Income Tax Appellate Tribunal - Ahmedabad
Mangukia Brothers,, Surat vs Assessee
-1-
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before S/Shri G. D. Agrawal, V.P. and Mahavir Singh, JM
ITA No.554/Ahd/2008
Asst. Year :2004-05
M/s Mangukia Brothers, Vs. Asstt. C.I.T., Circle-9,
Plot No.218, Tarabaug, Surat.
Varachha Road, Surat.
(Appellant) (Respondent)
..
Appellant by :- Shri Hardik Vora, A.R.
Respondent by:- Shri H.P. Meena, Sr.DR
ORDER
Per G. D. Agrawal, Vice President.
In this appeal by the assessee following grounds are raised :-
(1) On the facts and in circumstances of the case as well as law on the subject, the ld. CIT(A) has erred in confirming the action of the AO in rejecting the books of accounts u/s 145(3) of the Act.
(2) On the facts and in circumstances of the case as well as law on the subject, the ld. CIT(A) has erred in confirming the action of the AO in making addition of Rs.21,07,443/- for alleged low Gross Profit.
(3) On the facts and in circumstances of the case as well as on the subject the ld. CIT(A) has erred in enhancing the addition by Rs.42,32,151/- for alleged low Gross Profit.
2. The facts of the case are that the assessee derives income from import and exports of diamonds. For the year under consideration the assessee has disclosed the Gross Profit of Rs.2,30,75,880/- on the ITA No.554/Ahd/2008 Asst. Year 2004-05 turnover of Rs.42,14,88,574/-. The AO rejected the assessee's books of account on the ground that the assessee has under-valued the closing stock. It would be evident from the following observations of the AO at page 8 of the assessment order:-
"The assessee was asked to give explanation as to how it was possible to value the closing stock below the cost of manufacturing. In this context, the assessee was also asked to show cause why the books of accounts should not be rejected for under valuation of closing stock."
The AO has also observed that the assessee is not maintaining the quality- wise details of the processing of diamonds. He, therefore, enhanced the GP by 0.5% which resulted in an addition of Rs.21,07,443/-. On appeal, the CIT(A) upheld the rejection of the books of accounts. However, he compared the net profit percentage of the year under consideration with that of preceding two years. He found that the net profit percentage of the assessee in Asst. Year 2002-03 was 5.67% and in Asst. Year 2003-04 2.35%. Thus the average net profit for preceding two years was 4.01%. For the year under consideration the net profit disclosed by the assessee is 2.47%. Thus there was fall of 1.54% in the net profit rate. He, therefore, worked out the addition at Rs.63,39,594/-. Since the AO himself made the addition of Rs.21,07,443/- he enhanced the addition by Rs.42,32,151/- (Rs.63,39,594/- (-) Rs.21,07,443/-). The assessee aggrieved by the order of CIT(A) is in appeal before us.
3. At the time of hearing before us, it is contended by the ld. Counsel that identical issue has been considered by the Tribunal, Ahmedabad 'C' Bench in the case of M/s Dhami Brothers vs. ACIT, Cir.9., Surat vide ITA No.2309/Ahd/2008 for Asst. Year 2004-05. In that case also on identical facts addition was made by the AO by applying GP rate. The same was enhanced by the CIT(A) by applying net profit rate of 4%.
2 ITA No.554/Ahd/2008Asst. Year 2004-05 However, the Tribunal deleted the addition made by the AO for low GP/NP. He, therefore, submitted that the above decision the GP addition made by the AO which is enhanced by CIT(A) should be cancelled.
4. The ld. DR on the other hand, relied upon the orders of authorities below and he stated that the addition has been rightly enhanced by the CIT(A) because there was fall in the net profit rate and the assessee had under valued the closing stock. The assessee has also not properly maintained the quantitative details of the diamonds because in those quantitative details quality of the diamonds was not mentioned. That in the absence of quality of diamond trading result of the assessee becomes unverifiable. He alternatively submitted that even if the decision of the Tribunal in the case of M/s Dhami Brothers (supra) relied upon by the ld. Counsel is applied then addition to the closing stock as sustained by the Tribunal in M/s Dhami Brothers (supra) should be made. He was fair enough to accept that the facts in the assessee's case as well as in that of M/s Dhami Brothers(supra) were almost identical. In that case also AO pointed out that there was under valuation of closing stock as well as of absence of quanlitative details, but the AO did not make any addition to the closing stock and made the addition to the GP only. The CIT(A) made the addition on the basis of net profit which resulted enhancement of addition. However, finally the Tribunal deleted the GP/N.P. addition but directed that the addition be made in respect of under valuation of closing stock. He, therefore, submitted if the decision of M/s Dhami Brothers(supra) is applied in this case then the AO may be directed to make the addition for under valuation of closing stock.
3 ITA No.554/Ahd/2008Asst. Year 2004-05
5. In rejoinder, it was submitted by the ld. Counsel that in the case of the assessee since no addition to the valuation of closing stock was made by the AO the Tribunal should not direct for making of any such addition. However, he furnished the working of under valuation of closing stock. The working given by the assessee is as under :-
Partriculars Rs. Rate per carat for the polished diamond 9,980.56
(As calculated by A.O. on page 8 of assessment order) Quantity of closing stock 9,929.70 Value of closing stock as per AO's valuation 99,103,966.63 Value of closing stock shown by assessee 98,552,272.00 Difference in valuation of closing stock 551,694.63
6. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that identical issue was considered by the Tribunal in the case of M/s Dhami Brothers(supra) wherein the Tribunal held as under :-
"7. We have considered the arguments of both the sides and perused the material placed before us. The AO has rejected the assessee's books of accounts and estimated the value of closing stock as well as GP. The reasoning given by the AO for rejecting the books of accounts reads as under;
"5.3 It would not be out of place to make a mention in this context that, as per the provisions of section 44AA of the I. T. Act, every person carrying on business is compulsorily required to keep and maintain such books of accounts and other documents as may enable them AO to compute the assessee's total income in accordance with the provisions of the I..T. Act. From this, it follows that the purpose and intention of the Legislature in enacting the provisions of section of44AA of the Act is to put an obligation on the assesses to maintain and keep primary records on the basis of which the tax authorities are able to ascertain and compute the assessee's correct income. From this it also follows that it is not always the prerogative of the assessee to maintain the records the manner in 4 ITA No.554/Ahd/2008 Asst. Year 2004-05 which it likes. However, as noticed in the preceding paras the assessee has not maintained the books of accounts and documents on the basis of which the income declared in the return could be ascertained. If the primary records were maintained by the assessee they were not produced for examination to compute the correct income.
5.9 Here it would be pertinent to mention that the assessee has shown closing stock of polished diamonds of the quantity of 44299.10 cts. At Rs.54,23,81,050/-. The detailed inventory of the stock in terms of quality is not furnished. Therefore, in absence of details in terms of quality wise production of diamonds from each lot it is not ascertainable which type of diamonds was produced from a particular lot in order to determine the value. Therefore, in view of this, it would rather be correct to say that the valuation of stock is not verifiable. Here, it would be pertinent to mention that the Hon'ble Supreme Court in the case of British Prints India Ltd. reported in 188 ITR 44, has been held that where the accounts are prepared without disclosing the real cost of the stock in trade albeit on sound expert advise in the interest of efficient administration of business, it is the duty of the AO to determine the taxable income by making such computation as he things fit. Therefore, the claim of the assessee that it is assessee's option to maintain the books of accounts in the manner that suits to it can no longer be accepted and has to be rejected. In this context, reliance is also placed upon the Mumbai ITAT's decision in the case of DCIT Vs. Samir Dianionds Export Pvt. Ltd. reported in 71 ITD 75, i 5.10 I, therefore, in view of the above defects in the system of method of accounting, reject the book results of the assessee under section 145(3) of the IT. Act and proceed to estimate the value of closing stock and estimate the Gross profit as under:"
It was explained by the learned counsel that the assessee has maintained regular books of accounts, which were duly audited. Each items of sale/purchase is verifiable. The only dispute is with regard to maintenance of qualitative details for the processing of the diamond by the assessee. The assessee maintained complete date-wise details of quantity of each lot of the diamond given for the processing as well as polished diamonds received after the processing. Such date wise details of the processing of the diamonds were furnished before the AO and copy of which is also enclosed from page no.63 to 149 of the assessee's paper book. The AO has seated that in these details quality of the diamond is not mentioned. It is submitted by the learned counsel that it is not practical to maintain the quality wise details of each and every diamond. Each and every diamond is of a separate quality depending upon its colour, clarity, cut etc. and this is almost impossible to maintain quality wise details for each and every piece of diamond. That the assessee is maintaining the quantitative details in the same fashion since preceding many years and it was always accepted in the past. Section 145(3) which empowers the AO to reject the assessee's trading results and make the assessment in the manner provided under section 144 reads, as under:
"145. Method of accounting.--( 1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of 5 ITA No.554/Ahd/2008 Asst. Year 2004-05 accounting regularly employed by the assessee (2).......
(3) Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144."
8. From the above, it Is evident that if the AO is not satisfied about the correctness or the completeness of the accounts of the assessee, he may make an assessment in the manner provided in section 144. In this case, there is no dispute about the correctness of the assessee's accounts. As per the AO for want of qualitative details of the processing of diamonds, the accounts of the assessee cannot be said to be complete. We are unable to agree with the above views of the AO. Section 44AA provides for maintenance of the books of accounts. As per the sub-section (2), every person carrying on business or profession is required to keep and maintain such books of accounts and other documents as may enable to the AO to compute the total income of assessee in accordance with the provisions- of this Act. Sub-section (3) of section 44AA empowers the Central Board of Direct Tax to prescribe by rules the books and other documents to be kept and maintained by the assessee. The CBDT as per rule 6F has prescribed the books of accounts and other documents to be kept and maintained by the persons carrying on certain specific profession. However, no books of accounts are prescribed for the person carrying on business. Thus, the assessees carrying on business are required maintain such books of accounts as will enable the AO to compute the income of the assessee. The present assessee has maintained the regular books of accounts which were duly audited. The sale and purchase of the assessee is vouched and verifiable. The assessee has also maintained quantitative details in respect of diamonds purchased and sold by it as well as for processing of diamond. There is no adverse comment from the auditor that the profit cannot be computed from the books of accounts maintained by the assessee. In our opinion, the qualitative details of each piece of diamond is not necessary for computation of the income of the assessee. Income of the assessee can be very well computed on the basis of accounts already maintained by the assessee. In view of the above, we are unable to agree with the AO that there is defect in the system of method of accounting of the assesses which requires rejection of the book results under Section 145(3) of the Act and estimation of the GP.
9. Now we come to the valuation of the closing stock. The assessee has shown the closing stock of polished diamond amounting to Rs.54,23,81,050/-. However, no details with regard to the valuation of the closing stock of the polished diamond are furnished before us. It seems that no such details was furnished before the AO or CIT(A). In the absence of any details of the closing stock and valuation thereof, the AO cannot verify the correctness of the valuation of closing stock. In such circumstances, the AO has worked out the valuation of closing stock of polished diamond in the following manner;
6 ITA No.554/Ahd/2008 Asst. Year 2004-05 COST OF PRODUCTION Rough diamond Weight in Value carat Opening stock of rough diamond 31,260,33 Rs.5,07,64,125 Purchase of Rough diamond 5,26,599.94 Rs.83, 50,69,208 (-)Exchange Rate difference Rs.4,88,64.619 Less: Refection of Rough diamond 2,44,040.73 Rs. 14.64,244 Less: Closing stock of Rough 41,797.32 Rs.2,76,75,407 diamond Consumption of Rough diamond Rs,80,78,29,063 Add: Manufacturing exps. Labour Rs.7,47,46,302 Wages Rs.8S.23.662 Electricity Rs.44,42,262 Salary 70% of Rs.31.70.283 Rs.9,08,82.509/- Rs.45,28,976 Total 95,834.68 Rs.89,78,05.777/- Opening of polished 38.151,91 Rs.37.J6. 79,847 stock diamond Production of Polished diamond 95.834.68 Rs.89.78,05.777 1,33,986,59 Rs. 126,94,85,624 Less: Sales of polished diamond 89,687.49 Rs.79,88,83,175 Less: Exchange difference on Rs.2.32,75,007 export ' • Rs.77,56,18,168 Less: Cost of sale (net of GP) Rs. 72, 24,88, 323 (6.85%) 7 ITA No.554/Ahd/2008 Asst. Year 2004-05 Therefore Closing stock 44,299.10 Rs.54,69,97,301
Closing Stock as per book 44,299.10 Rs.54.23.81. 050 Therefore suppression of closing Rs.46,16,251 stock
10. Ai the time of hearing before us, the learned counsel for the assessee could not point out any mistake in the above working of the valuation of the closing stock by the AO. A specific question was also asked to him that in the absence of details of the valuation of the closing stock by the assessee, how the value shown by the assessee can be verified? The learned counsel for the assessee was unable to reply to such question, and made an alternate request that if the value of the closing stock of this year is increased, then the direction should be given that the opening stock of the next should also be increased by the sum of Rs.46,16,251/-. The learned DR had no objection to the above request of the learned counsel. It is a settled law that the closing stock of one year would be the opening stock of next year. Therefore, if the AO increased the value of closing stock in this year, automatically, the opening stock of the next year is to be increased. After considering the arguments of both the sides and the facts of the case, we are of the opinion that since the assessee was unable to furnish the details of the closing stock and valuation thereof, the AO was justified in working out the value of closing stock. No mistake in the valuation of the closing stock by the AO was pointed out by the learned counsel. We therefore accept the value of the closing stock determined by the AO. However, accepting the alternate plea of the learned counsel, we direct that the value of the closing stock will be taken as value of opening stock of the next year. Thus, the addition of Rs.46,16,251/- made by the AO to the valuation of the closing stock is upheld. The direction of the CIT(A) to make the addition by working out the net profit at the rate of 4% is hereby quashed."
In the above case, the Tribunal has held that merely because the assessee has not maintained the quality-wise details in respect of diamonds purchased, sold/processed, the books of the assessee cannot be rejected. However, the Tribunal has also observed that if there is under-valuation of closing stock, the AO would be justified in making the addition by valuing the closing stock correctly. Merely because there is under valuation of closing stock the rejection of entire trading results and application of GP or NP rate would not be justified. Proper course should be to make a proper valuation of closing stock and make the addition for the under valuation of the closing stock. In this case also the 8 ITA No.554/Ahd/2008 Asst. Year 2004-05 AO has recorded the finding of under valuation of closing stock, which has also been fairly admitted by the ld. Counsel. He has also furnished the working quantifying the addition required to be made for difference in the valution of closing stock. Considering the totality of above facts and respectfully following the decision of the Tribunal in the case of M/s Dhami Brothers (supra) we delete the addition made by the AO/CIT(A) for low GP/N.P. etc. However, with regard to under valuation of closing stock we restore the matter back to the file of AO and we direct him to make the addition for under valuation of closing stock. The assessee has given the working of under valuation of closing stock showing the under valuation at Rs.5,51,692/-. The AO will verify the above working and will accordingly make the addition for undervaluation of closing stock.
7. In the result, assessee's appeal is partly allowed.
Order was pronounced in open Court on 30.11.10.
Sd/- Sd/-
(Mahavir Singh) (G. D. Agrawal)
Judicial Member Vice President
Ahmedabad,
Dated : 30.11.10.
Mahata/-
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
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ITA No.554/Ahd/2008
Asst. Year 2004-05
1.Date of dictation 26/11/2010.
2.Date on which the typed draft is placed before the Dictating 27/11/2010 Member................Other Member................
3.Date on which the approved draft comes to the Sr.P.S./P.S.............
4.Date on which the fair order is placed before the Dictating Member for pronouncement..............
5.Date on which the fair order comes back to the Sr.P.S./P.S...............
6.Date on which the file goes to the Bench Clerk...........
7.Date on which the file goes to the Head Clerk.............
8.The date on which the file goes to the Asstt. Registrar for signature on the order........................
9.Date of Despatch of the Order.................
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