Soul Jewels, Mumbai vs Department Of Income Tax

ी जो ग दर संह, या यक सद य एवं ी संजय अरोड़ा, लेखा सद य के सम ।

BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARORA, AM

आयकर अपील सं./I.T.A. No. 5448/Mum/2012 ( नधा रण वष / Assessment Year: 2006-07) Dy. CIT, Central Circle-1, Soul Jewels, Room No. 902, 9th Floor, बनाम/ 306, Prasad Chambers, Old CGO Building, Annexe, Vs. Opera House, Mumbai-400 004 M. K. Road, Mumbai-400 020 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAFVS 1684 H (अपीलाथ" /Appellant) : (#$यथ" / Respondent)

अपीलाथ" क% ओर से / Appellant by : Shri Kishan Vyas

#$यथ" क% ओर से/Respondent by : Shri Anant N. Pai

सनु वाई क% तार,ख / : 13.01.2015 Date of Hearing घोषणा क% तार,ख / : 27.03.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)-36, Mumbai ('CIT(A)' for short) dated 21.06.2012, allowing the Assessee's appeal contesting its assessment u/s.143(3) r/w s. 153A of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2006-07 vide order dated 27.12.2011.

2. The assessee, a partnership firm in the business of export of studded jewellery, was observed by the Assessing Officer (A.O.) during the course of the assessment proceedings to have sold 436.1 carats (Cts.) of polished diamonds, which comprised its opening stock as on 01.04.2005, at a book value of Rs.23,45,002/-, to its sister concern, 2 ITA No. 5448/Mum/2012 (A.Y. 2006-07) Dy. CIT vs. Soul Jewels M/s. Pooja Exports, Mumbai, on 05.07.2005, and which had in turn exported the same on 18.11.2005 at Rs.64,78,736/-. There had thus been an under reporting of profit by it, by Rs.41,33,734/- (Rs.64,78,736 - Rs.23,45,002). The diamonds had in fact been purchased by the assessee firm at a cost of Rs.42,29,594/- during the financial year (f.y.) 2004-05, and toward which the A.O. tabulated the latest bills (prior to 31.03.2005), aggregating to 436.10 Cts., for that year. The assessee had thus in fact under-valued its closing stock as on 31.03.2005 by the difference of Rs.18,84,592/- (i.e., Rs.42,29,594 - Rs.23,45,002/-), booking a loss to that extent for that year. Assessment was completed by making an addition for the impugned sum of Rs.41.34 lacs to the retuned income of Rs.3,05,910/-. In appeal, the assessee found favour with the ld. CIT(A), who decided the matter thus:

'5.5 I have considered the submissions of the appellant and the order of the AO. I agree with the contention of the appellant that method of valuation adopted by the learned AO is incorrect. In diamond industry the grade quality of each piece of diamond is different so FIFO method can be applied on identical items and not similar items. In case of identical items, its first value should be as per specific identification method i.e. the actual cost and if the actual cost is not available than it has to be valued following FIFO method. In case of appellant, the actual cost is available and the appellant has rightly valued the same. It has also been pointed out that these polish diamonds were purchased as a trading commodity and hence the same was valued on the basis of actual purchase cost. The said inventory was a direct purchase from M/s. Navkar Diamonds dated April 23, 2004 and transfer of the same inventory was made to the sister concern at cost and not lower of the purchase price as worked out by the AO. Further, the goods are sold to M/s. Pooja Exports who has paid the taxes on same income. The CA certificate to that effect has been submitted by the appellant; hence the same income cannot be taxed twice. So I hereby delete the addition of Rs.41,33,734/-. The grounds of appeal of the appellant are allowed.' Aggrieved, the Revenue is in appeal, raising the following grounds:

'1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer being difference in valuation of closing stock for A.Y. 2005-06 without appreciating that the assessee, inspite of adequate opportunity being provided, failed to discharge the onus of burden of proof and could not be substantiate its claim with relevant documentary evidences.' 3 ITA No. 5448/Mum/2012 (A.Y. 2006-07) Dy. CIT vs. Soul Jewels

3. We have heard the parties, and perused the material on record. The assessee has a closing stock of polished diamonds as on 31.03.2005 and, consequently, an opening stock (as on 01.04.2005) thereof at 436.10 cts., valued at Rs.23,45,002/- (PB pgs. 4, 7), which it has identified as purchased - on 26.03.2004, i.e., during the financial year 2003-04, from M/s. Navkar Diamonds, Mumbai, for Rs.23,45,002/-, vide their bill no.

ND/PD/MAR/07/2003-04 (PB pg.2). The same, therefore, continued to be in the assessee's stock since, i.e., till its sale in July, 2005. The Revenue has not impugned this fact, as by showing the assessee's stock (at 858.27 Cts. as on 31.03.2004) to have fallen below the level of 436.10 Cts. at any time after 26.03.2004 (the said date being wrongly mentioned by the ld. CIT(A) as 23.04.2004). Surely, the FIFO (i.e., first in first out) method of valuation could only be applied in the absence of a direct identification and, two, only separately for the different qualities or grades of diamonds. We may though add that where the assessee's accounts do not exhibit the said different grades, the onus to establish the same is only on it. No under-valuation, however, has been shown by the Revenue, with the assessee adverting to the relevant goods as been sourced from M/s. Navkar Diamonds even before the A.O. (vide its letter dated 20.10.2011), so that it cannot be said to be a case of an after-thought, i.e., before the ld. CIT(A), or of the assessee being unable to substantiate its claim/s before the A.O., as alleged by the Revenue per its ground/s of appeal.

Though an issue as to the said goods witnessing no increase in price from March, 2004 to July, 2005, while correspondingly an abnormal increase between July, 2005 to November, 2005, does arise, no comparative valuation for the period, i.e., for which the assessee held the stock, is on record, so as to contend under- selling. The same, even if so, could only be inferred by applying the GP rate (which is on sale value, and could therefore be worked out on cost as well), which has been assessed by the Department at 6.55% for A.Y. 2005-06 (PB pgs. 9-10) and at 2.43% for the current year, which shows both its extent as well as of it being not constant, but subject to variation. The assessee having ostensibly bought the relevant goods at market value, an enquiry into the abnormal profit of Rs.4.134 lacs (being at 63.81% of the sale price), disclosed on the transaction by M/s. Pooja Exports, only could have, if at all, led to any 4 ITA No. 5448/Mum/2012 (A.Y. 2006-07) Dy. CIT vs. Soul Jewels finding qua under-selling by the assessee, which is the Revenue's case and charge in substance. No case of under-selling is made out in the facts and circumstances of the case.

That being the case, reference to the sale value fetched by Pooja Exports, which definitely is far in excess (of the purchase cost), and thus to its profits, is of little consequence. That the said profit stands taxed in the hands of Pooja Exports, as claimed by the assessee with reference to its assessment orders for the current year (PB pgs. 13-

18), though not of any direct relevance to the assessee, does take away any tax motive from the impugned 'under-selling'. Further, there being no factual basis to the Revenue's case, examining the same on the legal aspects, also sought to be raised by the assessee, does not arise. The Revenue's case is accordingly dismissed.

4. In the result, the Revenue's appeal is dismissed.

प1रणामतः राज व क% अपील खा1रज क% जाती है ।

Order pronounced in the open court on March 27, 2015

Sd/- Sd/-

(Joginder Singh) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मंब ु ई Mumbai; 5दनांक Dated : 27.03.2015 व. न.स./Roshani, Sr. PS

आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to :

1. अपीलाथ" / The Appellant

2. #$यथ" / The Respondent

3. आयकर आयु6त(अपील) / The CIT(A)

4. आयकर आयु6त / CIT - concerned

5. 9वभागीय # त न ध, आयकर अपील,य अ धकरण, मुंबई / DR, ITAT, Mumbai

6. गाड> फाईल / Guard File आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai