IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D Before Shri MUKUL Kr. SHRAWAT, JUDICIAL MEMBER and Shri D.C. AGRAWAL, ACCOUNTANT MEMBER Date of hearing : 02/06/2011 Drafted on: 06/06/2011 ITA No.1721/AHD/2007 Assessment Year : 2004-05 M/s.R.Jaykumar & Co. Vs. Asst.CIT A/1, Krink Tower Circle-9 Mini Bazaar Surat Varachha Road Surat PAN/GIR No. : AADFR 1175 N (APPELLANT) .. (RESPONDENT) Appellant by : S/Shri Rasesh Shah & Hardik Vora Respondent by: Shri P.L. Kureel, D.R. ORDER PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER : This is appeal at behest of Assessee which has emanated from order of Learned CIT(Appeals)-V, Surat dated 23/02/2007 passed for Assessment Year 2004-05 and substantive ground Nos.1 & 2; reproduced below: 1. On facts and in circumstances of case as well as law on subject, learned CIT(Appeals) has erred in confirming action of Assessing Officer in rejecting books of accounts u/s.145(3) of Act. 2. On facts and in circumstances of case as well as law on subject, learned CIT(Appeals) has erred in confirming action of Assessing Officer in making addition of rs.21,89,930/- for alleged low Gross Profit. ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -2- 2. Facts in brief as emerged from corresponding assessment order passed u/s. 143(3) of I.T. Act, 1961 dated 21.12.2006 were that assessee-firm is engaged in business of export of diamonds. return of income declaring total income of Rs.6,75,330/- has been filed. However, GP addition of Rs.21,89,930/- was made which is subject of controversy in this appeal. 3. AO has observed that gross profit was declared at Rs.30,68,691/- on turnover of Rs.4,37,98,613/-, hence, giving GP ratio @ 7.01%. As against; that for immediate preceding Assessment Year on turnover of Rs.2,19,00,007/- GP of Rs.29,34,551/- was disclosed which was @ 13.40%. Since there was fall of GP of about 6.39% in comparison to past results, hence, investigation was commenced. At outset, ld.AR at this juncture has informed that AO has proceeded on wrong assumption that assessee used to import rough diamonds in lots. This observation was made by AO as per paragraph No.4 of impugned assessment order. Since AO has misunderstood facts therefore, in paragraph No.5 he has commented that to ascertain production of diamonds, it was necessary to keep records both in terms of quality and in terms of quantity. Ld.AR has again vehemently objected that once assessee was not in manufacturing of polished diamonds out of purchase of rough diamonds, therefore, such observation of AO was factually ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -3- incorrect. To buttress this factual position, ld.AR has stated that in paragraph No.5 AO has made chart wherein there was neither opening nor closing stock of rough diamond which by itself has proved that there was no existence of rough diamonds, hence, there was no manufacturing of polished diamonds. For sake of completeness, that chart is reproduced below: Item Opening Value (Rs.) Closing Value (carats) (carats) (Rs.) Rough Nil Nil Nil Nil Diamonds Polished 4,083.52 3,51,18,272 2,301.04 1,72,57,900 Diamonds Rejected 2,204.98 22,050 2,204.98 22,050 diamond 3.1. Our attention has also been drawn on submission made before AO as it was referred in paragraph No.5.2 of impugned assessment order; reproduced below: 5.2. In this regard assessee vide its submission dated 24.11.2006, assessee has stated that valuation of polished diamond was done at average cost price. Valuation of stock at cost is in conformity with accounting standard. valuation of cost of average basis is not prescribed for valuation of closing stock by ICAI. Assortment and re- assortment is continuous for raw materials as well as for polished diamonds. stock at year end was from different lot purchased. So it is not possible to match cost of manufacturing with polished diamond. Considering such peculiarity of trade stock is valued t average. method ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -4- of valuation is same as followed in preceding previous year and it was accepted by department in three years scrutiny assessments also. It is to be also noted that assessee maintains proper records and no defects in maintenance of records was pointed out. rate of gross profit is higher than that of other business man of this line of business. So there is no question of rejection of books u/s.145 of Act, as method is proper and accepted by department in preceding year also . 3.2. It has also been contested that in last three assessment years scrutiny was done but no such addition was proposed, though assessee had followed same method of valuation. It was also contested that no defect was found in records of assessee. It was also informed that there was closing stock of only polished diamonds of quantity of 492.51 carats for value of Rs.49,98,977/-. AO was not convinced and he has insisted upon to furnish detailed inventory stock in terms of quality of diamonds. As per AO, in absence of details in terms of quality-wise production of diamonds from each lot it was not ascertainable which type of diamonds were produced form particular lot in order to determine value. He has, therefore, concluded vide paragraph No.6.1 that it would be correct to say that valuation of stock was not verifiable. Against that observation of AO, assessee has again reiterated that it was wrong on part of AO to say that there was production of ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -5- diamonds. Through written submission correct facts were reiterated as under:- 7.3. assessee vide its letter dated 24.11.2006 has replied that It is to be noted that assessee is doing business of trading of goods i.e. assessee purchases polished diamonds and sold polished diamonds. Day today stock records are maintained. No defects were pointed out during assessment proceedings. Business is not mathematical formula where end result is always same. Confirmation of purchase parties have already filed. Sales are of export. Every export of polished diamond were passed through custom clearance. business never constant from year to year. margin of profit depends upon demands of goods manufactured by assessee firm and supply of same goods in market, quality of goods manufactured, market accessibility of partners of firm, etc. It is to be noted that there is increase in gross profit and net profit in absolute terms, which is main object of businessmen. rate of g.p.8% is better compared to profit earned in this line of business. As there is transaction of import and export only and same was passed through custom authorities, trading result declared should be accepted. 3.3. Even then, AO was not convinced and he has computed fall of gross profit percentage as under: 7.2. above table shows that in preceding A.Y., assessee has actually made gross profit of 13.38% (13.4 .02) though including exchange rate gain, business gross ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -6- profit had increased to 13.4%. Whereas in year under consideration assessee has lost 1.1% of its G.P. due to exchange rate gain. If we exclude percentage loss due to exchange rate difference, actual gross profit percentage earned during year comes to only 8.11 (7.01 + 1.1). Thus, actual down fall of gross profit percentage as compared to last year is 5.27%. 3.4. Though, fall in GP was computed at 5.27% but it was held by AO that it would be reasonable to enhance declared gross profit by 5% and accordingly addition of Rs.21,89,930/- was made which was contested. 4. It was contested that only polished diamonds were available at closing stock which were valued at average cost price basis. It was contested that AO had proceeded to estimate gross profit at 5% though no defect was found in books of account. It was contested that all purchases as well as sales were duly recorded. It was also reiterated before first appellate authority that assessee had carried out only trading activity, i.e. purchase of polished diamonds and export of polished diamonds. It was emphasised that AO had wrongly presumed that assessee had carried out manufacturing activity. It was vehemently pleaded that under wrong presumption, AO had proceeded to make addition on account of low gross profit. Though ld.CIT(A) has recorded those pleadings in paragraph No.6 but he has overlooked and affirmed action of AO on ground that even if ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -7- assessee had carried out trading activity of polished diamonds by purchasing same from open market and exporting out of country, but while preparing inventory of closing stock assessee should have prepared details of diamonds in terms of quality and quantity of each piece of diamond. assessee had failed to produce those details, therefore, AO was justified in assessing gross profit at 5.27% and he was reasonable to make addition by adopting GP rate at 5% only. Since appeal was dismissed, therefore assessee is now further in appeal. 5. From side of appellant, S/Shri Rasesh Shah & Hardik Vora appeared and preliminary objection was that AO had proceeded on wrong footing that assessee was engaged in manufacturing activity of diamonds. correct fact is that assessee is trader and, therefore, purchased polished diamonds from local market and exported polished diamonds out of country. Since assessee is in trading business, therefore, day- to-day stock was properly maintained. All purchases as well as sales were fully recorded. Ld.AR has contested that there was not single whisper of any defect in books of account of assessee. He has pleaded that there was only one allegation that assessee has not furnished quality-wise details of diamonds. In this regard, ld.AR has placed reliance on decision of ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -8- ITAT C Bench Ahmedabad in case of M/s.Dhami Brothers vs. ACIT bearing ITA No.2309/Ahd/2008 for Assessment Year 2004- 05, dated 06/08/2010 for legal proposition that there was no mandatory requirement to maintain qualitative details in this type of business for purpose of computation of profit. Ld.AR has also placed order of assessee which was passed for AY 2001- 02 u/s.143(3) of Act dated 25/02/2004 in support of argument that there was fall of GP in that year but no addition was made by disturbing gross profit declared by assessee. He has clarified that for AY 2001-02 gross profit was 9.96% as against gross profit @ 15.61% of preceding year but even then no GP addition was made in AY 2001-02 though thorough scrutiny was done. Ld.AR has also pleaded that AO has not cited any comparable case of that area, however, correct fact is that gross profit declared by assessee was better than others. He has concluded that since assessee is in trading business, then naturally percentage of profit is lower in comparison to manufacturing activity. 6. From side of Revenue, ld.DR supported orders of Revenue Authorities and argued that in absence of qualitative details, it was not possible for Revenue Department to examine correctness of profit declared by assessee. He has pleaded; in this line of business of diamonds, most ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 -9- important factor is quality of diamond, therefore, non- disclosure of quality was with purpose to hide correct profit earned. 7. We have heard both sides at some length. We have carefully perused orders of authorities below in light of short compilation filed before us. At outset, it is necessary to place on record that entire assessment order was based upon wrong appreciation of facts. Under wrong premise, AO has proceeded that assessee was engaged in manufacturing activity of diamonds. Facts of case have been revealed that assessee has, in fact, traded in polished diamonds. Records of case have revealed that polished diamonds have been purchased from local market and those were exported out of country. This fact could have been ascertained by AO himself because he has placed in body of assessment order chart of stock of polished diamond and rejected diamond and in that chart rough diamonds were shown as NIL. Meaning thereby neither there was opening balance nor closing balance of rough diamonds. This fact has also been brought to his notice that in past assessments were under scrutiny and no such addition was ever warranted and whatever GP rate was declared same was accepted by Revenue Department. Before us, such assessment passed u/s.143(3) of Act for AY 2001-02 dated ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 - 10 - 25/02/2004 is furnished. On perusal of impugned assessment order, it is also evident that no specific defect in books of account have been pointed out by AO. On other hand, assessee has placed on record that on account of export trading activity purchases as well as sales were fully vouched and, therefore, verifiable. On part of Revenue, there was no detection of any wrong mention of sales or inflation of purchases. assessee has also explained reason of fall in GP that due to variation in exchange rate in foreign currency assessee had suffered low profit in comparison to past year. However, it was pleaded that it was universal phenomenon, therefore, exchange rate has also caused lower margin of profit for assessee as well. According to us, since AO has proceeded under wrong premise and made addition under wrong assumption of facts, therefore, such addition must not be affirmed. We hereby reverse those findings which were based upon error and delete addition. 8. In result, appeal of Assessee is allowed. Order signed, dated and pronounced in Court on 17th June, 2011. Sd/- Sd/- ( D.C. AGRAWAL) ( MUKUL Kr. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 17 / 6 /2011 T.C. NAIR, Sr. PS ITA No.1721/Ahd/2007 M/s.R.Jaykumar & Co. vs. ACIT Asst.Year - 2004-05 - 11 - Copy of Order forwarded to : 1. Assessee. 2. Department. 3. CIT Concerned 4. ld. CIT(Appeals)-V, Surat 5. DR, Ahmedabad Bench 6. Guard File. BY ORDER, //True Copy// (Dy./Asstt.Registrar), ITAT, Ahmedabad 1. Date of dictation .. 02/06/2011 2. Date on which typed draft is placed before Dictating Member 06/06/2011 Other Member 3. Date on which approved draft comes to Sr.P.S./P.S .. 4. Date on which fair order is placed before Dictating Member for pronouncement 5. Date on which fair order comes back to Sr.P.S./P.S 17/6/2011 6. Date on which file goes to Bench Clerk 17/6/2011 7. Date on which file goes to Head Clerk . 8. date on which file goes to Assistant Registrar for signature on order .. 9. Date of Despatch of Order M/s. R.Jaykumar & Co. v. ACIT.- Circle-9