The DCIT, Circle-9, Surat V. M/s. Jodhani Exports, Surat

ITA 970/AHD/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73160 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 27-03-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 31-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K C MATHEWS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH BEFORE: SRI D.K TYAGI, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTAN T MEMBER THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-9, ROOM NO. 401, 4 TH FLOOR, AAYKAR BHAVAN, MAJURA GATE, SURAT (APPELLANT) VS M/S JODHANI EXPORTS, F-2, JAY BHAVANI KRIPA, 2 ND FLOOR, B/H SARDAR DIAMOND COMPLEX, BACHKANIWALA COMPOUND, NR. KAPODARA CHAR RASTA, VARACHHA ROAD, SURAT PAN: AACFJ0272B (RESPONDENT) REVENUE BY: SRI K.C. MATHEWS, SR.D.R. ASSESSEE BY: SRI URVASHI SODHAN, A.R . DATE OF HEARING : 27-03-2014 DATE OF PRONOUNCEMENT : 31-03-20 14 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER:- THIS IS THE REVENUES APPEAL AGAINST THE ORDER OF LD. CIT(A)-V SURAT DATED 23-12-2009. ITA NO. 970/AHD/2010 ASSESSMENT YEAR 2006-07 I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 2 2. REVENUE HAS TAKEN FOLLOWING EFFECTIVE GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS . 6,52,176/- MADE BY THE AO ON ACCOUNT OF EXCESS RE-ASSORTMENT CHARGE S PAID COMPARED TO THE EARLIER YEAR DESPITE THE FACT THAT THE ASSES SEE HAS FAILED TO DISCHARGE THE ONUS OF EXPLAINING SUCH EXCESSIVE EXP ENSES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS . 8,61,886/- MADE BY THE AO ON ACCOUNT OF ADDITION TO THE CLOSING STO CK OF POLISHED DIAMONDS, DESPITE THE FACT THAT THE ASSESSEE HAS FA ILED TO FILE QUALITATIVE DETAILS OF STOCK OF DIAMONDS, AS HELD B Y THE HONBLE TRIBUNAL IN THE CASE OF M/S. I.P. PATEL & CO. THAT MAINTENANCE OF BASIC RECORD OF DIFFERENT TYPES OF DIAMONDS QUALITY WISE AND QUANTITYWISE IS NECESSARY. 3. GROUND NO. 1 RELATES TO ADDITION OF RS. 6,52,176 /- BEING 40% OF THE RE- ASSORTING CHARGES. 4. THE AO DURING THE ASSESSMENT PROCEEDINGS OBSERVE D THAT RE- ASSORTMENT CHARGES HAVE INCREASED DISPROPORTIONATEL Y BY 108% IN COMPARISON TO IMMEDIATE PRECEDING YEAR WHILE EXPORT TURN-OVER HAD INCREASED ONLY 44.25%. ASSESSEE WAS ASKED TO FURNI SH REASONS FOR THIS SUBSTANTIAL INCREASE IN THE EXPENSES. THE EXPLANAT ION OFFERED BY THE ASSESSEE WAS NOT FOUND SATISFACTORY BY THE AO AND HE HELD TH AT GENUINENESS OF THIS EXPENDITURE HAS NOT BEEN PROVED WITH SUPPORTING EVI DENCES AND KEEPING IN VIEW THE DISPROPORTIONATE INCREASE IN EXPENDITURE I N RELATION TO EXPORT TURN- OVER AMOUNT OF RS. 6,52,176/- BEING 40% OF THE TOTA L RE-ASSORTMENT CHARES WAS ADDED TO THE INCOME. I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 3 5. BEFORE LD. CIT(A), THE SUBMISSION OF THE ASSESSE E WAS THAT THIS ADDITION HAS BEEN MADE BY AO WITHOUT TAKING INTO CO NSIDERATION THAT THESE EXPENSES WERE INCURRED ON VARIOUS PERSONS FOR ASSOR TING THE POLISHED DIAMONDS AS PER THE SPECIFICATIONS OF BUYERS OUT OF LOT AND CUT POLISHED DIAMONDS AVAILABLE WITH THE ASSESSEE. IT WAS ALSO CLARIFIED ON BEHALF OF THE ASSESSEE THAT IT WAS PRUDENT TO UNDERSTAND WHAT IS RE-ASSORTMENT. IT WAS A PROCESS IN WHICH PERSONS HAVING DEEP KNOWLEDGE OF T HE QUALITY AND SIZE OF CUT AND POLISHED DIAMONDS SEGREGATING THEM IN VARIO US LOTS, AS PER SPECIFICATIONS OF THE BUYERS FOR WHICH THE RE-ASSOR TMENT CHARGES ARE PAID. THE INCREASE IN RE-ASSORTMENT CHARGES WAS ON ACCOUN T OF KEEN COMPETITION IN THE INTENTIONAL MARKET AND TO EXPORT POLISHED DIAMO ND AS PER BUYERS SPECIFICATIONS WAS INEVITABLE. THESE CHARGES WERE CO-RELATED WITH SALES/EXPORTS. THE COMPLETE DETAILS REGARDING THES E CHARGES PAID HAD BEEN FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS A LONG WITH RELEVANT DEBIT NOTES. PAYMENT TO ALL THESE PERSONS WERE MADE BY A CCOUNT PAYEE CHEQUE AND AFTER DEDUCTING TDS U/S. 194H, HENCE THE GENUINENES S OF PAYMENT CANNOT BE DOUBTED. THE ADDITION MADE BY AO HYPOTHETICALLY TO THE EXTENT OF 40% WAS NOT TENABLE AND JUST. TAKING INTO CONSIDERATION THE SE SUBMISSIONS OF THE ASSESSEE, LD. CIT(A) DELETED THIS ADDITION. 6. BEFORE US LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AO AS EXPENSES INCURRED BY THE ASSESSEE WERE VERY HIGH AND ASSESSE E FAILED TO JUSTIFY THIS DISPROPORTIONATE RISE IN THESE EXPENSES. LEARNED C OUNSEL OF THE ASSESSEE ON THE OTHER HAND RELIED ON THE ORDER OF LD. CIT(A). I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 4 7. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT AO HAS MADE THIS ADDITION BY DISALLOWING THE RE-ASS ORTMENT EXPENSES AS THERE HAVE BEEN DISPROPORTIONATE INCREASES IN THESE EXPENSES IN RELATION TO INCREASE IN EXPORTS. THE EXPLANATION OF THE ASSESS EE THAT INCREASE IN RE- ASSORTMENT EXPENSES WAS ON ACCOUNT OF COMPETITION I N THE MARKET AND THAT THESE EXPENSES WERE INCURRED FOR ASSORTING THE POLI SHED DIAMONDS FOR EXPORTS AS PER BUYERS SPECIFICATION WAS IGNORED BY THE AO WITHOUT BRINGING ANY MATERIAL ON RECORD TO THE CONTRARY. WE FURTHER FIN D THAT THE PAYMENTS HAVE BEEN MADE TO THE PERSONS TO THE ASSORTERS BY ACCOUN T PAYEE CHEQUE AFTER DEDUCTING TDS AS PER PROVISIONS OF SECTION 194H. S IMPLY BECAUSE THERE IS SUBSTANTIAL INCREASE IN RE-ASSORTING EXPENSES DURIN G THE YEAR UNDER APPEAL, DISALLOWANCE CANNOT BE MADE BY AO WITHOUT BRINGING ANY MATERIAL/EVIDENCE ON RECORD TO PROVE THAT THESE EXPENSES WERE NOT GEN UINE. SINCE THE SAME HAS NOT BEEN DONE IN THIS CASE, WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER OF LD. CIT(A) WHO HAS DELETED THE ADHOC DISALLOWANCE M ADE BY THE AO. THIS GROUND OF THE REVENUE IS DISMISSED. 8. SECOND GROUND RELATES TO ADDITION OF RS. 8,61,88 6/- MADE BY THE AO ON ACCOUNT OF ADDITION TO THE CLOSING STOCK OF POLI SHED DIAMONDS. 9. DURING THE ASSESSMENT PROCEEDINGS AO OBSERVED TH AT CLOSING STOCK OF 43094.3 CARATS OF POLISHED DIAMONDS HAS BEEN VALUED AT RS. 31,95,76,982/-, WHICH WORK OUT TO RS. 7,415/- PER CARAT. THE AO F URTHER OBSERVED THAT CONSIDERING THE PECULIARITY OF BUSINESS IT WAS NECE SSARY TO ASCERTAIN THE PRODUCTION OF DIAMOND BOTH IN TERMS OF QUALITY AND QUANTITY. ACCORDING TO I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 5 HIM, THE ASSESSEE HAD DECLINED TO FURNISH THE QUALI TY-WISE PRODUCTION OF POLISHED DIAMONDS ON THE GROUND THAT REQUISITE RECO RDS WERE NOT MAINTAINED. 10. ACCORDING TO AO IT WAS APPARENT THAT ASSESSEE H AS A RECORD OF PRODUCTION OF POLISHED DIAMOND ON THE BASIS OF QUAL ITY. OTHERWISE TAKING INTO ACCOUNT THE QUALITY OF POLISHED DIAMONDS SOLD, IT WOULD BECOME IMPOSSIBLE FOR THE ASSESSEE TO HAVE A CONTROL OVER THE TRADING ACTIVITY. HOWEVER, THE ASSESSEE HAD DECLINED TO FURNISH SUCH REPORT MERELY ON THE GROUND THAT THE REQUISITE RECORDS WERE NOT MAINTAIN ED. THE AO OBSERVED THAT THE VERY FACT THAT ASSESSEE HAD ADMITTED THAT AFTER THE CUT AND POLISHED DIAMONDS RECEIVED BACK FROM THE LABOUR PARTIES THEY ARE SORTED BY THE ASSESSEE IN DIFFERENT LOTS, SIZE, QUALITY ETC WOULD INDICATE THAT THE ASSESSEE HAD BEEN SORTING THEM OUT ON PIECE BY PIECE BASIS . 11. IN VIEW OF THIS, AND IN THE ABSENCE OF DETAILS IN TERMS OF QUALITY-WISE PRODUCTION OF DIAMONDS, THE AO HELD THAT IT WAS NOT ASCERTAINABLE WHICH TYPE OF DIAMONDS WERE PRODUCED FROM A PARTICULAR LO T IN ORDER TO DETERMINE THE VALUE. THEREFORE HE HELD THAT THE VALUATION OF STOCK WAS NOT VERIFIABLE. HE FURTHER HELD THAT THE CLAIM OF THE ASSESSEE THAT IT WAS ASSESSEES OPTION TO MAINTAIN THE BOOKS OF ACCOUNT IN THE MANNER THAT SU ITS TO HIM CAN NO LONGER BE ACCEPTED AND HAS TO BE REJECTED. IN THIS CONTEX T, HE PLACED RELIANCE ON THE DECISION OF MUMBAI ITATS DECISION IN THE CASE OF D CIT VS. SAMIR DIAMONDS EXPORT PVT. LTD REPORTED IN 71 ITD 75. AO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE AND AFTER TAKING INTO CONSID ERATION THE REPLY OF THE ASSESSEE HE VALUED ALL POLISHED DIAMONDS ON ACCOUNT OF INCIDENTAL EXPENSES WHICH ACCORDING TO HIM WORKS OUT TO RS. 20 PER CARA T. ACCORDINGLY A SUM OF I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 6 RS, 8,68,886/- WAS ADDED TO THE INCOME OF THE ASSES SEE. WHILE MAKING THIS DISALLOWANCE AO OBSERVED AS UNDER:- THE ONLY WAY AVAILABLE TO DETERMINE THE VALUE THE POLISHED DIAMONDS IS TO CONSIDER AFTER MERGING OTHER INCIDENTAL EXPEN SES, WHICH AFTER CONSIDERING ALL THE FACTORS AND FACTS PRESENTED AND ANALYZED ACCORDING TO ME ROUGHLY WORKS OUT TO RS. 20/- PER CARAT THUS RS. 8,61,886/- (20X43094.3 CTS) IS ADDED TO THE VALUE OF CLOSING S TOCK OF POLISHED DIAMONDS. 12. THE SUBMISSION OF THE ASSESSEE BEFORE HIM HAS B EEN NOTED BY LD. CIT(A) ARE AS UNDER:- 11. THE AR OBJECTED TO THE ADDITION MADE BY THE A SSESSING OFFICER. THE AR SUBMITTED THAT THE AO MADE ADDITION ON ACCOU NT OF OTHER INCIDENTAL EXPENSES WHICH ACCORDING TO HIM ROUGHLY WORKS OUT TO RS.20 PER CARAT. HOWEVER, AO HAD NOT SPECIFIED 'OTH ER INCIDENTAL EXPENSES' OR THE DETAILED WORKING BY WHICH HE HAD A RRIVED AT RS.20/- PER CARAT. THE AR FURTHER SUBMITTED THAT THE INVENT ORY AS PER THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLE AND ACCOUNT ING STANDARD 2 ON 'VALUATION OF INVENTORY' ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, HAS BEEN VALUED AT LOWER OF T HE COST OR NOT REALIZABLE VALUE. THE APPELLANT HAS COMPILED WITH THE PROVISIONS OF THE STANDARD. IT HAS BEEN FURTHER ARGUED THAT THE V ALUATION OF INVENTORY FOR DETERMINING THE INCOME CHARGEABLE UND ER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PROFESSION' HAS BE EN DONE AS PER PROVISIONS OF SECTION 145A OF THE IT ACT 1961. THE SAME METHOD OF ACCOUNTING HAS BEEN FOLLOWED CONSISTENTLY AND REGUL ARLY WHICH WAS ACCEPTED BY THE DEPARTMENT IN THE PAST. 12. ARGUING FURTHER, THE AR SUBMITTED THAT COMPLET E AND DETAILED SHEETS SHOWING VALUATION OF INVENTORY AT THE END OF THE YEAR WERE FURNISHED TO THE AO WHEREIN THE APPELLANT ARRIVED A T THE VALUE OF CLOSING INVENTORY OF THE POLISHED DIAMONDS AS PER R ECOGNIZED METHOD OF VALUATION, I.E. LOWER OF COST OR NET REALIZABLE VALUE. HE STATED THAT I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 7 OUT OF THE TOTAL DIAMONDS PROCESSED AND PRODUCED BY THE APPELLANT, THE BEST DIAMONDS WERE SOLD/EXPORTED. OBVIOUSLY, THE REMAINING WOULD BE OF LOWER VALUE ON LY AND SOLD AS AND WHEN DEMAND ARRIVED AT THE BEST FETCHABLE PRICE . THE AR WENT ON ADDING THAT 'THE FINISHED PRODUCT/POLISHED DIAMONDS HAVE BEEN VALUED AT LOWER OF COST OR NET REALIZABLE VALUE. IN THIS R EGARD, YOUR GOODSELFS KIND ATTENTION IS DRAWN TO THE ENCLOSED STATEMENTS, WHICH INDICATE THE WORKING OF AVERAGE COST OF FINISHED DIAMONDS AT RS. 7287/- PER CARAT ON COST OF PRODUCTION BASIS AND THE AVERAGE COST WO RKS OUT TO RS.7100/- PER CARAT, IN BOTH THE CASES IT IS LOWER THE VALUATION ADOPTED BY THE APPELLANT. IN ANY CASE, THE INVENTORY CANNOT BE VALUED AT COST HIGHER THAN THE ACTUAL COST.' 13. WITH REGARD TO MAINTENANCE OF QUALITY-WISE DET AILS, THE AR SUBMITTED THAT SEPARATE LOT WISE DETAILS OF PROCESS ING AND RECEIPT WERE MAINTAINED ON THE BASIS OF ROUGH DIAMONDS. THE ASSE SSEE HAD FURNISHED LOT/LABOUR REGISTERS OF THE WHOLE YEAR TO THE AO. CONTESTING THE CONTENTION OF THE AO, THAT THE APPELLANT DID NO T MAINTAIN REQUISITE BOOKS, IT WAS ARGUED THAT THIS IS FACTUALLY INCORRE CT AS THE APPELLANT HAD MAINTAINED COMPLETE SET OF BOOKS REQUIRED BY IT AND WHICH ARE GENERALLY MAINTAINED IN AN INDUSTRY. 13. AFTER TAKING INTO CONSIDERATION THE ABOVE SUBMI SSION OF THE ASSESSEE LD. CIT(A) DELETED THIS ADDITION. 14. BEFORE US LD. DR SUPPORTED THE ORDER PASSED BY AO AND TOOK US TO THE RELEVANT PORTION OF THE AO. LEARNED COUNSEL OF THE ASSESSEE ON THE OTHER HAND RELIED ON THE ORDER OF LD. CIT(A). 15. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT AO HAS MADE ADDITION TO THE CLOSING STOCK OF POLISH ED DIAMONDS BY REVALUING THEM AFTER MERGING INCIDENTAL CHARGES TO THE VALUE OF DIAMONDS I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 8 WHICH ACCORDING TO HIM WORKS OUT TO RS. 20 PER CAR AT. THUS, CLOSING STOCK WAS ENHANCED AT RS. 20 PER CARAT BY RS. 8,61,886/- . THE WORKING OF ARRIVING AT THE VALUE OF RS. 20 PER CARAT OF POLISHED DIAMON DS IS ALSO NOT COMING OUT OF AOS ORDER. WE FURTHER FIND THAT THIS ADDITION HAS BEEN MADE BY AO WITHOUT HOLDING THAT THE INVENTORY OF CLOSING STOCK HAS NOT BEEN VALUED BY THE ASSESSEE BY THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE AND BEFORE MAKING THIS ADHOC DISALLOWANCES NEITHER BOOKS OF ACCOUNT WERE REJECTED BY THE AO NOR ANY DEFECT WAS FOUND OUT IN THEM. WE ARE THEREFORE NOT INCLINED TO INTERFERE WITH THE ORDER OF LD. CIT (A) DIRECTING THE AO TO DELETE THE ADDITION ON ACCOUNT OF SUPPRESSION OF VA LUE OF CLOSING STOCK OF POLISHED DIAMOND BY OBSERVING AS UNDER:- 14. I HAVE CONSIDERED THE VIEWS OF THE AO AND THE DETAILED SUBMISSIONS OF THE APPELLANT. THE AO, ALTHOUGH HAS DISCUSSED VARIOUS ASPECTS OF VALUATION OF CLOSING STOCK, HAS MADE ADD ITIONS TO THE STOCK ON ACCOUNT OF OTHER INCIDENTAL EXPENSES WHICH ACCOR DING TO HIM ROUGHLY WORKS OUT TO RS.20/- PER CARAT. THE CLOSING STOCK HAS BEEN ENHANCED @ 20/- PER CARNT BY RS.8,61,886/-. AS PER THE PROVISIONS OF SECTION 145A OF THE IT ACT VALUATION OF THE INVENTO RY FOR DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD ''PROFITS AND GAIN OR BUSINESS OR PROFESSION' SHALL BE (A) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REG ULARLY EMPLOYED BY THE ASSESSEE; AND (B) FURTHER ADJUSTMENT TO INCLUDE THE AMOUNT OF ANY TAX, DUTIES, CESS OR BEING (BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF THE LOCATIONS AND CONDITIONS AS ON DATE OF VALUATION. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT TH E INVENTORY HAS NOT BEEN VALUED BY THE METHOD OF ACCOUNTING REGULARLY E MPLOYED BY THE ASSESSEE. SIMILARLY, THE AO HAS NOT POINTED OUT ANY TAX, DUTIES, CESS OR FEE ACTUALLY PAID OR INCURRED WHICH HAS BEEN OMITTE D TO THE ADJUSTED IN THE VALUE OF CLOSING STOCK. THE AO HAS NOT SPECI FIED OTHER I.T.A NO. 970/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. M/S. JODHANI EXPORTS 9 INCIDENTAL CHARGES OR THE DETAILED WORKING BY WHICH HE HAD ARRIVED AT ADDITION OF RS.20/- PER CARAT. IN THE DISCUSSION O N THE ISSUE OF SUPPRESSION OF CLOSING STOCK, THE AO HAS NOT POINTE D OUT ANY INCIDENTAL EXPENSES OR ITS WORKING BY WHICH THE CLO SING STOCK HAS BEEN UNDER VALUED TO THE EXTENT OF RS.20/- PER CARAT. TH E DISCUSSIONS IN THE ORDER ON THE ISSUE OF VALUATION OF CLOSING STOCK AN D THE DECISION TO ENHANCE THE SAME HAS NO LIVE LINK OR LINKAGE. THE D ISCONNECT IS VERY EVIDENT HERE. IN VIEW OF THE ABOVE, THIS GROUND OF REVENUES APPE AL IS ALSO DISMISSED. 16. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE SD/- SD/- (ANIL CHATURVEDI) ( D.K. TYAGI) ACCOUNTANT MEMBER J UDICIAL MEMBER AHMEDABAD : DATED 31/03/2014 AK / COPY OF ORDER FORWARDED TO:- 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,