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TMI Blog2012 (12) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the AO in respect of low Gross Profit. The AO has dealt with the issue as under:- "2 The assessee, a partnership firm, is engaged in the business of job work of diamond and export of diamond. During the year the assessee has shown gross profit of Rs.1,01,82,895/- @ 13.81% on total turn over of Rs.7,37,47,135/- as against gross profit of Rs.1,07,26,776/- @ 20% on gross receipts of Rs.5,36,39,699/- in the immediately preceding year. Thus, there is a fall in the gross profit ratio in the year under consideration. 3. As noted in the preceding paras that the assessee had shown GP @ 13.81% as compared to GP of 20% in the immediately preceding assessment year. Thus there was a fall in gross profit of 6.19%. Here it would be pertinent to mention further scanning of trading of account revealed that the assessee had carried out export trading activity from its branch office situated at Mumbai and the job work from its head office at Surat. In this context the assessee vide this office query letter dated 19.7.2005 alongwith notice u/s. 142(1), the assessee was categorically asked to explain the fall in gross profit. Before going into the discussion on the fall in g.p. the nature of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price of a diamond of one carat of the same quality, i.e., similar cut, colour and clarity would not be Rs.50,000 i.e. (5000 X 10) but may be around Rs.1 lac or more. Similarly, the price of a .05 carat or 5 cents may be around Rs.400 instead of Rs.2,500. The sum and substance of this is that as the size of the diamond increases, the increase in its price is far more than the proportion of increase in the weight of same quality of diamond. Same criteria would apply in the case of cut, i.e. if a diamond is weighing 10 cents but with inferior quality of cuts costs Rs.2,000, a diamond of superior cut but of same weight, i.e., carat, colour and clarity may cost Rs.3,000. Similar considerations apply to the other factors, viz., colour and quality. The less colour a diamond has or in other words, the more it is on whiter side, for the same caratage, cut clarity, the higher would be its price. The same can be stated about the clarity of diamonds. 5. In view of the peculiarity of the business, it becomes necessary to ascertain the production of the diamonds both in terms of quality and quantity. In this backdrop, on examination of audit report in Form BCD furnished along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular lot in order to determine the value. Therefore, in view of this, it would rather be correct to say that the valuation of stock is not verifiable. Here, it would be pertinent to mention that the Hon'ble Supreme Court in the case of British Prints India Pvt. Ltd. reported in 188 ITR 44, has been held that where the accounts are prepared without disclosing the real cost of the stock in trade albeit on sound expert advise in the interest of efficient administration of business, it is the duty of the Assessing Officer to determine the taxable income by making such computation as he thinks fit. Therefore, the claim of the assessee that it is assessee's option to maintain the books of accounts in the manner that suits to it can no longer be accepted and has to be rejected. In this context, reliance is also placed upon the Mumbai ITAT's decision in the case of DCIT Vs. Samir Diamonds Export Pvt. Ltd. reported in 71 ITD 75. Fall in gross profit 7. As already discussed in para-3 above, there is a fall in gross profit ratio 6.19% during the year under consideration as compared to the g.p. ratio of immediately preceding assessment year. In this context, the assessee vide its lett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans during the year under consideration. Further the financial charges decrease the net profit and not the gross profit. Another reason cited by you is recession in whole economy which is also not convincing since the economy in F.Y. 03-04 was on boom and not on recession. The GDP growth rate during F.Y.03-04 has increased from around 5% to 8.2%. Thus, the reasons cited by you is general in nature are not convincing. So you are asked to show cause as to why your book result should not be rejected and the gross profit should not be enhanced to that of last year i.e. 20% and the difference should not be added to your total income". 7.3 In response to the above, the assessee vide its letter dated 16.11.2006 has stated as under: During the year under consideration there is a fall in G.P. as compare to last year in this connection, we have given our reason, but you have stated that reason cited by us is general in nature. In this connection we have further to state that in last year we have sold diamond at Rs.13,030/- per Cts. While in the year under consideration the same is Rs.12,771/- per Cts. as again cost of polish diamond is Rs.70,4257-and Rs.77,0077- respectively. So we earn p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the job work they do not have to look into clarity, cut, shape, weight, etc. for polished diamond. So there was difference in rate of labour charges for own manufacture and job work manufacture. This clearly shows that the assessee himself depends upon the quality for labour payment, but they have not furnished such quality details, even though, it was specifically called for. 7.4 Thus, in view of the above facts, it is apparent that the assessee had the record of production of polished diamonds on the basis of quality. Otherwise, taking into account the quantity of polished diamonds sold, it would become. impossible for the assessee to have a control over the trading activity. However, f the assessee had declined to furnish such records merely on the ground that the requisite records were not maintained. The very fact that the assessee had admitted that after the cut and polished diamonds received back from the labour parties they were sorted by the assessee in different lots, sizes, quality etc. would indicate that the assessee had been sorting them out on piece by piece basis. 7.5 As regards the assessee's submission that in the last year the per carat cost of diamond sold wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the total turnover of Rs.7,37,47,135/- on an estimated basis. I, therefore, add a sum o^ Rs.28,49,884/- to the total income of the assessee." 4. Aggrieved by this order, the assessee carried the mat ter in appeal before the first appellate authority. Before the learned CIT(A), the assessee's contention was that the addition on account of low gross profit made by the Assessing Officer was totally uncalled for as it was based on her guess work and surmises. According to the AR of the assessee, due to certain adverse factors such as rise in the cost of polished diamonds and reduction in the profit earned on sale (export) on per carat basis during the year in comparison to immediate preceding assessment year, its profit had gone down. To further elaborate the above referred submission, it was stated by the AR, that during year, the cost of exported polished diamonds of 5774.38 carats was Rs.6,35,64,240/- i.e. on an average it was Rs.11,007.98 per carat and against that its realized average sale price was Rs.l2,771.44 per carat which resulted into a profit of Rs.1,763.46 per carat and as against that the profit-of-the assessee in the immediate preceding assessment year was Rs.2,695.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 15,047,504 20.40% 5. Thus, on the basis of the above referred facts and figures, the AR pleaded that if the cost as well as sale factors are taken into consideration (as discussed above,) then there was no fall in gross profit ratio at all. Further, according to the AR, if the gross profit ratio for the year under consideration was compared by the Assessing Officer on the basis of gross profit ratio disclosed by the assessee-firm in the immediate preceding assessment year, the factors responsible for down fall in gross profit ratio should necessarily be taken into account, only then the comparison can be justified. 6. In support of his above referred submissions, the AR relied on the decision of the ITAT, Ahmedbad 'C' Bench in the case of Ladakkchand Jivraj & Sons V/s. I.T.O. - 35 TTJ (Ahd.) 512. In addition to the above, the AR further relied upon the findings of the ITAT 'D' Bench in the case of Keystone India (P) Ltd. V/s. DCITJ (2006) 99 TTJ (Ahd.) 386 wherein, according to him, on similar issue as that in the case of the assessee-firm, the ITAT has held that the rejection of books of accounts due to fall in gross profit ratio and not being satisfied with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven. In my considered opinion, if the fall in gross profit ratio has been explained satisfactorily and no specific defects were pointed out in the books of accounts by the Assessing Officer, then the findings of the various Courts as referred to above have been found applicable to the issue involved in the case of the appellant. Further, after going through the findings of the Hon'ble Supreme Court of India in the case of British Paints (India) Ltd. (supra), it is found that the Hon'ble Court has held that that the findings of the Assessing Officer was justified in the said case because while valuing the closing stock, the assessee i.e. British Paints (India) Ltd. did not consider the major portion of the operative expenses while valuing the same. In the case of the appellant, on the contrary, after going through the details and method of valuation of closing stock as reflected in its books of accounts, it is noticed that it had considered all the expenses while valuing the closing stock. I am, therefore, of the opinion that the findings in the case of British Paints (India) Pvt. Ltd. is not applicable to the issue involved in the case of the appellant. I, therefore, keeping the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee during the assessment proceedings which is also a part of our order. Placing reliance on the decisions of the Tribunal in the cases of Ladakchand Jivraj and Sons vs. ITO 35 TTJ 35 and Keystone India Pvt. Ltd. vs. DCIT (2006) 99 TTJ (Ahd) 386, he concluded his arguments by praying that the order passed by the learned CIT(A) may kindly be upheld. 11. In reply, the learned DR submitted that the decision of the Tribunal in the case of Balar Exports (supra) is the latest decision on the issue and the same may kindly be followed instead of earlier decision of the Tribunal relied upon by the assessee. 12. We have heard both the parties and perused the records and find that during the assessment proceedings, it was noticed by the AO that there was fall in GP rate by 6.19% as compared to last year. Assessee's explanation was sought by him for this sharp decline in GP ratio. The assessee's explanation was not found satisfactory by the AO. According to the AO, the assessee did not maintain the stock in terms of quantity and quality. He was of the view that as per the provisions of section 44AA of the Act, the assessee is required to keep and maintain such books of account an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee did not disclose the correct profits. This is clear from para 7.3 and 7.4 of the assessment order. 13. We further find that the learned CIT(A) while giving relief to the assessee, has relied on the decision of the ITAT Ahmedabad in the case of Ladakchand Jivraj and Sons vs. ITO 35 TTJ (Ahd) 512 which is according to us is not applicable to the facts of this case. In the case of Ladakchand Jivraj and Sons (supra), the assessee was a wholesale dealer in tea who submitted details chestwise instead of kilogramwise as asked by the AO. As a result, the AO made a GP addition. This was deleted by the Tribunal saying that the AO did not bring anything on record to justify that "there was any quantity of goods not accounted for or the rates of sales were not reliable or the purchases were inflated". This case of tea can hardly be compared with that of diamond. A grain of tea and a grain of diamond vary not only in value but also in respect of the qualities attached to it. The AO has specifically brought out the nuances of Diamond Industry in para 4.1 of the order which reads as under:- "4.1 - - - -- if the price of 0.10 carat or 10 cents as it may be called in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of M/s Dhami Brothers vs. ACIT [ITA No. 2309/Ahd/2008, order dated 06-08-2010] for the proposition that even if the quality wise details of stock were not produced before the AO, the book results cannot be rejected In the cases of M/s Jodhani Exports and M/s Dhami Brothers (supra), there was no dispute about the fact that the assessee did not maintain quality-wise details of closing stock. While in the assessee's case, the AO after discussing the issue in detail, has held clearly that though the assessee was maintaining quality-wise and quantity-wise details of its stock but the same were not produced before the AO. The relevant paras 7.3 and 7.4 of the assessment order, at the cost of repetition, are reproduced below:- "7.3 A plain reading of the submission of the assessee shows that the assessee himself gives contradictory statements. At one place, the assessee states that it is not possible to give quality of diamond manufactured by it and it depends upon the quality of rough, etc. On other hand it is stated that in their own manufacture they require quality of diamond as they have to export good quality of diamond. Further, for the query raised on account of excess labo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc., and actual yield therefrom as they were said to have been destroyed after goods were received back - Assessing Officer further found that assessee had shown a uniform yield between 25 per cent to 26 per cent of polished diamonds from all sorts of rough diamonds, good or bad, while number of yield varied from 4 pieces to 200 pieces per carat - He also found that labour charges were also shown to have been paid at uniform rate irrespective of quality of diamond which was inconceivable - He, therefore, concluded that in absence of vital details and in view of incompleteness of books of account book results could not be accepted and on basis of assessee's own record and results disclosed by sister concerns, made flat addition at 5 per cent of disclosed sales - Whether an assessee can claim that since his books of account were found to be correct and complete in preceding years, it is a conclusive proof of fact that they are correct and complete for subsequent year also - Held, no - Whether, therefore, assessee's claim that it was its prerogative to maintain books of account in a manner that it liked and that Assessing Officer could not reject them because they had been accepting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the results in the cases of the assessee's group and the assessee's own case for the assessment year 1989-90, the GP rate shown at 5.61 per cent as against 15.50 per cent arid per cent in the cases of the assessee's own sister concerns for the assessment year 1989-90, he made flat addition @ 5 per cent on disclosed of Rs.7,75,00,985. On appeal, the Commissioner (Appeals) accepted figures submitted by the assessee as also the explanation regarding Gross Profit Rate in the assessment year 1989-90, and deleted the addition. On revenue's appeal: The Commissioner (Appeals) decided the appeal merely on the basis of the submissions made by or on behalf of the assessee without considering the facts discussed in the assessment order and taking care to check even superficially the veracity of the arguments and the facts as well as law submitted before him. The price of diamond depends on four Cs. They are at (i) carat (ii) cut (iii) colour and five clarity which the Assessing Officer took into consideration but the Commissioner (Appeal) did not examine. The explanation of the assessee before the Bench that the diamonds in which assessee dealt, being very small in size, it was not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness without getting account of each and every piece of diamond, yet, it was stated that those packets had been destroyed would mean that the Assessing Officer was correct in coming conclusion that the accounts were not correct and complete because the corroborative and contemporaneous evidence had been admittedly destroyed by the assessee. Thus, the way in which the assessee should have actually maintained lots of its diamonds, as admitted before the Commissioner (Appeals) would only confirm that the assessee had been, in fact, noting down and maintaining the details required by the Assessing Officer when it received back the cut and polished diamonds from the labour parties and when it was sorting them in different lots, sizes, quality, etc. From this also to be inferred that the assessee had withheld the complete and correct details regarding its accounts from the Assessing Officer and, hence, the accounts which the Assessing Officer was allowed to examine were not correct and complete and, hence, he was justified in invoking the provisions of section 145(2). Even if in the past, from year to year, the department has taken the view that the books of account maintained in a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertion. It had, therefore, to be ignored. As regards observations of the Commissioner (Appeals) that no specific defects had been pointed out by the Assessing Officer in the assessee's accounts, the fact that relevant papers containing details regarding rough diamonds given for cutting, shaping, etc., and receiving them back from labour parties had been destroyed, was sufficient to show that when the primary and original documents which should have corroborated the entries in the books of account had been destroyed, the entries made in the books of account could not be verified and, consequently, the Assessing Officer was entitled to hold that the books of account were not correct and complete. Even the assessee's own export bills recorded the number of pieces per carat, from just four pieces per carat to as many as 200 pieces per carat and, yet, it was claimed before the Assessing Officer that no piecewise details were maintained by the assessee. The Assessing Officer had also pointed out that labour charges were also not proved and were inflated and non-genuine. He had also pointed out that the labour charges were determined on the basis of rough diamonds per carat and number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they could not be maintained. Even if it is true, while it may be ignored in the business of rice, referred to by the assessee, or other food grains or other commodities involving bulk dealings, it can in no circumstances be ignored in the business of diamonds where each and every piece, whether smallest or bigger one, carries substantial mom value and no diamond dealer can sweep away the diamonds without counting each piece as might be done by the traders in rice business. Therefore, non-maintenance of these details or non-production of these details in diamond business, justified the Assessing Officer to come to the conclusion that the books of account maintained by the assessee were not correct and complete. Taking all these factors in to account, the observation of the Commissioner (Appeals) that no specific defects had been pointed out by the Assessing Officer was not factually correct and that the Assessing Officer after having pointed out various defects regarding incorrectness and incompleteness of the accounts of the assessee was justified in invoking the provisions of section 145(2). As regards addition at flat rate of 5 per cent of disclosed turnover, in this yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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