Income Tax Appellate Tribunal - Ahmedabad
Pankaj Diamonds,, Surat vs Assessee on 22 October, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
Before Shri N.S. SAINI, ACCOUNTANT MEMBER and
Shri MAHAVIR SINGH, JUDICIAL MEMBER
Date of hearing:22.10.2009 Drafted on: 22.10.2009
ITA No.2608/AHD/2009
Assessment Year : 2003-2004
M/s. Pankaj Diamonds Vs. A.C.I.T.,
4-7, Krishan Diamond Circle-9, Aayakar Bhavan,
Park, Varachha Road, Majura Gate,
Surat. Surat.
PAN/GIR No. : AADFP 5145 L
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri Vartik Chokshi A.R.
Respondent by: Shri C.K.Mishra Sr. D.R.
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
This is an appeal filed by the Assessee against the order of the ld.CIT(Appeals)-V, Surat, dated 13.09.2006.
2. Ground no. 1 of the appeal reads as under:
"1. The CIT(A) has grievously erred in law and on facts in confirming the addition of gross profit by 0.25% amounting to Rs.32,33,694/-. In doing so, the Learned Commissioner of Income Tax(Appeals) has erred in law and facts in confirming the rejection of books of accounts under section 145(3) of the Act. This addition be deleted."
3. The brief facts of the case are that the Learned Assessing Officer observed that the appellant had shown gross profit ratio of 6.95% on the ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -2- gross sales of Rs.129.34 Crores as against gross profit of 8.39% on gross sales of Rs.77.57 Crores shown in the immediate preceding year and thus, there was a fall in the gross profit ratio of 1.44%. On being required to explain the fall in the gross profit as compared to the immediately preceding year, the appellant explained that in the immediate preceding year the exchange rate difference receipt was more than that receipt during the year under consideration. It was submitted that in the preceding Assessment Year there was a gain of 2.63% on account of exchange rate difference vis-à-vis total export sale, whereas during the year under consideration, there was a loss of 0.86% on account of exchange rate difference on total sales which has resulted in a gross effect of 3.49% to gross profit in comparison to the immediately preceding year. Therefore, the gross profit during the year under consideration was reduced by 0.39%. However, during the year, the assessee firm made more profit on export business which ultimately resulted in decrease in gross profit by 1.44%. The Learned Assessing Officer did not agree with the submission made by the assessee. He observed that taking into account, the difference in exchange rate, the assessee has shown more profit than the immediate preceding year but keeping in view the fact that it had not maintained record of quality wise production and sale, it was difficult to accept the gross profit ratio. The Learned Assessing Officer carried out an exercise with the production records maintained by the assessee in respect of sales made in the first 10 days of the accounting year out of the opening stock when there was a minimum production of polished diamonds. After the verification carried out by him and the accountant of the appellant, the Learned Assessing Officer observed that the appellant has earned gross profit @ 8% without ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -3- taking into account difference in foreign exchange rate as compared to the overall gross profit of 7.75%. After this, the Learned Assessing Officer required the appellant to explain why the gross profit ratio should not be estimated @ 8% as worked out by him for the entire year as it was worked out by him without considering the foreign exchange rate difference. The appellant submitted that the same was not acceptable to it as it could not be the basis of estimation of gross profit for the entire year. It was submitted that during the year, it had shown more profit than in the immediate preceding Assessment Year if the rate of exchange difference is considered and hence, the gross profit ration shown by the appellant should be accepted. However, the Learned Assessing Officer did not accept the submission of the assessee and observed that it would be sufficed to say that in absence of proper record of production in terms of quantity and quality, the correct profit could not be reduced from the books of account maintained by the assessee and rejected the books of account by invoking the provision of section 145(3) of the Act and estimated the gross profit @ 8% and enhanced its gross profit by 0.25% on the gross sales of Rs.1,29,34,77,593/- which was arrived at Rs.32,33,694/- and added the same to the total income of the assessee.
4. In appeal, the Learned Commissioner of Income Tax(Appeals) observed that the rejection of books of account by the Learned Assessing Officer was justified. He further observed that the Learned Assessing Officer with the help of available production records with the appellant for sale in the opening period of its business as the sales were made out of the opening stock which were inventorised by the assessee on the basis of the quantity and quality of the diamond pieces god manufactured by it but could not be sold at the end of the accounting period of the earlier ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -4- year worked out the same without taking into account, the exchange rate difference and the same appears to be justified as it was a clear indication of the gross profit. Hence he confirmed the addition made by the Learned Assessing Officer by enhancing the gross profit rate by 0.25% and dismissed the ground of appeal of assessee.
5. The Learned Authorised Representative of the Assessee submitted before us that on the similar facts and circumstances of the case, in the Assessment Year 2004-05 in the assessee's own case, the Tribunal deleted the addition made on account of non maintenance of quality-wise details of diamonds as the gross profit ratio shown by the assessee compared favorably with that in the immediate preceding year. Therefore, following the same the addition made requires to be deleted.
6. It was further submitted that month-wise stock statement of rough diamonds copy of which is placed at page 43 of the paper book was filed before the Learned Assessing Officer. Month-wise stock statement of polished diamonds copy of which is placed at page 44 of the paper book was filed before the Learned Assessing Officer. Statement of monthly purchase of diamonds copy of which is placed at page 46 of the paper book was also filed before the Learned Assessing Officer. Statement of monthly sales of diamond, copy of which is placed at page 47 of the paper book was also filed before the Learned Assessing Officer. Further, details of polished diamond stock giving details of the party from whom purchases were made, copy of which is placed at page 58 of the paper book was filed before the Learned Assessing Officer. Still further, copy of Export Register for the period 1.04.2002 to 31.03.2003, copy of which is placed at pages 60 to 63 of the paper book was also filed before the ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -5- Learned Assessing Officer. Even copy of purchase Register from 1.04.2002 to 31.03.2003, copy of which is placed at page 64 of the paper book was also filed before the Learned Assessing Officer. Therefore, the Learned Assessing Officer was not justified in observing in his order that the assessee has not maintained quality wise details of diamonds.
7. The Learned Authorised Representative of the Assessee further explained that the fall in the gross profit ratio during the year under consideration as compared to the gross profit ratio of the immediately preceding year was on account of exchange loss and if the same is ignored then the gross profit ratio of the current year was more than that of the immediately preceding year and for this, he placed reliance on page 2 of the paper book.
8. Further, referring to Para 5.2.1 of the Assessment order, the Learned Authorised Representative of the Assessee submitted that the Learned Assessing Officer has noted in his order that the reasons put forth by the assessee for fall in gross profit ratio was convincing. After observing as above, the Learned Assessing Officer was not justified in rejecting the book result of the assessee and estimating the gross profit of the assessee and making addition to the income of the assessee.
9. The Learned Authorised Representative of the Assessee further placed reliance on the decision of Tribunal in the case of Triveni Pharma vs. Income Tax Officer ITAT, JAIPUR THIRD MEMBER BENCH (2005) 92 ITD 125 (Jp)(TM), wherein it was held as under:
ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -6- "The assessee is a dealer of poultry feed on wholesale basis. It submitted its return with the tax audit report. The auditors also filed quantitative details of opening stock, purchases, sales and the closing stock. In fact, the assessee has throughout claimed that it is making purchases of goods in bags and is selling the same in bags on wholesale basis. It neither buys nor sells less than a bag. In support of the claim photocopies of invoices have been made available. Photocopies of ledger account have also been placed on record. Having regard to the fact that clear evidence of sales and purchases in bags is available, the controversy raised relating to non-mention of unit in the quantitative statement is unnecessary. The assertion of the assessee supported by entries in accounts that purchase and sale is made in bags was not refuted with reference to material on record. Even otherwise, it is unthinkable that a dealer having turnover of Rs. 5.65 crores would sell goods in kilograms. No objection, whatsoever was raised by the AO that valuation of closing or opening stock was not available with the assessee. This is evident from the assessment order. Thus, when the AO had not raised any query it was unnecessary for the Tribunal to get involved in the controversy not raised by the AO. The AO further did not challenge that purchases and sales of the assessee are fully vouched. It is difficult to understand how accounts can be rejected when fact of vouched purchases and sales is not disputed. The only objection the AO raised was that the assessee did not maintain quantitative details of each item. It is further evident from the assessment order that the AO was not aware of amendment made in s. 145 and therefore, applied unamended provision, i.e., sub-s. (2) of s. 145. He did not apply sub-s. (3) of s. 145 which was invoked by the CIT(A) for the