9911796707
TMI Blog1982 (10) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... ives income from dealing in precious and semi-precious stones. It sells such ready goods after purchase from the market as well as out of its own manufacture. Goods are also sold through the agency of others mostly the sister concerns. It also undertakes to sell goods of others, again mostly of its sister concerns, as commission agents. The sister concerns mainly are K.D. Jhaveri, Jaipur and Mahendra Jewellers, Jaipur. The assessee is mainly an exporter of precious stones. In the jewellery account, on total sales of ₹ 10,18,213 gross profit shown is at ₹ 4,05,603 which reflects a rate of about 40 per cent. The value of the closing stock shown in this account is ₹ 25,58,907. The ITO has observed that proviso to section 145(1) of the Income-tax Act, 1961 ('the Act') is applicable in the case of the assessee as held by the Tribunal in the assessee's appeal [IT Appeal No. 946 (JP.) of 1979] for the assessment year 1975-76. The ITO has further observed that 'admittedly, the assessee has been valuing its closing stock at cost.' He also observed that this method has been followed by the assessee year after year. Since the actual cost of each item in the closing stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 8.95 54,61,251 Less: Disparity at the rate of 40 per cent 21,84,500 32,76,751 Less: Value of the closing stock as declared by the assessee 25,58,907 Amount by which the closing stock has been undervalued 7,17,844 5. The assessee challenged the above addition before the Commissioner (Appeals) who has upheld the applicability of proviso to section 145(1) but deleted the entire addition, observing as follows: "In my appellate order for 1975-76, I have carefully perused the orders of the Tribunal in appellant's own case and in the case of Mahendra Jewellers as also the order of the Settlement Commission in the case of K.D. Jhaveri Bros. The arguments of the appellant and the department in all these cases were more or less on the same lines as in the case now before me. The uniform conclusion to which both the Tribunal and the Settlement Commission have come is as follows: (i) When the gross profit rate is held to be reasonable by the department, the closing stock should be treated to have been correctly valued even though there may be no supporting evidence in the form of a verifiable closing stock inventory. (ii) The basis of valuation of the closing stock by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te prevalent as on the closing day of the accounting year. Therefore, in the fitness of things the exchange rate as adopted in the proforma invoice is simultaneously giving the price both in terms of the dollar and the rupee would be the most proper. Hence, there is no justification for substituting the rate of ₹ 8.95 per dollar as on the valuation date to convert the closing stock value of the goods lying unsold abroad in terms of dollar into rupee. Hence the addition made in this regard is to be deleted." 6. The revenue is aggrieved against the deletion made by the Commissioner (Appeals). Shri P.C. Hadia, on behalf of the revenue, submitted that the disparity rate adopted by the assessee was imaginary. It had no basis whatsoever and the assessee was changing the same year after year suiting its convenience. He further submitted that the disparity rate of 48 per cent adopted by the assessee had no basis, whereas the disparity rate of 40 per cent adopted by the ITO was held to be reasonable by the Tribunal for the assessment year 1975-76. He further pointed out that the finding by the Commissioner (Appeals) that reasonable gross profit will take care of the value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1975-76 while it has been restored to the Commissioner (Appeals) for the assessment year 1976-77. Based on above facts he urged that since the disparity rate adopted by the assessee at 48 per cent is the same as gross profit rate, the closing stock was properly valued by the assessee and as such there was no under valuation thereof so as to warrant any additions. Shri N.M. Ranka also pointed out that since the export invoice value is the one which is offered by the assessee, it is likely to be below that price on actual sale depending upon the negotiations and at any rate it would not go beyond the export invoice value or the asking price. It is because of this likely fluctuation that cushion of 1 to 2 per cent is kept which is added to the gross profit rate. The disparity rate in such circumstances is a little more than the gross profit rate. Shri N.M. Ranka also referred to the varying disparity and gross profit rates in cases of sister concerns of the assessee as well as in the case of the assessee itself for various assessment years tabulated at page 1 of the compilation, which are as under: COMPARATIVE CHART OF EIV BOOK VALUE DISPARITY, GROSS PROFIT AND DIFFERENCE IN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of export of the goods abroad export invoice is prepared which indicates the asking price in dollars. At the bottom of this document, the conversion rate in Indian rupee is also given. In this connection he referred to paper book pages 63, 64 and 65. He submitted that the same conversion rates as are indicated in the export invoices from time to time are adopted for the goods not actually sold and lying in closing stock at the end of the year and this method was regularly followed by the assessee year after year and accepted by the department. The ITO had also not recorded any finding that true profits cannot be deduced by following such method consistently. The ITO had also not given any basis for adopting disparity rate of 40 per cent. He was, therefore, not justified in charging the disparity rate adopted by the assessee or the method regularly employed by it. He also submitted that the method employed by the assessee was not unreasonable and it could not be substituted unless a better one was adopted by the ITO. In support of these contentions Shri N.M. Ranka relied upon a number of judicial pronouncements by the various High Courts. 8. Shri R.L. Goyal and Sunil Goyal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the above submissions made by the rival parties, the following points emerge for our consideration: A When the gross profit shown is reasonable, whether it would still be necessary to value the closing stock to arrive at the gross profit? B Whether the closing stock is to be valued first to arrive at the gross profit rate and disparity rate is then to be adopted. C Principles to be followed for adopting the gross profit and disparity rates for arriving at the cost price with reference to export invoice value (EIV) (asking price)? D Whether the assessee has adopted the correct diparity rate in valuing the closing stock? 11. Before answering the above points, we would like to state in brief the method followed by the assessee in arriving at the cost price of the closing stock. As stated earlier, the assessee is a trader in precious and semiprecious stones. It purchases ready goods from the market and sells the same without any processing. It also manufactures its own goods from the raw material purchased from the market. Major part of the goods are sold abroad on consignment basis. At the time of export, an export invoice is prepared in which the value asked by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in EIV are ₹ 7.50 and ₹ 8.50 per dollar. Let us take exchange rate in the EIV of ₹ 7.50 per dollar. Suppose on the date of actual sale the exchange rate is ₹ 8.50 per dollar and on the date of remittance to India at ₹ 9.75. The gain of ₹ 1 per dollar (₹ 8.50 minus ₹ 7.50) will fall under the first category and that of ₹ 1.25 (₹ 9.75 minus ₹ 8.50) under the second category. Remittances during the accounting period may be for sales during the same year or even of the earlier year. 12. With this background we shall consider the above questions. Our answers to the above questions are that the value of the closing stock on the principles of accountancy has to be made to arrive at the correct gross profits. Simply because the assessee is showing reasonable profits with reference to the past history of the case or other comparable cases in the same line of trade would not lead to the conclusion that the profits shown are correct. The correct profits can be worked out only after valuing the closing stock. The closing stock is to be valued first to arrive at the correct gross profit. Whatever may be the result after valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to other considerations) and that the disparity rate and the gross profit rates have to be the same, we shall give the following illustrations of three different assumed trading accounts. Trading Account (1) Rs. Rs. Purchases including open- ing stock (20 items at the rate of ₹ 1,000 each) Sales (15 items) 20,000 Closing stock (5 items at cost, i.e., at the rate of ₹ 1,000 each) 20,000 Gross profit 5,000 5,000 25,000 25,000 Gross profit percentage with respect to sales 25 per cent Gross profit percentage with respect to cost 33.33 per cent Trading Account ( II) Rs. Rs. Purchases including opening stock (20 items at the rate of ₹ 1,000 each) Sales (15 items) Closing stock (5 items at cost, i.e., ₹ 1,000 each) 24,000 20,000 5,000 Gross profit 9,000 29,000 29,000 Gross profit percentage with respect to sales 37.5 per cent Gross profit. percentage with respect to cost 60 per cent Trading Account ( III) Rs. Rs. Purchases including opening stock (20 items at the rate of ₹ 1,000 each) Sales (15 items) 24,000 Closing stock (5 items) 2,000 20,000 Gross profit 6,000 26,000 26,000 Gross profit percentage with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciples by working out the market price from cost price. The cost price in the first trading account of 5 items left in the closing stock is at ₹ 5,000. From this value, we have to arrive at the market price. The gross profit rate in the first trading account is at 25 per cent with reference to the sale price and 33.33 per cent with reference to the cost price. For arriving at the market price from the cost price, the cost price has to be increased by 33.33 per cent which would give the figure of ₹ 6,666, as we have worked out the asking price for the purpose of deducting the disparity rate therefrom. In the second trading account, the gross profit with reference to the cost is at 60 per cent. The cost price of ₹ 5,000 being the value of the goods in the closing stock is, therefore, to be increased by 60 per cent so as to arrive at the market price or the asking price. This would give the figure of ₹ 8,000 as we have already worked out earlier. 13. We have said earlier that the gross profit rate and disparity rate will be the same. This will be so when the actual sale price is shown in the sales account converting dollars at the exchange rate prevailing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory and that too on account of part sales made during the accounting period will cover this situation. This will not reflect gain or loss of sales for the entire accounting period. It will partly cover gains of periods prior to the accounting period. Then there is no basis to sort out as to what remittances related to arrears of earlier period and which to sales of current accounting period. The proper course, therefore, would be to work out sales with reference to the exchange rates prevailing on the actual dates of sales. BY adopting this method, there will be no change in the method of working out the gross profit inasmuch as the assessee has tried to cover this situation by adding exchange rate difference to the gross profit so as to arrive at the gross profit rate of 48 per cent which though does not fully cover the situation. This. will also give a fair idea of difference in EIV and the actual sale so as to arrive at the cushion addition or deduction from the gross profit to arrive at the disparity rate. If the actual sale is less than EIV, then certain percentage will have to be added to the gross profit rate. On the contrary, if the actual sale is more than the EIV, then ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it rate and the disparity rate would be the same. Shri N.M. Ranka from pages 182 to 183 and 184 tried to show that the gross profit or the disparity rate in respect of the assessee's ready goods was 45.3 per cent and in respect of Jakhad goods at 46 per cent. Perusal of statement at pages 182 and 183 would show that total purchases shown therein are ₹ 18,884.15 and EIV at ₹ 34,631.81. The statement further shows that sales shown therein are at exchange rates of ₹ 7.50 or 8.50 per dollar and not exchange rates of the actual dates of sale. The gross profit worked at 45.3 per cent is, therefore not correctly reflected. This rate of 45.3 per cent is with reference, to EIV. If the overall gross profit rate is 45.3 per cent why the gross profit is around 40 per cent is not understood. This would only show that the assessee has tried to bring on record transactions near about the disparity rate to justify the deduction at that rate, which in fact is not correct. A minute study of this statement would further reveal that sales made were only at ₹ 20,247 and not ₹ 34,532 inasmuch as sales of EIV of ₹ 14,285 (against serial Nos. 2, 6 to 10 and 22) did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re materially the same, it presents no difficulty. Since the revenue has not brought on record the component of the exchange rate gains representing the appreciation in money value, we take the gross profit rate of 48 per cent as nearly correct. In this view of the matter, we hold that disparity rate of 48 per cent adopted by the assessee calls for no interference. The second point for consideration is the value to be adopted in converting the asking price. We have pointed out earlier that the scientific approach would be to adopt the exchange rate prevailing on the last day of the accounting period, but this will result in higher profits without giving the assessee the benefit of similar approach for valuing the opening stock also. No such exercise has been done by the ITO for the opening stock while enhancing the value for the closing stock. In the absence of any details before us, we presume that such an exercise for the opening stock will off set the increase in the closing stock, resulting in no addition on this account. That being so we do not find any justification for enhancing the asking price of the closing stock. For these reasons, we refrain to interfere with the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 35B. This is how the ITO worked out the qualifying amount for deduction under section 35B at ₹ 42,425. The assessee aggrieved against the above working of the ITO went up in appeal before the Commissioner (Appeals). One of the claims was that the export sales were more than 75 per cent of the total sales and, therefore, the ITO was wrong in observing that only 50 per cent of the expenditure was admissible for weighted deduction under section 35B. The Commissioner (Appeals) accepted this contention and held that since the export sales constituted 75 per cent of the total sales, it would be more reasonable to treat 75 per cent of the expenses as relating to export instead of 50 per cent as adopted by the ITO. He, therefore, directed the ITO to modify the computation for deduction under section 35B accordingly. 20. The revenue is aggrieved against the above direction given by the Commissioner (Appeals). Shri H.R. Lodha, the learned departmental representative did not seriously argue this ground of appeal. It may be pointed out that while allocating the expenses between qualifying and non-qualifying expenses under section 35B, the ITO took into consideration th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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