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TMI Blog2016 (11) TMI 664X X X X Extracts X X X X X X X X Extracts X X X X ..... red in confirming the addition of Rs. 5,37,250/- on account of estimating the gross profit @ 7% instead of accepting the gross profit @ 6.93% as returned by the appellant." 3. The brief facts of the case are that the assessee firms deals in diamonds. The A.O. observed that during the relevant previous year, total sales of the assessee firmwas Rs. 81,60,68,947/- which included export of cut/polished diamonds of Rs. 47,35,18,419/- and local sale of polished diamonds of Rs. 33,45,86,347/- and export sale of rough diamonds of Rs. 79,64,181/-. The assessee firm has shown an income of Rs. 91,01,299/- from the exchange rate difference which is a part of the gross profit. The gross profit of Rs. 5,65,87,574/- was worked out and the GP rate was arrived at 6.93%. The GP ratio arrived in the last assessment year was 7.79%. The assessee firm was asked to explain the reason for the fall in gross profit ratio. The assessee firm explained that the assessee firm maintains the stock of rough diamonds at cost. The assessee values the closing stock of polished diamonds at 'cost plus labour'. The assessee submitted that during the year under consideration the value of the closing stock of polished d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, as low as @ Rs. 3,770/- per carat has also been made. (b) The average yield has also come down from 43.32% to 41.60%, in comparison to last year. No record of yield of each lot sent for manufacturing has been maintained. (c) The export sale of 1266.81 carats of rough diamond has been made @ Rs. 6,286.79 per carat. (d) In nowhere in this stock register it is stated as to which lot is being sent to karigars or to its own factory for manufacturing of the polished diamonds. In the absence of which it is no possible to work out the exact cost of rough diamonds sent for manufacturing of the polished diamonds and consequently no proper value of the polished diamonds can be made. (e) The 1st receipt of the manufactured polished diamonds weighing 900.25 carats has been shown on 30.4.2007. This work was carried out in its own factory by the assessee. When the rough diamonds were sent to the factory and which part of the purchases of rough diamonds were sent to the factory, is not evident from the stock register filed, it is not possible to value correctly the polished diamonds received out of rough diamonds sent for manufacturing. (f) Stock register of polished diamond is also file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons given in the fall of gross profit are also not acceptable. The AO observed that it is an accepted fact that the assessee maintains stock of rough diamonds at cost and it is not disputed. The AO observed that the assessee's submission that he values its closing stock of polished diamonds at "Cost + labour" and inventory of closing stock of polished diamonds has been filed and on the basis of it the valuation of closing stock is proper, is not acceptable. The inventory of closing stock of polished diamonds consist of weight in carats and its value. What is the number of pieces, what is the colour of pieces, what is the weight of each piece, what is the- size of each piece, what piece is made out of which purchase of rough diamond is not available. As valuation of each piece of diamond depends upon the above parameters, the submission of the assessee was not accepted by the AO as none of the details has been filed. When this details can be furnished in the sale bill why can't it be maintained in the stock register. The AO observed that If the turnover has gone up, then it does not mean that the gross profit has to come down. Even there is fall in yield, despite the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee submitted that all purchases and sales pertaining to import and export were subject to strict surveillance of Customs. Quality-wise polished diamond stock was not maintained in view of the different quality of polished diamonds due to factors like weight, cut, clarity, colour, shape and number of pieces. It was submitted that due to peculiarity of diamond trade and the high price of the commodity the sale of diamond activity is a complex affair. When the diamonds are shown to the customers in packets, it is not necessary that the entire packet will be bought by them. The buyer himself assorts the diamond or through his staff and offers the price with a condition that he will buy only 70% to 80% of the goods shown to him depending upon the orders he has in his hand. When such unsold goods are received back from the prospective buyers, these diamonds are again mixed with other packet containing polished diamonds. This cycle of trade is a perpetual one. Hence it is not only cumbersome but a herculean task to maintain the stock of polished diamonds according to quality. There are more than 2500 exporters in the diamond trade and none of them maintains the stock register of polis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard was also filed. It was submitted that the partners of the assessee firm had no experience of running the factory and the workers were taking them for a ride. There were go slow practice on the part of the workers which hampered the production as well. The workers were continuously demanding higher wages, bonus, leave pay, etc. which the assessee firm was not willing to give and ultimately at the end of the year, it was difficult to continuing the manufacturing activity with the help of their own labour and hence they discontinued the production in their factory and from the assessment year 2009-10 onwards , the assessee got the manufacturing done through outside job work parties. With respect to the increase in the percentage of labour as compared to last year, the assessee submitted that there were 350 qualities of rough diamonds of different rates and in the preceding assessment year 2007-08 the assessee had bought rough diamonds of high value and high quality of average price Rs. 25,537/- per carat whereas in the assessment year 2008-09, the assessee bought rough diamonds, the average price was Rs. 17,165/- per carat. The average sale price in the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in this regard. With regard to the realizable value, the assessee has explained the reasonableness of the same having regard to the value of exports made in the subsequent year out of the closing stock held by him as on 31st March, 2008. Thus, the contention of the A.O. that the valuation of opening stock, manufactured stock and closing stock is not open to verification does not appear to be correct was the observation of learned CIT(A). It was also observed by the learned CIT(A) that the assessee entered into local market for the first time unlike the earlier years in which he was exclusively engaged in exports. Due to recession in the export markets, the assessee has to change his strategy that he has not only entered into local market, but also into the low value products. Thus, the assessee involved in achieving higher turnover with a lower margin of profit and this resulted in a slight fall in the GP compared to the earlier years but an increase in the net profit rate due to saving on the administrative costs etc. . The assessee duly explained the inferior quality/low value rough diamonds used in the manufacturing but the A.O. has not considered the aforesaid information ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the increase in the labour charges incurred during the year but it may not be a complete explanation by itself. Thus, it was observed that there is no verifiable information as to the quality of the rough diamonds that was worked upon through job workers and hence, the fall in the gross profit rate is not fully explained. The ld. CIT(A) accordingly estimated the GP at 7% instead of 6.93% reported by the assessee on the turnover shown in the books and addition of Rs. 5,37,250/- was upheld vide appellate order dated 16/12/2011 passed by learned CIT(A). 6. Aggrieved by the appellate order dated 16/12/2011 passed by the ld. CIT(A), the assessee is in appeal before the Tribunal. 7. The ld. Counsel for the assessee submitted that the assessee had a GP ratio of 6.93% during the assessment year 2008-09 as against 7.79% in the preceding year. The ld. Counsel submitted that books of account were rejected by the A.O. on the ground that closing stock is not verifiable due to details of received manufactured polished diamonds are not evident and the closing stock is not verifiable as to color, size etc.. The ld. CIT(A) estimated the GP ratio at 7% instead of 6.93% declared by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eding year. The invoices are placed in paper book filed with the Tribunal at page 28-56. We have observed that the assessee is not able to justify the substantial rise in the payment of job work charges to the workers i.e. @ Rs. 500/- per carat as against Rs. 108/- per carat in preceding year. The labour charges have substantially gone up as compared to the preceding year which is almost 400% without any justification . It was observed that TDS has been deducted but the assessee has to explain the abnormal rise in the job work charges per carat with cogent reasons. No cogent explanation has been brought on record by the assessee to substantiate this substantial rise in the job work charges. It is stated before us by the ld DR. that the Revenue is not in appeal against the order of the ld. CIT(A) which order of ld. CIT(A) has been accepted by the Revenue. In our considered view, the ld. CIT(A) has taken the GP ratio @ 7% as against 6.93% which in our considered view is quite justified and fair keeping in view factual matrix of the case. We do not find any infirmity in the order of the ld. CIT(A). The A.O. adopted the GP rate @ 7.79% whereas the assessee has declared GP rate @ 6.93%. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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