Income Tax Appellate Tribunal - Ahmedabad
Assistant Commissioner Of Income Tax vs Vallabhbhai Dhanjibhai & Co. (Also ... on 30 January, 1996
ORDER
B.L. Chhibber, A.M.
1. These cross appeals arise out of the order of the CIT(A)-I, Rajkot.
2. The assessee is a partnership firm and is engaged in the business of cutting and polishing of the rough diamonds and exporting the same. The rough diamonds are mostly purchased from outside India. During the S. Y. 2043 (the year ending 22nd Oct., 1987) relevant to the asst. yr. 1988-89, the assessee firm disclosed gross profit of Rs. 13,21,481 on sales of Rs. 1,53,53,536 giving a G. P. rate of 8.60% as against the gross profit of Rs. 8,61,677 on total sales of Rs. 1,09,24,440 i.e. 7.88% of the last year. The common controversy in both the appeals relates to valuation of closing stock of cut and polished diamonds at the end of the accounting year. The assessee at the end of the accounting year declared closing stock of cut and polished diamonds at 1635.08 cts. The details of this closing stock are as follow :-
(i) Cut and polished diamonds in the custody of IT Department consequent upon search 203.57 cts.
(ii) Cut and polished diamonds
with the assessee 1431.51 cts.
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1635.08 cts.
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The assessee valued 203.57 cts. of cut and polished diamonds with the IT Department at the rate of Rs. 1,134.74 per ct. i. e at Rs. 23,100. There is no dispute about this valuation. However, the assessee valued cut and polished diamonds weighing 1,431.51 cts. at the rate of Rs. 270.81 per ct. i.e. at Rs. 3,87,670. The controversy raised before us by both the sides pertains to the valuation of this latter variety of diamonds.
2.1. The AO was of the opinion that the diamonds weighing 1,431.51 cts. were undervalued. He accordingly issued a show cause notice to the assessee to explain the basis of valuation. It was submitted before the AO that during the year under appeal the assessee had purchased the diamonds of inferior quality and the diamonds which remained at the end of the accounting year were without any size, shape and colour inferior in colour and were near to the level of rejection. It was also stated that the stock was valued at the market rate prevailing at the end of S. Y. 2043. The assessee also submitted copy of some sale bills of the succeeding year i.e. S. Y. 2044 and claimed that these sales were from the diamonds of closing stock which it had with it. The details of such sales were furnished by the assessee before the AO as follows :
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Bill No. Date Party Rs. /Carrat Crts.
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C/2/2044 9-1-83 M/s Ansogems Overseas
Exports P. Ltd. 525 549.78
C/3/2044 22-1-88 M/s S. S. S.
Information. 500 572.40
C/7/2044 20-4-88 M/s R. K. Diamonds 505 800.97
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The AO was not satisfied with the explanation furnished for the following reasons :
"(1) The closing stock of cut and polished diamonds were from the purchases made upto the month of June. The total cts. given for cutting and polishing were 39,711 cts. out of which rejection received back shown is 5,516 cts. and yield shown from remaining 34,194 cts. is 7,768 cts. i.e. 22.78. If at all the quality of rough diamonds purchased and given for cutting and polishing was low, the rejection claimed is very high. Out of 39,611 cts. assessee claimed 5,516 cts. rejected. Another point is that after showing the rejection, remaining cts. of 34,194 were of good quality rough diamonds. The yield shown by the assessee is 22.78% which is very low. In the preceding year i.e. 1987-88 assessee had given 27,274 cts. of rough diamonds for cutting and polishing, out of which he had shown the yield of 24.12% and rejection shown only 60.95 cts. The rejection ratio shown in asst. yr. 1988-89 is very high. Therefore the assessee's claim that diamonds of closing stock were of inferior quality and of without shape and size, is not tenable.
(2) The assessee has not submitted any basis/proof of market price on which he has valued the closing stock of S. Y. 2043. Assessee has claimed that it has taken the market value of the diamonds as the basis for valuation of the closing stock. Market value of an item, in all means, is the value which it would fetch in a fair and open market. It is not the value adopted by a seller to manipulate his book results and thereby undermine the real profits from the business. To arrive at the market price, the assessee has come up with a plea that the value of diamonds can be determined only after breaking the stone which engulf the diamonds. It is also stated that the price of diamonds cannot be definite or fixed. However, the books of the assessee reveal that the sales immediately preceding the last sale of 13th Oct., 1987 was of $200 per carat and the first sale of immediately succeeding accounting year is of Rs. 3,010 per carat. The last sales of its accounting year effected are on 13th Oct., 1987 at the rate of $ 60 per carat and $ 40 per carat. The intention behind this sale in no way can be treated as bona fide. Even he could not adhere on this so called last market rate for valuing the closing stock and he further undervalued the stock and adopted a rate of Rs. 270 per carat.
