2016 (11) TMI 664 - AT - Income Tax

G.P. estimation - substantial rise in the payment of job work charges to the workers - Held that - We have observed that the assessee is not able to justify the substantial rise in the payment of job work charges to the workers i.e. @ ₹ 500/- per carat as against ₹ 108/- per carat in preceding year. The labour charges have substantially gone up as compared to the preceding year which is almost 400% without any justification. It was observed that TDS has been deducted but the assessee has to explain the abnormal rise in the job work charges per carat with cogent reasons. No cogent explanation has been brought on record by the assessee to substantiate this substantial rise in the job work charges. It is stated before us by the ld DR. that the Revenue is not in appeal against the order of the ld. CIT(A) which order of ld. CIT(A) has been accepted by the Revenue. In our considered view, the ld. CIT(A) has taken the GP ratio @ 7% as against 6.93% which in our considered view is quite justified and fair keeping in view factual matrix of the case. We do not find any infirmity in the order of the ld. CIT(A). The A.O. adopted the GP rate @ 7.79% whereas the assessee has declared GP rate @ 6.93%. The ld. CIT(A) estimated the GP rate @ 7% keeping in view the peculiar facts and circumstances of the assessee s case. In our considered view, the view taken by the ld. CIT(A) is quite reasonable and fair considering the peculiar facts and circumstances of the case.- Decided against assessee

Issues Involved:
1. Confirmation of addition on account of estimating the gross profit rate.
2. Rejection of books of account by the Assessing Officer (AO).
3. Valuation and verification of stock of rough and polished diamonds.
4. Comparison of gross profit ratios over different assessment years.
5. Justification of increased labor charges and job work costs.
6. Acceptance of book results and estimation of gross profit by the CIT(A).

Issue-wise Detailed Analysis:

1. Confirmation of Addition on Account of Estimating the Gross Profit Rate:
The assessee firm appealed against the confirmation of an addition of ?5,37,250/- on account of estimating the gross profit (GP) rate at 7% instead of the 6.93% as returned by the appellant. The AO had initially estimated a higher GP rate of 7.79%, leading to an addition of ?83,43,116/-. The CIT(A) reduced this addition, estimating the GP rate at 7%, resulting in the contested addition of ?5,37,250/-.

2. Rejection of Books of Account by the Assessing Officer (AO):
The AO rejected the books of account under section 145 of the Income Tax Act, 1961, citing that the valuation of opening stock, manufactured stock, and closing stock was not verifiable. The AO noted discrepancies in the stock registers, such as the absence of details regarding the number of pieces, size, weight, cut, quality, clarity, and color of the diamonds, which are essential for accurate valuation.

3. Valuation and Verification of Stock of Rough and Polished Diamonds:
The AO observed that the stock registers lacked essential details, making it impossible to verify the exact cost and valuation of rough and polished diamonds. The assessee maintained that it was impractical to record such detailed information due to the nature of the diamond trade, where stocks are frequently assorted and re-assorted. The CIT(A) acknowledged the trade practices but emphasized the need for a consistent and verifiable method of stock valuation.

4. Comparison of Gross Profit Ratios Over Different Assessment Years:
The assessee provided a comparative analysis of gross profit ratios over the assessment years 2006-07 to 2008-09, showing a decline in the GP ratio from 8.09% to 6.93%. The assessee attributed the fall in GP ratio to increased turnover, recession in the international market, and entry into the local market with low-value products. The CIT(A) considered these factors and noted the slight fall in GP ratio despite the increased turnover.

5. Justification of Increased Labor Charges and Job Work Costs:
The assessee explained the significant increase in labor charges due to the deployment of its own labor, leading to higher wages and additional benefits such as PF/ESIC. The AO, however, found the explanation insufficient, noting a substantial rise in job work charges from ?108/- per carat in the preceding year to ?500/- per carat during the assessment year under consideration. The CIT(A) partially accepted the assessee's explanation but upheld the addition due to the lack of verifiable information on the quality of rough diamonds and the abnormal increase in job work charges.

6. Acceptance of Book Results and Estimation of Gross Profit by the CIT(A):
The CIT(A) rejected the AO's action of estimating higher sales and upheld the book results, noting that the assessee's method of stock valuation was consistent and reasonable. The CIT(A) estimated the GP rate at 7%, considering the peculiar facts and circumstances of the case, such as the increased labor costs and the nature of the diamond trade. The Tribunal found the CIT(A)'s estimation justified and upheld the order, dismissing the appeal filed by the assessee.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming the addition of ?5,37,250/- by estimating the GP rate at 7%. The rejection of books of account by the AO was upheld, but the CIT(A)'s estimation of GP rate was deemed reasonable and fair, considering the peculiar facts and circumstances of the case. The appeal filed by the assessee was dismissed.

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