PER CHANDRA POOJARI, AM: The appeal and the stay application by the assessee are directed against the order of the CIT(A)-IV, Hyderabad dated 30.6.2011 for the assessment year 2008-09.
2. The assessee raised the first ground of appeal with regard to sustaining the partial disallowance of the addition at Rs. 1,32,01,183 out of the disallowance of Rs. 7,46,50,849 made by the Assessing Officer towards production loss due to wastage at 5.403%.
3. Brief facts of the issue are that the assessee is a company engaged in manufacturing and sale of gold and silver ornaments, SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== besides trading in bullion. The assessee had claimed wastage of gold, silver and real stones. As required by the Revenue authorities, the submitted a "Note on Wastage" stating that gold bullion is processed in their factor for manufacturing of jewellery. Some items are given to the karigars to carry on jewellery making on job work basis. Other items are manufactured in in-house factory. Regarding the job work given to the karigars, issues to them and receipts from them are recorded in operational sheets. Entries are passed every month on the basis of the details available in respect of the karigars. with regard to the factory production, production activities are carried on in the following departments:
a) Casting department,
b) Ghat-1 department,
c) Ghat-II department (hand work)
d) Buffing department
e) Setting department
f) Tagging department
4. It was explained that loss of material happens in these departments. Physical stock is taken once in a month in all these departments. The difference between the stock as per books and physical stock is considered as wastage in the factory and entry is passed at the end of the month and the wastage in the factory and the wastage in the process of job work is the total wastage. In the year under consideration the wastage in factory is 46296 grams and the wastage in the job work is 12668 grams and the total SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== wastage is 58964 grams (including consumption in plating of 2024.600 grams).
5. The Assessing Officer observed that the assessee was claiming wastage purely on estimate basis and no day to day accounts of loss of gold in the form of wastage had been maintained. The contention of the assessee that 'entries have been passed every month on the basis of details available in respect of the karigars', the Assessing Officer noted that the same applied only to the wastage occurring in the process of job works with karigars. The Assessing Officer opined that the assessee had not been able to explain any reason for the loss occurring at the factory in the form of wastage. The Assessing Officer concluded that the assessee is making entries towards 'wastage' as per its own convenience, without following any accounting principles and had not mentioned the quantum of loss in any statutory register required to be maintained for stock for various authorities. The entries are being passed on monthly basis on the basis of the details available in respect of the karigars, for which no day to day accounts are maintained. The Assessing Officer felt that having such a huge turnover, the assessee should have maintained day to day accounts for the loss of metals due to wastage. The Assessing Officer held that the assessee failed to substantiate its claim of wastage, he disallowed the entire amount of Rs. 7,46,50,849 SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== claimed by the assessee. On appeal, the CIT(A) allowed the wastage at 3%.
6. The learned counsel for the assessee, before us, submitted that there was wastage for the earlier year and also subsequent years as follows: Particulars Assessment year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Commodity Gold Gold Gold Gold Gold Gold Unit of measurement Grams Grams Grams Grams Grams Grams Opening stock 11586.79 45631.02 52709.08 65933.60 102800.88 79419.36 Add: Purchase during year (less Purchase return 426791.89 641507.26 726790.82 1090582.13 661054.93 604977.27 438778.68 687138.28 779499.89 1156515.73 763855.81 684396.63 Less Closing stock 45128.45 52709.08 65933.60 102800.88 79419.35 64446.56 Production during the year (including production loss) 393250.23 634429.21 713566.30 1053714.85 684436.46 619950.07 Production loss (wastage) 13519.76 30400.00 46415.72 56940.06 29851.36 23240.62 Percentage (%) 3.44 4.79 6.50 5.40 4.36 3.75
7. The learned counsel for the assessee also drew out attention to the rate of net profit as below: Assessment year % of NP 2005-06 1.23 2006-07 1.59 2007-08 1.68 2008-09 1.92 2009-10 1.50 2010-11 2.25
8. From the above, he submitted that for the A.Y. 2008-09, the rate of net profit is 1.92% which is higher than the earlier year and as such books of account are to be considered as true and correct and there cannot be any chance for estimation of wastage or estimation of income by the lower authorities. Further, he SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== submitted that the CIT(A) relied on the Notification issued under Customs Act bearing No. 52/2003 dated 31st March, 2003 wherein wastage in case of (a) plain jewellery and articles thereof un- studded is at 3.5% and (b) studded jewellery and articles thereof at 9%. He submitted as per the circular the wastage claimed by the assessee is within the permitted figures of wastage prescribed by the Notification received under Customs Act. Further, he submitted that thereafter new notification has been issued by Customs department bearing NO. 84/2007 Customs, dated 6.7.2007 and 47/2008 New Delhi dated 11th April, 2008. However, there was no change in the percentage of wastage prescribed therein. Further, he submitted that the assessee's claim of wastage at 5.403% is less than the rate of wastage claimed by different units in this line of business. He also relied on the judgement of Delhi High Court in the case of CIT vs. Aero Club (336 ITR 443) wherein it was held as under: "The assessee was engaged in the business of manufacturing and trading of footwear. The assessee filed its return for the assessment year 1994-95 but did not annex the audit report. The Assessing Officer estimated the profit and adopted the income of Rs. 17,28,389. Before the Commissioner (Appeals) the assessee contended that the assessee's group was merely in the business of exports to the USSR, and after its disintegration, the assessee had started the business of local manufacture and sales. This being the initial year of business, the turnover was low. The assessee was incurring losses. It was pointed out by citing the comparable case of B that in the year 1994 the declared profit before tax was 0.19 per cent, and if this rate was applied to the turnover of the assessee as accepted by the Assessing Officer, the net profit in the SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== case of the assessee would come to Rs. 1,19,415, whereas the assessee had declared a profit of Rs. 6,60,883 in its audited profit and loss account. The Commissioner (Appeals) held that the net profits as declared by the assessee could not be disturbed. This was upheld by the Tribunal. On appeal to the High Court: Held, dismissing the appeal, that the Commissioner (Appeals) and the Tribunal rightly set aside the best judgement assessment of the Assessing Officer on the ground that the Assessing Officer had not brought on record any comparable case wherein the net profit declared by a taxpayer in a similar business was higher than the one declared by the assessee. The profit margins of a tax payer as declared by him, could be varied and disturbed only if the profit margins in the case of other assessees engaged in similar business are higher. The assessee had brought on record evidence that in the case of a company having similar business, the declared profits were in fact lower than the profits declared by the assessee. The Assessing Officer in his remand report was also unable to comment on the comparable case of B and A relied upon by the assessee. In the circumstances, the Tribunal rightly held that the net profit as declared by the assessee was not required to be disturbed."
9. Further, he submitted that the assessee meticulously maintained the stock register and there is no rejection of accounts by the Assessing Officer. Without rejecting the books of account wastage cannot be determined arbitrarily. He drew our attention to Paper Book page Nos. 80 to 84 where the assessee quantified the wastage on periodical basis.
10. The learned DR strongly opposed the argument of the assessee's counsel and relied on the order of the CIT(A). SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. ===============================
11. We have heard both the parties and also perused the material available on record. In this case, the Assessing Officer made disallowance towards wastage on the reason that the assessee did not maintain day to day account of wastage. According to the Assessing Officer the assessee is making entries regarding wastage as per his convenience and no contemporaneous records have been maintained regarding quantification. But the Assessing Officer lost sight of the fact that there is wastage while manufacturing gold jewellery and the wastage claimed by the assessee has to be allowed and it should be on reasonable basis. As seen from the net profit declared by the assessee, the net profit for the present assessment year is at 1.92%. However, the same is 2.25 for assessment year 2010-11. Further wastage claimed by the assessee for assessment year 2008-09 is 5.4%. However, the same for assessment year 2009-10 is 4.36% and the wastage claimed by the assessee is as follows: Particulars Assessment year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Commodity Gold Gold Gold Gold Gold Gold Unit of measurement Grams Grams Grams Grams Grams Grams Opening stock 11586.79 45631.02 52709.08 65933.60 102800.88 79419.36 Add: Purchase during year (less Purchase return 426791.89 641507.26 726790.82 1090582.13 661054.93 604977.27 438778.68 687138.28 779499.89 1156515.73 763855.81 684396.63 Less Closing stock 45128.45 52709.08 65933.60 102800.88 79419.35 64446.56 Production during the year (including production loss) 393250.23 634429.21 713566.30 1053714.85 684436.46 619950.07 Production loss (wastage) 13519.76 30400.00 46415.72 56940.06 29851.36 23240.62 Percentage (%) 3.44 4.79 6.50 5.40 4.36 3.75 SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. ===============================
12. The average wastage works out at 4.71%. Considering the rate of net profit at 1.92% for the present assessment year which is higher than all earlier years giving weightage towards this, we make wastage at a round figure of 5% considering the facts and circumstances of the case. Further, we make it clear that our observation is only to the present year under consideration and this finding shall not prejudice the Assessing Officer while completing the assessment for any other assessment year. This ground of the assessee is partly allowed.
13. The next ground is with regard to addition towards stock variation. Brief facts of the issue are that there was difference in closing stock shown by the assessee in bank statement as compared to the return of income which is as follows: Metal As per Bank Statement (Rs.) As per Return of income (Rs.) Difference (Rs.)
1. Gold 12,03,97,265.00 9,91,87,965.00 2,12,09,300.00
2. Silver 2,039.11 1,651.00 388.11
3. Other metals 2,67,44,498.69 2,00,97,029.00 6,47,469,69.00 Total 2,78,57,157.80
14. The Assessing Officer made addition of Rs. 2,78,57,158. On appeal the CIT(A) sustained the addition only to the extent of Rs. 9,27,810 with reference to the variation in the quantity. There is excess stock of 45 ct of diamonds. Against this the assessee appeal is in appeal before us.
15. The learned counsel for the assessee submitted that the Assessing Officer added a sum of Rs. 2,78,57,158 on account of SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== differences in the valuation of closing stock as per statement furnished to bank and as per books of various items. Out of this addition, the CIT(A) has confirmed addition of Rs. 9,27,810 and deleted the balance addition of Rs. 2,69,29,348. The learned counsel for the assessee invited the attention of Bench to para 18.5 of the order of the CIT(A) which shows the quantity of stocks as per books and that as per bank statement. The total quantity of diamonds which includes polka and URD as per statement given to bank as on 31.3.2008 is 1605 ct and the quantity of stock as per books is 1560 ct. There is a variation of 45 ct and the CIT(A) valued the difference at Rs. 20,618 per ct as shown in the bank statement. Doing so, the value came to Rs. 2,97,810 which was sustained by the CIT(A).
16. Regarding the variation in the quantity of stock, the learned counsel for the assessee submitted that every month stock statement has to be filed before 5th of the succeeding month. The time is so short that there are bound to be some variations in the quantities and valuation due to arithmetical and calculation errors. The stock statement filed with the bank is accepted even if there are any variations as long as they are marginal. The assessee does not go into precise calculations while preparing stock statement to the bank. Mostly quantities are rounded off while calculating. If the variation is considered in relation to the total stocks held, it is marginal in nature. The closing stock SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== valuation for the purpose of books is more authentic figure as the same is prepared with better care and precision. Every efforts is made to rectify error if any, while valuing the stocks for the purpose of books. The stock statements filed with the banks are primarily made to assure the bank that their loans are well secured and, therefore, small variations are generally ignored for reconciliation of the figures stated in the statement to bank with actual stocks. Accordingly, the learned counsel for the assessee submitted that the difference in the physical quantity of stocks at
45 ct may be ignored and no addition is warranted.
17. The learned counsel for the assessee further submitted that even the value taken at Rs. 20,618 per ct is not correct. The difference of 45 ct (even if true) is taken as entirely that of diamonds whereas the grouping is diamond polka, diamonds and URD. The value is as follows: Description Value as per bank state (Rate per ct.) Value as per books (Rate per ct.) Diamond polki Rs. 700 (mostly rejects) Rs. 12,465 Diamonds Rs. 20618 Rs. 11,665 Diamonds (URD) - Rs. 17,976
18. The learned counsel for the assessee further submitted that the difference could have occurred either in diamond polki or diamonds or diamond URD because they are grouped as per unit. Value shown in books is at cost while values as per bank statement is approximate realisable values. Therefore, valuing the difference of 45 ct at Rs. 20,618 per ct is not justified. In any SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== event, the difference of 45 ct is only due to calculation errors in the statement, but physically the said stock never existed. It would be unjust to treat any difference between the stock statement and book stock as if the said stock existed but not declared. Since the stock statements are intended for the bank to be satisfied about the availability of adequate security to cover its loan, the statement is so prepared with reasonable accuracy, but not tallying the same to the last gram or last ct or to the last rupees. As far as the assessee is concerned, it tried to be as precise as possible while reporting the existence of stocks to the bank but variations are bound to be there in any such statements given to bank because of the factors explained above. Accordingly the learned counsel for the assessee submitted that the variation of 45 ct deserves to be ignored and no addition is called for and without prejudice, it is contended that the valuation sustained by the CIT(A) at Rs. 9,27,810 is excessive.
19. The learned DR relied on the order of the CIT(A).
20. We have heard both the parties and perused the material available on record. In the present case, there is variation in quantity at 45 carats of diamonds in the stock statement submitted to the bank as compared to the books of account. As per bank statement it is 1605 ct and as per closing stock it is 1560 ct of diamonds in books of account. When the assessee claims that books of alone is correct and inflated stock statements given SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== to bank are motivated, heavy burden lies on the assessee to prove the correctness of the claim. The practice of inflation of stock in statements given to bank is not shown to exist nor that it has been recognised in commercial circle or by the court even assuming that such practice exists, we are not expected to take judicial notice of such practice so as to enable the assessee to go back on his own statement given to the bank as to the stock held or hypothecated to the bank. In view of this, we are of the opinion that the stock register of the assessee is not reliable and on this count the addition made is sustained. This ground of the assessee is dismissed.
21. The assessee filed Stay Application No. 107/Hyd/2011 seeking stay of demand of Rs. 1,54,29,528 and the same becomes infructuous as we have disposed of the appeal itself.
22. In the result, appeal of the assessee is partly allowed and the Stay Application is dismissed. Order pronounced in the open court on _26th December, 2011. sd/- sd/- Sd/- (H.S. SIDHU) JUDICIAL MEMBER Sd/- (CHANDRA POOJARI) ACCOUNTANT MEMBER Hyderabad, dated the _26th December, 2011 SA No. 107 & I.T.A No 1326/Hyd/2011 M/s. Sanghi Jewellers Pvt. Ltd. =============================== Copy forwarded to:
1. M/s. Sanghi Jewellers Pvt. Ltd., c/o. Shri Y. Ratnakar, Advocate, Tilak Road, Hyderabad.
2. Asst. Commissioner of Income-tax, Circle-3(1), Hyderabad.
3. The CIT(A)-IV, Hyderabad.
4. The CIT-III, Hyderabad.
5. The DR A Bench, ITAT, Hyderabad tprao
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