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TMI Blog2008 (7) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... for stock of polished diamonds." 2. Briefly stated, the facts are that the assessee is a company engaged in the business of trading of diamonds. Assessee filed the return of income declaring the loss of Rs. 23,98,730. Assessment was completed under section 143(3) determining the total loss of Rs. 49,15,181 after making adjustments to the brought forward losses. Before such adjustments, the total income determined was Rs. 5,70,64,144. The increase of assessable income/loss was on account of disallowance of amortized preliminary expenses under section 35D holding that section 35D( i ) is inapplicable to these expenses and also on account of change in the valuation of closing stock. 3. During the appeal proceedings before us, on the outset, AR argued that the appeal is not maintainable in view of the decision of the SB in the case of Jt. CIT v. Peerless Developers Ltd. [2006] 103 ITD 349 (Kol.) for the proposition that the tax effect in appeal filed by the revenue before the Tribunal is nil (case of only reduction of losses), is not maintainable in view of the CBDT Circular No. 1979, dated 27-3-2000, even if it involves question of law. Per contra , the DR argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in deleting the addition of Rs. 5,68,89,526 made by the Assessing Officer on account of under valuation of closing stock of polished diamonds. 8. Briefly stated, the facts are that the assessee claimed closing stock of 11869 carats and same was valued at Rs. 13,26,80,565 as on 31-3-1998. Assessing Officer asked for furnishing the details and the basis of valuation of the opening and closing stocks and required the assessee to produce records in this regard. After examining the same, Assessing Officer found that this is a fit case for rejecting the books of account without any reference to section 145 of the Act. As a result of the said rejection, applying the FIFO method, the Assessing Officer valued the said closing stock of diamonds of 11869 carats at Rs. 18,96,70,253, thus, making addition of Rs. 5,68,89,256. Manner of arriving at the above figures and the application of FIFO method were discussed in pages 4 and 5 of the assessment order. In this regard, the assessee s explanation to the Assessing Officer was the books of account cannot be rejected as the same were audited by the Statutory Auditors and also as they certified the valuation of closing stock. In this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out by the Directors who has a technical expertise and adequate experience in this field. No documents are required in respect of valuation exercises of diamond in view of the expert directors. Ld. AR justified for the absence of movements records that the assessee deals in polished diamonds not manufacturing of polished diamonds. He further argued that in the judgment in the case of British Paints India Ltd. ( supra ) is not applicable in the assessee s case. CIT(A) considered aforesaid submissions of the assessee and found that the observations of the Assessing Officer are due to lack of proper understanding in the diamond trade in the local market. CIT(A) justified assessee s manner of maintenance of the books of account (for example sale and purchase bills without details of quality of diamonds) and the valuation of closing stock and deleted the addition. He also did not obtain any additional facts during the remand proceedings too. CIT(A) reasoned that the addition made by the Assessing Officer does not have tax implications as the assessee has huge losses and left with more losses to be carried forward for future years. Regarding application of judgment in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at and how it is lower than the cost price, Assessing Officer case is not the case of rejection of the method of valuation and it is the case of properly working out the same valuation on the basis of FIFO method and adopting the cost price; quality based lots were maintained and sold as evidenced by the sales made in the next year. Onus is on the assessee on the issue of true profits are possible to be arrived at using the NRV method of valuation. How the books of account are closed as on 1-4-1998 while the figures of August 1998 for closing stock valuation are to be adopted as is evident in this case. Why the assessee adopted the figures of the August 1998 while NRV has to be based on the last day sale. 12. Ld. AR submissions include that the Assessing Officer s reliance on the case of the associated concern is misplaced, as the facts are different and distinguishable. No details or documents are maintained for the raw materials or the closing stock as the Directors had rich experience in this field, purchase bills are issued by the suppliers without the details of the quality of the diamonds purchased and he has no control on this issue; the judgment in the case of British ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee ( a )has a method of valuation for closing stock as reproduced in para 8 above, ( b )has used the values of the sales effected in next year, ( c )made sales of the closing stock of diamonds in lots with varying values per carat as per the details filed by the assessee himself, and ( d )quality details of the closing stock diamonds are not maintained by the assessee and, therefore, not available to the Assessing Officer. In the light of the above divergent arguments of both the parties and the admitted facts, we need to discuss the provisions of section 145, under which of the provisions, the Assessing Officer rejected the assessee s accounts and other relevant issues for the purpose of adjudicating the revenue grounds. 15. Scope of section 145 : The Assessing Officer assumes jurisdiction in rejecting the books of account of the assessee by virtue of newly substi- tuted section 145 of the Income-tax Act relating to Method of accounting by the Finance Act, 1995 with effect from 1-4-1997 and it reads as under: "145. (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall be computed in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid provisions read with section 44AB and other guidelines issued in connection with the books of account to be maintained by the class of assessees of this kind, adequately advocates for maintenance of the said registers/day-books apart from other books/ledgers enlisted in clause ( 12A ) of section 2. In other words, the requirement of maintaining day-to-day stock register is thus a statutory requirement of the assessee-company, which is engaged in trading of diamonds during the year. Having upheld the importance of such closing register, we need to elaborate on the meaning of correctness and completeness of assessee s accounts. C. The completeness of accounts refers not only to the accounting entries for all the transaction done in the previous year but also to the ledgers, day-books, cash books, account-books and other books and further the other books should logically include those books or documents necessary for supporting the main books enlisted in the definition. In other words, the failure to maintain the said books certainly makes the accounts of the assessee incomplete. On the other hand, the correctness of the accounts refers to the quality or accuracy or reliabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or such particulars are maintained but allegedly not furnished to the Assessing Officer as evident from the orders of the revenue authorities; ( b ) making use of the sales values effected in the subsequent year as against the declared policy relating to method of valuation of closing stock as reproduced in 8 above; and ( c ) relying on the substitute methods i.e., expertise of the Directors in the diamond industry for sale value or realizable value determinations instead of the books of account which are generally maintained on actuals. 18. Further, we have analysed, if the above failures invite the rejection of assessee s accounts. The failure relating to non-maintenance or non-furnishing of the documents or details relating to the diamonds may contribute for the completeness of the books and should not result in questioning the correctness of the books of account. Regarding the use of values of sales effected in subsequent year for the purposes of net realizable value of the closing stock, we have perused the sales of the assessee and found that the rates per carat in each sale bill are different. It implies that the assessee segregated the stock and affected the sales a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king all the factors into consideration, we are of the opinion that the assessee s accounts cannot be considered incomplete and incorrect. However, it is the case of mere failure to comply with the declared method of accounting to the extent that the assessee relied on the sale figures of the next year. On the other hand, we find that the Assessing Officer has not mentioned in the assessment order the specific requirements of the provisions of section 145, which are not complied with by the assessee, whether it is the method of accounting or the incorrectness and incompleteness of accounts. Though we are of the opinion that the stock are sold in lots evident from the manner of 22 sales registered in subsequent periods, Assessing Officer has erred in resorting to FIFO method. Though, this approach of the Assessing Officer is validated by various judgments of the Apex Court in the cases of CST v. H.M. Esufali H.M. Abdulali [1973] 90 ITR 271, State of Kerala v. C. Velukutty [1966] 60 ITR 239 and Kachwala Gems v. Jt. CIT [2007] 288 ITR 10, it is obvious that the extent of arbitrariness should be reduced. The judgment of the Supreme Court in the case of Kachwala Gems ( sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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