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TMI Blog2008 (9) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing cost of the year. 4. Since both the above grounds are interconnected, therefore, they are being disposed off together for the sake of convenience. 5. The A.O observed that the quantitative details of diamonds were not produced due to which the closing stock of diamonds of the assessee was not verifiable. The A.O, therefore, rejected the books of account in the absence of the information about the quality of the closing stock for valuation. The A.O also observed that the assessee has made sales at varying prices and, therefore, it was unverifiable as such information is not available with the assessee. In his opinion, although, the assessee has such records of quality of diamonds, the same was consciously not produced. He was of the view the piece-wise assortment on the basis of weight, clarity, colour and luster are inherently necessary process in a diamond business and also crucially linked to the sale price of individual diamond piece, records thereof will acquire the character of primary records and depriving the Revenue of the same to verify the correctness of the income is contrary to the obligation caste upon the assessee to maintain such records for verification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a commercial adventure according to the nature of business and its special character allow certain adjustments but his primary purpose and duty is to deduce the correct income and this he cannot do without taking into account the value of the stock in trade at the beginning and at the end of the year by ascertaining the difference between them. In the instant case, failure to maintain or furnish quality-wise production or sales records raises a serious doubt about the correctness and completion of books of account. The Hon'ble Supreme Court has held that even a regularly employed method of accounting can be discarded if correct profits of the year are not shown. Whether the profits are correct cannot be ascertained because of non-access to quality-wise records of production and sale of diamonds. Inability of verification of quality of diamonds seriously handicaps the verifiability of average margin of profits as held in CIT v. Parekh Bros. (1987) 167 ITR 344(Pat.). Improsper valuation is held to be a justifiable ground for rejection of books of accounts by the Hon'ble Madras High Court in the case of CIT v. Sri Viswasardas Gokuldas 14 ITR 110 (Mad.). Non mention of quality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Star Rays declared 3.78% net profit for A.Y 2003-04 and 4.42% for A.Y 2004-05. The Ld. CIT(A), therefore, concluded that there was enough justification in enhancement the income of Rs. 2,06,26,738/- on the turnover of Rs. 160,43,24,078/- at the ratio of 1.28%. 9. In the light of the above observations made by the Ld. CIT(A), he proceeded to estimate the taxable income of the assessee. He observed that in the enhancement notes issued to the assessee, it was stated net profits varied from 7.41% to 3.08%. The average in four cases was around 4.53%. However, the lowest net profit rate shown is 3.08% by Bhojal Diamond on the turnover of Rs. 26,63,43,460/-. On the other hand, D. Subhahshchandra & Co., with turnover of Rs. 899,969,901/- showed net profit rate @ 4.42%. Since the assessee was having almost double turnover at around Rs. 155.00 crores, it will be proper and fair to estimate the net profit at the lower side at 3%. He observed that this would mean of income of Rs. 4,65,94,861/-since the taxable income as per assessment order was worked out to Rs. 2,46,61,270/-, he made addition for the balance amount of Rs. 2,19,33,591/- to the income of the assessee. 10. Ld. Counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able: With due respect sir, first of all the comparable cases quoted by your honour does not indicate the detailed information regarding business activities, management, nature of business, turnover, place of business etc. Lot's of information, explanation requires for the same & numerous factors are affecting the % of net profit. So respectfully, your straight forward comparison is not justifiable. (2) Comparison of Net Profit is not Justifiable: Only Comparison of net profit ignoring other factors is, with due respect, illogical & not justifiable. Even Gross Profit can only be compared with past history of the same assessee & not the net profit. Net Profit % depends on numerous factors & case to case all facts are different so comparison of Net Profit with other units is illogical & can not be done. (3) Gross Profit: There has been rise in gross profit in the year under scrutiny A.Y. 2004-05 in comparison of earlier A.Y. 2003-04. This important point should not be, respectfully, brushed aside. So, the firm has shown better position. (4) Exact Nature of Business: Your honour has not given the exact nature of business because in diamond industry exact nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to more tax revenue too. From above all aspect to gather, we hope your honour will satisfy with our answer & explanation. However let's know if any further explanation & information is required. 12. Ld. D.R., on the other hand, supported the order of the lower authorities. He justified the enhancement of income made by the Ld. CIT(A). 13. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the assessee is engaged in the manufacturing as well as trading and export of diamonds. During the year under consideration, the A.O observed that the quality-wise details of closing stock could not be furnished by the assessee. We also observed that stock register maintained by the assessee does not give qualitative details of diamonds. The assessee explained before the A.O that on account of numerous quality of diamonds dealt in to maintain the quality-wise details is not practically possible. The A.O. finding this error, rejected the trading result of the assessee and estimated the closing stock of the assessee at Rs. 16,78,67,218/- in place of Rs. 16,25,60,000/- shown by the assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the income shown by the assessee. We also observe that no material could be brought on record by the Revenue to show that the value of closing stock of diamonds shown by the assessee at Rs. 16,25,60,000/- was incorrect or the method of valuation consistently adopted and followed by the assessee was incorrect. In the absence of any material to show that the actual value of closing stock possessed by the assessee as on 31.3.2004, was more than the value shown by the assessee, in our considered opinion, the A.O was not justified in making trading addition of Rs. 53,07,218/-. Further, it is observed that none of the lower authorities have found that the various expenses claimed by the assessee in its P&L A/c were not supported by vouchers or not verifiable or were not genuine. In the above circumstances, the Ld. CIT(A) was not justified in rejecting various expenses disclosed by the assessee's day-to-day maintained books of account. Further, in business, profit is a result of various dynamics. The result of two different businessmen doing the business in the same line may defer greatly because of various reasons for e.g., the value of plant and machinery employed in the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, the Hon'ble CIT(A) has erred in making addition of Rs. 2,19,33,591 as against Rs. 1,04,96,553 he himself having estimated the income @ 3% of the total turnover. 4. Without prejudice to the above, on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in making addition of Rs. 2,19,33,591 without granting any consequential deduction under Section 80HHC of the Ac on the revised gross total income. 5. Without prejudice to the above, on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in making estimation of income @ 3% of total turnover which was calculated on the basis of average net profit of other enterprises involved in diamond industries, without providing necessary data, facts and figures on the basis of which the net profit of other enterprises were worked out and in the absence of any information given to the assessee whether those other enterprises were maintaining quality wise stock registers and whether their books of account and income declared were accepted by the department and as such their cases were comparable with the assessee or not. 18. Ld. D.R. vehemently objected to the additional g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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