PRISM JEWELLERY, MUMBAI V. ITO 20(2)(1), MUMBAI

ITA 8709/MUM/2010

• Counselvise Citation: 870919914 RSA 2010
• Duration Of Justice: 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 22-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 13-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATBIR SINGH
• Keywords: Unexplained investment; Depreciation; Transfer pricing; Additional evidence; Cost of acquisition
• Section: 271(1)(c); 69

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH, MUMBAI BEFORE SHRI R.V. EASWAR, PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 8709/MUM/2010 (ASSESSMENT YEAR: 2006-07) M/S. PRISM JEWELLERY INCOME TAX OFFICER 20(2)(1) UNIT NO. 3, BLDG.NO. 1, SEEPZ++ PIRAMAL CHAMBERS, P AREL (SEZ), MIDC, MAROL INDL. ESTATE VS. MUMBAI 400013 ANDHERI (E), MUMBAI 400096 PAN - AAFFP 9020 J APPELLANT RESPONDENT APPELLANT BY: SHRI R. MURALIDHAR/ SHRI APURVA R. SHAH RESPONDENT BY: SHRI SATBIR SINGH O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A) XXXI, MUMBAI DATED 27.10.2010. 2. ASSESSEE HAS RAISED TWO GROUNDS, WHICH ARE ELABORAT E HAVING SUBMISSIONS ALSO BUT IN SUBSTANCE GROUND NO. 1 PERT AINS TO THE DETERMINATION OF PROFIT UNDER SECTION 10A WHEREAS G ROUND NO. 2 PERTAINS TO ADDITION OF UNEXPLAINED INVESTMENT IN STOCK OF DIAM ONDS. THESE TWO GROUNDS ARE DEALT WITH AS UNDER. 3. BRIEFLY STATED, ASSESSEE IS A PARTNERSHIP FIRM ENGA GED IN THE BUSINESS OF TRADING, CUTTING AND POLISHING AND EXPO RT OF DIAMONDS AND DIAMOND STUDDED JEWELLERY. THIS IS THE SECOND YEAR OF BUSINESS AND ASSESSEE FILED RETURN OF INCOME CLAIMING AN AMOUNT OF ` 4,24,30,179/- AS DEDUCTION UNDER SECTION 10A OF THE ACT. IN THE COURSE OF ASSE SSMENT PROCEEDINGS A.O. DENIED DEDUCTION UNDER SECTION 10A WHILE ELABORATEL Y DISCUSSING THE REASONS FOR DENYING THE DEDUCTION. IN DOING SO VIDE PARA 7.3 OF THE ASSESSMENT ORDER HE ALSO CONSIDERED THAT ASSESSEE H AS SHOWN PROFITS IN 2 EXCESS OF ABOUT 25% AS GROSS PROFIT SHOWN BY THE AS SESSEE AT 20.96% IS EXTREMELY HIGH. HE MADE THE FOLLOWING OBSERVATIONS ON THE ISSUE OF QUANTUM OF DEDUCTION UNDER SECTION 10A: IN THE UNLIKELY EVENT OF ASSESSEE SUCCEEDING IN AP PEAL, THE PROFIT OF THE UNIT WILL BE REDUCED BY 25%, KEEPING IN VIEW TH E FACTS STATED ABOVE AND THE REASONS MENTIONED, IN VIEW OF THE PRO VISIONS OF SECTION 10A(7) R.W.S. 80IA(10). PENALTY PROCEEDINGS UNDER S ECTION 271(1)(C) READ WITH EXPLANATION 1 THERETO ARE INITIATED FOR F ILING OF INACCURATE PARTICULARS OF INCOME. IN ARRIVING AT THE ABOVE CONCLUSION, THE A.O. NOTI CED THAT ASSESSEE HAS PURCHASED AND SOLD GOODS FROM GROUP COMPANIES AND S ISTER CONCERNS AND ASSESSEE FAILED TO RECONCILE THE AVERAGE SELLING RA TE AND PURCHASES AND DETAILS OF SALES TO OTHER THIRD PARTIES. THESE MATT ERS WERE CARRIED TO THE CIT(A). THE CIT(A) ALLOWED ASSESSEE THE BENEFIT OF SECTION 10A VIDE HIS ORDER, WHICH THE REVENUE HAS NOT CONTESTED. THEREFORE, THE ISSUE OF ALLOWANCE UNDER SECTION 10A WAS NOT IN QUESTION. HOWEVER, THE CIT(A), WHILE DETERMINING THE QUANTUM FOR DEDUCTION UNDER SECTION 10A, REDETERMINED THE PROFITS AFTER CALLING FOR EXPLANATION FROM THE ASSESSEE. THE THREE REASONS MADE BY THE CIT(A) WERE: (A) THAT THE GROSS PROFIT (GP) EARNED BY ASSESSEE FROM THE SALES AND PURCHASES MADE TO GROUP CONCERNS IS MORE THAN THE PROFIT EARNED ON THE SALES MADE TO OTHERS (B) THE N ET PROFIT (NP) SHOWN BY ASSESSEE IN THE EARLIER YEAR WAS LESS COMPARED TO T HE NP SHOWN IN THIS YEAR IN ASSESSEES OWN CASE; AND (C) ON THE BASIS OF THE DETAILS FILED BY THE ASSESSEE WITH REFERENCE TO THE G.P. IN SIMILAR BUSI NESS BEFORE THE TRANSFER PRICING OFFICER THE AVERAGE PROFIT DECLARED WAS ABO UT 2.12% AS AGAINST 20.59% SHOWN BY ASSESSEE. THEREFORE HE WAS OF THE V IEW THAT PROFITS WERE INFLATED BY ASSESSEE IN ORDER TO CLAIM EXCESS DEDUC TION AND VIDE PARA 3.3.11 REDETERMINED THE ALLOWABLE DEDUCTION UNDER SECTION 10A AT ` 48,10,884/- AS AGAINST ` 4,45,67,639/- SHOWN BY ASSESSEE. ASSESSEE IS CONTES TING THE ABOVE ACTION OF THE CIT(A) IN GROUND NO. 1. 4. DRAWING OUR ATTENTION TO THE STATEMENT FILED BEFORE THE A.O. AND CIT(A) AND DETAILS FURNISHED TO THEM, THE LEARNED COUNSEL CONTESTED THE ABOVE THREE REASONS GIVEN BY THE CIT(A) IN RESTRICT ING THE DEDUCTION. IT WAS 3 HIS SUBMISSION THAT THE CIT(A) HAS WRONGLY CALCULAT ED THE G.P. CONSIDERING THE PURCHASES AND SALES FROM GROUP CONC ERNS FOR ARRIVING AT THE G.P. AND COMPARED THE SALES AND PURCHASES OF OTHER CONCERNS IGNORING THE FACT THAT RAW MATERIAL HAS BEEN PURCHASED FROM DIFF ERENT SOURCES AND MANUFACTURING OF ORNAMENTS/DIAMOND STUDDED JEWELLER Y WAS MADE FROM COMMON POOL OF RAW MATERIAL. THEREFORE ONLY CONSIDE RING THE SALES TO SISTER CONCERNS WITH THAT OF PURCHASES FROM SISTER CONCERN S WHILE ARRIVING THE G.P. IS NOT A CORRECT PROCEDURE. IT WAS SUBMITTED THAT T HE STATEMENTS PREPARED IN PARA 3.3 OF THE NET PROFIT ARRIVED AT BY THE CIT(A) WAS ONLY RS.82.86 LAKHS WHEREAS THE PROFIT EARNED BY ASSESSEE FIRM WAS ` 464.48 LAKHS. THEREFORE THE RATIO ADOPTED BY THE CIT(A) WHILE COMPARING THE FIG URES WAS ALSO NOT CORRECT. IT WAS FURTHER SUBMITTED THAT ASSESSEE BUSINESS PRO FILE WAS MANUFACTURING HIGH VALUE JEWELLERY IN SPECIALISED DESIGNS AND THE REFORE RAW MATERIAL UTILIZED IS NOT ONLY FROM PURCHASES FROM SISTER CON CERNS BUT ALSO FROM OTHERS AND SALES WERE ALSO MADE TO DIFFERENT PERSONS. THER EFORE THE EXERCISE UNDERTAKEN BY THE CIT(A) IN TAKING THE SALES TO SIS TER CONCERNS AND PURCHASES FROM SISTER CONCERNS AND ARRIVING AT THE G.P. WAS NOT CORRECT. WITH REFERENCE TO THE N.P. COMPARISON OF EARLIER YE AR TO THIS YEAR IT WAS THE SUBMISSION THAT EARLIER YEAR WAS THE FIRST YEAR OF BUSINESS AND THE TURNOVER WAS ALSO LESS WHEREAS THIS YEAR IT IS A FULL FLEDGE D BUSINESS YEAR AND ASSESSEE HAS OPTIMISED ITS EFFICIENCY. IT WAS FURTH ER SUBMITTED THAT THERE WAS HIGHER CLAIM OF DEPRECIATION IN EARLIER YEAR AN D LESS DEPRECIATION IN THIS YEAR. THEREFORE THE CIT(A) ERRED IN TAKING THE NET PROFIT COMPARISON FOR ARRIVING AT THE FINDING THAT ASSESSEE HAS DISCLOSE D HIGHER PROFIT DURING THE YEAR IS NOT CORRECT. HE FILED THE GROSS PROFIT COMP ARISON OVER THE TWO YEARS AS UNDER: - WORKING OF PROFITABILITY (FIGS IN LAKHS) F.Y F.Y 2005-06 2004-05 A SALES 2,315.66 669.81 B COST OF MANUFACTURING 1,714.551 515.25 4 C GROSS PROFIT A B 601.10 154.56 GPR C/A 26% 23% ADMIN OVERHEADS 96.84 48.91 DEPRECIATION 27.78 44.22 D OPERATING PROFIT 476.48 61.43 OPR D/A 21% 9% ADMIN+DEPRN AS % OF TURNOVER 5% 14% INTEREST 9.19 1.48 OTHER INCOME (0.43) (0.17) E NP 467.72 60.12 NPR E/A 20% 9% 5. REFERRING TO THE ABOVE TABLE IT WAS THE SUBMISSION THAT IN THE EARLIER YEAR THE TURNOVER WAS ONLY 6.69 CRORES WHER EAS THIS YEAR IT WAS ` 23.15 CRORES. THE G.P. IS COMPARABLE AT 23% TO 26%. THERE IS DIFFERENCE IN OPERATING EXPENSES WHICH RESULTED IN HIGHER PROFIT DURING THIS YEAR DUE TO LESS EXPENSES AND LESSER DEPRECIATION. THESE FACTOR S WERE NOT CONSIDERED BY THE CIT(A) WHILE COMPARING THE NET PROFIT ONLY LEAV ING THE G.P. COMPARISON IN THIS CASE. IT WAS FURTHER SUBMITTED THAT THE CIT (A) ALSO HAS TAKEN OUT ONLY THOSE ITEMS OF THE DATA SUBMITTED TO THE TRANSFER P RICING OFFICER WHERE THE OPERATING PROFITS WAS LESS AND IGNORED THE OTHER DA TA FURNISHED BEFORE THE TRANSFER PRICING OFFICER. REFERRING TO PAGE NO. 56 OF THE PAPER BOOK IT WAS SUBMITTED THAT ASSESSEE HAS FURNISHED THE STATEMENT OF GOLDIAM INTERNATIONAL WHERE THE OPERATING PROFITS WAS 12.40 % ON A TURNOVER OF ` 147.13 CRORES AND IN THE CASE OF VAIBHAV GEMS THE O PERATING PROFITS WAS 17.02% ON THE TURNOVER OF ` 219.47 CRORES, THE STATEMENTS OF WHICH WERE TOTALLY IGNORED BY THE CIT(A). HE ADOPTED ONLY OTHE R DETAILS AS STATED IN PARA 3.3.3 TO ARRIVE AT THE AVERAGE OPERATING PROFIT OF 4.8% AS AGAINST ASSESSEES 20.59%. HE FURTHER SUBMITTED THAT THE REVISED STATE MENT PREPARED BY THE CIT(A) IN PARA 3.3.4 IS ALSO NOT CORRECT AS HE FOLL OWED THE SAME PATTERN OF ADOPTING OF PROFITS FROM GROUP CONCERNS IN ARRIVING AT THE PROFIT AND FURTHER SUBMITTED THAT THE TOTAL PROFIT ADOPTED BY THE CIT( A) WAS AT ` 5.04 CRORES AS 5 AGAINST ` 4.67 CRORES ARRIVED AT BY THE ASSESSEE IN THE BOOKS OF ACCOUNT. HE THEN REFERRED TO ANOTHER STATEMENT PREPARED BY THE CIT(A) IN PARA 3.3.8 WHERE THE TOTAL PROFIT WAS TAKEN AT 2.38 CRORES AND FURTHER IN PARA 3.39 AT ` 5.54 CRORES. IT WAS SUBMITTED THAT THE CIT(A) WENT ON WRONG PRESUMPTIONS IN ORDER TO CONSIDER THAT ASSESSEE HAS DISCLOSED HI GHER PROFITS FOR CLAIMING DEDUCTION UNDER SECTION 10A, WITHOUT ANY BASIS. IT WAS FURTHER SUBMITTED THAT THE A.O. ALSO DID NOT GIVE ANY REASON WHILE MA KING AN ADHOC STATEMENT THAT 25% OF THE PROFITS WERE EXCESS. LEARNED COUNSE LS SUBMISSION THAT ASSESSEE HAS MAINTAINED BOOKS OF ACCOUNT AND ALL PU RCHASES AND SALES WERE VOUCHED AND THE ASSESSMENT IN THE GROUP CONCERNS WE RE MADE WITHOUT MAKING ANY ADDITIONS OR DISALLOWANCE IN THOSE CASES AND FURTHER THE TRANSFER PRICING OFFICER HAS ALSO EXAMINED THE SALE PRICE TO GROUP CONCERNS AND GAVE A FINDING THAT THAT THE SALES ARE ARMS LE NGTH TRANSACTIONS AND THIS ORDER OF THE TPO WAS ALSO ACCEPTED. THEREFORE, HE S UBMITTED THAT THERE IS NO CASE FOR MAKING RESTRICTION OF THE PROFIT DECLARED BY ASSESSEE. HE PLACED ON RECORD IN THE PAPER BOOKS THE ORDERS OF THE GROUP C ONCERNS AND ORDER OF THE TRANSFER PRICING OFFICER AND STATEMENTS MADE BEFORE THE CIT(A) WITH REFERENCE TO VARIOUS SUBMISSIONS. 6. THE LEARNED D.R., HOWEVER, SUPPORTED THE ORDER OF T HE CIT(A) TO STATE THAT ASSESSEE HAS INFLATED PROFITS SO AS TO C LAIM HITHER DEDUCTION. IT WAS HIS SUBMISSION THAT ASSESSEE HAS NOT MATCHED TH E ITEMS EMBEDDED IN THE JEWELLERY WHILE THEY WERE SOURCED FROM GROUP CO NCERNS OR OTHERS, THEREFORE THE CIT(A) HAS TAKEN A PLAUSIBLE SEGREGAT ION OF THE TRANSACTIONS. WHILE ADMITTING THAT DIFFERENT PROFIT FIGURES WERE ARRIVED AT BY THE CIT(A) DEPENDING ON INCLUSION OF RECEIPTS, INCLUSION OF CL OSING STOCK, ETC. IT WAS LEARNED D.R.S SUBMISSION THAT EVEN AFTER CONSIDERI NG THE DETAILS FILED BEFORE THE TRANSFER PRICING OFFICER AND HIS ORDERS RELATIN G TO AVERAGE OPERATING PROFIT INCLUDING THE TWO CONCERNS WHICH ASSESSEE SU BMITTED WAS EXCLUDED, THE GP COMES TO ONLY 7.10% (AS AGAINST 4.09 CONSIDE RED BY THE CIT(A)) THERE IS INDICATION THAT ASSESSEES PROFITS WERE INFLATED AS THE GP DISCLOSED WAS 6 20.59%. THEREFORE THE A.O. AND THE CIT(A) WERE CORR ECT IN REDUCING THE PROFIT FOR THE PURPOSE OF SECTION 10A. 7. WE HAVE CONSIDERED THE ISSUE AND ALSO EXAMINED THE DOCUMENTS PLACED ON RECORD. AS ALREADY STATED ABOVE THERE ARE THREE REASONS TAKEN BY THE CIT(A) IN COMING TO THE CONCLUSION THAT THERE W AS EXCESS PROFIT. THE A.O., HOWEVER, HAS NOT DONE ANY EXERCISE IN DETERMI NING THE PROFIT AND JUST BECAUSE ASSESSEE HAS NOT RECONCILED THE USE OF RAW MATERIAL AND THE PRICE AT WHICH THESE ARE SOLD, HE WAS OF THE OPINION THAT 25 % OF THE PROFIT WAS EXCESS DECLARED. THIS STATEMENT OF THE A.O. WAS NOT SUBSTA NTIATED BY ANY DATA OR BASIS BUT ONLY MADE ON ESTIMATE. BE THAT AS IT MAY, THE CIT(A) HAS TAKEN UP HIMSELF DETERMINATION OF PROFIT TAKING CUE FROM THE OBSERVATION OF THE A.O. HOWEVER, HIS METHODOLOGY WAS NOT CORRECT. AS RIGHTL Y SUBMITTED BY THE LEARNED COUNSEL, TAKING SALES TO GROUP CONCERNS AND OTHERS AS A BASIS AND GIVING CREDIT FOR ONLY PURCHASES FROM THE GROUP CON CERNS AND OTHERS RESPECTIVELY AND ARRIVING AT THE GROSS PROFIT AND W ORKING OUT THE G.P. TO COMPARE WITH PROFIT EARNED ON TRANSACTIONS IS NOT A SCIENTIFIC METHOD OF COMPARISON. THERE IS NO EVIDENCE THAT ONLY PURCHASE S FROM SISTER CONCERNS ARE UTILISED IN MAKING THE JEWELLERY ITEMS SOLD TO THE SISTER CONCERNS. UNLESS THE RAW MATERIALS UTILISED FOR PREPARING THE GOLD/ JEWELLARY ORNAMENTS ARE EXAMINED, IT CANNOT BE STATED THAT ALL THE PURCHASE S FROM SISTER CONCERNS WERE UTILISED EXCLUSIVELY FOR MAKING SALES TO SISTE R CONCERNS. SINCE THERE IS COMMON POOL OF RAW MATERIAL WHICH GOES INTO THE MAN UFACTURING OF VARIOUS VALUE ADDED JEWELLERY, THE SEGREGATION OF ACCOUNTS ON THE BASIS OF PURCHASES AND SALES TO SISTER CONCERNS AND OTHERS IS NOT A CO RRECT METHOD. NOT ONLY THAT IT IS NOTICED THAT WHILE ARRIVING AT THE G.P. FIGURES THE PROFITS TAKEN BY THE CIT(A) VARIES FROM 82.86 LAKHS TO A HIGH OF 5.6 4 CORES (AS IN PARA 3.3.9). THIS INDICATES THAT THE METHOD ADOPTED BY THE CIT(A ) HAS NO REASONABLE BASIS. AS RIGHTLY POINTED OUT, THE METHOD ADOPTED I TSELF IS FAULTY. WITH REFERENCE TO THE SECOND ASPECT OF COMPARISON OF NET PROFIT OF EARLIER YEAR WITH THAT OF THIS YEAR THE LEARNED COUNSEL PLACED ON REC ORD A COMPARATIVE CHART OF EARLIER YEAR WITH THAT OF THIS YEAR WHERE THE G.P. ARRIVED AT ON A SMALL 7 TURNOVER OF ` 6.69 CRORES IN EARLIER YEAR AT 23% IS VERY MUCH COMPARABLE WITH THAT OF 26% ON TURNOVER OF ` 23.5 CRORES. THE NET PROFIT IS VARYING DUE TO REDUCTION IN ADMINISTRATIVE OVERHEADS AND ALSO LESS ER DEPRECIATION CLAIM. THEREFORE, COMPARISON OF NET PROFIT AS DONE BY THE CIT(A) IS ALSO NOT CORRECT. THE THIRD ASPECT THAT THE CIT(A) HAS CONSIDERED IS THE COMPARATIVE OPERATING PROFIT OF SIMILARLY PLACED JEWELLERY CONCERNS. THIS DATA WAS FURNISHED BY THE ASSESSEE ON THE BASIS OF THE AVAILABLE DATA IN DIFF ERENT DOMAINS FOR THE PURPOSE OF TRANSFER PRICING, IN WHICH THE OPERATING PROFIT OF SEVEN CONCERNS WERE EXAMINED AND THE AVERAGE OPERATING PROFIT WAS ARRIVED AT 7.0% AND ASSESSEE WAS DECLARED AT 20.59%. ON THE BASIS OF TH IS COMPARATIVE STUDY, THE TRANSFER PRICING OFFICER ACCEPTED THE SALE PRIC E TO SISTER CONCERNS/ASSOCIATE CONCERNS AS ARMS LENGTH TRANSAC TIONS VIDE HIS ORDER DATED 29.02.2008. SINCE THE SALES ARE ACCEPTED AT A RMS LENGTH PRICE AND SINCE THERE IS NO ALLEGATION THAT THE PURCHASES ARE MADE AT A LESSER PRICE, THE COMPARISON OF DATA GIVEN TO THE TRANSFER PRICIN G OFFICER FOR OBSERVATION THAT ASSESSEES OPERATING PROFIT WAS VERY HIGH, IN OUR VIEW IS ALSO NOT CORRECT. MOREOVER, THE CIT(A), FOR THE REASONS NOT EXPLAINED , HAS EXCLUDED FROM THE COMPARISON THE HIGH PROFIT DATA OF GOLDIAM INTERNAT IONAL WHERE THE OPERATING PROFIT ON HIGHER TURNOVER WAS AT 12.40% A ND IN THE CASE OF VAIBHAV GEMS THE OPERATING PROFIT WAS 17.02%. THERE FORE, IT CANNOT BE STATED THAT THE OPERATING PROFIT CANNOT BE MORE. OF VARIOUS CONCERNS SHOWN IN THE STATEMENT THE OPERATING PROFIT VARIES FROM 2 % TO 17%. ASSESSEES EXPLANATION WITH REFERENCE TO THE OPERATING PROFIT WAS THAT THEY WERE HAVING NICHE JEWELLERY AND WAS TRYING TO PREPARE EXCLUSIVE DESIGNS WHICH FETCHES MORE PROFITS. THIS ASPECT OF THE ARGUMENT WAS NOT C OUNTERED. THE A.O. ALSO HAS NOT EXAMINED WHETHER THE PURCHASES AND SALES TO THE SISTER CONCERNS WERE MANIPULATED SO AS TO MAKE HIGHER PROFIT. HE ON LY OBSERVED THAT THE PROFIT IS TO BE REDUCED BY 25% WITHOUT ANY BASIS. T HE CIT(A)S EXERCISE IN COMPARING VARIOUS DATA AS STATED ABOVE IS ALSO NOT CORRECT. THE REASONS EXPLAINED BY ASSESSEE OF HIGHER OPERATING PROFIT IS PLAUSIBLE GIVEN THE FACT THAT THIS IS THE SECOND YEAR OF BUSINESS AND THE A. O. HAS ACCEPTED THE RETURNS OF THE SISTER CONCERNS FROM WHOM ASSESSEE P URCHASED THE GOODS AND 8 FURTHER THE TRANSFER PRICING OFFICER HAS GIVEN A FI NDING THAT THE SALES TO THE SISTER CONCERNS ARE ARMS LENGTH TRANSACTIONS. WE ARE OF THE OPINION THAT THERE IS NO BASIS FOR COMING TO THE CONCLUSION THAT PROFITS ARE ABNORMALLY INFLATED BY THE ASSESSEE. IN VIEW OF THIS, ASSESSEE S GROUND NO. 1 IS ALLOWED. THE A.O. IS DIRECTED TO ALLOW THE DEDUCTION AS CLAI MED. 8. GROUND NO. 2 PERTAINS TO THE ISSUE OF ADDITION OF U NEXPLAINED INVESTMENTS IN THE STOCK OF DIAMONDS. THIS ISSUE AR OSE IN THE CIRCUMSTANCES THAT THE ASSESSEE HAS PURCHASED 10616.34 CARATS OF DIAMONDS VALUED AT ` 17,99,11,531/- IN THE BOOKS OF ACCOUNT. IN THE TAX AUDIT REPORT THE AUDITOR HAS MENTIONED THE PURCHASES OF 9573 CARATS ONLY. TH E A.O. WAS OF THE OPINION THAT THE DIFFERENCE OF CARATS PURCHASED WAS OUTSIDE THE BOOKS OF ACCOUNT AND MADE AN ADDITION OF ` 1,96,07,488/- AS UNEXPLAINED INVESTMENT BY THE ASSESSEE. BEFORE THE CIT(A) ASSESSEE CONTEND ED THAT IT HAS NOT ONLY PURCHASED THE TOTAL DIAMONDS FROM GROUP CONCERNS B UT ALSO FROM OUTSIDE WHICH INCLUDE SOME IMPORTS BUT ALSO THE ENTIRE VAL UE WAS ACCOUNTED FOR IN THE BOOKS OF ACCOUNT, PAID BY WAY OF CHEQUES AND TH E ENTIRE COST REPRESENTS THE COST OF PURCHASE OF 10616.341 CARATS. THEREFORE THE QUESTION OF UNACCOUNTED PURCHASES DOES NOT ARISE. WITH REFERENC E TO THE STATEMENT OF PURCHASES OF 9573 CARATS SHOWN BY THE TAX AUDITOR I N THE REPORT, ASSESSEE FURNISHED THE STATEMENT FROM THE TAX AUDITOR HOW TH E FIGURE HAS REVISED AND GAVE FOLLOWING RECONCILIATION: DURING THE HEARING, IT WAS SUGGESTED THAT A CLARIF ICATION BE OBTAINED FROM THE TAX AUDITORS ON HOW THE SAID FIGURE OF 9,5 73 CARATS CAME TO BE ENTERED I THE TAX AUDIT REPORT. WE HAVE CHECKED OUR WORKING PAPERS IN THIS REGARD A ND WE CONFIRM AS UNDER: 178.67 CTS. REPRESENT ITEMS WHICH WERE SENT TO A CU STOMER AS SAMPLES AND THEY WERE DULY RETURNED. THESE WERE SPECIFICALLY EXCLUDED WHI LE REPORTING THE QUANTITY OF DIAMONDS CONSUMED SINCE THERE WAS NO VALUE ASSOCIAT ED WITH THESE. THE SAME HOWEVER ARE INCLUDED IN THE TOTAL OF 10616.341 CTS. GIVEN BY THE CLIENT TO THE TAX DEPARTMENT. 9 887.21 CTS. REPRESENT IMPORTS OF DIAMONDS. THE LOCA L PURCHASE OF DIAMONDS AND IMPORTS OF DIAMONDS WERE ACCOUNTED FOR SEPARATELY IN THE B OOKS OF ACCOUNTS AS IS ALSO EVIDENT FROM THE GROUPING TO THE PROFIT AND LO SS ACCOUNT, THOUGH THEY WERE GROUPED TOGETHER ULTIMATELY. DUE TO INADVERTEN CE THE QUANTITY OF IMPORTED DIAMONDS WAS NOT INCLUDED WHILE MENTIONING THE QUANTITY OF DIAMONDS PURCHASED AND CONSUMED IN THE TAX AUDIT RE PORT. THE PURCHASE INVOICES WERE VOUCHED AND WE HAVE RE-V OUCHED THEM AND WE CONFIRM THAT THE PURCHASE COST OF ` 17.99 CRORES REPRESENTS THE PURCHASE COST OF 10437.671 CARATS AND THAT 178. 67 CARATS REPRESENT SAMPLES RETURNED BACK THUS AGGREGATING TO A PURCHASE OF 10,616.341 CARATS. 9. THE CIT(A), HOWEVER, DID NOT AGREE WITH THE ABOVE A ND OBSERVED AS UNDER: - 5.2.2 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT O RDER AND THE SUBMISSIONS OF THE AR AND THE CLASSIFICATION OF THE TAX AUDITOR ON THIS ISSUE AS DISCUSSED ABOVE. FROM THE SAME, AS I FIND THE APPELLANT AS PER THE DETAILS OF PURCHASES FURNISHED HAS SHOWN DI AMONDS PURCHASED OF 10,616.341 CARATS VALUED AT RS.17,99,1 1,531.50 BUT THE SAME IS SHOWN AT 9,573 CARATS OF PURCHASED AND CONSUMPTION IN ANNEXURE -F TO THE TAX AUDIT REPORT IN FORM NO. 3CD DATED 30.10.2006. THE DIFFERENCE IS THE QUANTITY OF DIAMO NDS PURCHASED AND CONSUMED ACCORDING TO THE AR AS DISCUSSED ABOVE IS ON ACCOUNT OF TYPOGRAPHICAL MISTAKE OF THE TAX AUDITOR. HOWEVE R, THE APPELLANT OR THE AR HAS FAILED TO DEMONSTRATE THE SAID EXPLANATI ON OFFERED BY THE TAX AUDITOR AS PER HIS REPLY SUBMITTED VIDE LETTER DATED 15.12.2009, DISCUSSED ABOVE. IT HAS FAILED TO FURNISH THE NAMES AND ADDRESSES OF THE CUSTOMERS TO WHOM THESE FREE SAMPLES WERE GIVEN WHICH WAS NOT RECORDED IN ITS BOOKS OF ACCOUNT AND ACCORDINGLY NO T TAKEN INTO CONSIDERATION BY THE TAX AUDITORS. EVEN, THE AR HAS FAILED TO FURNISH THE EVIDENCES REGARDING THE SEPARATE DETAILS OF DIA MONDS PURCHASED LOCALLY AND IMPORTED WITH REGARD TO THE DIFFERENCE OF 887.211 CARATS S EXPLAINED BY THE TAX AUDITORS, AS DISCUSSED ABOVE. IN NUTSHELL, NO SUCH EVIDENCES WERE PRODUCED TO SUBSTANTIATE THE CL AIM OF THE TAX AUDITOR. HOWEVER, FROM THE REPLY OR EXPLANATION AS FURNISHED BY THE TAX AUDITOR IT IS SEEN THAT THE BOOKS OF ACCOUNT MA INTAINED BY THE APPELLANT ARE NOT PROPER SO AS TO DEDUCE THE CORREC T PROFITABILITY OF THE APPELLANT. THE TAX AUDITOR HAS DULY CERTIFIED THAT FREE SAMPLES ARE BEING ISSUED OR GIVEN BY THE APPELLANT TO ITS VARIO US CUSTOMERS IN RESPECT OF WHICH NO RECORDS ARE MAINTAINED BY THE A PPELLANT. THEREFORE, IN THE ABSENCE OF SUCH DAY TO DAY COMPLE TE RECORDS OF THE MOVEMENT OF GOODS, AS CERTIFIED BY THE TAX AUDITOR, TO MAY CONSIDERED 10 OPINION THE BOOKS OF ACCOUNT MAINTAINED BY THE APPE LLANT ARE LIABLE TO BE REJECTED BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT. ASSESSEE IS AGGRIEVED ON THE ABOVE. 10. THE LEARNED COUNSEL REFERRING TO THE STATEMENT FILE D BEFORE THE CIT(A) AND THE AUDITED ACCOUNTS PLACED ON RECORD SU BMITTED THAT ASSESSEE HAS PURCHASED THE TOTAL DIAMONDS AT 10616.341 VALUE D AT RS.17,99,11,531 WHICH WAS ACCOUNTED FOR IN THE BOOKS OF ACCOUNT. IT HAS FURNISHED THE COMPLETE DETAILS PARTY-WISE, BILL-WISE AND ALSO FUR NISHED LETTER FROM THE AUDITOR WHICH WERE NOT CONSIDERED BY THE CIT(A) PR OPERLY. THE SUMMARY OF THE SUBMISSIONS ARE AS UNDER: - 1. THE APPELLANT FILED A LETTER OF THE AUDITOR EXP LAINING THE DIFFERENCE IN CARATS SHOWN IN THE AUDIT REPORT AND THAT IN THE SUBMISSIONS MADE. THE CITA HELD THAT THE APPELLANT HAD FAILED TO DEMONSTRATE THE EXPLANATION OFFERED BY THE AUDIT OR. HOWEVER, THE CITA HAD NEVER ASKED THE APPELLANT TO PROVIDE F URTHER EVIDENCE TO DEMONSTRATE THE SAME NOTWITHSTANDING THAT THE AUDITORS EXPLANATION WAS FILED ON 15 TH OCTOBER 2009 AND VARIOUS HEARINGS WERE HELD THEREAFTER. 2. THE CITA STATED THAT THE NAMES AND ADDRESSES OF THE CUSTOMERS TO WHOM FREE SAMPLES WERE GIVEN WERE NOT FURNISHED. THE FREE SAMPLES HAD BEEN SEND TO PRISM ENTERPRISES LTD. (PE PL), WHICH WAS CLEARLY MENTIONED IN THE LISTING BASED ON WHICH THE ADDITION HAS BEEN MADE (REFERENCE PAGE 14 OF THE PAPER BOO K) FURTHER, PRISM ENTERPRISES WAS A RELATED CONCERN AND ALL EVI DENCE RELATED TO OWNERSHIP ETC. OF PEPL WAS ALREADY FURNI SHED IN THE CONTEXT OF VARIOUS OTHER GROUNDS WHICH WERE BEING A DJUDICATED. 3. THE CITA ALLEGES THAT THE FREE SAMPLES GIVEN WER E NOT RECORDED IN THE BOOKS. THIS IS AN INCORRECT STATEMENT AND TH E ISSUE AND RECEIPT BACK OF SAMPLES IS EVIDENT FROM THE STOCK B OOK NOW PRODUCED AS ADDITIONAL EVIDENCE PAGE 65 OF THE PA PER BOOK. 4. THE CITA ALLEGES THAT THE AR FAILED TO FURNISH E VIDENCE REGARDING SEPARATE DETAILS OF DIAMONDS PURCHASED LOCALLY AND IMPORTED WE REITERATE THAT THE AR WAS NEVER ASKED TO FURNISH ANY SUCH EVIDENCE. IT IS ALSO RELEVANT TO NOTE THAT THE CITA IN HIS LETTER DATED 8 TH FEBRUARY 2010 (PAGE 27 OF THE PAPER BOOK) PARA 4 ASKED THE AR TO FURNISH ALL COPIES OF PURCHASE INVO ICES FOR VERIFICATION. THE SAME WERE CARRIED FOR VERIFICATIO N AS IS MENTIONED ON PAGE 32 OF THE PAPER BOOK IN THE ARS RESPONSE. 11 5. THE CITA SAYS THAT THE TAX AUDITOR HAS DULY CERT IFIED THAT FREE SAMPLES ARE ISSUED OR GIVEN BY THE APPELLANT TO ITS VARIOUS CUSTOMERS IN RESPECT OF WHICH NO RECORDS ARE MAINTA INED BY THE APPELLANT NO SUCH STATEMENT IS MADE BY THE TAX AU DITOR. THE TAX AUDITORS LETTER IS AT PAGE 24 OF THE PAPER BOOK . A COMPLETE LISTING OF WHAT CONSTITUTES A PURCHASE OF RS.17,99,11,531 PARTY WISE BILL WISE DETAILS SHOW ING CARATS AND AMOUNTS WAS FURNISHED DURING THE ASSESSMENT (PA GES 12 15 OF PAPER BOOK). ALL THE INVOICES WHICH WERE PROD UCED FOR VERIFICATION TO THE CITA AS MENTIONED ABOVE. A VERI FICATION OF THE INVOICES WOULD CLEARLY SHOW THAT THE PURCHASE PRICE OF 10616.341 CARATS (INCLUDING SAMPLES WERE THE COST I S NIL) IS RS.17,99,11,531 AND THAT HENCE THERE IS NO UNACCOUN TED PURCHASE OF DIAMONDS. 11. THE LEARNED D.R., HOWEVER, SUBMITTED THAT ASSESSEE WAS UNABLE TO EXPLAIN THE PURCHASES FROM THE BOOKS AND STOCK REGI STER AND THE CIT(A) REJECTED THE BOOKS OF ACCOUNT WHILE ESTIMATING THE PROFIT UNDER SECTION 10A. THEREFORE THERE IS JUSTIFICATION FOR MAKING THE ADD ITION AS UNEXPLAINED INVESTMENT. HE SUPPORTED THE ORDER OF THE CIT(A). 12. WE HAVE CONSIDERED THE ISSUE. WE ARE UNABLE TO UNDE RSTAND HOW UNEXPLAINED INVESTMENT CAN BE WORKED OUT ON THE BAS IS OF THE PURCHASES RECORDED IN THE BOOKS OF ACCOUNT. FIRST OF ALL ASSE SSEE OWN BOOKS OF ACCOUNT SHOWS PURCHASES AT ` 10616.341 CARATS FOR A VALUE OF ` 17,99,11,531/-. THESE FIGURES HAVE BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNT AND RECONCILIATION WAS GIVEN AS UNDER: - PRISM JEWELLERY A.Y. 2006-07 PURCHASES AS PER GROUPINGS IMPORTS CUT AND POLISHED DIAMONDS 16,919,980 LOCAL CU8T AND POLISHED DIAMONDS 162,981,668 LOCAL PEARLS 9,855 TOTAL 179,911,533 AS PER LISTING PAGE 15 ADD: GOLD MOUNTINGS/PURCHASES/SILVER/ALLOYS IMPORT 6,405 ,689 GOLD MOUNTINGS/PURCHASES/SILVER/ALLOYS LOCAL 18,211 ,802 PRECIOUS STONES/CZ PURCHASE/MODELS LOCAL 178,172 CLEARING AND FORWARDING 126,181 EXCHANGE DIFFERENCE 2,262,200 12 TOTAL PURCHASES 207,095,577 AS PER ACCOUNTS, PAGE 7 BREAK UP OF PURCHASES (FROM LISTING AT PAGES 12-15) CARATS IMPORTED PURCHASES WORLD SHINER 248.380 PRISM DIAM INC 233.040 DAIMINTER BVBA 405.791 887.21 SAMPLES IN WHERE VALUE IS NIL PRISM ENTERPRISES 32.84 PRISM ENTERPRISES 53.44 PRISM ENTERPRISES 92.39 178.67 13. ASSESSEE ALSO FURNISHED STATEMENT FROM THE TAX AUDI TOR EXPLAINING THAT THE SAMPLES WERE NOT CONSIDERED AT 178.69 CARA TS AND HOW THE IMPORTED PURCHASES AMOUNTING TO 887.21 WERE EXCLUDE D. INSTEAD OF RECONCILING AND EXAMINING THE ABOVE, THE A.O. AND T HE CIT(A), IN OUR VIEW, ERRED IN TREATING IT AS UNEXPLAINED INVESTMENT OUTS IDE THE BOOKS OF ACCOUNT. THE QUESTION OF UNEXPLAINED INVESTMENT OUTSIDE THE BOOKS OF ACCOUNT DOES NOT ARISE WHEN THE BOOKS ITSELF HAS ACCOUNTS PURCHA SES AND PAYMENT THROUGH CHEQUES. ASSESSEE RECORD ITSELF INDICATES T HE PURCHASES AT THAT QUANTITY AND THE SAME VALUES WERE CARRIED TO THE P & L ACCOUNT AS PER THE GROUPING SHOWN ABOVE. ON THESE FACTS, WE ARE UNABLE TO CONFIRM THE ACTION OF THE A.O. AND CIT(A) IN TREATING THE UNEXPLAINED INVESTMENT OF DIAMOND JEWELLERY, JUST BECAUSE THE TAX AUDIT HAS SHOWN LES SER FIGURE IN QUANTITATIVE DETAILS IN THE AUDIT REPORT. TO THAT EXTENT THE STA TEMENT FROM THE AUDITOR AND THE EXPLANATION FOR THE FIGURES WERE BONAFIDE A ND REASONABLE. WE ARE ALSO UNABLE TO UNDERSTAND ON WHAT BASIS THE CIT(A) REJECTED THE BOOKS OF ACCOUNT WHILE CONFIRMING THE ADDITION. IT MAY BE A NOTHER REASON THAT THE CIT(A) CONSIDERED THE PROFITS DISCLOSED BY THE ASSE SSEE AS INFLATED WHILE CONSIDERING THE DEDUCTION UNDER SECTION 10A BUT THA T DOES NOT MEAN THAT THERE WILL BE UNACCOUNTED PURCHASES OUTSIDE THE BOO KS OF ACCOUNT WHEN ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10 A. THE ENTIRE APPROACH OF THE A.O. AS WELL AS THE CIT(A) IS NOT CORRECT GIVEN THE FACT THAT THE DIFFERENCE IS ARRIVED ON THE BASIS OF THE BOOKS ACCOUNT IT SEL F. PROVISIONS OF SECTION 69 WILL APPLY ONLY WHEN THE INVESTMENTS WERE NOT RECOR DED IN THE BOOKS OF 13 ACCOUNT AND ASSESSEE HAS NOT OFFERED ANY EXPLANATIO N FOR THE NATURE AND SOURCE OF INVESTMENT. IN THIS CASE, ASSESSEE HAS RE CORDED THE TRANSACTION IN THE BOOKS OF ACCOUNT AND THE MISTAKE IN REPRESENTIN G THE CARATAGE BY THE TAX AUDITOR WAS ALSO PROPERLY RECONCILED. THEREFORE , IN OUR VIEW THERE IS NO SCOPE FOR ANY ADDITION OF UNEXPLAINED INVESTMENT AS MADE BY THE A.O. AND CONFIRMED BY THE CIT(A). BOTH ON FACTS AS WELL AS O N LAW THERE IS ANY SCOPE FOR TREATING UNEXPLAINED INVESTMENT OUT OF ACCOUNTE D PURCHASES. IN VIEW OF THIS, WE HAVE NO HESITATION IN DELETING THE ADDITIO N. GROUND NO. 2 IS ACCORDINGLY ALLOWED. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE 2011. SD/- SD/- (R.V. EASWAR) (B. RAMAKOTAIAH) PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 30 TH JUNE 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXXI, MUMBAI 4. THE CIT XX, MUMBAI CITY 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.