Darrk Diamonds Vs I.T.O (ITAT Surat)
ITAT Surat held that the addition on account of unaccounted profit on estimation basis, in trading/ manufacturing of diamonds, restricted at 10% of the sales in view of CBDT instructions vide circular no. 2/2008 dated 22nd February 2008.
Facts-
The appellant is engaged in the manufacturing and trading of rough and polished diamonds. AO made an addition on account of undervaluation of stock of rough diamonds. AO made the addition by taking view that the average purchase rate was much higher than the average rate of opening stock and that still the closing stock was valued at 12% than the average rate of opening stock. It was also alleged that no lot wise details were provided though such records are maintained by the manufacturer.
CIT(A) upheld the order of AO. Being aggrieved, the present appeal is filed.
Conclusion-
We find that on making addition the unaccounted profit on estimation, went upto 36% of the turnover, if it is added the gross profit of the assessee it would be 42 %, which is quite unrealistic in the in the trade of diamonds. The assessee has already declared GP at 5.88%. We further noted that Central Board. of Direct Taxes (CBDT) in its Circular No 2/2008 dated 22nd February 2008 had came with instruction that profit to the extent of 6% in the trading and manufacturing of diamonds is acceptable as results. We find that total sale of the assessee is not disputed by the assessing officer. Considering the facts that we have upheld the rejection of books of account, and further held that estimation adopted by ld CIT(A) is not realistic that is higher side, therefore, we direct the assessing officer to consider the consider the unaccounted profit of assessee at 10% of the sales during the year under consideration, which in our view will be sufficient to avoid the possibility of revenue leakage. As the assessee has already declared 5.88% GP, the assessee be granted set off of the GP already declared by it. In the result, the Ground No. 3 raised by the assessee is partly allowed.
FULL TEXT OF THE ORDER OF ITAT SURAT
1. This appeal by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-3, Surat (in short, the ld. CIT(A) dated 02/03/2015 for the Assessment year 2006-07. The assessee has raised following grounds of appeal:
“(I) Validity of the order:
The learned Commissioner of Income Tax (Appeals) erred in wrongly holding that the Assessing Officer had followed the directions laid down by the Income Tax Appellate Tribunal of examining the evidence as per para 5 of the order o f the Income-tax Appellate Tribunal and on that ground the order is required to be cancelled.
(II) Rejection of book result:
(1) On the facts and circumstances of the case and as per law, the learned Commissioner of Income Tax (Appeals) erred in rejecting book result when the assessee had maintained complete quantitative accounts of the diamonds.
(2) The appellant submits that the learned Commissioner of Income Tax (Appeals) erred in not considering the submission and evidence in the above matter.
(3) The appellant further submits that the learned Commissioner of Income Tax (Appeals) erred in relying on the judgment of D. Subhashchandra & Co. which dealt with polished diamonds whereas the appellant dealt with rough diamonds.
(4) The appellant further submits that the learned Commissioner of Income Tax (Appeals) further erred in not differentiating between the rough makeable diamonds and rough rejected diamonds.
(III) Changing base of addition:
On the facts and circumstances of the case and as per law, the learned Commissioner of Income Tax (Appeals) was not justified in changing the base of addition from valuation of stock (Rs. 52,32,680/-) to estimating alleged unaccounted profit of (Rs. 41,00,000) to alleged unaccounted profit.
The appellant further submits that there was no basis to retain and make addition of Rs. 41,00,000/-.
(IV) Miscellaneous:
(1) The learned Commissioner of Income Tax (Appeals) erred in not dealing with ground No. IV.
(2) The appellant craves leave to add, alter or vary any of the grounds of appeal. ”
2. At the outset of hearing the learned authorised representative (AR) of the assessee submits that he is not pressing ground No.1, thus, the ground No.1 of the appeal is dismissed as not pressed. Now adverting to the facts leading to the additions assailed in other grounds of appeals.
3. Brief facts of the case are that the assessee is a partnership firm, engaged in the manufacturing and trading of rough and polished diamonds. Initially the assessment for assessment year (AY) 2006-07 was completed under section 143(3) on 31.12.2008. The assessing officer made addition of Rs. 52,32,680/- on account of under valuation of stock of rough diamonds. The assessing officer made addition by taking view that the average purchase rate was much higher than the average rate of opening stock and that still the closing stock was valued at 12% than the average rate of opening stock. It was also held that no lot wise details were provided though such records are maintained by the manufacturer. On appeal before ld CIT(A), the additions were upheld. The ld CIT(A) also held that lost wise details were not furnished and that average valuation of opening stock of rough diamonds was higher than the valuation of closing stock. On further appeal before Tribunal the matter was restored the file of assessing officer vide order dated 25.01.2012 in ITA No. 168/Ahd/2010. The reasons to restore the appeal to the assessing officer was that before ld CIT(A), the assessee filed additional details which was not accepted by him. The Tribunal also noted that the assessing officer raised the issue of valuation of stock on 24.12.2008 by issuing show cause notice to the assessee and assessment order was passed on 31.12.2008. Thus, the assessee was prevented to file requisite details. The details filed before ld CIT(A) was not appreciated and that such details require verification at the end of assessing officer.
4. In restoration proceedings the assessing officer again repeated the similar addition in order passed under section 143(3) read with section (rws) 254 dated 28.03.2013. Before passing the assessment order the assessing officer issued show cause notice to the assessee to furnish required details as submitted before ld CIT(A). The assessing officer recorded that the assessee submitted that rough diamonds are obtained and issued to the contractors for manufacturing of polished diamonds but these rough diamonds from which also include and remained in stock and are referred to as rejected rough diamonds having negligible value. It was also contended that when the rough diamonds and rejected rough diamonds are shown together rough diamonds having very low value, the overall valuation of all rough diamonds goes down considerably. And that rough diamonds of 20,294.02 carat, there was rejection of 17,041.34 carat. The reply of the assessee was not accepted by the assessing officer. The assessing officer held that the assessee has not furnished the quality wise details of diamonds. Diamonds are very precious item and the assessee is require to maintain stock movement register, lot to lot details, issue and dispatch register and has to prepare detail inventory of opening and closing stock. From verification of purchase bills, sales bills and from purchase and sale register, genuineness of rejected diamonds is not verifiable. Hence, the details filed before ld CIT(A) regarding valuation of closing stock in not credible. The assessee failed to produce documentary evidences to substantiate the valuation of closing stock during the original assessment as well as in restoration proceedings. The contention of the assessee that closing stock of rough diamonds of 20,294.03 carat contained rejected diamonds of 17,041 carat is not reliable and is afterthought exercise. The valuation of closing stock is not genuine and is not supported by documentary evidences and was rejected. The assessing officer worked out the addition in the following manner;
