The ACIT, Circle-9,, Surat v. M/s. D. Nitin & Co.,, Surat

ITA 4008/AHD/2008 | 2005-2006
Pronouncement Date: 09-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 400820514 RSA 2008
Assessee PAN AACFD0042R
Bench Ahmedabad
Appeal Number ITA 4008/AHD/2008
Duration Of Justice 2 year(s) 8 month(s) 29 day(s)
Appellant The ACIT, Circle-9,, Surat
Respondent M/s. D. Nitin & Co.,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 09-09-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 09-09-2011
Date Of Final Hearing 24-08-2011
Next Hearing Date 24-08-2011
Assessment Year 2005-2006
Appeal Filed On 11-12-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD D BENCH . .. . . .. . !' !' !' !' #$ #$ #$ #$ %% % & %% % & %% % & %% % & ' ' ' ' ( ' ( ' ( ' ( ' BEFORE S/SHRI G.D. AGARWAL VICE-PRESIDENT AND MUKUL KR. SHRAWAT JUDICIAL MEMBER) ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 [ASSTT. YEAR : 2005-2006] ACIT CIR.9 SURAT. /VS. M/S.D.NITIN & CO. 201 HIRAPANNA OPP: CRYSTAL CHAMBERS KOHINOOR SOCIETY ROAD VARACHHA ROAD SURAT. PAN : AACFD 0042 R ( (( (*+ *+ *+ *+ / APPELLANT) ( (( ( -*+ -*+ -*+ -*+ / RESPONDENT) .& / 0 (/ ASSESSEE BY : SHRI B.L. YADAV ' / 0 (/ REVENUE BY : SHRI R.N. VEPARI DATE OF HEARING : 24 TH AUGUST 2011 DATE OF PRONOUNCEMENT : 9 TH SEPTEMBER 2011 (2 / O R D E R PER G.D. AGARWAL VICE-PRESIDENT : THIS IS REVENUES APPEAL AND THE ASSESSEES CO AGAINST THE ORDER OF THE COMMISSI ONER OF INCOME-TAX (APPEALS)-V AHMEDABAD DATED 29.09.2008 ARISING OUT OF THE ORDER OF THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOM E TAX ACT 1961. REVENUES APPEAL: 2. THE FIRST GROUND OF THE REVENUES APPEAL READS A S UNDER: I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 1 12 08 890/- MADE ON ACCOUNT OF GP BY THE AO BY REJECTING THE BOOK RESUL TS OF THE ASSESSEE WITHOUT APPRECIATING THE FACTS OF THE CASE THAT THE ASSESSEE FAILED TO PRODUCE COMPLETE SET BOOKS OF ACCOUNTS AND TO SUBST ANTIATE THE LOW GROSS PROFIT SHOWN BY IT. ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -2- 3. AT THE TIME OF HEARING BEFORE US IT IS STATED B Y THE LEARNED DR THAT THE ASSESSEE DERIVES INCOME FROM IMPORT AND EXPORT OF D IAMONDS. THAT THE GP OF THE ASSESSEE HAS REDUCED TO 6% AS AGAINST 7.32% IN THE IMMEDIATELY PRECEDING YEAR. THAT THE AO EXAMINED THE ASSESSEES BOOKS OF ACCOUNTS IN DETAIL AND FOUND THAT THE ASSESSEE HAS PURCHASED AND SOLD DIAM ONDS AS PER THE QUALITY OF DIAMOND. THEREFORE IT IS OBVIOUS THAT THE ASSESSE E HAS MAINTAINED QUANTITATIVE DETAILS QUALITY-WISE OTHERWISE HE COULD NOT HAVE PROPER CONTROL OVER THE TRADING ACTIVITY. THAT DESPITE MAINTAINING OF SUCH PRIMARY RECORDS THE ASSESSEE HAS NOT PRODUCED THE SAME BEFORE THE AO. IN THIS RE GARD HE REFERRED TO PARA 9.1 TO 9.4 OF THE ASSESSMENT ORDER WHICH READS AS UNDER : 9.1 AS REGARDS THE ASSESSEES CONTENTION THAT PRAC TICALLY IT IS IMPOSSIBLE TO MAINTAIN QUALITY AND QUANTITY-WISE RE CORDS IN RESPECT OF PRODUCTION AS WELL AS SALES IT WOULD BE SUFFICE TO SAY THAT IT CANNOT BE ACCEPTED THAT THE ASSESSEE SHOULD NOT HAVE BEEN MAI NTAINING QUALITY- WISE RECORD OF THE DIAMONDS. IF WHAT THE ASSESSEE SAYS WERE TRUE IT COULD NOT HAVE SOLD LOTS OF DIAMONDS AT DIFFERENT P RICES. IN THIS CONTEXT ON EXAMINATION OF BILLS OF EXPORT ON RANDOM BASIS IT WAS SEEN THAT