2015 (12) TMI 989 - AT - Income Tax

Invoking of provisions of section 145(3) for rejecting the books of accounts of assessee - only reason for which the Assessing Officer has rejected the books of accounts is for non-maintenance of quality-wise and piecewise detail of polished diamonds and has prepared vouchers for payment of labour charges - Held that - Assessee is dealing in polished diamonds, better GP rate in comparison to preceding year, no specific default in the books of accounts, prepared quantitative details with calculation of wastage and yield duly recorded in books of accounts and certified by Chartered Accountant. It seems that Assessing Officer has tried to impose his experience of similar types of assessment done by him in case of other assessee(s). This action of the Assessing Officer cannot be held correct. However, assessee has its own way of doing business and preparation of books of accounts and there is no set bench mark that the quality wise or piece wise details of goods dealt has to be kept by each assessee. Therefore, applying the ratio of the decision of M/s Dhami Brothers vs. ACIT 2010 (8) TMI 817 - ITAT AHMEDABAD we are of the view that Assessing Officer was not correct in invoking the provisions of section 145(3) of the Act and accordingly, we uphold the order of CIT(A) and reject this ground of Revenue. - Decided in favour of assessee. Addition on account of disallowance of excess labour expenses - CIT(A) deleted the addition - Held that - The Assessing Officer has tried to compare the business style of the assessee with other assessees engaged in similar type of business, wherein in some cases he may have observed that other assessees paid to the labourers on the basis of their bills and the labour charges vary on the basis of quality of goods whereas in the case of assessee they have been paid on the basis of quantity. The assessee has been paying job charges @ of ₹ 375 per carat of roof diamond consistently since last three years whereas the Assessing Officer on the basis of his experience of assessing another unit has come to an average rate of ₹ 236 per carat of job work charges. This comparison and imposing of rates charged by other units can be justified only if the Assessing Officer proves that assessee had paid less amount than the amount actually shown in the supporting vouchers and there has been no such case observed by the Assessing Officer. So much so that when Assessing Officer called a few labour contractors for cross examining as to what is actual amount they have received, those labour contractors have confirmed that they have received the same amount of labour charges as mentioned in the supporting vouchers which have been countersigned by them.Therefore, considering the history of the assessee and nature of business and that profit is higher as compared to the preceding assessment year, would prove that assessee spent genuine expenditure wholly and exclusively for the purpose of business. We accordingly set aside the orders of the authorities below and delete the addition. - Decided in favour of assessee. Addition on account of suppressed yield - as per AO there was NIL rejection in the preceding year in comparison to 1.78% rejection during the year and secondly qualitywise and piece wise details were not available and he has tried to place in the facts of other assessees assessed by him - CIT(A) deleted the addition - Held that - Assessing Officer did not appreciate the fact that yield in the case of precious stone cannot be set by a similar bench mark because no body can predict the possible yield of finished goods which can be derived from cutting and polishing rough diamonds and also rough diamonds are in itself different in their quality but generally when there is fine quality of rough diamonds there is always a possibility of higher yield and vice versa in case of inferior type of rough diamond. As submitted by assessee that variation in yield has arisen due to variation in rates and use of little inferior quality of rough diamond during the year in comparison to previous year. However, overall yield in Asst. Year 2008-09 is 29.25% in comparison to 29.12% yield in asst. year 2007-08. Further regarding rejection it is only from the rough diamonds of lower purchase price. Assessee has properly maintained quantitative details along with quantity of goods produced and quantity of wastage and yield. The very basis taken by Assessing Officer that there was no wastage in preceding year and, therefore, the wastage in this year is manipulated is far from truth and without any basis and therefore, there is no weightage in the observation made by the Assessing Officer. As discussed earlier business style of each assessee has its own unique way of working and all cannot be examined with a similar bench mark else there always be the similar percentage of profit earned by every assessee. Business is controlled by the owner or the management and the level of yield, GP/NP achieved will vary from case to case depending on the application of strategic mind by the businessman. In view of above discussions, we find no infirmity in the order of ld. CIT(A) and uphold the same.- Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of account under Section 145(3) of the I.T. Act, 1961.
2. Disallowance of excess labour expenses.
3. Addition on account of suppressed yield.

Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):
The Assessing Officer (AO) rejected the books of account of the assessee on the grounds that the assessee failed to maintain quality-wise and piece-wise details of polished diamonds and relied only on quantity-wise details. The AO also noted discrepancies in labour charges and the valuation of closing stock. The CIT(A) overturned this decision, citing that the book results cannot be rejected solely on the lack of quality-wise details, especially when quantity-wise details are maintained and no defects in these records were pointed out. The Tribunal upheld the CIT(A)'s decision, referencing a similar case (M/s Dhami Brothers vs. ACIT) where it was ruled that qualitative details are not necessary for computing income if quantitative details are adequately maintained.

2. Disallowance of Excess Labour Expenses:
The AO disallowed Rs. 32,24,477/- of labour expenses, arguing that the assessee paid higher rates per carat compared to other similar cases and failed to produce proper labour registers. The CIT(A) deleted the disallowance, noting that the AO did not provide comparable instances to substantiate the claim and that the assessee's GP rate had actually increased. The Tribunal agreed with the CIT(A), emphasizing that the AO's reliance on other cases without concrete evidence was unjustified. The Tribunal referenced the case of ACIT vs. Veer Gems, where similar disallowances were deleted due to lack of evidence and proper maintenance of records by the assessee.

3. Addition on Account of Suppressed Yield:
The AO added Rs. 23,08,633/- to the income, alleging suppressed yield based on a comparison of yield percentages and rejection rates between the current and preceding years. The CIT(A) found the addition baseless, noting that the yield percentage had actually increased and the rejection was due to the use of inferior quality rough diamonds, which was supported by a decrease in the cost per carat. The Tribunal upheld the CIT(A)'s decision, stressing that yield variations are common in the diamond industry and cannot be standardized across different entities. The Tribunal cited the case of ACIT vs. Lathiya Brothers, where similar additions were deleted due to the lack of concrete evidence and the natural variability in diamond yield.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on all grounds. The rejection of books of account under Section 145(3) was deemed invalid, the disallowance of excess labour expenses was deleted due to lack of evidence, and the addition on account of suppressed yield was overturned as it was based on incorrect assumptions and lack of concrete evidence. The Tribunal emphasized the importance of maintaining proper records and the variability in business practices and outcomes in the diamond industry.