M/s. Parvati Gems,, Surat v. The ACIT, Range-9,, Surat

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- 32 HIRANAGAR SOCIETY VARCHHA ROAD SURAT PAN NO.AAFFP2965C ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE-9 SURAT V/S . V/S . ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE-9 SURAT M/S. PARVATI GEMS 31- 32 HIRA NAGAR SOCIETY VARACHHA ROAD SURAT (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI R.N.VEPARI AR REVENUE BY:- SHRI SANJEEV KASHYAP SR-DR O R D E R PER D.C.AGRAWAL ACCOUNTANT MEMBER:- THESE ARE TWO CROSS APPEALS ONE FILED BY THE ASS ESSEE 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 T HEM FOR PROCESSING AND FOR POLISHING OF AND EXPORT OF POLISHED DIAMONDS. THE A SSESSEE USED TO PURCHASE ROUGH DIAMONDS FROM MARKET ABROAD AND INDIA. THEY W ERE PURCHASED IN LOTS. THE QUALITY AND THE PRICE VARIED ACCORDING TO THE L OTS. 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 SUBJEC TED TO POLISHING AND OTHERS WHICH CANNOT BE SUBJECTED TO POLISHING DUE TO LOWER QUALITY OF SUCH DIAMONDS. THE IDENTIFIED DIAMONDS FOR POLISHING ARE FURTHER C ATEGORIZED 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 GRO UND THAT ASSESSEE DID NOT PRODUCE QUALITATIVE RECORD OF THE DIAMONDS OBTAINED AFTER CUTTING AND POLISHING AS ACCORDING TO ASSESSEE RECORD OF QUANTITATIVE PU RCHASED AND QUANTITATIVE SALES MINUS WASTAGE WAS THE ONLY RECORD BOOK KEPT AND PRO DUCED BEFORE THE ASSESSING OFFICER. THE LD. CIT(APPEALS) CONFIRMED THE REJECTION OF THE BOOKS ON THE GROUND THAT NOT ONLY THERE WAS NO QUALITATIV E RECORD BUT ALSO THE BASIS FOR VALUATION OF DIAMOND WAS NOT DISCLOSED. LD. CIT(AP PEALS) HELD THAT IN ABSENCE OF QUALITATIVE DETAILS WITH REGARD TO POLISHED DIAM OND PIECES SHOWN IN THE CLOSING STOCK IT IS DIFFICULT TO ACCEPT THE VALUAT ION SHOWN BY THE ASSESSEE. HE ACCORDINGLY UPHELD THE REJECTION OF THE BOOK RESUL TS. 3. AGAINST THIS LD. AR FOR THE ASSESSEE SUBMITTED T HAT 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 I N 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 H AS ACCEPTED THE BOOK RESULTS EVEN THOUGH THE AS0SESSEE HAD NOT MAINTAINE D QUALITATIVE RECORDS. 4. LD.SR-DR ON THE OTHER HAND SUBMITTED THAT IN NON E 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 P ARTIES 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 A S 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 O F M/S. B. SURESHKUMAR & CO. (SUPRA) THE TRIBUNAL OBSERVED AS UNDER:- 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND TH E FACTS AND CIRCUMSTANCES OF THE CASE. AFTER CAREFUL CONSIDERAT ION 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 RAT E-WISE DETAILS OF CLOSING STOCK OF FINISHED DIAMONDS THERE WAS NO QU ESTION FOR THE ASSESSING OFFICER TO ARRIVE AT THE CONCLUSION THAT THE ASSESSEE INFLATED THE VALUE OF COST PRICE WITHOUT BRINGING ANY EVIDENCE T O SHOW THAT THE RATE ADOPTED BY THE ASSESSEE FOR EVERY QUALITY OF DIAMON D 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 BI LL. IN OUR OPINION WAS NOT THE RIGHT COURSE TO ARRIVE AT THE CONCLUSION TH AT THE ASSESSEE HAD INFLATED ITS CLOSING STOCK. THE FACT THAT THE ASSES SEE 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 APPEARE D AS 29/05/02 BUT WHEN THE LD. COUNSEL FOR THE ASSESSEE ASKED TO CLAR IFY HE SUBMITTED THAT THE CORRECT DATE IS 29/05/2001 AND MAY BE READ ACCO RDINGLY) WHICH WAS OUT OF CLOSING STOCK AS ON 31/03/2000 AND THE LD. D R HAVING NOT DISPUTED THIS FACT THE ASSESSEES PLEA THAT VALUATION OF CL OSING STOCK A ON 31/03/2000 WAS AS PER METHOD FOLLOWED BY IT CONSIST ENTLY 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 DIFFEREN T QUALITY AND FETCHES DIFFERENT PRICE IN THE MARKET AND SINCE THE ASSESSI NG OFFICER HAD NOT BROUGHT ANY MATERIAL TO DEAL WITH THIS ASPECT OF TH E ISSUE WE ARE IN AGREEMENT WITH THE SUBMISSION OF THE ASSESSEE AS WE LL 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 ASSES SING 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 RE CORD. 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 ROUG H DIAMONDS DURING THE YEAR AND EXPORTED OVER 4500 CARAT OF DIAMONDS. IT IS ADMITTED FACT THAT IN THIS LINE OF BUSINESS TILL THE ROUGH DIAMON DS ARE PROCESSED THE QUALITY OF THE DIAMONDS MANUFACTURED IS NOT KNOW. E VEN AFTER THE DIAMONDS ARE PROCESSED THE QUALITY WILL DEPEND UPO N VARIOUS FACTORS SUCH AS COLOUR CLARITY CUT AND CARAT. THEREFORE IN TERMS OF THESE FACTORS EACH DIAMOND MANUFACTURED IS DIFFERENT FRO M THE OTHER. CONSIDERING THE VOLUME OF BUSINESS IT IS IMPRACTIC ABLE TO HAVE QUALITATIVE AS WELL AS QUANTITATIVE RECORDS OF THE TOTAL STOCK IN POSSESSION OF THE ASSESSEE. SUCH STOCK HAS TO BE GROUPED TOGET HER SO AS TO FIND COMMON VALUE FOR THE GROUP OF DIAMONDS. AS PER THE VALUATION REPORT OBTAINED FROM APPROVED VALUER HE HAS BIFURCATED TH E VALUATION IN 31 GROUPS HAVING DIFFERENT RATES. AS CONTENDED THIS IS THE USUAL PRACTICE IN THE INDUSTRY AND WHICH THE ASSESSEE FOLLOWS. THIS C ONTENTION 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 T HE LOWER AUTHORITIES ONLY ON THE GROUND THAT QUALITY-WISE DETAILS OF DIA MONDS WERE NOT KEPT BY THE ASSESSEE. FURTHER THE ADDITION WAS MADE MERELY ON ESTIMATE BASIS WITHOUT BRINGING ON RECORD ANY MATERIAL TO SHOW THA T THE ASSESSEE HAS EARNED ANY INCOME-TAX IN EXCESS OF THE AMOUNT DISCL OSED IN THE RETURN. IT IS AN ESTABLISHED POSITION OF LAW THAT EVEN AFTER R EJECTING THE BOOK RESULT IF THE ASSESSING AUTHORITY ADDITION ANY INCOME-TAX TO THE INCOME-TAX DECLARED BY THE ASSESSEE THEN THE SAID ADDITION H AS 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 OB SERVED THAT THE TRADING RESULT SHOWN BY THE ASSESSEE COMPANIES FAVOURABLY W ITH THE PAST ACCEPTED POSITION IN THE CASE OF THE ASSESSEE ITSELF. THEREF ORE 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 T HAT NO MATERIAL COULD BE BROUGHT ON RECORD BY THE REVENUE TO SHOW T HAT 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 A DOPTED AND FOLLOWED BY THE ASSESSEE WAS INCORRECT. IN THE ABSENCE OF ANY M ATERIAL 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 ASS ESSEE IN OUR CONSIDERED OPINION THE A.O WAS NOT JUSTIFIED IN MA KING TRADING ADDITION OF RS.53 07 218/-. FURTHER IT IS OBSERVED THAT NO NE OF THE LOWER AUTHORITIES HAVE FOUND THAT THE VARIOUS EXPENSES CL AIMED 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 ASSE SSEES DAY-TO-DAY MAINTAINED BOOKS OF ACCOUNT. FURTHER IN BUSINESS PROFIT IS A RESULT OF VARIOUS DYNAMICS. THE RESULT OF TWO DIFFERENT BUSIN ESSMEN DOING THE BUSINESS SIN THE SAME LINE MAY DEFER GREATLY BECAUS E OF VARIOUS REASONS FOR E.G. THE VALUE OF PLANT AND MACHINERY EMPLOYED IN THE BUSINESS THE RATIO OF OWN CAPITAL VERSES BORROWED CAPITAL EMPLOY ED IN THE BUSINESS TIME DEVOTED BY THE OWNER OF THE BUSINESS RISK TAK ING CAPACITY OF THE OWNER ETC. THUS MERELY BECAUSE THE PROFIT DISCLOS ED BY THE OTHER BUSINESSMEN IN TERMS OF THE TURNOVER OF ITS BUSINES S 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 T O THE INCOME-TAX OF THE ASSESSEE. THE LD. CIT(A) HAS BROUGHT NO MATERIA L 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 HI M. WE ARE CONFIDENT THAT THE REVENUE AUTHORITIES MUST HAVE COME ACROSS THE CASE OF OTHER ASSESSEES WHEREBY SECURING SIMILAR OF MORE TURNOVE R THE ASSESSEE SUFFERS A LOSS IN THE BUSINESS OR SECURED LESSER PROFIT THA N 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 TH E RATE OF NET PROFIT OF 3% IN MAKING ADDITION OF RS.2 19 33 591/-. AS THE A DDITION 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 O N THE SURMISES AND CONJECTURES THE SAME ARE FOUND UNSUSTAINABLE ON TH E 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 B E ACCEPTED EVEN IF ASSESSEE DOES NOT MAINTAIN QUALITATIVE RECORDS OF THE DIAMON DS. 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. H OWEVER 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 NO T MAINTAINING QUALITATIVE RECORD OF DIAMONDS THE BOOKS CAN BE REJ ECTED. 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 B EEN ISSUING ROUGH DIAMONDS AND THE EXPECTED YIELD WAS NOTED ON THE PA CKETS AND THOSE DETAILS WERE VERIFIED BY THE ASSESSEE OR ITS REPRES ENTATIVE WHEN CUT AND POLISHED DIAMONDS WERE RECEIVED FROM LABOURERS SHO WED THAT THE ASSESSEE COULD NOT RUN ITS BUSINESS WITHOUT GETTING ACCOUNT OF EACH AND EVERY PIECE OF DIAMOND YET IT WAS STATED THAT THO SE PACKETS HAD BEEN DESTROYED. THIS WOULD MEAN THAT THE ASSESSING OFFIC ER WAS CORRECT IN COMING TO THE CONCLUSION THAT THE ACCOUNTS WERE NOT CORRECT AND COMPLETE BECAUSE THE CORROBORATIVE AND CONTEMPORANEOUS EVIDE NCE HAD BEEN ADMITTEDLY DESTROYED BY THE ASSESSEE. THUS THE WAY IN WHICH THE ASSESSEE SHOULD HAVE ACT UALLY MAINTAINED THE LOTS OF ITS DIAMONDS AS ADMITTED BEFORE THE COMMIS SIONER (APPEALS) WOULD ONLY CONFIRM THAT THE ASSESSEE HAD BEEN IN F ACT NOTING DOWN AND MAINTAINING THE DETAILS REQUIRED BY THE ASSESSING O FFICER 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 C OMPLETE AND CORRECT DETAILS REGARDING ITS ACCOUNTS FROM THE ASSESSING O FFICER AND HENCE THE ACCOUNTS WHICH THE ASSESSING OFFICER WAS ALLOWED TO EXAMINE WERE NOT CORRECT AND COMPLETE AND HENCE HE WAS JUSTIFIED I N INVOKING THE PROVISIONS OF SECTION 145(2). EVEN IF IN THE PAST FROM YEAR TO YEAR THE DEPARTM ENT HAS TAKEN THE VIEW THAT THE BOOKS OF ACCOUNT MAINTAINED IN A PARTICULA R MANNER ARE TO BE TREATED AS CORRECT AND COMPLETE A SUCCEEDING ASSES SING OFFICER CAN POINT OUT THAT LOOKING TO THE FACTS OF THAT CASE AND INVE STIGATION DONE BY HIM THEY CANNOT BE TREATED AS CORRECT AND COMPLETE. THA T 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 Y EAR OR YEARS ARE ALSO COMPLETE AND THAT NO ASSESSING OFFICER CAN EITHER Q UESTION THE ASSESSEE ON THIS ISSUE OR EVEN AFTER QUESTIONING TAKE THE VI EW THAT THE BOOKS OF ACCOUNT FOR THAT SUBSEQUENT YEAR ARE NOT CORRECT AN D COMPLETE. AS PER THE DECISION OF THE SUPREME COURT IN THE CAS E 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 T HE STOCK-IN-TRADE ALBEIT ON SOUND EXPERT ADVISE IN THE INTEREST OF EFFICIENT ADMINISTRATION OF BUSINESS IT WOULD BE THE DUTY OF THE ASSESSING OF FICER TO DETERMINE THE TAXABLE INCOME BY MAKING SUCH COMPUTATION AS HE TH INKS 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 LIKE D AND THAT THE ASSESSING OFFICER COULD NOT REJECT THEM BECAUSE THE Y 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 OF FICERS DUTY IS TO ASCERTAIN THE CORRECT PROFITS FROM THE BOOKS OF ACC OUNT MAINTAINED BY THE ASSESSEE AND IF THE BOOKS OF ACCOUNT ARE NOT CORREC T AND COMPLETE THE FACT THAT ALL OTHER ASSESSEES IN THAT TRADE ARE MAI NTAINING SIMILAR ACCOUNTS CANNOT BE A BASIS FOR SUPERSEDING THE DEC ISION OF THE ASSESSING OFFICER WHEREBY HE HAD REJECTED THE ASSESSEES BOOK S 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 TH AT 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 TH E COMMISSIONER (APPEALS) WITHOUT ANY EVIDENCE OR MATERIAL IN SUPPO RT OF THIS ASSERTION. IT HAD THEREFORE TO BE IGNORED. AS REGARDS OBSERVATIONS OF THE COMMISSIONER (APPEAL S) THAT NO SPECIFIC DEFECTS HAD BEEN POINTED OUT BY THE ASSESSING OFFIC ER IN THE ASSESSEES ACCOUNTS THE FACT THAT RELEVANT PAPERS CONTAINING DETAILS REGARDING ROUGH DIAMONDS GIVEN FOR CUTTING SHAPING ETC. AND RECE IVING THEM BACK FROM LABOUR PARTIES HAD BEEN DESTROYED WAS SUFFICIENT T O SHOW THAT WHEN THE PRIMARY AND ORIGINAL DOCUMENTS WHICH SHOULD HAVE CO RROBORATED THE ENTRIES IN THE BOOKS OF ACCOUNT HAD BEEN DESTROYED THE ENTRIES MADE IN THE BOOKS OF ACCOUNT COULD NOT BE VERIFIED AND CON SEQUENTLY THE ASSESSING OFFICER WAS ENTITLED TO HOLD THAT THE BOO KS OF ACCOUNT WERE NOT CORRECT AND COMPLETE. EVEN THE ASSESSEES OWN EXPORT BILLS RECORDED THE N UMBER OF PIECES PER CARAT FROM JUST FOUR PIECES PER CARAT TO AS MANY A S 200 PIECES PER CARAT AND YET IT WAS CLAIMED BEFORE THE ASSESSING OFFIC ER THAT NO PIECE-WISE DETAILS WERE MAINTAINED BY THE ASSESSEE. THE ASSESS ING OFFICER HAD ALSO POINTED OUT THAT LABOUR CHARGES WERE ALSO NOT PROVE D AND WERE INFLATED AND NON-GENUINE. HE HAD ALSO POINTED OUT THAT THE L ABOUR CHARGES WERE DETERMINED ON THE BASIS OF ROUGH DIAMONDS PER CARA T 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 CORREC T AND COMPLETE. THE ASSESSEE HAD SHOWN ALMOST A UNIFORM YIELD BETWEEN 2 5 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 COSTL Y COMMODITY AS DIAMONDS IT COULD NOT BE SAID THAT THE YIELD IN RE SPECT OF EACH ROUGH STONE HAD BEEN CORRECTLY RECORDED IN THE BOOKS OF A CCOUNT. 