THE ASSESSEE HAD EXPORTED POLISHED DIAMONDS AT DIFFEREN T RATES AND ALL 4CS ARE MENTIONED THERE. A FEW OF SUCH RATES ARE AS UN DER: XXX 9.2 IT WOULD FURTHER BE NECESSARY TO MENTION THAT VERIFICATION OF BOOKS OF ACCOUNTS REVEALED THAT THE ASSESSEE HAD PU RCHASED DIFFERENT VARIETIES OF ROUGH DIAMONDS AND ACCORDINGLY THEIR V ALUE DIFFERED FROM LOT TO LOT. FEW OF SUCH INSTANCES NOTICED ON VERIF ICATION OF PURCHASES ARE AS UNDER: DATE INVOICE NO. DESCRIPTION QUANTITY IN CARATS RATE PER CARAT US $ 1.3.2005 05/105-R INDIAM LTD. ROUGH 13.15 203.90 287.10 307.90 446.96 1 296.65 1304.84 1 944.98 6 771.60 271.91 81.93 51.20 61.44 82.50 41.99 46.08 56.32 23.04 ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -3- 7 883.10 34.31 FROM THE ABOVE IT IS APPARENT THAT THE ASSESSEE HA D PURCHASED DIFFERENT VARIES OF ROUGH DIAMONDS IN LOTS AND OBVIOUSLY DIFF ERENT VARITIES OF POLISHED DIAMONDS WERE PRODUCED. 9.3 THUS IN VIEW OF THE ABOVE FACTS IT IS APPAREN T THAT THE ASSESSEE HAD THE RECORD OF PRODUCTION OF POLISHED DIAMONDS O N THE BASIS OF QUALITY. OTHERWISE TAKING INTO ACCOUNT THE QUANTI TY OF POLISHED DIAMONDS SOLD IT WOULD BECOME IMPOSSIBLE FOR THE A SSESSEE TO HAVE A CONTROL OVER THE TRADING ACTIVITY. HOWEVER THE ASS ESSEE HAD OMITTED TO FURNISH SUCH RECORDS MERELY ON THE GROUND THAT THE REQUISITES RECORDS WERE NOT MAINTAINED. THE VERY FACT THAT THE ASSESSE E HAD ADMITTED THAT THE CUT AND POLISHED DIAMONDS RECEIVED BACK FROM TH E LABOUR PARTIES THEY WERE SORTED BY THE ASSESSEE IN DIFFERENT LOTS SIZES QUALITY ETC. WOULD INDICATE THAT THE ASSESSEE HAD BEEN SORTING T HEM OUT ON PIECE BY PIECE BASIS. ASSESSEE HAS FURTHER STATED IN ABOVE SUBMISSION THAT LABOUR CHARGES FOR POLISHING WORK ALSO DEPENDS UPON QUALIT Y WHICH AGAIN SUPPORTS THAT QUALITY WISE RECORDS ARE MUST FOR THI S BUSINESS. 9.4 PAUSING FOR A MOMENT HERE IT WOULD NOT BE UNNE CESSARY TO MENTION THAT AS PER THE PROVISIONS OF SECTION 44AA OF THE I.T.ACT EVERY PERSON CARRYING ON BUSINESS IS COMPULSORILY REQUIRE D TO KEEP AND MAINTAIN SUCH BOOKS OF ACCOUNTS AND OTHER DOCUMENTS AS MAY ENABLE THE ASSESSING OFFICER TO COMPUTE THE ASSESSEE'S TOTAL I NCOME IN ACCORDANCE WITH THE PROVISIONS OF THE I.T.ACT. FROM THIS IT F OLLOWS THAT THE PURPOSE AND INTENTION OF LEGISLATURE IN EVADING THE PROVISI ONS OF SECTION OF 44AA OF THE ACT IS TO PUT AN OBLIGATION ON THE ASSESSEE TO MAIN AND KEEP PRIMARY RECORDS ON THE BASIS OF WHICH THE TAX AUTHO RITIES ARE ABLE TO ASCERTAIN AND COMPUTE THE CORRECT INCOME. FROM THIS IT ALSO FOLLOWS THAT IT IS NOT ALWAYS THE PREROGATIVE OF THE ASSESSEE TO MAINTAIN THE RECORDS THE MANNER IN WHICH IT LIKES. HOWEVER AS NOTICED I N THE PRECEDING PARAS THE ASSESSEE DID NOT MAINTAIN THE BOOKS OF ACCOUNTS AND DOCUMENTS ON THE BASIS OF WHICH THE INCOME DECLARED IN THE RETUR N COULD BE ASCERTAINED. IF THE PRIMARY RECORDS WERE MAINTAINED BY THE ASSESSEE THEY WERE NOT PRODUCED FOR EXAMINATION TO COMPUTE T HE CORRECT INCOME. HE THEREFORE REQUESTED THAT THE ORDER OF THE CIT(A) SHOULD BE REVERSED AND THAT OF THE AO SHOULD BE RESTORED. ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -4- 4. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTH ER HAND RELIED UPON THE ORDERS OF THE CIT(A). HE HAS STATED THAT THE ASSES SEE HAS MAINTAINED THE QUANTITATIVE DETAILS WHICH IS WEIGHT WISE. HOWEVER THE QUALITY-WISE QUANTITY DETAILS HAVE NOT BEEN MAINTAINED. HE ALSO STATED T HAT IT IS IMPOSSIBLE TO MAINTAIN QUALITY WISE DETAILS. THAT THE AO HAS PRE SUMED THAT THE ASSESSEE HAS MAINTAINED QUALITY WISE QUANTITATIVE DETAILS WHILE NO SUCH DETAIL IS ACTUALLY MAINTAINED BY THE ASSESSEE. WHEN SUCH DETAIL IS NO T MAINTAINED BY THE ASSESSEE THE QUESTION OF PRODUCING THE SAME BEFORE THE AO DOES NOT ARISE. HE THEREFORE SUBMITTED THAT THE AO REJECTED THE ASSESS EES BOOKS OF ACCOUNTS ON PRESUMPTION WHICH IS FACTUALLY INCORRECT. HE FURT HER STATED THAT THE ITAT AHMEDABAD BENCH IN THE CASE OF M/S.DHAMI BROTHERS V S. ACIT VIDE ITA NO.2309/AHD/2008 EXAMINED THE ISSUE WHETHER THE ASS ESSEES BOOKS OF ACCOUNTS CAN BE REJECTED IF THE ASSESSEE HAS NOT M AINTAINED THE QUALITY-WISE QUANTITATIVE DETAILS. THE ITAT CAME TO THE CONCLUS ION THAT IN THE CASE OF THE DIAMOND TRADERS QUALITY-WISE DETAILS OF EACH PIECE OF DIAMOND IS NOT NECESSARY FOR COMPUTATION OF THE INCOME OF THE ASSESSEE AND THEREFORE IF THE QUALITY-WISE QUANTITATIVE DETAILS IS NOT MAINTAINED THE BOOKS O F ACCOUNTS OF THE ASSESSEE CANNOT BE REJECTED HE FURTHER STATED THAT NO DEFE CT IS POINTED OUT BY THE REVENUE IN THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE THEREFORE THE REJECTION OF THE BOOKS OF ACCOUNTS BY THE AO WAS NO T JUSTIFIED. THE CIT(A) RIGHTLY DELETED THE ADDITION. HE THEREFORE REQUEST ED THAT THE ORDER OF THE CIT(A) ON THIS POINT SHOULD BE SUSTAINED AND GROUND NO.1 OF THE REVENUES APPEAL MAY BE REJECTED. 5. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BO TH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US WE FIND THAT THE AO HAS REJECTED THE ASSESSEES BOOKS OF ACCOUNTS MAINLY ON THE GROUND T HAT THE ASSESSEE HAS MAINTAINED THE QUALITY-WISE QUANTITATIVE DETAILS WH ICH HE FAILED TO PRODUCE BEFORE THE AO. FROM THE PERUSAL OF THE ASSESSMENT ORDER IT IS EVIDENT THAT SUCH FINDING OF THE AO IS BASED PURELY ON PRESUMPTION. THE ASSESSEES COUNSEL HAS ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -5- MADE A STATEMENT AT THE TIME OF HEARING BEFORE US T HAT THE ASSESSEE HAS MAINTAINED THE QUANTITATIVE DETAILS OF THE ROUGH DI AMONDS AS WELL AS POLISHED DIAMONDS BUT THE QUALITY WISE QUANTITATIVE DETAILS HAS NOT BEEN MAINTAINED. HE ALSO STATED THAT IT IS IMPOSSIBLE TO MAINTAIN THE Q UALITY WISE DETAILS OF THE DIAMOND BECAUSE ALMOST EACH DIAMOND IS OF DIFFERENT QUALITY. AFTER CONSIDERING THE ARGUMENTS OF THE BOTH THE SIDES WE FIND THAT THE FINDING OF THE AO IS BASED PURELY ON THE PRESUMPTION WITHOUT ANY M ATERIAL OR EVIDENCE IN SUPPORT OF SUCH FINDING. WE THEREFORE ACCEPT THE A SSESSEES CONTENTION THAT THE ASSESSEE HAS NOT MAINTAINED THE QUALITY-WISE QUANTI TATIVE DETAILS. 6. NOW THE SECOND QUESTION ARISES WHETHER THE BOOKS OF ACCOUNTS OF THE ASSESSEE CAN BE REJECTED IF THE ASSESSEE HAS NOT MA INTAINED THE QUALITY WISE QUANTITATIVE DETAILS. WE FIND THAT THIS ISSUE IS C ONSIDERED BY THE ITAT IN THE CASE OF M/S.DHAMI BROTHERS (SUPRA) IN WHICH ONE OF US IS A PARTY. IN THIS CASE THE ITAT HELD AS UNDER: 7. WE HAVE CONSIDERED THE ARGUMENTS OF BOTH THE SID ES AND PERUSED THE MATERIAL PLACED BEFORE US. THE AO HAS REJECTED THE ASSESSEES BOOKS OF ACCOUNTS AND ESTIMATED THE VALUE OF CLOSING STOC K AS WELL AS GP. THE REASONING GIVEN BY THE AO FOR REJECTING THE BOOKS O F ACCOUNTS READS AS UNDER: 5.8 IT WOULD NOT BE OUT OF PLACE TO MAKE A MENTION IN THIS CONTEXT THAT AS PER THE PROVISIONS OF SECTION 44AA OF THE I.T. ACT EVERY PERSON CARRYING ON BUSINESS IS COMPULSORILY R EQUIRED TO KEEP AND MAINTAIN SUCH BOOKS OF ACCOUNTS AND OTHER DOCUMENTS AS MAY ENABLE THEM AO TO COMPUTE THE ASSESSEES TOT AL INCOME IN ACCORDANCE WITH THE PROVISIONS OF THE I.T. ACT. FR OM THIS IT FOLLOWS THAT THE PURPOSE AND INTENTION OF THE LEGIS LATURE IN ENACTING THE PROVISIONS OF SECTION OF 44AA OF THE A CT IS TO PUT AN OBLIGATION ON THE ASSESSEE TO MAINTAIN AND KEEP PRI MARY RECORDS ON THE BASIS OF WHICH THE TAX AUTHORITIES ARE ABLE TO ASCERTAIN AND COMPUTE THE ASSESSEES CORRECT INCOME. FROM THIS IT ALSO FOLLOWS THAT IT IS NOT ALWAYS THE PREROGATIVE OF THE ASSESS EE TO MAINTAIN THE RECORDS THE MANNER IN WHICH IT LIKES. HOWEVER AS NOTICED IN THE PRECEDING PARAS THE ASSESSEE HAS NOT MAINTAINED THE BOOKS OF ACCOUNTS AND DOCUMENTS ON THE BASIS OF WHICH THE IN COME DECLARED IN THE RETURN COULD BE ASCERTAINED. IF TH E PRIMARY ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -6- RECORDS WERE MAINTAINED BY THE ASSESSEE THEY WERE N OT PRODUCED FOR EXAMINATION TO COMPUTE THE CORRECT INCOME. 5.9 HERE IT WOULD BE PERTINENT TO MENTION THAT THE ASSESSEE HAS SHOWN CLOSING STOCK OF POLISHED DIAMONDS OF THE QUA NTITY OF 44299.10 CTS. AT RS.54 23 81 050/-. THE DETAILED I NVENTORY OF THE STOCK IN TERMS OF QUALITY IS NOT FURNISHED. THEREF ORE IN ABSENCE OF DETAILS IN TERMS OF QUALITY WISE PRODUCTION OF D IAMONDS FROM EACH LOT IT IS NOT ASCERTAINABLE WHICH TYPE OF DIAM ONDS WAS PRODUCED FROM A PARTICULAR LOT IN ORDER TO DETERMIN E THE VALUE. THEREFORE IN VIEW OF THIS IT WOULD RATHER BE CORR ECT TO SAY THAT THE VALUATION OF STOCK IS NOT VERIFIABLE. HERE IT WOULD BE PERTINENT TO MENTION THAT THE HONBLE SUPREME COURT IN THE CASE OF BRITISH PRINTS INDIA LTD. REPORTED IN 188 ITR 44 HAS BEEN HELD THAT WHERE THE ACCOUNTS ARE PREPARED WITHOUT DISCLO SING THE REAL COST OF THE STOCK IN TRADE ALBEIT ON SOUND EXPERT A DVISE IN THE INTEREST OF EFFICIENT ADMINISTRATION OF BUSINESS I T IS THE DUTY OF THE AO TO DETERMINE THE TAXABLE INCOME BY MAKING SUCH C OMPUTATION AS HE THINGS FIT. THEREFORE THE CLAIM OF THE ASSE SSEE THAT IT IS ASSESSEES OPTION TO MAINTAIN THE BOOKS OF ACCOUNTS IN THE MANNER THAT SUITS TO IT CAN NO LONGER BE ACCEPTED A ND HAS TO BE REJECTED. IN THIS CONTEXT RELIANCE IS ALSO PLACED UPON THE MUMBAI ITATS DECISION IN THE CASE OF DCIT VS. SAMI R DIAMONDS EXPORT PVT. LTD. REPORTED IN 71 ITD 75. 5.10 I THEREFORE IN VIEW OF THE ABOVE DEFECTS IN THE SYSTEM OF METHOD OF ACCOUNTING REJECT THE BOOK RESULTS OF TH E ASSESSEE UNDER SECTION 145(3) OF THE I.T. ACT AND PROCEED TO ESTIMATE THE VALUE OF CLOSING STOCK AND ESTIMATE THE GROSS PROFI T AS UNDER: IT WAS EXPLAINED BY THE LEARNED COUNSEL THAT THE AS SESSEE HAS MAINTAINED REGULAR BOOKS OF ACCOUNTS WHICH WERE DU LY AUDITED. EACH ITEMS OF SALE/PURCHASE IS VERIFIABLE. THE ONL Y DISPUTE IS WITH REGARD TO MAINTENANCE OF QUALITATIVE DETAILS F OR THE PROCESSING OF THE DIAMOND BY THE ASSESSEE. THE ASS ESSEE MAINTAINED COMPLETE DATE-WISE DETAILS OF QUANTITY O F EACH LOT OF THE DIAMOND GIVEN FOR THE PROCESSING AS WELL AS POL ISHED DIAMONDS RECEIVED AFTER THE PROCESSING. SUCH DATE WISE DETAILS OF THE PROCESSING OF THE DIAMONDS WERE FURNISHED BEFOR E THE AO AND COPY OF WHICH IS ALSO ENCLOSED FROM PAGE NO.63 TO 1 49 OF THE ASSESSEES PAPER BOOK. THE AO HAS STATED THAT IN T HESE DETAILS QUALITY OF THE DIAMOND IS NOT MENTIONED. IT IS SUB MITTED BY THE LEARNED COUNSEL THAT IT IS NOT PRACTICAL TO MAINTAI N THE QUALITY WISE DETAILS OF EACH AND EVERY DIAMOND. EACH AND EVERY DIAMOND IS OF A SEPARATE QUALITY DEPENDING UPON ITS COLOUR CLARI TY CUT ETC. AND ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -7- THIS IS ALMOST IMPOSSIBLE TO MAINTAIN QUALITY WISE DETAILS FOR EACH AND EVERY PIECE OF DIAMOND. THAT THE ASSESSEE IS M AINTAINING THE QUANTITATIVE DETAILS IN THE SAME FASHION SINCE PREC EDING MANY YEARS AND IT WAS ALWAYS ACCEPTED IN THE PAST. SECT ION 145(3) WHICH EMPOWERS THE AO TO REJECT THE ASSESSEES TRAD ING RESULTS AND MAKE THE ASSESSMENT IN THE MANNER PROVIDED UNDE R SECTION 144 READS AS UNDER: 145. METHOD OF ACCOUNTING.--(1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSE SSEE (2) ....... (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR THE COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR WHERE NO METHOD OF ACCOUNTING PROVIDED IN SUB-SE CTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2) HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE THE ASSESS ING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SE CTION 144. 8. FROM THE ABOVE IT IS EVIDENT THAT IF THE AO IS NOT SATISFIED ABOUT THE CORRECTNESS OR THE COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE HE MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SE CTION 144. IN THIS CASE THERE IS NO DISPUTE ABOUT THE CORRECTNESS OF THE ASSESSEES ACCOUNTS. AS PER THE AO FOR WANT OF QUALITATIVE DE TAILS OF THE PROCESSING OF DIAMONDS THE ACCOUNTS OF THE ASSESSEE CANNOT BE SAID TO BE COMPLETE. WE ARE UNABLE TO AGREE WITH THE ABOVE VIEWS OF THE AO. SECTION 44AA PROVIDES FOR MAINTENANCE OF THE BOOKS OF ACCOUNTS. AS PER THE SUB- SECTION (2) EVERY PERSON CARRYING ON BUSINESS OR P ROFESSION IS REQUIRED TO KEEP AND MAINTAIN SUCH BOOKS OF ACCOUNTS AND OTH ER DOCUMENTS AS MAY ENABLE TO THE AO TO COMPUTE THE TOTAL INCOME OF ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT. SUB-SE CTION (3) OF SECTION 44AA EMPOWERS THE CENTRAL BOARD OF DIRECT TAX TO PR ESCRIBE BY RULES THE BOOKS AND OTHER DOCUMENTS TO BE KEPT AND MAINTA INED BY THE ASSESSEE. THE CBDT AS PER RULE 6F HAS PRESCRIBED T HE BOOKS OF ACCOUNTS AND OTHER DOCUMENTS TO BE KEPT AND MAINTAI NED BY THE PERSONS CARRYING ON CERTAIN SPECIFIC PROFESSION. HOWEVER NO BOOKS OF ACCOUNTS ARE PRESCRIBED FOR THE PERSON CARRYING ON BUSINESS. THUS THE ASSESSEES CARRYING ON BUSINESS ARE REQUIRED MAINTAIN SUCH BOO KS OF ACCOUNTS AS WILL ENABLE THE AO TO COMPUTE THE INCOME OF THE ASS ESSEE. THE PRESENT ASSESSEE HAS MAINTAINED THE REGULAR BOOKS OF ACCOUN TS WHICH WERE DULY AUDITED. THE SALE AND PURCHASE OF THE ASSESSEE IS VOUCHED AND VERIFIABLE. THE ASSESSEE HAS ALSO MAINTAINED QUANT ITATIVE DETAILS IN RESPECT OF DIAMONDS PURCHASED AND SOLD BY IT AS WEL L AS FOR PROCESSING OF DIAMOND. THERE IS NO ADVERSE COMMENT FROM THE AUDITOR THAT THE ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -8- PROFIT CANNOT BE COMPUTED FROM THE BOOKS OF ACCOUNT S MAINTAINED BY THE ASSESSEE. IN OUR OPINION THE QUALITATIVE DETAILS OF EACH PIECE OF DIAMOND IS NOT NECESSARY FOR COMPUTATION OF THE INC OME OF THE ASSESSEE. INCOME OF THE ASSESSEE CAN BE VERY WELL COMPUTED ON THE BASIS OF ACCOUNTS ALREADY MAINTAINED BY THE ASSESSEE. IN VI EW OF THE ABOVE WE ARE UNABLE TO AGREE WITH THE AO THAT THERE IS DEFEC T IN THE SYSTEM OF METHOD OF ACCOUNTING OF THE ASSESSEE WHICH REQUIRES REJECTION OF THE BOOK RESULTS UNDER SECTION 145(3) OF THE ACT AND ES TIMATION OF THE GP. NO CONTRARY DECISION IS BROUGHT TO OUR KNOWLEDGE TH EREFORE RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE ITAT WE HOLD T HAT DUE TO FAILURE ON THE PART OF THE ASSESSEE TO MAINTAIN THE QUALITY-WISE Q UANTITATIVE DETAILS THE BOOKS OF ACCOUNT OF THE ASSESSEE CANNOT BE REJECTED. NO OTHER DEFECT IS POINTED OUT BY THE AO IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE WH ICH IS DULY AUDITED. ONCE THERE IS NO DEFECT IN THE ASSESSEES BOOKS OF ACCOU NTS THE SAME CANNOT BE REJECTED THEREFORE ONCE THE BOOKS CANNOT BE REJECT ED THE ESTIMATED ADDITION MADE BY THE AO BY ENHANCING THE GP AT THE RATE OF 1 % OF THE SALES CANNOT BE SUSTAINED. WE THEREFORE UPHOLD THE ORDER OF THE CI T(A) WHEREIN HE DELETED THE ADDITION MADE BY THE AO ON ACCOUNT OF LOW GP ACCORD INGLY GROUND NO.1 OF THE REVENUES APPEAL IS REJECTED. 7. GROUND NO.2 OF THE REVENUES APPEAL READS AS UND ER: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD.CIT(A) HAS ERRED IN TREATING THE LOSS OF RS.57 9 6 350/- AS BUSINESS LOSS AS AGAINST THE SPECULATION LOSS TREATED BY THE AO WITHOUT APPRECIATING THE FACTS OF THE CASE. 8. IT IS NOTED BY THE AO THAT THE ASSESSEE HAS BOOK ED FORWARD CONTRACT FOR FOREIGN EXCHANGE TO THE TUNE US $36 00 000. HOWEVE R THE ASSESSEE SUFFERED NET LOSS OF RS.57 96 350/- AND CLAIMED AS BUSINESS LOSS. THE AO DISALLOWED THE SAME ON THE GROUND THAT THE FORWARD CONTRACTS A RE NOT BOOKED AGAINST ANY SPECIFIC EXPORT AND ALL WERE ULTIMATELY CANCELLED W ITHOUT EFFECTIVE DELIVERY OF FOREIGN EXCHANGE AND THEREFORE THE CONTRACT ENTERED INTO BY THE ASSESSEE WERE NOT IN THE NATURE OF HEDGING TRANSACTIONS. HOWEV ER THE CIT(A) ALLOWED THE ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -9- CLAIM OF THE ASSESSEE BY HOLDING THAT THE CONTRACT ENTERED INTO BY THE ASSESSEE WAS IN THE NORMAL COURSE OF BUSINESS AND WAS VERY M UCH IN THE NATURE OF HEDGING TRANSACTION. 9. THE LEARNED DR RELIED UPON THE ORDER OF THE AO W HILE THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND SUPPORTED THE ORDER OF THE CIT(A). THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDER OF THE ITAT AHMEDAB AD IN THE CASE OF M/S.BHOJAL GEMS VS. ACIT WHEREIN THE ITAT REJECTED SIMILAR CLAIM OF THE REVENUE AND DISMISSED ITS APPEAL. THE LEARNED COUN SEL ALSO RELIED UPON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. FRIENDS AND FRIENDS SHIPPING PVT. LTD. TAX APPEAL NO.251 OF 2010 DATED 23- 8-2011. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND NO MERIT IN THIS GROUND OF THE APPEAL RAISED BY THE REVENUE. TWO DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASSE SSEE SUPPORTS THE CASE OF THE ASSESSEE. IN THE BHOJAL GEMS (SUPRA) THE ITAT AH MEDABAD BENCH ALLOWED THE SIMILAR CLAIM OF THE ASSESSEE. THE RELEVANT OB SERVATION OF THE ITAT READS AS UNDER: 9.1 CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF THE ABOVE DECISIONS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LE ARNED CIT(A) IN DELETING THE ADDITION. THE LEARNED CIT(A) ON PROPER APPRECIATION OF THE FACTS AND MATERIAL ON RECORD RIGHTLY NOTED THAT THE CASE OF THE ASSESSEE FALLS IN THE PROVISO TO SECTION 43(5) OF THE IT ACT BECAUSE THE FORWARD CONTRACT ENTERED INTO BY THE ASSESSEE WAS HEDGING T RANSACTION AND WOULD NOT BE COVERED BY THE DEFINITION OF SPECULATI VE TRANSACTION. THE ASSESSEE ENTERED INTO THE TRANSACTION TO SAFEGUARD THE BUSINESS INTEREST AGAINST FLUCTUATION IN RATES OF FOREIGN EXCHANGE. N OTHING IS BROUGHT ON RECORD IF THE ASSESSEE HAS VIOLATED ANY NORMS ISSUE D BY RESERVE BANK OF INDIA. THE LEARNED CIT(A) THEREFORE RIGHTLY HELD THAT THE BANK BEING AUTHORIZED DEALER WILL NOT ALLOW THE ASSESSEE TO BO OK FORWARD CONTRACTS FOR SPECULATION PURPOSES. THE LEARNED COUNSEL FOR T HE ASSESSEE ALSO FILED THE DETAILS OF NAMES OF THE BANK OF THE FORWA RD CONTRACT TO SHOW CANCELLATION DATE AND THE GAIN/LOSS WHICH SUPPORT T HE FINDINGS OF THE ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -10- LEARNED CIT(A) THAT ASSESSEES TRANSACTION THROUGH BANK WAS A GENUINE BUSINESS TRANSACTION THEREFORE LOSS SHALL HAVE T O BE ALLOWED IN THE CASE OF THE ASSESSEE. CONSIDERING THE FACTS AND CIRCUMST ANCES AND THE FINDING OF THE LEARNED CIT(A) IN THE LIGHT OF THE DECISIONS OF THE HONBLE BOMBAY HIGH COURT AND THE HONBLE CALCUTTA HIGH COU RT (SUPRA) WE DO NOT FIND ANY MERIT IN THE DEPARTMENTAL APPEAL ON THIS ISSUE. WE CONFIRM THE FINDINGS OF THE LEARNED CIT(A) AND DISM ISS THE DEPARTMENTAL APPEAL. SIMILARLY IN THE CASE OF FRIENDS AND FRIENDS SHIPP ING PVT. LTD. (SUPRA) HONBLE GUJARAT HIGH COURT HELD AS UNDER: HAVING THUS HEARD THE LEARNED ADVOCATES FOR THE PA RTIES AND HAVING PERUSED THE DOCUMENTS ON RECORD WE FIND THAT THE I SSUE IS COVERED BY THE DECISIONS OF THE BOMBAY HIGH COURT IN THE CSE O F BADRIDAS GAURIDA P. LTD. AND THE CALCUTTA HIGH COURT IN THE CASE OF SOORAJMULL NAGARMULL (SUPRA). IN THE DECISION OF THE BOMBAY HIGH COURT THE ASSES SEE WAS I THE BUSINESS OF EXPORT OF COTTON. THE ASSESSEE HAD ENT ERED INTO FORWARD CONTRACT WITH BANKS IN RESPECT OF FOREIGN EXCHANGE. SOME OF THESE CONTRACTS COULD NOT BE HONOURED FOR WHICH THE ASSES SEE HAD TO PAY RS.13.50 LACS WHICH WAS DEBITED TO THE PROFIT AND L OSS ACCOUNT. THE ASSESSEE CLAIMED THE SUM AS BUSINESS LOSS. REVENUE WAS OF THE OPINION THAT THE LOSS WAS SPECULATIVE IN NATURE. BOMBAY HI GH COURT FOLLOWING THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF SOORAJMULL NAGARMULL (SUPRA) HELD THAT THE EXPENDITURE WOULD N OT BE COVERED UNDER SECTION 43(5) OF THE ACT AS SPECULATIVE TRANSACTION . RESPECTFULLY FOLLOWING THE ABOVE TWO DECISIONS WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS THE GROUND NO.2 OF THE REVENUE. 11. GROUND NO.3 OF THE REVENUES APPEAL READS AS UN DER: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 1 52 700/- MADE BY AO ON ACCOUNT OF FOREIGN TRAVEL EXPENSES WITHOUT A PPRECIATING THE FACTS OF THE CASE. 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE CLAIMED TOTA L EXPENDITURE OF RS.14 66 169/- TOWARDS FOREIGN TRAVELING EXPENSES. HOWEVER THE ASSESSEE DID ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -11- NOT FURNISH THE DETAILS OF THE EXPENDITURE AND VOUC HERS IN SUPPORT OF SUCH EXPENDITURE. THE ASSESSEE ONLY FURNISHED THE BREAK UP OF THE EXPENDITURE THAT SUM OF RS.7 02 670/-WAS INCURRED TOWARDS AIR-FARE A ND VISA CHARGES AND THE BALANCE EXPENDITURE OF RS.7 63 499 TOWARDS OTHER EX PENSES. THE AO FULLY ALLOWED EXPENDITURE ON AIR-FAIRE AND VISA CHARGES HOWEVER FROM THE OTHER EXPENSES HE DISALLOWED 20%. THE CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO. IT WAS STATED BY THE LEARNED DR THAT THE C IT(A) DELETED THE DISALLOWANCE ON THE GROUND THAT THE EXPENDITURE WAS REASONABLE LOOKING TO THE HUGE TURNOVER OF THE ASSESSEE THEREFORE FOREIGN V ISITS WERE FOR THE PURPOSE OF BUSINESS. HE HAS STATED THAT AO NEVER DOUBTED THAT THE VISITS WAS FOR THE PURPOSE OF BUSINESS BECAUSE THE AO HIMSELF HAS ALL OWED THE AIR-FARE AND VISA CHARGES FULLY. BUT IN THE ABSENCE OF DETAILS OF TH E EXPENSES AND VOUCHERS IN SUPPORT OF OTHER EXPENSES IT COULD NOT BE VERIFIED BY THE AO THAT OTHER EXPENDITURE WAS FOR THE PURPOSE OF BUSINESS. EVEN DURING THE VISITS FOR THE PURPOSE OF BUSINESS THE ASSESSEE MAY INCUR PERSONA L EXPENDITURE. THAT 20% DISALLOWANCE OUT OF OTHER EXPENDITURE WAS QUITE FAI R AND REASONABLE. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) AND STATED THAT THE TURNOVER OF THE ASSESSEE WAS RS.112 CRORES AND THEREFORE THE TOTAL EXPENDITURE ON FOREI GN TRAVELING WAS 0.13% OF THE TURNOVER. HE THEREFORE STATED THAT THE ORDER OF TH E CIT(A) SHOULD BE SUSTAINED. 13. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF B OTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. THERE IS NO DISPUTE THAT THE FOREIGN VISITS BY THE PARTNERS OR EMPLOYEES OF THE ASSESSEE FIRM WERE FOR THE PURPOSE OF ASSESSEES BUSINESS. IT IS ADMITTED BY THE AO HIMS ELF. HOWEVER EVEN IN THE VISIT FOR THE PURPOSE OF BUSINESS THERE MAY BE PER SONAL EXPENDITURE ON SHOPPING OR OTHERWISE. IN THE ABSENCE OF DETAILS O F OTHER EXPENDITURE THE AO COULD NOT HAVE VERIFIED WHETHER THE OTHER EXPENDITU RE WAS ENTIRELY FOR THE PURPOSE OF BUSINESS. IT IS SETTLED LAW THAT ONUS I S UPON THE ASSESSEE TO ESTABLISH THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF ITA NO.4008/AHD/2008 WITH CO.NO.08/AHD/2009 -12- BUSINESS. SINCE THE ASSESSEE DID NOT FURNISH THE D ETAILS OF OTHER EXPENDITURE AND THE VOUCHERS IN SUPPORT OF THE EXPENDITURE IN OUR OPINION 20% DISALLOWANCE OUT OF OTHER EXPENSES I.E. EXCLUDING AIR-FARE AND V ISA CHARGES WAS FAIR AND REASONABLE. WE THEREFORE REVERSE THE ORDER OF THE CIT(A) ON THIS POINT AND RESTORE THAT OF THE AO. ACCORDINGLY GROUND NO.3 O F THE REVENUES APPEAL IS ALLOWED. 14. SO FAR AS THE ASSESSEES CO IS CONCERNED THE S AME MERELY SUPPORTS THE ORDER OF THE CIT(A). THIS BEING IN FRUCTOUS IS DISMISSED. 15. IN THE RESULT REVENUES APPEAL IS PARTLY ALLOW ED WHILE THE ASSESSEES CO IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT THE DATE MENTIONED O N THE FIRST PAGE OF THIS ORDER. SD/- SD/- ( %% % & %% % & %% % & %% % & /MUKUL KR. SHRAWAT ) ' ' ' ' /JUDICIAL MEMBER ( . .. . . .. . G.D. AGARWAL) !' !' !' !' /VICE-PRESIDENT C OPY OF THE ORDER FORWARDED TO: 1) : APPELLANT 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR ITAT. BY ORDER DR/AR ITAT AHMEDABAD