M/s Dhami Brothers, Surat v. The ACIT, Circle-9, Surat

ITA 984/AHD/2007 | 2003-2004
Pronouncement Date: 12-03-2010 | Result: Partly Allowed

Appeal Details

RSA Number 98420514 RSA 2007
Assessee PAN AABFD4987E
Bench Ahmedabad
Appeal Number ITA 984/AHD/2007
Duration Of Justice 3 year(s) 6 day(s)
Appellant M/s Dhami Brothers, Surat
Respondent The ACIT, Circle-9, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 12-03-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 12-03-2010
Date Of Final Hearing 08-03-2010
Next Hearing Date 08-03-2010
Assessment Year 2003-2004
Appeal Filed On 06-03-2007
Judgment Text
ITA.984-1136-07. 1 IN THE INCOME_TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD BEFORE SHRI T. K. SHARMA AND SHRI D.C. AGARWAL. ITA NO.984/AHD/2007 (BY ASSESSEE) AND ITA.NO. 1136/AHD/2007(BY DEPT.) (ASSESSMENT YEAR: 2003-04 ) M/S.DHAMI BROTHERS NEAR KARAMNATH MAHADEV MANDIR KAPODARA VARACHHA ROAD SURAT. VS THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-9 AAYAKAR BHAVAN MAJURA GATE SURAT. (APPELLANT) (RESPONDENT) PAN: AABFD 4987 E APPELLANT BY : SHRI R.N. VEPARI RESPONDENT BY : SHRI M.C. PANDIT SR.D.R. ( (( ( )/ )/)/ )/ ORDER PER: SHRI D.C. AGARWAL. THESE ARE THE TWO CROSS APPEALS ONE FILED BY THE REVEN UE AND THE OTHER FILED BY THE ASSESSEE AGAINST THE ORDER PASSED B Y LT. CIT(A) DATED 27.12.2006. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPORT PROC ESSING POLISHING AND EXPORT OF DIAMONDS. DURING THE ASSESSMENT YEAR THE ASSESSEE HAS DECLARED TOTAL INCOME OF RS. 1 74 71 762/-. I N ITS APPEAL THE REVENUE HAS RAISED FOLLOWING GROUNDS :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED CIT(A) HAS ERRED IN ALLOWING DEDUCTION U/ S.80HHC ITA.984-1136-07. 2 AFTER CONSIDERING THE EXCHANGE RATE INCOME OF RS.27 75 8 54/- DISALLOWED BY ASSESSING OFFICER AS PER ASSESSMENT ORDER U/S. 143(3) OF THE I.T.ACT 1961 DATED 24.02.2006. WHEREAS THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS :- (I) REJECTION OF BOOK RESULT :- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) WAS NOT JUSTIFIED IN CONFIRMING REJECTION OF BOOK RESULT. (2) THE APPELLANT SUBMITS THAT THE LEARNED CIT(A) HA S MISCONSTRUED THE PECULIAR CHARACTERISTIC OF DIAMOND BUSINESS IN CONFIRMING THE ABOVE. (II) ADDITION OF GROSS PROFIT :- (1) THE LD. CIT(A) ERRED IN CONFIRMING ADDITION OF GROSS PROFIT OF 22 66 310/- WHEN SLIGHT FALL IN THE GROSS PROFIT HAD BEEN EXPLAINED AND IN THE BACKGROUND OF THE ABOVE THE ADDITION WAS REQUIRED TO BE DELETED. (III) DISALLOWANCE OUT OF FOREIGN TRAVEL EXPENSES RS.86 736/ - (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE BACKGROUND OF BUSINESS AND NATURE OF TURNOVER EXCEEDING RS.90 CRS. AND THE DETAILS HASVING BEEN FURNISHED THERE WAS NO JUSTIFICATION FOR DISALLOWING TRAVELING EXPENSES. ITA NO.984/A/07 (ASSESSEES APPEAL) 3. IN ITS APPEAL THE ASSESSEE HAS OBJECTED TO THE REJECTION OF THE BOOKS OF ACCOUNTS RESORTED TO BY THE ASSESSING OFFICER AND CON FIRMED BY THE LD. CIT(A). WHILE REJECTING THE BOOKS OF THE A SSESSEE THE AO ITA.984-1136-07. 3 NOTICED THAT ASSESSEE HAS NOT FURNISHED THE RECORD OF STOCK OF DIAMONDS OF DIFFERENT QUALITIES AT DIFFERENT STAGES OF PRODUCTION. THE ASSESSEE IMPORTS ROUGH DIAMONDS IN LOTS. THE PRICE OF THESE LOTS VARY FROM LOT TO LOT AS EACH OF THEM HAVE DIFFERENT QUALI TY OF ROUGH DIAMONDS. THESE DIAMONDS ARE ASSORTED AND OUT OF THAT D IAMONDS WHICH CAN BE POLISHED ARE SEGREGATED. THEY ARE FURTHER CLASSIFIED ON THE BASIS OF THEIR QUALITY. THESE SEGREGATED DIAMONDS ARE GIVEN TO LABOURERS FOR FURTHER PROCESSING CUTTING AND POLISHING. T HE QUALITY OF ROUGH DIAMONDS GIVEN TO THE LABOURERS IN PACKETS FOR F URTHER PROCESS OF CLEAVING AND POLISHING. THE QUALITY OF ROUGH DIAMO NDS IN A PACKET RANGES FROM ONE TO FIFTY IN NUMBER. THE NUMBER OF PI ECES GIVEN TO LABOURERS WITH THEIR WEIGHT IS ALL RECORDED FOR THE P URPOSE OF CONTROL. WHEN THE DIAMONDS ARE RECEIVED BACK AFTER POLISHING T HEIR WEIGHT AND QUALITY IS FURTHER IDENTIFIED AND SEGREGATED. THE QUA LITY IS DETERMINED ON THE BASIS OF CARAT CUT COLOUR AND QUALITY. THUS WI THOUT KEEPING A CONTROL OVER EACH PIECE OF DIAMOND AND WITHOUT HAVING A RECORD OF ROUGH DIAMONDS OF WHAT IS HANDED OVER TO LABOURERS AND OF RECEIVED BACK FROM THEM THE ASSESSEE CANNOT CONTROL HIS BUSINESS. ACCO RDING TO THE A.O. ASSESSEE HAS DECLINED TO FURNISH SUCH RECORD MERE LY ON THE GROUND THAT THE REQUISITE RECORDS ARE NOT MAINTAINED. ACCORDINGLY THE A.O. REJECTED THE BOOKS OF ACCOUNTS AND RESORTED TO ESTIMA TION OF PROFIT. 4. THE LD. CIT(A) CONFIRMED THE SAME ON THE GROUND TH AT ASSESSEE DECLINED TO PRODUCE THE BASIC RECORDS OF PROCESSING AND PRO DUCTION. 5. BEFORE US THE LD. A.R. ARGUED THAT NO SUCH RECORD IS MAINTAINED AND THEREFORE IT IS NOT CORRECT TO REJECT THE BOOKS ON THE GROUND THAT ASSESSEE HAS DECLINED TO PRODUCE SUCH RECORDS. TE LD. D R ON T HE OTHER HAND SUPPORTED THE ORDER OF LOWER AUTHORITIES. ITA.984-1136-07. 4 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING T HE MATERIAL ON RECORD WE DECLINE TO INTERFERE IN THIS PART OF THE ORDERS OF AUTHORITIES BELOW. WE ARE UNABLE TO BELIEVE ON THE A RGUMENTS ADVANCED BY LD. A.R. THAT IN THE DIAMOND MANUFACTURIN G AND TRADING NO QUALITY-WISE RECORD IS MAINTAINED. IN FACT EACH PIECE OF DIAMONDS IS PRECIOUS AND SPECIFIC. THEREFORE RECORD OF EACH DIAMOND PIECE IS REQUIRED TO BE MAINTAINED. FURTHER EACH PIECE IS IDENT IFIABLE ON THE BASIS OF ITS QUALITY DEPENDING UPON ITS CHARACTERISTICS ON THE BASIS OF CARAT CUT COLOUR AND CLARITY. WE ARE UNABLE TO BELIEV E THAT DIAMONDS ARE TREATED LIKE SOME ORDINARY COMMODITY AND THEREFOR E NO QUALITYWISE RECORD IS KEPT. WHATEVER ROUGH DIAMONDS ARE IMPORTED T HEY ARE ASSORTED AND RECORD IS KEPT. IT IS EVALUATED BY DIFFEREN T EMPLOYEES OF THE ASSESSEE TO ESTIMATE MAXIMUM OUT-PUT FROM A PARTICU LAR PIECE OF ROUGH DIAMOND. WITHOUT KEEPING A RECORD OF WEIGHT OF THE ROUGH DIAMOND GIVEN FOR PROCESSING CUTTING AND POLISHING AND ALSO OF ITS OUTPUT A DIAMOND MANUFACTURER WOULD NOT BE ABLE TO KEEP A CONTROL OVER NUMBER OF PIECES IMPORTED NUMBER OF PIECES GIVEN TO LABOURERS FOR PROCESSING CUTTING AND POLISHING AND NUMBER OF PIEC ES RECEIVED FROM THEM THEREAFTER. THE DIAMONDS ARE IMPORTED IN L OT BUT EVALUATED PIECE BY PIECE. THIS ENABLES THE MANUFACTURER TO KEEP CON TROL OVER WASTE. ON OUR ASKING FROM THE LD. A.R. AS TO HOW MUCH W ASTE OCCURRED IN THIS YEAR IN TERMS OF CARAT NO INFORMATION W AS PROVIDED. A FIGURE OF TOTAL WASTE ACCUMULATED OVER NUMBER OF YEARS WAS GIVEN TO THE A.O. THE BASIS FOR REJECTING THE DIAMONDS WAS ALSO NOT PROVIDED. THE DATA OF DIAMONDS REJECTED FROM YEAR TO YEAR AND I TS WEIGHT AGAINST TOTAL WEIGHT OF DIAMONDS PROCURED WAS ALSO NOT PROVIDED. IN VIEW OF NON AVAILABILITY OF BASIC RECORDS IT IS NOT POSSI BLE TO BELIEVE THAT INCOME CAN BE CORRECTLY COMPUTED FROM THE OVERALL FINAL ACCOUNTS ITA.984-1136-07. 5 SUBMITTED BY THE ASSESSEE AND THEREFORE AUTHORITIES BELO W WERE JUSTIFIED IN REJECTING THE BOOKS AND ESTIMATING THE PRO FITS. WE ACCORDINGLY REJECT THE FIRST GROUND RAISED BY THE ASSESSEE. 7. FOR ESTIMATING THE PROFITS THE A.O. NOTICED THAT TH IS YEAR ASSESSEE HAS SHOWN GROSS PROFIT RATE OF 8.76% WHEREAS IN EAR LIER YEAR GROSS PROFIT RATE OF 9.39% WAS SHOWN. IN ASSESSMENT YEAR 20 01-02 THE GROSS PROFIT RATE WAS 10.48%. THE ASSESSEE HAD DECLARED TOTAL TURNOVER OF 90.65 CRORES AND AND A GROSS PROFIT OF 7.94 CRORES THIS YEAR. IN THE PRECEDING YEAR THE TOTAL TURNOVER WAS 90 .58 CRORES AND G.P. DECLARED WAS 8.51 CRORES. THUS THE FALL OF 0.36% W AS NOTICED. ACCORDING TO THE ASSESSEE IT IS ONLY A MINOR VARIATION. A CCORDING TO HIM THERE IS SUBSTANTIAL RISE IN PRICE OF ROUGH DIAMOND WHIL E THE SALE PRICE OF POLISHED DIAMONDS IS COMPARATIVELY LOW. IT IS ALSO SU BMITTED THAT THERE WAS VARIATION IN MANUFACTURING TECHNIQUE VARIAT ION IN EFFICIENCY OR CLEVERNESS OF THE LABOURERS ETC WHICH RESULTED IN FALL IN G.P. HOWEVER THE A.O. DID NOT ACCEPT THIS EXPLANATION AND ENHANCED THE G.P. RATE BY .25%. 8. THE LEARNED CIT(A) CONFIRMED THE SAME FINDING THAT THERE IS NO EXPLANATION FROM THE ASSESSEE AS TO WHY BASIC RECORDS WAS NO T SUBMITTED. 9. AGAINST THIS LEARNED A.R. SUBMITTED THAT FALL IN G .P. IS MARGINAL AND CAN HAPPEN IN ANY BUSINESS. THEREFORE NO ADDITION ON THIS ACCOUNT CAN BE MADE. 10. THE LD. D.R. ON THE OTHER HAND SUBMITTED THAT EF FECT OF EXCHANGE GAIN RECEIVED THIS YEAR BUT ACTUALLY PERTAINED TO EXPORT OF ITA.984-1136-07. 6 EARLIER YEARS HAS ALSO AFFECTED THE GROSS PROFIT RATE. IF IT IS EXCLUDED THE G.P. RATE WOULD BE FURTHER LOW. HE SUBMITTED THAT THE REJECTION OF THE DIAMONDS THIS YEAR IS HIGHER FOR WHICH NO EXPLANATI ON HAS BEEN SUBMITTED. EVEN THOUGH ASSESSEE IS SHOWING TOTAL REJECTED DIAMONDS AT 30338.57 CARATS BUT IT INCLUDED BROUGHT FORWARD R EJECTED DIAMONDS ALSO. IT IS NOT KNOWN WHAT HAS BEEN DONE TO THEM WHET HER THEY ARE STILL IN STOCK OR HAS BEEN DISPOSED OFF AND IF SO AT WHA T RATE. NO WORKING HAS BEEN GIVEN BY THE ASSESSEE AS TO EFFECT ON G. P. RATE OF FOREIGN EXCHANGE GAIN WHICH PERTAINED TO EARLIER YEAR S. NO DATA IS GIVEN BY THE ASSESSEE AS TO WHETHER QUALITY OF DIAMONDS IMPORTED THIS YEAR WAS DIFFERENT THAN WHAT WAS IMPORTED IN EARLIER YEARS. THEREFORE THERE BEING NO POSSIBLE EXPLANATION ADDITION SO MADE BY THE AUTHORITIES BELOW SHOULD BE CONFIRMED. 11. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE ARE OF TH E CONSIDERED VIEW THAT ASSESSEE HAS NOT CORRECTLY GIVEN THE COMPARATIVE DATA FOR COMPARING THE GROSS PROFIT EARNED BY THE ASSESSEE. THE ACCOU NT OF REJECTED DIAMONDS HAS NOT BEEN FURNISHED AND AS TO WHET HER THEY STILL EXIST IN THE STOCK OR DISPOSED OFF. THERE IS NO APPARENT REASON TO CONTINUE TO HOLD REJECTED DIAMONDS FROM YEAR TO YEAR. SECONDLY THE ACTUAL G.P. RATE EARNED AND ITS COMPARISON WITH EARLIER YEARS COULD BE UNDERSTOOD BY ELIMINATING THE EFFECT OF FOREIGN EXCHAN GE GAIN RECEIVED IN THE CURRENT YEAR BUT ACTUALLY PERTAINED TO THE EXP ORT OF EARLIER YEARS. CONSIDERING THE OVERALL FACTS OF THE CASE WE CONFI RM AN ADDITION OF RS.10 LAKHS IN THE GROSS PROFIT. ACCORDINGLY THE ASSESSEE GETS RESULTANT RELIEF. THIS GROUND IS PARTLY ALLOWED. ITA.984-1136-07. 7 12. DISALLOWANCE OF RS.86 736/-. THE THIRD GROUND IS ABOUT THE DISALLOWANCE OUT OF TRA VELING EXPENSES. IN OUR CONSIDERED VIEW THE ESTIMATED DISALLOWA NCE OUT OF TOTAL TRAVELING EXPENSES SHOULD NOT BE RESORTED TO. EACH ITEM OF EXPENDITURE IN FOREIGN TRAVELING SHOULD BE IDENTIFIE D AND THE FINDING IS REQUIRED TO BE GIVEN AS TO WHETHER IT WAS FOR THE BUSI NESS PURPOSES OR NOT. IF EXPENDITURE WAS FOR BUSINESS PURPOSE AND INCURRE D ABROAD AND IS SUPPORTED BY OUT-GOING OF FOREIGN EXCHANGE THEN ESTI MATED DISALLOWANCE WILL NOT BE JUSTIFIED. WE ACCORDINGLY DEL ETE THIS ADDITION. THIS GROUND IS ALLOWED. AS A RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY AL LOWED. ITA.NO.1136/A/2007 (DEPARTMENTS APPEAL) 13. IN THE APPEAL FILED BY THE REVENUE THE ONLY ISSUE IS ALLOWING DEDUCTION U/S. 80HHC ON FOREIGN EXCHANGE GAIN. WE HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND ARGUMENTS OF THE PARTIES. IT IS NOT DISPUTED THAT FOREIGN EXCHANGE GAIN PERTAI NED TO EXPORT MADE BY THE ASSESSEE IN EARLIER YEARS. IT IS ALSO NOT DISPUTED THAT GAINS WERE RECEIVED WITHIN THE EXTENDED PERIOD AS APPROVED BY TH E CONCERNED AUTHORITIES. THE A.O. DISALLOWED THE CLAIM ON THE GROU ND THAT THIS GAIN DID NOT PERTAINED TO CURRENT YEARS EXPORT AND THEREF ORE DEDUCTION U/S. 80HHC FOR THIS YEAR COULD NOT BE ALLOWED. THE LEARN ED A.O. FURTHER OBSERVED THAT THIS INCLUDED GAIN ON ACCOUNT OF IMPORT ALSO. THEREFORE NO DEDUCTION U/S. 80HHC CAN BE ALLOWED ON TH E GAINS RESULTING FROM IMPORTS. HE ACCORDINGLY DISALLOWED THE DE DUCTION U/S. 80HHC AMOUNTING TO RS.27 75 854/-. THE LD. CIT(A) ON T HE OTHER ITA.984-1136-07. 8 HAND ALLOWED THE CLAIM OF THE ASSESSEE ON THE BASIS OF DECI SION OF HON. GUJARAT HIGH COURT IN CIT VS. AMBA IMPEX (2006) 282 I TR PAGE-144 (GUJ.)/201 CTR 409. 14. BEFORE US THE LEARNED D.R. SUBMITTED THAT THE DED UCTION U/S. 80- HHC CANNOT BE ALLOWED ON GAIN RESULTING FROM IMPORTS AND SECONDLY IT WILL BE ALLOWED IN THE YEAR WHEN EXPORT WAS DONE AND TO WHICH THE EXCHANGE RATE GAIN RELATED. 15. ON THE OTHER HAND THE LEARNED AR RELIED ON THE ORDER OF CIT(A) AND DECISION OF HON. GUJARAT HIGH COURT IN THE CASE OF A MBA IMPEX (SUPRA). 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO DISPUTE TO THE PROPOSITION THAT FOREIGN EXCHANGE GAIN IS RELATED TO E XPORTS OF GOODS. IT WOULD BE ON REVENUE ACCOUNT AS HELD IN RENAISSANCE ..J EWELLERY PVT.LTD. VS. ITO (2007) 289 ITR-(AT) 65 (ITAT) (MUM .) AND BY HON. BOMBAY HIGH COURT IN THE CASE OF HOMI MEHJTA & SONS PVT. LTD. VS. CIT (1996) 222 ITR 528 (BOM.). SIMILAR VIEW WAS TAKE N BY ITAT MADRAS IN THE CASE OF CHANGEPOND TECHNOLOGIES PVT. LTD. VS. ACIT (2008) 22 SOT 220 (CHENNAI). IN OTHER WORDS IF FORE IGN EXCHANGE GAIN RELATED TO REVENUE ACCOUNT IT WOULD BE CONSIDERED AS INCOME AND CONSEQUENTLY DEDUCTION U/S. 80HHC WOULD BE ALLOWED IN TH E YEAR TO WHICH EXPORT PERTAINED AND A.O. WILL CARRY OUT NECESSA RY RECTIFICATION U/S/ 155(13) IN RESPECT OF THAT ASSESSMENT YEAR. THE EFF ECT OF EXCHANGE GAIN ON ACCOUNT OF IMPORT HAS TO BE CONSIDERED A ND ITS EFFECT ON PROFITS HAS TO BE WORKED OUT. IF EXCHANGE GAIN RELA TED TO IMPORTS OF EARLIER YEARS THEN ITS EFFECT HAS TO BE RESORTED TO IN THAT YEAR. THIS WAS ALSO THE RATIO OF DECISION OF HON. GUJARAT HIGH COUR T IN AMBA ITA.984-1136-07. 9 IMPEX (SUPRA). IN VIEW OF THE ABOVE WE RESTORE THIS ISSUE TO THE FILE OF THE AO TO WORK OUT THE EXCHANGE RATE GAIN PERTAINING TO THIS ASSESSMENT YEAR GIVE NETTING ON ACCOUNT OF EXCHANGE RATE EFFECT RESULTING FROM IMPORTS AND ALLOW THE DEDUCTION U/S. 80 HHC ON THE NET GAIN PERTAINING TO THIS YEAR. FOR EARLIER YEARS HE MA Y RESORT TO ACTION U/S. 155(13) IF ALL THE FACTS ARE AVAILABLE ON RECORD. 17. AS A RESULT THIS GROUND OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. AS A RESULT FINALLY APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AND APPEAL OF THE REVENUE IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 12/03/2010. SD/- SD/- (T. K. SHARMA) (D.C.AGARWAL) JUDICIALMEMBER. ACCOUNTANT MEMBER. AHMEDABAD. DATED: 12/03/2010. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNED. 5. THE DR. ITAT AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT AHMEDABAD. ITA.984-1136-07. 10