2015 (7) TMI 933 - AT - Income Tax

Rejection of the books of accounts - assessment order under section 144 r.w.section 145(3) - Held that - The defects pointed out by the AO are of such a nature, which authorize him to harbour a belief that true income of the assessee cannot be deduced from those accounts. For example, the assessee had adopted incorrect method of accounting with regard to the purchases and sale of licence premium in trading and profit & loss account. The assessee has been showing such sales in profit & loss account, but it has not been recognizing any opening and closing stock of licence premium. It is quite difficult to cross verify such an item. The electricity expense are manufacturing expenses, these must have been debited to manufacturing account, whereas, the assessee has debited in the profit & loss account. Therefore, considering the concurrent findings of both the authorities on this issue, we do not see any reason to interfere in the order of the CIT(A) on this issue in rejecting books of accounts - Decided against assessee. Disallowance of labour charges - AO allowed labour charges at the rate of ₹ 240 per carat. This disallowance of ₹ 60/- per carat is multiplied with the total carats of diamonds, then the addition, therefore, worked out to ₹ 45,44,029/- - Held that - even if this disallowance is confirmed, then the assessee will not be burdened with any tax liability, because the moment the expenses will be disallowed, its profit ratio will increase and it will claim deduction under section 80HHC at an higher amount. Therefore, for the purpose of taxability, it is an academic issue and revenue neutral. Respectfully following the order of the ITAT in the Asstt.Year 2002-03, coupled with the fact that ultimately this issue will not bring any tax to the Revenue, we allow this ground of appeal partly, and confirm the adhoc disallowance of ₹ 10 lakhs, which is in the same ratio, as made and confirmed in the Asstt.Year 2002-03 - Decided partly in favor of assessee. Valuation of closing stock - AO took the value of the diamond at cost - Held that - There is no dispute with regard to the proposition that closing stock is to be valued either at the market price or at cost, whichever is lower. The working given by the assessee before the CIT(A) as well as before us in the paper book is altogether an unscientific calculation, because, the assessee has reduced the cost by sale value of the items sold. Whereas, it ought to have reduced the cost by the cost of items sold. In sale value, profit is also embedded. Therefore, the method of the assessee in working out the balancing figure is not correct. The learned First Appellate Authority has rightly rejected the contentions of the assessee. We do not find any merit in this ground of appeal. It is rejected. But, we direct the AO to give credit of this addition in the opening stock of the diamonds in the next year. - Decided against assessee. Disallowance of labour expenses - Held that - After due consideration of the record, and well reasoned findings recorded by the AO, pointing out defects in the details maintained by the assessee, we are of the view that the CIT(A) has rightly upheld the disallowance - Decided against assessee. Ee-computation of the deduction under section 80HHC after excluding the job work receipts from the total turnover - Held that - The ld. CIT(A), after taking into consideration the job work receipt, commission, interest etc. directed the AO to reduce 90% of net receipts from the eligible profit while working out the deduction admissible under section 80HHC of the Act. In our opinion, the ld.CIT(A) has appreciated the controversy in right perspective and does not call for any interference. The order of ld.CIT(A) is in line of latest decision of Hon ble Supreme Court in the case of ACG Associates Capsules Ltd. Vs. CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA . In view of the above discussion, we do not find any merit in this appeal. - Decided against revenue. Addition on account of valuation of closing stock of rough diamond - Held that - As far as purchase of diamond is concerned, there is no dispute. Thus, the invoices are of no help for the assessee. Similarly, as far as the transmission of rough diamonds from Mumbai to Surat, is also not a relevant fact for deciding this issue. The assessee is required to demonstrate on the basis of day-to-day stock register in quality-wise, that a particular rough diamond were purchased by it were consumed in manufacturing. The remaining diamonds in the closing stocks are directly linked to a particular purchase invoice. There is no such details maintained by the assessee. It is not cross-verifiable. The chart prepared by the assessee is self-styled, just mentioning about the availability of one lot of diamonds in the closing stock. The ld.CIT(A) has appreciated the controversy in right perspective, and has gone through the stand of the assessee. Therefore, we do not find any reason to interfere in the order of the ld.CIT(A) on this issue. - Decided against assessee. Value of rejected diamonds - AO has adopted the value on net realized average value of rejection as accepted by CIT(A) - Held that - No error in the method adopted by the AO. He valued the rejected diamonds at net realized average value, whereas, the assessee did not disclose any basis. Therefore, we do not find any error in the order of the CIT(A). - Decided against assessee. Addition of closing stock of polished diamonds - Held that - The value of the closing stock has to be adopted by the assessee either at market price or at cost, whichever is lower. The AO has adopted the average cost for the purpose of value of the closing stock. We have upheld the same in the Asstt.Year 2003-04. Relying upon our order in the earlier part of this order, we do not find any reason to interfere with the order of the CIT(A). - Decided against assessee.

Summary

Issues Involved:
1. Rejection of books of accounts and assessment under section 144 r.w. section 145(3) of the Income Tax Act.
2. Disallowance of labor charges.
3. Addition on account of valuation of closing stock of polished diamonds.
4. Disallowance of labor expenses.
5. Re-computation of deduction under section 80HHC after excluding job work receipts from total turnover.
6. Valuation of closing stock of rough diamonds.
7. Valuation of rejected diamonds.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Assessment under Section 144 r.w. Section 145(3):
The assessee's books of accounts were rejected by the AO, upheld by the CIT(A), due to defects such as incorrect accounting methods for purchases and sales of license premiums and incorrect debiting of electricity expenses. The Tribunal noted that the AO is authorized to reject book results if true income cannot be deduced from the accounts and upheld the rejection of the books of accounts and assessment under section 144 r.w. section 145(3).

2. Disallowance of Labor Charges:
The AO disallowed labor charges at the rate of Rs. 60 per carat, totaling Rs. 45,44,029/-, based on comparison with rates in previous years. The CIT(A) and Tribunal found no change in circumstances from previous years where similar disallowances were deleted. The Tribunal partly allowed the appeal, confirming an ad-hoc disallowance of Rs. 10 lakhs, considering the issue revenue-neutral as it affects the deduction under section 80HHC.

3. Addition on Account of Valuation of Closing Stock of Polished Diamonds:
The AO added Rs. 2,14,86,709/- to the income, valuing closing stock at average manufacturing cost due to discrepancies in the assessee's valuation method. The CIT(A) and Tribunal upheld this addition, rejecting the assessee's unscientific calculation method. However, the Tribunal directed the AO to give credit for this addition in the next year's opening stock.

4. Disallowance of Labor Expenses:
The AO disallowed 10% of labor payments, amounting to Rs. 10,24,967/-, due to unverifiable payments and lack of supporting evidence. The CIT(A) upheld this disallowance, and the Tribunal agreed, noting the well-reasoned findings of defects in the details maintained by the assessee.

5. Re-computation of Deduction under Section 80HHC:
The AO included job work receipts in the total turnover for computing the deduction under section 80HHC. The CIT(A) directed the AO to exclude job work receipts from the total turnover, considering them an independent activity. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decision in ACG Associates Capsules Ltd. Vs. CIT.

6. Valuation of Closing Stock of Rough Diamonds:
The AO applied the FIFO method, valuing the closing stock at Rs. 7,54,33,074/- and adding Rs. 5,45,30,060/- to the income. The CIT(A) upheld this method, finding no basis for the assessee's claim of lower value stock remaining. The Tribunal agreed, noting the lack of day-to-day stock records and cross-verifiable details by the assessee.

7. Valuation of Rejected Diamonds:
The AO valued rejected diamonds at Rs. 11.58 per carat, contrasting the assessee's valuation at Rs. 10 per carat, based on net realized average value. The CIT(A) upheld this valuation, and the Tribunal found no error in the AO's method, rejecting the assessee's ground of appeal.

Conclusion:
The Tribunal partly allowed the appeal for the Asstt.Year 2003-04, confirming some disallowances and additions while providing partial relief. The appeals for the Asstt.Years 2004-05 and 2005-06 were dismissed, upholding the AO's and CIT(A)'s decisions on various issues, including valuation of closing stock and labor expenses. The Tribunal's decisions were based on detailed examination of facts, accounting methods, and legal provisions, ensuring compliance with the Income Tax Act.