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2014 (7) TMI 1031 - AT - Income TaxRestriction of Labour charges Held that - A reasonable rate should have been applied by CIT(A) - it would be fair and reasonable to allow labour charges as claimed by the assessee - the short comings of the assessee shall also be addressed - an average rate can be allowed instead as claimed by the assessee The decision in Dy. Commissioner of Income-Tax Versus M/s. M. Kantilal Exports 2014 (7) TMI 819 - ITAT AHMEDABAD followed - thus the order of the CIT(A) is modified in respect of an adhoc disallowance Decided partly in favour of Revenue. Under valuation of closing stock of polished diamonds Held that - This year can be treated as a demarcating year from the past years; hence without disturbing the value of the opening stock the AO is authorized to change the method of valuation for valuing the closing stock - an average of the two valuations is the right solution - The average of the two valuations - To resolve this long pending issue is a reasonable and fair approach to compute the value of the stock of the polished diamond at an average value of the closing stock - Closing stock of the diamond was and by applying the rate - The decision in Dy. Commissioner of Income-Tax Versus M/s. M. Kantilal Exports 2014 (7) TMI 819 - ITAT AHMEDABAD followed - the AO is directed to re-calculate the valuation of the polished diamond by adopting the average rate of the two figures and accordingly compute the under valuation of the polished diamonds Decided partly in favour of Revenue. Valuation of closing stock of polished diamonds - Valuation made without any method Valuation made at average rate of purchases Held that - The valuation of the stock is to be made at the market price or the cost price whichever is lower - when the complete information about the quality of the stock is not made available then to resolve the issue a middle path is to be adopted - the assessee was in possession of the rough diamond; hence the difference of the two i.e. purchase cost (- minus) sale cost is the correct method for determining the valuation of the rough diamond - The decision in Dy. Commissioner of Income-Tax Versus M/s. M. Kantilal Exports 2014 (7) TMI 819 - ITAT AHMEDABAD followed - the AO is directed to re-compute the valuation of the closing stock of the rough diamonds by adopting an average rate on the same guidelines Decided partly in favour of Revenue. Admission of additional evidence Deduction u/s 80HHC Export realization during extended period Held that - The assessee has received approval from the R.B.I and the realising Bank for extension of period for realisation in terms of section 80HHC (2)(a) of the Act there was no reasons for not allowing deduction u/s 80HHC of the Act on this realization - The AO is directed to include the said late realisation in export sale proceeds and allow deduction u/s 80HHC of the Act on this amount also Decided against Revenue. Defects in Labour payment expenses Held that - The labour charges are different from lot to lot depending upon the quality of the diamond manufactured - while explaining the correctness of the valuation of the stock in the past year the assessee himself had taken a plea that the diamonds are of two qualities a superior quality and inferior quality - the valuation of such type of diamonds effect the overall valuation of the closing stock - it was impractical to pay an identical rate of job charges to all the job workers - Certain other doubts have also been raised such as a huge amount of labour charges remain outstanding at the end of the financial year- the AO is directed to re-compute the disallowance an average is to be taken for the purpose of disallowance of labour expenses Decided partly in favour of Assessee.
Issues Involved:
1. Disallowance of labour charges. 2. Under-valuation of closing stock of polished diamonds. 3. Under-valuation of closing stock of rough diamonds. 4. Deduction under Section 80HHC of the IT Act on export realization during the extended period. 5. Validity of assessment under Section 144 r.w.s. 145(3) of the IT Act. Detailed Analysis: 1. Disallowance of Labour Charges: The Revenue appealed against the CIT(A)'s decision to restrict the disallowance of Rs. 34,21,248/- to Rs. 5,00,000/- and Rs. 2,00,000/- respectively. The AO noted a decline in the GP rate and found discrepancies in the books of accounts, including unverified labour expenses and unpaid labour charges. The CIT(A) restricted the disallowance, citing lack of adverse findings and the normal course of business. However, the Tribunal, referencing a similar case (M/s. M. Kantilal Exports), decided to allow labour charges at Rs. 270 per carat instead of Rs. 300, directing the AO to re-compute the disallowance accordingly. 2. Under-Valuation of Closing Stock of Polished Diamonds: The AO added Rs. 1,02,53,498/- due to under-valuation, comparing the average sale price of March 2002 with the whole year's average. The CIT(A) deleted the addition, emphasizing consistent valuation methods and the need to adjust both opening and closing stocks uniformly. The Tribunal, disagreeing with the CIT(A), referred to a similar case (M/s. Kantilal Exports) and directed the AO to re-calculate the valuation by averaging the figures, thereby partly allowing the Revenue's ground. 3. Under-Valuation of Closing Stock of Rough Diamonds: The AO added Rs. 1,10,00,414/- for under-valuation of rough diamonds, using the average rate of the last three months' purchases. The CIT(A) deleted the addition, citing documentary evidence and the revenue-neutral nature of the adjustment. The Tribunal, referencing M/s. Kantilal Exports, adopted an average rate for re-computation, partly allowing the Revenue's ground. 4. Deduction under Section 80HHC of the IT Act on Export Realization During the Extended Period: The AO disallowed the deduction due to lack of RBI approval for extended realization. The CIT(A), however, found that requisite approvals were obtained and directed the AO to allow the deduction. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's grounds. 5. Validity of Assessment under Section 144 r.w.s. 145(3) of the IT Act: The assessee challenged the invocation of Section 145(3) due to incomplete books of accounts. The CIT(A) upheld the AO's action, citing unverifiable labour payments and lack of production records. The Tribunal, referencing a similar case (M/s. Kantilal Exports), dismissed the assessee's ground, affirming the rejection of books of accounts. Conclusion: Both the Revenue's and the assessee's appeals were partly allowed, with the Tribunal directing re-computation of disallowances and valuations based on average rates and consistent methodologies, while upholding the CIT(A)'s decisions on certain grounds.
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