2022 (5) TMI 295 - AT - Income Tax

Valuation of closing stock - Rejection of books of accounts - assessing officer made addition in respect of closing stock valuation of rough diamonds - AO rejected the working of closing stock by taking view that complete details were not furnished by the assessee - HELD THAT - The assessee follows weighted average basis of valuation for valuation of stock as recognized in para- 16 of Accounting Standard -2, dealing with the valuation of inventories issued by Institute of Chartered Accountants of India. Date wise, quantity -wise polished Diamond, stock register, date wise polished diamond, quantitative details regarding the rejection of diamonds, date wise quantity and value floor of the polished diamond register along with the valuation of closing stock were furnished. We find that the submissions of ld AR of the assessee are contrary to the submissions recorded by the assessing officer. It is not the case of assessee that the finding of the assessing officer is perverse. We are conscious of the fact that that this is second round of litigation and instead of sending matter back, we are proceeds to adjudicate the issues. We find that there is objection of the assessing officer that the complete details were not provided by the assessee on the other hand, now we noted that the assessee has now taken stand that assessee follows weighted average basis of valuation for valuation of stock as recognized in para-16 of Accounting Standard -2, dealing with the valuation of inventories issued by Institute of Chartered Accountants of India. No such explanation or stand was asserted by the assessee before assessing officer. The assessee has taken new plea, which is not acceptable to us. Thus, we affirm the order of assessing officer in rejecting the valuation of closing stock. Valuation of stock - addition of account of valuation of stock - GP estimation - AO reinstated the addition by taking view that no details were furnished by the assessee despite providing opportunity to the assessee - CIT(A) made additions by applying 20% rate to the total inward of diamonds (opening stock plus purchases) - HELD THAT - Working of addition the CIT(A) recorded certain discrepancies in the books of the assessee viz; no finance charges are claimed, sales and administrative expenses are only Rs. 3.44 Lacks only, labour charges were Rs. 18.30 lakhs and that the monthly net profit shown by the assessee is only Rs. 27,544/- which is equal to the normal salary of semi-skilled diamond labour. We further find that the ld CIT(A) estimated the unaccounted profit at the rate of 20% on the total inward of diamonds consisting of opening stock plus purchases. The ld CIT(A) worked out the addition of Rs. 40,87,076/-, which was rounded off to Rs. 41,00,000/-( forty one lakhs). On making addition the unaccounted profit on estimation, went upto 36% of the turnover, if it is added the gross profit of the assessee it would be 42 %, which is quite unrealistic in the in the trade of diamonds. The assessee has already declared GP at 5.88%. We further noted that Central Board. of Direct Taxes (CBDT) in its Circular No 2/2008 dated 22nd February 2008 had came with instruction that profit to the extent of 6% in the trading and manufacturing of diamonds is acceptable as results. We find that total sale of the assessee is not disputed by the assessing officer. Considering the facts that we have upheld the rejection of books of account, and further held that estimation adopted by ld CIT(A) is not realistic that is higher side, therefore, we direct the assessing officer to consider the consider the unaccounted profit of assessee at 10% of the sales during the year under consideration, which in our view will be sufficient to avoid the possibility of revenue leakage. As the assessee has already declared 5.88% GP, the assessee be granted set off of the GP already declared by it. In the result, the Ground No. 3 raised by the assessee is partly allowed.

Issues Involved:
1. Validity of the order.
2. Rejection of book result.
3. Changing base of addition.
4. Miscellaneous.

Detailed Analysis:

1. Validity of the Order:
The appellant did not press this ground during the hearing, and thus, it was dismissed as not pressed.

2. Rejection of Book Result:
The appellant, a partnership firm engaged in manufacturing and trading rough and polished diamonds, challenged the rejection of its book results. The Assessing Officer (AO) initially added ?52,32,680 on account of under-valuation of stock of rough diamonds, citing discrepancies like higher average purchase rates compared to opening stock rates and the absence of lot-wise details. The CIT(A) upheld this addition, noting the lack of quality-wise details and discrepancies in the valuation of closing stock. The Tribunal restored the matter to the AO for fresh adjudication, but the AO repeated the addition, rejecting the appellant's explanations about the valuation of rough and rejected diamonds. The CIT(A) confirmed the rejection of the valuation of closing stock but substituted the addition with an estimated unaccounted profit of ?41,00,000, applying a 20% rate to the total inward of diamonds.

3. Changing Base of Addition:
The appellant contested the CIT(A)'s change of the base of addition from stock valuation to estimated unaccounted profit. The CIT(A) justified the change by pointing out discrepancies in the appellant's books, such as low finance charges, minimal sales and administrative expenses, and low monthly net profit. The Tribunal found the estimation of unaccounted profit at 20% of total inward diamonds to be unrealistic, as it resulted in a gross profit rate of 42%, which is significantly higher than the industry norm. The Tribunal directed the AO to consider a more realistic unaccounted profit rate of 10% of the sales, allowing a set-off for the already declared gross profit of 5.88%.

4. Miscellaneous:
The appellant's other grounds of appeal became academic as substantial relief was granted on the primary submissions.

Conclusion:
The Tribunal dismissed the ground related to the validity of the order as not pressed. It upheld the rejection of the valuation of closing stock but found the CIT(A)'s estimation of unaccounted profit to be excessive. The Tribunal directed the AO to consider a 10% unaccounted profit rate on sales, allowing a set-off for the declared gross profit. The appeal was partly allowed, providing substantial relief to the appellant.

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