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 T O 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 ASSESSEES BUSINESS HAD EITHER NOT BE EN MAINTAINED OR EVEN IF MAINTAINED WAS REFUSED TO BE PRODUCED BEFORE TH E ASSESSING OFFICER WAS CORRECT. THEREFORE SO FAR AS THE ASSESSING OFF ICER WAS CONCERNED THE BOOKS OF ACCOUNT PRODUCED BEFORE HIM WERE NOT C ORRECT AND COMPLETE. ANOTHER DEFECT WHICH HE POINTED OUT WAS THAT THERE WAS NO RECORD TO CORRELATE AS TO WHETHER THE SAME QUALITY OF DIAMOND S 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 C AN LEAVE IT TO THE SWEET WILL OF THE LABOUR PARTY TO TAKE ROUGH OF HIG HER QUALITY AND HIGHER WEIGHT FROM THE ASSESSEE AND GIVE BACK THE CUT AND POLISHED DIAMONDS OF INFERIOR QUALITY AND LESSER WEIGHT PER PIECE. THE A SSESSEE ITSELF HAD CONCEDED THAT WHEN THE ROUGH DIAMONDS WERE GIVEN FO R CUTTING AND POLISHING THE EXPECTED YIELD WAS NOTED ON THE PACK ETS AND WHEN THE CUT AND POLISHED DIAMONDS WERE RECEIVED BACK FROM THE L ABOUR PARTIES THEY WERE ASSORTED INTO DIFFERENT LOTS SIZES AND QUALIT Y-WISE AND THEY WERE THEREAFTER OFFERED FOR SALE TO CUSTOMERS. FURTHER THERE WAS NO SUCH RECORD TO SHOW IF ANY SPECIAL INSTRUCTIONS WERE GIV EN 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 SMALLE ST OR BIGGER ONE CARRIES SUBSTANTIAL MONETARY VALUE AND NO DIAMOND D EALER CAN SWEEP AWAY THE DIAMONDS WITHOUT COUNTING EACH PIECE AS MI GHT BE DONE BY THE TRADERS IN RICE BUSINESS. THEREFORE NON-MAINTENANC E OF THESE DETAILS OR NON-PRODUCTION OF THESE DETAILS IN DIAMOND BUSINESS JUSTIFIED THE ASSESSING OFFICER TO COME TO THE CONCLUSION THAT TH E BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE WERE NOT CORRECT AND COM PLETE. 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 OBSERVAT ION 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 RE GARDING 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 N O.3CD AND FOUND NOTICE IN THE FOLLOWING SCHEDULE AS UNDER:- ITEM OPENING (CARATS) VALUE (RS) CLOSING (CARATS) VALUE (RS) ROUGH DIAMONDS 6290.72 1 27 84 824 33748.62 5 49 33 837 POLISHED DIAMONDS 40611.09 3 65 53 320 3791.93 2 78 10 885 REJECTED DIAMOND 4321.2 53 382 4594.67 58 851 THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS BEE N SUPPLYING/EXPORTING GOODS TO M/S.BHARGAV GEMS CO. LTD. ITS EXPORT TO M/S. BH ARGAV GEMS CO. LTD. IS 90% OF THE TOTAL EXPORT. ONCE OF THE PARTNER OF TH E 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 BUS INESS 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 WI TH M/S. BHARGAV GEMS CO. LTD. NO DOCUMENTARY EVIDENCE TO SUPPORT THAT NONE O F 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. BHARG AV 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 T O M/S. BHARGAV GEMS CO. LTD. WAS MADE AT ARMS 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 CA RAT WAS PROVIDED TO THE AO. THE ASSESSEE ALSO FAILED TO GIVE DETAILS AS TO DECR EASE IN AVERAGE SALE PRICES BUT NO DETAILS OF INCREASE IN LABOUR COST WAS GIVEN. TH E AO NOTICED THAT GP RATE WAS DECREASED FROM 8.11% IN LAST YEAR TO 6.0% IN THE CU RRENT YEAR. BUT NO SATISFACTORY EXPLANATION OF SUCH FALL WAS GIVEN EXC EPT SHOWING THAT TURNOVER HAS INCREASED TO RS.7.49 CRORE FROM RS.4.20 CRORES IN T HE 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 A CCORDINGLY ALSO ALLOWED DEDUCTION U/S.80HHC OF THE ACT ON SUCH ENHANCED PRO FIT. 8. LD. CIT(APPEALS) CONFIRMED THE ADDITION BUT REDU CED 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 DISCU SSED BY THE A.O. AND ALSO WENT THROUGH THE SUBMISSION MADE BY THE A.R. A FTER THE PERUSAL OF THE FACTS IT IS SEEN THAT THE APPELLANT COULD NOT SUBMIT THE QUALITATIVE DETAILS WITH REGARD TO THE DIAMONDS MANUFACTURED DU RING THE YEAR A WELL AS THE DIAMONDS SHOWN IN THE CLOSING STOCK. IT IS P ERTINENT TO MENTION WHILE EXPORTING THE DIAMONDS THE APPELLANT HAD ELA BORATELY MENTIONED THE QUALITY AND QUANTITY OF EACH PIECE OF DIAMOND A ND REALIZED THE EXPORT PRICE ACCORDINGLY AND IN SUCH A SITUATION IT IS DI FFICULT TO BELIEVE THE SUBMISSION AS MADE BY THE A.R THAT IT WAS VERY DIFF ICULT TO MAINTAIN QUALITATIVE DETAIL FOR EACH AND EVERY PIECE OF DIAM OND MANUFACTURED DURING THE YEAR BECAUSE OF HUGE NUMBER OF CUT AND P OLISHED PIECES OBTAINED FROM THE LABOUR PARTIES AFTER THE MANUFACT URING/POLISH WORK CARRIED OUT BY THEM. IN SUCH A SITUATION I AGREE W ITH 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 CLOSIN G STOCK IT WAS DIFFICULT TO ACCEPT THE VALUATION AS REFLECTED BY T HE APPELLANT AND CONSEQUENTLY I HOLD THAT FINDING OF THE A.O THAT I TS BOOK RESULTS WERE NOT RELIABLE APPEARS TO BE ACCEPTABLE. 17. WHILE ANALYZING THE REASONS FOR FALL IN G.P. RA TIO 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 P RECEDING 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 EX CHANGE RATE DIFFERENCE RECEIPTS WHICH WAS HIGHER DURING THE YEA R IN COMPARISON TO EARLIER YEAR IS ALSO NOT VERY CONVINCING BECAUSE TH AT IS NOT THE ONLY FACTOR FOUND RESPONSIBLE FOR FALL IN G.P RATIO AND ALONG W ITH THAT THERE WERE OTHER FACTORS SUCH AS INCREASE IN LABOUR EXPENSES REDUCTION IN PROFIT MARGIN AND INCREASE IN THE COST OF PRODUCTION OF DI AMONDS ON PER CARAT BASIS ETC. FOR WHICH THE A.R DID NOT MAKE ANY PROPE R SUBMISSION. THE SUBMISSION OF THE A.R THAT EACH DIAMOND PIECE IS DI FFERENT THAN THE OTHER AND COMMANDS DIFFERENT PRICE IN THE INTERNATIONAL M ARKET 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 MENT IONED BY THE A.R. I FIND THAT IT WOULD BE PROPER IF THE ADDITION IS RESTRICT ED 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 A PPELLANT GETS A RELIEF OF RS.7 49 815/-. ACCORDINGLY THIS GROUND OF APPEAL I S PARTLY ALLOWED. 9. THE DEPARTMENT IS IN APPEAL AGAINST RELIEF GIVEN BY LD. CIT(APPEALS) WHEREAS AS ASSESSEE IS IN APPEAL AGAINST THE ADDITI ON SUSTAINED. LD. AR BASICALLY SUBMITTED THAT GP IN THIS TRADE CANNOT BE CONSTANT WHICH DEPENDS UPON THE MARKET CONDITIONS. TURNOVER HAS INCREASED AND L ABOUR 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 ASSE SSING OFFICER HAS GIVEN DETAILED DISCUSSION AND POINTED OUT THE DEFECTS SUC H 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 MAI NTAINING 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. C IT(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 COM PARED TO EARLIER YEARS. LD. CIT(APPEALS) HAS GIVEN COGENT REASONS AS TO WHY BOO KS SHOULD BE REJECTED AND PROFIT SHOULD BE ENHANCED BY 1%. WE ARE CONVINCED W ITH THE REASONING GIVEN BY LD. CIT(APPEALS) AND THEREFORE WE UPHOLD HIS ORD ER. 12. IN THE RESULT BOTH THE APPEALS ONE FILED BY REVENU E 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