BY THE ASSESSEE. THEREFORE, THEY COULD NOT BE EXPORTED. THE RESULT WAS THAT THE ASSESSEE WAS FORCED TO SELL THE DIAMONDS IN THE LOC AL MARKET AT LOW PRICES WHICH IS THE REASON WHY FOR THE YEAR UNDER A PPEAL, IN CONTRAST WITH THE EARLIER TWO YEARS, THE LOCAL SALES FAR EXC EED THE EXPORT SALES WHEREAS IN THE EARLIER TWO YEARS THERE WAS ONLY A S MALL DIFFERENCE BETWEEN THE TWO. THE ASSESSEE ALSO FILED STATEMENT S BEFORE THE CIT(A) SHOWING THE DETAILS OF IMPORT OF ROUGHS IN Q UANTITY, AMOUNT, DUE DATE OF PAYMENT, ACTUAL PAYMENT DATES AND PAYMENT A DVICES OF THE PUNJAB AND SIND BANK. A CERTIFICATE ISSUED BY THE GEMS AND JEWELLERY EXPORT PROMOTION COUNCIL, MUMBAI WAS ALSO FILED TO SUPPORT THE LOW 4 YIELD WHICH THE ASSESSEE OBTAINED DUE TO POOR QUALI TY OF THE IMPORTED ROUGHS. ON THE BASIS OF THE ELABORATE MATERIAL AND WRITTEN SUBMISSIONS FILED BEFORE THE CIT(A), THE ASSESSEE C ONTENDED THAT THE ASSESSING OFFICER OUGHT TO HAVE ACCEPTED THE BOOK R ESULTS. 4. THE CIT(A) WAS NOT SATISFIED WITH THE ASSESSEES EXPLANATION AND THE MATERIAL ADDUCED BEFORE HIM IN SUPPORT OF T HE APPEAL. AFTER REFERRING TO THE ASSESSEES EXPLANATION, HE HELD TH AT NO PROOF WAS SUBMITTED TO SUPPORT THE CLAIM THAT THERE WAS NO DE MAND IN THE OVERSEAS AS WELL AS LOCAL MARKET WHICH COMPELLED TH E ASSESSEE TO SELL THE DIAMONDS AT LOWER PRICES. HE ALSO HELD THAT TH ERE WAS NO PROOF TO SHOW THAT THE FUNDS POSITION OF THE ASSESSEE WAS PR ECARIOUS. HE ALSO HELD THAT FROM THE DETAILS FURNISHED BY THE ASSESSE E IT COULD NOT BE VERIFIED AS TO WHETHER THE IMPORTED ROUGHS WERE OF POOR QUALITY COMPARED TO THE EARLIER YEARS. ACCORDING TO THE CI T(A), THE ASSESSEE DID NOT MAINTAIN A PROPER STOCK REGISTER CONTAINING QUANTITATIVE DETAILS OF THE STOCK. HE SURMISED THAT WHAT THE ASSESSEE M AY HAVE MAINTAINED WOULD BE ONLY A LUMPSUM ESTIMATE OF DIFF ERENT CATEGORIES OF GOODS FROM WHICH THE CORRECTNESS OF THE PURCHASE AND SALES COULD NOT BE VERIFIED. IN PARAGRAPH 2.5 HE ALSO OBSERVED THAT THE DOCUMENTS AND ARGUMENTS PRESENTED BEFORE HIM WERE NOT FURNISH ED BEFORE THE ASSESSING OFFICER AND PROPER EXPLANATION WAS NOT GI VEN. IN THIS VIEW OF THE MATTER HE SUSTAINED THE ADDITION, AGAINST WH ICH THE ASSESSEE IS IN FURTHER APPEAL. 5. IT WAS VEHEMENTLY CONTENDED BY THE LEARNED COUNS EL FOR THE ASSESSEE, WHO TOOK US THROUGH THE CONTENTS OF THE P APER BOOK 5 CONTAINING 51 PAGES FILED BEFORE US, THAT THE CIT(A ) HAS NOT PROPERLY APPRECIATED THE ASSESSEES CONTENTIONS AND THE MATE RIALS AND ARGUMENTS PRESENTED BEFORE HIM. HE SUBMITTED THAT THE ASSESSEE DID MAINTAIN A STOCK REGISTER WHICH WAS ALSO SHOWN TO T HE ASSESSING OFFICER AND IN SUPPORT OF THIS PLEA HE DREW OUR ATT ENTION TO THE ASSESSEES LETTER DATED 20 TH AUGUST 2007 TO THE ASSESSING OFFICER, IN WHICH IN PARAGRAPH 12 THE ASSESSEE HAS STATED THAT IT WAS MARINATING A COMPUTER GENERATED STOCK REGISTER (PAGE 3 OF THE PA PER BOOK). HE ALSO DREW OUR ATTENTION TO THE ASSESSEES WRITTEN S UBMISSIONS DATED 19 TH FEBRUARY 2009 FILED BEFORE THE CIT(A), IN WHICH IT WAS CLAIMED THAT THE ASSESSEE PROVIDED TO THE ASSESSING OFFICER DETA ILS OF INVENTORIES OF OPENING AND CLOSING STOCK, STOCK REGISTER AND DETAI LED STOCK SUMMARY AS ON 31.03.2005. WHAT THESE DETAILS CONTAINED HAS ALSO BEEN MENTIONED IN THE AFORESAID LETTER. IN EXHIBIT E ATTACHED TO THIS LETTER, THE ASSESSEE HAS ALSO ENCLOSED THE COPIES OF THE IN VENTORIES OF THE OPENING AND CLOSING STOCK FOR THE YEAR AS WELL AS T HE COMPUTERIZED SHEETS TOGETHER FORMING THE STOCK REGISTER FOR THE PERIOD FROM 01.04.2004 TO 31.03.2005. THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD SUBMITTED THAT THE ASSESSING OFFICER IN STEAD OF VERIFYING THE SALES, PURCHASES AND CLOSING STOCK WITH THE STOCK R EGISTER (COMPUTERIZED SHEETS) AND THE INVENTORIES, ERRONEOU SLY PROCEEDED TO STATE THAT NO STOCK REGISTER WAS MAINTAINED BY THE ASSESSEE. OUR ATTENTION WAS ALSO DRAWN TO THE ASSESSEES LETTER D ATED 16 TH MARCH 2009 FILED BEFORE THE CIT(A) WITH SEVERAL ANNEXURES WHICH CONTAINED ELABORATE DETAILS ABOUT THE OPENING AND CLOSING STO CK, PURCHASES AND 6 SALES AND ALSO INCLUDED A RECONCILIATION OF THE OPE NING STOCK AND PURCHASES WITH THE CLOSING STOCK IN TERMS OF QUANTI TY AND AMOUNT. WE WERE TAKEN THROUGH THE ANNEXURES TO THE AFORESAID L ETTER. 6. IT WAS FURTHER CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSING OFFICER DID NOT SPECIFI CALLY INVOKE SECTION 145(3) OF THE ACT, TO REJECT THE BOOKS OF ACCOUNT A ND HAS IN FACT NOT QUESTIONED THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNTS OR THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. HE HAS MERELY POINTED OUT TO THE FALL IN THE RATE OF GROSS PROFIT AND HAS LOOSELY REFERRED TO THE NON-MAINTENANCE OF THE STOCK REGISTER WITHOU T LOOKING INTO ANY OF THE DETAILS FURNISHED BY THE ASSESSEE REGARDING THE STOCK. IT WAS SUBMITTED THAT THE PURCHASES AND SALES WERE NOT DOU BTED AND THERE WAS NO SALES SUPPRESSION OR PURCHASE INFLATION FOUN D OUT BY THE ASSESSING OFFICER. IT WAS CONTENDED THAT THE ASSES SING OFFICER DID NOT EVEN CARE TO TAKE INTO ACCOUNT THE OPENING STOCK FO R THE YEAR BEFORE MAKING THE STATEMENT THAT THE ASSESSEE HAS SHOWN HU GE SALES WITHOUT MATCHING PURCHASES. IT WAS THUS POINTED OUT THAT B OTH THE ASSESSING OFFICER AS WELL AS THE CIT(A) DID NOT ATTACH DUE IM PORTANCE TO THE MATERIAL ADDUCED BEFORE THEM AND PROCEEDED TO DECID E THE ISSUE ON THE BASIS OF SURMISES AND CONJECTURES. 7. AS REGARDS THE ASSESSEES EXPLANATION THAT THERE WAS NO DEMAND FROM OVERSEAS AND LOCAL BUYERS WHICH COMPELL ED THE ASSESSEE TO DISPOSE OF THE STOCK AT LOWER PRICES, I T WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT NO POSITI VE PROOF COULD BE ADDUCED TO DEMONSTRATE THE FALLING DEMAND AND THE A SSESSEE CANNOT 7 BE ASKED TO PROVE A NEGATIVE. AS REGARDS THE FUNDS POSITION, THE ENTIRE BOOKS OF ACCOUNTS WERE BEFORE THE ASSESSING OFFICER AND THEY WOULD SHOW THAT THE ASSESSEE WAS FINDING IT DIFFICULT TO MEET THE LIABILITY FOR THE OF ROUGH DIAMONDS WITHIN A PERIOD OF 89 DAYS. AS REGARDS THE OBSERVATION OF THE CIT(A) THAT THE DUE DATE FOR PAY MENT OF THE IMPORT WAS AFTER 89 DAYS WAS NOT PROVED BY THE ASSESSEE, I T WAS SUBMITTED BEFORE US THAT THIS WAS WRITTEN CLEARLY ON THE FACE OF THE BILLS AND IMPORT DOCUMENTS FILED BEFORE THE CIT(A) AND NO FURTHER PR OOF WAS NECESSARY. 8. ON THE STRENGTH OF THE AFORESAID SUBMISSION, THE LEARNED COUNSEL FOR THE ASSESSEE MADE A FORCEFUL PLEA THAT THE ENTIRE ADDITION WAS BASED ON CONJECTURES AND SURMISES AND DUE TO RE LUCTANCE ON THE PART OF THE INCOME TAX AUTHORITIES TO TAKE NOTE OF THE DOCUMENTS AND OTHER MATERIAL ADDUCED BEFORE THEM. HE ACCORDINGLY CONTENDED THAT THE ADDITION SHOULD BE DELETED. 9. ON THE OTHER HAND, THE LEARNED SENIOR DR WHILE S TRONGLY PLACING RELIANCE ON THE FINDINGS OF THE INCOME TAX AUTHORIT IES, ESPECIALLY THOSE OF CIT(A), POINTED OUT THAT THE FLAWS IN THE ARGUME NTS OF THE ASSESSEE WERE (A) THERE WAS NO EVIDENCE TO SHOW THE FALL I N THE DEMAND FOR THE DIAMONDS BOTH IN THE LOCAL AND IN THE OVERSEAS MARK ET; (B) THAT THERE WAS NO EVIDENCE TO SHOW THAT THE FUNDS POSITION OF THE ASSESSEE WAS BAD WHICH FORCED HIM TO SELL THE DIAMONDS AT LOW PR ICES; (C) THE TAX AUDITORS HAVE THEMSELVES REPORTED IN FORM NO.3CD IN COLUMN 28(B), COLUMN 32(D) THAT THE QUANTITATIVE STOCK REGISTER O F THE PRECIOUS AND SEMI-PRECIOUS STONES OF MULTIPLE GRADES AND VALUES WERE NOT MAINTAINED; AND (D) IN SCHEDULE G TO THE ACCOUNTS OF THE ASSESSEE 8 THERE IS REFERENCE TO THE AUDITORS STATEMENT THAT T HE MANAGEMENT ITSELF HAS VALUED THE STOCK OF POLISHED AND ROUGH DIAMONDS AS PER INVENTORY TAKEN (PHYSICAL VERIFICATION) AND THE VALUATION OF THE DIAMONDS WAS ON VISUAL APPRAISAL AND THIS CERTIFICATE WAS RELIED UP ON BY THE AUDITORS AND IT WAS FURTHER MENTIONED THAT SINCE THE ASSESSEE HA D NOT MAINTAINED QUANTITATIVE DETAILS WITH VALUES, GRADES AND VARIET IES, THE DETAILS CERTIFIED BY THE MANAGEMENT WERE NOT CHECKED AND VE RIFIED BY THE AUDITORS. ON THE BASIS OF THESE FOUR REFERENCES, T HE LEARNED SENIOR DR CONTENDED THAT THE ASSESSEE DID NOT MAINTAIN QUALIT Y-WISE OR GRADE- WISE DETAILS OF THE STOCK AND, THEREFORE, THERE WAS NO POINT IN RELYING ON THE COMPUTERIZED SHEETS OF STOCK VALUATION, EVEN AS SUMING THAT THEY WERE BEFORE THE ASSESSING OFFICER. IN THIS CONNECT ION HE SUPPORTED THE FINDING OF THE CIT(A) THAT THE SO CALLED COMPUTERIZ ED STOCK STATEMENTS COULD ONLY BE LUMPSUM ESTIMATES OF DIFFERENT CATEGO RIES OF DIAMONDS. ACCORDING TO THE LEARNED SENIOR DR, THE NON-MAINTEN ANCE OF A PROPER STOCK REGISTER WAS FATAL TO THE ASSESSEES CLAIM TH AT ITS BOOK RESULTS SHOULD HAVE BEEN ACCEPTED. 10. IN HIS BRIEF REPLY, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD MAINTAINED THE VERY SAME RECORDS EVEN IN RESPECT OF THE ASSESSMENT YEAR 2002-03, IN WHICH YEAR IT HAD SHOWN A GROSS PROFIT RATE OF 3.39%, WHICH WAS ACCEP TED BY THE ASSESSING OFFICER AND IN THIS CONNECTION DREW OUR A TTENTION TO PAGE 4 OF THE PAPER BOOK, WHICH IS A LETTER WRITTEN BY THE ASSESSEE TO THE ASSESSING OFFICER ON 20.11.2007. HE ALSO POINTED O UT THAT IN THE ASSESSMENT YEAR 2002-03 ALSO THE EXPORT SALES WERE FAR LESS THAN THE 9 LOCAL SALES (ONLY ABOUT 32%), SIMILAR TO THE POSITI ON OBTAINING IN THE YEAR UNDER APPEAL AND THAT IS WHY FOR THE YEAR UNDE R APPEAL THE GROSS PROFIT RATE IS ONLY 2.86%. HIS SUBMISSION WAS THAT SINCE THE FACTS FOR THE YEAR UNDER APPEAL ARE SUBSTANTIALLY SIMILAR TO THE FACTS OBTAINING IN THE ASSESSMENT YEAR 2002-03, THE ASSESSEES PLEA TH AT THE GROSS PROFIT FALLS WHENEVER THE LOCAL SALES ARE MUCH MORE THAN T HE EXPORT SALES SHOULD MERIT ACCEPTANCE. 11. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL CONTENTIONS. IN OUR OPINION, THE ADDITION IS NOT J USTIFIED. THE ASSESSING OFFICER HAS, FIRSTLY, MADE AN OBSERVATION THAT THE ASSESSEE WAS ABLE TO ACHIEVE HUGE SALES WITHOUT CORRESPONDING PURCHASES. THIS IS AN ERRONEOUS OBSERVATION BECAUSE THE OPENING STOCK OF RS.3,66,46,823/-, WHICH WAS THE CLOSING STOCK FOR THE EARLIER YEAR, W AS NOT TAKEN NOTE OF BY HIM. HE HAS THUS MADE A FACTUAL ERROR WHICH MIG HT HAVE CLOUDED HIS APPROACH TO THE ACCOUNTS OF THE ASSESSEE. SECO NDLY, THE DETAILS ABOUT THE STOCK SUBMITTED BY THE ASSESSEE IN THE CO URSE OF THE ASSESSMENT PROCEEDINGS DO NOT AT ALL FIND A PLACE I N THE ASSESSMENT ORDER. ALL THAT THE ASSESSING OFFICER HAS REPEATED ATLEAST TWICE IN THE ASSESSMENT ORDER IS THAT THE ASSESSEE DID NOT MAINT AIN A STOCK REGISTER AND IT HAS BEEN SO REPORTED IN THE TAX AUDIT REPORT . THIS AGAIN IS NOT A COMPLETE STATEMENT AS THE LETTERS WRITTEN TO THE ASSESSING OFFICER SEEM TO INDICATE. THE LEARNED COUNSEL FOR THE ASSE SSEE HAD REFERRED TO THE LETTER DATED 20.08.2007 WRITTEN TO THE ASSES SING OFFICER IN THE COURSE OF THE ASSESSMENT PROCEEDINGS. IN COLUMN 6 OF THIS LETTER, THE ASSESSEE HAS REFERRED TO AN ENCLOSED STATEMENT SHOW ING DETAILS OF 10 INVENTORY OF THE OPENING AND CLOSING STOCK SHOWING PARTICULARS OF THE GOODS, QUANTITY, RATE, AMOUNT; AS WELL AS THE METHO D OF VALUATION. IN COLUMN 12 OF THIS LETTER, THE ASSESSEE HAS REITERAT ED THAT IT WAS MAINTAINING REGULAR COMPUTERIZED BOOKS OF ACCOUNT I NCLUDING A STOCK REGISTER. IN THE ASSESSEES WRITTEN SUBMISSIONS DA TED 19.02.2009 BEFORE THE CIT(A), IT WAS STATED THAT ALL THE REQUI RED DETAILS WERE FURNISHED IN THE COURSE OF THE ASSESSMENT PROCEEDIN GS AND THESE DETAILS WERE FILED AS EXHIBIT D TO THE LETTER. I N PARAGRAPH 6 OF THE AFORESAID LETTER, THE ASSESSEE HAS ALSO STATED THAT THE ASSESSING OFFICER DID NOT VERIFY THE SALES, PURCHASES AND THE CLOSING STOCK WITH THE STOCK REGISTER AND INVENTORIES WHICH WERE SUBMI TTED TO HIM AND WHICH SHOWED PARTICULARS OF GOODS, THE DETAILS IN QUALITY, QUANTITIES AND VALUE (PAGE 8 OF THE PAPER BOOK). COPIES OF W HATEVER WAS FILED BEFORE THE ASSESSING OFFICER WITH REGARD TO THE STO CK AND THE INVENTORIES WERE FILED BEFORE THE CIT(A) ALSO. AGA IN IN THE SAME WRITTEN SUBMISSIONS (PAGE 9 OF THE PAPER BOOK), THE ASSESSEE HAS ATTEMPTED TO MEET THE POINTS RAISED BY THE ASSESSIN G OFFICER INCLUDING THE POINT THAT NO STOCK REGISTER WAS MAINTAINED. T HE ASSESSEES REPLY IS AS BELOW: - STOCK REGISTER SHOWING QUANTITY, QUALITY, RATE AND VALUE ALONGWITH INVENTORIES OF OPENING AND CLOSING STOCK HAVE BEEN SUBMITTED. HENCE IT CANT BE SAID THAT STOCK REGISTER IS NOT MAINTAINED AND CLOSING STOCK CANT BE ASCERT AINED. DETAILS OF THE STOCK OF DIAMONDS WERE AGAIN FILED B EFORE THE CIT(A) VIDE LETTER DATED 16.03.2009. IT IS IN THIS LETTER THAT THE ASSESSEE EXPLAINED THE DIFFICULTY IN MEETING THE PAYMENT SCH EDULE OF THE IMPORT 11 OF ROUGH DIAMONDS, THE POOR QUALITY OF THESE DIAMON DS, THE YIELD THEREFROM SUPPORTED BY THE CERTIFICATE OF THE GEMS AND JEWELLERY EXPORT PROMOTION COUNCIL, ETC. THERE IS NO REFEREN CE TO THE COPIOUS DETAILS FILED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. IT IS NO DOUBT TRUE THAT A FALL IN THE RATE OF GROSS PROFIT, PARTICULARLY A STEEP FALL AS IN THE ASSESSE ES CASE, SHOULD EXCITE THE SUSPICION OF THE ASSESSING OFFICER AND IS CERTA INLY A CAUSE FOR FURTHER ENQUIRY; BY ITSELF IT CANNOT BE MADE THE SO LE BASIS OF THE ADDITION. WHEN THE MATTER WAS EXAMINED BY THE CIT( A), HE DID NOT CONSIDER IT NECESSARY TO EXAMINE IN DETAIL THE STOC K STATEMENTS FILED BEFORE THE ASSESSING OFFICER, PRESUMABLY BECAUSE IN HIS OPINION THE STOCK STATEMENTS WOULD HAVE CONTAINED ONLY A LUMPSU M ESTIMATE OF DIFFERENT CATEGORIES OF GOODS FROM WHICH THE ASSESS ING OFFICER COULD NOT VERIFY THE CORRECTNESS OF THE PURCHASES AND SAL ES. THIS APPEARS TO US, WITH RESPECT, MERELY A CONJECTURE OR SUSPICION. THE CORRECTNESS OF THE PURCHASES COULD HAVE ALSO BEEN VERIFIED FROM TH E BILLS PRODUCED BY THE ASSESSEE IN SUPPORT OF THE IMPORT OF ROUGH DIAM ONDS. NO DOUBT HAS BEEN RAISED REGARDING THE BILLS. IT HAS NOT BE EN POINTED OUT, AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL FOR THE AS SESSEE, THAT THE PURCHASES WERE INFLATED. NOR IS THERE ANY EVIDENCE TO SHOW THAT THE ASSESSEE HAS INDULGED IN SUPPRESSION OF SALES. THE DIAMONDS WERE SOLD AT LOWER PRICES IN THE LOCAL MARKET AND THAT I S WHY THE LOCAL SALES ARE ALMOST FOUR TIMES THE EXPORT SALES. ANY OF THE LOCAL PURCHASERS COULD HAVE BEEN SUMMONED TO VERIFY THE SALES MADE T O THEM BY THE ASSESSEE. THIS EXERCISE HAS ALSO NOT BEEN UNDERTAK EN. THE ASSESSEE 12 HAS ALSO SUBMITTED THE COPIES OF THE IMPORT DOCUMEN TS AND PAYMENT ADVICES FROM THE BANK IN SUPPORT OF THE IMPORT OF R OUGHS. NOTHING HAS BEEN SAID AGAINST THEM. THUS, WHATEVER DOCUMENTS W ERE MADE AVAILABLE IN RESPECT OF THE PURCHASES AND SALES TO THE INCOME TAX AUTHORITIES APPEAR TO HAVE BEEN FOUND TO BE IN ORDE R. IT IS THEREFORE SURPRISING AS TO HOW THE CIT(A) CAN OBSERVE THAT TH E STATEMENTS OF STOCK DO NOT ENABLE THE ASSESSING OFFICER TO VERIFY THE CORRECTNESS OF PURCHASE AND SALES. THEIR CORRECTNESS COULD HAVE B EEN VERIFIED EVEN OTHERWISE, A TASK WHICH WAS NOT UNDERTAKEN BY THE A SSESSING OFFICER. THE EXPLANATION OF THE ASSESSEE FOR FALL IN DEMAND FOR THE DIAMONDS COMPELLING IT TO SELL AT LOWER PRICES IN THE LOCAL MARKET IS A PLAUSIBLE SITUATION AND AGAIN AS POINTED OUT BY THE LEARNED C OUNSEL FOR THE ASSESSEE, IT IS NOT POSSIBLE FOR THE ASSESSEE TO PR OVE A NEGATIVE. THE CLAIM THAT THE ASSESSEE SOLD THE DIAMONDS IN THE LO CAL MARKET AT LOWER PRICES HAS NOT BEEN CHALLENGED. IF THAT IS SO, THE CLAIM THAT THE DEMAND FOR THE DIAMONDS WAS FALLING STANDS VINDICAT ED FOR NO BUSINESSMAN IN HIS RIGHT MIND WOULD SELL HIS STOCK AT LOWER PRICES IF THEY COMMANDED A GOOD MARKET. THE FACT THAT THE AS SESSEE HAD 89 DAYS TO MAKE PAYMENT FOR THE IMPORTED ROUGHS OF MOR E THAN RS.3.00 CRORES IS SUPPORTED BY THE BILLS THEMSELVES AND THE IMPORT DOCUMENTS AND PAYMENT ADVICES. IT WOULD THUS APPEAR TO US TH AT IT IS NOT FULLY CORRECT TO SAY THAT THE ASSESSEE DID NOT MAINTAIN A STOCK REGISTER OR THAT HE HAS NOT MAINTAINED PROPER RECORDS RELATING TO HIS BUSINESS. ALL THE RECORDS MAINTAINED BY THE ASSESSEE WERE ADDUCED BEFORE THE ASSESSING OFFICER BUT HE CHOSE TO REST THE ADDITION ON THE TECHNICAL 13 PLEA THAT A FORMAL STOCK REGISTER WAS NOT MAINTAINE D AND IN DOING SO HE FAILED TO TAKE NOTE OF THE MATERIAL ADDUCED BEFORE HIM IN SUPPORT OF THE STOCK POSITION. 12. THE LEARNED SENIOR DR HARPED ON THE REPORT OF T HE TAX AUDITOR. THE QUANTITATIVE PARTICULARS OF THE PRINCIPAL ITEMS OF RAW MATERIALS, FINISHED PRODUCTS AND BYE-PRODUCTS WERE SUBMITTED I N THE COURSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE ASSESSING OFFICER AS NOTED IN THE EARLIER PARAGRAPHS. THERE IS REPEATED REFERENCE TO THE SAME IN THE ASSESSEES LETTERS TO THE ASSESSING OFFICER AS WELL IN THE WRITTEN SUBMISSIONS BEFORE THE CIT(A). WHATEVER DETAILS WE RE FILED BY THE ASSESSEE TO SHOW THE QUANTITATIVE DETAILS OUGHT TO HAVE BEEN EXAMINED BY THE ASSESSING OFFICER AND A REASONABLE VIEW OUGHT TO HAVE BEEN TAKEN. HE FAILED TO DO SO. 13. THERE IS FORCE IN THE ASSESSEES CONTENTION THA T WHENEVER THE LOCAL SALES ARE MANY TIMES MORE THAN THE EXPORT SAL ES THERE IS A STEEP FALL IN THE RATE OF GROSS PROFIT BECAUSE IT INDICAT ES THAT THE DIAMONDS WERE SOLD AT LOWER PRICES IN THE LOCAL MARKET BECAU SE OF FALL IN DEMAND IN THE OVERSEAS MARKET OR POOR QUALITY OF THE DIAMO NDS NOT FIT FOR EXPORT. THIS POSITION IS PROVED BY THE FACT THAT I N RESPECT OF THE ASSESSMENT YEAR 2002-03 THE EXPORT SALES WERE RS.75 ,16,134/- AND THE LOCAL SALES WERE RS.2,68,08,854/-. THE GROSS P ROFIT WAS 3.3% WHICH WAS ACCEPTED IN THE ASSESSMENT. SIMILARLY, F OR THE YEAR UNDER APPEAL AS AGAINST THE LOCAL SALES OF RS.2,11,44,279 /- THE EXPORT SALES ARE ONLY RS.56,51,795/-. THIS GIVES A GROSS PROFIT RATE OF 2.86%. THERE IS SIMILARITY BETWEEN THE COMPOSITION OF THE SALES IN THE TWO YEARS. IT 14 WOULD THEREFORE BE MORE APPROPRIATE TO COMPARE THE YEAR UNDER APPEAL WITH THE ASSESSMENT YEAR 2002-03 AND NOT WITH THE A SSESSMENT YEARS 2003-04 AND 2004-05 AS WAS DONE BY THE ASSESSING OF FICER. 14. FOR THE AFORESAID REASONS, WE ARE SATISFIED THA T THERE IS NO JUSTIFICATION FOR REJECTING THE ASSESSEES BOOKS OF ACCOUNT AND ESTIMATING THE GROSS PROFIT AT 10.94%. THE ASSESSI NG OFFICER IS DIRECTED TO ACCEPT THE BOOK RESULTS SHOWN BY THE AS SESSEE. THE ADDITION OF RS.20,55,297/- IS DELETED AND THE APPEA L IS ALLOWED WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH MAY 2010. SD/- SD/- (R K PANDA) (R V EASWAR) ACCOUNTANT MEMBER SENIOR VICE PRESI DENT MUMBAI, DATED 14 TH MAY 2010 SALDANHA COPY TO: 1. M/S SYADVAD ENTERPRISES 162-2A, KALPATARU ESTATE, JVL ROAD ANDHERI (EAST), MUMBAI 400 099 2. ITO, WARD 20(3)(2) 3. CIT-20 4. CIT(A)-XXXII 5. DR E BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI