Income Tax Appellate Tribunal - Ahmedabad
Pankaj Diamonds,, Surat vs Department Of Income Tax on 6 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH - AHMEDABAD
(BEFORE SHRI MUKUL KR. SHRAWAT, JM AND SHRI A. MOHAN ALANKAMONY, AM)
ITA No.1975/Ahd/2009:A. Y.: 2006-07
The D. C. I. T., Circle-9, Room No.423, Vs M/s. Pankaj Diamond,
4th Floor, Aayakar Bhavan, Majura Gate, 4-7, Krishna Diamond Park,
Surat Kapodara, VArachha Road,
Surat P. A. No. AADFP 5145L
(Appellant) (Respondent)
Appellant by Shri D. P. Gupta, CIT DR
Respondent by Shri S. N. Soparkar and
Shri P. M. Mehta, AR
Date of hearing: 06-03-2012
Date of pronouncement: 20-04-2012
ORDER
PER A. MOHAN ALANKAMONY: This appeal by the Revenue is directed against order of the learned CIT(A)-V, Surat dated 31st March, 2009, for assessment year 2006-07 in Appeal No. CAS-V/303/08-09 on the following grounds:
"1. On the facts and circumstances of the case and in law, the Ld. CIT(A)-V, Surat, has erred in deleting the addition of Rs.2,27,44,941/- made on account of suppression of yield inspite of papers impounded during the survey on assessee- firm and the internal and external comparison made by the A. O. suggest that assessee-firm has suppressed the yield?ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 2
2. On the facts and circumstances of the case and in law, the Ld. CIT(A)-V, Surat, has erred in deleting the addition made on account of suppression of yield of Rs.2,27,44,941/- accepting the different mutually incoherent explanations furnished by the assessee-firm for different entries on the impounded papers found during the survey?
3. On the facts and circumstances of the case and in law, the Ld. CIT(A)-V, Surat, has erred in accepting the contention of the assessee that Rs.1,74,11,890/- is a business loss whereas in the return of income assessee-firm itself claimed that the said loss as speculation loss?
4. On the facts and circumstances of the case and in law, whether the Ld. CIT(A)-V, Surat, is justified in giving credit of alleged foreign exchange gain in import and exports against loss of Rs.1,74,11,890/- incurred by assessee-firm by speculating the forward exchange contracts?
5. On the facts and circumstances of the case and in law, whether the Ld. CIT(A)-V, Surat, is justified in considering loss incurred by assessee-firm by speculating in forward exchange contracts which are having no relation/tie up with the any of the import and export contracts of the assessee- firm or its prime business transactions as business loss?"
2. Briefly, the facts of the case as emerged from the order of the learned CIT(A), are that the assessee is a Company engaged in the business of import and purchase of rough diamonds and cutting & polishing of rough diamonds and thereafter export and local and sales of the polished diamonds. As per trading results the assessee has shown gross profit of Rs.16,96,76,656/- @ 6.80% of the total turnover of Rs.246,69,58,888/- in comparison to earlier year gross profit of Rs.14,28,50,454/- @7.30% on the total turn over of Rs.193,79,41,937/-. During the course of assessment proceedings various details furnished by the assessee were verified and it was noted that fall in gross profit ratio of the assessee during the year under consideration is 0.50%. The assessee had shown gross profit margin of 6.8% as against gross profit ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 3 margin of 7.3% in the immediately preceding assessment year without considering dividend and bank interest etc. The assessee was called for to explain the fall in gross profit margin and was asked to explain as to why profit at 7.3% should not be estimated. During the scrutiny proceedings the learned AR of the assessee stated that the primary reason for fall in gross profit margin was on account of increase in trading activity of polished diamonds which had led to fall on overall basis, since the margin in trading business is always less as compared to manufacturing and it was explained that purchase of polished diamond has increased from Rs.35.77 Crores to Rs.67.66 Crores. The assessee vide its letter dated 8-12-2008 explained that if the trading activity of polished diamonds was considered separately then the gross profit margin for manufacturing business would be 8.48% as compared to 8.22%.
2.1 The AO has also stated at Para 4 of his order that a survey u/s 133A of the IT Act was carried out in this case on 21-02-2008 at the premises of (1) Krishna Diamond Park, Surat, (2) Savani Diamond Estate, Surat and (3) Opera House, Mumbai from where certain loose papers in the form of computerized print-outs were found and impounded. The AO has referred to pages 18, 20, 21 and 22 which are titled as "Summary Report" (month projection), pertaining to the months of December, 2005 to March, 2006. These papers were found from Vasant H. Rajyaguru who was employee of the assessee firm. These papers contained the production record of the assessee firm for the above mentioned four months. Statement of Shri Rajyaguru was recorded, who explained in detail, the contents of the impounded papers. On the basis of his statement, the AO concluded that the impounded papers represented the actual production of cut and polished ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 4 diamonds for four months. It was submitted by the assessee firm before the AO that these papers only reflected projected production and not actual production. It was explained that Shri Rajyaguru on receipt of rough diamonds, issued the same for manufacturing process and he noted the expected production of cut and polished diamonds. It was further explained that even if it is assumed that the impounded papers were in respect of actual production obtained, there is no variation in the figures recorded on the impounded papers and in the stock register maintained by the assessee. It was submitted that the production as recorded in the stock register for the relevant four months was not less than the estimated production shown in the papers found during the course of survey. The assessee also filed a detailed affidavit from Shri Rajyaguru wherein he explained the earlier statement but the A O rejected the affidavit on the ground that it was only an afterthought, without examining Shri Rajyaguru.
2.2 Another feature of the production process adversely noted by the AO is that the yield of cut and polished diamond from its own production is much more that the yield obtained from the rough diamonds issued to outside 'karigars'. In this respect, the following data has been compiled by the AO at page 11 of the assessment order:-
Khata Pankaj Krishna
Patdar Diamond Diamond
Months Rough Polished Yield % Rough Polish Yield
consumed diamonds consumed diamonds %
December 9127.17 2586.27 28.34 14975.89 5028.72 33.58
January 14055.14 3737.71 26.59 24808.48 8302.40 33.47
February 12397.72 3375.97 27.23 18380.31 6267.49 34.10
ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 5
March 13298.68 3532.83 26.57 18729.32 5958.65 31.98
The assessee explained before the A 0 that the rough diamonds issued to outside 'karigars' were of inferior quality and, therefore, the yield is bound to be low. However, the A O drew adverse Inference from this fact. The A0 further noted that during the immediately preceding assessment year, the yield of cut and polished diamond was 29.34% whereas this year the yield was 28.61%, hence, from this fact also the A0 drew adverse inference. The A0 at page 12 of his order has also referred to some comparable cases where the position of yield was as under:-
Name of the Turnover Chadel Total Average
concern rought % rough % cost of
rough
per
carat
Mani Exports 140 Crores 31.28 23.50 1733
Davangiya Brothers 174 Crores 31.51 22.20 1362
Ajanta Exports 110 Crores 34.05 15.90 1290
Priyanka Gems 249 Crores 33.59 32.72 4102
The AO has also given at pages 12 and 13 of his order the position of yield in assessee's case for the present assessment year as compared to the preceding three assessment years which are:
AY Chadel rough % Total rough % Average cost of rough used per carat 2003-04 26.62 19.39 -
2004-05 26.58 21.68 -
2005-06 29.34 24.05 2825
2006-07 28.61 22.75 2650
On the basis of the reasons given above, the AO concluded that the assessee firm has understated the yield of cut and polished diamonds ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 6 and therefore estimated the yield at 29% and made the impugned addition with the following discussion at page 13 of his order:-
"Even in the case of assessee he has obtained yield of 29.34% during the assessment year 2005-06 with the average of rough of Rs.2825 per carat. Whereas during the year under consideration the assessee has used rough diamonds with the average cost of Rs.2650 per carat which is more or less similar in quality with respect to the quality of rough diamonds used by him in the earlier years but he has shown fall in yield in 0.73% during the year under consideration. In view of this after considering all the Explanation and submissions furnished by the assessee and after taking into consideration all the explanation and submissions furnished by the assessee and after taking into consideration the internal is well as external data it is justified to estimate the yield of assessee reasonably at 29% on the quantity of chadel diamond reflected by him in the, audit report furnished by him for A.Y. 2006-07 and therefore, I add Rs.2,2744,941 to the total income of the assessee by estimating yield at 29.00% against reported figure of 28.61% as under:-
PARTICULARS AMOUNT Rs.
Polished diamond manufactured during 1,28,547.42
the year [CTS]
Yield of polished diamond as reported 28.61%
Roughs processed during the year [CTS] 4,49,309
Estimated yield of polished diamond 29.00%
Estimated polished diamond [CTS] 130299. 73 Suppressed polished diamond [CTS] 1752.31 Estimated cost of polished diamond per 12,980 carat [Rs.423000000/32588 cts] Addition 227,44,941 ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 7 2.3 Before the learned CIT(A) on this issue, in addition to verbal arguments the Ld.AR filed detailed written submissions on behalf of the assessee firm, the relevant part of which reads as under:
"3. The AO has framed the assessment order without considering the details submitted during the course of assessment proceedings, drawing wrong conclusions from the details submitted, passing assessment order without granting a reasonable opportunity to the appellant to submit specific details/ provide explanation, not giving any specific reason for reaching the adverse conclusion used against the appellant and considering wrong fact for justifying the addition made. The alleged addition made by the AO justifies quashing on the folio-wing grounds:
(i) Considering the Cardinal Rule of Interpretation, that the document should be read in its present form i.e. the computer printouts are monthly estimates as evidenced by the heading itself.
(ii) Statement recorded of Mr. Vasant H. Rajyaguru on 22-2-2008 & subsequent clarification made by filling duly notarized affidavit by Mr. Vasiant H. Rajyaguru in response to the statement so noted.
(iii) Not pointing out single defect in Books of Accounts as well as other exhaustive documentary evidences produced before the A O.
(iv) The AO has also accepted the operational/ gross profit of the appellant firm, which conclusively justifies the argument that no estimation in yield is required. Bonk Results have been accepted. Refer para 3 of the Assessment order.
(v) Even other wise, the yield reported in the books of accounts is higher as compared to yield mentioned in the loose papers for which reliance is placed by the AO.
(vi) Even other wise, the notings recorded in the loose papers, are part data with respect to:
i. process,
ii time / shift,
ii. khatas etc.
ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 8
and cannot be compared with complete data recorded in books and if it has it has to be subject to certain adjustments.
(vii) No opportunity or show cause given by the A O for making addition on the basis of yield ratio shown by other diamond enterprises,
(viii) The AO contention and its subsequent rebuttal would satisfy your honour that the estimation of yield is without any base and required to be quashed.
(ix) Ratios laid down by Hon'ble courts and IT AT, that once the books of accounts are accepted, operation performance has not been doubted, no other defects found, no estimation in yield is justified.
Each of the above contentions arc elaborated in subsequent para's.
4. The taxing authorities while doing the assessment, exercises quasi Judicial powers and therefore in doing so they must act in fair manner and not in a biased manner. In view of the above, the appellant submits that the assessment order passed by the A O is bad in law and ultra-vires and needs to be quashed.
5. Contentions of the appellant
5. 1 That the Computer print out indicates only monthly summary Projections and are only estimates: -
What is pertinent to be noted is that all the papers referred to by the AO are titled as "Summary Report (Monthly Projection)". These loose papers are only estimates made by the management before it distributes the makeable rough diamonds either to sub- contractors/labourers or within its own department for further processes. This monthly projections are made by the appellant firm to set standards of the minimum yield accepted from the sub- contractors/labourers and in-house department from the makeable rough handed over for further processing. This report enhances the capability of the management evaluating the yield which has been generated from its own department as well as the sub- contractors/labourers to whom makeable rough diamonds have been handed over for processing. It is also a well settled principle ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 9 that the loose papers have to be read as a whole and needs to he interpreted in a manner just as a common man would understand. It cannot he read in bits & parts to suit the convenience of either party. Accordingly, these loose papers being only monthly projection cannot be compared with actual books of account, since it is a summary of monthly projection. This wax also clarified by Mr. Vasant Rajyaguru vide his affidavit wherein he has staled that his role in the appellant firm was limited for making monthly projections and far which he used to enter data into the computer system. He stated that he used to make entries only as per the instruction of Himmatbhai and was not aware of any other transaction given to either contractors or other third parties. In support of its Affidavit given wherein Mr. Vusant Rajyaguru has stated that the loose papers titled as "Summary Report"
[Monthly Projections] are merely the estimates and carry no evidentiary value. The appellant had placed on record, a comparative chart showing the yield of polished diamonds to makeable rough along with the necessary documentary evidence [refer para No. 6]. On perusal of the said chart, it can be seen that there is a minor difference in the actual yield figures, the reason being that what Mr. Vasant Rajyaguru was punching in the software was only to figure-out the tentative yield that the management should expect or its contractors and labourers.
6. Without prejudice to the above contention, even if it is assumed that the loose papers consist of actual figures, the same cannot be said to be a conclusive evidence to frame the assessment because they consist of noting in relation to a part of the processes only. These loose papers cannot be compared with the actual books of account for the reason that they represent only a part of the data relating to the whole manufacturing processes and consists of noting only in relation to few processes. Further these noting consist of data only in relation to few khatas and pertain to few processes. Estimating yield on the basis of part of data is not at all possible and should not be the base for computing yield. Instead the A 0 has not appreciated this fact. In respect of the above contention, the appellant had placed on record a comparative chart showing the difference in the yield ax per the loose papers and us per the books of account. While bringing this on record, it is also high lighted that the yield as per the books of account is more than the yield as per loose papers. This is because the loose papers suggest nothing but only represents a part of the production process. The reasons why the ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 10 loose papers cannot be used for the purpose of reaching to any conclusion are high-lighted hereunder:-
Even if it is not accepted that the loose papers are projections, then also estimates cannot be made based on those print outs only because -
(i) In fact these loose papers start from some what middle of the total number of the processes;
(ii) They do not reflect the entire process;
(iii) Some of the departments and khatas are not within its purview/scope.
(iv) Some of the processes carried out after polished diamond comes from the factory are not all considered like boiling, assortment, breaking and repairs i.e. the processes which are usually carried out by the Mumbai office;
(v) Buyers also return many pieces for either repairs or replacement which affect the ultimate yield as reflected in the books;
(vi) That Mr. Vasant Rajyaguru was receiving makeable rough only from certain Lotting Departments and of only certain shifts.
(vii) Books of accounts show the result of all the processes i.e. right up to the diamonds are ready to sell and or accepted to the buyers;
(viii) Part cannot be made basis of comparison. These papers relate only to a particular period and consist of only limited processes '.
(ix) It may happen that polished diamonds are directly sent by the sub-contractors/labourers lo the Bombay office.
This data does come within the functional scope of Mr. Vasant Rajyaguru and hence, is not entered in the sheets.
(x) Further, such diamond pieces which are polished by the labour contractors, may be returned back by the buyers ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 11 for repairs/replacements and for the purpose of repairs/replacements, they may be sent back either to the contractors or to the Surat office. As what is entered into by Mr. Vasant Rajyaguru is details relating to makeable roughs only, he does not enter any details in relation to polished diamonds, whether they come for repairs or replacements.
(xi) The appellant had also, stated that the yield in the months of December 2005 to March 2006 is higher then the yield which comes out from the loose papers. A chart showing the yield as mentioned in the books of account for the period of December 2005 to March 2006 vis a vis the loose papers for the corresponding period is reproduced herein below:-
Period Makeable rough to % as mentioned in
polished diamond loose papers
(booing estimates)
December 2005 31.45. 31.59
January 2006 30.05 29.73
February 2006 31.20 31.33
March 2006 31.24 30.98
Average 30.985 30.907
6.1 In support of the above contentions the appellant submitted complete details of rough diamond for December 2005 to March 2006 as per books of accounts------------------------------------------------
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6.2 Mr. Vasant Rajyaguru was also entering the details of labour expenses on the estimated makeable rough diamonds received from the Lotting Department. Ax contended above and in support of the claim that these loose papers do not reflect the entire processes. Also, the estimated total labour expenses represent only variable portion for makeable roughs to be processed. A comparative chart shoring the labour expenses ns per the loose papers vide pages 18, 20 to 22 of File BF-27 and the books of account is reproduced hereunder :-
ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 12Period ROUGH (Makeable) POLISHED (wt) LABOUR (Rs) (wt) Loose Books Excess Loose Books Excess Loose Books Excess paper in paper in Books paper in Books Books (paid) Dec '05- 125773 178260 52487 38821 51861 13040 21827980 25402807 3574827 March'06 This itself proves that the loose papers, if not accepted as estimates, they can be related at the most to only a part of the activities undertaken by the assessee during the shift in which Mr. Vasant Rajyaguru was working. The appellant during the course of the assessment proceedings, was also called for to explain vide order sheet entry dt, 12-12-2008 the reasons for increase in the labour expenses by Rs.1.00 crores, in comparison to financial year 2004-05, were the expenditure by the appellant vide communication dt. 17-12-2008 which was accepted by the A O and no adverse inference was called for.
6.3 Further, in order to support the claim that the loose papers represent only a part of the whole process, jt was also explained to the A O that in certain columns of the loose papers, a figure "0" in the quantity columns namely rough diamonds, polished diamonds, etc, was being punched into by Mr. Vasant Rajvaguru. Certain expenses which were required to be incurred irrespective of the quantity ofmakeable romh polished i.e. fixed expenses were not punched by Vasant. This computer print outs and data contained only apart of the details and did not include and does not include those fixed expenses which were required to be incurred. Hence, the computer print outs may best be viewed as a part of the variable processes undertaken at a particular point of time with reference to certain activities coming within the scope of Mr. Vasant Rajyaguru. Accordingly, these computer print outs are either defective or are part processes and cannot be compared with the actual data recorded in the books of account.
6.4 Hence these loose papers are not comparable with actual books of accounts since:
• they represent on a part of the data relating to the whole manufacturing process at a particular phase and point of time ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 13 • they consist of notings in relation to few processes involved in diamond processing • the notings relate only to few khatas and pertain to processes beginning after makeable rough diamonds are issued for further processing.
Therefore it is not possible for anyone to estimate the yield of the polished diamonds as the data in the loose papers in limited and comprising part of all the processes. THE PART CANNOT BE COMPARED WITH WHOLE or PART CANNOT BE TAKEN AS THE BASIS FOR COMPUTING WHOLE YIELD.
7. In light of the information and explanation submitted to the A O during the course of the assessment proceedings, the appellant vehemently submitted that the estimation of the yield, as made by the A O at 29% is completely unjustified in view of the fact that all the material information and data had been provided to him during the course of the assessment proceedings and the A O had not been able to point out a single defect in the data submitted to him. The following are the lists of the documents/evidences which were available with him or were produced before him, during the course of the assessment proceedings through different communications:-
(i) Audited copy of the annual accounts,
(ii) Tax Audit report
(iii) Cash book/bank boob sales book /purchase books / Register /produced before the AO for verification,
(iv) Stock register comprising of raw roughs, chadel roughs, polished diamonds for the assessment year 2006-07.
(vi) Complete monthly summary of:-
A. Rough diamonds received and processes for the assessment year 2006-07.
B. Raw roughs processed into chadel roughs for the A. Y. 2006-2007 C. Makeable rough process from chadel rough for A. Y. 2006-07
(vii) Lotwise Details of manufacturing of makeable diamonds from chadel roughs vis-a-vis raw roughs for Dec. 2005 to March 2006 along with relevant vouchers for various losses incurred during the a similar period. The same is enclosed ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 14 herewith vide Annexure C of the paper book for your ready reference.
(viii) Copies of the vouchers [filed before the A O] shall be produced, if required, during the course of hearing.
7.1 Vide para - 3 of the assessment order it can be perused that the Gross profit margin of the appellant has been accepted. Once there is a specific finding of the A. O. in accepting the Gross Profit it can be inferred that the books of accounts have been accepted He particularly has failed in indicating any instances of discrepancies in the stock register. Entire purchases and sales are vouched, detailed, verifiable and the working results have always been accepted in the past except the year under appeal. The appellant company has maintained all possible records for manufacturing/processing as also purchase and sale. The accounts are backed by quantitative tally and stock register. The AO has not pointed out any mistake in the opening stock, purchases, sales and the closing stock and there is no dispute In this regard. No material has been brought on record by the AO for proving the low production/low yield and the assessee has made the sales out of books of account. Reliance may be placed on the decision of International Forest Co. v. CIT 1975 CTR (J&K) 88 :
(1975) 101 ITR 721 (J&K), Pandit Bros. v. CIT (1954) 26 ITR 159 (Punj) for the proposition that no addition could be made merely on the basis of low yield or low GP by rejecting books of account.
Once the dross Profit has been accepted by the A.O., he cannot estimate yield of the appellant firm.
7.2 Inspite of producing so many evidences in relation to the fact that these papers reflect only a part of the whole process, the A O has neither considered this argument, nor has given any finding and has proceeded to make the estimation of the yield by placing reliance on similar Companies/firms. It can be inferred from this act of the AO that the loose papers could not, by any stretch of imagination, support him in framing an assessment as this document was not an incriminating document. 8 Without prejudice to the above contentions, Mr. Vasant Rajyaguru used to enter delta only in relation to makeable rough diamonds. During the course of the search proceedings, statement of Mr. Vasant Rajyaguru was taken and recorded on oath. He was specifically risked to explain all the loose papers vide question No. ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 15
4. Vide question No.4, he was asked his role in the organization. He had replied that he enters the data of diamonds which come from the Lotting department, and then distribute the diamonds to different khatas. Based on the above statement, it would be necessary to understand the number of processes a rough diamond undergoes before reaching and passing to the Lotting department. The rough diamonds are of different qualities and varieties of sizes. The lot of rough diamonds is completely non- homogenous. No two pieces of rough diamonds in a lot are alike. These rough diamonds are purchased in lots and then graded or grouped and assorted by skilled employees. The rough diamonds usually undergoes several processes before it can be termed as makeable rough. Out of the raw rough primary rejection of the diamonds which cannot be processed at all, is figured out and are removed from the lot. The resultant rough diamonds are termed as chadel rough. Chadel rough diamonds further undergo through the laser and cleaving department and the Lotting department. The major process which takes place is in the laser/cleaving department. A flow chart of activities which takes place of any diamond processing use for converting a raw rough may makeable diamond is represented here under:
RAW ROUGH / PRIMARY REJECTIOIN / CHADEL ROUGH / PROCESS LOSS OF LASER /CLEANING ETC.
/ MAKEAM.E ROUGH [received from Lotting Department] / In order to keep a track of all the processes the appellant has created different khatas through which the roughs are routed through. Following are some of the main khatas:
(i) Rough assortments/Rough Primary rejections and verification through chapka, todfod, etc.
(i) Laser / cleaving department
(ii) Lotting department
(iii) Blocking department
(iv) Ghat department
(v) Talia department ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 16
(vi) Talia Pel department 8 and 12
(vii) Mathada department 8.1 It may be worthwhile to note that what Mr. Vasant Rajyaguru in his statement had referred to is that he had been receiving rough diamonds from Lotting department for transferring them after necessary entries to various other khatas. It is amply clear that what he receives and what he enters is makeable rough because makeable rough is derived only after passing through the laser / cleaving department, which is khata No. 1 as reproduced above. This was also further clarified by Vasant Rajyaguru vide his affidavit. In his affidavit vide point No. 11 he has stated that in the computer print the details of the diamonds represent makeable rough i.e. diamonds which have undergone laser/cleaving /processes. The A O vide assessment order has held that the contention of the assessee is not acceptable because most of the diamonds firms give rough diamonds derived after primary rejection i.e. chadel roughs only to the labour contractors for further processing and not after passing them through the laser/cleaving processes. It can he inferred from the statement taken on oath during the survey proceedings itself that what had been entered into by Mr. Vasant Rajyaguru was the data relating to makeable rough diamonds only because he was authorized to receive rough diamonds from the Lotting department. Affidavit of Mr. Vasant Rajyaguru reiterates the same fact. This Affidavit was also supported by evidences duly placed before the A O during the assessment proceedings. This, the contention of the A O that the roughs mentioned in the loose papers tire chadel roughs and not makeable roughs, as contended by the AO is also based on certain assumptions and presumptions. This is because the appellant had also placed on the file of the AO confirmation of the sub-contractors that they were receiving makeable rough from the appellant. In this connection, it is submitted that if the A O were to conclusively believe that the roughs mentioned in the computer print out were chadel roughs, then he ought to have examined and called for the details from the various sub contractors to arrive at a conclusion that the roughs given by the assessee to the sub contractors were in fact, chadel roughs and not makeable roughs.
The assessee during the course of the assessment proceedings, had also explained to the AO stating that the roughs submitted to the sub contractors were the makeable roughs and in case if any examination of the same were required, the same may be ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 17 produced on an opportunity being given. However, no such request was made by the AO in the course of the assessment proceedings.
9. The appellant submits that the estimation made by the A O in yield is required to be deleted in view of the fact that all the observation made by the A O has been rebutted leaving no room for any addition in yield of Polished Diamond. The observation of the A O and its Rebuttal are as under.
AO's observation Rebutted to the AO's
observation
1. The loose papers found 1. Considering the rule of
during the course of survey are interpretation, that the
not monthly estimates and document is to be read in its
actual data present form, the heading
marked on the loose paper
categorically states that they
are monthly projection.
2. The clarification made in the
affidavit executed by Mr.
Vasant H Rajguru that these
are estimates that were
prepared for the purpose of
management.
2. The AO has contended that 1. Complete manufacturing
the rough diamonds pertain to process was explained to the
only two types of classification, AO which is also enclosed vide
i. e. rough diamonds before Annexure-I with the Statement
rejecting and makeable of Facts.
diamond after rejection.
2. The appellant in the course
of assessment proceedings
had explained that the roughs
are classified as i) Raw roughs,
ii) Chaddel rough and iii)
Makeable rough.
3. The Rough after primary
rejection/weight loss from Raw
Rough is termed as Chadel
ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 18
Rough. The rough, after
process loss from Chadel
Rough is termed as Makeable
Rough.
4. Exhaustive lot-wise
documentary evidence was
produced before the A.O.
justifying the classification of
roughs which was not disputed
by him neither in the
assessment nor in the
assessment order.
3. The rough mentioned in the 1. Mr. Vasant H. Rajguru loose papers so seized, are received from the lotting chadel rough. department and they always refer to makeable rough i.e. after considering all process losses.
2. This is further proved by the fact that the roughs given to the sub-contractor for further processing is always a makeable rough since the entire processing for concerting raw rough up to makeable rough is carried out in the factory premises itself.
3. Confirmation of sub-
contractors.
4. The A. O. has also observed 1. The A. O. has fundamentally that the yield mentioned in the erred in understanding the loose paper differs between the manufacturing process of roughs processed by the sub- polished diamond since the contractors and rough yield depends upon the quality processed in the factory of roughs, shapes, size, colour, premises of Pankaj Diamond clarity etc. It is not sacrosanct. itself.
2. Further the primary reason for variation in yield is on account of the fact that it is a ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 19 general practice to retain better quality of roughs to be processed within the factory premises by the labourers of the appellant firm leading to a higher percentage in yield as compared to roughs submitted to the sub-contractors.
5. The A.O. has also observed 1. The observation made by that because of the repairing the A. O. is a misconception. loss arising during the process The repairing loss is due to the of polished diamond, the return of diamonds from either percentage of yield as stated Head office and/or customers by the appellant would always and it is not directly related to a be lower against what has particular month or period. A been submitted by it. diamond manufactured in the month of March may come for repair in the month of June. So the monthly results are not directly out of the inputs of that month only. Also however, he has failed to take into consideration that as a result of repairing loss there not always reduction in the percentage of yield since the said repairing loss at many times would be compensated by other losses which would have occurred at a lesser percentage during the same manufacturing process.
Accordingly, had the A. O. understood the manufacturing process in entirety, the said observation would not have been made.
2. Further the said Repairing loss not being mentioned in the loose papers is yet another consideration that they are incomplete and part date, which cannot be ground for ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 20 making any addition.
6. The A O has estimated yield 1. The A. O. has proceeded to on the basis of yield shown by make the addition of yield on similar other enterprises. the basis of yield shown by other enterprises without considering the fact that the books of accounts have been accepted, the operational profit has not been doubted and the explanation regarding the loose papers submitted have been accepted.
2. Having proved the above contention, the A. O. had still estimated yield on the basis of yield shown by other enterprises without providing any opportunity or giving a show cause notice for the proposed action. The same is against the principle of natural justice.
10. Without prejudice to the above discussion, yield can be estimated only with respect to a period relating to which the incriminating documents have been found. During the course of the survey proceedings, loose papers for the months of December 2005 to March 2006 have only been found. As evident from the chart reproduced below, average yield of polished diamonds to chadel roughs for the aforesaid period is 29.67% which is more than 29%, as estimated by the A O. Thus, this contention of the A O is not acceptable. Again, if the claim of the appellant is accepted that what had been entered into by Mr. Vasant Rajyaguru was only, makeable rough, then the average yield for the mid period comes out to 30.9875% which is much nearer to the industry average. The percentage of yield for the period from December 2005 to March 2006 of chadel rough to polished diamond is reproduced here under:
ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 21 Period Chadel to polished diamond (Books)
December 2005 29.47%
January 2006 29.67%
February 2006 28.56%
March 2006 31.00%
In this respect, the appellant hi id also submitted to the A O complete movement of diamond received from chadel lo makeable roughs which clearly explains the basic real rejection, loss, weight and process loss, etc. to the A O. It would be relevant to note that the AO has proceeded to estimate the yield of the entire year. He has estimated yield of the chadel rough to polished diamond at 29% instead of 28.61% as claimed by the appellant. The CIT (A) may direct A.O. to estimate yield if at all required only for the period for which the so called incriminating documents have been found and as the yield in the books is more than the computer sheets estimation for the entire year is uncalled for and may be deleted. Unless there is any material evidence, no addition can be made for earlier period or subsequent period:
1. Shankur Rice Co. vs. ITO (21)00) 67 TTJ(Asr) 84 : (2000) 72ITD 139 (Asr).
Samral Beer Bar vs. Asstt. C1T (WOO) 69 TTJ (Pune) (TM) 113 : (2000) 75 ITD 19 (Pune) (TM).
2. Conclusion Estimate of suppression of sale's for a larger period could not be made on the basis of the diary found in search showing suppression of sales in a particular period.
11. Inspite of the above fads on record, the A O has concluded that yield of polished diamonds cannot be computed vis a vis makeable roughs. As discussed, there is no pre-defined yard- stick to compute yield of diamonds. At this juncture, we would also like to place reliance on the Reports received from Mumbai Diamond Merchants' Association and Jewels Export Promotion Council, which stale that a yield in any diamond process house can range anywhere between 10 to 55%. Copies of the said reports are attached herewith for ready reference as Annexure -D.
12. Further, the A O has also held that the yield generated from labour contractors/sub-contractors should be at least nearer ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 22 or equal to the yield which the appellant generates in its own factory. In this respect, the appellant would \like to submit that if it is accepted that the noting in the rough weight column of the loose papers is makeable rough then it would be pertinent to note that the yield derived by the appellant is more than the industry average as high lighted by the A 0. The average yield of makeable rough to polished diamond is coming out ]of the books of account for the period December 2005 to March 2006 is 30.9875% which is more than the industry average. Also the plea that the yield of polished diamond from the labour contractor is less than the yield as generated in the appellant factory premises is not acceptable because of the fact that the yield differs from assessee to assessee and more particularly differs from assessee to assessee because the yield is dependent on many factors; such as the process adopted for polishing the diamond by the planners who decide the variety in shapes & sizes, such as round, emerald of the diamond. Thus, the level of skilled employed undertaking such process, the machinery and the equipments utilized in order to undertake such process and many other factors. Thus, as claimed by the AO the yield has generated in the factory premises of the appellant cannot be compared with that of the yield us generated in the premises of its contractors.
Based on the discussion above, the Hon'ble CIT(A) may direct the A O to delete the addition taken place on account of the estimation of the yield at 29% and accept the yield of the appellant, especially when no corroborative evidences have been brought on record, reflecting unaccounted sales of the alleged suppressed yield."
2.4 The learned CIT(A) considering the submissions of the assessee deleted the addition. The findings of the learned CIT(A) in the appellate order are reproduced as under:
"I have given a careful consideration to the relevant facts, the reasons stated by the A0 to justify impugned addition and the submissions made before me on behalf of the appellant firm. First of all it may be mentioned that the A0 has attached much importance to the papers found during the course of survey. In my view it is futile to enter into any controversy as to whether these papers indicate actual production or estimated / projected ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 23 production. In the light of the factual position which has been reproduced (supra), it is clear that the actual production recorded in the books of accounts for the relevant four months is not less than the production indicated in the impounded papers. The data in the impounded papers are reflecting only some of the processes and department & it does not contain details from purchase of complete rough to polished diamond. Therefore, in my view, there is no basis for any adverse inference or any assumption on the basis of impounded papers that the assessee has suppressed the production. It is notable that during the course of survey no evidence was found to suggest that the appellant firm had made any sales which were not recorded in the books of accounts. The situation has been fully explained by assessee firm before the AO as also before me.
The AO has drawn adverse inference from the fact that the average yield during the preceding assessment year was 29.34% whereas during the year under appeal it came down to 28.61%. It is notable that from the factual position already stated by the AO in the assessment order which has been reproduced (supra) in the shape of chart, the average production of cut and polished diamonds during the assessment years 2003-04 to 2005-06 is 27.51% and 21.7% in relation to chadel rough and total rough respectively. As against this, the actual production during the present assessment year is more at 28.61% and 22.75% respectively. It Is also notable that during the immediately preceding year the average cost of rough was Rs.2,825/- per carat whereas this year It is Rs.2,670/- per carat which means that the quality of rough was inferior during the present year . Moreover, when the production this year is more than the average production of preceding three Assessment Years, there is no basis for drawing any adverse inference. Further, the A 0 has not pointed out a single defect in the books of accounts or the method of accounting. The legal position is absolutely clear from the various cases referred to above. Accordingly, in my view merely because there is some minor variation in the yield as per the preceding assessment year, no addition can be made.
Another reason given by the AO is that the yield position in respect of rough diamonds Issued to outside 'karigars' is much less than yield obtained from in-house production. The assessee submitted a proper explanation that it is the normal practice to ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 24 issue inferior quality of rough diamonds to outside 'karigars'. In my view there is no reason for not accepting this reasonable explanation especially in view of the fact that the average production this year is better than the average production of preceding Assessment Years.
The A0 has also referred to some comparable cases and the factual position regarding yield in these cases has been reproduced (supra). It is true that In relation to chadel rough, the yield position for the comparable cases is better. However, In relation to the total rough, yield position in assessee's case is better. For this purpose, the facts of Priyanka Gems have to be ignored because in that case, the cost of rough is Rs.4,102/- as against the cost of Rs.2,650/- in the case of the assessee. In the remaining 3 cases, the average yield vis-a-vis total rough is 20.5% whereas in the case of the assessee it is 22.75%. Further, the facts and circumstances in different concerns may not be similar. Moreover, during the course of assessment proceedings, the assessee was never confronted with the data collected by the A 0 in respect of other comparable cases. After considering the facts and circumstances and hold that the A0 was not justified In making addition of Rs.2,27,44,941/- and therefore, the same is deleted. The alternative ground of treating the aforesaid addition as closing stock is not required to be dealt with, since the addition itself has been deleted."
2.5 Aggrieved and dissatisfied with the above order of the learned CIT(A), the revenue is in appeal before us.
3. Before us, the learned DR relied on the order of the AO and submitted that the AO rejected the process loss documents furnished by the assessee holding that such records are not furnished during the survey proceedings nor found during the course of survey. Ld. DR further supported the contention of the Ld. AO that these documents are nothing but created records. Ld. DR further submitted that the Ld.AO had rightly rejected the assessee's contention with regard to yield worked out by the appellant and estimated the yield of the assessee ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 25 after making diligent external comparisons with the comparable concerns and also making internal comparison of the assessee's yield in the earlier years and thereby reasonably estimated the yield of the assessee at 29% and rightly made the addition of Rs.2,27,44,941/- to the total income of the assessee. Ld. DR pointed out that the yield position in respect of rough diamonds issued to outside "Karigars" is much less than the yield obtained from in-house production. Ld. DR further added that the reliance placed by the Ld. CIT(A) on the assessee's explanation that " It is a normal practice to issue inferior quality of rough diamonds to outside karigars and that there is no reason for not accepting the explanation of the assessee especially in view of the fact that the average production during the year under consideration is better than the average production of preceding assessment years" is not correct and is to be rejected. With regard to learned CIT(A)'s observation that the AO has not detected any defect in the books of accounts of the assessee, it was submitted by the learned DR that requisite details of stock records were not made available before the Revenue in order to establish that there was no suppression of sales.
4. The learned AR on the other hand relied upon the order of the learned CIT(A). In addition to the written submissions, the learned AR vehemently argued that no adverse inference can be drawn from the papers found and impounded during the course of survey and it was reiterated that if it is assumed that these papers contained record of actual production for the four months, the same tallies with the production shown in the stock registers and there can be no assumption that production has been suppressed. It is submitted that the assessee firm has maintained regular books of accounts meticulously including stock registers and day to day production record. The books have been ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 26 statutorily audited and copies of audited accounts along with report of the auditors were duly filed before the AO. No defects whatsoever have been pointed out in the books of accounts or the method of accounting and merely on the basis of minor variation in the position of yield as compared to the preceding assessment year, the AO has made a huge arbitrary addition entirely on the basis of mere assumptions. It is further pointed out that even in assessee's own case, the position of yield for AY 2003-04 and 2004-05 was 26.62% and 26.58% respectively, as compared to which the yield during the assessment year under appeal is better at 28.61%. The average yield for the AY 2003-04 to 2005-06 is 27.51% vis-a-vis chadel rough and 21.7% vis-a-vis the total rough and that as against these, the yield during the present AY is 28.61% and 22.75% respectively. It was also submitted that the rough diamond given to 'karigars' are after carrying out certain processes and therefore the assessee has already suffered certain expense loss due to labour cost and wastage. It was also explained that such processed rough diamonds are termed as Makeable Rough and the books details contain the yield from the very beginning to an end of the process i.e. from chadel rough to makeable rough. He has also referred to the following decisions:
a) Shreyans Gems Pvt Ltd, Vs ACIT 111TTJ 959 ITAT Jaipur In this case addition was made on the ground of low yield. The addition was deleted because the AO did not point out any mistake in the opening stock, purchase, sales and the closing stock.
b) Dhanesh Cotton Ginning Dhell & Oil Mils Vs ITO 3 SOT 59 - ITAT Jodhpur. In this case addition made on the basis of low yield was deleted as the AO did not point out any defects in the books of accounts maintained.ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 27
c) Pushpanjali Dying & Printing Mills Pvt. Ltd. Vs. Jt. CIT 72 TTJ 886 ITAT Ahmedabad. In this case it was held that merely on the basis of low yield and excess expenditure on electricity, no addition can be made when the books of accounts are duly audited and no defects have been found therein.
d) ITO Vs. Vigyan Chemical Industries 40 TTJ 81 ITAT Delhi wherein it was held that the yield of product may vary from concern to concern and year to year depending on various factors and merely on that basis addition cannot be made.
For the same propositions reliance has been placed on the following cases also:-
1) ITO Vs Jagadamba Rice & General Mills - 86 Taxman 46 1TAT Chandigarh
2) Bishen Singh Gill Cotton Factory Pvt. Ltd. Vs. A.O. - 81 Taxman 150 - I.T.A.T. Amritsar
3) Raj Enterprise Vs ITO - 51 TTJ 408 - ITAT Jaipur
4) Punet Udyog Vs ACIT - 164 Taxman 167 - ITAT Delhi The learned AR also relied on the Hon'ble Calcutta High Court decision in the case of Siddheshwari Cotton Mills Pvt. Ltd. Vs CIT - 117 ITR 953 wherein it was held that without rejecting books of accounts, no addition can be made on the basis that the production account indicated more wastage than in preceding year.ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 28
5. We have heard the rival submissions, perused the orders of the authorities below and considered the materials on record along with the citations of case referred. At the outset, it is pertinent to mention that the assessee had declared a whooping turnover of Rs.246.79 Crores against which the net profit declared is only Rs.6,06,485/- for the relevant assessment year. Similarly, the total turnover declared by the assessee for earlier assessment year i.e. 2005-06 was Rs.193.79 Crores against which the assessee had declared similar nominal net profit. It is also not disputed that year after year such results were declared by the assessee. No doubt the learned AO had every reason to go deep into the books of accounts and relevant documents necessary in order to verify the results declared by the assessee Company were genuine. It is also important to note that the assessee is in the high profile business of trading and processing of diamonds which requires specific skill, technology and experience. Considering the nature of the business the learned AO had made efforts to identify the right quality/quantity of diamonds processed. Universally accepted market phenomenon is that, whenever in a trading activity or manufacturing activity where skill and technology are involved, profit margins are high. In the case before us, we find that the net profit declared by the assessee is very low. In these circumstances, the learned AO had rightly proceeded to go in for a detailed investigation. However, we find that the learned AO did not elaborately and closely examined the books of accounts, stock register, stock movement register, diamond processing records, records pertaining to manufacturing and polishing of diamond, reconciliation of rough blocks and diamonds purchased with the closing stock giving effect to sales and wastage etc., and in particular the exact details of the rough diamonds or diamonds purchased as the case may be which is immensely important. Only by examining such records ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 29 correct yield analysis could be relied upon. The learned AO has simply proceeded on the following basis:-
(i) The assessee's contention with respect to loose papers found during the course of survey to be mere monthly estimates and not the actual figures were not acceptable because Mr. Vasantbhai Rajyaguru, the employee of the assessee has agreed in his statement that whatever figure shown in the computer printout indicates monthly summary data of actual figures.
(ii) The assessee's contention that whatever quantity mentioned in the column "rough weight" means rough diamonds and classified rough diamond into three classes (i) raw rough diamonds (ii) Chadel rough diamonds and (iii) makeable rough diamonds were not acceptable because the other diamond firms were also doing same business like assessee and were showing only two types of diamond classification -
(i) rough diamond (before rejection) and (ii) makeable diamond after rejection and were showing yield either on gross rough diamonds or makeable rough diamonds and the same was mentioned in the audit report as yield for particular year which ranges within 28% to 50%. Further, on looking at the figures of computer generated sheets the yield obtained by the assessee from rough diamonds manufactured by labour contractor was much less than that what the assessee was getting from its own unit.
(iii) The claim of the assessee that the yield mentioned on makeable rough diamond is more or less similar and whatever the minimum difference is due to repairing loss, is also not acceptable because the yield as shown in the loose paper were sometimes less than the yield as per books. If repairing loss is eminent by yield percentage as per loose paper, should always be higher than the yield percentage as per books. The claim of the assessee that the yield mentioned in loose paper is part of production process is also not genuine. Finally the learned AO concluded by making an addition of Rs.2,27,44,941/- with the following observations:ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 30
"Even in the case of assessee he has obtained yield of 29.34% during the assessment year 2005-06 with the average cost of rough of Rs.2825 per carat. Whereas during the year under consideration the assessee has used rough diamonds with the average cost of Rs.2,650/- per carat which is more or less similar in quality with respect to the quality of rough diamonds used by him in the earlier years but he has shown fall in yield in 0.73% during the year under consideration. In view of this after considering all the explanation and submissions furnished by the assessee and after taking into consideration the internal as well as external data it is justified to estimate the yield of assessee reasonably at 29% on the quantity of chadel diamond reflected by him in the audit report furnished by him for A. Y. 2006-07 and therefore, I add Rs.2,27,44,941/- to the total income of the assessee by estimating yield at 29.00% against reported figure of 28.61% as under:
"PARTICULARS AMOUNT
Polished Diamond Manufactured during
the year (CTS) 1,28,547.42
Yield of Polished Diamond as Reported 28.61%
Roughs Processed during the year (CTS) 4,49,309
Estimated yield of Polished Diamond 29.00%
Estimated Polished Diamond (CTS) 1,30,299.73
Suppressed Polished Diamond (CTS) 1752.31
Estimated Cost of Polished Diamond Per 12,980
Carat (Rs.423000000/32588.08 cts)
Addition 227,44,941"
5.1 In this case before us, the learned AR explained the reason for low
profitability was due to the complexity and unpredictability of the diamond business. Since large numbers of items of diamonds are involved, it is not possible to maintain complete production records ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 31 attributable to each item of diamonds. However, we are not in agreement with such reasoning. It is obvious that whenever manufacturing process is simple, lesser records/controls will suffice. When the process is complicated and that too involving material of high value, stricter controls coupled with accurate maintenance of records has to be adhered. In the case of diamond trade, the manufacturer or the trader necessarily has to maintain complete records with respect to purchase, processing cost, particulars of yield etc., of the diamonds dealt with. Even before a rough diamond is given to the artisan for final cutting and polishing, the manufacturer, trader knows as to what will be the yield for that variety of diamonds. The particulars in detail of every piece of rough diamond which are given to artisan are recorded by the manufacturer/trader meticulously without which control on the stock will go haywire and practically impossible to conduct the business. Therefore, it is pertinent for the assessee to maintain complete records of every piece of rough diamond purchased, labour payment made for every piece of cut and polished diamond, particulars of yield, inventory - opening stock, purchase, sale and closing stock etc. When the whole industry runs on this line, it is surprising to note that the assessee is not in possession of such records.
5.2 On perusing the manner in which the assessment order is passed, it is obvious that the learned AO relied more on estimates and reasoning instead of verifying the books of accounts and relevant documents. If due to various reasons, books of accounts are not reliable, then of- course the Ld. AO may reject the books of accounts and make assessment based on estimates. The learned AR also brought to our notice that the Ld. AO had not rejected the books of accounts citing some cogent reasons. On further analyzing the financial statements it is ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 32 evident that the appellant had made an investment of Rs.11,70,52,132/- on wind mill and claimed depreciation of Rs.4,68,20,853/- Source Page 86 of the assessee's paper book. Even after ignoring its depreciation effect the net profit of the appellant works out to 1.92% i. e., [ (4,68,20,853 + 6,38,405 ) / 2,46,69,58,888 ] x 100, which patently appear to be too low. Looking at the complexities of the business of the assessee coupled with high turnover of approx. Rs.247 Crores and further taking into account of the very low profit declared by the assessee, in the interest of justice for both the parties, we find it appropriate to remit the issue back to the file of the learned AO with direction to examine the books of accounts including stock register, stock movement register, manufacturing and processing records of diamond including register for stock movement of diamonds from one process to another process along with the paper slips maintained by the appellant with respect to the work assigned to the artisans, records pertaining to polishing of diamond and reconciliation of rough blocks and diamonds purchased with the closing stock giving effect to sales and wastage etc., other requisite documents and most importantly the details of purchases of rough diamonds or diamonds as the case may be along with the rate of purchase, justification for such rate and details from whom the purchases are made and pass appropriate order as per law on merits. Further we find it appropriate to add that the complete details of opening stock, purchases, basis of making labour payment for each and every piece of diamonds, sales, closing stock etc., may also be classified according to the following categories or any other reasonable method adopted in the industry:-
No. of pieces Total carat Values
0-5 cents " " "
ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 33
5-10 cents " " "
10-15 cents " " "
15-30 cents " " "
30-50 cents " " "
50- 1 carat " " "
1 carat and
and above " " "
Needless to mention, only as an alternative, that if the learned AO finds any cogent reason to reject the books of accounts, he may proceed to do so and pass appropriate order on estimated basis keeping in view of the intricacies and nature of such high profile trade. The assessee is also directed to cooperate with the Revenue in the assessment proceedings and furnish the requisite books and documents promptly before the learned AO. It is ordered accordingly. Thus, grounds No.1 and 2 of the appeal of the Revenue are allowed for statistical purposes.
6. The relevant facts in respect of grounds No.3,4 and 5, briefly stated are that in the profit and loss account, the assessee firm debited a sum of Rs.1,74,11,890/- as speculation loss being loss due to fluctuation in foreign exchange etc., on account of forward hedging contracts in foreign currency. As against this loss, foreign exchange gain on export of polished diamonds was shown at Rs.1,97,24,855/-. Thus, the net gain on foreign exchange was Rs.78,17,130/-. It appears that under some misconception, the loss of Rs.1,74,11,890/- was treated by the assessee as speculation loss, This mistake was pointed out to the AO by writing a letter during the course of assessment proceedings and it was submitted that the foreign exchange gain should be recomputed after taking into account the loss which is an allowable business expenditure and not speculation loss. It was explained that the loss was in respect of taking appropriate forward cover and hedging the receivables and payables in ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 34 foreign exchange from time to time and any loss arising from such hedging is in the nature of allowable business loss. The AO was convinced about the correctness of the assessee's claim but he rejected this claim with the following observations at Para 5.1 and 5.2 of his order;-
"5.1 In support of the assessee's arguments, it had also produced the relevant documents to justify the claim that the foreign currency loss of Rs.1,74,11,890 debited in the profit and loss account was in the nature of import and export operations carried out by it.
5.2 There is sufficient force In the contention of the assessee that foreign currency trading loss mentioned and disallowed in the return of income is allowable deduction on the ground that the same pertains to hedging of receivables and payable in foreign currency carried out for the operation of diamond business. At this stage, the claim of the assessee is not acceptable in view of the Hon'ble Supreme Court decision in the case of Goetze [India] Ltd. vs. commissioner of Income Tax [2006] 284 ITR 323. As per the said decision, the assessee cannot claim deduction by addressing a letter to the A O but must do so by filing a revised return. "
From the above, it is clear that even though the AO was convinced about the correctness and allowability of the assessee's claim, he rejected it on the ground that revised return should have been filed. 6.1 While the matter reached the learned CIT(A) in appeal, the assessee filed a detailed written submissions before him on behalf of the assessee firm on this issue, relevant part of which reads as under:
"Prima facie, the ratio of the decision of the Hon'ble Supreme* Court in the case of Goetze (India) Ltd., (supra) is squarely applicable to the facts of the case because as per the law, the onus lies on the assessee to make right claim and such claim must be made within the framework of provisions of Act. However, this situation, though, it is perfectly in consonance with the position of law may result into genuine hardship to the assessee as the assessee would be left with the option only to proceed under section 264 that too in case they have not gone into appeal before the learned CIT (A) on the same issue or the learned CIT (A) has mot admitted those issue. Other option would be to approach ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 35 Central Board of Direct Taxes under section 119 of the Act for getting the specific relief. Both these options involve time as well w engagement of other administrative authorities which can be otherwise devoted to other important issues. This situation has compelled us to look into the duties of the assessing authorities rather than powers of assessing authorities because Government is entitled to collect only the tax legitimately due to it otherwise the tax not so collected would be violative of the Article 265 to the Constitution of India. In such pursuit, we have found that the CBDT as back as in 1955 issued Circular No. 14 (XL-35), dated 11th April, 1955 as to what should be a Departmental attitude towards refund and reliefs to the assessees. The subject circular is reproduced below for the purpose of ready reference:
"V. Miscellaneous - Refund and reliefs due to assessees - Departmental attitude towards - The Board have issued instructions from time to time in regard to the attitude which the Officers of the Department should adopt in dealing with assessee in matters affecting their interest and convenience. It appears that these instructions are not being uniformly followed."
6.2 The learned DR relied upon the order of the AO and submitted that the learned CIT(A) was not right in directing the AO to delete the addition of Rs.1,74,11,890/- treating the same as business loss of the assessee firm while the assessee firm itself has claimed the same as speculation loss in its return of income.
6.3 It was further explained that in the aforesaid circular, the officers of the Department were advised not to take advantage of the ignorance of any assessee with respect to their rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief are due to them.
ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 366.4 Further, regarding the Hon'ble Supreme Court's decision in the case of Goetze India Ltd. Vs. CIT (supra), following arguments have been made by the assessee :-
"As far as the decision of the Hon'ble Apex Court in the case of Goetze (India) Ltd. (supra) is concerned, there is no dispute that the same is binding on everybody concerned. In the said decision, the Hon'ble Apex Court has also ruled that Appellate Tribunal may adjudicate the issue if a claim is made by any party subject to satisfaction of prescribed rules; hence, even the Hon'ble Apex Court has not barred the assessee to raise its legal claim before Appellate Authorities. However, such process would result into undue hardships, delay and multiplicity of proceedings. The Hon'ble Apex Court, on numerous occasions has laid the proposition that the Assessing Authorities are bound to compute the correct income only and collect only legitimate tax, hence, merely for a procedural lapse or technicalities, in our opinion, the assessee should not be compelled to pay more tax than what is due from him."
6.5 It was further contended by the learned LD. AR that the AO is statutorily bound to compute the total income of the assessee in accordance with the provisions of the Income-tax Act. In the present case, the assessee did not make any new claim but only pointed out to the AO that the legitimate business loss was wrongly shown as speculation loss in the accounts and therefore, this mistake should be set right by computing the total income as per the relevant provisions of the Income-tax Act. Moreover, the learned AO was fully convinced regarding the correctness of the assessee's claim but he rejected it on technical ground. It is submitted that the Hon'ble Supreme Court's decision would not be applicable to the facts of the present case, for the simple reason that no new deduction was claimed by the assessee. The relevant facts were already part of the audited accounts and therefore, the AO was requested to rectify the mistake. It was further submitted ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 37 that such loss arising on account of hedging against fluctuation of foreign exchange rates to cover the genuine Import/Export transaction of the assessee is allowable business expenditure which is substantiated from the following cases:
1l) ACIT Vs SRF Ltd - 21 SOT 122, ITAT Delhi
2) Komal Exports Vs ACIT- 19 SOT 602, ITAT Delhi
3) Apollo Tyres Ltd Vs ACIT -84 ITD 234, ITAT Spl.Bench,
Delhi
4) C.I.T. Vs. M/s. Woodward Governor India P. Ltd, 8th April,
2009 in CIVIL Appeal No.2206 of 2009 (arising out of S.L.P.(C) No.593 of 2008).
Ld. AR also relied on the ITAT Cochin Bench decision in the case of Thomas Kurlan Vs. ACIT - 303 ITR (AT) 110 inviting attention of the learned CIT(A) to the relevant part of the ratio of this case which is reproduced below from the Head Note:
"Held, (i) that though the AO is an executive officer in the administration of the Act, the function of the AO is fundamentally quasi-judicial. The taxing authorities should exercise quasi-judicial powers, and in doing so they must act in a fair and not in a partisan manner. Being a quasi-judicial authority, the Assessment Order is duty bound to determine the correct tax payable by the assessee. In arriving at such correct tax, the A0 is duty bound to allow the deductions and exemptions available to the assessee in accordance with law. When the facts were available on record before the A0 and particularly when he had noted the turnover and net profit from such business, the A 0 was duty bound to have asked the assessee why he had not: claimed the deduction under section 80HHC. The order of the Commissioner (Appeals) not admitting the claim of deduction under Section 80HHC made for the first time before him was not reasonable. Although he might not have had the power to restore the matter back to the file of the AO, at the relevant point of time, he should have admitted the claim, called for a remand report and then decided according to law instead of rejecting altogether the claim of the assessee, more particularly when the facts relating to export business and relevant turnover and profits were available in the assessment order itself."ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 38
The Ld. AR also pointed out that from the above case it is clear that the AO is duty bound to determine the correct tax payable by the assessee and to allow deductions and exemptions in accordance with law even if such deductions are not claimed. The Ld. AR also drew support from the decision of the Hon'ble Supreme Court's 3 Judges Bench in the case of National Thermal Power Company Vs CIT - 229 ITR 383 before the learned CIT(A) wherein at page 386 of the said decision the Hon'ble Supreme Court observed as under:
"Under section 254 of the Income-tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as It thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item.
The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal (vide e.g. CIT v. Anand Prasad [1981] 128 ITR 388 (Delhi), CIT v. Karamchand Premchand P. Ltd. [1969] 74 ITR 254 (Guj) and CIT v. Cellulose Products of India Ltd. [1985] 151 ITR 499 (Guj) [FB]). Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal Is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee."ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 39
It was also submitted that similar view has been taken by the Hon'ble Himachal High Court in the case of Himachal Gramin Bank Vs DCIT - 305 ITR 163 wherein the Hon'ble High Court held that even if deduction under sec.80-P is claimed for the first time before the Commissioner of Income-tax (Appeals), the same has to be considered and allowed if the conditions of section 80-P are fulfilled.
7. The learned CIT(A) considering the submissions of the Ld.AR and the citations pointed out, directed the AO to allow net foreign currency loss of Rs.95,94,760/ computed after deducting, gain already offered for taxation of Rs.78,17,130/- from the total loss of Rs.174,11,890/- and deleted the addition. The findings of the learned CIT(A) are reproduced as under:
"I have given a careful consideration to the facts and the submissions made by The A.R. appearing for the assessee as also the reason given by the A0 for not accepting the claim of the assessee. There is no dispute about the facts and the legal position. Even the A0 has accepted that the foreign exchange loss is allowable under the provisions of the Income-tax Act. The various cases relied upon by the A.R. for the assessee proves that such loss has to be set off while computing the total income of the assessee. It is also an admitted position that during the course of assessment proceedings the assessee did not make any new claim which was not there on record. The assessee only made a request that the loss wrongly shown as speculation loss in the profit and loss account has to be treated as legitimate business loss. The facts were already available on record and the A 0 was bound to compute the total income correctly in accordance with the provisions of the Income-tax Act. In my view, the Supreme Court decision In the case of Goetze India Ltd. Vs. CIT would not apply to the facts of the present case. Even if for the sake of argument it is assumed that the Honourable Supreme Court decision did apply in this case, the legitimate claim which has been rejected by the A0 and which is clearly allowable on the basis of the fact already available on record, the appellate authorities are legally bound to admit and allow such claim as per the provisions of law as held by ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 40 a larger Bench of the Honourable Supreme Court In the case of NTPC (supra). In the present case the facts are clear and the loss is required to be allowed as already discussed above. Therefore, the A.O. is directed to allow net foreign currency loss of Rs.95,94,760/- computed after deducting, gain already offered for taxation of Rs.78,17,130/- from the total loss of Rs.174,11,890/-."
8. Being aggrieved and dissatisfied with the above findings of the learned CIT(A), the Revenue is in appeal before us.
9. We have heard the rival submissions, perused the orders of the authorities below and carefully considered the material on record along with the citations referred to by both the parties. There is force in the contention of the assessee that Foreign Currency Trading loss though not claimed as business loss in the return of income is an allowable deduction since it pertains to hedging of receivable and payables in foreign currency carried out for the operation of diamond business of the assessee. The facts of the case cited in 284 ITR 323 Goetze (India) Ltd does not appear to be identical with the facts of the case before us. At this juncture, it is relevant to quote the decision rendered by the Hon'ble Supreme Court in the case of Goetze (India) Ltd. Vs CIT, 284 ITR 323 (SC) as under:
"1. Leave granted.
2. The question raised in this appeal relates to whether the appellant assessee could make a claim for deduction other than by filing a revised return. The assessment year in question was 1995-96. The return was filed on November 30, 1995, by the appellant for the assessment year in question. On January 12, 1998, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Income-tax Act to make amendment in the return of income by modifying an application at the assessment stage without revising the return.ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 41
3. This appellant's appeal before the Commissioner of Income-tax (Appeals) was allowed. However, the order of the further appeal of the Department before the Income- tax Appellate Tribunal was allowed. The appellant has approached this court and has submitted that the Tribunal was wrong in upholding the Assessing Officer's order. He has relied upon the decision of this court in National Thermal Power Company Ltd. Vs CIT (1998) 228 ITR 383, to content that it was open to the assessee to raise the points of law even before the Appellate Tribunal.
4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs."
10. From the above order of the Hon'ble Supreme Court it is evident that the Hon'ble Supreme Court held that any deduction claimed by way of letter before the Assessing Officer cannot be entertained unless and until the claim is made otherwise than by filing a revised return. However, in the case before us, the claim made by the assessee before the learned AO at the assessment stage was not a claim of deduction but rectification of the computation wrongly made without appreciating certain facts. It is well settled principle that the learned AO has to complete the assessment proceedings keeping in mind of all the relevant provisions of the Act and when particularly the assessee has pointed out the mistake committed in the computation, it is the primary ITA No.1975/Ahd/2009 (AY 2006-07): DCIT, Surat Vs M/s. Pankaj Diamonds 42 duty on the part of the learned AO to correct the mistake and make assessment according to law. But in the present case, while completing the assessment, the learned AO has not done so. Therefore, the order of the learned CIT(A) is upheld on these issues and we hereby dismiss grounds No.3, 4 and 5 raised by the Revenue.
13. In the result, appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced in the open Court on this 20th day of April, 2012 Sd/- Sd/-
(MUKUL KR. SHRAWAT) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Lakshmikant Deka/-
Deka/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad