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Income Tax Appellate Tribunal - Ahmedabad

Jayaben Bholabhai Patel,, Surat vs Assessee

                IN THE INCOME TAX APPELLATE TRIBUNAL
                   AHMEDABAD BENCH "D", AHMEDABAD
             Before Shri Mahavir Singh,JM & Shri A.N. Pahuja, AM
                               S.P. no.05/Ahd/2010
                          (in I.T.A. No.3710/Ahd/2008
                          (Assessment year 2005-06)
                                        &
                            I.T.A. No.3710/Ahd/2008
                          (Assessment year 2005-06)

Smt. Jayaben Bholabhai Patel                vs   ACIT, Circle-9
Prop Jay Impex                                   Surat
12, Maninagar Society
Ashwanikumar Road
Surat
[PAN : AFJPP2200D]
      (Applicant / Appellant)                           (Respondent)

                           Assessee by :         Shri RN Vepari,AR
                           Respondent by:        Shri CK Mishra,DR

                                    ORDER

A.N. Pahuja : This appeal by the assessee directed against an order dated 22- 09-2008 of the ld. CIT(A)-V, Surat, raises the following grounds:

"(I) Rejection of Book Result:-

(1) On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming rejection of Books of Accounts when all complete records which assessee can possibly maintain were maintained.

(II) Estimation of Gross Profit:-

(1) The learned Commissioner of Income-tax (Appeals) erred in confirming estimation of gross profit and consequent addition to the income when the reasons for fall in gross profit were furnished and not dealt with and also the distinguishing feature in case of the appellant's business of dealing in local sales instead of export sales was not considered.

(2) On the facts and circumstances of the case, the gross profit estimation and consequent addition is required to be deleted.

(III) Miscellaneous:-

(1) The learned Commissioner of Income-tax (Appeals) ought to have deleted interest charged u/s 234B of the Act.

(2) The appellant craves leave to add, alter or vary any of the grounds of appeal."

2. Facts,in brief, as per relevant orders are that return declaring income of Rs.5,86,685/- filed on 22.10.2005 by the assessee, a manufacturer and trader of diamonds, after being processed on 15.1.2006 u/s 143(1) of the Income-tax Act,1961[hereinafter referred to as the 'Act'],was taken up for scrutiny with the issue of notice u/s 143(2) of the Act on 20.10.2006. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that assessee had shown gross profit @ 1.20% on a turnover of Rs.14,76,63,863/- while the gross profit rate in the earlier years was as under:

                    A.Y.           Turnover (Rs.)        Rate of G.P.
                       2002-03         6,07,77,662                1.47%
                       2003-04         6,98,50,804                1.38%
                       2004-05         5,13,19,065                1.38%
                       2005-06        14,76,63,863                1.20%

Since GP rate in the year under consideration had declined , the AO asked the assessee to furnish reasons for fall in GP rate along with valuation of opening/closing stock, basis of its valuation and quality wise stock details along with details of forward contract and consequent profit/loss and quantitative analysis of fall in gross profit besides name and addresses of the vendors from whom purchase of rough diamonds was made, details of rejection of rough diamond alongwith assortment charges paid, details of quality and quantity of production of polished diamond from the rough diamonds. After perusing the details furnished by the assessee, the AO found that though the assessee maintained quantitative inventory of closing stock, assessee failed to furnish 3 SP No.05 /Ahd/2010 ITA No.3710/Ahd/2010 qualitative details of closing stock as also qualitative details of production as well as opening stock of polished diamonds. In the absence of these details, the AO observed that it was not possible for him to ascertain as to which type of diamond was produced from a particular lot nor the assessee could establish lot to lot correlation and therefore, the valuation of stock was not verifiable, which ultimately resulted in fall in gross profit. After elaborately analyzing the process of manufacturing diamonds from the imported rough diamonds and product valuation in diamond industry, the AO further observed that price of polished diamonds depended upon 4C's i.e, cut, colour, clarity and carat i.e the quality of diamonds played a major role in fixing the price. Accordingly, in order to verify the production of the diamonds both in terms of quality and quantity , the AO ,vide letter dated 16.11.2007 asked the assessee to furnish the following details:

"(i) diamond movement register showing receipts of rough diamond, their assortment, their day to day movement to job workers lot wise and qualitywise and receipts from job workers of above diamond on basis of above lot and quantity, rejection of rough diamond, yield of each lot;

(ii) rough diamond movement register of each process i.e. ghat, talia, pehal, mathala and dorimaru and payment made for each of these process to various workers, factory wise, and labour register;

(iii) any forward transactions entered for purchase / sale of foreign currency;

as also necessary details / evidences to justify its claim besides the inventory of both opening and closing stock taken and certified by the management as on 31.3.2005 alongwith documentary evidences in support of basis and process of valuation and inform as to whether separate records of polished diamonds showing their quality (i.e. variety) and quantity wise produce and sales thereof were maintained and if maintained, to produce them for examination. On perusal of details furnished by the assessee, the AO ,accordingly,observed that:

"(a) there was gradual fall in gross profit rate year after year as compared to earlier years;

(b) the assessee had failed to submit the basis and process of valuation of closing stock along with documentary evidences with respect to quality and quantity of raw goods and finished goods, certificate by the partners / management to this effect and detailed inventory taken on 31.3.2004 and 31.3.2005 by partners of the firm;

(c) no proof in support of wages paid to karigars like labour payment register or labour attendance register had been submitted for verification nor the basis of payment to the workers / karigars @ Rs 341/- per carat .

(d) the assessee did not submit the basis for negotiation / payment of labour charges at Rs.341/- per carat, which was higher compared to market rate as M/s Jodhani Export, Surat claimed job work charges at Rs.265/- per carat and M/s D Nitin & Co claimed job work charges on an average rate of Rs.190/- per carat.

(e) even the Identity of stock of rough diamonds given to karigars was not verifiable vis-à-vis purchase lot, neither the yield therefrom , the assessee having not submitted the movement of rough diamonds from the stage of their assortment and then movement of makeable rough diamond to different kargiars for undergoing the process of polishing like table ghat, table talia, etc. and yield therefrom.

2.1 In view of the foregoing ,especially when the assessee failed to furnish quality wise details of polished diamonds nor substantiated its claim of Rs.341/- per carat towards labour expenditure and did not produce piece wise details of production vis-à-vis claim of labour expenses, relying upon decisions in the case of British Paints India Pvt Ltd 188 ITR 44 (SC) and DCIT vs Samir Diamonds Export Pvt Ltd 71 ITD 75 (Mum), the AO rejected book results having recourse to provisions of sec. 145 of the Act. After comparing the trading results of the assessee vis-a-vis results of the following assessees:

Sr.No Name of the assessee Turnover (in Gross profit crores)

1. M/s R. Vipul & Co 8.24 9.1%

2. M/s Sejal Exports 23.62 7.11%

3. M/s Gem Star Co. 18.42 7.85%

4. M/s Parvati Gems(sister 8.13 5.50% concern) the AO enhanced GP rate by 4%,resulting in an addition of Rs.59,06,555/- .

3. On appeal, in the absence of quality wise details of diamonds , the ld CIT(A) concluded that quality being inherently linked to the business of diamonds, plays a major role in fixing the price of diamonds and valuation of stock. Since the assessee admittedly did not furnish these details nor substantiated the basis of payment to labour and did not produce primary records relating to labour payment and labour attendance while lotwise production remaining unverifiable , the ld. CIT(A) upheld the rejection of books of account. As regards estimation of gross profit, the ld. CIT(A) concluded as under:

" On page 11 of the assessment order, the assessing officer has picked up 4 cases where the turnover has ranged from Rs.8.13 crores to Rs.23.62 crores. The G.P. disclosed varies from 5.50 to 9.1%. The appellant's turnover is Rs.14,76,68,868/-. There is a trend of decrease in G.P. as turnover goes up. Thus the fair estimation of G.P. in the present case would be between 5.50% to 9.1%. It is seen from the table that M/s. R. Vipul & Co. has shown a G.P. of 9% on a turnover of Rs.8.24 Crores while Gem Star Co. has shown a G.P. rate of 7.85% on a turnover of 18.42%. But since the appellant's turnover is 14.76 Crore, the assessing officer should have estimated between 7.85% to 9.1%. But assessing officer has also quoted another instance where M/s Parvati Gems has shown a G.P. of 5.50% on a turnover of 8.13%. I have also came across a case of Ruch Exports where a G.P. of 7.56% has been shown on a turnover of Rs.11.16 Crores. By adopting estimate at 5.20% in appellant's case an addition of 4% has been made, which to my mind is most reasonable. Ideally the appellant should have been given an opportunity to show cause as why the addition on account of comparative G.P. rates be not be made, which in this case has not been done. But, since assessing officer has taken lower than the minimum G.P. rates disclosed 6 SP No.05 /Ahd/2010 ITA No.3710/Ahd/2010 bymentioned parties-the grievance does not survive effectively. Even on merit the GP dislosed by the appellant @1.20% is too low to be left uninterfered with and requires upward rationalization which has been done by the assessing officer most reasonably. The assessing officer's action stands upheld."

4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). While carrying us through the impugned order , the ld. AR on behalf of the assessee relied upon his own orders for the preceding assessment years and submitted that the AO did not give an opportunity to the assessee while enhancing the gross profit by 4% nor confronted the comparable cases. The said cases chosen by the AO were of exporters while the assessee was selling diamonds in the local market only. Inter alia, the ld. counsel for the assessee relied on the decision of the ITAT Ahmedabad Bench "B in the case of ITO vs M/s B Sureshkumar & Co in ITA No.2632/Ahd/2003 dated 19-12-2007.On the other hand , the ld. DR while supporting the findings of the ld. CIT(A) did not throw light as to whether or not comparable cases chosen by the AO were of exporters or local manufacturers and traders.

6. We have heard both the parties, gone through the facts of the case and carefully considered the rival contentions. It is true that the assessee furnished the quantitative particulars maintained by it, but as rightly pointed out by the Revenue, in diamond trade it is more important to furnish the particulars relating to quality of the diamond. As concluded by the ld. CIT(A) and undisputedly, these were not furnished before the Assessing Officer or the ld. CIT(A). Rejection of book results cannot obviously be for the same reasons in all cases without regard to the nature of the business, goods dealt with etc. In the case of diamonds, it is well-known that it is a high-value item and much depends on cut, carat, colour and clarity i.e the quality of the diamonds. The bedrock of the Assessing Officer's reasoning is that the quality wise details were not given. The ld. CIT(A) has given a concurrent finding. In the letters dated 6.11.2007,16.11.2007& 14-12-2007, the Assessing Officer specifically asked the assessee a query relating to quality of the diamonds and the basis of 7 SP No.05 /Ahd/2010 ITA No.3710/Ahd/2010 valuation of opening/closing stock. In view of the specific query raised by the Assessing Officer it was the duty of the assessee to demonstrate it with evidence, also leading evidence regarding the quality of the diamonds. In these circumstances, we are satisfied that there existed sufficient reasons for the Assessing Officer to reject the book results, having recourse to provisions of section 145(3) of the Act, notwithstanding the acceptance of the same in the earlier years. We are in agreement with the ld. CIT(A) on this aspect of the matter. Therefore, ground no.I(1) is dismissed

7. As regards estimation of profits after rejection of book results , we are of the opinion that it is not open to the AO to make any addition on estimate basis or on pure guess work. The ld. CIT(A) while upholding the findings of the AO regarding estimation of profits on the basis of compable results in the case of few other assesses including a sister concern, observed that the assessee should have been given an opportunity to showcause before adopting comparative GP rate . The ld. DR appearing before us did not oppose the submissions of the ld. AR that comparable cases were of exporters while the assessee was selling diamonds only in the local market. Though the ld. AR placed reliance on decision M/s B Sureshkumar & Co (supra), but the said decision is also of an 100% exporter of polished diamonds. Thus, reliance on the said decision is totally misplaced. In these circumstances, especially when the AO did not confront the comparable cases chosen by him to the assessee before adopting GP rate of 5.20%, we consider it fair and appropriate to set aside the order of the ld. CIT(A) on this aspect and restore the matter to the file of the AO for deciding the issue relating to application of GP rate afresh in accordance with law after allowing sufficient opportunity to the assessee, keeping in mind our aforesaid observations. With these directions, ground nos II(1) &(2) in the appeal are disposed of.

8. Ground no. (III)(1) pertains to charging of interest u/s 234B of the Act. The levy of interest u/s 234B of the Act being mandatory [Commissioner Of Income Tax.vs Anjum M. H. Ghaswala And Others,252 ITR 1(SC), affirmed by Hon'ble 8 SP No.05 /Ahd/2010 ITA No.3710/Ahd/2010 Apex Court in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449(SC) and in the case of CIT v. Sant Ram Mangat Ram Jewellers [2003] 264 ITR 564(SC)] while no submissions have been made before us by the ld. AR on behalf of the assessee, this ground is dismissed. However, the AO may allow consequential relief ,if any, while giving effect to this order.

9. No additional ground having been raised in terms of residuary ground no. (III)(2), accordingly, this ground is dismissed.

10. Since appeal of the assessee has been disposed of, there is no reason to accept the plea of the assessee for stay of demand .

11. In the result , appeal of the assessee is partly allowed, but for statistical purposes while stay petition is rejected.

Order pronounced in the open cour, on 18th February, 2010.

      Sd/-                                                        Sd/-
(Mahavir Singh)                                                (A.N. Pahuja)
Judicial Member                                            Accountant Member
Ahmedabad,
 Dated :18th February, 2010
Pk/-
Copy to:
    1.The assessee
    2. ACIT, Circle-9, Surat
   3. CIT(A)-V, Surat
   4 CIT-III,Surat                                 By order
    5. DR, "D" Bench

                                            Deputy Registrar, ITAT, Ahmedabad