(3) Further, assessee's claim regarding the sale of his closing stock in succeeding year. On comparison of these bills with other sales bills of the assessee it is noticed that these sales have been effected to the local parties in Bombay, whereas majority of the sales are effected to foreign buyers. The most intriguing factors seen from these sales bills is that in other bills the size, shape and colour of the diamonds is mentioned, whereas in the so called sale bill of closing stock no such description is given. Only thing written on the sale bill is "one packet of diamond". Thus, the intention behind the preparation of such a bill is totally obvious and mala fide in nature.
(4) Also it is seen from the books of the assessee that during the previous year relevant to asst. yr. 1988-89 it had a total turnover of Rs. 1,53,53,536 on a total sale of 7,401 carats of diamonds. The gross profit generated therein was Rs. 13,21,48 which formed a ratio of 8.60%. But during the succeeding previous year relevant to asst. yr. 1989-90, the total turnover was Rs. 4,02,22,325 on a total sales of 12,995 cts. diamonds. The gross profit generated was 49,46,930 i.e. 12.29%. This implied that the average sale price generated per carat during asst. yr. 1988-89 was 2,074 whereas in asst. yr. 1989-90 it has shown an abnormally high sale price of Rs. 3,095 per carat. Out of the 12,995 carats sold in the previous year relevant to asst. yr. 1989-90 more than 11% of the stock belonged to the carried over diamonds of asst. yr. 1988-89. This clearly implies that the assessee was having better quality of diamonds with him at the end of S. Y. 2043.
(5) The assessee's claim that diamonds remained in closing stock were low in quality and thereby valued at prevailing so called market value rate is a concocted story to undervalue the same and to bring down the real book profit. The objective and motive behind this manipulation is also crystal clear because in the immediately succeeding year the ambit of s. 80HHC has been enlarged and deduction on export profit is of upto 100%. The shortcut adopted by the assessee was undervaluing the closing stock in asst. yr. 1988-89 and reflecting the subsequent income in 1989-90 to claim a total relief under s. 80HHC. This simply amounts to manipulation of accounts with a view to underestimate the real profit."
2.2. The AO accordingly rejected the assessee's valuation of closing stock and by adopting the average cost price of diamonds at the rate of 1703.11 per cts. worked out the valuation of closing stock at Rs. 24,38,018 and thereby made an addition of Rs. 20,50,348 to the income of the assessee firm.
3. When the matter came up before the CIT(A), the assessee filed particulars of purchases and sales of diamonds relating to four assessment years i.e. asst. yrs. 1986-87 to 1989-90 [reproduced by the CIT(A) at page 10 and 11 of his order] and submitted that there was a change in the pattern of purchases during the accounting year under consideration because 49.56% of the total purchases were below $10 per crt. as against only 10.06% of such purchases in the immediately preceding year. Similarly, the purchases of above $ 21 per ct. stood at 18.39% during the accounting year under consideration as against 35.43% in the immediately preceding year. It was further argued before the CIT(A) that the sales of finished diamonds of $ 200 and above per crt. stood at 33.49% as against 17.83% in the immediately preceding year. At the same time, sale of diamonds of $ 75 to 100 stood at 19.11% this year as against 9.80% of the immediately preceding year. This again indicated a change in the pattern that the higher quality and lower quality registered a substantial increase in percentage as compared to that of the immediately preceding year. After perusing the details furnished before him and after considering the submission made before him, the CIT(A) directed the AO to value the closing stock of cut and polished diamonds at the rate of Rs. 1000 per crt. observing as under :
"5. I have carefully considered the detailed submissions of the authorised representative and also looked into the material evidences placed on record. I am of the view that the authorised representative's arguments carried a lot of force and contained considerable merit on facts and in law. The Asstt. CIT started looking at the results of the accounting year under consideration with particular reference to the results of immediately preceding year as well as subsequent previous year before rejecting the book results of the year under consideration. In fact, as urged by the authorised representative, there is a marked difference because of certain change in the pattern of both purchases and sales this year as compared to last year. The average purchase price of rough diamonds has gone down to Rs. 195.69 per crt. as compared to Rs. 249.78 per crt. of last year. Similarly, the average sale price had gone up to Rs. 2075 per crt. as against Rs. 1,780 of last year. There is clear evidence that the purchases of rough diamonds of this year were of inferior quality because the price of 49% of total purchases was below $ 10 per crt. and similarly, the sales of superior diamonds stood @ 92.58% of the total sales as against 82.19% of the immediately preceding year. The assessee was left with a closing stock of 24,097.36 crts. of rough diamonds this year as against only 2146.72 crts. last year. This is an accumulation of poor quality rough and finished diamonds as closing stock because of having no foreign market for the far inferior quality of cut and polished diamonds remained unsold and the assessee had, therefore, valued them at Rs. 270.81 per crt. as there is clear evidence from last sales before close of the accounting year that some sales were effected at as low as $ 40 only per ct. The cost of production alone should not have been taken as the relevant factor for valuing the closing stock by the Asstt. CIT, leaving all other relevant factors pointed out by the authorised representative, before him. The assessee was following consistent method of cost price or market price whichever is lower all along. Even the price for which the products were sold in the immediately succeeding year also do not warrant such valuation @ 1,703 by the Asstt. CIT. I would, therefore, fix the rate, as a via media, at Rs. 1,000 per crt. and the Asstt. CIT is directed to modify the valuation accordingly, in view of the fairly inferior quality left over and also the sudden spurt of market value of asst. yr. 1988-89."
4. The Revenue is aggrieved because according to it the CIT(A) is not justified in directing the AO to adopt the valuation of diamonds in the closing stock at the rate of Rs. 1000 per crt., while the assessee is aggrieved by the fact that the CIT(A) has given only partial relief.
5. Shri N. B. Shah, the learned counsel for the assessee, reiterated the submissions made before the CIT(A). He submitted that in the assessment year under appeal the assessee imported rough diamonds but the pattern of import had undergone substantial change inasmuch as out of its total import in asst. yr. 1988-89 about 49.56% of the imports were from the value ranging from $ 2.67 to $ 10 per crt. as against 10.26% of the preceding year. Similarly, for the value ranging from $ 11 to $ 20 per crt. rough diamonds purchased were about 32.04% out of the total purchases as against 54.5% of preceding year and for value ranging from $ 21 and above out of the total purchases 18.39% purchases were in asst. yr. 1988-89 as against of 35.43% of the earlier year. Thus, there was a marked difference in the pattern of purchases which brought higher rejection ratio. After rejection whatever was left out was got cut and polished and were sold during the year; the sales had shown better trend. The learned CIT was explained the whole process of business but he failed to appreciate that the rough diamonds purchased at inferior price were bound to produce inferior diamonds which were bound to fetch inferior price. He further submitted that the AO erred in applying the rate of cost of production without assessing any reason for valuing the closing stock in the face of the above narrated change in the pattern of purchases of rough diamonds. The learned counsel further submitted that though the CIT was satisfied that the assessee was following the method of stock valuation of "cost price or market price whichever is low", yet he fixed the rate "as a via media" at Rs. 1,000 per crt. for which their is no justification whatsoever. He prayed that the addition retained by the CIT(A) should be deleted.
6. Shri R. K. Chaudhary, the learned Departmental Representative, strongly supported the order of the AO which according to him is based on proper appreciation of facts and circumstances of the case. He submitted that the assessee did not furnish closing stock tally either before the AO or before the CIT(A) and simply harped on the general contention that the diamonds purchased by it were of inferior quality. He submitted that there was no proof with the assessee that the cut and polished diamonds lying with it as closing stock were of inferior quality. He further submitted that while the assessee has valued the cut and polished diamonds lying in the custody of the IT Department at the rate of Rs. 1,134.74 per crt., the stock of cut and polished diamonds in its possession was valued at a palpable law and uniform rate of Rs. 270.81 per crt. which fact clearly showed that the assessee had undervalued the stock. He further submitted that the assessee had motive to undervalue the stock as pointed out by the AO. He therefore submitted that the finding of the CIT(A) should be reversed and that of the AO be restored.
7. We have considered the rival submissions and perused the facts on record. The main contention of the assessee before the authorities below was that during the year under appeal it had purchased inferior quality of rough diamonds and accordingly this factum reflected itself in the valuation of closing stock. While this contention may be partially true but it is also known fact that the manufacturers of diamonds do not plunge into darkness in making purchases and their past experience, their vision of the eye and the sharpness of their intelligence to take a decision as to the rough diamonds to be purchased and their judgment as to the rough diamonds available for their purchases are all important factors which govern the business of diamonds. Value of a diamond depends upon the size, shape and colour of the diamond and accordingly it cannot be uniform for all types of diamonds. It is noted that the assessee did not file list of closing stock before the authorities below giving size-wise, shape-wise and colour-wise details of the diamonds. The assessee chose to value the closing stock of cut and polished diamonds on the basis of some bills of sale at the end of the S. Y. 2043 and another bill of sale in the beginning of S. Y. 2044 but such bill does not give the details but only mentions "one packet of diamond". Under the circumstances the sale price as indicated by the assessee cannot be bona fide method of valuation of closing stock of cut and polished diamonds. There can not be a uniform purchase price for rough diamonds and correspondingly no uniform sale price of cut and polished diamonds. Neither the last purchase bill nor the last sale bill of the year under consideration nor the first sale bill of the succeeding accounting year can be the basis of valuation of a precious commodity like diamonds. The onus was on the assessee to file the details of closing stock of cut and polished diamonds size-wise, shape-wise and colourwise but the assessee failed to do the same. It is now well settled law that the onus to prove the basis of a transaction lies clearly squarely on the assessee. [CIT vs. Ramdas Ramlal (1984) 149 ITR 256 (MP) and CIT vs. Chandravilas Hotel]. Under the circumstances what is to be determined is a fair and reasonable method of valuation of closing stock. In our view, the AO for the detailed reasons given by him rightly adopted the average cost price for valuation because such average purchase price is inclusive of purchase price of inferior as well as superior rough diamonds. We accordingly reverse the finding of the CIT(A) whereby he has adopted the value at the rate of Rs. 1,000 per carat "as a via media" and restore that of the AO.
8. We also agree with the finding of the AO that there was a motive for under-valuation of closing stock of cut and polished diamonds because from the facts and circumstances of the case the existence of such motive cannot be wholly ruled out. The assessee closed its accounts on 22nd Oct., 1987 but filed the return of income on 29th June, 1988 and in between in February, 1988 the new Budget had been presented whereby the ambit of s. 80HHC had been enlarged and deduction on export profit was provided upto 100%. Since the return was filed on 29th June, 1988 the assessee had enough time to under-value manipulate the closing stock of cut and polished diamonds.
9. In its appeal (ITA No. 4556/Ahd/1990) the Revenue has raised yet another ground which reads as under :
"The learned CIT(A) erred in law and on facts in deleting the addition on account of interest on interest free loans of Rs. 16,200".
During the year under appeal the assessee advanced interest free loans of Rs. 20,000 to M/s Vandit Steel and Rs. 70,000 to Vanitaben, wife of one of the partners. The AO called upon the assessee to explain as to why no interest was charged on these advances when a heavy interest was paid on bank loans. The assessee pointed out to the AO that the sum of Rs. 20,000 was advanced to M/s Vandit Steel for the purchase of a plot at GIDC, Versaj, and therefore interest was not charged.
Similarly, Smt. Vanitaben happened to be wife of Shri Nanjibhai, partner of the assessee firm and a loan of Rs. 70,000 was paid to her but no interest was charged because Shri Nanjibhai had a sum of Rs. 90,000 in his capital account. The AO was not satisfied with the explanation furnished and added a sum of Rs. 16,200 being estimated interest on the interest free loans.
10. On appeal, the CIT(A) deleted the addition on the ground that the AO had made the addition purely on estimate basis.
11. The learned Departmental Representative submitted that there was no commercial urgency in advancing the loan to Smt. Vanitaben. The learned counsel for the assessee submitted that no loans were raised by the firm for advancing the above noted two loans free of interest because the total capital of the partners in the firm stood at Rs. 8,86,000.
12. We have considered the rival submissions and perused the facts on record. We find that the AO has not established any nexus between the interest free loans and the advances raised by the assessee firm. So far as the loan of Rs. 20,000 to M/s Vandit Steel is concerned, the same was made for purchase of a plot at GIDC, Versaj for business and therefore there was no question for charging of interest. Similarly, loan of Rs. 70,000 advanced to Smt. Vanitaben could be from the capital account of the partners and no loans were raised by the assessee for advancing the interest free loan. There being no nexus we uphold the finding of the CIT(A) and decline to interfere.
13. In the result, the appeal filed by Revenue is allowed in part and the appeal filed by assessee is dismissed.