1. AO could not disallow the loss on the basis of non-maintenance of qualitative stock records provided no adverse findings were found- ITAT Ahmedabad held in Dhami Brothers Vs DCIT that if the assessee had not maintained any qualitative stock records to justify the sales price of diamonds and closing price of stock then the loss in the books of accounts would not be disallowed if after verification the AO had not found anything adverse about the transactions of the assessee. In other words if the AO had tried to find the real facts about the loss in the books of accounts and did not find anything adverse then the loss should be allowed to the assessee even though the assessee had not maintained any qualitative stock records.
2. No addition can be made without issuing Show Cause Notice- If Show Cause Notice had not been issued to the assessee then no addition can be made to the income of the assessee because for making any addition or levying any penalty Show Cause Notice was required to be given. It was the law of natural justice.
Facts of the case:
Assessee was engaged in the business of importing, manufacturing and exporting diamonds. Assessee filed its return of income with the total sales of Rs 2,40,08,065/- and loss of Rs 1,45,08,970/- . AO rejected the books of account on the basis that it did not maintained qualitative details of stock in hand and stock sold and disallowed the above loss because AO was unable to reach at the correct price of the diamonds sold so was unable to calculate the correct profit/loss on sale of diamonds. Assessee was in appeal with ITAT.
Assessee sold a property for Rs 55000/- whose value as per stamp valuation authority is Rs 3,38,775/- so AO made addition of Rs 2,83,775/- u/s 50C without issuing Show Cause Notice to the assessee. Assessee filed an appeal with ITAT.
Contention of the assessee:
Assessee was of the view that it was not possible to maintain record of the every piece of diamond because every piece had its own cut, shape, shinning and other specifications etc. They used to value the diamonds in lots which was the industry standard. Moreover non maintenance of qualitative records did not allow the AO to disallow the loss incurred to the assessee. If possible AO could made the verification of the sales price of the diamonds as he had produced all the sales bill with the purchasing party address, PAN No and all other required details.
No Show Cause Notice was issued to the assessee for making addition, So addition could not be made.
Contention of the revenue:
Revenue was of the view that as no satisfactory explanation was provided by the assessee of the stock sold and stock lying. Moreover no explanation was provided by the assessee for the loss incurred by the assessee. Further no qualitative record of the stock sold and stock in hand was maintained by the assessee. So loss should be disallowed as AO was unable to reach at conclusion of the cost of the diamonds sold
AO was of the view that as the assessee had not produced the sale deed so addition was to be made.
Held by ITAT:
ITAT held that as the AO had held verification from the parties who had purchased diamonds from the assessee as assessee had provided the details with their PAN No to the AO but AO had not found anything adverse about the transactions. So AO should allow the loss incurred to the assessee. Merely non – maintenance of qualitative records would allow the AO to disallow the loss incurred by the assessee.
ITAT held that as the AO failed to issue Show Cause Notice to the assessee for making addition so the addition made by the AO should be restored back.