Tax Appeal Nos. 1026 and 1027 of 2013

M.R. SHAH AND R.P. DHOLARIA, JJ.

Sudhir M. Mehta for the Appellant.

ORDER

M.R. Shah, J. - At the request of Shri Sudhir Mehta, learned counsel appearing on behalf of the appellant, we have called from the Registry the papers of Tax Appeal No.1027/2013 for admission hearing. We have called the papers of Tax Appeal No.1027/2013 from the Registry for admission hearing alongwith Tax Appeal No.1026/2013, which is on board, as in both the appeals, the common impugned judgment and order passed by the learned Income Tax Appellate Tribunal [hereinafter referred to as "ITAT"] are under challenge and we have heard Shri Sudhir Mehta, learned counsel appearing for the appellant on admission hearing of Tax Appeal No.1027/2013 also while hearing Tax Appeal No.1026/2013.

2. As common question of facts and law arise in both these tax appeals and as such they arise out of the impugned common judgment and order passed by the learned ITAT, both these appeals are disposed of by this common order.

3. Feeling aggrieved and dissatisfied with the impugned common judgment and order passed by the learned ITAT dated 17.05.2013 in ITA No.359 and 4/Ahd/2008 for the assessment year 2004-05, by which the learned ITAT has dismissed the appeal preferred by the Revenue [ITA No.4/Ahd/2008] and has partly allowed the appeal preferred by the assessee being ITA No.359/Ahd/2008 and reduced the net profit to 7.5% instead of net profit at 8% as adopted by the learned CIT(A), Revenue has preferred the present appeals.

3.1. In Tax Appeal No.1026/2013 which is arising out of the impugned order passed by the learned Tribunal in ITA No.4/Ahd/2008, the Revenue has proposed the following substantial question of law.

"Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT has correct in applying net profit of 7.5% on gross receipt, instead of specify decides on facts on the disallowance unverifiable and inflated labour charges made by the AO?"

While preferring Tax Appeal No.1027/2013 arising out of the impugned judgment and order passed by the learned ITAT in ITA No.359/Ahd/2008, the Revenue has proposed the following substantial questions of law.

4. Facts leading to the present appeals in nut-shell are as under:

4.1 That the assessee, who is engaged in the business of polishing diamond on job work basis filed his return of income for the assessment year 2004-05. That during the year the assessee has shown diamond labour income of Rs. 24,98,00,504/- as against the previous years labour income of Rs. 80,45,399/-. That alongwith other expenses such as electric power expenses; telephone expenses; octroi expenses; diamond tuition fees and auditorium expenses, the assessee claimed the laser cutting charges of Rs. 1,27,30,551/- under operating expenses. The assessee also claimed deduction towards labour expenses. That the AO passed the assessment order determining the total income at Rs. 6,41,82,992/-, after making following additions.

4.2 Feeling aggrieved and dissatisfied with the assessment order making above additions, assessee preferred an appeal before the learned CIT(A) and the learned CIT(A) vide order dated 26.11.2007 partly allowed the said appeal and directed the AO to compute the assessee's income at the rate of 8% of the job receipt as against the income declared by the assessee at 7.13% and other additions were directed to be deleted.

4.3 Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A) deleting the addition of Rs. 1,00,000/- and Rs. 10,000/-made by the AO in respect of diamond tuition expenses and auditorium expenses respectively as well as deleting the addition of Rs. 48,48,440/-and Rs. 1,24,360/- made by the AO in respect of electric power expenses and out of electric bills respectively as well as deleting the addition of Rs. 10,00,000/- made by the AO in respect of laser expenses and auditorium expenses respectively as well as deleting the additions of Rs. 1,50,00,000/- and Rs. 4,22,95,871/- made by the AO in respect of manufacturing expenses and labour expenses respectively.

4.4 Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A) in directing the AO to compute the assessee's income at the rate of 8% of the job receipt as against the income declared by the assessee at 7.13%, the assessee also preferred appeal before the learned ITAT and by impugned common judgment and order, the learned ITAT has dismissed the appeal preferred by the revenue and has partly allowed the appeal preferred by the assessee reducing the profit rate at 7.% against 8% as held by the learned CIT(A).

4.5 Feeling aggrieved and dissatisfied with the impugned common judgment and order passed by the learned ITAT, the revenue has preferred the present appeals with the aforesaid proposed questions of law.

5. Shri Sudhir Mehta, learned counsel appearing on behalf of the appellant - revenue has vehemently submitted that the learned ITAT has erred in law in restricting to 7.5% of total job receipt while the learned CIT(A) directed the AO that the income of the assessee be computed at 8% of the turnover.

5.1 It is submitted that as such the learned ITAT has not given any cogent reasons for restricting to 7.5% of the total job receipt. It is further submitted that the learned ITAT has erred in law in restricting to 7.5% of total job receipt, when the assessee himself declared job receipt at 7.13% which would only result in a very nominal addition in view of the grave magnitude of discrepancies found. It is further submitted by learned counsel for the appellant that the learned Tribunal has materially erred in allowing the excess payment of laser expenses in comparison to the prevailing market rate to the persons governed under section 40A(2)(b) of the Act of Rs.10,00,000/-.

5.2 It is further submitted by Shri Mehta, learned counsel appearing on behalf of the appellant that learned ITAT has erred in confirming the order passed by the learned CIT(A) in deleting the addition of Rs.4,22,95,871/- made on account of unverifiable and inflated labour charges.

5.3 It is further submitted that the learned ITAT has failed to appreciate that the AO issued summonses under section 131 to various parties and it was found that the addresses were not true and the parties were not available on their respective addresses and thereby the AO came to the conclusion that net profit has been manipulated by the assessee by computing the labour charges.

Making above submissions, it is requested to admit/allow the present appeals.

6. Heard Shri Sudhir Mehta, learned counsel appearing on behalf of the appellant.

6.1 So far as the deletion of addition of Rs.10,00,000/- made by the AO in respect of laser expenses [proposed substantial question No.2[A] in Tax Appeal No.1027/2013] is concerned, while making such deletion, the learned CIT(A) has observed that the laser expenses paid to Ravi Laser and Shri Bhavin Zadafia, the payment to them are reflected in the regular books of account maintained by the assessee and they are supported by the proper bills of the parties. The learned CIT(A) has also observed that the AO has neither noticed any defect in their bills nor the AO has brought on record any comparable cases to show that excessive payments were made which could be hit by mischief of provisions of section 40A(2)(b) of the Act.

Making above observations, the learned CIT(A) has directed to deleted the disallowance of Rs.10,00,000/- made by the AO on estimated basis. The learned ITAT has confirmed the aforesaid deletion by observing in para 12 as under:

"12. From the assessment order, we find that this disallowance was made by the AO on the basis that the assessee had hired machinery from M/s. Zadafia as well as used his own machinery. He has also noted that the partners had not complied with the AO's summons. He further notices that a sum of Rs. 11,25,715/- is outstanding for laser charge in the books of account of the assessee as dues payable to Shri Bhavin M. Zadaphyia. He further noted that the assessee had shown laser charges of Rs. 7,36,364/-paid to Shri Bhavin M. Zadaphyia on account of polishing of diamonds but he had made entry in the name of Urvesh M. Zadaphiya. By making these observations, the AO made addition of Rs.10 lacs out of laser charges paid to Shri Bhavin M. Zadaphyia. The same has been deleted by the learned CIT(A) on the basis that the AO had made lump sum addition without assigning any reason at all. He also noted that Shri Bhavin M. Zadaphyia operated from same premises and he was distant relative of the assessee and it cannot be a valid reason to disallow any payment made to him. This finding of the learned CIT(A) could not be controverted by the learned Departmental Representative of the Revenue that disallowance was made by the AO on lump sum basis for vague reasons which are not found to be valid and hence, on this issue also, we do not find any reason to interfere in the order of the learned CIT(A). Accordingly, we hereby reject this ground of appeal of the Revenue."

Considering the aforesaid facts and circumstances and the finding given by the learned CIT(A), it cannot be said that the learned CIT(A) and/or learned ITAT have committed any error in deleting the aforesaid deletion of Rs.10,00,000/-.

6.2 Now, so far as deleting the addition of Rs.4,22,95,871/- made by the AO on unverifiable inflated labour charges and directing the AO to compute the assessee's income at 7.5% on gross receipt, it appears that the total turnover of the assessee during the assessment year worked out to Rs. 24,98,00,504/- and while submitting Rs.15,96,12,007/- as labour payments to various parties. However, the AO disallowed Rs.4,22,95,871/- with respect to the labour payments to various parties and made addition of the aforesaid amount on account of unverifiable and inflated labour charges. While deleting such additions, the learned CIT(A) observed in para 8.6 as under:

"8.6 I have gone through the submissions of the appellant and perused the record of the Assessing Officer. Discrepancies noted in the quantity of rough and polished diamond are totally illfounded as shortage gets accounted on account of laser cutting which is normal and the lot wise break of the same is reflected in the primary record itself and therefore, the issue does not need much elaboration. And therefore AO's action can not be upheld. The yield is in line of normal trend in the business. Cutting is bound to lead to certain losses in weight. Regarding the allegation of labour inflations it is seen that the appellant has submitted voluminous record relating to receipts of job work, labour expenses, labour register, labour bills, Jangad books, bank statements and confirmation of the labour parties, together with the copies of their individual I.T Returns and allied accounts, including personal attendance before the Assessing Officer. The appellant has maintained regular books of accounts which are found to having been maintained on day-to-day basis, these are audited by the Chartered Accountants and the return is supported by tax audit report u/s. 44AB. The Assessing Officer neither detected any defects/discrepancies in the accounts of the appellant nor any cogent evidence brought on record. The AO has basically reasoned out the disallowance on the basis of small gaps in the statement of actual job workers who do not work directly under the proprietor and hence could not have met him personally. Most of the job workers are organized by a few trusted people who supervise the manufacturing assignments and wage payments on behalf of the proprietor. The AO has also not taken in to consideration the fact that actual production and dispatch of manufactured diamonds has not been adversely commented upon nor any such finding given. The prevalent market rate of wages per carat diamond is also in the same range. The overall profitability of business and net profit ratio is relatively higher than what has been disclosed by the similarly placed parties in the same range of turnover. In cases of Shri Dhanjibhai Bhagwanbhai Patel v. Dy. CIT Investigation [IT Appeal No.780 (Ahd.) of 2001] and Bhadiadra Diamonds [IT (SS) No.16 & 18/Ahd/1999] 6% is held to be a reasonable G. P. in a regular diamond case. Further in another Ahmedabad ITAT decision in the case of Atul M. Zaveri (HUF) v. ITO [IT Appeal No.2128 (Ahd) of 2003] wherein in the similar circumstances of job work receipts were involved it was decided that 3% profit can be reasonable estimated in respect of job work activities. It has been brought to my notice that in the said case labour charges running into crores of rupees to more than 300 parties were paid in cash. The Assessing Officer had issued summons u/s. 131 to various parties, it was found that the addresses were not true and parties were not available on their respective addresses. The assessee was also not able to produce the parties before the Assessing Officer. Other expenses like salary, brokerage and assortment charges were also not verifiable. In such circumstances 3% was held to be reasonable estimate of profit. In the case before me over all picture of the business, which is of job work, reveals 7.31% as net profit which is perhaps far better than the prevailing N. P. ratio in this line of business. The purpose of scrutiny is to ascertain correct income. The department has been empowered to carry out investigation, examine concerned parties, reject books of accounts, carry out surveys or search and seizure operations to find out correct income. The taxpayer is also expected to maintain books of accounts bills and vouchers and various registers basically to substantiate his claim of income. In both cases only taxable income is to be ascertained or substantiated. Blind confirmation of the additions in the present case would mean assessing the appellant at the net profit rate of 32.25% which would be ridiculous in this lien of business where jurisdictional ITAT has held profit between 3% to 6% to be reasonable. Even if, hypothetically, if no books of accounts were kept or produced can such estimation of income be termed as reasonable, is the moot question. The written submissions of the appellant which have been reproduced above and have been carefully gone through by me have substantially taken away the force of the argument of the A. O. If rough diamonds have been received and polished returned and nothing is doubted about the same, surely some job charges will be paid. And the entire payment is through bank and no cash is paid to any party. Whether the rate of job charges is excessive or higher than the prevalent market rate can be examined. But in the case before me no such case is made. AO's main arguments that no prudent person will give the rough diamonds to be polished to outside parties who can not overcome the risk involved in frequent and virtually daily physical movement of precious items, especially when the appellant himself has his own fully secured factory along with the fact that some parties themselves were not knowing the assessee proprietor himself and that Mr. Vanmali was the effective leader of the seven suspect parties by his own admission, can not justify huge addition so made overlooking the income offered to taxation.

Nevertheless fact of discrepancies as noted also prove that everything is not perfect with appellants claims of wage payments too. There is certain scope, however meagre it may be on account of adequacy of taxable income offered, of possible inflation. In my view it will be reasonable if the income from the business is estimated at 8% of the turnover. The addition made on this point deserves to be deleted.

Therefore in the light of facts and circumstances of the case the AO is directed to compute appellants' income at the rate of 8% of the job receipts."

That the aforesaid findings of the learned CIT(A) has been confirmed by the learned ITAT. When it was found that the assessee has submitted voluminous records relating to receipts of job work, labour expenses, labour register, labour bills, bank statements and confirmation of the labour parties, together with the copies of their individual IT returns and when the assessee maintained regular books of accounts which are found to have been maintained on day-to-day basis and the same are audited by the Chartered Accountants and the return is supported tax audit report under section 44A(2)(b) and when the AO neither detected any defect nor discrepancies in the accounts of the assessee when the learned CIT(A) as well as the ITAT have deleted the aforesaid disallowance of Rs.4,22,95,871/- and when the learned ITAT has directed to compute the income at 7.5% on gross receipt, it cannot be said that the learned ITAT has committed any error which calls for interference of this Court. We are of the opinion that the reasoning given by the learned CIT(A) as well as the ITAT. It cannot be disputed that the estimation of proper rate is permissible and is, accordingly, done by the learned ITAT. As such no question of law much less substantial question of law arise in the present appeals.

7. In view of the above, both these tax appeals deserve to be dismissed and are, accordingly, dismissed.