first time. The basis of rejection of books of account was non- maintenance of day-to-day stock register and quantitative details of goods purchased and sold. No reference whatsoever was made to the notification applying accounting standards in case of assessees maintaining books on mercantile basis. Thus, when the Revenue authorities had not analysed application of accounting standards, it was not possible for the Tribunal to see application of those standards at its level for the first time. The result is that the JM could not record clear finding as to which of the three circumstances indicated by him in para 4 of his proposed order, was applicable in this case. He has merely observed that the accounts of the assessee could not be accepted and counsel for the assessee did not address as to how provisions ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -7- of s. 145(3) are not applicable to the case; the assertions not supported by facts on record. The observations made in the order of the JM are not factually correct. The assessee has recorded purchase and sale of each item in the ledger. The said ledger was admittedly produced before the AO. From the said ledger the assessee ' s auditor prepared quantitative details and the same are filed with the return. The above statement contains all necessary details of opening stock, purchases, sales and closing stock. When complete ledger account of purchases and sales is maintained, it cannot be said that accounts of the assessee are not subject to verification. Stock available with the assessee on any given date can be found out by making reference to the ledger account. Therefore, books of account in this case could not be rejected on the ground that they were not correct or incomplete or not subject to verification. The assessee furnished monthly stock tally before the CIT(A) which was wrongly not taken into account. It is, therefore, difficult to accept that application of provision of s. 145(2) (as applied by the AO) or s. 145(3) [as done by the CIT(A)], was not challenged. Not having met with success, the assessee impugned the addition in appeal and reiterated the submissions. Copy of stock tally filed with the AO with the return, copies of ledger account, copies of sale and purchase bills were placed in the paper book. The assessee maintained that its purchases and sales were fully vouched and complete details of opening and closing stock were available with the assessee. The arguments and contention of the assessee are noted even in the impugned order of the CIT(A) as also by the AM in his order. How else the assessee was required to challenge application of provision of s. 145(3) ? In the circumstances, the books of account could not be rejected in this case. The addition in dispute is clearly unsustainable under the law. It is liable to be deleted."
10. The Learned Departmental Representative supported the order of the Learned Commissioner of Income Tax(Appeals).
11. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the Learned Assessing Officer observed that assessee has declared ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -8- gross profit of 6.95% as against 8.39% shown in the immediately preceding year. The Assessee explained before him that gross profit of the year under consideration actually works out to 7.75% and because of exchange loss the same was worked out to 6.95% in the year. Further, in the immediately preceding year there was a gain on exchange difference of 2.63% and therefore, the actual rate of gross profit in the immediately preceding year was 5.76%. He thus, explained to the Learned Assessing Officer that the gross profit ratio in the year under consideration is better than the gross profit ratio of the preceding year. The Learned Assessing Officer held the above explanation of the assessee appears to be convincing. He observing that details of diamond was not maintained quality wise rejected the book result of the assessee. He then observed from first ten days transaction of the year that gross profit of the assessee is about 8%. He therefore, estimated the gross profit of the assessee @8% and as the gross profit disclosed by the assessee was @ 7.75% the Learned Assessing Officer made addition to the income of the assessee of Rs.32,33,694/- being 0.25% of the total sales. The Learned Commissioner of Income Tax(Appeals) confirmed the above finding of the Learned Assessing Officer. We find that in the instant case, it is not in dispute that on exclusion of difference of foreign exchange gain or loss from the trading result, the rate of gross profit of the year under appeal works out to 7.75% which compares favourably with the past accepted position in the case of the assessee itself of 5.76% of gross profit in the immediately preceding year. Further, in our considered view, the Learned Assessing Officer was not justified in estimating rate of gross profit of the full year merely on the basis of the rate of gross profit of first ten days of the previous year. In business, it is not necessary that all the transactions will ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04 -9- fetch similar rate of gross profit which depends upon many factors like market condition, other competitors in the market etc. Taking a sample of merely ten days to work out profit of 365 days cannot be held to be a reasonable basis. Further, it is observed that this Tribunal in the case of the assessee itself in Assessment Year 2004-05 vide order dated 05.09.2008 passed in ITA No.555/Ahd/2008 held as under:
"In the instant case, it is observed that the trading result shown by the assessee compares favourably with the past accepted position in the case of the assessee itself. Therefore, merely rejecting the book result on the ground that quality-wise details of diamonds has not be maintained will not empower the Learned Assessing Officer to add any income shown by the assessee."
12. In view of the above, as it is in dispute that the gross profit of 7.75% disclosed in the year under consideration was more than the gross profit rate of 5.76% accepted in the case of the assessee in the immediately preceding year, in our considered view, the lower authorities were not justified in adding Rs.32,33,694/- to the income of the assessee merely on the basis of estimate and without bringing any material to show that the assessee actually earned more income than the income disclosed in the return. We therefore, delete the addition of Rs.32,33,694/- and allow the ground of appeal of the assessee.
13. Ground no.2 of the appeal reads as under:
"2. On facts and in circumstances of law the Learned Commissioner of Income Tax(Appeals) grievously erred in confirming disallowance of foreign traveling expenses Rs.6,02,348/- without appreciating the purpose and evidence of expenditure. The addition should be deleted."
ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04
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14. The brief facts of the case are that during the course of assessment proceedings, the Learned Assessing Officer has asked the appellant firm to submit the details of foreign travel expenses such as name of the person who undertook the tour, purpose of such travelling and final outcome of such travelling with supporting evidences and in response to that the appellant firm had submitted certain details in the form of name of the persons, who undertook the travelling, details of places visited by them, result of such visits and the expenses incurred for each trip. However, according to the Learned Assessing Officer besides the above referred details, no other details to substantiate its claim of expenditure were furnished and in the result, the Learned Assessing Officer was compelled to decide the issue on the basis of details available on record. Further, according to the Learned Assessing Officer, it could not be disputed that to avail the claim of any expenditure under sec.37 of the Act, the onus was on the appellant-firm to establish that such expenditure was exclusively incurred for the purposes of business activities. In support of his view, the Learned Assessing Officer had relied on the findings of the Hon'ble Rajasthan High Court in the case of Jaipur Electro Pvt. Ltd. V/s. CIT (1997) 233 ITR 535 wherein according to him, the Hon'ble Court has held that though the reasonableness of the expenditure has to be judged from the point of view of the business, such point of view has to be a prudent and reasonable point of view from an apparent taint of excessiveness, collusiveness and colourable discretion. Further, in support of this view, the Learned Assessing Officer had further relied on the findings of the Hon'ble Delhi High Court in the case of Siddho Mal & Sons V/s. C.I.T. (1980) 122 ITR 839 (Del.). Besides the above cases/decisions, the Learned Assessing Officer had also relied on the findings of the Hon'ble Gujarat ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04
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High Court in the case of Commissioner of Income Tax V/s. Chandravilas Hotel (1987) 164 ITR 102 (Guj.) wherein according to him, the Hon'ble Court has held as under:
"Mere production of vouchers in support of the claim for deduction of expenditure by way of commission would not prove the claim of the assessee. It was the duty of the assessee to prove the payment to R especially when the Income-tax Officer doubted the genuineness of it."
Thus, on the basis of the above referred facts and also by relying on the findings of the Hon'ble Court as referred to above, the Learned Assessing Officer has disallowed 10% of the total foreign travel expenses as claimed by the appellant and added a sum of Rs.6,02,348/- to the total income of the appellant for being taxed by treating the same as not incurred for the purposes of business.
15. In appeal before the Learned Commissioner of Income Tax(Appeals), the assessee submitted that the foreign travelling expenses were incurred in connection with the business activities of the appellant firm and in this regard, all the details were submitted before the Learned Assessing Officer and therefore, the disallowance as made by him should be deleted.
16. The Learned Commissioner of Income Tax(Appeals) after considering the submissions of the assessee observed that the assessee has not provided any evidence to prove his contentions and simply made general submission as were made before the Learned Assessing Officer. Thus, the assessee has totally failed to substantiate his contentions whereas the Learned Assessing Officer had given fair number of opportunity to the appellant firm to substantiate its claim regarding the ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04
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genuineness of the expenses. He therefore, justified the action of the Learned Assessing Officer in disallowing 10% of foreign traveling expenses claimed by the assessee.
17. The Learned Authorised Representative of the Assessee has submitted before us that the business of the assessee was of importing rough diamonds and exporting the same after polishing. The Representative of the assessee was required to travel abroad to inspect the quality of rough diamonds before its import by the assessee. Therefore, the foreign traveling expenses were incurred out of business necessity and accordingly the expenditure incurred was for the purposes of the business of the assessee allowable deduction while computing the total income of the assessee. Hence, the order of the Learned Commissioner of Income Tax(Appeals) should be set aside and the ground of the appeal of the assessee should be allowed.
18 Learned Departmental Representative supported the order of the Learned Commissioner of Income Tax(Appeals).
19. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the Learned Assessing Officer disallowed Rs.6,02,348/- out of the foreign traveling expenses claimed by the assessee on estimate. According to the Learned Assessing Officer, the assessee has furnished details like name of person who undertook the travel, place visited and the outcome of the tour but in his opinion, the assessee has not furnished any further details to substantiate its claim. He therefore, on an estimate ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04
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disallow 10% of the total foreign traveling expenses. The above action of the Learned Assessing Officer was confirmed by the Learned Commissioner of Income Tax(Appeals). Before us, the Learned Authorised Representative of the Assessee pointed out that the assessee's nature of business was to import rough diamonds and to export the same after polishing. It was explained that before importing the rough diamonds, the assessee's representative has to go abroad to check the quality of diamond to be imported. In the above circumstances, the assessee has to incur foreign traveling expenses. It was also contended that all the details as required by the Learned Assessing Officer was furnished by the assessee and no defect therein could be pointed out by the Learned Assessing Officer. We find that it is not in dispute that details of foreign traveling expenses was furnished by the Assessee before the lower authorities. The Learned Assessing Officer has not been able to bring on record any specific details which were asked by him but were not filed by the assessee. The AO has just made a general remark that further evidence or details to substantiate the claim was not furnished by the assessee without pointing out what was the further details or evidences which were required by him and could have been filed by the assessee but was not filed by the assessee. We further observe that the genuineness of the foreign traveling expenses, in the instant case is not in doubt. The disallowance of 10% was made without any basis or material. In these circumstances, in our considered opinion, the above arbitrarily made disallowance is not in consonance with the facts of the case and therefore, such disallowance cannot be sustained. We therefore, delete the disallowance of Rs.6,02,348/- and allow the ground of appeal of the assessee.
ITA No2608/Ahd/2006.
M/s.Pankaj Diamonds Asst.Year -2003-04
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20 Ground no.3 of the appeal reads as under:
"3. The Learned Commissioner of Income Tax(Appeals) grievously erred in confirming disallowance of Telephone expenses Rs.51,548/- on alleged personal use of partners disregarding the facts of personal expenditure debited to partners accounts. The addition should be deleted.
21. At the time of the hearing, the Learned Authorised Representative of the Assessee submitted that he is not pressing this ground of appeal. Hence, the same is dismissed as not pressed.
22. In the result, the appeal of the assessee is partly allowed.
Order signed, dated and pronounced in the Court on 23/10/2009.
Sd/- Sd/-
( MAHAVIR SINGH) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 23/10/2009
Paras#
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-V, Surat.
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
स᭜यािपत ᮧित //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad