M/s. Gami Exports, Surat v. The ACIT.,Circle-6,, Surat

ITA 124/AHD/2009 | 2005-2006
Pronouncement Date: 22-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 12420514 RSA 2009
Bench Ahmedabad
Appeal Number ITA 124/AHD/2009
Duration Of Justice 2 year(s) 6 month(s) 10 day(s)
Appellant M/s. Gami Exports, Surat
Respondent The ACIT.,Circle-6,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 22-07-2011
Date Of Final Hearing 21-07-2011
Next Hearing Date 21-07-2011
Assessment Year 2005-2006
Appeal Filed On 12-01-2009
Judgment Text
- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI JM AND A. MOHAN ALANK AMONY AM M/S GAMI EXPORTS 101 DTC BUILDING HATFALIA HARIPURA SURAT. VS. ASSTT. CIT CIRCLE-6 SURAT. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI R. N. VEPARI AR RESPONDENT BY:- SHRI P. R. GHOSH DR O R D E R PER A. MOHAN ALANKAMONY ACCOUNTANT MEMBER . THIS APPEAL IS FILED BY THE ASSESSEE DIRECTED AGAI NST THE ORDER OF THE LD.CIT(A)-IV SURAT FOR THE ASSESSMENT YEAR 2005-06 DATED 6/10/2008 RAISING THE FOLLOWING GROUNDS :- I. REJECTION OF BOOK RESULT - (1) THE LD. CIT(A) ERRED IN CONFIRMING REJECTION OF BOO K RESULT ONLY BECAUSE THE ASSESSEE HAS NOT MAINTAINED QUALITY-WIS E DETAILS WHICH IS AN IMPOSSIBILITY AS EACH DIAMOND IS A DIFF ERENT QUALITY. (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE BOO K RESULT OUGHT TO HAVE BEEN ACCEPTED. II ADDITION OF GROSS PROFIT - (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN SUSTAINING PART OF THE ADDITION AS GROSS PROFIT BY TAKING IT AT 8% ITA NO.124/AHD/2009 ASST. YEAR 2005-06 ITA NO.124/AHD/2009 ASST. YEAR 2005-06 2 (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE ENT IRE ADDITION IS REQUIRED TO BE DELETED. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS E NGAGED IN THE BUSINESS OF IMPORT EXPORT MANUFACTURING AND SALE OF DIAMONDS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.10.2005 D ECLARING TOTAL INCOME OF RS.17 66 280/-. THE RETURN OF INCOME WAS ACCOMPA NIED WITH AUDIT REPORT PROFIT AND LOSS ACCOUNT CAPITAL ACCOUNT B ALANCE SHEET ETC. SUBSEQUENTLY THE CASE WAS TAKEN UP FOR SCRUTINY. DU RING THE COURSE OF ASSESSMENT PROCEEDINGS THE LD. AO OBSERVED THAT THE ASSESSEE HAS SHOWN GROSS PROFIT OF 6.915 % COMPARED TO 8.45% FOR THE P REVIOUS YEAR. SHE HELD THAT THE GROSS PROFIT SHOWN WAS QUITE LOW COMP ARED TO OTHER DIAMOND MANUFACTURERS. A CHART PREPARED ON PAGE 3 O F THE ASSESSMENT ORDER SHOWS THAT THE GROSS PROFIT IN OTHER CASES RA NGED FROM 8.2% TO 14%. IT WAS ALSO OBSERVED THAT THE ASSESSEE WAS NOT MAIN TAINING QUALITY WISE DETAILS OF CLOSING STOCK. NORMALLY THE AVERAGE COST OF MANUFACTURING PER CARAT WOULD BE ABOUT RS.10434.26 BUT THE ASSESSEE HAD TAKEN THE VALUE OF CLOSING STOCK OF POLISHED DIAMONDS AT RS.5149.30 PE R CARAT WHICH IS SUBSTANTIALLY LOWER COMPARED TO THE COST OF PRODUCT ION. WHEN QUARRIED THE ASSESSEE STATED THAT DIAMONDS HAD VARIOUS FEATU RES AND THEREFORE NUMBER OF FACTORS HAVE TO BE CONSIDERED FOR ITS VAL UATION. THE ASSESSEE HAD ALSO STATED THAT THE VALUATION WAS DONE BY EXPE RT VALUERS AND IT WOULD NOT BE APPROPRIATE TO VALUE ALL THE DIAMONDS BY AVE RAGE METHOD AS PROPOSED BY THE AO. IT WAS FURTHER EXPLAINED THAT USUALLY IN THIS TRADE DIAMONDS OF HIGH QUALITY ARE SOLD FIRST AND WHAT RE MAINS IN STOCK ARE OF LOWER QUALITY AND LOWER VALUE. THEREFORE THE VALUE OF THE STOCK AT THE END OF THE YEAR WOULD BE LOWER. THE LD.AO DID NOT ACCEP T THE EXPLANATION GIVEN BY THE ASSESSEE. LD.AO OBSERVED THAT THE DIAM ONDS WHICH WERE EXPORTED IN THE SUBSEQUENT YEAR WERE SHOWN IN LOTS IN THE EXPORT INVOICES BUT THIS DESCRIPTION WAS NOT REFLECTED IN THE DETAI LS OF CLOSING STOCK ITA NO.124/AHD/2009 ASST. YEAR 2005-06 3 FURNISHED BY THE ASSESSEE. DUE TO THE ABOVE MENTION ED REASONS AND SINCE THE ASSESSEE HAD NOT MAINTAINED PROPER STOCK RECORD S THE LD. AO REJECTED THE BOOKS OF ACCOUNTS BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE IT ACT AND THEREAFTER ESTIMATED GP AT THE SAME RATE AS IN THE LAST YEAR IE. AT 8.45% AND MADE AN ADDITION OF RS.9 95 907/-. 3. THE ASSESSEE WENT ON APPEAL BEFORE THE FIRST APP ELLATE AUTHORITY AND IT WAS SUBMITTED THAT NO DEFECTS WERE FOUND BY THE AO IN THE BOOKS OF ACCOUNTS AND THE AOS OBSERVATION THAT QUALITY WISE DETAILS WERE NOT MAINTAINED WAS ALSO NOT BASED ON CORRECT APPRECIATI ON OF FACTS. EACH DIAMOND WAS A QUALITY BY ITSELF. THE VALUATIONS OF DIAMONDS ARE COMPLEX AND THEREFORE SUCH VALUATION IS POSSIBLE ONLY BY EX PERT VALUERS WHO VALUE THE SAME BASED ON ITS CUT COLOUR CLARITY AND CARA T. THE LD.AO WAS ALSO FURNISHED WITH LOT WISE DETAILS OF PRODUCTION AND T HEREFORE THERE WAS NO DEFECT IN THE VALUATION OF CLOSING STOCK BY THE ASS ESSEE. IT WAS FURTHER CLARIFIED BY THE ASSESSEE THAT IT HAD FILED DETAILE D CHART AND REASONS AS TO WHY THERE WAS A SLIGHT FALL IN GP DURING THE YEAR. IT WAS SUBMITTED THAT DURING THE CURRENT YEAR THERE WAS MAINLY TRADING AC TIVITY WHEREAS IN EARLIER YEARS THERE WERE PREDOMINATELY MANUFACTURIN G ACTIVITY. IT WAS ALSO POINTED OUT THAT THERE WAS INCREASE IN EXPORTS SALE S TO RS.646.78 LACS COMPARED TO THE EARLIER YEAR EXPORT SALE OF RS.466. 85 LACS. FURTHER THE COST OF PRODUCTION DECREASED BY 7.69% AND THE REALI ZATION PER CARAT ALSO DECREASED TO THE EXTENT OF 10% COMPARED TO PREVIOUS YEAR. IT WAS FURTHER SUBMITTED THAT THE GP RATE IN MANUFACTURING ACTIVIT Y DECLINED FROM 8.45% TO 8.03% I.E. BY 0.42% ONLY AND THEREFORE ADDITION COULD HAVE BEEN MADE ONLY TO THIS EXTENT EVEN IF THE ASSESSEES CONTENTI ON WAS NOT ACCEPTED. 4. THE LD. CIT(A) CONSIDERED THE SUBMISSIONS OF ASS ESSEE AND THE CONTENTION OF THE AO. AFTER TAKING INTO CONSIDERATI ON ALL THE FACTS AND ITA NO.124/AHD/2009 ASST. YEAR 2005-06 4 CIRCUMSTANCES OF THE CASE HE ESTIMATED THE GP AT TH E RATE OF 8% AS AGAINST 8.45% ADOPTED BY THE AO WITH THE FOLLOWING OBSERVAT IONS:- I HAVE CONSIDERED THE SUBMISSIONS AND GONE THROUGH THE DETAILS FILED BY THE APPELLANT. THERE IS NO DOUBT ABOUT THE FACT THAT THE APPELLANT HAS NOT MAINTAINED ANY QUALITY WISE DETAILS OF PROD UCTION AND CLOSING STOCK OF POLISHED DIAMOND. THAT WOULD MEAN THAT THE CLOSING STOCK HAS BEEN VALUED BY THE APPELLANT AS PER HIS CONVENIENCE . ALTHOUGH I AM INCLINED TO AGREE WITH THE APPELLANT THAT THE PRICE OF DIAMOND WOULD DEPEND UPON A NUMBER OF FACTORS WHICH HAVE BEEN ENU MERATED BY THE LD. AR IN HIS SUBMISSIONS BUT THIS METHOD OF VALUATION IS NOT ACCEPTABLE SINCE IT WILL DEPEND UPON THE APPELLANTS WORD ONLY AND WOULD HAVE NO SCIENTIFIC OR MATHEMATICAL BASIS BEHIND IT. THE APP ELLANT COULD VERY WILL VALUE A PIECE OF DIAMOND WHICH HAS A COST PRICE OF RS.1 LAKH AT RS.10 000/- POINTING OUT A NUMBER OF FACTORS BUT TH AT WOULD NOT BE ITS PRICE AS SUCH. IN ORDER TO ARRIVE AT A CORRECT PICT URE OF CLOSING STOCK THE ONLY METHOD AVAILABLE WOULD BE THE AVERAGE COST PRI CE WHICH HAS BEEN RIGHTLY ADOPTED BY THE AO. IT IS SEEN THAT THE VALU E OF CLOSING STOCK TAKEN BY THE APPELLANT IS FAR LESS THAN THE AVERAGE NET R EALIZABLE PRICE AND ALSO THE COST PER CARAT AFTER INCLUDING DIRECT OVERHEADS TO THE COST OF ROUGH DIAMONDS. THEREFORE THE AOS ACTION IN REVALUATION OF CLOSING STOCK IS IN ORDER. HOWEVER IN THE PRESENT CASE THE AO HAS NOT MADE THE ADDITION ON ACCOUNT OF CLOSING STOCK BUT HAS INVOKED THE PROVIS IONS OF SECTION 145(3) OF THE IT ACT TO REJECT THE BOOK RESULTS AND ESTIMA TED THE GROSS PROFIT. HOWEVER I ALSO FIND SOME MERITS IN THE SUBMISSIONS OF THE APPELLANT THAT THERE WAS A CHANGE IN BUSINESS ACTIVITY DURING THE YEAR SINCE MANUFACTURING AS WELL AS TRADING ACTIVITY WAS UNDER TAKEN BY THE APPELLANT AS COMPARED TO ONLY MANUFACTURING ACTIVIT Y IN THE EARLIER YEAR BUT THIS ALONE CANNOT BE TAKEN AS A REASON FOR SHAR P DECLINE IN THE GP RATE. SINCE THE BOOKS OF ACCOUNTS HAVE BEEN REJECTE D THE PROFIT HAS TO BE ESTIMATED AND I AM OF THE CONSIDERED VIEW THAT IT W OULD BE FAIR AND REASONABLE IF THE GP IS TAKEN AT SLIGHTLY A LESS TH AN THE LAST YEARS VALUE AT 8.45% ON ACCOUNT OF THE FACT THAT SOME TRADING A CTIVITY HAS ALSO BEEN DONE BY THE APPELLANT DURING THE YEAR UNDER APPEAL. I THEREFORE ESTIMATE THE GP @ OF 8% AS AGAINST 8.45% ADOPTED BY THE AO. 5. AGGRIEVED WITH THE ABOVE ORDER OF THE LD. CI T(A) THE ASSESSEE IS IN APPEAL BEFORE US. LD.AR STOUTLY ARGUED THAT THE REV ENUE HAD GROSSLY ERRED IN THEIR FINDINGS AND REITERATED THE SUBMISSI ONS MADE ON EARLIER OCCASIONS BEFORE THE REVENUE. LD.AR HOWEVER DESIRED NOT TO PRESS THE GROUND OF REJECTION OF THE BOOKS OF ACCOUNTS BUT PR AYED THAT THE RATE OF ITA NO.124/AHD/2009 ASST. YEAR 2005-06 5 GP AT 8% ADOPTED BY THE LD.CIT(A) IS EXCESSIVE AND THEREFORE IT MAY BE REDUCED TO 7%. 6. ON THE OTHER HAND THE LD.DR VEHEMENTLY ARG UED STATING THAT THE LD.CIT(A) HAD CONSIDERED THE ISSUE IN DETAIL AND HA VE GRANTED SUFFICIENT RELIEF TO THE APPELLANT AND THEREFORE HIS ORDER MAY BE CONFIRMED. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CARE FULLY STUDIED THE MATERIALS BEFORE US. FROM THE FACTS OF THE CASE IT IS APPARENT THAT THE ASSESSEE HAD ARRIVED ITS G.P AT 6.91% AND THE SAME WAS ENHANCED BY THE LD.AO TO 8.45% BASED ON THE ASSESSEES EARLIER YEAR S GP AND BY REJECTING THE BOOKS OF ACCOUNTS FOR INACCURATE RECO RDING OF STOCK. THE LD.CIT(A) THOUGH ACCEPTED THE STAND OF THE LD.AO K EEPING IN VIEW OF THE COMPLEXITIES OF THE ISSUE REDUCED THE GP TO 8% . THE ASSESSEE AGITATED BY THE TREATMENT MET OUT BY THE REVENUE PR AYS FOR FURTHER REDUCTION IN THE ADDITIONS MADE. KEEPING IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE ISSUE BEFORE US TO MEET BOTH ENDS AND TO AVOID PROTRACTED UNPRODUCTIVE LITIGATION IN THE INTEREST OF JUSTICE WE ARE OF THE CONSIDERED OPINION THAT THE ESTIMATION OF GP AT 7.5 % SHOULD SUFFICE. IT IS ORDERED ACCORDINGLY. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 22/7/11. SD/- SD/- (BHAVNESH SAINI) (A. MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD DATED : 22/7/11. MAHATA/- ITA NO.124/AHD/2009 ASST. YEAR 2005-06 6 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD 1.DATE OF DICTATION 21/7/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 21/7/11. /OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..