Gujarat H.C : Whether when at time of framing of scrutiny assessment, assessee had furnished details of valuation of polished diamonds and methodology for working of average cost of polished diamonds as well as rough diamonds and had also disclosed its interest liability as well as details of advances made during year and being satisfied with details given in disclosures

High Court Of Gujarat

Balar Exports vs. DCIT, Central Circle -1

Assessment Year : 2003-04

Section : 147

Akil Kureshi And Ms. Sonia Gokani, JJ.

Special Civil Application No. 16401 Of 2010

April 4, 2011

ORDER

Akil Kureshi, J. – The petitioner assessee, a partnership firm is engaged in the business of export of diamonds. In the present petition, the assessee has challenged a notice dated 29.3.2010 issued by the respondent Deputy Commissioner of Income-Tax under Section 148 of the Income-tax Act, 1961 (hereinafter referred to as ” the Act”) stating that he has reason to believe that income of the assessee chargeable to tax for the assessment year 2003-2004 has escaped assessment within the meaning of Section 147 of the Act. The assessee was, therefore, required to file a return of income for the said year.

2. Briefly stated the facts are as follows:-

2.1 For the assessment year 2003-2004 the assessee had filed return of income showing income of Rs. 1,41,74,770/- after claiming deduction under Section 80HHC of the Act.

2.2 The return of the assessee was taken in scrutiny assessment. The Assessing Officer framed assessment on 24.3.2006. By detailed order he computed total income of assessee at Rs. 1,42,86,450/- after giving benefit of deduction under Section 80 HHC of the Act as found admissible.

2.3 By way of impugned notice the assessment was sought to be reopened by the respondent on the ground that income of the assessee for the assessment year in question had escaped assessment.

2.4 The respondent had separately recorded reasons for such proposal of reopening of assessment, which read as follows:-

“In this case assessment u/s.143(3) was completed on 20.02.2006 on total income of Rs. 1,42,86,450/- against the returned income of Rs. 1,41,74,770/-.

Point-1

The assessee was having closing stock of polished diamond of Rs. 12,916.01 carat which was valued at Rs. 9,88,83,587/- at the rate of Rs. 7,656/- per carat. The manufacturing cost of the polished diamond was Rs. 8,089 per carat. The assessee had sold the polished diamond at the average rate of Rs. 10,266 per carat. It was seen that the rate of Rs. 7,656/- adopted by the assessee on the closing stock of polished diamond is without any basis or justification. The assessee had undervalued the closing stock of polished diamond by Rs. 433 per carat leading to suppression of income by Rs. 55,92,632/- (12,916.01 × Rs. 433).

Point-2

It was seen from the assessment records that the assessee had purchased rough diamond of 75850.45 carats at an average rate of Rs. 2982.52 the assessee was having stock of 62491.41 carats of rough diamonds. Thus the total quantity of 138341.86 carats stock of rough diamond was available with the assessee during the year and out of which 68396.39 carat were issued for manufacturing. It is noticed that the closing stock of rough diamond was valued at the average rate of Rs. 1238.91 per carat whereas the same should have been valued at cost or market whichever is lower. As the assessee purchased the rough diamond at the rate of Rs. 2982.52 per carat during the year and the assessee valued the closing stock of rough diamond at the rate of Rs. 1238.91 per carat. Thus the assessee has undervalued the closing stock of rough diamond by Rs. 121958030/-. The income escaped has been worked out to Rs. 60979015/- with consequent tax effect of Rs. 30757434/- (considering the 50% U/s. 80HHC deduction).

Point-3

The assessee claimed interest expense of Rs. 32,08,394/- and shown interest receipt of Rs. 69,599/-. It is observed that the assessee has advanced interest free loans of Rs. 17,17,290/- to three relatives. Thus, the assessee has diverted the borrowed funds for advancing interest free loans. The interest so disallowable to Rs. 2,06,075/- and consequent tax effect of Rs. 1,03,943/-.

The assessment u/s.143(3) was completed on 20.02.2006 and income chargeable to tax has escaped assessment for the A.Y. under consideration. The facts and issues discussed above were come to notice after completion of assessment proceedings and were not discussed during the original assessment proceedings and the assessee also failed to disclose fully and truly all material facts as discussed above. Therefore, the case required to re-open u/s.147. Issue notice u/s.148 IT Act. “

2.5 Such reasons were communicated to the assessee. The assessee raised objections to the proposal to reopen assessment vide communication dated 18.11.2010. Such objections were, however, disposed of by the respondent by order dated 13.12.2010.

3. The assessee, therefore, has approached this Court in the present petition challenging such reopening of the assessment. We may notice that by the time the assessee approached the Court, it appears that draft assessment order was already passed. However, the Division Bench of this Court by order dated 23.12.2010 restrained the respondent from proceeding further pursuant to impugned letter dated 29.3.2010. No final order of assessment has been passed.

4. We have heard learned counsel for the parties for final disposal of the petition.

5. It is the case of the petitioner that in the return filed, the assessee had given detailed working out of the closing stock and the price of the diamonds adopted for working out such closing stock to the Assessing Officer. By communication dated 4.8.2005 it was conveyed that closing stock of rough diamonds had been valued at cost price whereas the same for polished and rejected diamonds were made at cost or market price whichever was lower. During the assessment proceedings the assessee had also addressed a letter dated 10.11.2005 showing the loans and advances given by the assessee during the said year. Supporting documents were produced with respect to both the issues, namely, valuation of the diamonds for the purpose of closing stock as also with respect to loans given to three individuals which pertains to point No.3 in the reasons recorded. It is also the case of the assessee that during the assessment proceedings all issues were examined by the Assessing Officer threadbare. Detailed correspondence was entered into, documents were demanded and supplied. All issues were examined in detail in a speaking order of assessment passed by the Assessing Officer. In short, it is the case of the assessee that it had supplied along with the return all necessary details to permit Assessment Officer to frame the assessment. Certain details, which were required during scrutiny assessment, were also supplied.

6. On the basis of above factual contentions, assessee had raised objections to the reopening notice vide communication dated 18.11.2010 opposing the proposal on various grounds, including on the grounds that proper valuation of closing stock was made, proposed reopening of concluded assessment order would be invalid, that the issue of advances, totaling to Rs. 17,17,290/- to three individuals was before the Assessing Officer and no disallowance of interest on account of interest free advances to these individuals was made by the Assessing Officer. Any other view at this stage would only amount to change of opinion. It was also contended that the assessee had even otherwise large funds available on which no interest was paid. It, therefore, cannot be stated that interest bearing funds were diverted for advancing interest free loans. In short, the assessee contended that proposed reopening beyond 4 years from the end of relevant assessment year in view of the provisions contained in Section 147 of the Act, would not be permissible.

7. The respondent, however, by communication dated 13.12.2010, which has also been impugned in this petition, disposed of such objections holding that before reopening, proper reasons were recorded and approval of the Commissioner of Income-Tax was also obtained. Reopening pertains to period beyond 4 years but within six years from the end of assessment year. In particular, with respect to valuation of closing stock and diversion of tax bearing funds for making interest free advances he noted as under:

“It is found that the assessing officer did not call for or examine any details for Lot-wise movement of diamond from the stage of purchase of rough to the stage of its final product. The assessee also did not furnished the details to prove that whatever diamond sold was actually part of closing stock only. The assessee also did not furnished the details that which lot of rough diamond was converted and which lots of polished diamonds were produced and its sale to a particular party on a particular date. From the record available, it is not possible to ascertain that whatever bill were produced for sale of diamond in subsequent year were those diamonds which were manufactured in previous year and were the part of closing stock as on 31.03.2003. Accordingly, the contention of the assessee that the present query regarding undervaluation of closing stock of polished diamond is a change of opinion is totally incorrect and not supported by the facts as evident from the records.

Similarly the assessee failed to furnish any nexus between the interest free advances was given from interest free fund in the earlier assessment proceeding. Accordingly, the contention of the assessee that the present query regarding disallowance of interest expenses is a change of opinion is totally incorrect and not supported by the facts as evident from the records. “

8. On the basis of above sequence of facts, learned counsel for either side made detailed submissions before us. Learned counsel Mr. J.P. Shah drew our attention to various documents on record to contend that all facts necessary for framing assessment were before the Assessing Officer. After detailed examination and scrutiny, original assessment was framed. Detailed order on all issues was passed. The assessee had disclosed all material facts for assessment. In absence of any failure on the part of the assessee to disclose fully and truly all material facts for assessment, the power of reopening beyond four years cannot be exercised.

9. With respect to point Nos.1 and 2, in the recorded reasons he submitted that the detailed working out of the cost of diamonds for the purpose of closing stock valuation was placed before the Assessing Officer. The Assessing Officer accepted such methodology.

10. With respect to point No.3 pertaining to diversion of interest bearing funds for advancing interest free loans, he contended that all details of such funds were placed before the Assessing Officer. There was no concealment or non-disclosure on the part of the assessee, reopening, therefore, on such a ground was not permissible.

11. On the other hand, learned counsel for the Revenue vehemently contended that the assessee did not accept the market value or the cost of diamonds which ever is lower, instead valued the closing stock at Rs. 7,656/- per carat, which is much lower than both the above prices. He contended that the reasons recorded sufficiently demonstrate such discrepancies. He relied on the affidavit-in-reply to contend that from the details filed by the assessee, it was not possible to ascertain whether the bills were produced for sale of diamonds in subsequent years. Whatever bills were produced for the sale of diamonds were those diamonds which were manufactured in the previous year and were part of the closing stock in the year 2003-2004. With respect to diversion of interest bearing funds he submitted that before the Assessing Officer at the time of original assessment proceedings, full details of advances made to the three parties were not placed. In short, counsel submitted that the notice was valid and reopening for assessment should be permitted.

12. Having thus heard learned advocates for the parties at considerable length though the point raised are three, point Nos. 1 and 2 essentially pertain to the valuation of closing stock.

13. It is the case of the department that the cost of polished diamond was Rs. 8,089/- per carat. Market value at which the assessee sold them was Rs. 10,266/- per carat, whereas for the purpose of valuation of closing stock, the assessee adopted the rate of Rs. 7,656/- per carat. However, the assessee was required to adopt one of the two rates i.e. the cost price or the market value. The assessee, thus, undervalued the closing stock of the polished diamonds. It is further contended that the assessee had also under valued the rough diamonds for the purpose of computing the closing stock. The rough diamonds for the purpose of closing stock were valued at an average rate of Rs. 1238.91 per carat, whereas the same should have been valued at the cost or market price which ever was lower. As the assessee had purchased the rough diamonds at the average rate of Rs. 2982.52/- per carat during the year, the assessee had, thus, undervalued even the unpolished diamonds for the purpose of closing stock.

14. Point No.3 on the other hand, pertains to allegation of assessee diverting its interest bearing funds for the purpose of making interest free advances. It is the case of the Revenue that the assessee had claimed interest expenses of Rs. 32,08,394/-. During the year the assessee had advanced interest free loans of Rs. 17,17,290/- to three relatives. The assessee had thus diverted interest bearing funds for advancing interest free loans. Interest on such loans of Rs. 2,06,075/- was, therefore, disallowable thereby having tax effect of Rs. 1,03,943/- for the year in question.

15. Focusing our attention to the point Nos.1 and 2 of the reasons recorded, which as we have noticed, overlap, essentially pertain to alleged undervaluation of the closing stock. We find that during the original assessment details were placed before the Assessing Officer. In the return filed itself, the assessee had produced the details of working out the closing stock which included polished diamonds, rough diamonds and rejections as under:-

“Less: Closing stock of: Current year Previous year
– Polished Diamonds 98,883,587 86,434,399
– Rough Diamonds 86,656,432 69,746,163
– Rejections 916,961 805,507
186,456,980 156,986,069″

 

Along with the return, the assessee also filed its notes and disclosed as under :

“(1) Significant Accounting Policies:

(d) The Opening & Closing Stock of Rough Diamonds have been valued at Cost Price and the same for Polished & Rejected Diamonds have been valued at Cost or Market Price whichever is lower.”

16. The assessee had also filed Form No. 3CB which is a statement to be furnished under Section 44AB of the Act. One of the items in the form was method of accounting employed in the previous year to which the assessee stated mercantile. Other item was whether there was any change in the method of accounting employed vis-a-vis that employed in the immediately preceding year. The assessee declared no change in the method of accounting employed. In a question as to method of valuation of closing stock employed in the previous year and whether there was any deviation from the method of valuation prescribed under Section 145A of the Act, the assessee answered “Rough diamonds: At cost price, Polished and Rejected Diamonds: At Cost or Market Price which ever is lower. No deviation is made from the method of valuation prescribed under Section 145A.” In the same Form at item No.12, the assessee supplied details of raw-material which included opening and closing stocks of rough diamonds as well as polished diamonds.

17. In a communication dated 4.8.2005 by the assessee to the Assessing Officer it was stated as under:-

“(3) As regards the valuation of closing stock, kindly note that the closing stock of rough diamonds has been made at cost price whereas the same for polished and rejection diamonds were made at cost or market price whichever is lower. The necessary evidences w.r.t. valuation of closing stock are enclosed as Pages No.3 to 13.”

Along with such communication, documents in respect of the above statements were also filed.

18. By letter dated 24.11.2005 the Assessing Officer called upon the assessee to furnish the method of valuation of closing stock of polished and unpolished diamonds along with supporting evidences. The exact query of the Assessing Officer was as follows:-

“3. In Schedule 5 of the Audited accounts, you had shown the polished and rejected diamonds of Rs. 9,88,83,587/- and Rs. 9,16,961/- respectively. In this context, vide this office order sheet entry dated 21-8-2005 your authorized representative Shri Janak Soni C.A. was requested to furnish the method of valuation of closing stock of polished and rejected diamonds along with supporting evidences. The details were required to be submitted by you on 14-10-2005. Perusal of records reveals that the details are yet to be furnished by you. You are, therefore, requested to kindly explain the method of valuation of closing stock of aforesaid stocks along with necessary details/evidences.”

19. The assessee replied to the said letter vide communication dated 23.12.2005. In answer to the above noted query the assessee made the following statement:-

“(1) Please note that the stock of Polished Diamonds is valued at cost or market price whichever is lower basis. In substantiation of the adopted method for valuation, we enclose a statement indicating the various rates at which the closing stock was sold-off by us during the subsequent year as Pages No.3 to 5. The photocopies of the bills indicating the sale rates in the subsequent years are also enclosed as Pages No.6 to 52. Please note that the stock of rejected diamonds is valued at Rs. 22/- per carat.”

Along with the said communication the assessee also enclosed details of valuation of polished diamonds as on 31.3.2003 and the methodology for working out average cost of polished diamonds per carat. It was after the such detailed exercise undertaken by the Assessing Officer he framed his original assessment.

20. Upon perusal of the above documents, we are of the opinion that there was no failure on the part of the assessee to disclose fully and truly all material facts for the purpose of computation of the income of the assessee for the relevant assessment year.

21. With respect to the point Nos.1 and 2 reasons recorded are not sufficient to permit reopening of the assessment. We reiterate that assessee had been adopting particular methodology for valuing his closing stock. For the purpose of closing stock, the assessee had accepted certain valuation for its polished and unpolished diamonds and rejects. Such methodology may or may not be fully acceptable. The question is whether all facts were presented before the Assessing Officer when the original assessment was being framed. We have taken note of details of documents on record, disclosures made by the assessee, answers to the queries raised by the Assessing Officer and find that the assessee cannot be blamed for failure to disclose fully and truly all facts necessary for assessment of the income.

22. With respect to ground No.3 in the reasons recorded we notice that in the return of income filed by the assessee, it had shown loans and advances of Rs. 23,23,284/- against interest liability of Rs. 50,77,260/- of the previous year and it had showed interest liability of Rs. 31,38,795/-. Further vide its communication dated 10.11.2005 the assessee had supplied the details of loans and advances to three individuals, namely, Jignesh G. Navadia, Keyur M. Balar, Jayfun Park Pvt. Ltd. totaling to Rs. 17,17,290/-. In response to the communication it was stated that such details were supplied as desired by the Assessing Officer. Since there was no documents through which such details were called for, we requested learned counsel for the Revenue to produce note sheets to link answer of the assessee to the query raised. Such documents were made available to us. In the note sheet dated 31.8.2005, it is recorded that the representative of the assessee is requested to furnish several details one of them being “loans and advances to Jayfun/Jignesh/Keyur- explanation.”

23. From the above noted details, it can be seen that before the Assessing Officer, at the time of framing scrutiny assessment, all details were available. The assessee had, at the outset, disclosed its interest liability as well as details of advances made during the assessment year in question. Since the Assessing Officer was not fully satisfied, he had raised queries about details of such advances, in particular, in favour of three individuals. Such details were supplied. It cannot be stated that the assessee had not fully and truly disclosed material facts necessary for assessment. Being satisfied with the details given in disclosures, the Assessing Officer did not make any additions in the assessment order ultimately passed.

24. In view of the above, we do not find it necessary to examine the assessee’s contention that even otherwise the assessee had sufficient interest bearing funds and that therefore, it cannot be stated that the assessee diverted its interest bearing funds to non-interest earning advances. Even otherwise, such detailed scrutiny, in our opinion, cannot be part of the challenge to the reopening proceedings.

25. In the result, we find that the reasons recorded and supported by affidavit by the Revenue would not permit reopening of the assessment beyond 4 years. The petition is, therefore, allowed. Impugned notice dated 29.3.2010 and the order rejecting the objections of the petitioner dated 13.12.2010 are quashed with consequential effect. Petition is disposed of accordingly.

[Citation 353 ITR 422]

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