The Surat bench of Income Tax Appellate Tribunal (ITAT) comprising Shri Pawan Singh, JM and Dr Arjun Lal Saini, AM has held that the addition on profit estimation needs to be done on profit to the extent of 6% in trading &manufacturing of diamonds is acceptable as per CBDT Circular.
The appellant is a partnership firm, engaged in the manufacturing and trading of rough and polished diamonds. The assessing officer made an addition of Rs. 52,32,680/- on account of undervaluation of stock of rough diamonds by taking the closing stock valued at 12% than the average rate of the opening stock and no lot wise details were provided though such records are maintained by the manufacturer. CIT(A) held that lot wise details were not furnished and that the average valuation of opening stock of rough diamonds was higher than the valuation of closing stock.
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. It was contended that the assessee has not furnished the quality wise details of diamonds or documentary evidence to substantiate the valuation of closing stock during the original assessment as well as in restoration proceedings. The respondent contended that the assessee could not produce a valuation of inventories and the details filed by the assessee regarding the valuation of closing stock is not credible which was rejected by the assessing officer. The appellant submitted that if the addition is substituted it will amount to a 36% net profit rate of the turnover which is unrealistic and the Gross profit result would be 42% which is also unrealistic.
It was observed that there was an objection of the assessing officer that the complete details were not provided by the assessee, on the other hand, the assessee has now taken the stand as they follow the weighted average basis of valuation for valuation of stock as recognized in para-16 of Accounting Standard -2, dealing with the valuation of inventories issued by Institute of Chartered Accountants of India which was not asserted by the assessee before assessing officer.
The Tribunal observed that Central Board of Direct Taxes (CBDT) Circular No 2/2008 had instructed that profit to the extent of 6% in the trading and manufacturing of diamonds is acceptable as result. Further held that the estimation adopted by CIT(A) is a higher side and directs the assessing officer to consider the unaccounted profit of the assessee at 10% of the sales during the year under consideration, which would be sufficient to avoid the possibility of revenue leakage. The appeal filed by the assessee was partly allowed. The appellant was represented by Shri Hiren Vepari and the respondent was represented by the Shri Sita Ram Meena.
Subscribe Taxscan Premium to view the Judgment
Support our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.