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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 ..... sale of polished diamonds, both in the local market and also export market. During the course of assessment proceedings, on verification of books of accounts of the assessee firm, the AO observed certain deficiencies in the maintenance of books of accounts by the assessee as described hereunder. 4.1 The AO observes that it is very relevant to maintain piece wise quantitative data in the stock register so as to determine the correct state of affairs of the business. It is also observed by the AO that such data is mentioned invariably in this line of business in every bill including those of the assessee as well. From an examination of the stock register, furnished in the form of computerized print outs by the assessee, the AO further observed that the crucial aspect of quality details of the diamonds manufactured has not been incorporated. However, the AO is of the 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 pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the innumerable pieces of the final out put are mixed and then assorted on the basis of certain parameters, as discussed by the AO as well, by qualified persons. It is further submitted that at the time of sales also, the range of weight of stones in a lot are not similar but may vary marginally and same is the case with the quality as well. It is the submission of the appellant that no two stones are exactly the same even though they might have come from the same source of rough diamond and considering the unique nature of the trade, the insistence of the AO on production of piece wise qualitative record is quite an impossible demand and is against the accepted trade practices. 5.2 With respect to the quality wise maintenance of stock details, it is submitted that the appellant had repeatedly furnished the books of accounts disclosing the 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire assessment proceedings and on this count also the action of the AO is untenable for the blatant violation of principles of natural justice. It is therefore, submitted by the appellant that the rejection of books by the AO is untenable, and the following decisions among others were relied upon in support thereof: (i) Sundar Agencies Vs CIT (1997) 63 ITD 245 (ITAT, Bombay) - addition cannot be based on jejune reasoning or guess work (ii) International Forest Co Vs CIT 101 ITR 721 (J&K) - books accounts cannot be rejected without cogent evidence (iii) Pandit Bros Vs CIT (1954) 26 ITR 159 (Punj) - to reject the accoi there must be definite findings of the AO for which there rnusl definite material (iv) CIT Vs Gokaldas Hukumchand (1994) 11 ITR 462 (Bombay HC) - the suspicion, however strong, do not take 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same - Yaggina Veeraraghavulu & Mavuleti Somaraju & Co. v. CIT [1966] 62 ITR 528 (AP). Assessee must be furnished with details of comparable cases relied upon - An assessment made by estimating the profits of the assessee on flat rate basis on the basis of comparable cases, without furnishing details of such cases to the assessee, :is illegal - Joseph Thomas & Bros. v. CIT [1968] 68 ITR 796 (Ker.). Assessee must be provided opportunity to cross-examine witnesses -While estimating profits where oral evidence of witness was relied on by the income-tax authorities, the assessee must be given opportunity to cross-examine the witness and where comparative instances of other business were supplied by assessee it was also necessary for the department to come to a finding as to the norm of the gross 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee before he can have the option to estimate the gross profit - CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.)." 6.1 Even thought the AO might have strong reasons to raise his suspicion about the correctness of the book results, however strong the basis could be, it cannot form the sole basis of assessment in without bringing on record material evidences and without cogent reasoning therefore. 6.2 In view of the above, I incline to agree with the contentions of the appellant that rejection of books is not tenable in law and on facts of the case. 6.3 In result, the appellant succeeds on this ground." This leaves the Revenue aggrieved. 3. We have heard both the parties and perused the relevant case record. The Revenue strongly 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds. Sales and purchases have also been duly reflected and accounted for in the books of accounts with supporting evidences of bills and invoices. It is therefore submitted that each transaction as recorded in the books of account is genuinely supported by verifiable evidences and that there is no need to estimate the GP at a different rate than that arrived at on the basis of such regular book results. It is further submitted that as the volume of profit was the prime motive of business and not the rate of profit, maintenance of same GP as of the previous year at the same level could not be prudently expected from the business man's point of view. It is further pointed out that the reasons for such fall in GP as adduced b appellant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given any opportunity to rebut such estimation of the GP at a higher rate, which is against the judicial view in this arena as elucidated in the preceding ground discussed supra. 9.1 In view of the above, I am inclined to agree with the contentions of the appellant that the estimation of GP at a higher rate on the basis of the preceding year in appellant's case is untenable and therefore, the AO is directed to delete the addition made in this regard. 9.2 In result, the appellant's ground succeeds on this count." 5. We have heard rival contentions. It is admitted 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 @ Rs. 1,251/- and Rs. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the estimation of a higher yield ratio by the AO is uncalled for. It is further pointed out that the AO, while holding a variance ol.28% in the yield as a sharp decline, has conveniently brushed aside the steep decrease of 17.82% in the cost per carat, as evidenced by the tabulated data in the assessment order itself, and chose to call it as a marginal decline, shows the self contradictory views, quite indicative enough of the prejudiced mind set and the biased approach of the AO to the whole gamut of the issue. It is further contented that the AO's presumptions are not based on cogent evidences but is at best a subjective opinion on the basis of certain presumptions and generalizations 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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