2015 (12) TMI 1122 - AT - Income Tax

Disallowance of 25% of the unverifiable purchases - Held that - The issue under consideration relates to taxability of unverifiable purchases of precious and semi precious stones used in jewellery manufacturing. The Coordinate Bench of ITAT in a bunch of appeals, on similar issue, by consolidated order in the case of Anuj Kumar Varshney & Others vs. ITO (2015 (4) TMI 533 - ITAT JAIPUR) has held that 15% of unverifiable purchases shall be held to be income of the assessee from undisclosed sources in the relevant years. It is also brought to our notice that both Revenue and assessee have gone in appeal before Hon ble Rajasthan High Court against this bunch of orders. In similar cases, to avoid multiplicity of appeals, this Bench has set aside the impugned issues raised in such appeals, to the file of the AO to decide the same afresh after the judgment of Hon ble Rajasthan High Court in the case of Anuj Kumar Varshney & others (supra) is delivered. Therefore, following our earlier orders on the same lines, the issue raised in subject appeal is also accordingly set aside to the file of the AO to decide afresh - Decided in favour of revenue for for statistical purposes. G.P. addition - CIT(A) reducing the G.P. rate on reduced sale by giving weighted average price, not following AS-2 and giving telescoping benefit to the assessee - Held that - Regarding the net profit decided by the Assessing Officer and partly confirmed by the ld CIT(A), the ld Assessing Officer made valuation of sale on approval memos on the basis of average method. However, the assessee chose to apply weighted average price method, it is a fact that in jewellery business, particularly diamonds are sold on the basis of colour, cut, clarity and carat, therefore, the ld Assessing Officer was not right to apply simple average method of valuation of sale made on approval memos. The assessee s calculation of sale on the basis of approval memos is more scientific than the Assessing Officer. The ld CIT(A) had applied G.P. rate @ 20%. The assessee has shown G.P. rate on the basis of regular books of account @ 18.44% as mentioned by the Assessing Officer on page 2 of the assessment order. Therefore, the GP applied by the ld CIT(A) is also reasonable. Further the ld CIT(A) has allowed the set off against the excess stock found during the course of search, which is also reasonable on the ground that there is no evidence found during the course of survey that either firm or partner of the firm has taken out the income upon unaccounted sale and made expenditure or made investment outside the book. Therefore, she rightly allowed the set off unaccounted income estimated by applying G.P. rate on sale made through approval memo. - Decided against revneue

Issues Involved:
1. Disallowance of 25% of unverifiable purchases.
2. Reduction of gross profit rate from 25.58% to 20%.
3. Reduction of gross sale price from Rs. 2,78,03,137/- to Rs. 53,71,957/- for unrecorded sales.
4. Use of 'Weighted average' price method versus categorizing and linking quality and rate of goods.
5. Applicability of AS-2 principles for valuation of inventory.
6. Requirement of a proper stock register for FIFO valuation.
7. Telescoping profit with unexplained investment in excess stock.

Detailed Analysis:

1. Disallowance of 25% of Unverifiable Purchases:
The Assessing Officer (AO) found that the assessee had unverifiable purchases from various suppliers, leading to a disallowance of 25% of the total unverifiable purchases amounting to Rs. 18,02,655/-. The CIT(A) deleted this addition, observing that the past history of the assessee is the best guide for estimating gross profit (GP) and found a GP rate of 20% reasonable. The Tribunal set aside the issue to the AO for fresh decision post the Rajasthan High Court judgment in a similar case.

2. Reduction of Gross Profit Rate from 25.58% to 20%:
The AO applied a GP rate of 25.58% on unrecorded sales, while the CIT(A) reduced it to 20%, considering it reasonable based on past history and industry standards. The Tribunal upheld the CIT(A)'s decision, noting that the GP rate of 20% was reasonable and more aligned with the business practices in the gem and jewelry industry.

3. Reduction of Gross Sale Price from Rs. 2,78,03,137/- to Rs. 53,71,957/-:
The AO had estimated the sale price of goods mentioned in the approval memos at Rs. 2,78,03,137/- based on a simple average rate. The CIT(A) accepted the assessee's valuation of Rs. 53,71,957/- using the weighted average method, which considers the quality and characteristics of the gems. The Tribunal concurred with the CIT(A), finding the weighted average method more appropriate and scientific for this industry.

4. Use of 'Weighted Average' Price Method:
The AO used a simple average rate to value the goods, while the CIT(A) and the assessee argued for a weighted average method, which accounts for variations in quality, size, and other attributes of the gems. The Tribunal agreed that the weighted average method was more suitable for valuing sales in the gem and jewelry business.

5. Applicability of AS-2 Principles for Inventory Valuation:
The AO contended that AS-2 principles for FIFO/weighted average method of inventory valuation were not applicable for determining the sale price of already sold goods. The CIT(A) and Tribunal did not directly address this issue but implicitly supported the weighted average method for sales valuation, aligning with industry practices.

6. Requirement of a Proper Stock Register:
The AO argued that a proper stock register was necessary for applying FIFO valuation, which was missing in this case. The CIT(A) and Tribunal focused on the appropriateness of the weighted average method for sales valuation and did not emphasize the need for a stock register in their decisions.

7. Telescoping Profit with Unexplained Investment in Excess Stock:
The AO did not allow the set-off of excess stock found during the survey against the profit estimated from unaccounted sales. The CIT(A) allowed this set-off, reasoning that there was no evidence of income being taken out for expenditure or investment outside the books. The Tribunal upheld this decision, finding it reasonable to allow the set-off against the unaccounted income.

Conclusion:
The Tribunal partly allowed the revenue's appeal, setting aside the issue of unverifiable purchases to the AO for fresh decision post the High Court judgment. It upheld the CIT(A)'s decisions on the GP rate, sales valuation using the weighted average method, and the set-off of excess stock against unaccounted income. The Tribunal found the CIT(A)'s approach reasonable and aligned with industry practices in the gem and jewelry business.

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