Income Tax Appellate Tribunal - Ahmedabad
M. Kantilal Exports, Surat vs Assessee on 30 June, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, AHMEDABAD
BEFORE SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER AND
SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER
ITA No.3379/Ahd/2007
A.Ys. 2002-03
Dy. Commissioner of Vs M/s. M. Kantilal
Income-Tax, Central Exports, Ambica Niwas,
Circle-2, Aayakar Bhawan, Mohan-ni- Chawl,
Majura Gate, Surat. Varaccha Road, Surat.
PAN: AAAFM4325L
(Appellant) (Respondent)
ITA No.2469/Ahd/2008
A.Ys. 2003-04
M/s. M. Kantilal Exports, Vs Assistant Commissioner
Ambica Niwas, Mohan-ni- of Income-Tax, Central
Chawl, Varaccha Road, Circle-2, Aayakar
Surat. Bhawan, Majura Gate,
PAN: AAAFM4325L Surat.
(Appellant) (Respondent)
Revenue by : Shri K.C. Mathews,
Sr.D.R.,
Assessee(s) by : Sri Ashwin Parikh, Ld AR
सुनवाई कᳱ तारीख/ Date of Hearing : 16/05/2014
घोषणा कᳱ तारीख /Date of Pronouncement : 30/06/2014
आदेश/O R D E R
PER SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER
These two appeals pertained to the A.Ys. 2002-03 & 2003-04, respectively filed by the Revenue Department and the assessee arising from the orders of learned CIT(A)-III, Surat dated 05.05.2007 and ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04 -2- learned CIT(A)-II Ahmedabad dated 11.01.2008. For the sake of convenience these two appeals have been consolidated and hereby decided by this common order.
A) REVENUE'S APPEAL ( A.Y. 02-03 ):
2. We shall first take up A.Y. 2002-03, an appeal filed by the Revenue Department and the grounds raised are hereby decided as follows:
"1. The CIT(A) has erred on the facts and circumstances of the case and in law in restricting the disallowance on account of labour charges to Rs.10 lacs as against the total disallowance of Rs.1,08,83,214/- made by the Assessing Officer.
3. Facts in brief as emerged from the corresponding assessment order passed u/s.144 r.w.s. 145(3) of the IT Act dated 28.02.2005 were that a return declaring income of Rs.1,52,97,743/- was filed accompanied by Tax Audit report. The assessee is a partnership firm engaged in the business of purchase of rough diamonds and after polishing exported the diamonds. The assessee has also done job work of diamond for cutting and polishing. The year-wise position of the sales and the GP was as under:
A.Y. Turnover G.P. G.P.(%) Remarks
2002-03 1,06,21,19,900 9,50,38,614 8.95% Includes GP in
job work and
EOU amount.
2001-02 66,54,28,426 7,99,83,008 12.43% Includes GP in
job work
account
2000-01 88,33,84,749 8,89,74,118 10.07% ---
1999-2000 80,08,80,514 9,66,14,453 12.06% ---
ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
-3-
3.1 The first remark of the AO was that the GP had fallen down by 3.48% although there was 60% increase in the turnover. The assessee has informed that for different units separate books of accounts have been maintained for different activities as under:
Name of Activity as Turnover GP GP% Remarks
the seen from
account trading and P
& L Account
M/s. M. Purchase, mfg 959056688 92767661 9.67% ---
Kantilal and sale of
Exports diamond
(export)
M/s. M. Job work of 111103102 2270953 2.04% Separate
Kantilal mfg diamond trading and P &
Exports L Account
(Job) prepared but no
separate
balance sheet
prepared and no
separatge report
in F. No. 3CB
and 3CD filed.
M/s. M. Purchase & 748532 52069 6.96% Net Profit of
Kantilal sale of Rs.52069/-
Exports diamond taken to M/s. M.
(EOU) (Exports) Kantilal
Exports.
Separate
balance sheet
prepared but no
separate report
in F.No. 3CB
and 3CD and
10CCAC filed.
3.2 However, AO has noticed certain discrepancies and therefore invoked the provisions of Section 145 of IT Act. It was observed by the ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04 -4- AO that although the books of accounts have been produced but the basic requirement of "Production Record" was not maintained. It has also been noted by the AO that "jangads" i.e. receipts for transportation of rough and polished diamonds were not produced. It was also pointed out by the AO that the labour expenses register, manufacturing and production register and stock register were not maintained. On the basis of the above chart, AO has commented that in the unit of M/s. M. Kantilal Exports (Job) the labour receipts were of Rs.11,11,03,102/-, however, a meager profit of Rs.22,70,953/- was disclosed, giving GP profit @ 2.04%. On the basis of the verification of the accounts of the said unit it was noted by the AO that certain incidental expenditure like salary, wages, angadia charges, conveyance, brokerages, interest, rent etc. were not shown in the books of accounts. Even in the unit i.e. EOU unit a small turnover of Rs.7,48,532/- was disclosed which was not supported by separate report.
The assessee had offered its explanation that in the 'Job Unit' the assessee had received rough diamonds from M/s. Classic Diamonds Ltd. The assessee on receiving rough diamonds had given those rough diamonds to various job workers. The assessee's explanation was that he had earned about 2% commission income. No workers have been employed for manufacturing of diamonds. But the AO had rejected that explanation and mentioned that the separate "trading account" of job work was prepared where job work receipts disclosed of Rs.11,11,03,102/- were duly credited in the account. Side by side, on the other hand, Labour Charges of Rs.10,88,32,143/- were debited. According to AO, it was found that there was no mention of receipt of 'commission' in the said account. All the cheques were received from the supplier were deposited in the bank account of the assessee and in turn ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04 -5- cheques were issued to labourers. According to AO, this type of transaction could not be treated as an activity to earn only commission. To verify the correctness of the claim, the AO issued summons u/s.131 to the job workers. Some of the summonses were served and some remained un-served. Few of them have complied with the notice. It was also commented by the AO that a search in the year 1999 was conducted and it was found that the registration certificate by Surat Municipal Corporation (SMC) for those job workers were found from the business premises of M/s. M. Kantilal Group, whose addresses were the same as that of factory premises of M/s. Kantilal Group. Some of the job workers were interrogated. According to AO, those were not the independent job workers, but were employees of the group. Those employees must be getting small monthly basic salary. Even, the machinery/equipment used to cut the diamonds did not belong to the job workers, but belonged to M/s. M. Kantilal Group. Even, those job workers have given blank cheques signed by them to assessee so they had no control over their respective bank accounts. The AO has thus formed an opinion that there was no evidence in support of the claim of labour expenses of Rs.10,88,32,149/-. The observation of the AO was as under:
"During the year under reference, the assessee firm has claimed labour expenses of Rs.10,88,32,149/- in respect of its job work account, however, not even an iota of evidence had been furnished for the labour expenses. The names of these job workers and their whereabouts have not been disclosed to the department till date. This has cast a shadow of doubt about the existence of these job workers. Similarly, the assessee firm could not furnish the necessary slips called "jhangad" for the movement of rough diamonds to alleged job workers. These are claimed to have been disposed off or destroyed by the assessee (order sheet entry dated 21.02.2005.) I fail to understand as to how such a crucial piece of evidence has been destroyed by the assessee. This was affirmed on 21.02.2005. However the assessee has some how or other managed to enclose five Xerox copies of jangads in its submission dated 28.02.2005, the authencity of same is doubtful. In any case the labour expenses of Rs.10.88 crores and 9.60 crores have remained unverified."ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04 -6- 3.3 An inspector of the office was deputed who had conducted an inquiry and submitted his report. It was found that the assessee has furnished incorrect information. It was also noted by him that the assessee group was having common electricity connection. It was also informed that huge amount of 'labour charges' were outstanding as on 31st March, 2002. None of the labourers were owning the machinery and none of them were having electricity connection in their names. It was also noted that those labourers were puppets of the assessee. The assessee had shown slight increase in the payment of labour charges. Earlier it was Rs.245 per carat, but for A.Y. 2002-03 the assessee had shown a flat rate of Rs.300 per carat. The AO's objections were as under:
"It is also seen that the assessee has shown the labour charges payments at the flat rate of Rs.300/- per carat in all the cases of the group such as M/s. M. Kantilal Exports, M/s. Anjana Exports and M/s. R. Vipul & Co. It was Rs.245/- per carat in A.Y. 1998-99, Rs.222/- per carat in A.Y.1999-2000, Rs.239.50 per carat in A.Y. 2000-01. The figures of A.Y. 2001-02 are not being considered since the consumption and production of diamonds is disputed in appeal. The average rate of labour charges in earlier three years was Rs.240/- per carat. It is also established fact of the diamond industry that labour charges vary from lot to lot of diamond depending upon quality of diamond such as goli, Russian, german etc., size of diamond purchase price of diamond as also other factors such as colour and cleanliness of diamonds. There cannot be any flat rate of diamond labour as allegedly claimed by the assessee."
3.4 According to AO, there could not be an identical rate of job charges for all the lots of diamond processed. So, it was held by the AO that the claim of payment of Rs.300/- per carat was excessive. In earlier years, it had varied from Rs.245 per carat for A.Y. 1998-99 to Rs.220 per carat for A.Y.1999-00. For A.Y. 2000-01 the payment was @ Rs.239 per carat. According to AO, the average rate in earlier years was Rs.240 only. An another logic has also given by AO that the average purchase price of rough diamond was Rs.672 per carat and the sale price was of ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04 -7- Rs.7,290/- per carat, which was towards lower side than the price of the earlier years. According to AO, there was no logic to give average rate of Rs.300/- per carat for labour charges for the year under consideration.
4. In the light of the above factual background, we have heard both the sides. From the sides of the appellant, learned DR, Mr. T.P, Krishna Kumar appeared and from the side of the respondent assessee learned AR Mr. Ashwin Parekh appeared.
5. After hearing the submissions of both the sides. One fact had come to our notice as noted in paragraph 8 of the assessment order that in Diamond Industry, the labour charges vary from lot to lot, depending upon the quality of diamond manufactured. Labour charges are also being paid depending upon the size of the diamond and other allied factors. Therefore, it was noted that there should not be any flat rate of labour charges for manufacturing / cutting / polishing of diamond. On account of this reason, we are not in agreement with the finding of learned CIT(A) that a uniform rate of Rs.300 could be paid by the assessee as a labour charges. It appears to be impractical that an identical/alike rate of job charges could be paid for all the lots which were processed by the job workers. Certain other doubts have also been raised, such as, an huge amount of labour charges remained outstanding at the end of the financial year. Therefore, a basic question is that whether an abrupt increase in the labour charges in the year under consideration was justifiable or not? Whether such an increase was in the normal course of business? A doubt has also been raised that why these type of workers were working with different masters at the ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04 -8- same time. All those points have been questioned by the AO, therefore, we hereby hold that it was wrong on the part of learned CIT(A) to comment that the AO had not brought any adverse findings on record. Rather, learned CIT(A) has said that the complete record of labour charges were not produced and only few persons have appeared before the AO, hence, according to us learned CIT(A) has simply expressed a probability that labour payment was excessive.
5.1 An argument has been raised before us that in the past the labour charges as claimed by the assessee have been accepted by the Revenue Department. However, in this connection, we want to say that the doctrine of res judicata is not strictly applicable in tax matters. Each assessment year is independent of others. Issue relevant to a particular assessment year is to be considered and decided on the facts pertained to that particular assessment year, irrespective of the fact that the same issue had arisen in earlier years. In any case, the present factual situation is that the specific record about the payment of labour charges had not been maintained by the assessee, therefore, there was no alternative but to adopt an estimation. The AO had thought it proper that the abrupt increase of Rs.300 per carat from the previous year payment of Rs.240 was excessive; hence, the difference between the two, i.e., Rs.60 was disallowed. The final finding as also the calculation of the disallowance was as under:
"In view of detailed discussion on labour expenses and applicability of the provisions of Section 145(3) of the Act in the earlier paras, it is clear that the assessee has failed to explain the genuineness of the labour expenses and to substantiate increase in the rate of labour charges from average labour charge at the rate of Rs.240/- per carat in earlier assessment years to Rs.300/- per carat. Considering the above findings diamond labour charges at the rate of Rs.60/- per carat for 320088.22 carats of diamonds which work out to Rs.1,92,05,203/- are disallowed."ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04 -9- 5.2 When the matter was carried before the First Appellate Authority an adhoc disallowance of Rs.10 lac was sustained and the balance was deleted.
5.3 Instead of granting adhoc relief, we are of the view, that a reasonable rate should have been applied by learned CIT(A). To cover up all the points or objections raised by the Revenue Department as also to give justice to the respondent assessee we hereby hold that it would be fair and reasonable to allow labour charges @ Rs.270 per carat, instead of Rs.300 per carat as claimed by the assessee. In this manner the short comings of the assessee shall also be addressed. The outcome of this direction should be that the labour charges payment to the extent of Rs.300 per carat, as claimed by the assessee, is now to be disallowed and side by side the rate of Rs. 240/- as adopted by the A.O.is also not approved. According to us to settle the issue being very old it is appropriate to adopt an average rate which comes to Rs.270/- per carat. This rate can be applied on the total diamonds in carats meant for the labour charges. The A.O. had applied the rate on the diamond weighing 320088.22 Carates. Now on this weight if apply the rate of excess payment of Rs.30/-, as decided by us, then the disallowance shall be of Rs. 96,02,640/-. We hold accordingly. In this manner, the ground raised by the Revenue is hereby partly allowed.
6. Ground Nos. 2 and 3 are reproduced below:
"2. The CIT(A) has erred on the facts and circumstances of the case and in law in deleting the addition of Rs.4,64,36,371/- made by the Assessing Officer on account of under valuation of closing stock of polished diamonds.
3. The CIT(A) has erred on the facts and circumstances of the case and in law in not considering the fact that the valuation made by the assessee is without any method whereas the Assessing Officer has valued it as market rate."ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 10 -
7. For the purpose of valuation of the closing stock of polished diamond, the AO had made a list of sale of polished diamond for the month of March, 2002. Total sales as per 24 invoices was stated to be for a sum of Rs.11,56,42,548/- in respect of 14022.08 carats. The average sale price of the diamond during the month of March, 2002 was therefore calculated at Rs.8,247/- per carat. As per AO, the average sale price for the month of February, 2002 was Rs.5635/- per carat. The AO has calculated the average sale price of the year at Rs.7772/- per carat. The AO's version was that the sale price had never fallen below Rs.5635/- per carat during the year. But the appellant had shown closing stock of the polished diamond at the average rate of Rs.4650/- per carat. According to AO, the assessee has under valued the closing stock. The AO's objection was that the assessee had not produced the stock register. The AO has also computed the average manufacturing cost per carat at Rs.6969.41, therefore, the AO has opined that the value of the closing stock at Rs.4650 per carat was not possible. He has therefore made an addition on account of under valuation of closing stock at Rs.4,64,36,371/- as follows:
"The closing stock is to be valued at cost or realizable value whichever is lower. If the basic principle of valuation is adopted, the assessee's submission is self explanatory that there is definitely under valuation of closing stock. The valuation of closing stock can never be less than cost. And realizable value of the polished diamond is determinate from sale instances of succeeding assessment year. The assessee has itself submitted few sale instances at its convenience to show sale at lower rate made in succeeding assessment year. This is not reliable piece of evidence as it has not been correlated with the closing stock as at 31.03.2002. Otherwise also the submission goes against the assessee, if the assessee's point of view is accepted for the time being, in as much as as per the selective sale instances furnished by the assessee, also the sale price of polished diamond was upto Rs.5894 per carat. Considering sale instances of diamonds as at the end of the year, there is no logical reason as to why the value of closing stock of diamonds should not be adopted at Rs.8247/-. The average value of sale is Rs.5635 per carat for the month of ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 11 -
February 2002 and Rs.6387 for the month of January 2002. The valuation of closing stock of polished diamond is much lower as compared to any of the criteria that can be adopted. The manufacturing cost to the assessee is Rs.6969.41 per carat. In that case the valuation of polished diamond can never be less than Rs.6969.41. The incorrect method even if followed over the years has to be rejected if no correct income can be deduced from it. In facts and circumstances, I am convinced that this is a glaring case of under valuation of closing stock of polished diamond. I accordingly after considering the assessee's submission in this regard, make an addition of Rs.4,64,36,371/- to the book results as worked out as under:
Closing Stock of polished diamonds (12909.74 Ct. x Rs.8247/-) as discussed Rs.10,64,66,708/- Less : Value of closing stock shown Rs. 6,00,30,337/-
Unaccounted closing stock of polished diamonds : Rs.4,64,36,371/-."
8. When the matter was carried before the First Appellate Authority, learned CIT(A) has held that if one method of valuation for the closing stock was adopted by the AO in the past, then the same method should also have been made for the current year. According to him, the addition was made on hypothetical basis. The addition was deleted after assigning following reasons:
"I have considered the submissions and have gone through the various documents furnished before me. It is seen that the AO has made the addition disregarding the evidences to the effect filed during the course of assessment proceedings. A perusal of the export invoices of the year show that the appellant's contention of having sold superior quality diamonds during the year is correct. It is a normal practice in any trade that a superior quality item gets sold more easily and quicker than an inferior quality item. This is more so in diamond business, where superior quality diamond are in high demand whereas the inferior quality ones are sold with difficulty and at a lower realizable value. The AO has taken the details of sale for the month of January, February & March only and has worked out the average sale price of the year at Rs. 7,272/- per carat and has also stated that the sale price never fell below Rs.5,635/- through the year but has not taken into account the sale invoices or the calculations given by the appellant to appreciate, the fact that the appellant's version of being left with mostly inferior quality diamonds at the end of the year could be correct. In view of this, it appears that the AO has made the addition by adopting a higher average price for closing stock on the basis of conjectures and surmises only in total disregard of appellant's explanation. It is also seen that the invoices of export made in ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 12 -
the next A.Y. show the average sale price at Rs.4,650 per carat only and therefore it supports the appellant's contention of having valued the closing stock at Rs.4650 per carat. I am also inclined to agree with the appellant that the anticipated sale value of this stock would be Rs.6,65,22,980/- and since the gross profit during the year was 9.76%, the total cost of closing stock would be the same as declared by the appellant. I am also in agreement with the appellant that such an addition to closing stock would result in higher opening stock for the next year which would be a revenue neutral exercise. Further, the opening stock of the current year would also have to be amended, since the same method of valuation would have to be adopted for opening stock also. In view of this, such an addition made on hypothetical basis and without appreciating the submissions of the appellant is not sustainable and is hereby directed to be deleted. The appellant gets a relief of Rs.4,64,36,371/- on this account."
9. We have heard both the sides and examined the facts of the case. The facts of the case have revealed that the opening stock of 39438 carat of polished diamonds was valued at Rs.21,51,04,188/- depicting an average rate of 5497 per carat. The assessee on one hand has stated that the 'quality wise stock' maintenance was not possible, but on the other hand an explanation was offered before learned CIT(A) that the total stock manufactured had two types of diamond, one was having higher rate of sales and other type had low rate of sales of the diamond. Further, in respect of valuation of diamonds, the assessee has furnished a list of superior quality diamond sold during the year. If that list could be prepared by the assessee then why the complete list with quality and quantity of diamond could also not furnished before the AO? Learned CIT(A) has simply said that the addition was merely on hypothetical basis, but according to us it was an incorrect observation. What the AO has adopted was in fact based upon the material on record, i.e., details of the sales made in the month of March, 2002 and likewise the sales of few other months of the financial under consideration. According to the said details a sum of Rs.8,247/- per carat was found to ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 13 -
be the average sale price for the month of March, 2002. In a situation when there was no other convincing factor to determine the exact valuation of the polished diamond as furnished by the assessee; we are of the view that the valuation of the polished diamond could have been made by adopting the basis of the sale of the last month of the accounting period. This figure can thus be a starting point for the calculation. Hence, by comparing the sale price of the last month a reasonable view can be adopted about the exact position of the valuation of the closing stock. The assessee had adopted the average value of the polished diamond in the closing stock at Rs.4,650/- however the value per carat of the diamond in the month of March, 2002 was Rs.8,247/-. We therefore comment that the average price at Rs.4,650/- per carat was towards lower side. To resolve the issue a mid path can be adopted.
9.1 As a general rule, a profit of a business can only be determined by taking into account the valuation of the stock. There has to be a comparison at the opening with the closing of the accounting year. So as a normal rule, a profit is to be ascertained by valuing stock-in-trade at the beginning as also at the close of the accounting year. There is one more well accepted rule that the valuation can be adopted by taking into account the cost price or the market price whichever is lower. Normally, according to this system, on the first occasion, the stock is brought in at cost price. If any portion thereof is left unsold at the close of the year, the value to be entered therefor, according to this system of accounting, is its market price. If it is found that such market price is below cost, valued accordingly but that would be the valuation of the opening stock of the subsequent year. This method of writing up accounts would result in ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 14 -
depressing the profits earned during the year, since it would set off an unrealized loss against the realized profits of the year. Naturally, such method runs counter to the cardinal principle of revenue law that no loss should be entered in the year of account, unless the loss has been actually realized and suffered. The justification given from the Courts upholding this practice is that any provision which might be made for an estimated loss, by adopting the lower market valuation, would be erased and set off, if the market improved in the subsequent year or by the time the goods were actually sold. So, the method of accounting at the lower market value when it is below cost, is in order to enable the trader to distribute his loss more evenly, whenever there is loss. Then the justification of stock has to be seen as per either LIFO or FIFO method. But in a period of rising prices of the raw material, the price of the finished product would go up. In such a case, unless the raw material used up in the manufacture is identified with its purchases at a particular price, it could be difficult to strike the profit of the business correctly. It is simple in a situation, where the quality of the raw material is the same with the quality of the finished goods. But in those circumstances where the quality of the raw material changes drastically and value is also increased drastically then because of the value enhancement due to quality enhancement the valuation of the closing stock has to be adopted at a reasonable price. From the records, it is not clear whether LIFO method was consistently followed or not. It is also not clear whether in this particular year the assessee had adopted FIFO method because one of the argument is that the old stock remained unsold. It is for the AO, after examining the facts, to consider whether it would be fairer and more appropriate to apply the rate which is relevant to ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 15 -
ascertain the value of the closing stock. Naturally the value of the stock prevailing on the last day of the accounting period is relevant, however, the value prevailing on the first day of the accounting period is not at all relevant in the present situation, especially, when the assessee has failed to bring any material necessitating for making any corresponding changes in the value of the opening stock. In the present case, due to lack of information about the quality of the diamonds, the AO was in difficulty to correctly assess the valuation. Therefore, it is correct to disturb the valuation at least for the year under consideration so that the discrepancy as noted in respect of the quality of the diamond can to some extent be rectified. We, therefore, hold that this year can be treated as a demarcating year from the past years; hence, without disturbing the value of the opening stock, the AO is authorized to change the method of valuation for valuing the closing stock. With this theory in mind, we hereby hold that an average of the two valuations is the right solution. The average of the two valuations is 6448/-. To resolve this long pending issue, according to us, is a reasonable and fair approach to compute the value of the stock of the polished diamond at Rs.6448/- per carat as an average value of the closing stock. Closing stock of the diamond was 12909.74 Ct. and by applying the rate of Rs. 6,448/- the value to be worked out is Rs.8,32,42,003/-, out which the value declared as per assessee is to be reduced of Rs. 6,00,30,337/; thus the balance comes to Rs. 2,32,11,666/-. We, therefore, do not approve the total deletion of the impugned addition, and restrict the addition to this extent only. In this manner, this ground of the Revenue may be treated as partly allowed.
10. Ground Nos.4 and 5 are reproduced below:
"4. The CIT(A) has erred on the facts and circumstances of the case and in deleting the addition of Rs.4,30,07,818/- made by the Assessing Officer on account of under valuation of closing stock of rough diamonds.ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 16 -
5. The CIT(A) has erred on the facts and circumstances of the case and in law in not considering the fact that the valuation made by the assessee is without any method whereas the Assessing Officer has valued it at market rate."
11. It was noted by the AO that the valuation of the rough diamond was @ 734.73 per carat. The AO has made a list of purchase of rough diamond from the month of December, 2001 to March, 2002; relevant portion is extracted below:
Month Rough Amount (Rs.) Average of
diamonds purchase price
carats
December 2001 129779.31 175,484,456 1352.18
January 2002 233199.17 122,584,442 525.66
February 2002 7950.24 82,273,067 1040.77
March 2002 946.43 6,009,802 6349.97
Total 442975.15 386,351,767 872.00
11.1 The assessee had valued the closing stock of rough diamond @ 734 per carat as against that as per the above chart the average cost of rough diamond was at Rs.872.17 per carat. The addition by the AO was made in the following manner:
"As stated earlier the assessee firm has not adduced any reason whatsoever for drastic fall in G.P. of 3.48% i.e. from 12.43 to 8.95%. Considering that the fall in G.P. is not explained by the assessee and the book results have been rejected for the reasons discussed elaborately in foregoing paragraphs, G.P. of Rs.3.48% amounting to Rs.3,69,61,773/- is estimated. However, since additions of Rs.1,92,05,203/- on account of inflation in labour expenses Rs.41,80,910/- on account of disallowance of electricity expenses and Rs.4,64,36,371/- on account of under valuation of closing stock of polished diamond and Rs.4,30,07,818/- for under valuation of closing stock of rough diamonds have been made, the assessee is allowed benefit of telescoping."
12. When the matter was carried before the First Appellate Authority, it was explained that the AO had made the addition by adopting average cost of purchase at Rs.872 per carat. But according to assessee, the ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 17 -
average cost of purchase was Rs.674/- per carat. Learned CIT(A) has granted relief as follows:
"I have gone through the details and find that as per the show cause notice issued by the AO dated 21.02.2005, the AO has proposed that the average purchase price should be Rs.674/- per carat and it is only to increase it to the desired level that the AO has included, the purchases for the month of December, 2001 as also while finalizing the assessment order. There is no justification of including four months purchases just to increase the average cost of closing stock specially, in view of the fact that the purchases of the last three months would be sufficient to cover the closing stock. It is seen that the purchases in the months of January, February, March was 3,13,195.84 carats and this tock of rough diamonds at the end of the year was 3,11,650.86 carats. I am inclined to agree with the appellant that the rough diamonds purchased prior to this period would have been consumed for production of polished diamonds and I also see no justification in AO's action in including the purchases for December, 2001 also for working out the value of closing stock. Going by that logic, there was nothing to prevent the AO from considering the purchases of may be six or seven months before the close of accounting year to arrive at an average cost which would have resulted in a higher or lower value of closing stock. It appears that the AO has considered last four months purchases simply to arrive at a higher value of closing stock and therefore such an addition based on premises is not sustainable and is hereby directed to be deleted. The appellant gets a relief of Rs.4,30,07,818/- on this account."
13. We have heard the submissions of both the sides. We have perused the material placed before us as also the arguments of both the sides. The assessee had valued the closing stock of rough diamond @ Rs.734 per carat; however AO has computed the average cost of four months @ Rs.872.17 per carat. The average of the two comes to Rs.803 per carat. One of the settled view is that the valuation of the stock is to be made at the market price or the cost price, whichever is lower. But in a situation, as in the case of the assessee, when the complete information about the quality of the stock is not made available then to resolve the issue a middle path is to be adopted. Therefore, considering the totality of the circumstances and the facts narrated that the assessee was in possession of the rough diamond; hence, the difference of the two, i.e., purchase cost ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 18 -
(- minus) sale cost is the correct method for determining the valuation of the rough diamond. The average of the two is Rs.803 per carat, which according to us is required to be adopted by replacing the closing stock of diamonds calculated by adopting the average rate at Rs.734.73 per carat. In this manner, this ground of the Revenue is also partly allowed.
14. In the result, Revenue's Appeal is partly allowed.
B. Assessee's Appeal (A.Y. 2003-04)
15. Now, we shall take up the assessee's appeal for A.Y. 2003-04 and the grounds are hereby decided as follows:
"The learned CIT(A) had grievously erred in law and on fact in confirming the rejection of books of accounts without any defects u/s.145(3) of the Act. The books of accounts should held as proper."
16. Facts in brief as emerged from the corresponding assessment order passed u/s.144 r.w.s. 145(3) of IT Act were that the return showing an income of Rs.1,85,70,763/- was filed. The AO had raised a query that why the books of account should not be rejected and that in the absence of convincing records the labour expenses should not be disallowed and further on account of under valuation of closing stock of polished diamonds an addition should not be made. The AO has noted that books of accounts produced consisted of "janghads". However, the day to day production record was not produced. According to AO, the bunch of "Janghads" could not explain the day to day production because there was a consumption of 4,81,710.91 carats of rough diamonds and there was production of 1,63,185.65 carats of polished diamonds. According to AO, there was lower gross profit rate in accordance with the following chart.
ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 19 -
A.Y. Turnover G.P. G.P (%) Remarks
2003-04 1,20,18,79,346 8,58,81,909 7.14% Includes GP in
job work and
EOU account
2002-03 1,06,21,19,900 9,50,38,614 8.95% Includes GP in
job work and
EOU account
2001-02 66,54,28,426 7,99,83,008 12.43% Includes GP in
job work
account
17. On the basis of the above chart, it was found that the gross profit had fallen by 1.81% as compared to the preceding year. It was also noted by the AO that there was increase of about 13% in the turnover. The assessee had pleaded that it had maintained separate books of account for different activities and for each activity the profit was separately calculated as per the following chart.
Name of Activity as Turnover G.P. G.P. Remarks
the seen from
account trading
and P&L
account.
M/s. M. Purchase, 111,43,26,376 84025238 7.54% ---
Kantilal mfg. and
Exports sale of
diamond
(export)
M/s. M. Job work 87547877 1855965 2.12% Separate
Kantilal of mfg. trading and
Exports diamond P&L a/c.
(JOB) prepared but no
separate
balance sheet
prepared and no
separate report
in 3CB & 3CD
filed.
ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 20 -
18. However, the AO was not convinced; hence, to verify the genuineness of the job work labour expenses; issued summons u/s.131 to different job workers. Summons could not served as received back unserved and it was found that the job workers were not traceable. Due to that reason the details furnished by the assessee in respect of job work expenses could not be verified. The labour expenses claimed were Rs.8,56,91,912/- in "job work account". The assessee was also not able to produce day to day slip for the movement of the rough diamond. The 'janghads' in respect of big lots were stated to be produced only. An another point has also been touched by the AO that the electricity expenses debited by the assessee of Rs.86,79,991/- out of which a sum of Rs.28,82,375/- was charged from labour job workers. According to AO, there was no basis of the said apportionment and how the balance was reflected in the trading account of M/s. M. Kantilal Exports (Job). The AO has opined that the books of accounts did not reflect the correct affairs of the business. The AO had invoked the provisions of Section 145(3) of IT Act. For the invocation of the said provision certain reasons have been given by the AO, however, but keeping brevity in mind not reproduced by us. In the absence of number of days of the manufacturing and the production register a doubt had arisen. So as to ascertain discrepancies in labour expenses account, electricity account and difference closing stock of diamond; the AO has rejected the books of account. It was also noted by the AO that a survey u/s.133A of IT Act was carried out at the different premises of the group on 18.12.2002. A statement of one of the partner, Sri Kanjibhai Manjibhai recorded. He has stated that the electricity bill and some other common expenditure were borne by the firm M/s. M. Kantilal Export. He has also stated that firm ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 21 -
was paying Rs.250 to Rs.300 per carat for labour job charges. The Revenue Department wanted the details of the rough diamond receipt and the polished diamond sent back for the period under consideration but it was informed that such details can be available from the main office of the firm, i.e., Ambica Niwas. On inquiry, it was found that monthly details were already removed from the computer. It was found from the records of the head office that around 500 workers were working however no details of the work done by those job workers were available for the period of 8 months. Few accounts of few workers doing the work of diamond cutting "Mathara, i.e., Top Tariya, i.e., Bottam, Pel i.e., design cutting were found. But the record for the earlier period was not available. Again the AO has commented that the firm had not maintained complete production record. Therefore, books of account is rejected which was challenged before learned CIT(A).
18.1 After considering the explanation of the assessee and the reasons given by the AO for rejection of books of account learned CIT(A) has held as under:
"I have carefully considered the assessment order and the above submissions. The AO has given the reasons for not accepting the explanation of the assessee on account of the defects stated by him. It is a fact that the labour payment was not verifiable as stated in detail in the assessment order and that the day to day consumption and production record of quantity and quality is not maintained. Even in survey complete records were not available. Hence the assessing officer is justified in applying section 145(3) of the Act. The first ground of appeal is accordingly not accepted. It is observed that merely because in the earlier years the book results are accepted and no addition is made, it does not justify the assessee's plea that the same status should be applied for the subsequent year. This ground of appeal is, therefore, rejected."
19. After hearing the submissions of both the sides and considering the totality of the facts and circumstances of the case as also the incomplete ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 22 -
information found at the time of search/survey operation, we hereby hold that there was no fallacy in rejecting the books of account by the Revenue Authorities. A view taken by learned CIT(A) is hereby confirmed. This ground of the assessee is dismissed.
20. Ground Nos. 2 and 4 are reproduced below:
"2. The learned CIT(A) had grievously erred in law and on fact in confirming the disallowance of labour expenses at Rs.2,89,02,654/- paid at market rate of Rs.300/- per cts. which was allowed in A.Y.2001/02. The addition should therefore be deleted.
4. The learned CIT(A) had grievously erred in law and on fact in confirming the disallowance of labour expenses of Rs.85,69,191/- at 10% of job labour payment to sub-contractors without appreciating the only commission charge entitled to appellant at 2.12%. The addition of Rs.85,69,191/- should be deleted."
20.1 These two grounds are connected with each other, therefore, consolidated and decided as under.
20.2 The AO has issued summons u/s.131 to different labourers to verify the claim of labour expenses. Few labourers have attended and their statements were recorded. The AO wanted the details of the work done by them but that could not be produced. In the light of their statements and the defects found in the books of account, the AO has observed certain defects as under:
"9.2 The alleged job workers have depicted to be working in different factory premises owned by M. Kantilal group of cases and no rent is paid by them. No plant and machinery are owned by them. As regards electricity expenses, it was deposed by all the alleged job workers as listed above that regards electricity expenses, it was stated that they are sharing electricity expenses in proportion of the turnover that is job work receipts in their hands. However, it is obvious from the above mentioned chart that these are fabricated and "make believe figures". In the case of alleged job worker at Sr. No.3 the job work receipts is shown at Rs.33,28,513/- but the electricity expenses are just 1/3rd at Sr.No.6 which stands at Rs.21,684/-. This is preposterous. The same sort of contradiction appears with reference to ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 23 -
alleged job worker appearing at Sr. No.8 & 9 as above. As stated earlier they have not furnished the requisite details called for in the summons. As such though some of the alleged job workers have attended in response to summons issued u/s.131 and the veracity established as such, there confirmation of having done labour job work of the assessee firm is preposterous and not believable to be true. The alleged job worker shown as such in the books of account and by filing their returns of income in their names under the management of M/s. M. Kantilal Group is nothing but distortion of facts to suit its convenience."
20.3 Therefore, it was noted by the AO that the alleged labourers did not own plant and machinery. There was disparity in electricity expenses. The job workers have not furnished the details of the payments received on completion of job workers. According to AO, it was a modus operandi of the assessee to diversify the profit by showing alleged expenditure to job workers. Further, an objection was raised by the AO that the assessee had shown labour charges at the flat rate of Rs.300 per carat in all cases. On comparison, it was found that in A.Y. 1998-99 it was Rs.245 per carat, for A.Y. 1999-00 it was Rs.222 per carat and for A.Y.2000-01 it was Rs. 239.50 per carat. The average rate of labour charges in earlier years was thus Rs.240 per carat. The AO has disbelieved a flat rate given for job work because according to him in the diamond industry the labour charges vary from lot to lot depending upon the quality of the diamond manufactured by those labourers. After discussing few case laws, a disallowance for labour expenses was made by the AO as under:
"9.10 In view of detailed discussion on labour expenses and applicability of the provisions of section 145(3) of the Act in the earlier paras, it is clear that the assessee had failed to explain the genuineness of the labour expenses and to substantiate increase in the rate of labour charges from average labour charge at the rate of Rs.240/- per carat in earlier assessment years to Rs.300/- per carat. Considering the above findings diamond labour charges at the rate of Rs.60/- per carat for 481710.91 carats of diamonds which work out to Rs.2,89,02,655/- is disallowed."ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 24 -
20.4 This action of the AO was challenged before learned CIT(A). After considering a remand report furnished by the AO in the past, learned CIT(A) has upheld the addition in the following manner:
"5.2 I have considered the assessment order and the above submissions on this issue. 1 find that the appellant has from year to year raised the amount of job work charges. It is also found that it is not in dispute that the job workers are not having any infrastructure facility of their own like machinery, their own premises or their own electricity connection. Even the appellant has accepted this fact in the submissions made before me. It is also noticed that ail the job are having place of business, registered at the premises of the appellant group. It is in view of this fact that the A.O. has not accepted the genuineness of payment. At the same time it is also noticed that out of 19 persons, only 9 persons had remained present, 4 persons were not available at their given address and that the appellant could not produce them for verification. The appellant's explanation is also contradictory in as much as it is stated by the job workers that they are sharing the electricity expenses proportionally and against this explanation in the appellants submission in para 6 on page 8, it is specifically accepted-that electricity charges are borne by the appellant. In the circumstances, though the job workers have been filing their income tax returns, the payment made to them is not accepted by the A.O. on the ground that it is only in order to adjust the profit of the appellant. If the infrastructure facility is provided by the appellant, there is no reason for increasing the job work charges from year to year, that too without any basis. Considering all these aspects I confirm the addition made by the AO on this ground. The assessing officer has disallowed the payment to the extent of the higher payment at Rs.60/- which is increase in the year under consideration and this disallowance is most reasonable. This ground of appeal is, therefore, dismissed."
21. From the side of the appellant, learned AR, Mr. Ashwin Parekh appeared and pleaded that the diamond industry is a labour oriented industry and therefore without the help of trained labourers the polishing as well as the cutting of diamond could not be possible. He has therefore pleaded that considering the huge turnover of the assessee of the polished diamonds it is justifiable to allow the labour expenses.
22. From the side of the Revenue, learned CIT-DR, Mr. T.P. Krishna Kumar appeared and supported the action of the AO and learned CIT(A).
ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 25 -
23. While deciding the appeal of the assessee for A.Y. 2002-03, we have dealt with this issue wherein we have noted that one of the admitted fact was the labour charges are different from lot to lot depending upon the quality of the diamond manufactured. We have also noted that while explaining the correctness of the valuation of the stock in the past year, the assessee himself had taken a plea that the diamonds are of two qualities, a superior quality and inferior quality; hence, the valuation of such type of diamonds effect the over all valuation of the closing stock. Therefore, we have opined that it was impractical to pay an identical rate of job charges to all the job workers. Certain other doubts have also been raised such as a huge amount of labour charges remain outstanding at the end of the financial year. Facts of the year under consideration are identical with the facts as discussed above for A.Y.2002-03. For A.Y. 2003-04, as well, the AO had allowed Rs.240 per carat labour charges as against the claim of the assessee of Rs.300 per carat. To recover up all the points and the objections raised from both the sides it was decided supra that it would be fair and reasonable to allow labour charges @ Rs.270 per carat. We hold accordingly and the AO is directed to re- compute the disallowance. Resultantly, this ground of the assessee is partly allowed.
24. Ground No.3 is reproduced below:
"The learned CIT(A) had grievously erred in law and on fact in confirming the addition of Rs.3,75,67,484/- on account of valuation of Closing Stock of polished diamond made at cost which the Assessing Officer determined at market rate of March, 2003. The Addition of Rs.3,75,67,484/- should be deleted."ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008
Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 26 -
25. The AO has prepared a chart of the sales by mentioning the invoice number, the carats and the amount of sale and on that basis he has noted that for the month of March, 2003 the average sale price of the diamond was Rs.9,966/- per carat. However, the assessee had valued the closing stock of polished diamonds @ Rs.8790 per carat. The assessee's reply was that the average manufacturing cost of the diamond during the year per carat was Rs.7327, therefore, the value of the closing stock of the polished diamond shown by the assessee at Rs.7890/- was reasonable. The assessee has tried to explain that the polished diamonds of lower quality were remained in the closing stock. However, the AO was not convinced primarily on the ground that the assessee had failed to substantiate that explanation with support of any documentary evidence. Further, as per AO, the assessee had not furnished any detail about the manufacturing cost of the diamond. According to him, the valuation of the closing stock could never be less than the cost; however, the realizable value of the polished diamond can be determined from the sales instance of the succeeding year. The assessee has not submitted any sales instance of subsequent year to explain its stand. The AO has therefore computed the value of the closing stock as under:
"Closing Stock of Polished diamonds (31945.14 ct. X Rs.9966/-) as discussed Rs.31,83,65,265/-
Less: Value of closing stock shown Rs.28,07,97,781/-
Unaccounted closing stock of polished diamonds: Rs. 3,75,67,484/-
26. Against the said addition, the issue was carried before learned CIT(A). Through a chart, the assessee has tried to demonstrate the cost of the rough diamond consumed for production of polished diamonds and thereafter placed before learned CIT(A) the average figures of the cost of polished diamonds. According to the said chart, the average cost of ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 27 -
opening stock manufacturing cost of polished diamonds was about Rs.7,237/-. As against that since the assessee had adopted the valuation of the polished diamonds @ 8,790 per carat, therefore, the argument of the assessee was that the valuation was higher than the average cost, therefore, there was no discrepancy in the stock valuation. Learned CIT(A) was not convinced and affirmed the action of the AO in the following manner:
"6.2 I have considered the assessment order and the above submissions. It is found that the appellant has shown the value of stock adopting the value of diamond at Rs.8790/- per carat. According to the assessing officer the sale price in March 2003 was of Rs.9966/- per carat. The appellant had claimed that the polished diamond of lower quality was remaining in the stock. For this it is observed by the A.O. that there was no evidence produced by the appellant. The appellant had also not furnished details of manufacturing cost of diamond and the A.O. had observed that the cost of polished diamond was not made available for comparison with the value of closing stock. Hence he had adopted the average sale price of March 2003. The appellant has claimed that they furnished to A.O. list of diamonds remaining in stock. However, this is not supported by concrete evidence that particular diamond is in stock out of particular lot. The appellant has in the submissions before me furnished statement of cost of rough diamond consumed for production of diamond. This cost has been added to the opening stock of polished diamond. While working out the cost of the rough diamond consumed for production of diamond, it appears from this working that there are certain discrepancies in the working. Stock of rejection is worked out at 129059.80 carats whereas in the cost part is shown at 144766.74 carats. Cost of consumption is given by way of balancing figure deducting rejection produced and stock of rough, which is not correct. The appellant has claimed manufactured diamonds at 163185 cts. out of consumption of rough of 481710.91 cts. For which there is no explanation for difference. Further, closing stock of polished diamond is also worked out after deducting sale of stock which is balancing. How this figure is worked out is not known. Further, he has reduced the cost by sale price of rejection whereas working of stock of rejection he has adopted different figures of sale. There is no reconciliation of these figures. Hence the A.O. was justified in observing that the cost of polished diamond remaining in stock was not available. There is also no basis for value adopted at Rs.8790/- by the appellant. The A.O. has, therefore, rightly adopted the sale price of March 2003 for the value of the stock. This ground of appeal is, therefore, rejected and addition made is confirmed."
27. We have heard both the sides. At the outset, it is worth to mention that while deciding assessee's appeal for A.Y. 2002-03 in foregoing ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 28 -
paragraph we have dealt with this issue of valuation of the closing stock of polished diamond. As per the details available on record, the assessee was in possession of 31945.14 carat of polished diamonds in the closing stock. The assessee had valued the polished diamonds @ Rs.8790 per carat, therefore, the total value of the closing stock was at Rs.28,07,97,781/-. We have noted that there was contradiction in the explanation of the assessee. The assessee, on one hand, stated that the quality wise stock maintenance was not possible, but on the other hand, an explanation was offered that the total stock manufactured had two types of diamonds, one having higher value and the other having lower value. The stand of the Revenue Department, therefore, was that in the absence of the details of the quality wise production of the diamond, how the Assessee can now take a stand that there was two types of quality of polished diamonds. Rather, in our humble opinion each diamond has its own quality based upon the cut, its colour, its size and finally its carat. Manufacturing of diamond cannot compare with the manufacturing of other common products such as bricks, iron sheets, medicines, colours and paints, etc. In respect of all other items, the value of the finished product remains identical for each article of finished goods; hence, an average common rate depicting the cost of purchase, cost of production, to be calculated on average basis. That basis is to be compared with the realizable value of the finished goods. In respect of those items which are identical in value such an average method is an acceptable as well as practicable way of valuation of the closing stock. But that general acceptable principle of valuation of closing stock of finished good cannot be applied as it is in respect of valuation of the diamonds. Reason being each diamond has a specific quality. Because of the distinguishable ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008 Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 29 -
features one diamond to be value differently from other diamonds. Now, the question is that in a situation when the assessee is not coming forward to give details of the quality of the diamonds then the Revenue Department has no other method to value the polished diamonds but to apply an average rate of valuation. Due to this reason, considering the sale instances at the end of the year the AO had adopted the rate at Rs.9,966/- per carat. In above paragraph, we have said that in the absence of any other factor to determine the exact valuation of the polished diamond the valuation could be determined by considering the sales of the last month of the accounting period. This can be said to be one of the reasonable method for valuation of the stock. However, this fact can also not be ruled out that there could be a possibility that in the last month a particular quality of diamonds might have been sold for a particular price, but that quality might not match with the quality of the diamond remained as a stock. Therefore, we had no other basis but to adopt a middle path by calculating the average between two valuations, one given by the assessee and the other adopted by the Revenue Department. The assessee had adopted the average value of the polished diamond in the closing stock at Rs.8,790/- per carat, however, the value as adopted by the AO was Rs.9,966/- per carat as the average of the two is Rs.9378/- per carat. According to us, this can be said to be a reasonable and fair approach to resolve the issue as well as to compute the value of the closing stock of the polished diamond at Rs.9378/- per carat as an average value of the entire stock. We, therefore, direct to modify the value of the unaccounted closing stock of the polished diamond as determined by the AO to this extent and therefore this ground of the assessee is hereby partly allowed.
ITA No.3379/Ahd/2007 & ITA No.2469/Ahd/2008Dy. CIT, Surat Vs. M/s. M. Kantilal Exports.
A.Ys.2002-03 & 2003-04
- 30 -
28. In the result, the Appeal of the assessee is partly allowed.
29. The combined result is that both the above appeals are partly allowed.
Sd/- Sd/-
(ANIL CHATURVEDI) (MUKUL Kr. SHRAWAT)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 30/06/2014
Prabhat Kr. Kesarwani, Sr. P.S.
आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy of the Order forwarded to :
1. अपीलाथᱮ / The Appellant
2. ᮧ᭜यथᱮ / The Respondent.
3. संबंिधत आयकर आयुᲦ / Concerned CIT
4. आयकर आयुᲦ(अपील) / The CIT(A)-III, Ahmedabad
5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाडᭅ फाईल / Guard file.
आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad