Income Tax Appellate Tribunal - Ahmedabad
Parvati Gems,, Surat vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "D" BENCH AT SURAT CAMP,
AHMEDABAD
Before Shri T.K. Sharma, Judicial Member, and
Shri D. C. Agrawal, Accountant Member
ITA No.2846 & 3329/Ahd/2007
Assessment Year: 2004-05
Date of hearing:18.5.10 Drafted:19.5.10
M/s. Parvati Gems, 31- V/s. Asstt. Commissioner of
32, Hiranagar Society, Income-tax, Circle-9,
Varchha Road, Surat Surat
PAN No.AAFFP2965C
Asstt. Commissioner of V/s. M/s. Parvati Gems, 31-
Income-tax, Circle-9, 32, Hira Nagar Society,
Surat Varachha Road, Surat
(Appellant) .. (Respondent)
Assessee by :- Shri R.N.Vepari, AR
Revenue by:- Shri Sanjeev Kashyap, SR-DR
ORDER
PER D.C.Agrawal, Accountant Member:-
These are two cross appeals - one filed by the assessee and another filed by Revenue against the order of Ld. CIT(Appeals)-V, Surat dated 22-05-2007.
2. The facts of the case are that the assessee is a partnership-firm engaged in the business of import of rough diamonds by grade them for processing and for polishing of and export of polished diamonds. The assessee used to purchase rough diamonds from market abroad and India. They were purchased in lots. The quality and the price varied according to the lots. The rough diamonds are ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 2 segregated into two parts - one which can be subjected to polishing and others which cannot be subjected to polishing due to lower quality of such diamonds. The identified diamonds for polishing are further categorized according to their weight and inner contents such as clarity and spots inside. Combination of good colour, clarity and weight would fetch higher price. The Assessing Officer in this case rejected the books of accounts on the ground that assessee did not produce qualitative record of the diamonds obtained after cutting and polishing, as according to assessee record of quantitative purchased and quantitative sales minus wastage was the only record book kept and produced before the Assessing Officer. The Ld. CIT(Appeals) confirmed the rejection of the books on the ground that not only there was no qualitative record but also the basis for valuation of diamond was not disclosed. Ld. CIT(Appeals) held that in absence of qualitative details with regard to polished diamond pieces shown in the closing stock, it is difficult to accept the valuation shown by the assessee. He accordingly, upheld the rejection of the book results.
3. Against this Ld. AR for the assessee submitted that the Tribunal in ITA No.2632/Ahd/2003 in the case of ITO v. M/s. B. Sureshkumar & Co. for assessment year 2000-01 pronounced on 19-12-2007, in the case of ACIT v. M/s. Gami Exports in ITA No.3146/Ahd/2007 pronounced on 12-02-2010 and in the case of M/s. Pankaj Diamond v. ACIT in ITA No.555/Ahd/2008 for assessment year 2004-05 pronounced on 05-09-2008, has accepted the book results even though the as0sessee had not maintained qualitative records.
4. Ld.SR-DR on the other hand submitted that in none of the cases, Tribunal held that books cannot be rejected even if assessee does not maintain qualitative record of diamonds.
ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 3
5. After considering the rival submissions of the parties, we tend to agree with Ld. SR-DR that in none of these cases referred to by Ld. AR Tribunal has held that if assessee does not maintain qualitative record then books cannot be rejected. To say that gross profit can be deduced as no substantial defect has been found is not equal to saying that books cannot be rejected even though qualitative record is not maintained. In the case of M/s. B. Sureshkumar & Co. (supra) the Tribunal observed as under:-
"4. We have considered the rival submissions and the facts and circumstances of the case. After careful consideration of the totality of the facts and circumstances of the case, we are of the opinion that the assessee having furnished the quantity-wise and rate-wise details of closing stock of finished diamonds, there was no question for the Assessing Officer to arrive at the conclusion that the assessee inflated the value of cost price without bringing any evidence to show that the rate adopted by the assessee for every quality of diamond was more than the cost price or the market price. Simply, relying on one sale bill without verifying the quality of diamond sold under that Bill. In our opinion, was not the right course to arrive at the conclusion that the assessee had inflated its closing stock. The fact that the assessee had sold 175.18 carat of diamonds @ Rs.14,705/- as per invoice No.2 dated 20/05/01 (in the copy submitted by the assessee, the date is appeared as 29/05/02, but when the ld. counsel for the assessee asked to clarify he submitted, that the correct date is 29/05/2001 and may be read accordingly), which was out of closing stock as on 31/03/2000 and the ld. DR having not disputed this fact, the assessee's plea that valuation of closing stock a on 31/03/2000 was as per method followed by it consistently, i.e. cost price or market price whichever was less gets supported. It is an admitted fact that so far as diamond industry is concerned, each and every piece of polished/finished diamond has got to be of different quality and fetches different price in the market and since the Assessing Officer had not brought any material to deal with this aspect of the issue, we are in agreement with the submission of the assessee as well as the finding and the CIT(Appeals) that application of average method on the basis of one sale bill was not justified on the pat of the Assessing Officer."
In the case of M/s. Gami Exports (supra), Tribunal observed as under:-
"8. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. We find that the ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 4 year under appeal, the turnover of assessee exceeds Rs.466 lacs. The assessee has processed more than 16000carat of rough diamonds during the year and exported over 4500 carat of diamonds. It is admitted fact that in this line of business till the rough diamonds are processed, the quality of the diamonds manufactured is not know. Even after the diamonds are processed, the quality will depend upon various factors, such as, colour, clarity, cut and carat. Therefore, in terms of these factors, each diamond manufactured is different from the other. Considering the volume of business, it is impracticable to have qualitative as well as quantitative records of the total stock in possession of the assessee. Such stock has to be grouped together so as to find common value for the group of diamonds. As per the valuation report obtained from approved valuer, he has bifurcated the valuation in 31 groups having different rates. As contended this is the usual practice in the Industry and which the assessee follows. This contention is not found to be correct."
In the case of M/s. Pankaj Diamond (supra) Tribunal observing as under:-
"16. We find that the book result was rejected by the lower authorities only on the ground that quality-wise details of diamonds were not kept by the assessee. Further, the addition was made merely on estimate basis without bringing on record any material to show that the assessee has earned any Income-tax in excess of the amount disclosed in the return. It is an established position of law that even after rejecting the book result if the assessing authority addition any Income-tax to the Income-tax declared by the assessee, then, the said addition has to be based on some material and the same cannot be added on the whims or caprice of the assessing authority. In the instance case, it is observed that the trading result shown by the assessee companies 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 been maintained will not empower the A.O to add any Income-tax to the Income-tax shown by the assessee. We also observe that no material could be brought on record by the Revenue to show that the value of closing stock of diamonds shown by the assessee at Rs.16,25,60,000/-was incorrect or the method of valuation consistently adopted and followed by the assessee was incorrect. In the absence of any material to shown that the actual value of closing stock possessed by the assessee as on 31.3.2004, was more than the value shown by the assessee, in our considered opinion, the A.O was not justified in making trading addition of Rs.53,07,218/-. Further, it is observed that none of the lower authorities have found that the various expenses claimed by the assessee ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 5 in its P&L A/c were not supported by vouches or not verifiable or were not genuine. In the above circumstances, the Ld.CIT(A) was not justified in rejecting various expenses disclosed by the assessee's day-to-day maintained books of account. Further, in business, profit is a result of various dynamics. The result of two different businessmen doing the business sin the same line may defer greatly because of various reasons for e.g. the value of plant and machinery employed in the business, the ratio of own capital verses borrowed capital employed in the business, time devoted by the owner of the business, risk taking capacity of the owner, etc. Thus, merely because the profit disclosed by the other businessmen in terms of the turnover of its business defers with the rate of profit disclosed body the assessee in terms of his turnover will not, by itself, empowers the Ld. CIT(A) to add any amount to the Income-tax of the assessee. The Ld. CIT(A) has brought no material on record to shown that the rate of net profit of the assessee should be the same as that in the case of other assessee, which were considered by him. We are confident that the Revenue authorities must have come across the case of other assessee's whereby securing similar of more turnover the assessee suffers a loss in the business or secured lesser profit than the assessee. In the instant case, as no specific defect in the various expenses claimed by the assessee in the P&L A/c could be pointed out by the Revenue, the Ld. CIT(A) was not justified in arbitrarily applying the rate of net profit of 3% in making addition of Rs.2,19,33,591/-. As the addition of Rs.53,07,218/- and Rs.2,19,33,591/- assessee found to be not based on cogent and relevant material and are based merely on the surmises and conjectures, the same are found unsustainable on the facts of the instant case. We therefore, delete the addition of Rs.53,07,218/- and Rs.2,19,33,591/-."
Thus, nowhere it is held that book results should be accepted even if assessee does not maintain qualitative records of the diamonds. It is different aspect that further addition can not be sustained because there was no material available with the Assessing Officer to make the addition. However, in similar circumstances, ITAT Mumbai Bench in the case of DCT v. Samir Diamonds Export (P) Ltd. (1999) 71 ITD 75 (Mum) held that if assessee is not maintaining qualitative record of diamonds the books can be rejected. Tribunal held as under:-
ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 6 "Furthermore, the very fact that the assessee had been issuing rough diamonds and the expected yield was noted on the packets and those details were verified by the assessee or its representative when cut and polished diamonds were received from labourers, showed that the assessee could not run its business without getting account of each and every piece of diamond, yet, it was stated that those packets had been destroyed. This would mean that the Assessing Officer was correct in coming to the conclusion that the accounts were not correct and complete because the corroborative and contemporaneous evidence had been admittedly destroyed by the assessee.
Thus, the way in which the assessee should have actually maintained the lots of its diamonds, as admitted before the Commissioner (Appeals), would only confirm that the assessee had been, in fact, noting down and maintaining the details required by the Assessing Officer when it received back the cut and polished diamonds from the labour parties and when it was sorting them in different lots, sizes, quality, etc. From this also it was to be inferred that the assessee had withheld the complete and correct details regarding its accounts from the Assessing Officer and, hence, the accounts which the Assessing Officer was allowed to examine were not correct and complete and, hence, he was justified in invoking the provisions of section 145(2).
Even if in the past, from year to year, the department has taken the view that the books of account maintained in a particular manner are to be treated as correct and complete, a succeeding Assessing Officer can point out that looking to the facts of that case and investigation done by him, they cannot be treated as correct and complete. That is what the Assessing Officer who framed the assessment in the instant case had done. No assessee can claim that since its books of account were found to be correct and complete in a preceding year, it is a conclusive proof of the fact that the books of account for subsequent year or years are also complete and that no Assessing Officer can either question the assessee on this issue or even after questioning take the view that the books of account for that subsequent year are not correct and complete. As per the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 where the accounts were prepared without disclosing the real cost of the stock-in-trade albeit on sound expert advise in the interest of efficient administration of business, it would be the duty of the Assessing Officer to determine the taxable income by making such computation as he thinks fit. Therefore, the claim of the assessee that it was the assessee's prerogative to ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 7 maintain the books of account in the manner it liked and that the Assessing Officer could not reject them because they had been accepted in the past, could no longer be accepted and had to be rejected. Regarding the question as to whether the Assessing Officer was justified in rejecting the books of account, the Assessing Officer's duty is to ascertain the correct profits from the books of account maintained by the assessee and if the books of account are not correct and complete, the fact that all other assessees in that trade are maintaining similar accounts, cannot be a basis for superseding the decision of the Assessing Officer whereby he had rejected the assessee's books of account. Secondly, neither before the Assessing Officer, nor before the Commissioner (Appeals), nor before the Tribunal any evidence had been adduced to corroborate the claim of the assessee that the details required by the Assessing Officer were not maintained in the trade in which the assertion was engaged. At best, it could be said to be a self-serving association made by the assessee and accepted by the Commissioner (Appeals) without any evidence or material in support of this assertion. It had, therefore, to be ignored.
As regards observations of the Commissioner (Appeals) that no specific defects had been pointed out by the Assessing Officer in the assessee's accounts, the fact that relevant papers containing details regarding rough diamonds given for cutting, shaping, etc., and receiving them back from labour parties had been destroyed, was sufficient to show that when the primary and original documents which should have corroborated the entries in the books of account had been destroyed, the entries made in the books of account could not be verified and, consequently, the Assessing Officer was entitled to hold that the books of account were not correct and complete.
Even the assessee's own export bills recorded the number of pieces per carat, from just four pieces per carat to as many as 200 pieces per carat and, yet, it was claimed before the Assessing Officer that no piece-wise details were maintained by the assessee. The Assessing Officer had also pointed out that labour charges were also not proved and were inflated and non-genuine. He had also pointed out that the labour charges were determined "on the basis of rough diamonds per carat and number of pieces per carat", but no such details were stated to have been maintained on the plea that it was a Herculean task. For this reason also, the books of account could not be said to be correct and complete. The assessee had shown almost a uniform yield between 25 per cent to 26 per cent of polished diamonds from the rough diamonds. In the absence of ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 8 details maintained by the assessee for such a costly commodity as diamonds, it could not be said that the yield in respect of each rough stone had been correctly recorded in the books of account. Even otherwise, as pointed out by the Assessing Officer in his order, when the diamonds obtained by the assessee after cutting and polishing, ranged from 4 pieces per carat to 200 pieces per carat, no prudent human being having ordinary commonsense would believe that the yield of cut and polished diamonds would be uniform at 25 per cent to 26 per cent only. Thus, on the basis of preponderance of probability also it was to be held that the inference of the Assessing Officer to the effect that the correct record of the assessee's business had either not been maintained, or even if maintained, was refused to be produced before the Assessing Officer, was correct. Therefore, so far as the Assessing Officer was concerned, the books of account produced before him were not correct and complete. Another defect which he pointed out was that there was no record to correlate as to whether the same quality of diamonds had been received after cutting and polishing of which the rough was given. The price of diamonds may vary substantially on the basis of its colour and clarity, cut and carat. Hence, no assessee dealing in diamonds can leave it to the sweet will of the labour party to take rough of higher quality and higher weight from the assessee and give back the cut and polished diamonds of inferior quality and lesser weight per piece. The assessee itself had conceded that when the rough diamonds were given for cutting and polishing, the expected yield was noted on the packets and when the cut and polished diamonds were received back from the labour parties, they were assorted into different lots, sizes and quality-wise and they were thereafter offered for sale to customers. Further, there was no such record to show if any special instructions were given to the agent to have particular roughs to be cut in a particular manner. No such details had been produced on the ground that they could not be maintained. Even if it is true, while it may be ignored in the business of rice, referred to by the assessee, or other food grains or other commodities involving bulk dealings, it can in no circumstances be ignored in the business of diamonds where each and every piece, whether smallest or bigger one, carries substantial monetary value and no diamond dealer can sweep away the diamonds without counting each piece as might be done by the traders in rice business. Therefore, non-maintenance of these details or non-production of these details in diamond business, justified the Assessing Officer to come to the conclusion that the books of account maintained by the assessee were not correct and complete.
ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 9 Taking all these factors into account, the observation of the Commissioner (Appeals) that no specific defects had been pointed out by the Assessing Officer was not factually correct and that the Assessing Officer after having pointed out various defects regarding incorrectness and incompleteness of the accounts of the assessee was justified in invoking the provisions of section 145(2). "
6. In view of the above, we uphold the rejection of books and applicability of provision of Sec.145(3). This ground of assessee's appeal is accordingly rejected.
7. The Assessing Officer after rejecting the books proceeded to estimation of profits. He examined the audit report in Form No.3CD and found notice in the following Schedule as under:-
Item Opening Value (Rs) Closing Value (Rs)
(carats) (carats)
Rough 6290.72 1,27,84,824 33748.62 5,49,33,837
diamonds
Polished 40611.09 3,65,53,320 3791.93 2,78,10,885
diamonds
Rejected 4321.2 53,382 4594.67
diamond
58,851
The Assessing Officer noticed that assessee has been supplying/exporting goods to M/s.Bhargav Gems Co. Ltd. Its export to M/s. Bhargav Gems Co. Ltd. is 90% of the total export. Once of the partner of the assessee-firm is Shri Bhargav B Patel and the name of the Thiland Co. is also M/s. Bhargav Gems Co. Ltd. The assessee did not produce the details about constitution of M/s. Bhargav Gems Co. Ltd. It is carrying on 90% of business with them. The Ld. CIT(Appeals) noticed that one Shri Nilesh Patel is the person covered u/s.40A2(b) of the Act and he is also associated with M/s. Bhargav Gems Co. Ltd. No documentary evidence to support that none of the partners of the ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 10 assessee-firm were connected at all with M/s. Bhargav Gems Co. Ltd. was provided, even though the Assessing Officer as well as Ld. CIT(Appeals) called for the same. Assessee failed to prove that sale to M/s. Bhargav Gems Co. Ltd. was made at arm's length price. It was claimed that GP varied from lot-to-lot but, no such details were provided to the Assessing Officer. Thus, no lot-wise description of stock such as number of piece per carat, was provided to the AO. The assessee also failed to give details as to decrease in average sale prices but no details of increase in labour cost was given. The AO noticed that GP rate was decreased from 8.11% in last year to 6.0% in the current year. But no satisfactory explanation of such fall was given except showing that turnover has increased to Rs.7.49 crore from Rs.4.20 crores in the assessment year 2002-03 and that labour cost has increased. The AO rejected the explanation and proceeded to estimate profits by enhancing GP by 2% of the turnover which resulted in an addition of Rs.14,99,631/-. The AO accordingly also allowed deduction u/s.80HHC of the Act on such enhanced profit.
8. Ld. CIT(Appeals) confirmed the addition but reduced the addition to 1% of the turnover as against 2% made by the Assessing Officer by observing as under:-
"16. I have perused the facts of the case, as discussed by the A.O., and also went through the submission made by the A.R. After the perusal of the facts, it is seen that the appellant could not submit the qualitative details with regard to the diamonds manufactured during the year a well as the diamonds shown in the closing stock. It is pertinent to mention while exporting the diamonds, the appellant had elaborately mentioned the quality and quantity of each piece of diamond and realized the export price accordingly and in such a situation, it is difficult to believe the submission as made by the A.R that it was very difficult to maintain qualitative detail for each and every piece of diamond manufactured during the year because of huge number of cut and polished pieces, obtained from the labour parties after the manufacturing/polish work carried out by them. In such a situation, I agree with the observations of the A.O that in the absence of qualitative details with regard to the ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 11 polished diamonds pieces shown as pat of the closing stock, it was difficult to accept the valuation as reflected by the appellant and consequently, I hold that finding of the A.O that its book results were not reliable appears to be acceptable.
17. While analyzing the reasons for fall in G.P. ratio by 2.10%, the submission as made by the A.R does not appear to be completely convincing, as the difference between the G.P shown during the year in comparison to the same, as reflected in immediate preceding astt. year is found quite substantive. The submission as made by the A.R that the fall in G.P ratio was mainly because of the amount of exchange rate difference receipts which was higher during the year in comparison to earlier year is also not very convincing because that is not the only factor found responsible for fall in G.P ratio and along with that there were other factors such as increase in labour expenses, reduction in profit margin and increase in the cost of production of diamonds on per carat basis etc. for which the A.R did not make any proper submission. The submission of the A.R that each diamond piece is different than the other and commands different price in the international market and hence, a steady profit margin could not be maintained cannot be accepted in entirety because this situation had also prevailed ion earlier years wherein, the appellant carried out the same kind of business of import and export of diamonds and reflected higher profit margin. I, therefore, in view of above referred discussion hold that the addition on account of low G./p made by the A.O was justified but however, taking into consideration, the various trade situations as mentioned by the A.R. I find that it would be proper if the addition is restricted at 1% of the total turnover which comes to Rs.7,49,815/- and thus, the addition made by the A.O is restricted to this amount. In this way the appellant gets a relief of Rs.7,49,815/-. Accordingly, this ground of appeal is partly allowed."
9. The Department is in appeal against relief given by Ld. CIT(Appeals), whereas as assessee is in appeal against the addition sustained. Ld. AR basically submitted that GP in this trade cannot be constant which depends upon the market conditions. Turnover has increased and labour cost has also increased. The Assessing Officer has not found any specific defect and there is no material for making addition.
ITA No.2846 & 3329/Ahd/2007 A.Y. 2004-05 M/s. Parvati Gems v. ACIT Cir-9, SRT Page 12
10. On the other hand, Ld.SR-DR submitted that Assessing Officer has given detailed discussion and pointed out the defects such as there is no basis for valuation of closing tock, there is no explanation in fall in GP and the labour and charges are not verifiable. Assessee is not maintaining qualitative details, and lot-wise description of diamonds were not given.
11. After considering the rival contentions we are of the considered view that no interference is called for in the order of Ld. CIT(Appeals). The labour charges as shown by the assessee are not verifiable as substantial payment is made in cash. The wastage shown by the assessee is also not subject to verification, fall in GP is also substantial as compared to earlier year's. Ld. CIT(Appeals) has given cogent reasons as to why books should be rejected and profit should be enhanced by 1%. We are convinced with the reasoning given by Ld. CIT(Appeals) and therefore we uphold his order.
12. In the result, both the appeals one filed by Revenue and other filed by the assessee are dismissed.
Order pronounced in Open Court on 28/05/2010
Sd/- Sd/-
(T.K.Sharma) (D.C.Agrawal)
(Judicial Member) (Accountant Member)
Ahmedabad,
Dated : 28/05/2010
*Dkp
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-V, Surat
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad