ACIT -5(2), MUMBAI v. M/s. LAKHI GEMS IMPEX P. LTD., MUMBAI

ITA 1215/MUM/2007 | 2003-2004
Pronouncement Date: 29-01-2010 | Result: Dismissed

Appeal Details

RSA Number 121519914 RSA 2007
Assessee PAN AAACL0756B
Bench Mumbai
Appeal Number ITA 1215/MUM/2007
Duration Of Justice 2 year(s) 11 month(s) 20 day(s)
Appellant ACIT -5(2), MUMBAI
Respondent M/s. LAKHI GEMS IMPEX P. LTD., MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-01-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 29-01-2010
Date Of Final Hearing 13-11-2009
Next Hearing Date 13-11-2009
Assessment Year 2003-2004
Appeal Filed On 08-02-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH MUMBAI BEFORE SHRI N.V. VASUDEVAN JM & SHRI R.K. PANDA AM I.T.A. NO. 1215/MUM/2007 (ASSESSMENT YEAR 2003-04) I.T.A. NO. 3529/MUM/2007 (ASSESSMENT YEAR 2004-05) ASST. CIT-5(2) R. NO. 571 AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020 VS. M/S. LAKHI GEMS IMPEX PVT. LTD. 18 VANDEKAR MANSION 2 ND FLOOR OPERA HOUSE MUMBAI-400 004 PAN: AAACL0756B APPELLANT RESPONDENT APPELLANT BY: MR. A.P. SINGH RESPONDENT BY: MR. A.V. SONDE O R D E R DATE OF HEARING: 13.11.2009 DATE OF ORDER: 29.01.2010 PER R.K. PANDA AM: THE ABOVE TWO APPEALS FILED BY THE REVENUE ARE DIRECTED AGAINST THE SEPARATE ORDERS DATED 30.11.20 06 AND 14.2.2007 OF THE CIT(A)-V MUMBAI RELATING TO ASSESSMENT YEARS 2003-04 AND 2004-05 RESPECTIVELY. SINCE COMMON GROUNDS ARE INVOLVED IN BOTH THESE APPEALS THEREFORE THESE WERE HEARD TOGETHER AND A RE BEING DISPOSED OFF BY THIS COMMON ORDER. I.T.A. NO. 1215/MUM/07 (A.Y. 2003-04): 2. GROUNDS OF APPEAL NO. 1 BY THE REVENUE READS AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER THE LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF LABOUR I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 2 CHARGES OF RS.27 39 191/- OUT OF TOTAL LABOUR CHARGES OF RS.22 69 75 285/- ALTHOUGH THE GENUINENESS OF THE TRANSACTIONS WERE NOT PROVED. 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF IMPORT OF ROU GH DIAMONDS CUTTING AND POLISHING AND THEREAFTER EXPO RT OF THE SAME. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE COMPANY HAS CLAIMED A SUM OF RS.22 69 75 283 AS LAB OUR CHARGES PAID TO KARIGARS. ON BEING ASKED BY THE ASSESSING OFFICER THE ASSESSEE FILED PARTICULARS O F THE INDIVIDUAL RECIPIENTS. THE ASSESSING OFFICER ISSUE D NOTICE U/S. 133(6) TO THE FOLLOWING PARTIES: (A) SHRI K.K. KASI - RS.5 27 610/- (B) SHRI PRATAPBHAI R. PUROHIT - RS.3 20 123/- (C) SHRI VITHALBHAI RAGHAVBHAI LUKHI - RS.9 18 362/ - (D) SYAM DIAMOND - RS.5 87 752/- (E) SHRI K.K. KESHWAN - RS.3 85 344/- 4. THE ASSESSING OFFICER OBSERVED THAT ALTHOUGH NOTICE U/S. 133(6) WAS SERVED ON SHRI K.K. KASI NO REPLY WAS RECEIVED FROM THE SAID PERSON. ON BEING CONFRONTED THE ASSESSEE FILED CONFIRMATION IN RESPECT OF SHRI K.K. KASI. HOWEVER IN ABSENCE OF PAN IN THE CONFIRMATION IN R ESPECT OF THE SAID PARTY THE ASSESSING OFFICER DOUBTED TH E CREDITWORTHINESS OF THE PARTY AND THE GENUINENESS O F THE TRANSACTION. ACCORDINGLY HE DISALLOWED THE LABOUR CHARGES OF RS.5 27 610/- PAID TO SHRI K.K. KASI. 5. IN CASE OF THE REMAINING FOUR PERSONS THE ASSESSIN G OFFICER NOTED THAT THE NOTICES ISSUED U/S. 133(6) W ERE RETURNED BACK UNSERVED BY THE POSTAL AUTHORITIES. WHEN THIS FACT WAS BROUGHT TO THE NOTICE OF THE ASSESSEE S REPRESENTATIVE THE ASSESSEE COMPANY FILED CONFIRMA TION IN RESPECT OF THESE PERSONS. SINCE THE PAN IN RESPECT OF THE I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 3 PERSONS DID NOT EXIST IN THE CONFIRMATIONS THE ASS ESSING OFFICER DOUBTED THE CREDITWORTHINESS OF THE PARTIES AND GENUINENESS OF THE TRANSACTIONS. ACCORDINGLY HE DISALLOWED THE BALANCE AMOUNT OF LABOUR CHARGES IN RESPECT OF THE ABOVE FOUR PARTIES AMOUNTING TO RS.2 2 11 581/-. 6. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THIS IS NO T A CASH CREDIT WHERE THE ASSESSING OFFICER HAS TO ANAL YSE THE CREDITWORTHINESS. IT WAS SUBMITTED THAT SIMPLY BEC AUSE THE PA NO. IS NOT FILED THE TRANSACTION CANNOT BE HELD TO BE NON-GENUINE PARTICULARLY WHEN CONFIRMATIONS ARE ON RECORD. THE CIT(A) AGREED WITH THE ASSESSEE AND HE LD THAT NON-AVAILABILITY OF PA NO. CANNOT MAKE A TRANSACTIO N AS NON-GENUINE. AGGRIEVED WITH SUCH ORDER OF THE CIT( A) THE REVENUE IS IN APPEAL BEFORE US. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF O F THE ASSESSEE. THERE IS NO DISPUTE TO THE FACT THAT OUT OF THE FIVE KARIGARS TO WHOM NOTICES U/S. 133(6) WERE ISSU ED NOTICE WAS SERVED ON ONE PARTY VIZ. K.K. KASI AND THE NOTICES ISSUED TO THE REMAINING FOUR PARTIES WERE R ETURNED UNSERVED BY THE POSTAL AUTHORITIES. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE DURING THE CO URSE OF ASSESSMENT PROCEEDINGS HAS FILED THE CONFIRMATIONS OF ALL THE 5 RECIPIENTS TO WHOM LABOUR CHARGES WERE PAID. WE FIND MERELY BECAUSE PA NOS. WERE NOT MENTIONED THE ASSESSING OFFICER DISALLOWED THE LABOUR CHARGES DOU BTING THE CREDITWORTHINESS OF THE KARIGARS AND THE GENUIN ENESS OF THE TRANSACTIONS. WE ALSO FIND WHEN THE ASSESSEE FILED THE CONFIRMATIONS ON 7.3.2006 THE ASSESSING OFFICER DID I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 4 NOTHING TILL HE PASSED THE ORDER U/S. 143(3) ON 24. 3.2006. WE FIND THE CIT(A) DELETED THE ADDITION HOLDING THA T MERE NON-FURNISHING OF PA NOS. IS NOT SUFFICIENT TO MAKE THE TRANSACTION AS NON-GENUINE. WE THEREFORE AGREE W ITH THE FINDING OF THE CIT(A) THAT THIS IS NOT A CASE OF CA SH CREDIT AND THE ISSUE RELATES TO THE ALLOWABILITY OF EXPEND ITURE. SINCE THE PARTIES HAVE CONFIRMED TO HAVE RECEIVED T HE PAYMENTS THEREFORE IN OUR OPINION MERELY FOR WAN T OF PA NOS. THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DIS BELIEVING THE TRANSACTIONS BY DOUBTING THE CREDITWORTHINESS O F THE KARIGARS. IN THIS VIEW OF THE MATTER WE UPHOLD TH E ORDER OF THE CIT(A) AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 8. GROUNDS OF APPEAL NO. 2 BY THE REVENUE READS AS UNDER: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.6 99 24 518/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK WHICH WAS DETERMINED BY ADOPTING THE AVERAGE MANUFACTURED COST METHOD SINCE THE ASSESSEE HAS NOT REASONABLY MAINTAINED THE STOCK TO ARRIVE AT A FAIR VALUATION OF THE CLOSING STOCK. 9. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSING OFFICER ON PERUSAL OF ANNEXURE 5 TO FORM NO. 3CD NO TICED THAT THE ASSESSEE COMPANY HAS SHOWN THE VALUATION O F CLOSING STOCK IN RESPECT OF ROUGH DIAMONDS AT RS.53 99 95 752 AND TOTAL QUANTITY OF ROUGH DIAMOND S WAS SHOWN AT 17 14 272.23 CTS. FROM THE QUANTITATI VE DETAILS OF ROUGH DIAMONDS AND POLISHED DIAMONDS GIV EN BY THE ASSESSEE IN THE SAID ANNEXURE HE NOTED THAT THE CLOSING STOCK IS VALUED @ RS.314.99 PER CT. WHEREAS THE VALUE OF OPENING STOCK AND PURCHASES IS SHOWN AT I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 5 RS.383.67 PER CT. IN RESPECT OF CLOSING STOCK OF P OLISHED DIAMONDS HE NOTICED THAT MANUFACTURING COST OF 2 18 713.12 CTS IS REFLECTED AT RS.97 54 14 247 I.E . THE COST OF RS.4 459.80 PER CT. HOWEVER THE COST OF C LOSING STOCK AT COST IS SHOWN AT RS.3911 PER CT. THE ASSE SSING OFFICER CONFRONTED THE ABOVE FACTS TO THE ASSESSEE. NOT BEING SATISFIED WITH THE VARIOUS SUBMISSIONS GIVEN BY THE ASSESSEE THE ASSESSING OFFICER ADOPTED THE AVERAGE MANUFACTURING COST OF RS.4 459.81 PER CT AND APPLIE D THE SAME ON THE QUANTITY OF THE CLOSING STOCK TO ARRIVE AT THE QUANTUM OF UNDERVALUATION. HE ACCORDINGLY MADE AN ADDITION OF RS.6 99 24 518 TO THE TOTAL INCOME OF T HE ASSESSEE. 10. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASSESSE E IS NOT IN THE LINE OF DIAMONDS WHICH ARE USED FOR M AKING JEWELLERY. IN CONTRAST THE ASSESSEE IS MANUFACTUR ING LOW COST FASHION ACCESSORIES WHICH ARE USED IN MISCELLA NEOUS DESIGNING LIKE IN JACKETS ETC. IN THESE DIAMONDS IT IS THE COLOUR AND SIZE WHICH ARE THE KEY ELEMENTS. IT WAS FURTHER SUBMITTED THAT THE DIAMOND PIECES ARE ALL O F DIFFERENT SHADES AND SIZES AND DO NOT FETCH UNIFORM PRICE. IT WAS SUBMITTED THAT THE DEMAND FOR SUCH ACCESSORY DIAMONDS STARTED DECLINING THE WORLD OVER FOR WHICH ONLY GOOD VARIETY OF MANUFACTURED STOCK COULD BE SOLD. TO ESTABLISH THE ABOVE CONTENTION THE FOLLOWING WAS RE LIED UPON: 1. THE AVERAGE SALES PRICE DURING THE YEAR WAS RS.5742.22 PER CT. WHICH IS RS.1289 PER CT. HIGHER THAN THEIR AVERAGE MANUFACTURING COST OF RS.4459.81 PER CT. 2. HUGE CLOSING STOCK LEFT AT THE END OF THE YEAR AT 127413 CT. I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 6 11. IT WAS SUBMITTED THAT WHATEVER GOOD STOCK WAS AVAILABLE WAS SOLD TO MEET THE DEMAND OF THE MARKET . WHATEVER IS LEFT IS OF INFERIOR VARIETY AND THEREFO RE THE VALUATION IS LOW. IT WAS ARGUED THAT AVERAGE COST METHOD OF VALUATION IS NOT A RECOGNISED METHOD OF VALUATIO N OF CLOSING STOCK ESPECIALLY IN ASSESSEES CASE DUE TO THE VAST VARIATION IN SIZE AND COLOUR OF THE DIAMONDS. THE FOLLOWING WRITTEN SUBMISSION WAS ALSO FILED BEFORE THE CIT(A): THAT DURING THE YEAR THE MANUFACTURED STOCK OF 218712.13 CTS AGAIN CONSISTING OF VARIOUS QUALITIES SHADES SIZES AND WEIGHT ARE ASSORTED INTO DIFFERENT LOTS AND MIXED WITH THE OPENING STOCK OR STOCK MANUFACTURED DURING THE YEAR OF SIMILAR/NEAR TO SIMILAR LOTS TO ARRIVE AT THE SALEABLE LOTS AS PER THE INTERNATIONAL DEMAND IN THE MARKET. IN THE LIGHT OF ABOVE FACTS THE VALUATION ARRIVED AT OF DIFFERENT LOTS ARE 10 450 (HIGHEST) 1400 (LOWEST). IT SHALL NOT BE OUT OF PLACE TO MENTION THAT BETTER QUALITY GOODS ARE SOLD DURING THE YEAR AS PER THE INTERNATIONAL DEMAND AND THE LOWER END QUALITY GOODS ARE IN THE STOCK WHICH CAN BE SEEN FROM THE QUANTITIES AVAILABLE AT THE END OF THE YEAR (REFER BACK UP VALUE CHART). IN THE LIGHT & CIRCUMSTANCES OF THE CASE AND HIGHLY TECHNICAL ASPECT OF THE CASE WHEREIN ASSORTERS WHO HAVE THE EXPERTISE TO ASSORT THE GOODS INTO VARIOUS LOTS SIZES GRADES AND WEIGHTS DIFFERENT LOTS ARE ACCORDINGLY REFLECTS IN THE OPENING STOCK AS WELL AS IN THE MANUFACTURED STOCK AND ALSO IN THE CLOSING STOCK AND DUE TO SEPARATE VALUATION APPLICABLE IN OUR CASE THE WEIGHTED AVERAGE METHOD IS NOT APPLICABLE AND NOT PRACTICAL AS A SMALL LOT OF DIAMOND WITH HIGHER GRADE AND QUALITY MAY WORK OUT INTO VERY HIGH VALUATIONS AND A VERY LARGE QUANTITY OF DIAMONDS WOULD WORK OUT TO LOW VALUATION. 12. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LEARNED CIT(A) HELD THAT THE AVERAGE COST METHO D I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 7 ADOPTED BY THE ASSESSING OFFICER IS NOT A GOOD AND RECOGNISED METHOD OF VALUATION. HE ACCEPTED THE CONTENTION OF THE ASSESSEE THAT GOOD VARIETY MANUFA CTURED HAS BEEN EXPORTED IS WELL BROUGHT OUT. FURTHER THE WIDE VARIATION IN THE QUALITY OF DIAMONDS SIZE AND COLO UR OF THE DIAMONDS MAKE THE AVERAGE METHOD ABSOLUTELY INAPPROPRIATE FOR ARRIVING AT TRUE AND CORRECT PICT URE OF PROFIT. HE FURTHER OBSERVED THAT THIS IS NOT A CAS E WHERE THE ASSESSING OFFICER HAS GONE INTO THE STOCK RECOR D AND ESTABLISHED THAT THERE WAS ANY REAL MANIPULATION OF RECORDS. THE ASSESSING OFFICER IS SIMPLY ADOPTING THE AVERAGE METHOD AND MAKING THE ADDITION WHICH IS NOT JUSTIFIED IN THE FACTS OF THE ASSESSEES CASE. HE ACCORDINGLY HELD THAT THE ADDITION IS WITHOUT ANY F IRM BASE AND IS UNCALLED FOR AND DELETED THE SAME. AGG RIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN AP PEAL BEFORE US. 13. THE LEARNED DR FOR THE REASONS RECORDED BY THE ASSESSING OFFICER IN THE BODY OF THE ASSESSMENT ORD ER SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 14. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND SUBMITTED THAT THE REVENUE HAS ACCEPTED THE OPENING STOCK PURCHASES SALES AND CLOSING STOCK. FURTHER THE BUSINESS OF THE ASSESSEE WAS SHUTDOWN W ITH EFFECT FROM 31 ST MARCH 2007. THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE NEVER REJECTED AND THE CLOSING STOCK WAS ACCEPTED FOR ALL THE EARLIER YEARS. THE LEARNED CO UNSEL FOR THE ASSESSEE REFERRING TO THE CONSOLIDATED TRADING RESULTS FOR THE PERIOD FROM 1.4.2002 TO 31.3.2006 DREW THE ATTENTION OF THE BENCH TO THE VALUATION OF CLOSING STOCK OF 1 78 807.89 CTS OF CLOSING STOCK AS ON 31 ST MARCH 2006 AT I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 8 RS.68 06 42 744. HOWEVER ACCORDING TO THE VALUATI ON MADE BY THE ASSESSING OFFICER THE SAME STANDS AT RS.109 78 96 313. REFERRING TO THE CONSOLIDATED TR ADING ACCOUNT FOR THE PERIOD FROM 1.4.2006 TO 31.3.2007 HE SUBMITTED THAT IF THE ABOVE VALUATION OF THE ASSESS EE AS WELL AS THE ASSESSING OFFICER WAS CONSIDERED THEN T HE VALUATION OF CLOSING STOCK AS ON 31.3.2007 ACCORDI NG TO THE ASSESSEE COMES TO NIL WHEREAS ACCORDING TO THE ASSESSING OFFICER THE VALUATION OF SUCH NIL CLOSING STOCK COMES TO RS.51 72 53 569. REFERRING TO THE COPY OF THE ASSESSMENT ORDER FOR THE A.Y. 2006-07 PASSED U/S. 143(3) A COPY OF WHICH HAS BEEN FILED IN THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE OFFICE NO TE IN THE SAID ORDER AND SUBMITTED THAT THE ASSESSING OFFICER IN THE SAID ORDER HAS HIMSELF MENTIONED THAT IF THE METHOD OF VALUATION IS ADOPTED FOR THIS YEAR THE SAME WILL NO T BE BENEFICIAL TO THE REVENUE. FURTHER THE ASSESSING O FFICER HAD GIVEN A CALCULATION ON THE BASIS OF THE AVERAGE METHOD OF VALUATION ACCORDING TO WHICH THERE IS A L OSS OF ABOUT RS. 20 CRORES TO THE REVENUE IF THE SAME METH OD IS ADOPTED. HE ACCORDINGLY SUBMITTED THAT THE CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSE SSING OFFICER ON ACCOUNT OF NET VALUATION OF CLOSING STOC K. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF O F THE ASSESSEE. WE FIND THE ASSESSEE HAS ENCLOSED THE DE TAILS OF OPENING STOCK PURCHASES SALES AND CLOSING STOCK O F DIAMONDS BOTH QUALITY WISE AND VALUE WISE. WE FIND THE REVENUE IN THE PAST HAS ACCEPTED SUCH OPENING STOCK PURCHASES SALES AND CLOSING STOCK AND THE BOOKS WE RE NEVER REJECTED A STATEMENT MADE BY THE LEARNED COU NSEL I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 9 FOR THE ASSESSEE AND NOT CONTROVERTED BY THE LEARNE D DR. IT IS THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE BUSINESS HAS BEEN SHUT AS ON 31 ST MARCH 2007 AND THERE WAS NO CLOSING STOCK AS ON 31 ST MARCH 2007 AND IF THE AVERAGE METHOD OF VALUATION IS ADOPTED BY THE ASSESSING OFFICER IS ACCEPTED THEN T HE VALUE OF CLOSING STOCK AS ON 31 ST MARCH 2007 WILL BE RS.51 72 63 560 WHICH IS IMPOSSIBLE. WE FURTHER FI ND THE ASSESSING OFFICER IN THE ASSESSMENT ORDER PASSED U/ S. 143(3) DATED 12 TH DECEMBER 2008 FOR THE A.Y. 2006-07 HAS MENTIONED IN THE OFFICE NOTE AS UNDER: OFFICE NOTE : IN THE A.Y. 2004-05 THE CLOSING STOCK WAS VALUED BY THE ASSESSING OFFICER AT RS.1 22 95 57 287/- AS AGAINST BOOK VALUE OF RS.99 66 94 871/-. THIS CLOSING STOCK WAS TAKEN AS OPENING STOCK FOR THE A.Y. 2005-06 AND VALUE OF THE CLOSING STOCK WAS AGAIN ADOPTED BY THE ASSESSING OFFICER BY TAKING AVERAGE RATE AND ADDITION WAS MADE. IN A.Y. 2005-2006 CLOSING STOCK OF POLISHED DIAMONDS WERE VALUED AT RS.90 26 21 126/- AS AGAINST THE VALUE OF RS.45 52 92 075/- DECLARED BY THE ASSESSEE AND ADDITION OF RS.21 44 66 635/- WAS MADE DUE TO VALUATION OF CLOSING STOCK OF POLISHED DIAMONDS. NOW FOR A.Y. 06-07 IF THE METHOD ADOPTED BY THE ASSESSING OFFICER OF THE PRECEDING ASSESSMENT YEARS IS CONSIDERED THEN OPENING STOCK IS REQUIRED TO BE VALUED AT RS.90 26 21 126/- AND CLOSING STOCK AT RS.82 79 69 540/-. BY DOING SO THE INCOME OF THE A.Y. 2006-07 WILL DIMINISH BY AN AMOUNT OF RS.20 00 02 255/-. IN OTHER WORDS THE ASSESSEES RETURN INCOME HAS TO BE REDUCED BY THIS AMOUNT. IF THIS METHOD FOR VALUATION IS ADOPTED FOR THIS YEAR THE SAME WILL NOT BE BENEFICIAL TO THE REVENUE. HENCE BOOK RESULTS OF THE ASSESSEE ARE NOT DISTURBED. IT IS OBSERVED THAT IF THE SAME METHOD OF VALUATION I.E. AVERAGE RATE OF CLOSING I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 10 STOCK OF POLISHED DIAMONDS IS ADOPTED IN THIS ASSESSMENT. THE WORKING OF VALUATION WOULD HAVE BEEN AS UNDER: CLOSING STOCK VALUATION AS PER AVERAGE METHOD: POLISHED DIAMOND CARATS VALUE (RS.) OPENING BALANCE 204155.65 902621126.01 (455292075 AS PER BOOKS + 447329051 AS PER AO) ADD: MANUFACTURING 60583.45 ------------ 322704479.00 -------------------- 264739.10 1225325605.01 LESS: SALES 85824.51 230512233.00 SHORTAGE 26.70 ------------ --- ------------------- CLOSING STOCK 178887.89 827969540.04 LESS: CLOSING STOCK AS PER BOOK 58 06 42 744.00 -------------------- 24 73 26 796.00 LESS: ADJUSTMENT FOR OPENING STOCK OF CURRENT YEAR 44 73 29 051.00 -------------------- EXCESS/SHORTFALL IN VALUE OF CLOSING STOCK 20 00 02 255.00 ========== 16. THUS FROM THE ABOVE IT IS CLEAR THAT IF THE AVERAGE COST METHOD IS ADOPTED THEN IN THE A.Y. 2006-07 THE INCOME OF THE ASSESSEE WILL DIMINISH BY AN AMOUNT O F RS.20 00 00 255. THUS ACCORDING TO THE ASSESSING O FFICER HIMSELF THIS METHOD IS NOT TO BE ADOPTED FOR THE A. Y. 2006-07. WE THEREFORE FIND MERIT IN THE SUBMISSI ONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE METHO D OF VALUATION ADOPTED BY THE ASSESSING OFFICER IS WITHO UT ANY SOUND BASIS AND IS UNCALLED FOR. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED ORDER PASSED BY THE CIT(A) ON THIS ISSUE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND ACCORDINGLY UPHOLD THE SAME . THIS GROUND RAISED BY THE REVENUE IS ACCORDINGLY DISMISS ED. I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 11 I.T.A. NO. 3529/MUM/2007 (A.Y. 2004-05): 17. GROUNDS OF APPEAL NO. 1 BY THE REVENUE READS AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF ELECTRICITY EXPENSES IGNORING THE FINDINGS OF THE AO IN ASSESSMENT PROCEEDINGS. 18. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.13 06 607 AS ELECTRICITY CHARGES. FROM THE COPY OF THE BILL FILED BY THE ASSESSEE THE ASSESSING OFFICER O BSERVED THAT THE BILLS ARE NOT IN THE NAME OF THE ASSESSEE BUT IN SOME INDIVIDUAL NAMES. HE FURTHER NOTED THAT DURIN G THE PRECEDING YEARS NO SUCH CLAIM WAS DEBITED IN THE PR OFIT AND LOSS A/C. NOR THE ABOVE ELECTRICITY BILL RELATE S TO THE PREMISES OCCUPIED BY THE ASSESSEE. ON BEING CONFRO NTED BY THE ASSESSING OFFICER THE ASSESSEE REPLIED AS UN DER: THAT THE ASSESSEE IN EARLIER YEARS USED TO OUTSOURCE COMPLETELY THE PROCESS OF CONVERSION OF ROUGH DIAMONDS INTO POLISHED DIAMONDS; HOWEVER DURING THE YEAR PART OF THE PROCESS OF CONVERSION OF ROUGH INTO POLISHED DIAMONDS IS UNDERTAKEN AT THE OFFICE PREMISES AT 217/218 PAREKH MARKET OPERA HOUSE MUMBAI-400 004; THE SAID PREMISES ARE OWNED BY BROTHER OF THE DIRECTORS NAMELY SHRI DILIPKUMAR V. LAKHI WHO HAS KINDLY CONSENTED TO ALLOW THE USE OF OFFICE PREMISES AND MACHINES FOR THE MANUFACTURE/CONVERSION OF ROUGHS AND THE ASSESSEE AGREED TO PAY THE ELECTRICITY EXPENSES INCURRED DURING THE YEAR. IT SHALL NOT BE OUT OF PLACE TO MENTION THAT NO RENTAL CHARGES ARE INCURRED ONLY THE ACTUAL ELECTRICITY EXPENSES OF RS.13 06 607/- IS INCURRED FOR THE BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE. I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 12 19. HOWEVER THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE IN ABSEN CE OF ANY SUPPORTING EVIDENCE SUCH AS COPY OF AGREEMENT A ND PROOF REGARDING ANY MANUFACTURING ACTIVITY BEING DO NE OVER THERE. HE NOTED THAT THE PREMISES FOR WHICH T HE ELECTRICITY BILLS PERTAIN TO IS NOT AT ALL OCCUPIED BY THE ASSESSEE AS PER THE LIST OF PREMISES FURNISHED ALON G WITH THE RETURN OF INCOME OR DURING THE COURSE OF HEARIN G. ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE FAI LED TO DISCHARGE THE ONUS AS TO HOW THE ELECTRICITY EXPENS ES IS EXCLUSIVELY RELATED TO THE BUSINESS OF THE ASSESSEE COMPANY. HE ACCORDINGLY DISALLOWED THE ENTIRE CLAI M OF ELECTRICITY CHARGES AMOUNTING TO RS.13 06 607. 20. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE LABOUR CHARGES IN RESPECT OF LASER TREATMENT HAVE GONE DOW N BY RS.26 LAKHS. SUCH REDUCTION IS ON ACCOUNT OF THE L ASER TREATMENT ACTIVITY UNDERTAKEN IN-HOUSE FROM THE PRE MISES OF MR. DILIPBHAI. THE ASSESSEE DID NOT PAY ANY OTH ER CHARGES TOWARDS THE LASER MACHINE EXCEPT THE ELECTR ICITY CHARGES CONSUMED ON USE OF THE LASER. IT WAS FURTH ER SUBMITTED THAT SUCH ELECTRICITY CHARGES WERE NOT CL AIMED INDEPENDENTLY BY SHRI DILIPBHAI IN ANY OF THE CONCE RNS. A CERTIFICATE TO THIS EFFECT WAS ALSO FILED BEFORE TH E CIT(A). 20.1 BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE CIT(A) DELETED THE ABOVE DISALLOWANCE. WHILE D OING SO HE OBSERVED THAT THE DECLINE IN LABOUR PROCESSING C HARGES FROM RS.57.L86 LAKHS TO RS.18.27 LAKHS IS SUFFICIEN T EVIDENCE TO ESTABLISH THAT THE LASER TREATMENT HAS BEEN DONE IN-HOUSE. THEREFORE THE DISALLOWANCE OF ELEC TRICITY CHARGES PAYMENT ON THE GROUND THAT THE ELECTRICITY BILL PAYMENT IS NOT IN THE NAME OF THE ASSESSEE IS NOT I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 13 JUSTIFIED. HE ACCORDINGLY DELETED THE ADDITION. A GGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN AP PEAL BEFORE US. 21. THE LEARNED DR SUBMITTED THAT THERE WAS NO WRITTEN AGREEMENT BETWEEN THE TWO PARTIES. THE AUDITORS STATEMENT ALSO DOES NOT MENTION ABOUT THIS FACT. T HE ASSESSEE HAS NOT PAID ANY LEASE RENT FOR THE MACHIN E. THE ORDER DELETING THE ADDITION BY THE CIT(A) IS MERELY ON THE BASIS OF A FARFETCHED ASSUMPTION SINCE THE BILLS AR E IN THE NAME OF SOMEBODY ELSE AND THERE IS NO AGREEMENT EIT HER FOR THE PREMISES OR FOR THE MACHINERY. THEREFORE THE DELETION MADE BY THE CIT(A) IS UNCALLED FOR. IF SU CH THEORY ADOPTED BY THE CIT(A) IS ACCEPTED THEN NO DOCUMENT/ AGREEMENT WILL BE NECESSARY FOR CLAIMING ANY EXPEND ITURE. 22. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND STRONGLY RELIED ON THE ORDER OF THE CIT(A). 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF O F THE ASSESSEE. WE FIND THE ASSESSING OFFICER DISALLOWED THE ELECTRICITY CHARGES ON THE GROUND THAT SUCH ELECTRI CITY CHARGES WERE NEVER CLAIMED IN THE PAST THE BILLS R ELATE TO PREMISES NOT OCCUPIED BY THE ASSESSEE AND THERE IS NO SUCH AGREEMENT BETWEEN THE ASSESSEE COMPANY AND THE BROTHER OF ONE OF THE DIRECTORS FOR USE OF THE LASE R MACHINE. WE FIND THE CIT(A) DELETED THE ADDITION O N THE GROUND THAT BECAUSE OF THE USE OF THE LASER MACHINE THE LABOUR CHARGES IN RESPECT OF LASER TREATMENT HAVE G ONE DOWN BY RS. 26 LAKHS AND THEREFORE IT IS A SUFFICI ENT EVIDENCE TO ESTABLISH THAT THE LASER TREATMENT HAS BEEN DONE IN-HOUSE. THIS THEORY OF LEARNED CIT(A) IN O UR I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 14 OPINION IS MERELY ON PRESUMPTION BASIS. IT IS THE SETTLED PROPOSITION OF LAW THAT FOR ANY CLAIM OF EXPENDITUR E THE ONUS IS ALWAYS ON THE ASSESSEE TO SUBSTANTIATE WITH DOCUMENTARY EVIDENCE TO THE SATISFACTION OF THE ASS ESSING OFFICER THAT THE EXPENDITURE SO CLAIMED IS WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IN THE IN STANT CASE WE FIND THIS ONUS HAS NOT BEEN DISCHARGED BY THE ASSESSEE. THE CERTIFICATE FILED BEFORE THE CIT(A) WAS NEITHER FILED BEFORE THE ASSESSING OFFICER NOR CONF RONTED BY THE CIT(A) TO THE ASSESSING OFFICER. UNDER THES E CIRCUMSTANCES WE ARE OF THE CONSIDERED OPINION THA T THE MATTER SHOULD GO BACK TO THE ASSESSING OFFICER WITH A DIRECTION TO GIVE ANOTHER OPPORTUNITY TO THE ASSESS EE TO SUBSTANTIATE WITH EVIDENCE TO THE SATISFACTION REGA RDING THE GENUINENESS OF SUCH ELECTRICITY EXPENSES. WE H OLD AND DIRECT ACCORDINGLY. THIS GROUND BY THE REVENUE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 24. GROUNDS OF APPEAL NO. 2 BY THE REVENUE READS AS UNDER: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.23 28 62 416/- MADE BY THE AO ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK WHICH WAS DETERMINED BY ADOPTING THE AVERAGE COST METHOD SINCE THE ASSESSEE HAD NOT REASONABLY MAINTAINED THE STOCK TO ARRIVE AT A FAIR VALUATION OF THE CLOSING STOCK. 25. AFTER HEARING BOTH THE SIDES WE FIND THIS GROUND I S IDENTICAL TO THE GROUNDS OF APPEAL NO. 2 IN I.T.A. NO. 1215/MUM/2007. WE HAVE ALREADY DECIDED THE ISSUE A ND THIS GROUND RAISED BY THE REVENUE HAS BEEN DISMISSE D. FOLLOWING THE SAME RATIO THIS GROUND BY THE REVENU E IS DISMISSED. I.T.A. NOS. 1215 & 3529/MUM/2007 M/S. LAKHI GEMS IMPEX PVT. LTD. =========================== 15 26. IN THE RESULT I.T.A. NO. 1215/MUM/2007 IS DISMISSED AND I.T.A. NO. 3529/MUM/2007 BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 29 TH JANUARY 2010. SD/- (N.V. VASUDEVAN) JUDICIAL MEMBER SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI DATED 29 TH JANUARY 2010 COPY TO: (1) THE APPELLANT (2) THE RESPONDENT (3) THE CIT(A)-V MUMBAI (4) THE CIT MC-V MUMBAI (5) THE DR A BENCH ITAT MUMBAI. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI TPRAO