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TMI Blog2015 (7) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us to take note of this provision. 145(1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. 9. From the bare reading of this section, it would reveal that it provides the mechanism how to compute the income of the assessee. According to sub-clause (i), the income chargeable under the head Profits and gains of the business or professions or income from other sources shall be computed in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.CIT(A) has erred in confirming the addition of ₹ 45,44,029/-. 12. Brief facts of the case are that the assessee has purchased rough diamonds, which were polished and manufactured as finished product. It has processed 75,733.82 carats. It had incurred job work charges at the rate of ₹ 300/- per carat. The learned 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/-. The reasoning assigned by the AO is that sister concerns and M/s.R. Vipul Co. had incurred job work charges at the rate of ₹ 245/- per carat in Asstt.Year 1998-99, ₹ 222/- per carat in Asstt.Year 1999-2000, ₹ 239.50 per carat in Asstt.Year 2000-01. Therefore, the assessee is not justified to make payment of ₹ 300/- per carat in this assessment year. 13. The appeal to the CIT(A) did not bring any relief to the assessee. 14. Before us, the learned counsel for the assessee contended that immediately preceding year, a similar disallowance was made which was deleted by the CIT(A) and confirmed by the ITAT vide or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on a hypothetical basis. I have gone through the details and find that appellant was paying job work charges at an average rate of ₹ 284/-per carat in AY 2001-02. This was increased to ₹ 300 per carat in the year under consideration and is in the normal course of business. The AO has not brought on record any instance that the-job workers denied to have received this amount per carte from the appellant. It is further seen that the chart of job workers drawn by the AO on page 22 and 23 of the assessment order is exactly the same as in the case of M/s Kantilal Exports for AY2002-03. It is not understood as to how the same job workers would be working in two different units at the same time and the AO's inference on this account appears to be erroneous. I am inclined to agree with the appellant, there would be no correlation between the electricity expenses and wages paid to the job workers, It is also no material, if the addresses of the job workers were their residential addressed. Since all these people were working In five factory premises of the appellant group with common electricity connection. It is also seen that these job workers were kind of labor c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arat of polished diamonds in stock. It valued the closing stock at the rate of ₹ 1775/- per carat and worked the total value of ₹ 1,55,28,871/-. The learned AO has observed that in the month of March, 2003, the average sale price of polished diamond was ₹ 4070/- per carat. The average manufacturing cost during the year is ₹ 4231/- per carat. The average sale price of the diamond for the whole year worked out to ₹ 6695.20 per carat. The assessee is required to determine the value of its closing stock either at cost or at market price whichever is lower. The assessee has valued the closing stock at ₹ 1,775/-. According to the AO, there is no basis for adopting this value, therefore, the ld. AO took the value of the diamond at cost. He adopted the average manufacturing cost of ₹ 4,231/- multiplied with this amount with number of diamond available with the assessee i.e. 8748.66 crate. The total value comes to ₹ 3,70,15,580/-. After giving credit of the value shown by the assessee at ₹ 1,55,28,871/-, the learned AO made addition of ₹ 2,14,86,709/-. 20. On appeal, the learned CIT(A) has confirmed the conclusions of the AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver is lower. The working given by the assessee before the CIT(A) [produced at page no.11] 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. 24. In the next ground of appeal, the grievance of the assessee is that the ld.CIT(A) has confirmed the disallowance of labour expenses of ₹ 10,24,967/-. 25. The brief facts of the case are that one of the concerns of the assessee is engaged in the job work. It has shown labour receipt of ₹ 1,04,54,602/- and labour charge payment of ₹ 1,02,49,678/-. The net profit has been shown at ₹ 2,04,924/- which works out to 1.96% of the labour receipts. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing out admissible deduction under section 80HHC. The ld. AO did not find merit in this contention of the assessee. He observed that the assessee is not maintaining separate account of different units where, different type of activities are claimed to have been undertaken. He held that deduction under section 80HHC is to be worked after including this job work receipts in the total turnover. 33. Dissatisfied with the action of the AO, the assessee carried the matter in appeal before the CIT(A). It was contended that the assessee has been maintaining separate books of accounts for three different activities. For the export activities, rough diamonds are imported and manufacturing was done on job work basis. Thereafter, export was made for polished diamonds. In respect of job work activity, they received only commission. There is no inter-connection between both these activities. The ld.First Appellate Authority has accepted the contentions of the assessee and held that job work activity is an independent activity of the assessee, which is not associated with the export. The ld.First Appellate Authority observed that out of the alleged net profit on job work charges only 90% amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 89. In view of the above discussion, we do not find any merit in this appeal. It is dismissed. 36. Now we take up the appeal of the assessee for the Asstt.Year 2004-05 i.e. ITA No.939/Ahd/008. 37. In the first ground of appeal, the assessee has pleaded that the ld.CIT(A) has erred in confirming the addition of ₹ 5,45,30,060/- which was added on account of valuation of closing stock of rough diamond. 38. The brief facts of the case are that the assessee has filed its return of income on 30.10.2004 declaring an income of ₹ 51,13,244/-. On scrutiny of the accounts, it revealed to the AO that the assessee has 1,17,668 carat of rough diamond valued at ₹ 209,03,014/-. According to the assessee it has purchased rough diamonds in different lots. At the end of the year, the diamond purchased on 7.11.2003 amounting to 1,15,667 carat and diamond purchased on 23.2.2004 amounting to 2000 carat were available. The value of these diamonds has been taken at cost. The invoice rate of the diamonds purchased on 7.11.2003 was ₹ 152.57 and diamond purchased on 23.2.2003 was ₹ 1627.90. After applying these rates, the assessee has worked out invoice cost at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, 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. The first ground appeal of the assessee is rejected. 41. In the next ground of appeal, the grievance of the assessee is that the ld.CIT(A) erred in confirming the addition of ₹ 1,51,364/-. 42. The brief facts of the case are that the certain diamonds were rejected. The assessee has valued those ..... X X X X Extracts X X X X X X X X Extracts X X X X
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