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TMI Blog2010 (8) TMI 904X X X X Extracts X X X X X X X X Extracts X X X X ..... iamonds without appreciating the facts that the value figure adopted by the assessee for the closing stock was a defiance to method of valuation as the same is not matching either with the manufacturing cost or net realizable value or average sale rice of the polished diamond? 2. The Assessment year is 2002-2003, and the relevant accounting period is the year ended on 31-3- 2002. The assessee, a Partnership Firm, who is engaged in the business of purchase of rough and polished diamonds, manufacturing and export of diamonds and job work of diamond cutting and polishing, filed return of income on 30.10.2002 declaring total income of ₹ 20,09,234/-. On verification of trading and profit and loss account of M/s. Anjana Exports (JOB), the Assessing Officer noticed that the assessee had shown net profit of ₹ 40,093/- on labour receipts of ₹ 23,53,598/- which worked out to 1.68%. According to the Assessing Officer despite the turnover of ₹ 23,53,598/- the assessee had not shown incidental expenses as detailed in paragraph 4 of the assessment order. Similarly, no expenses had been claimed in respect of staff and employees, which along with the other expenses were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record was of the view that the same did not disclose the correct state of affairs as prevailing. In view of the aforesaid defects, the Assessing Officer proposed rejection of book results by invoking the provisions of section 145 of the Act. 4. On behalf of the Assessee, it was submitted that the books of account were correctly maintained and that the assessee was maintaining all necessary records. There was no defect in any of the vouchers or expenses and that even if the Assessing Officer wanted to make any disallowance, the books of account could not be rejected on this ground alone. The Assessing Officer held that the method of accounting of the assessee was defective insofar as electricity expenses which were manufacturing expenses were debited to the Profit and Loss Account. In the main account of M/s. Anjana Exports, labour charges were shown at ₹ 2,84,34,687/- and the liability in respect of the same was ₹ 2,03,05,820/-, which meant that more than 71% of labour charges remained unpaid at the end of the year which according to the Assessing Officer, was highly improbable, since labourers and workers had to be paid either monthly or twice a month. It was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer further held that the claim of payment of ₹ 300/- per carat was excessive, since the labour charges per carat in the earlier year varied from ₹ 207/- to ₹ 230/-. According to the Assessing Officer the flat rate of ₹ 300/-per carat for labour charges was not acceptable when the quality of diamonds was inferior. He, therefore, held that the genuineness of the labour expenses was doubtful and disallowed the labour charges of ₹ 56,86,937/- at the rate of ₹ 50/- per carat for 94782.29 carat which was the difference between the average labour charges of earlier years and that of the year under consideration. 6. The assessee had shown sale of polished diamonds for the month of March at ₹ 72,91,340/- and the average sale price was ₹ 7,827/- per carat whereas the average price for the year under consideration was ₹ 5,742/- per carat. The Assessing Officer, therefore, proposed addition on account of under valuation of closing stock. The assessee in reply, submitted copies of labour bills; and a chart showing the date, purchase price of rough diamond, rejection, manufacturing charge, and polished diamonds in carats which co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was submitted that it was highly improbable that 71% of the labour charges could have remained outstanding at the year ending when labourers and workers have to be paid periodically, that is, twice a month or monthly. It was further submitted that the closing stock of polished diamonds as on 31.03.2002 was calculated at an average rate of 5572.82 per carat, whereas the average rate of sale price of diamonds was ₹ 7827.10 for the month of March 2002, hence it was apparent that the closing stock of polished diamonds have been undervalued to the extent of ₹ 1,72,81,354/-. It was submitted that the Tribunal had not appreciated the facts and circumstances of the case correctly and as such, the impugned order of the Tribunal gives rise to the questions of law as proposed, or as may be formulated by the Court. 9. From the facts noted hereinabove, it is apparent that the Commissioner (Appeals) has found that the books of account suffered from a number of defects and has accordingly upheld the action of the Assessing Officer in rejecting the books of account under section 145(3) of the Act. The Tribunal has also concurred with the said finding. 10. Insofar as proposed q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to the workers. From the orders made by the Commissioner (Appeals) as well as the Tribunal, it is apparent that both the appellate authorities have recorded concurrent finding of fact to the effect that the average rate of job work charges had increased from ₹ 284/- per carat to ₹ 300/- per carat in the year under consideration; nothing had been brought on record to indicate that such amount has not been actually paid to the job workers; that all the persons were working in the five factory premises of the assessee's Group; and that the job workers were more in the nature of labour contractors; the labour contractors were also assessees to income-tax; and that nothing had been brought on record to indicate that the job charges paid were bogus or highly inflated. Based on the aforesaid findings of fact, the Commissioner (Appeals) after recording that complete records of labour charges had not been produced and some of the persons to whom summons had been issued did not appear, made a disallowance of ₹ 8 lacs and deleted the disallowance of ₹ 48,86,937/- which has been upheld by the Tribunal. In the background of the aforesaid concurrent findings of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he average cost of stock was taken at ₹ 8,625/- per carat in that year. Going by the same analogy, the Commissioner (Appeals) was of the view that when the average sale price of polished diamonds during the month of March, 2002 was ₹ 7,827/- per carat, the average sale price at ₹ 5,742/- should also have been accepted. The Commissioner (Appeals) agreed with the contention raised by the assessee that if the closing stock is valued at a higher price, the opening stock for the current year as well as next year, was also required to be valued by adopting the same method, which would in fact result in a lower profit for the year under consideration. The Commissioner (Appeals) was also of the view that simply by considering three invoices of sale for the month of March, the valuation of the entire closing stock, which would include inferior quality diamonds also, was only based upon conjectures and surmises and was not sustainable. He, accordingly, deleted the addition made on account of undervaluation of the closing stock. The Tribunal in the impugned order has concurred with the findings of fact recorded by the Commissioner (Appeals), and has confirmed the deletion. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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