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TMI Blog2015 (9) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... dmitted that assessee’s gross profit from assessment year 2004-05 to the impugned assessment year 2007-08 reads 9.67%, 5.04%, 6% and 3.96%; respectively. The assessee attributed this fall to increase in turn over along with decline in export and local rates @ ₹ 1,251/- and ₹ 3,406/- respectively. The Assessing Officer neither disputes this rate fluctuation specifically nor does he draw any comparable instance to re-estimate the impugned gross profit. Be that as it may, the fact also remains that the very basis of this estimation is rejection of assessee’s books of account which already stands decided against the Revenue. It also fails to quote any evidence much less is specific one citing appropriate comparable instances in the course of hearing. We uphold the lower appellate findings accordingly.- Decided against revenue. Fall in diamond yield by 1.28% resulting in addition to income - CIT(A) deleted addition - Held that:- once the assessee’s book result already stands accepted in preceding paragraph, this issue is rendered academic. We further notice that the very yield in assessment year 2005-06 was 26.93% much less than 30.35% in assessment year 2004-05. This yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that the market value of polished diamonds being dependent on the quality parameters, such as carat, cut, colour and clarity, it is essential that the assessee must have details of all the above parameters for each and every piece of diamond that it manufactures. Even though the assessee submitted that it is possible to identify the stock and allocate cost to the same, the AO did not accept the contention as the former has not maintained details of closing stock quality wise which according to the AO has a significant bearing on the basis of valuation. 4.2 Thus, the AO came to the conclusion that such non maintenance of detailed qualitative record of the closing stock, piece wise, by the assessee tantamount to non maintenance of books of accounts and documents on the basis of which the income declared in the return could be correctly ascertained and therefore proceeded to reject the books of account of the assessee u/s.!45(3) of the Act. 4.3 In support of such action, the AO further relied on the decline in the Gross Profit ratio of the assessee firm from 6% in the immediately preceding year to 3.99% in the current year as being indicative of the undervaluation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same before the AO during the assessment proceedings. The closing stock details clearly show linkages of not only the quality but weight also. It is also submitted that the valuation of the closing stock of finished goods (polished diamonds) is completely supported with evidences and therefore, the doubting of valuation of closing stock in view of the issues raised by the AO is not based on facts. The appellant also has relied upon various case laws in support of its contention that book rejection is not tenable in law and on facts in its case. 5.3 It is further submitted by the appellant that the appellant firm has been consistently following the same method of accounting and valuation of closing stock year after year which has been accepted by the Department in the earlier years. It is further submitted the books of accounts are subjected to Tax Audit and that there is no adverse remark or inference in the Tax Audit Report either Regarding the reliance placed by the AO oh the decline in GP as indicative of undervaluation of stock, the appellant submits that the GP ratio of the firm has never been consistent through the years as it depends on many variables, including the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke the place of evidence. (v) Omar Salay Mohamed Sail Vs CIT (1959) 37 ITR 151 - the AO is entitled to base the assessment on pure guess work without refer to any evidence or material and the assessment cannot be made based on suspicion. 6. After carefully going through the submissions of the appellant and the facts as brought out in the records, it is observed that the AO has rejected the books of account of the appellant concern for not maintaining piece wise stock register and qualitative details thereof. The AO, therefore, reached the conclusion that the books of accounts of the appellant did not disclose the true and correct valuation of closing stock. However, it is pertinent to mention that the appellant has maintained its stock register on the basis of carats even in earlier years and has given cogent reasons for not maintaining piece wise stock details and following carat wise stock register. It is also pertinent to note that valuation of closing stock has not been estimated by the AO at any point of time based on the criteria of piece wise stock statement which resulted in a different figure than that adopted by the appellant. It is also to be noted that follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss profit on the basis of comparative cases - CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.). Basis for estimation and computation must be disclosed by ITO in a speaking order - If the assessee fails to satisfy the ITO as to the correctness of the profits returned by h|m, it is open to the ITO to take a higher percentage consistent with the state of trade in the locality or with any special circumstances of therassessee which warrant higher rate of profits. However the ITO must disclose the. basis and manner of computation and make his order a speaking order - Seth Nathuram Munalal v. C/r[1954] 25 ITR 216 (Nag.). Estimation must not be arbitrary, vague and fanciful but must be legal and regular - The law says that the ITO shall make the assessment to the best of his judgment; it means that he must make it according to the rules of reason and justice, not according to private opinion, but according to law and not humour, and that the assessment is to be not arbitrary, vague and fanciful, but legal and regular - Mysore Fertiliser Co. v. CIT [1966] 59 ITR 268 (Mad.). Estimate based on both relevant and irrelevant material cannot be sustained even pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly argued in favour of the Assessing Officer s action rejecting books of account. The assessee supports the CIT(A) s order. There is no dispute that assessee s books of account pertaining to its diamond stock are being maintained on carat basis . This method is consistently followed in preceding and succeeding assessment years. The case file contains details of quality-wise closing stock as on 31st March, 2007, audit report as well as sample copy of stock register for March 2007 relating to the relevant previous year. The Revenue fails to controvert correctness thereof except making oral submissions. The above stated consistency of past practice in maintaining books and stock caratwise is not rebutted. There is no other material quoted so as to reject assessee s books of account. We uphold the CIT(A) s order in these facts and hold that the same does not call for any interference. The Revenue s first substantive ground accordingly fails. 4. The Revenue s second substantive ground relates to addition of ₹ 90,12,001/- made after estimation of gross profit. The CIT(A) s finding hold that his decision on the first issue renders this ground infructuous. He also accepts the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t were not proved as wrong by the AO with any cogent evidence or material on record. Since each year is distinct and different from the earlier years, the attempt of the AO to estimate the GP on the basis of the preceding year without establishing as to how both were comparable was also untenable, particularly view of the fact that the volume of turnover has increased 250% over the preceding year. It is also submitted that the AO ignored the decrease in sale price of exported polished diamonds by ₹ 1,251/- at 15.8P/0 and that of local sale of polished diamonds by ₹ 3,406/- at 45.5% while estimating the GP of the current year as against that of the preceding year. It was further contended that there were such variancaes in GP in the appellant's own case in the earlier years as well, as pointed out by the AO in the assessment order itself, which were accepted by the Department is those years as such. The appellant further contends that the firm was not provided an opportunity of being heard prior to such estimation of GP at a higher rate on the basis of the preceding year which is against the judicial dictum. It is therefore, pleaded that without pointing any specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee attributed this fall to increase in turn over along with decline in export and local rates @ ₹ 1,251/- and ₹ 3,406/- respectively. The Assessing Officer neither disputes this rate fluctuation specifically nor does he draw any comparable instance to re-estimate the impugned gross profit. Be that as it may, the fact also remains that the very basis of this estimation is rejection of assessee s books of account which already stands decided against the Revenue. It also fails to quote any evidence much less is specific one citing appropriate comparable instances in the course of hearing. We uphold the lower appellate findings accordingly. The Revenue s second substantive ground stands rejected. 6. The Revenue s third substantive ground raises the issue of fall in diamond yield by 1.28% resulting in addition of ₹ 1,97,13,893/- being made in assessment order and deleted in lower appellate proceedings. The CIT(A) s observation on this issue are reproduced as under: 10. During the course of the assessment proceedings, the Assessing Officer observed that the yield ratio of the assessee firm has decreased in the relevant year to 27.63% from 28.91% in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns about the various aspects of the whole issue. It is therefore, submitted that the AO's arguments for estimating the yield ratio at a higher rate were quite flawed. It is also contended that the AO did not provide any opportunity before such estimation to rebut his presumptions even though he formed his belief on the basis of a third party, considered as comparable by him. It is further pointed out that the AO has also failed to elucidate as to how the third party case is considered as a comparable instance by virtue of similar quality of rough diamonds used if any and or the rejection rate of that party, nor was the appellant called upon to offer any rebuttal on such assumptions by the AO. Thus, relying on the various case laws, the appellant pleads that the addition made on this count be deleted. 12. Based upon the decision in Ground No.1, it is natural corollary that as rejection of books is not upheld, the estimate of yield ratio by the AO beyond book result is untenable in law. However, without prejudice to the same, even on facts, the following merits attention. 7. We have heard both the parties. The Revenue has filed a chart demonstrating the impugned yield ..... X X X X Extracts X X X X X X X X Extracts X X X X
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