Income Tax Appellate Tribunal - Mumbai
Rasiklal & Sons, Mumbai vs Assessee
1
ITA No.1974/Mum/2010
M/s Rasaklal & Sons
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'D' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI R.K. PANDA, A.M. AND SHRI VIJAY PAL RAO, J.M.
ITA No. 1974/Mum/2010
(Asst Year 2004-05)
M/s Rasiklal & Sons, Vs Income tax Officer- 16(3)(1),
2301, Panchratna, Opera Mumbai.
House,
Mumbai - 400 004.
(Appellant) (Respondent)
PAN NO. AAFFR8180D
Appellant by Shri Vipul Joshi
Respondent by Shri C.G.K. Nair
Date of hearing 01.12.2011
Date of pronouncement 13.01.2012
ORDER
PER R K PANDA, AM
This appeal filed by the assessee is directed against the order dated 15.01.2010 of the Commissioner of Income Tax (A)- 27, Mumbai relating to Assessment Year 2004-05.
2. Facts of the case in brief are that the assessee is a partnership firm engaged in the business as dealer, manufacturer, importers and exporter of diamonds and studded jewellery. The return of income was filed on 20.10.2004 declaring total income of Rs. 9,94,217/- which was processed u/s 143(1) of the Act on 18.3.2005 accepting the income returned. Subsequently on the basis of the audit objection by the Internal Audit Party the A.O. issued notice u/s 148 of the Act on 11.08.2006 on the ground that there was under valuation of stock of rough diamonds and stock of cut and polished diamonds which are as follows:-
2 ITA No.1974/Mum/2010M/s Rasaklal & Sons A. ROUGH DIAMONDS Qty (carats) Value (Rs) Avg. Rate/carat Value adopted by 7214.82 61,44,415 851,65 the assessee Value determined 7214.82 1,03,91,840 1440.34 by applying avg.
rate Difference in value 4,24,47,425 Less: deduction 12,74,227 u/s 80HHC @ 30%. Undervaluation of closing stock of 29,73,198 rough diamonds (A) B. CUT & POLISHED DIAMONDS Value adopted by 3199.24 26466760 5090.50 the assessee Value determined 5199.24 39804052 7655.85 by applying avg. rate Difference in value 1,33,37,292 Less: deduction 40,01,187 u/s 80HHC @ 30%. Undervaluation of 93,36,525 closing stock of rough diamonds (B) Total under valuation of closing stock i.e. A + B = 1,23,09,723/-
2.1 In response to the notice issued u/s 148, the assessee appeared before the A.O. from time to time and furnished the required details. During the course of assessment proceedings it was submitted that the balance of 7214.82 carats of rough diamonds which were lying with the assessee as closing stock includes rejection of diamonds received from labourers and cutters after converting the rough diamonds into polished diamonds. It was 3 ITA No.1974/Mum/2010 M/s Rasaklal & Sons submitted that the rough rejected diamonds are of negligible value and have been valued accordingly. It was submitted that the cut and polished diamonds are of different categories having different value and the assessee has valued the finished goods as per the quality of the diamonds. It was also submitted that the valuation is supported by purchase bills and vouchers for labour charges.
2.2 The A.O. noted that rough rejected diamonds are not included as a part of rough diamonds because such rough rejections have already undergone the processes of boiling, cleaving and cutting whereas the rough diamonds lying with the assessee are those which have not undergone any such process. Similarly the stocks of cut and polished diamonds which are stated to be of different categories and different values have been valued by the assessee and not by an independent valuer. According to the A.O. the yield percentage in converting rough diamonds into finished product ranges between 25 to 55% which takes care of both these aspects i.e. rough rejection diamonds (wastage) and valuation of cut & polished diamonds. He therefore rejected the argument of the assessee.
2.3 Subsequently the assessee made detailed submissions according to which the assessment cannot be reopened on the basis of comments/observations made by Audit Officers in view of the decision of Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT reported in 119 ITR 996 (SC) and decision of Hon'ble Allahabad High Court in the case of U.P. State Industrial Corporation v. CIT reported in 16 CTR 142 (Allahabad). It was submitted that reopening of the assessment u/s 147 cannot be carried out in the case of the assessee since there was no additional material/information at the time of reopening of the assessment, which was not available at the time of processing u/s 143(1) of the Act. It was submitted that the reasons recorded for reopening have been recorded without reference to entire assessment records, nature of business carried 4 ITA No.1974/Mum/2010 M/s Rasaklal & Sons on by the assessee and a detailed analysis of the reasons for arriving at the reason to believe that income chargeable to tax has escaped assessment.
The decision of the Hon'ble Supreme Court in the case of M/s G.K.N. Driveshafis (India) Ltd. v. ITO reported in 259 ITR 19 was cited before the A.O. and it was submitted that the same has not been followed.
2.4 It was submitted that rough diamonds of 2038.04 carats valued at Rs. 14,88,646/- had been imported in A.Y. 1987-88 in respect of which the assessee had a dispute with the supplier. This consignment was not consumed during the pendency of proceedings before the Hon'ble Bombay High Court and the Debt Recovery Tribunal. The assessee also submitted that the valuation of polished diamonds varies widely upon various factors and that to determine correct and true profit it is necessary to value the stock according to its class and category. It was submitted that during A.Y. 2003-04, the assessee has submitted valuation of closing stock adopting the cost qua each category in respect of rough diamonds as well as cut and polished diamonds which was accepted. The Accounting Standards of the I.C.A.I. requiring the valuation of stock by its class was brought to the notice of the A.O. It was submitted that the method followed by the assessee is an accepted method which has been consistently followed and has been accepted by the A.O. in two assessments framed u/s 143(3). Therefore, the method of valuation followed by the assessee gives a true and fair result of profit or loss and any other method may give absurd results.
2.5 However, the A.O. was not convinced with the above explanation given by the assessee and determined the value of cut and polished diamonds by following the average rate per carat and determined the total under valuation of stock at Rs. 1,23,09,723/-, the details of which are as under:-
5 ITA No.1974/Mum/2010M/s Rasaklal & Sons (A) ROUGH DIAMONDS Qty (carats) Value (Rs) Avg. Rate/carat Value adopted by 7214.82 61,44,415 851,65 the assessee Value determined 7214.82 1,03,91,840 1440.34 by applying avg.
rate Difference in value 4,24,47,425 Less: deduction 12,74,227 u/s 80HHC @ 30%.
Undervaluation of 29,73,198
closing stock of
rough diamonds (A)
(B) CUT AND POLISHED DIAMONDS
Qty (carats) Value (Rs) Avg. Rate/carat
Value adopted by 5199.24 26466760 5090.50
the assessee
Value determined 5199.24 39804052 7655.86
by applying avg.
rate
Difference in value 1,33,37,292
Less: deduction 40,01,187
u/s 80HHC @ 30%.
Undervaluation of 93,36,525
closing stock of
rough diamonds
(B)
Total under-valuation of closing stock i.e. A + B= 1,23,09,723/-
2.6 Before the ld. CIT(A) the assessee made two fold submissions i.e. challenging the validity of the reassessment proceedings on account of audit objections and the addition on account of under valuation of the closing stock of rough diamonds and polished diamonds. The ld. CIT(A) upheld the reassessment proceedings on the ground that the processing has been done 6 ITA No.1974/Mum/2010 M/s Rasaklal & Sons u/s 143(1) which cannot be considered to be an assessment proceeding and therefore the issue of notice u/s 147/148 of the Act is valid. So far as the addition on account of under valuation of closing stock of rough diamonds are concerned, he upheld the action of the A.O. on the ground that they have not kept the details of stock of rough diamonds category-wise nor do they have details to show what were the consumption in each category of rough diamonds. Therefore he held that the valuation made by the assessee based on the valuation of class and category of the rough diamonds is not correct. According to him there is absence of any details of what was the consumption of each category of rough diamonds and how much of it was left in the stock and what was the return of cut and polished diamonds from that stock of rough diamonds and what category of diamonds they produced and the yield rate of each category of rough diamonds. According to the ld. CIT(A) unless these details are filed to show the valuation of rough diamonds as per quality, the contention of the assessee cannot be accepted. However, he directed the A.O. to take into consideration the quantity of rough rejected diamonds which have to be valued at their estimated value as shown by the assessee. Similarly, he held that the stock of disputed diamonds for which purchase value had been taken at Rs. 14.84 lakhs from the year of import has to be taken at the same value. As regards the addition on account of cut and polished diamonds, he held that the valuation is based on the own choice of the assessee without any scientific basis or on some accounting principle. There are no details in the closing stock of different diamonds, quality-wise on the basis of which value of the diamonds can be taken as per the quality and colour of each lot of diamonds. He accordingly upheld the action of the A.O. in determining the value of closing stock by adopting average cost method for valuation of cut and polished diamonds.
7 ITA No.1974/Mum/2010M/s Rasaklal & Sons 2.7 Aggrieved with such order of the ld. CIT(A) the assessee is in appeal before us challenging the order of the ld. CIT(A) in upholding the validity of the reassessment proceedings and sustaining the addition on account of under valuation of closing stock made by the A.O.
3. The ld. counsel for the assessee submitted that the assessee is a partnership firm engaged in the business of exports of cut and polished diamonds since last 20 years. It maintains full and proper books of account and records showing category-wise details. He submitted that the books of account of the assessee were never rejected in the past. The method of valuation of stock was never doubted, even during scrutiny assessments for A.Y. 2002-03 and 2003-04. He submitted that the method of valuation of rough diamonds and cut and polished diamonds has been consistently followed b y the assessee and there is no deviation during this year. Referring to page 12 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the notes to accounts according to which the inventory are valued at the lower of cost or net realizable value. Raw material and finished goods are valued at cost or net realizable value whichever is less. Rejections are valued at net realizable value. Referring to page 18 of the paper book he submitted that the auditors have certified the various books of account maintained by the assessee which includes cash book, ledger, sales register, purchase register, stock register etc. Referring to page 19 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the comments of the auditors on the method of valuation of closing stock according to which the same is at cost or market value whichever is lower in case of finished goods and raw materials and it is valued at market value in case of rejections as certified by the partners. Referring to page 32 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the statement of movement/valuation of rough diamonds for the year ended 31.3.2004. Referring to page 33 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the 8 ITA No.1974/Mum/2010 M/s Rasaklal & Sons statement of movement/valuation of stock of polished diamonds and finished goods for the year ended 31.3.2004. Referring to page 37 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the quantitative details of rough stock for the year ended 31.3.2004. He submitted that the entire rough stock was purchased from Mamata Exports in shape of four invoices. Referring to page 34 to 36 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the details of party-wise labour bill register (paid) during the year 2003-04. Referring to page 38 of the paper book read with page 42 to 45 the ld. counsel for the assessee drew the attention of the Bench to the details of bills and purchases. He submitted that the closing stock is out of purchases made only from one party i.e. Mamta Exports and the assessee exports to only party. The ld. Counsel for the assessee referring to the copy of stock register of finished goods, drew the attention of the Bench to the item-wise opening balance, receipt, exports and closing balance carat-wise. Similarly he referred to the valuation of the finished goods and submitted that the closing stock of 5199.84 carats valued at Rs. 2,60,26,683/- has been arrived at after considering the opening stock, receipts, exports and the closing balance. Referring to the summary of stock of rough diamonds and the valuation thereof, he submitted that the entire closing stock consist of purchases made from Mamta Exports. Without examining the various details furnished by the assesse, the A.O. and the ld. CIT(A) have rejected the claim merely on the basis of objections raised by the internal audit party. The decision of the Hon'ble Supreme Court in the case of Indian & Eastern Express Society v. CIT reported in 119 ITR 996 (SC) was cited. Referring to the following decisions, he submitted that the A.O. is not competent to reopen the assessment merely on the basis of audit objection. Non-application of mind by the A.O. and his failure to record his own reasons will invalidate the provisions of section 147.
1. Indian & Eastern Express Society v. CIT -[1979] 119 ITR 996(SC)
2. CIT v. Lucas T.V.S. Ltd. [2001] 249 ITR 306 (SC) 9 ITA No.1974/Mum/2010 M/s Rasaklal & Sons
3. IL & FS Investment Managers Ltd. V. ITO & Ors [2008] 298 ITR 32(Bom).
4. Adani Exports v. CIT [1999] 240 ITR 224 (Guj)
5. CIT v. Mettur Chemical & Industrial Corporation [2000] 242 ITR 119 (Mad)
6. CIT v. Indian Sugar & General Industry Export Import Corporation Ltd. [2008] 8 DTR (Del) 112.
7. CIT v. Sant ram Mangat ram [2009] 312 ITR 100 (P&H)
8. Balaji Motors (P) Ltd. V. Dy. CIT [2004] 91 TTJ (Lucknow) 604 3.1 Referring to a series of decisions as filed in the paper book he submitted that when there is no material before the A.O. to form a conclusion that the income has escaped assessment, reopening of assessment u/s 147 is bad even if there is no assessment u/s 143(3).
3.2 Referring to the adoption of average cost by the A.O. for valuing the closing stock, he submitted that such an adjustment is in-correct unless similar adjustment is made to the opening stock also. For this proposition he referred to the decision of Hon'ble Bombay High Court in the case of CIT v. Mahalaxmi Glass Works and a series of other decisions filed in the paper book. Referring to the decision of Hon'ble Supreme Court in the case of CIT v. Bilahari Investments (P) Ltd. Reported in [2008] 299 ITR 1 (SC) he submitted that once the Department has accepted the method of valuation adopted by the assessee over several years, the same cannot be substituted by another method in absence of any finding by the A.O. that the method adopted by the assessee distorts the profits of a particular year. He submitted that there will a chain effect if the method followed by the assessee is disturbed. According to him closing stock of this year will become opening balance of next year. Therefore unless the opening stock is also adjusted it will give distorted figure. Since the assessee has filed all the bills and no defect was pointed out by the department, therefore, there cannot be any addition on account of under-valuation of closing stock.
10 ITA No.1974/Mum/2010M/s Rasaklal & Sons Referring to the copy of the assessment order for A.Y. 2006-07 passed u/s 143(3), he submitted that no such addition on account of under-valuation of closing stock has been made by the A.O. He accordingly submitted that the reopening proceedings initiated by the A.O. and upheld by the ld. CIT(A) is bad in law and no addition can be made on account of under-valuation of closing stock in view of rule of consistency and in absence of any defects pointed out by the Revenue Authorities.
4. The ld. D.R., on the other hand, relied on the order of the ld. CIT(A). He submitted that full details were not filed before the A.O. Therefore, the various submissions now produced by the ld. Counsel for the assessee should be examined by the A.O. Therefore, in the interests of justice the matter should be restored to the file of the A.O. for fresh adjudication.
4.1 The ld. Counsel for the assessee in his rejoinder drew the attention of the Bench to the letter addressed to the A.O. on 16.7.2007, 25.7.2007 (copies of which are placed at paper book page 46 to 50) and copy of letter dtd. 2,8.2007 (copy of which is placed at paper book page 51 to 58) and submitted that full details were given to the A.O. Therefore, the matter has to be decide on merits and the matter need not be restored back to the file of the A.O.
5. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that original assessment in this case was completed u/s 143(1). There is also no dispute to the fact that notice u/s 148 was issued on account of under-valuation of closing stock of rough diamonds and stock of cut and polished diamonds on the basis of audit objection. Before deciding the issue relating to the validity 11 ITA No.1974/Mum/2010 M/s Rasaklal & Sons of re-assessment proceedings on the basis of audit objection, we would like to deal with the ground on merit first. From the various pages of the paper book including the copy of audit report and the submissions made before the A.O., we find the assessee maintains cash book, ledger, purchase and stock register and values the closing stock at cost or the market value whichever is lower in case of finished goods and raw materials and values the rejections at market value. The assessee has given quantitative details of opening stock, purchases during the year, goods manufactured during the year, rejection received during the year, sales during the year and closing stock. The assessee filed before the Bench the copy of the stock register of finished goods and valuation thereof. Similarly, it has also filed the summary register of rough diamonds and the valuation of such rough diamonds as on 31.3.2004. The stock register of finished goods gives item- wise details of opening stock, received from manufacturers, exports made during the year and closing stock date-wise. The method adopted by the assessee valuing the closing stock of raw material and finished goods at cost or market price whichever is less is an acceptable method which has been accepted by the Department in scrutiny assessment during A.Y. 2002-03 and 2003-04 and again during A.Y. 2006-07. The submission of the ld. Counsel for the assessee that no addition has been made by the A.O. on account of under valuation of closing stock during scrutiny proceedings could not be controverted by the ld. D.R. 5.1 Further we find merit in the submission of the ld. Counsel for the assessee that if the closing stock is disturbed then corresponding adjustment has to be made to the opening stock. We find force in the submission of the ld. Counsel for the assessee that the closing stock balance of this year becomes the opening stock balance of next year and therefore it becomes revenue neutral. Since the method followed by the assessee is an accepted method of valuation of closing stock and since the Revenue in the past as well as subsequent year has accepted the method followed by the 12 ITA No.1974/Mum/2010 M/s Rasaklal & Sons assessee without disturbing the method of valuation of closing stock of rough diamonds and cut and polished diamonds and since the A.O. has not made corresponding adjustments for valuing the opening stock of rough diamonds and cut and polished diamonds, therefore, we are of the considered opinion that the average method of valuation followed by the A.O. in the instant case is erroneous and not in accordance with law. Further when the entire closing stock of rough diamonds consists of purchases from one party namely Mamta Exports for which bills were furnished before the A.O., there was no justification in adopting the average cost method. In this view of the matter we hold that the valuation of closing stock adopted by the assessee in the instant case should not have been disturbed. The ground of appeal No. 2 by the assessee is accordingly allowed. Since the assessee succeeds on merit as per ground of appeal No. 2, the first ground of appeal challenging the validity of reassessment proceedings on account of audit objection becomes academic in nature and therefore the same is not being adjudicated.
6. In the result, the appeal filed by the assessee is allowed.
Order pronounced on 13.01.2012.
Sd/- Sd/-
(VIJAY PAL RAO) ( R K PANDA )
Judicial Member Accountant Member
Place: Mumbai : Dated: 13.01.2012.
RK
13
ITA No.1974/Mum/2010
M/s Rasaklal & Sons
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT, City XVI, Mumbai
4 CIT(A) - 27, Mumbai
5 DR Bench D
6 Master File
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai