Shreyans Gems (P) Ltd. Vs. Assistant Commissioner of Income - Court Judgment

Excerpt:
1. these are cross-appeals by the assessee as well as by revenue arising from the order of learned cit(a) dt. 24th dec, 2004 for the asst. yr. 2000-01. the assessee has also filed the cross-objection against the revenue's appeal.2. we have heard the parties. in ground nos. 1 to 1.13 in assessee's appeal and ground no. 1 of cross-objection of the assessee, the assessee's main grievance is against the addition on account of undervaluation of the closing stock by rs. 1,74,67,878.briefly stated, the facts as per ao's order are that assessee deals in emerald. during the year, it purchased emerald rough, cut them into stones and then sold them locally. purchases were mostly imported.during the year, the assessee declared sales of rs. 6,69,74,001 on which gp of rs. 25,07,136 at a gp rate of 3.74 per cent was declared against sales of rs. 4,48,40,789 at a gp rate of 12.77 per cent in the immediately preceding year. the ao observed that sales and purchases were fully vouched and stock register has been maintained by the assessee. it was noticed by the ao that while 56,978.82 cts. of emerald cuts were sold for rs. 4,97,39,254 but the closing stock of 43,442.53 cts of the same were valued at rs. 2,40,500 only. the cost of production was worked out as under: particulars rough carats value sale rate opening stock 95,510 45,71,420 import 2,68,515 1,69,94,822 21,980 import 1,07,171.50 1,93,48,903 3,850 -------------- --------------- --------- in response to show-cause notice, the assessee filed his explanation vide letters dt. 14th dec, 2002 and 24th dec, 2002. the explanation of the assessee was that rough (emerald) used in production was imported vide bills dt. 9th april, 1999 (268515 cts.) and 11th may, 1999 (107171.50 cts.) as per which cost veried from 1 us dollar to 30 us dollar per carat. the better quality emerald cut was sold out and what remained in balance was the lower quality. copies of both the bills have been filed. the ao observed that there is no evidence that cheapest quality rough was used in producing the cuts remaining in stock because the assessee's records do not show quality-wise issue for production or recovery and therefore the assessee has deliberately undervalued the closing stock and therefore the assessee moved the application before settlement commission. therefore, the ao did not accept the explanation of the assessee and the valuation of 43,442.53 carats of closing stock was valued at rs. 407.63 per carat, i.e. the rate worked out as per ao's order p. 2 at rs. 1,77,08,478 for under-valuation of closing stock. the learned cit(a) confirmed the action of ao vide para 5.7 of his order by holding as under (relevant part of para reproduced) : the value of the stock shown by the assessee at rs. 2,40,500 is therefore wrong and cannot be accepted since the appellant adopted the cost or market price which is lower. in this case the sale price of finished product as discussed earlier is higher than the cost price. the manufacturing account in scn. d referred to above proves that the appellant has used 4,45,366.50 carats rough emerald for producing finished emerald 98,521 carats. therefore, there is neither any ambiguity nor any mistake in adopting the average cost price at rs. 407.63 per carat as discussed by the ao in his order of assessment and also shown in annex.-a of this order. in view of the above discussion and taking into consideration the facts and circumstances of the case, i am of the considered opinion that the action of the ao is justified and accordingly an addition of rs. 1,74,67,878 as made by the ao is hereby confirmed.3. mr. n.m. ranka, senior advocate, on behalf of the assessee, argued that the assessee is a private limited company. it was incorporated under the companies act, 1956 vide certificate of incorporation bearing no. 17-013987 of 1997-98 issued by the roc, rajasthan, jaipur, on 4th july, 1997. its registered office and business premises are at 3815, laxmi athithi grah, 2nd crossing, msb ka rasta, johari bazar, jaipur.shri prakash chand dhadda is the main executive working director since incorporation of the assessee company. from 4th july, 1997, he and his wife smt. pramila dhadda were directors. smt. pramila dhadda is primarily a housewife and has not been attending the business of the assessee company actively. she retired on 10th dec, 1999. in her place her son shri shreyans dhadda was appointed as director from 10th dec, 1999. shri shreyans dhadda was also a student and therefore during the previous year under assessment, was not actively attending to the business of the assessee company. shri p.c. dhadda has been primarily and mainly looking after the business of the assessee company. shri p.c. dhadda is also carrying on similar nature of business since long as proprietor of m/s prakash chand dhadda & co. the business of the assessee company and of p.c. dhadda & co. are being carried on mainly and primarily by shri prakash chand dhadda and from the same building known as laxmi athithi grah. the stock in trade of the assessee company also remained with its director shri p.c. dhadda. the business premises of the assessee company and of m/s p.c. dhadda & co. are in the same building. the assessee company maintains regular and proper books of account. entire purchases and sales are vouched, detailed and verifiable. the assessee company has been importing rough emeralds from abroad. the purchases are fully vouched, detailed and verifiable.remittances have been made through the banking channel. rough emeralds have been partly manufactured and partly sold as rough emeralds. such sales have been in the local market. manufactured precious stones have been sold in india. entire sales are vouched, detailed and verifiable.sales remittances have been received from abroad through banking channel. in respect of imports, all the formalities have been complied with and no mistakes or defects have ever been found by the regulatory authorities. business is on wholesale. payments for sales in india have also been received by cheques. complete details in respect of wage payments and other expenses have been maintained. such expenditure is vouched, detailed and verifiable. payments above rs. 20,000 have been made by cheques. entire purchases and sales are vouched, detailed, verifiable and the working results have always been accepted in the past except the year under appeal (paras 1 and 2 pb pp. 1-2). the assessee company has maintained all possible records for manufacturing/processing as also purchase and sale. the accounts are backed by quantitative tally and stock register. karigar bahis have been maintained wherein complete details relating to processing/manufacturing have been kept. same have been produced and examined by the lower authorities (para 2 pb 20). the rough emeralds are nature's product. the precious stones differ in colour, size, luster and quality. quality differs from piece to piece. it is neither practicable nor possible to maintain a qualitative tally/stock register. no jeweller who is manufacturing/processing the precious stones at jaipur, is maintaining a qualitative tally. there is no standard value. value differs from person to person. eyes and experience alone arrive at the value. neither there is standard quality nor fixed price. value apprised by different persons differ. value arrived at by the learned ao was objected to vide letters dt. 17th dec, 2002, 24th dec, 2002 and 25th jan., 2003 (pb 8-19). the learned lower authorities rejected the correct claim of the appellant company and computed its value in an arbitrary and fanciful manner. the said valuation is without basis, without material, contrary to the material on record and sound principles of valuation of coloured stones. it is based on doubts, suspicions and whims and after ignoring the material on record and the value apprised by the technical person, the dvo.working out value at average rate is defective and arbitrary action.many decisions were cited before the lower authorities and it was submitted that provisions of section 145 are inapplicable. correct and complete books of account have been maintained. method of valuation is at cost and as in the past. karigar bahis and stock registers have been maintained, produced and examined. these were produced before the ao and the cit(a). no defect' has been noticed by the lower authorities.we are producing the same for further verification, if any. rejecting the trading results and revaluing closing stock is erroneous and unsustainable in law (para 1.12, pb 34). the precious stones are the nature's product. there is no standard quality of the lumps of rough emeralds which are excavated from the mother earth. rough emeralds imported were of big sizes and in lump shape of different sizes. the purchases have to be made in bulk and by way of a lot. the rough emeralds so purchased are sorted out to find out as to which of the pieces are fit for manufacturing/processing. what is to be manufactured/processed is sorted out. whatever remains as rejection, popularly known as "tall". such tall is of negligible value. it remains to be accumulated. the selected rough emeralds are given to the karigars for conversion into various sizes. marking is done. cutting is done and 'ghat' is made manually and with hand driven machine. ghat of different pieces are made by different persons/karigars. after making of ghat/shaping the pieces are put for polishing. each and every piece of precious stone is affixed on a small wooden stick. the polishing is done manually and on hand-driving polishing wheels to give the correct edges. it enhances shine in the stone. after polishing, the polished product is again put in chemicals and thereafter assortments are made.assortments are kept in packets and from such assorted packet products are mixed by making re-assortments looking to the requirements and demands. as stated hereinabove, the rough product has to come in the hands of different persons and under different processes. as mentioned hereinabove, the rough precious stone being nature's product not of standard quality-the ultimate yield differs (paras 4 to 4.5, pb 4-5).the rough emeralds, ghat, finished products, etc. arc being displayed.same have been displayed in the past in the case of m/s m.d. jewellers (pb 54-58 paras 2 and 5) and the hon'ble tribunal had spot inspection.there had been a search on 29th oct., 1999, and onwards. at the material time shri p.c. dhadda, director of the assessee company and proprietor of m/s p.c. dhadda & co. was out of india. no responsible person was available. stock-in-trade of the assessee company was lying in the said premises, in the custody and control of its director, shri p.c. dhadda. in his absence, stock-in-trade of the assessee company and of the proprietary concern of shri prakash chand dhadda were mixed up.the stocks of the two concerns were put under seal. it had been submitted that the stock-in-trade of the assessee company is computable from its books of account and supporting record. details of stock-in-trade as computable from the said books of account and record as on 29th oct., 1999 were submitted. its value was rs. 66,31,434. such details were submitted with the letter dt. 10th nov., 1999 under the signatures of shri h.c. jam, part-time accountant (pb 130-133 paras 4 and 5). in the letter dt. 11th nov., 1999, it was again asserted that the entire stock under seal is duly accounted for and no part of it is undisclosed (pb 134-137 paras 6 and 12). in the letter dt. 13th nov., 1999, it was again informed that the current books of account of the assessee company are lying on the ground floor of the business premises at 3815, laxmi athithi grah. 2nd crossing, msb ka rasta, johari bazar, jaipur. with the letter dt. 11th nov., 1999, shri shreyans dhadda and accountant submitted copy of the stock register of the assessee company at pp. 64-67 before the dy. director of it (inv.), jaipur, on 11th nov., 1999 and much before resuming of search and the seizure effected on 11th nov., 1999 (pb 138-146, 147-148 paras 1-3). the stock under seizure is fully accounted for. no part of it is undisclosed (para 3.1 pb 3-4). letter dt. 29th nov., 1999 complaining seizure of stock of the assessee company was given (pb page nos. 149-150). the certificate about closing stock of the assessee company from bafna & associates, chartered accountants, was submitted (pb page no. 153). abovestated facts were brought on the assessment records. detailed letter dt. 5th dec, 2002 was submitted before the ao (pb page nos. 1-7). no contrary finding was given by the ao. the abovestated facts were brought to the notice of the learned cit(a) and placed on records (pb page nos.20-129). the detailed written submissions were made before the learned cit(a), who called for the comments of the ao. date of submission with date of remand letter with paper book page nos. paper book page nos. 18.09.2004 20-88 27.09.2004 106-107 18.10.2004 89-97 22.11.2004 108-110 06.12.2004 08-107 16.11.2004 111-113 18.12.2004 114-120 the affidavits of shri p.c. dhadda (pb page nos. 103-104); shri h.c.jain (pb page no. 105) and certificate of shri bafna (pb page nos. 119 and 153) remained uncontroverted, though shri jain and shri bafna appeared in person and copies provided to the ao. shri p.c. dhadda offered for cross-examination, but not examined. the relevant decisions applicable on facts were submitted but ignored by the learned cit(a).the appeal was partly allowed.4. mr. n.m. ranka further argued that trading account (pb 39 and 127) was submitted before the authorities below and was duly explained vide various letters dt. 5th dec, 2002, 17th dec, 2002, 24th dec, 2002 and 25th jan., 2003 to ao and written submissions/letters dt. 18th sept., 2004, 18th oct., 2004, 6th dec, 2004, 18th dec, 2004 to learned cit(a) and various other representations made before the authorities below as per paper book pages 1 to 216 including complete details of opening, purchases, manufacturing and sale of stock from 1st april, 1999 to 29th oct., 1999 (pb-38). trading accounts of rough emerald and cut emerald (pb-39) were submitted and explained. no unrecorded sales or purchases were pointed out i.e. all the sales and purchases accounted for have been accepted. value of opening stock, gross profit has also been accepted. karigar bahis, stock register has been maintained and no defect in the karigar bahi, stock register and quantitative tally was pointed out. the books of account are audited.5. mr. n.m. ranka invited our attention to submission before learned cit(a) dt. 18th oct., 2004, where the movement of stock i.e. opening stock 95,510 cts. (para 1.18 pb 91). rough emeralds imported on 9th april, 1999 vide bill pb-43, both purchased at us $ 1 to 2.50 per carat and only one lot purchased with cost of us $ 30 (para 1.19 pb-91), rough emerald imported on 20th may, 1999 (bill pb-44) and bulk purchases were between us $ 1 to 5 per carat and maximum rate us $ 9 per carat (para 1.20 pb-91), which was sorted khard out of tall and was of cheap quality which was put to manufacturing and ultimately finished product of 39,105 carats with cost of rs. 2,03,926 remained in stock (para 1.21 pb 91, para 1.31 pb-115). entire sale bills were produced before the authorities below and some of them were filed. he further argued that high quality goods were sold and residual were of low quality. to this, he invited our attention to sale bill dt. 14th may, 1999 (pb 45) which was sold 5.34 carats at rs. 15,000 per carat for rs. 80,100; 50.45 carats at rs. 6,000 per carat for rs. 1,55,350; bill dt.14th may, 1999 (pb 46) which was sold at rs. 1,175 and rs. 1,500 per carat; bill dt. 17th may, 1999 (pb 48) which was sold at rs. 5,330, rs. 6,000, rs. 4,550, rs. 3,100, rs. 3,375, rs. 2,445 etc; (iv) bill dt.5th june, 1999 (pb 49) which was sold at rs. 14,400, 14,900, 20,950 and 21,300 per carat-average rs. 14,352 per carat; bill dt. 3rd aug., 1999 (pb 50) which was sold at rs. 1,500, and rs. 1,050 per carat; bill dt.5th aug., 1999 (pb 51) which was sold at rs. 2,100 and rs. 1,300 per carat.6. mr. n.m. ranka further argued that admittedly stock register, karigar bahis with quantitative tally, maintained, produced and examined. only two imports were made. sale was made in local market and to few parties. entire sales are vouched, detailed and verifiable and no defect in the said record was found. the ao made no comments on facts. the remand report was also taken where the ao has raised the objection that no quality-wise details were maintained (pb 109-112).shri n.m. ranka argued that quality-wise details are neither possible nor practicable and other similar manufacturers are not maintaining and it was not maintained in the past or succeeding years. no revaluation/addition in the past and subsequent years have been made.he invited our attention to the order of the tribunal in the cases of raj enterprises v. ho (1995) 51 ttj (jp) 408, para 4 pb 101 and piasadilal devakinandan 22 tax world 191 pb 128-129. cit v. gotan lime khanij udhyog . incorrect valuation (pb 112) which is not supported by any material/evidence. the yield is not low (pb 112).the yield has been shown at 22.12 per cent out of sorted emeralds against 17.11 per cent (pb 35) for the asst. yr. 1999-2000; in the case of m.d. jewellers (pb 55), yield was 21 per cent and was accepted by the hon'ble tribunal by order dt. 16th aug., 1984. the hon'ble tribunal has discussed the processes of manufacturing in paras 2 and 5 after spot inspection. case was cited and copy was filed. (pb 53-58).applying of average rate was objected to (para 2 page no. 13). with the average rate, results would be distorted. the value of closing stock is rs. 2,40,500 [rs. 2,03,926 being item no. (iv)] plus rs. 36,574 out of (i), (ii) and (iii) proved pb 115 paras 1.30 and 1.31 and chart pb 38.7. as regards the controversy about cost claimed as computed by mr.bafna, notice of ao dt. 17th dec, 2002 was received (pb 8-9). the assessee has replied on 24th dec, 2002 before ao (pb 13-16 paras 2-5).(i) affidavit of shri p.c. dhadda (pb 103 para 4), (ii) affidavit of shri h.c. jain, accountant (pb 105), (iii) certificate of mr. bafna, chartered accountant (pb 119) were filed. mr. bafna and mr. h.c. jain also appeared in person who stood to the testimony and were not controverted. shri p.c. dhadda was not required to appear for examination. it is well-settled that in such circumstances contents of the affidavits/certificate stood proved in view of hon'ble apex court decision in the case of mehta parikh & co. v. cit (1956) 30 itr 181 (sc). there was no admission by shri bafna and shri h.c. jain. as directed by the ao, detailed workings were submitted and well explained but ignored by the ao. alleged admission, if any, was not finding on the assessee by the ao. the hon'ble apex court decision in the case of pullangode rubber & produce co. ltd. v. state of kerala and anr. supports the arguments, which was cited before the learned cit(a) also. there was assessee's reply vide para 1.28 (pb 114) and objection dt. 17th dec, 2004 (pb 119).8. the impugned addition by the ao and its sustenance by the cit(a) is arbitrary. the action is punitive and not to the best of the judgment.the discretion has been illegally exercised in favour of the revenue.9. it is not a judicious and judicial act. the scope of 'best judgment' assessment under the it law came up for consideration before the judicial committee as early as 1937 in cit v. laxminarain badridas (1937) 5 itr 170 (pc) therein, lord russell of kllowen, speaking for the judicial committee, observed : "the officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. he must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. he must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by the assessments of the assesee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork. in that sense, too, the assessment must be to some extent arbitrary."in reghubar mandal harihar mandal v. state of bihar, a case arising under the bihar sales-tax act, 1944, the law relating to "best judgment" assessment was examined at length by this court. therein, s.k. das j., speaking for the court, observed : "no doubt it is true that when the returns and the books of account are rejected, the ao must make an estimate, and to the extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion. to use the words of lord russell of killowen again, he must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must lake into consideration such materials as the ao has before him, including the assessee's circumstances, knowledge and previous returns and all other matters which the ao thinks will assist him in arriving at a fair and proper estimate. there were no defects - addition is without basis, imaginary and deserves to be deleted." 11. the learned departmental representative, on the other hand, supported the orders of lower authorities.12. we have perused the facts of the case. as stated, a search was carried out on 29th oct., 1999 at the common premises of m/s p.c.dhadda & co. and that of the assessee and the search warrant was in the name of m/s: p.c. dhadda & co. and not on assessee and p.c. dhaddha was out of station at the time of search. there was a mixing of goods of m/s p.c. dhaddha & co. and that of the assessee. the assessee has submitted, vide various letters before the authorities below, the quantitative details of opening, purchases, sales and closing stock.the movement of goods was duly explained as is evident from details of opening, purchases, manufacturing and sale from 1st april, 1999 to 29th oct., 1999 at pb-38 and trading account of rough emeralds and cut emeralds at pb-38 for the same period. mr. p.c. dhadda was out of india at the time of search and returned only on 12th nov., 1999. inventory of closing stock as on 29th oct., 1999 of the assessee company along with copy of stock register were submitted before the seizure was made on 11th nov., 1999. as per explanation submitted by the assessee at pb-38 and pb-39 through various letters and submission before lower authorities, we find that opening stock of 95,510 carats of rough emerald was sorted out for manufacturing on 2nd april, 1999 ultimately 50,510 carats were transferred to emerald tall account and 45,000 carats to manufacturing account, when the assessee on sorting, found that 50,510 carats of tall kharad with its cost of rs. 15,153 is not worth manufacturing, as per stock register. finished products of 10,856 carats were manufactured by 12th may, 1999 from 45,000 carats. the resultant tall was of 4,830 carats, in the process of manufacturing and the said 4,830 carats is reflected in stock register as receipt.similarly, finished emeralds were shown in the stock register under the emerald cuts.13. as regards imports made vide invoices as per pb 41 to 44, i.e.imported on 29th april, 1999 was made for 2,68,515 carats, which after sorting resulted in 98,000 carats for manufacturing and 1,50,515 carats of tall and entries were made in stock register. 20,000 carats were sold as it is without processing for rs. 11,00,000. 98,000 carats of rough emeralds were put to manufacturing on 29th april, 1999 which resulted into finished product of 19,890 carats by 17th may, 1999.there was a tall of 5,070 carats in the process of manufacturing and corresponding entries were made in the stock register. out of rough emeralds weighing 1,07,171.50 carats imported, rough emerald weighing 5,830 carats were sold as it is without processing and balance of 1,01,341.50 carats were to manufacturing resulting into 28,670 carats of finished product by 18th june, 1999. there was tall of 5,515 carats in the process of manufacturing and relevant entries were there in the stock register. two lots of tall kharad weighing 50,510 (out of opening stock) and 1,50,515 carats (out of rough emerald imported on 29th april, 1999) were put to manufacturing on 18th june, 1999 resulting on 39,105 carats of finished product by 2nd aug., 1999. as explained the wages paid was rs. 1,43,618 on a value of rs. 60,308 which was in stock as at 29th oct., 1999. the total cost computed was rs. 2,03,926. out of other manufactured cut emeralds there was left over of 4,337 carats of cheap quality as explained. therefore, the product manufactured by 2nd aug., 1999 and the leftover product both aggregating to 43,442.53 was of cost of rs. 2,40,500.14. the assessee has computed the actual cost of 43,442.53 carats including the wages at rs. 2,40,500. therefore, the working done as per ao's order cannot become a basis of valuation of 43,442.53 carats. no defect has been pointed by the ao or learned cit(a) in the opening stock, purchases, manufacturing, closing stock and the valuation as mentioned hereinbefore except the impugned valuation in closing stock.the said explanation was given before the ao and the learned cit(a) through various letters and submissions. no defect has been pointed out except there is no qualitative tally, which is neither possible nor practicable on account of special features of the trade of manufacturing. the raw kharad is nature's product and each stone differs from the other.15. mr. n.m. ranka, has displayed in the court, the products at various stages, (from raw material to finished product stage) and explained the process as under: (a) that the precious stones are the nature's product. there is no standard quality of the lumps of rough emeralds which are excavated from the mother earth. rough emeralds imported, were of big sizes and in lump shape of different sizes. the purchases have to be made in bulk and by way of a lot. (b) the rough emeralds so purchased are sorted out to find out as to which of the pieces are fit for manufacturing/processing. others what is to be manufactured/processed is sorted out. whatever remains as rejection, popularly known as "tall". such tall is of negligible value. it remains to be accumulated. (c) the selected rough emeralds are given to the karigars for conversion into various sizes. marking is done. cutting is done and 'ghat' is made manually with hand driven machine. ghat of different pieces are made by different persons/karigars. (d) after making of ghat/shaping, the pieces are put for polishing. each and every piece of precious stone is affixed on a small wooden stick. the polishing is done manually and on hand driving polishing wheels to give the correct edges. it enhances shine in the stone. (e) after polishing, the polished product is again put in chemicals and thereafter assortments are made. assortments are kept in packets and from such assorted packet products are mixed by making re-assortments looking to the requirements and demands. (f) as stated hereinabove, the rough product has to come in the hands of different persons and under different process. as mentioned hereinabove, the rough precious stones being nature's product are not of standard quality. therefore, the ultimate yield differs.16. the fall in gross profit was explained by mr. n.m. ranka due to tough competition, market being sluggish and slow and the assessee company decided to substantially reduce its profit by sale at lower margin of profit to stand in competition in the market and to enhance its turnover and ultimately turnover increased from rs. 4.48 crores to rs. 6.69 crores. most of rough emeralds have been sold as it is to wholesalers/manufacturers and therefore the gross profit was low. the assessee paid rs. 6,07,615 as foreign exchange difference in respect of purchases in dollars. with the above background, we find that the assessee has very well explained that the only low quality goods were left in stock, whose value cannot exceed rs. 2,40,500 for 43,442.53 carats as against valuation made by the ao at rs. 1,77,08,478. the whole position of the stock was explained by sh. h.c. jain, accountant, and mr. bafna, chartered accountant, and the explanations by sh. p.c.dhadda and sh. h.c. jain, accountant and the chartered accountant were submitted through affidavits/annexures and are on record. sh. p.c.dhadda was not required by the ao for examination. mr. bafna and mr.h.c. jain appeared in person and their statements have not been controverted. there was no admission made by the chartered accountant or accountant. therefore, the ao is not justified in drawing adverse inference on the statements of mr. bafna, chartered accountant and mr.h.c. jain, accountant. there is no finding by the ao that the assessee has admitted the valuation, as proposed by ao. therefore, the contents of the affidavits of sh. p.c. dhadda (sic-mr. h.c. jain), accountant, attain finality in view of hon'ble apex court decision in the case of mehta paiikh & co. (supra). also, the question arises when the assessee has established, as in the present case, that the closing stock of low quality remains as balance of a particular cost i.e., rs. 2,40,500, whether applying an average cost at rs. 407.63 per carat i.e., a cost which has the average of value of stock sold which is of much higher value than the value of actual stock of low quality will be the accurate valuation and whether it can be said that such average cost if applied to a quantity of closing stock will give an accurate income.the answer shall be 'no' and will be absurd. this is not the purpose of it act and the income cannot be computed on the whims, fancies, surmises and conjectures of ao. therefore, in the present case, the assessee has rightly valued the closing stock of rough emeralds, cut emeralds and has rightly identified from the mixed stock of m/s p.c.dhadda & co. and valued the same as per details and p&l a/c a't pb 38 and 39 in assessee's paper book. therefore, in our view, the assessee has supplied all the information possible and made the explanation as mentioned hereinbefore, to the ao and learned cit(a). the books of account have also not been rejected in the present case. therefore, the act of the ao and/or learned cit(a) in valuing a different figure than as explained by the assessee for closing stock is not a judicious act.in such circumstances and facts of the case, the valuation of closing stock of 43,442.53 carats is accepted at rs. 2,40,500. thus, ground nos. 1 to 1.13 of assessee's appeal and ground no. 1 of cross-objection of assessee are allowed.17. in ground nos. 2 to 2.3 of the assessee and ground no. 2 of co., the assessee's grievance is against the addition on account of undervaluation of work-in-progress by rs. 29.77,553 which has been sustained by the learned cit(a) at rs. 9,52,521.and the revenue grievance in ground no. 1 of their appeal is against sustenance of the addition from rs. 29,77,553 to rs. 9,52,521 by the learned cit(a).18. briefly stated, the facts in the said grounds are as per pp. 4 and 5 of ao's order as under: the assessee has valued closing work-in-progress at rs. 65,72,265. when asked to prove this valuation, the assessee filed a copy of bill dt. 30th aug., 1999 whereby 89,440 cts rough emerald were imported at the cost of rs. 1,06,45,402. this bill showed 6 lots varying in cost between 1.50 u.s. dollars and 35 u.s. dollars. it was explained that after sorting, 10,900 cts were sold for rs. 42,31,750. on questioning, it was admitted that the 6 lots had been mixed up and it could not be shown as to from which lot 10,900 cts were sold. the stock register also showed one entry for the whole of 6 lots contained in the bill because, the assessee's practice was to show receipt in the stock register on the basis of bills and not on the basis of quality of material purchased. since it could not be ascertained as to from which lot the sales have been effected, the only way to work out the cost of the balance 78,540 cts issued for production was to take the average cost plus the manufacturing wages incurred thereon. as the assessee has declared the value of work-in-progress at rs. 65,72,265 only, an addition of rs. 29,77,553 is made for undervaluation of work-in-progress.19. the learned cit(a) for the reasons mentioned in vide para 6.3 of his order sustained an addition of rs. 9,52,521, thus giving a relief of rs. 20,25,032.20. we have perused the facts of the case and after hearing the parties, we find that there is no dispute as regards quantitative details in the stock register maintained by the assessee. the only objection of the ao is that the assessee has not maintained the qualitative details with respect to the work-in-progress maintained by the assessee and accordingly the ao opted to value' this closing work-in-progress at average cost. the assessee has explained before the authorities below that the assessee has imported 89,440 carats of rough emerald vide bill dt. 30th aug., 1999 (pb 42 and 120 ) for rs. 1,06,45,402 and it consisted of 6 lots with cost between us$ 1.50 to us$ 35. in lot no. 14,449 gms. equal to 22,245 carats was sorted out.after sorting better quality kharad was sold with weight 1,09,000 carats for rs. 45,31,750. it includes, sale at rs. 751 and rs. 600 as well against average rate of 304.15 carats (para 2.3 at pb 93). it was explained vide para 3.1 (pb 124) that the value of left out 11,345 carats was rs. 25,06,909. the assessee earned a profit of rs. 2,55,418 i.e. 5.5 per cent which is more than normal rate of 2.3 per cent. on the basis of the working of the ao, profit on sale of rs. 45,31,000 would be about rs. 32,35,000 i.e. above 70 per cent which is impossible. even on the working of the learned cit(a), profit would be rs. 12,49,509. (rs. 45,31,000 less rs. 32,81,441) i.e. about 30 per cent which is not possible. moreover, the ao has not invoked the provisions of section 145 of the act and have not rejected the books of account.21. in such circumstances and facts of the case, when the assessee has completely explained the work-in-progress and its valuation, then the ao is not justified in making a different valuation i.e. on the basis of average cost plus manufacturing wages and the ao has not pointed out any specific defect in the explanation made by the assessee and therefore, the valuation of work-in-progress made by the assessee at rs. 65,72,265 is accepted by us. thus, the learned cit(a) is not justified in holding that the issue of mixing up of stocks with p.c.dhadda & co. is not relevant and valuation by departmental valuer is not relevant. therefore, the additions sustained by the learned cit(a) is directed to be deleted. thus, ground nos. 2 to 2.3 of the assessee and the ground no. 2 of the co. of the assessee are allowed and the ground no. l of the revenue is dismissed.22. in ground no. 3 of the assessee and ground no. 3 of the co, the assessee's grievance is against the decision of learned cit(a) that the stock of the assessee was not mixed up and was not valued and not under seizure on 11th nov., 1999 in the name of its director, shri prakash chand dhadda.23. briefly stated, the facts of the case are that the ao has not made any discussion with regard to the said grounds through a detailed letter dt. 5th dec, 2002 (pb 1) which was submitted before the ao whereas the learned cit(a) has given his findings vide paras 5.3 and 5.4 of his order that the plea of the assessee that stock is mixed up with m/s p.c. dhadda & co. at the time of search is not correct and the department valuation by the departmental valuer who has valued the closing stock which consists of two concerns, namely, m/s p.c. dhadda & co. and the assessee is not correct.24. shri n.m. ranka, senior advocate, argued that the detailed submissions were made before the learned cit(a) vide written submissions dt. 18th sept., 2004 vide paras 1.4 to 1.9 of the written submissions in pb 31 to 33 and the valuation report was also submitted before the learned cit(a). the departmental valuer has apprised the value of the stock found on 29th oct., 1999 and the cost in the books of account of m/s p.c. dhadda & co. and the assessee was as under: the said stock also includes the goods on approval given by m/s p.c.dhadda & co. of rs. 3,43,055 and thus there remains a nominal difference and reason whereof are the value put by the dvo at fair market value and if the margin of profit is reduced from the value put by dvo and then there shall be nil and negligence difference in two values and the other reason is that coloured stones have no standard value which differs from person to person. the details of many instances were given vide paras 3.3 to 3.7 of the submissions by the assessee before the learned cit(a) (pb 36-37), vide written submissions dt. 18th oct., 2004 in paras 2.6 and 2.7, pb 93-94 , written submissions dt. 6th dec, 2004 vide paras 2.8 and 2.9 pb 99-100, written submissions dt. 18th dec, 2004 in paras 2.10, pb 116 and vide paras 4.1 and 4.2 at pb 117 and written submissions dt. 21st dec, 2004 vide paras 5, 5.1 and paras 6 at pb 125-126). the written submissions with affidavits and other accompaniments were sent by the learned cit(a) to the ao for his comments and ao has sent three reports where the ao has observed that the valuation reports are not of much help and assessee's stock could not be identified and assessee himself was responsible for mixing up of the stock.25. the learned departmental representative, on the other hand, relied upon the findings of the authorities below.26. after hearing the parties and perusal of the facts, we find that the assessee has submitted the explanation before the ao and the learned cit(a) that the stock of the assessee is mixed up with the stock of m/s p.c. dhadda & co. and to the effect the affidavits have been given by shri p.c. dhadda and shri bafna who were not cross-examined by any of the authorities below. as aforementioned and a decision has been taken by us while deciding the issue in the ground nos. 1 to 1.13 of the assessee and ground no. 1 of the co of the assessee and also in ground nos. 2 to 2.3 of the assesses and the ground no. 2 of the co of the assessee that the assessee has duly explained the stocks and work-in-progress and also the valuation of the same and the authorities below have not found out any specific defects in the same. therefore, the stock of the assessee cannot be said to be unexplained by the assessee. since the explanation of the assessee and the affidavits of shri p.c. dhadda and shri bafna have not been disproved by any of the authorities below, in such circumstances and facts of the case, the explanation of the assessee has to be accepted and no adverse view can be drawn from the explanation or the statements made or submitted by the assessee. shri n.m. ranka relied upon the decisions of hon'ble apex court in the cases of mehta parikh & co.(supra), state v. guljari lal tandon and j.a. naidu v. state of maharastra . in view of the arguments made by shri n.m, ranka and explanation given by the assessee, we are of the view that the closing stock of the assessee as on 29th oct., 1999 was mixed up and was under seizure since 11th nov., 1999 and the said stock was not found anywhere else and the department has not brought on record that the assessee has sold the stock to any other person and the business of the assessee has been closed and the assessee has filed the return of income for the mowing years upto assessment year 2006-07 from the impugned assessment (pb 199 to 216) and no unrecorded sales in the following years have been brought on record and has not been pointed out by the learned departmental representative and therefore, the findings of the learned cit(a) are contrary to the material available on record and therefore, the explanation given by the assessee and the valuation made by the departmental valuer that cost of stocks of m/s p.c. dhadda & co. at rs. 60,92,357 and that of the assessee at rs. 68,33,199 is accepted. the assessee's explanation that the said stocks includes the goods on approval given by m/s p.c. dhadda & co. of rs. 3,43.055 is accepted. therefore, the learned cit(a) is not justified in making an observation that the stock of the assessee company as on the date of search was not mixed up and was not valued and not under seizure made on 11th nov., 1999 and thus the explanation of the assessee on the issue is accepted. thus, ground no. 3 of the assessee and ground no. 3 of the co of the assessee is allowed.27. in ground no. 2, the revenue's grievance is against the deletion of addition of rs. 1,11,91,527 on account of suppression of production and in ground no. 4 of the co, the assessee supports the order of the learned cit(a).28. briefly stated the facts of the case are as per pp. 5 and 6 of ao's order as under: this year yield of emerald stones from rough was shown at 22.12 per cent against 17.11 per cent last year. i questioned the assessee about the yield and the explanations as per the letters dt. 11th nov., 2002 and 24th dec, 2002 were that the yield was better than last year. it was stated before me orally that there was no scientific method to calculate yield because the rough emeralds were of different quality and size and the yield depended on quality and size of rough used. it was also stated that emerald tall was produced in the process of production of stones. this fact is clear from the stock details submitted with the return. i, therefore, looked into the records and found that the average cost of rough emerald consumed this year was rs. 78.74 per carat (41252675/523906) against rs. 37.88 per cent (7465270/197050) last year. this indicated that the rough used was of much better quality this year. the percentage of low quality tall produced was also low this year i.e. 3.46 per cent (15415 x 100/445366) against 22.97 per cent (45274 x 100/197050) last year. the wastage claimed this year is 74.41 per cent [331430.50 out of 445366.50 cts] against 59.50 per cent (118050.68 out of 197050 cts) last year. these facts were pointed out to the assessee vide my letter dt. 17th dec, 2002. the reply filed on 24th dec, 2002 was that the yield was better last year and the yield may not be compared product cost-wise. this reply is very vague. there was no explanation for high percentage of waste claimed. there was no reply to the question posed in view of the increased cost of rough emerald used and low quantity of tall produced indicating better quality of material used for production of emerald stones. in view of these facts, i estimate the yield at 25 per cent which means that the production of stones will be 1,11,341.50 cts against 98,521 cts declared, the additional production being 12,820.50 cts. average sales price of emerald stones was rs. 872.94 (4,97,39.254/56978.82). at that rate, the value of suppressed production is taken at rs. 1,11,91,527. an addition of rs. 1,11,91,527 is therefore, made for suppression of production of emerald stones.29. the learned cit(a) deleted the said addition vide para 7.2 at p. 18 of his order (relevant portion is produced) : the ao is not justified in making such addition in absence of any enquiry and examination of purchase and sale out of books whereas the ao has admitted that the purchases and sales are fully vouched and stock register is maintained which is evident from the assessment order. moreover, the quantity of rough emeralds is much higher in comparison to the preceding assessment order and the purchase price of emerald rough stones has not been examined by the ao and he just on his presumption made addition which cannot be said to be justified. the ao has also not given any comparable case of similar business in which the higher yield of production is declared by a particular assessee. since the appellant assessee has shown higher rate of yield in comparison to the preceding assessment year there does not arise any occasion for suppression of production only on the ground of higher wastage and lower production of tall kharad. i am therefore, of the considered opinion that the addition as made by the ao is based on contradictory findings without any enquiry and the same is not justified and therefore, it is deleted.30. after hearing the parties and on perusal of the facts, we find that the addition made by the ao is on account of low yield declared by the assessee. the ao has not pointed out any mistake in the opening stock, purchases, sales and the closing stock and there is no dispute in this regard. no material has been brought on record by the ao for proving the low production/low yield and the assessee has made the sales out of books of account. no comparable case has been brought on record. the assessee has declared the yield at 22.12 per cent. the assessee has submitted the comparable case of m/s m.d. jewellers where the tribunal has accepted a yield of 21 per cent (pb 55). the learned counsel for the assessee, shri n.m. ranka, has relied upon various decisions in support of deletion made by the learned cit(a) as under:khandelwal gems trading corporation v. asstt. cit (1996) 54 ttj (jp) 479, 481; (iii) shanker rice co. v. ito (2000) 67 ttj (asr)(sb) 84 : (2000) 72 itd 139 (asr)(sb); (iv) iac v. cosmopolitan trading corporation (1983) 34 ctr (trib) 37 (jp)(sb): (1985) 14 1td 327 (jp)(sb); (viii) triveni pharma v. ito (2004) 85 ttj (jp)(tm) 950 : (2005) 92 ttd 125 (jpxtm); (ix) uttam chuna pathar udyog v. ito (1997) 59 ttj (jp) 763 : (1998) 65 itd 466 (jp).31. therefore, in such circumstances and facts of the case, the ao is not justified in making any addition in the absence of any material on record. hence, we find no infirmity in the order of the learned cit(a) who has rightly deleted the addition of rs. 1,11,91,527 made by the ao.thus, ground no. 2 of the revenue is dismissed and ground no. 4 of the co of the assessee is allowed.32. in ground nos. 4 and 4.1 of the assessee and in ground no. 5 of the co, the assessee's grievance is against the sustenance of disallowance of rs. 56,012 out of foreign tour expenses.33. briefly stated, the facts are as per pp. 6 and 7 of ao's order as under: details of travelling expenses of rs. 3,18,397 filed. this included two amounts of rs, 54,062 and rs. 11,950 on travel to new york. i had earlier questioned about the directors and vide letter dt. 5th dec, 2002, the assessee had stated that shri shreyans dhadda became a director on 10th dec, 1999. in the letter, it was stated as under : shri shreyans dhadda was also a student and therefore, during the previous year under assessment was not actively attending to the business of the assessee company. the assessee was required to explain why the claim for travelling expenses in the name of shri shreyans dhadda be not disallowed as he was not actively engaged in business and was a student only. vide letter dt. 24th dec, 2002, it was explained that shri shreyans dhadda had travelled to bangkok and new york on the request of the assessee's supplier, m/s mona lisa gems, to see the fresh emerald rough and to study the market. from the purchase bills, it is seen that m/s mona lisa gems are based in new york and was the assessee's regular supplier of emerald rough. shri shreyans dhadda had travelled the bangkok and new york on 22nd march, 2000 and the travel details showed that shri prakash chand dhadda, the main director who was looking after the business had already left for new york on 21st march, 2000 i.e. a day earlier. there was thus no occasion for shri shreyans dhadda to see the emerald rough at m/s mona lisa gems, when the main director was already there. the assesses also could not show any business connection with bangkok. considering the above facts, i am satisfied that the travelling expenses claimed in the name of shri shreyans dhadda. have no business connection, i therefore, disallow the expenses claimed at rs. 56,012 (54,062+1,950) as unrelated to the business needs of the assessee.35. after perusal of the facts, we find that the director shri shreyans dhadda travelled to bangkok and new york. the explanation of the assessee was that shri shreyans dhadda has visited the assessee's suppliers, m/s monalisa gems who is the regular supplier of emerald rough to the assessee. shri n.m ranka argued that shri shreyans dhadda has travelled to bangkok and new york for the purpose of business and to understand the trend of the market. we are convinced with the explanation given by the assessee and arguments of shri n.m. ranka that shri shreyans dhadda has travelled to bangkok and new york on business purposes of the assessee in the capacity as the director of the assessee company and the ao has not brought on record any personal element of shri shreyans dhadda in the said travelling and therefore, the ao was not justified in making the addition on this account. hence, the addition sustained by the learned cit(a) is reversed. thus, ground nos. 4 and 4.1 of the assessee and ground no. 5 of the co of the assessee are allowed.36. in ground nos. 5, 6, 7, 8 and 9, the assessee is aggrieved against the charging of interest under sections 234b, 220(2) of the act and computing the total income at rs. 1,87,68,801 against returned income at rs. 2,92,390 and not giving of credit of tax of rs. 1,15,500 and holding the tax and interest payable at rs. 1,30,24,353.37. after hearing the parties and on perusal of the facts, we find that the issues raised in the ground nos. 5, 6, 8 and 9 are consequential and as regards the credit of tax of rs. 1,15,500 in ground no. 7 of the assessee, the ao is directed to allow the same after examining the claim of the assessee. thus, ground no. 7 of the assessee is allowed for statistical purposes.38. the ground no. 10 is general in nature and does not require any adjudication.39. in the result, the appeal of the assessee in ita no. 172/jp/2005 is partly allowed, the appeal of the revenue in ita no. t16/jp/2005 is dismissed and the co of the assessee bearing no. 22/jp/2005 is allowed....

Judgment:
1. These are cross-appeals by the assessee as well as by Revenue arising from the order of learned CIT(A) dt. 24th Dec, 2004 for the asst. yr. 2000-01. The assessee has also filed the cross-objection against the Revenue's appeal.

2. We have heard the parties. In ground Nos. 1 to 1.13 in assessee's appeal and ground No. 1 of cross-objection of the assessee, the assessee's main grievance is against the addition on account of undervaluation of the closing stock by Rs. 1,74,67,878.

Briefly stated, the facts as per AO's order are that assessee deals in emerald. During the year, it purchased emerald rough, cut them into stones and then sold them locally. Purchases were mostly imported.

During the year, the assessee declared sales of Rs. 6,69,74,001 on which GP of Rs. 25,07,136 at a GP rate of 3.74 per cent was declared against sales of Rs. 4,48,40,789 at a GP rate of 12.77 per cent in the immediately preceding year. The AO observed that sales and purchases were fully vouched and stock register has been maintained by the assessee. It was noticed by the AO that while 56,978.82 cts. of emerald cuts were sold for Rs. 4,97,39,254 but the closing stock of 43,442.53 cts of the same were valued at Rs. 2,40,500 only. The cost of production was worked out as under: Particulars Rough Carats Value Sale rate Opening Stock 95,510 45,71,420 Import 2,68,515 1,69,94,822 21,980 Import 1,07,171.50 1,93,48,903 3,850 -------------- --------------- --------- In response to show-cause notice, the assessee filed his explanation vide letters dt. 14th Dec, 2002 and 24th Dec, 2002. The explanation of the assessee was that rough (emerald) used in production was imported vide bills dt. 9th April, 1999 (268515 cts.) and 11th May, 1999 (107171.50 cts.) as per which cost veried from 1 US Dollar to 30 US Dollar per carat. The better quality emerald cut was sold out and what remained in balance was the lower quality. Copies of both the bills have been filed. The AO observed that there is no evidence that cheapest quality rough was used in producing the cuts remaining in stock because the assessee's records do not show quality-wise issue for production or recovery and therefore the assessee has deliberately undervalued the closing stock and therefore the assessee moved the application before Settlement Commission. Therefore, the AO did not accept the explanation of the assessee and the valuation of 43,442.53 carats of closing stock was valued at Rs. 407.63 per carat, i.e. the rate worked out as per AO's order p. 2 at Rs. 1,77,08,478 for under-valuation of closing stock. The learned CIT(A) confirmed the action of AO vide para 5.7 of his order by holding as under (relevant part of para reproduced) : The value of the stock shown by the assessee at Rs. 2,40,500 is therefore wrong and cannot be accepted since the appellant adopted the cost or market price which is lower. In this case the sale price of finished product as discussed earlier is higher than the cost price. The manufacturing account in Scn. D referred to above proves that the appellant has used 4,45,366.50 carats rough emerald for producing finished emerald 98,521 carats. Therefore, there is neither any ambiguity nor any mistake in adopting the average cost price at Rs. 407.63 per carat as discussed by the AO in his order of assessment and also shown in Annex.-A of this order. In view of the above discussion and taking into consideration the facts and circumstances of the case, I am of the considered opinion that the action of the AO is justified and accordingly an addition of Rs. 1,74,67,878 as made by the AO is hereby confirmed.

3. Mr. N.M. Ranka, senior advocate, on behalf of the assessee, argued that the assessee is a private limited company. It was incorporated under the Companies Act, 1956 vide certificate of incorporation bearing No. 17-013987 of 1997-98 issued by the RoC, Rajasthan, Jaipur, on 4th July, 1997. Its registered office and business premises are at 3815, Laxmi Athithi Grah, 2nd Crossing, MSB Ka Rasta, Johari Bazar, Jaipur.

Shri Prakash Chand Dhadda is the main executive working director since incorporation of the assessee company. From 4th July, 1997, he and his wife Smt. Pramila Dhadda were directors. Smt. Pramila Dhadda is primarily a housewife and has not been attending the business of the assessee company actively. She retired on 10th Dec, 1999. In her place her son Shri Shreyans Dhadda was appointed as director from 10th Dec, 1999. Shri Shreyans Dhadda was also a student and therefore during the previous year under assessment, was not actively attending to the business of the assessee company. Shri P.C. Dhadda has been primarily and mainly looking after the business of the assessee company. Shri P.C. Dhadda is also carrying on similar nature of business since long as proprietor of M/s Prakash Chand Dhadda & Co. The business of the assessee company and of P.C. Dhadda & Co. are being carried on mainly and primarily by Shri Prakash Chand Dhadda and from the same building known as Laxmi Athithi Grah. The stock in trade of the assessee company also remained with its director Shri P.C. Dhadda. The business premises of the assessee company and of M/s P.C. Dhadda & Co. are in the same building. The assessee company maintains regular and proper books of account. Entire purchases and sales are vouched, detailed and verifiable. The assessee company has been importing rough emeralds from abroad. The purchases are fully vouched, detailed and verifiable.

Remittances have been made through the banking channel. Rough emeralds have been partly manufactured and partly sold as rough emeralds. Such sales have been in the local market. Manufactured precious stones have been sold in India. Entire sales are vouched, detailed and verifiable.

Sales remittances have been received from abroad through banking channel. In respect of imports, all the formalities have been complied with and no mistakes or defects have ever been found by the Regulatory Authorities. Business is on wholesale. Payments for sales in India have also been received by cheques. Complete details in respect of wage payments and other expenses have been maintained. Such expenditure is vouched, detailed and verifiable. Payments above Rs. 20,000 have been made by cheques. Entire purchases and sales are vouched, detailed, verifiable and the working results have always been accepted in the past except the year under appeal (paras 1 and 2 PB pp. 1-2). The assessee company has maintained all possible records for manufacturing/processing as also purchase and sale. The accounts are backed by quantitative tally and stock register. Karigar bahis have been maintained wherein complete details relating to processing/manufacturing have been kept. Same have been produced and examined by the lower authorities (para 2 PB 20). The rough emeralds are nature's product. The precious stones differ in colour, size, luster and quality. Quality differs from piece to piece. It is neither practicable nor possible to maintain a qualitative tally/stock register. No jeweller who is manufacturing/processing the precious stones at Jaipur, is maintaining a qualitative tally. There is no standard value. Value differs from person to person. Eyes and experience alone arrive at the value. Neither there is standard quality nor fixed price. Value apprised by different persons differ. Value arrived at by the learned AO was objected to vide letters dt. 17th Dec, 2002, 24th Dec, 2002 and 25th Jan., 2003 (PB 8-19). The learned lower authorities rejected the correct claim of the appellant company and computed its value in an arbitrary and fanciful manner. The said valuation is without basis, without material, contrary to the material on record and sound principles of valuation of coloured stones. It is based on doubts, suspicions and whims and after ignoring the material on record and the value apprised by the technical person, the DVO.Working out value at average rate is defective and arbitrary action.

Many decisions were cited before the lower authorities and it was submitted that provisions of Section 145 are inapplicable. Correct and complete books of account have been maintained. Method of valuation is at cost and as in the past. Karigar Bahis and stock registers have been maintained, produced and examined. These were produced before the AO and the CIT(A). No defect' has been noticed by the lower authorities.

We are producing the same for further verification, if any. Rejecting the trading results and revaluing closing stock is erroneous and unsustainable in law (para 1.12, PB 34). The precious stones are the nature's product. There is no standard quality of the lumps of rough emeralds which are excavated from the mother earth. Rough emeralds imported were of big sizes and in lump shape of different sizes. The purchases have to be made in bulk and by way of a lot. The rough emeralds so purchased are sorted out to find out as to which of the pieces are fit for manufacturing/processing. What is to be manufactured/processed is sorted out. Whatever remains as rejection, popularly known as "Tall". Such Tall is of negligible value. It remains to be accumulated. The selected rough emeralds are given to the Karigars for conversion into various sizes. Marking is done. Cutting is done and 'ghat' is made manually and with hand driven machine. Ghat of different pieces are made by different persons/Karigars. After making of ghat/shaping the pieces are put for polishing. Each and every piece of precious stone is affixed on a small wooden stick. The polishing is done manually and on hand-driving polishing wheels to give the correct edges. It enhances shine in the stone. After polishing, the polished product is again put in chemicals and thereafter assortments are made.

Assortments are kept in packets and from such assorted packet products are mixed by making re-assortments looking to the requirements and demands. As stated hereinabove, the rough product has to come in the hands of different persons and under different processes. As mentioned hereinabove, the rough precious stone being nature's product not of standard quality-the ultimate yield differs (paras 4 to 4.5, PB 4-5).

The rough emeralds, ghat, finished products, etc. arc being displayed.

Same have been displayed in the past in the case of M/s M.D. Jewellers (PB 54-58 paras 2 and 5) and the Hon'ble Tribunal had spot inspection.

There had been a search on 29th Oct., 1999, and onwards. At the material time Shri P.C. Dhadda, director of the assessee company and proprietor of M/s P.C. Dhadda & Co. was out of India. No responsible person was available. Stock-in-trade of the assessee company was lying in the said premises, in the custody and control of its director, Shri P.C. Dhadda. In his absence, stock-in-trade of the assessee company and of the proprietary concern of Shri Prakash Chand Dhadda were mixed up.

The stocks of the two concerns were put under seal. It had been submitted that the stock-in-trade of the assessee company is computable from its books of account and supporting record. Details of stock-in-trade as computable from the said books of account and record as on 29th Oct., 1999 were submitted. Its value was Rs. 66,31,434. Such details were submitted with the letter dt. 10th Nov., 1999 under the signatures of Shri H.C. Jam, part-time accountant (PB 130-133 paras 4 and 5). In the letter dt. 11th Nov., 1999, it was again asserted that the entire stock under seal is duly accounted for and no part of it is undisclosed (PB 134-137 paras 6 and 12). In the letter dt. 13th Nov., 1999, it was again informed that the current books of account of the assessee company are lying on the ground floor of the business premises at 3815, Laxmi Athithi Grah. 2nd Crossing, MSB Ka Rasta, Johari Bazar, Jaipur. With the letter dt. 11th Nov., 1999, Shri Shreyans Dhadda and accountant submitted copy of the stock register of the assessee company at pp. 64-67 before the Dy. Director of IT (Inv.), Jaipur, on 11th Nov., 1999 and much before resuming of search and the seizure effected on 11th Nov., 1999 (PB 138-146, 147-148 paras 1-3). The stock under seizure is fully accounted for. No part of it is undisclosed (para 3.1 PB 3-4). Letter dt. 29th Nov., 1999 complaining seizure of stock of the assessee company was given (PB page Nos. 149-150). The certificate about closing stock of the assessee company from Bafna & Associates, Chartered Accountants, was submitted (PB page No. 153). Abovestated facts were brought on the assessment records. Detailed letter dt. 5th Dec, 2002 was submitted before the AO (PB page Nos. 1-7). No contrary finding was given by the AO. The abovestated facts were brought to the notice of the learned CIT(A) and placed on records (PB page Nos.

20-129). The detailed written submissions were made before the learned CIT(A), who called for the comments of the AO. Date of submission with Date of remand letter with paper book Page Nos.

paper book Page Nos. 18.09.2004 20-88 27.09.2004 106-107 18.10.2004 89-97 22.11.2004 108-110 06.12.2004 08-107 16.11.2004 111-113 18.12.2004 114-120 The affidavits of Shri P.C. Dhadda (PB page Nos. 103-104); Shri H.C.Jain (PB page No. 105) and certificate of Shri Bafna (PB page Nos. 119 and 153) remained uncontroverted, though Shri Jain and Shri Bafna appeared in person and copies provided to the AO. Shri P.C. Dhadda offered for cross-examination, but not examined. The relevant decisions applicable on facts were submitted but ignored by the learned CIT(A).

The appeal was partly allowed.

4. Mr. N.M. Ranka further argued that trading account (PB 39 and 127) was submitted before the authorities below and was duly explained vide various letters dt. 5th Dec, 2002, 17th Dec, 2002, 24th Dec, 2002 and 25th Jan., 2003 to AO and written submissions/letters dt. 18th Sept., 2004, 18th Oct., 2004, 6th Dec, 2004, 18th Dec, 2004 to learned CIT(A) and various other representations made before the authorities below as per paper book pages 1 to 216 including complete details of opening, purchases, manufacturing and sale of stock from 1st April, 1999 to 29th Oct., 1999 (PB-38). Trading accounts of rough emerald and cut emerald (PB-39) were submitted and explained. No unrecorded sales or purchases were pointed out i.e. all the sales and purchases accounted for have been accepted. Value of opening stock, gross profit has also been accepted. Karigar bahis, stock register has been maintained and no defect in the Karigar bahi, stock register and quantitative tally was pointed out. The books of account are audited.

5. Mr. N.M. Ranka invited our attention to submission before learned CIT(A) dt. 18th Oct., 2004, where the movement of stock i.e. opening stock 95,510 cts. (para 1.18 PB 91). Rough emeralds imported on 9th April, 1999 vide bill PB-43, both purchased at US $ 1 to 2.50 per carat and only one lot purchased with cost of US $ 30 (para 1.19 PB-91), rough emerald imported on 20th May, 1999 (bill PB-44) and bulk purchases were between US $ 1 to 5 per carat and maximum rate US $ 9 per carat (para 1.20 PB-91), which was sorted Khard out of Tall and was of cheap quality which was put to manufacturing and ultimately finished product of 39,105 carats with cost of Rs. 2,03,926 remained in stock (para 1.21 PB 91, para 1.31 PB-115). Entire sale bills were produced before the authorities below and some of them were filed. He further argued that high quality goods were sold and residual were of low quality. To this, he invited our attention to sale bill dt. 14th May, 1999 (PB 45) which was sold 5.34 carats at Rs. 15,000 per carat for Rs. 80,100; 50.45 carats at Rs. 6,000 per carat for Rs. 1,55,350; bill dt.

14th May, 1999 (PB 46) which was sold at Rs. 1,175 and Rs. 1,500 per carat; bill dt. 17th May, 1999 (PB 48) which was sold at Rs. 5,330, Rs. 6,000, Rs. 4,550, Rs. 3,100, Rs. 3,375, Rs. 2,445 etc; (iv) bill dt.

5th June, 1999 (PB 49) which was sold at Rs. 14,400, 14,900, 20,950 and 21,300 per carat-average Rs. 14,352 per carat; bill dt. 3rd Aug., 1999 (PB 50) which was sold at Rs. 1,500, and Rs. 1,050 per carat; bill dt.

5th Aug., 1999 (PB 51) which was sold at Rs. 2,100 and Rs. 1,300 per carat.

6. Mr. N.M. Ranka further argued that admittedly stock register, Karigar bahis with quantitative tally, maintained, produced and examined. Only two imports were made. Sale was made in local market and to few parties. Entire sales are vouched, detailed and verifiable and no defect in the said record was found. The AO made no comments on facts. The remand report was also taken where the AO has raised the objection that no quality-wise details were maintained (PB 109-112).

Shri N.M. Ranka argued that quality-wise details are neither possible nor practicable and other similar manufacturers are not maintaining and it was not maintained in the past or succeeding years. No revaluation/addition in the past and subsequent years have been made.

He invited our attention to the order of the Tribunal in the cases of Raj Enterprises v. HO (1995) 51 TTJ (Jp) 408, para 4 PB 101 and Piasadilal Devakinandan 22 Tax World 191 PB 128-129. CIT v. Gotan Lime Khanij Udhyog . Incorrect valuation (PB 112) which is not supported by any material/evidence. The yield is not low (PB 112).

The yield has been shown at 22.12 per cent out of sorted emeralds against 17.11 per cent (PB 35) for the asst. yr. 1999-2000; In the case of M.D. Jewellers (PB 55), yield was 21 per cent and was accepted by the Hon'ble Tribunal by order dt. 16th Aug., 1984. The Hon'ble Tribunal has discussed the processes of manufacturing in paras 2 and 5 after spot inspection. Case was cited and copy was filed. (PB 53-58).

Applying of average rate was objected to (para 2 page No. 13). With the average rate, results would be distorted. The value of closing stock is Rs. 2,40,500 [Rs. 2,03,926 being item No. (iv)] plus Rs. 36,574 out of (i), (ii) and (iii) proved PB 115 paras 1.30 and 1.31 and chart PB 38.

7. As regards the controversy about cost claimed as computed by Mr.

Bafna, notice of AO dt. 17th Dec, 2002 was received (PB 8-9). The assessee has replied on 24th Dec, 2002 before AO (PB 13-16 paras 2-5).

(i) Affidavit of Shri P.C. Dhadda (PB 103 para 4), (ii) Affidavit of Shri H.C. Jain, accountant (PB 105), (iii) Certificate of Mr. Bafna, chartered accountant (PB 119) were filed. Mr. Bafna and Mr. H.C. Jain also appeared in person who stood to the testimony and were not controverted. Shri P.C. Dhadda was not required to appear for examination. It is well-settled that in such circumstances contents of the affidavits/certificate stood proved in view of Hon'ble apex Court decision in the case of Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC). There was no admission by Shri Bafna and Shri H.C. Jain. As directed by the AO, detailed workings were submitted and well explained but ignored by the AO. Alleged admission, if any, was not finding on the assessee by the AO. The Hon'ble apex Court decision in the case of Pullangode Rubber & Produce Co. Ltd. v. State of Kerala and Anr.

supports the arguments, which was cited before the learned CIT(A) also. There was assessee's reply vide para 1.28 (PB 114) and objection dt. 17th Dec, 2004 (PB 119).

8. The impugned addition by the AO and its sustenance by the CIT(A) is arbitrary. The action is punitive and not to the best of the judgment.

The discretion has been illegally exercised in favour of the Revenue.

9. It is not a judicious and judicial act. The scope of 'best judgment' assessment under the IT law came up for consideration before the Judicial Committee as early as 1937 in CIT v. Laxminarain Badridas (1937) 5 ITR 170 (PC) Therein, Lord Russell of Kllowen, speaking for the Judicial Committee, observed : "The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by the assessments of the assesee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense, too, the assessment must be to some extent arbitrary."In Reghubar Mandal Harihar Mandal v. State of Bihar, a case arising under the Bihar Sales-tax Act, 1944, the law relating to "best judgment" assessment was examined at length by this Court. Therein, S.K. Das J., speaking for the Court, observed : "No doubt it is true that when the returns and the books of account are rejected, the AO must make an estimate, and to the extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion. To use the words of Lord Russell of Killowen again, he must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must lake into consideration such materials as the AO has before him, including the assessee's circumstances, knowledge and previous returns and all other matters which the AO thinks will assist him in arriving at a fair and proper estimate. There were no defects - addition is without basis, imaginary and deserves to be deleted." 11. The learned Departmental Representative, on the other hand, supported the orders of lower authorities.

12. We have perused the facts of the case. As stated, a search was carried out on 29th Oct., 1999 at the common premises of M/s P.C.Dhadda & Co. and that of the assessee and the search warrant was in the name of M/s: P.C. Dhadda & Co. and not on assessee and P.C. Dhaddha was out of station at the time of search. There was a mixing of goods of M/s P.C. Dhaddha & Co. and that of the assessee. The assessee has submitted, vide various letters before the authorities below, the quantitative details of opening, purchases, sales and closing stock.

The movement of goods was duly explained as is evident from details of opening, purchases, manufacturing and sale from 1st April, 1999 to 29th Oct., 1999 at PB-38 and trading account of rough emeralds and cut emeralds at PB-38 for the same period. Mr. P.C. Dhadda was out of India at the time of search and returned only on 12th Nov., 1999. Inventory of closing stock as on 29th Oct., 1999 of the assessee company along with copy of stock register were submitted before the seizure was made on 11th Nov., 1999. As per explanation submitted by the assessee at PB-38 and PB-39 through various letters and submission before lower authorities, we find that opening stock of 95,510 carats of rough emerald was sorted out for manufacturing on 2nd April, 1999 ultimately 50,510 carats were transferred to emerald Tall account and 45,000 carats to manufacturing account, when the assessee on sorting, found that 50,510 carats of Tall Kharad with its cost of Rs. 15,153 is not worth manufacturing, as per stock register. Finished products of 10,856 carats were manufactured by 12th May, 1999 from 45,000 carats. The resultant Tall was of 4,830 carats, in the process of manufacturing and the said 4,830 carats is reflected in stock register as receipt.

Similarly, finished emeralds were shown in the stock register under the emerald cuts.

13. As regards imports made vide invoices as per PB 41 to 44, i.e.

imported on 29th April, 1999 was made for 2,68,515 carats, which after sorting resulted in 98,000 carats for manufacturing and 1,50,515 carats of Tall and entries were made in stock register. 20,000 carats were sold as it is without processing for Rs. 11,00,000. 98,000 carats of rough emeralds were put to manufacturing on 29th April, 1999 which resulted into finished product of 19,890 carats by 17th May, 1999.

There was a Tall of 5,070 carats in the process of manufacturing and corresponding entries were made in the stock register. Out of rough emeralds weighing 1,07,171.50 carats imported, rough emerald weighing 5,830 carats were sold as it is without processing and balance of 1,01,341.50 carats were to manufacturing resulting into 28,670 carats of finished product by 18th June, 1999. There was Tall of 5,515 carats in the process of manufacturing and relevant entries were there in the stock register. Two lots of Tall Kharad weighing 50,510 (out of opening stock) and 1,50,515 carats (out of rough emerald imported on 29th April, 1999) were put to manufacturing on 18th June, 1999 resulting on 39,105 carats of finished product by 2nd Aug., 1999. As explained the wages paid was Rs. 1,43,618 on a value of Rs. 60,308 which was in stock as at 29th Oct., 1999. The total cost computed was Rs. 2,03,926. Out of other manufactured cut emeralds there was left over of 4,337 carats of cheap quality as explained. Therefore, the product manufactured by 2nd Aug., 1999 and the leftover product both aggregating to 43,442.53 was of cost of Rs. 2,40,500.

14. The assessee has computed the actual cost of 43,442.53 carats including the wages at Rs. 2,40,500. Therefore, the working done as per AO's order cannot become a basis of valuation of 43,442.53 carats. No defect has been pointed by the AO or learned CIT(A) in the opening stock, purchases, manufacturing, closing stock and the valuation as mentioned hereinbefore except the impugned valuation in closing stock.

The said explanation was given before the AO and the learned CIT(A) through various letters and submissions. No defect has been pointed out except there is no qualitative tally, which is neither possible nor practicable on account of special features of the trade of manufacturing. The raw Kharad is nature's product and each stone differs from the other.

15. Mr. N.M. Ranka, has displayed in the Court, the products at various stages, (from raw material to finished product stage) and explained the process as under: (a) That the precious stones are the nature's product. There is no standard quality of the lumps of rough emeralds which are excavated from the mother earth. Rough emeralds imported, were of big sizes and in lump shape of different sizes. The purchases have to be made in bulk and by way of a lot.

(b) The rough emeralds so purchased are sorted out to find out as to which of the pieces are fit for manufacturing/processing. Others what is to be manufactured/processed is sorted out. Whatever remains as rejection, popularly known as "Tall". Such Tall is of negligible value. It remains to be accumulated.

(c) The selected rough emeralds are given to the Karigars for conversion into various sizes. Marking is done. Cutting is done and 'ghat' is made manually with hand driven machine. Ghat of different pieces are made by different persons/Karigars.

(d) After making of ghat/shaping, the pieces are put for polishing.

Each and every piece of precious stone is affixed on a small wooden stick. The polishing is done manually and on hand driving polishing wheels to give the correct edges. It enhances shine in the stone.

(e) After polishing, the polished product is again put in chemicals and thereafter assortments are made. Assortments are kept in packets and from such assorted packet products are mixed by making re-assortments looking to the requirements and demands.

(f) As stated hereinabove, the rough product has to come in the hands of different persons and under different process. As mentioned hereinabove, the rough precious stones being nature's product are not of standard quality. Therefore, the ultimate yield differs.

16. The fall in gross profit was explained by Mr. N.M. Ranka due to tough competition, market being sluggish and slow and the assessee company decided to substantially reduce its profit by sale at lower margin of profit to stand in competition in the market and to enhance its turnover and ultimately turnover increased from Rs. 4.48 crores to Rs. 6.69 crores. Most of rough emeralds have been sold as it is to wholesalers/manufacturers and therefore the gross profit was low. The assessee paid Rs. 6,07,615 as foreign exchange difference in respect of purchases in dollars. With the above background, we find that the assessee has very well explained that the only low quality goods were left in stock, whose value cannot exceed Rs. 2,40,500 for 43,442.53 carats as against valuation made by the AO at Rs. 1,77,08,478. The whole position of the stock was explained by Sh. H.C. Jain, accountant, and Mr. Bafna, chartered accountant, and the explanations by Sh. P.C.Dhadda and Sh. H.C. Jain, accountant and the chartered accountant were submitted through affidavits/annexures and are on record. Sh. P.C.Dhadda was not required by the AO for examination. Mr. Bafna and Mr.

H.C. Jain appeared in person and their statements have not been controverted. There was no admission made by the chartered accountant or accountant. Therefore, the AO is not justified in drawing adverse inference on the statements of Mr. Bafna, chartered accountant and Mr.

H.C. Jain, accountant. There is no finding by the AO that the assessee has admitted the valuation, as proposed by AO. Therefore, the contents of the affidavits of Sh. P.C. Dhadda (sic-Mr. H.C. Jain), accountant, attain finality in view of Hon'ble apex Court decision in the case of Mehta Paiikh & Co. (supra). Also, the question arises when the assessee has established, as in the present case, that the closing stock of low quality remains as balance of a particular cost i.e., Rs. 2,40,500, whether applying an average cost at Rs. 407.63 per carat i.e., a cost which has the average of value of stock sold which is of much higher value than the value of actual stock of low quality will be the accurate valuation and whether it can be said that such average cost if applied to a quantity of closing stock will give an accurate income.

The answer shall be 'No' and will be absurd. This is not the purpose of IT Act and the income cannot be computed on the whims, fancies, surmises and conjectures of AO. Therefore, in the present case, the assessee has rightly valued the closing stock of rough emeralds, cut emeralds and has rightly identified from the mixed stock of M/s P.C.Dhadda & Co. and valued the same as per details and P&L a/c a't PB 38 and 39 in assessee's paper book. Therefore, in our view, the assessee has supplied all the information possible and made the explanation as mentioned hereinbefore, to the AO and learned CIT(A). The books of account have also not been rejected in the present case. Therefore, the act of the AO and/or learned CIT(A) in valuing a different figure than as explained by the assessee for closing stock is not a judicious act.

In such circumstances and facts of the case, the valuation of closing stock of 43,442.53 carats is accepted at Rs. 2,40,500. Thus, ground Nos. 1 to 1.13 of assessee's appeal and ground No. 1 of cross-objection of assessee are allowed.

17. In ground Nos. 2 to 2.3 of the assessee and ground No. 2 of CO., the assessee's grievance is against the addition on account of undervaluation of work-in-progress by Rs. 29.77,553 which has been sustained by the learned CIT(A) at Rs. 9,52,521.

And the Revenue grievance in ground No. 1 of their appeal is against sustenance of the addition from Rs. 29,77,553 to Rs. 9,52,521 by the learned CIT(A).

18. Briefly stated, the facts in the said grounds are as per pp. 4 and 5 of AO's order as under: The assessee has valued closing work-in-progress at Rs. 65,72,265.

When asked to prove this valuation, the assessee filed a copy of bill dt. 30th Aug., 1999 whereby 89,440 cts rough emerald were imported at the cost of Rs. 1,06,45,402. This bill showed 6 lots varying in cost between 1.50 U.S. Dollars and 35 U.S. Dollars. It was explained that after sorting, 10,900 cts were sold for Rs. 42,31,750. On questioning, it was admitted that the 6 lots had been mixed up and it could not be shown as to from which lot 10,900 cts were sold. The stock register also showed one entry for the whole of 6 lots contained in the bill because, the assessee's practice was to show receipt in the stock register on the basis of bills and not on the basis of quality of material purchased. Since it could not be ascertained as to from which lot the sales have been effected, the only way to work out the cost of the balance 78,540 cts issued for production was to take the average cost plus the manufacturing wages incurred thereon.

As the assessee has declared the value of work-in-progress at Rs. 65,72,265 only, an addition of Rs. 29,77,553 is made for undervaluation of work-in-progress.

19. The learned CIT(A) for the reasons mentioned in vide para 6.3 of his order sustained an addition of Rs. 9,52,521, thus giving a relief of Rs. 20,25,032.

20. We have perused the facts of the case and after hearing the parties, we find that there is no dispute as regards quantitative details in the stock register maintained by the assessee. The only objection of the AO is that the assessee has not maintained the qualitative details with respect to the work-in-progress maintained by the assessee and accordingly the AO opted to value' this closing work-in-progress at average cost. The assessee has explained before the authorities below that the assessee has imported 89,440 carats of rough emerald vide bill dt. 30th Aug., 1999 (PB 42 and 120 ) for Rs. 1,06,45,402 and it consisted of 6 lots with cost between US$ 1.50 to US$ 35. In lot No. 14,449 gms. equal to 22,245 carats was sorted out.

After sorting better quality Kharad was sold with weight 1,09,000 carats for Rs. 45,31,750. It includes, sale at Rs. 751 and Rs. 600 as well against average rate of 304.15 carats (para 2.3 at PB 93). It was explained vide para 3.1 (PB 124) that the value of left out 11,345 carats was Rs. 25,06,909. The assessee earned a profit of Rs. 2,55,418 i.e. 5.5 per cent which is more than normal rate of 2.3 per cent. On the basis of the working of the AO, profit on sale of Rs. 45,31,000 would be about Rs. 32,35,000 i.e. above 70 per cent which is impossible. Even on the working of the learned CIT(A), profit would be Rs. 12,49,509. (Rs. 45,31,000 less Rs. 32,81,441) i.e. about 30 per cent which is not possible. Moreover, the AO has not invoked the provisions of Section 145 of the Act and have not rejected the books of account.

21. In such circumstances and facts of the case, when the assessee has completely explained the work-in-progress and its valuation, then the AO is not justified in making a different valuation i.e. on the basis of average cost plus manufacturing wages and the AO has not pointed out any specific defect in the explanation made by the assessee and therefore, the valuation of work-in-progress made by the assessee at Rs. 65,72,265 is accepted by us. Thus, the learned CIT(A) is not justified in holding that the issue of mixing up of stocks with P.C.Dhadda & Co. is not relevant and valuation by Departmental Valuer is not relevant. Therefore, the additions sustained by the learned CIT(A) is directed to be deleted. Thus, ground Nos. 2 to 2.3 of the assessee and the ground No. 2 of the CO. of the assessee are allowed and the ground No. l of the Revenue is dismissed.

22. In ground No. 3 of the assessee and ground No. 3 of the CO, the assessee's grievance is against the decision of learned CIT(A) that the stock of the assessee was not mixed up and was not valued and not under seizure on 11th Nov., 1999 in the name of its director, Shri Prakash Chand Dhadda.

23. Briefly stated, the facts of the case are that the AO has not made any discussion with regard to the said grounds through a detailed letter dt. 5th Dec, 2002 (PB 1) which was submitted before the AO whereas the learned CIT(A) has given his findings vide paras 5.3 and 5.4 of his order that the plea of the assessee that stock is mixed up with M/s P.C. Dhadda & Co. at the time of search is not correct and the Department valuation by the Departmental Valuer who has valued the closing stock which consists of two concerns, namely, M/s P.C. Dhadda & Co. and the assessee is not correct.

24. Shri N.M. Ranka, senior advocate, argued that the detailed submissions were made before the learned CIT(A) vide written submissions dt. 18th Sept., 2004 vide paras 1.4 to 1.9 of the written submissions in PB 31 to 33 and the valuation report was also submitted before the learned CIT(A). The Departmental Valuer has apprised the value of the stock found on 29th Oct., 1999 and the cost in the books of account of M/s P.C. Dhadda & Co. and the assessee was as under: The said stock also includes the goods on approval given by M/s P.C.Dhadda & Co. of Rs. 3,43,055 and thus there remains a nominal difference and reason whereof are the value put by the DVO at fair market value and if the margin of profit is reduced from the value put by DVO and then there shall be nil and negligence difference in two values and the other reason is that coloured stones have no standard value which differs from person to person. The details of many instances were given vide paras 3.3 to 3.7 of the submissions by the assessee before the learned CIT(A) (PB 36-37), vide written submissions dt. 18th Oct., 2004 in paras 2.6 and 2.7, PB 93-94 , written submissions dt. 6th Dec, 2004 vide paras 2.8 and 2.9 PB 99-100, written submissions dt. 18th Dec, 2004 in paras 2.10, PB 116 and vide paras 4.1 and 4.2 at PB 117 and written submissions dt. 21st Dec, 2004 vide paras 5, 5.1 and paras 6 at PB 125-126). The written submissions with affidavits and other accompaniments were sent by the learned CIT(A) to the AO for his comments and AO has sent three reports where the AO has observed that the valuation reports are not of much help and assessee's stock could not be identified and assessee himself was responsible for mixing up of the stock.

25. The learned Departmental Representative, on the other hand, relied upon the findings of the authorities below.

26. After hearing the parties and perusal of the facts, we find that the assessee has submitted the explanation before the AO and the learned CIT(A) that the stock of the assessee is mixed up with the stock of M/s P.C. Dhadda & Co. and to the effect the affidavits have been given by Shri P.C. Dhadda and Shri Bafna who were not cross-examined by any of the authorities below. As aforementioned and a decision has been taken by us while deciding the issue in the ground Nos. 1 to 1.13 of the assessee and ground No. 1 of the CO of the assessee and also in ground Nos. 2 to 2.3 of the assesses and the ground No. 2 of the CO of the assessee that the assessee has duly explained the stocks and work-in-progress and also the valuation of the same and the authorities below have not found out any specific defects in the same. Therefore, the stock of the assessee cannot be said to be unexplained by the assessee. Since the explanation of the assessee and the affidavits of Shri P.C. Dhadda and Shri Bafna have not been disproved by any of the authorities below, in such circumstances and facts of the case, the explanation of the assessee has to be accepted and no adverse view can be drawn from the explanation or the statements made or submitted by the assessee. Shri N.M. Ranka relied upon the decisions of Hon'ble apex Court in the cases of Mehta Parikh & Co.

(supra), State v. Guljari Lal Tandon and J.A. Naidu v. State of Maharastra . In view of the arguments made by Shri N.M, Ranka and explanation given by the assessee, we are of the view that the closing stock of the assessee as on 29th Oct., 1999 was mixed up and was under seizure since 11th Nov., 1999 and the said stock was not found anywhere else and the Department has not brought on record that the assessee has sold the stock to any other person and the business of the assessee has been closed and the assessee has filed the return of income for the Mowing years upto assessment year 2006-07 from the impugned assessment (PB 199 to 216) and no unrecorded sales in the following years have been brought on record and has not been pointed out by the learned Departmental Representative and therefore, the findings of the learned CIT(A) are contrary to the material available on record and therefore, the explanation given by the assessee and the valuation made by the Departmental Valuer that cost of stocks of M/s P.C. Dhadda & Co. at Rs. 60,92,357 and that of the assessee at Rs. 68,33,199 is accepted. The assessee's explanation that the said stocks includes the goods on approval given by M/s P.C. Dhadda & Co. of Rs. 3,43.055 is accepted. Therefore, the learned CIT(A) is not justified in making an observation that the stock of the assessee company as on the date of search was not mixed up and was not valued and not under seizure made on 11th Nov., 1999 and thus the explanation of the assessee on the issue is accepted. Thus, ground No. 3 of the assessee and ground No. 3 of the CO of the assessee is allowed.

27. In ground No. 2, the Revenue's grievance is against the deletion of addition of Rs. 1,11,91,527 on account of suppression of production and in ground No. 4 of the CO, the assessee supports the order of the learned CIT(A).

28. Briefly stated the facts of the case are as per pp. 5 and 6 of AO's order as under: This year yield of emerald stones from rough was shown at 22.12 per cent against 17.11 per cent last year. I questioned the assessee about the yield and the explanations as per the letters dt. 11th Nov., 2002 and 24th Dec, 2002 were that the yield was better than last year. It was stated before me orally that there was no scientific method to calculate yield because the rough emeralds were of different quality and size and the yield depended on quality and size of rough used. It was also stated that emerald Tall was produced in the process of production of stones. This fact is clear from the stock details submitted with the return. I, therefore, looked into the records and found that the average cost of rough emerald consumed this year was Rs. 78.74 per carat (41252675/523906) against Rs. 37.88 per cent (7465270/197050) last year. This indicated that the rough used was of much better quality this year.

The percentage of low quality Tall produced was also low this year i.e. 3.46 per cent (15415 x 100/445366) against 22.97 per cent (45274 x 100/197050) last year. The wastage claimed this year is 74.41 per cent [331430.50 out of 445366.50 cts] against 59.50 per cent (118050.68 out of 197050 cts) last year. These facts were pointed out to the assessee vide my letter dt. 17th Dec, 2002. The reply filed on 24th Dec, 2002 was that the yield was better last year and the yield may not be compared product cost-wise. This reply is very vague. There was no explanation for high percentage of waste claimed. There was no reply to the question posed in view of the increased cost of rough emerald used and low quantity of Tall produced indicating better quality of material used for production of emerald stones. In view of these facts, I estimate the yield at 25 per cent which means that the production of stones will be 1,11,341.50 cts against 98,521 cts declared, the additional production being 12,820.50 cts. Average sales price of emerald stones was Rs. 872.94 (4,97,39.254/56978.82). At that rate, the value of suppressed production is taken at Rs. 1,11,91,527. An addition of Rs. 1,11,91,527 is therefore, made for suppression of production of emerald stones.

29. The learned CIT(A) deleted the said addition vide para 7.2 at p. 18 of his order (relevant portion is produced) : The AO is not justified in making such addition in absence of any enquiry and examination of purchase and sale out of books whereas the AO has admitted that the purchases and sales are fully vouched and stock register is maintained which is evident from the assessment order. Moreover, the quantity of rough emeralds is much higher in comparison to the preceding assessment order and the purchase price of emerald rough stones has not been examined by the AO and he just on his presumption made addition which cannot be said to be justified. The AO has also not given any comparable case of similar business in which the higher yield of production is declared by a particular assessee. Since the appellant assessee has shown higher rate of yield in comparison to the preceding assessment year there does not arise any occasion for suppression of production only on the ground of higher wastage and lower production of Tall Kharad.

I am therefore, of the considered opinion that the addition as made by the AO is based on contradictory findings without any enquiry and the same is not justified and therefore, it is deleted.

30. After hearing the parties and on perusal of the facts, we find that the addition made by the AO is on account of low yield declared by the assessee. The AO has not pointed out any mistake in the opening stock, purchases, sales and the closing stock and there is no dispute in this regard. No material has been brought on record by the AO for proving the low production/low yield and the assessee has made the sales out of books of account. No comparable case has been brought on record. The assessee has declared the yield at 22.12 per cent. The assessee has submitted the comparable case of M/s M.D. Jewellers where the Tribunal has accepted a yield of 21 per cent (PB 55). The learned Counsel for the assessee, Shri N.M. Ranka, has relied upon various decisions in support of deletion made by the learned CIT(A) as under:Khandelwal Gems Trading Corporation v. Asstt. CIT (1996) 54 TTJ (JP) 479, 481; (iii) Shanker Rice Co. v. ITO (2000) 67 TTJ (Asr)(SB) 84 : (2000) 72 ITD 139 (Asr)(SB); (iv) IAC v. Cosmopolitan Trading Corporation (1983) 34 CTR (Trib) 37 (Jp)(SB): (1985) 14 1TD 327 (Jp)(SB); (viii) Triveni Pharma v. ITO (2004) 85 TTJ (Jp)(TM) 950 : (2005) 92 TTD 125 (JpXTM); (ix) Uttam Chuna Pathar Udyog v. ITO (1997) 59 TTJ (Jp) 763 : (1998) 65 ITD 466 (Jp).

31. Therefore, in such circumstances and facts of the case, the AO is not justified in making any addition in the absence of any material on record. Hence, we find no infirmity in the order of the learned CIT(A) who has rightly deleted the addition of Rs. 1,11,91,527 made by the AO.Thus, ground No. 2 of the Revenue is dismissed and ground No. 4 of the CO of the assessee is allowed.

32. In ground Nos. 4 and 4.1 of the assessee and in ground No. 5 of the CO, the assessee's grievance is against the sustenance of disallowance of Rs. 56,012 out of foreign tour expenses.

33. Briefly stated, the facts are as per pp. 6 and 7 of AO's order as under: Details of travelling expenses of Rs. 3,18,397 filed. This included two amounts of Rs, 54,062 and Rs. 11,950 on travel to New York. I had earlier questioned about the directors and vide letter dt. 5th Dec, 2002, the assessee had stated that Shri Shreyans Dhadda became a director on 10th Dec, 1999. In the letter, it was stated as under : Shri Shreyans Dhadda was also a student and therefore, during the previous year under assessment was not actively attending to the business of the assessee company.

The assessee was required to explain why the claim for travelling expenses in the name of Shri Shreyans Dhadda be not disallowed as he was not actively engaged in business and was a student only. Vide letter dt. 24th Dec, 2002, it was explained that Shri Shreyans Dhadda had travelled to Bangkok and New York on the request of the assessee's supplier, M/s Mona Lisa Gems, to see the fresh emerald rough and to study the market. From the purchase bills, it is seen that M/s Mona Lisa Gems are based in New York and was the assessee's regular supplier of emerald rough. Shri Shreyans Dhadda had travelled the Bangkok and New York on 22nd March, 2000 and the travel details showed that Shri Prakash Chand Dhadda, the main director who was looking after the business had already left for New York on 21st March, 2000 i.e. a day earlier. There was thus no occasion for Shri Shreyans Dhadda to see the emerald rough at M/s Mona Lisa Gems, when the main director was already there. The assesses also could not show any business connection with Bangkok.

Considering the above facts, I am satisfied that the travelling expenses claimed in the name of Shri Shreyans Dhadda. have no business connection, I therefore, disallow the expenses claimed at Rs. 56,012 (54,062+1,950) as unrelated to the business needs of the assessee.

35. After perusal of the facts, we find that the director Shri Shreyans Dhadda travelled to Bangkok and New York. The explanation of the assessee was that Shri Shreyans Dhadda has visited the assessee's suppliers, M/s Monalisa Gems who is the regular supplier of emerald rough to the assessee. Shri N.M Ranka argued that Shri Shreyans Dhadda has travelled to Bangkok and New York for the purpose of business and to understand the trend of the market. We are convinced with the explanation given by the assessee and arguments of Shri N.M. Ranka that Shri Shreyans Dhadda has travelled to Bangkok and New York on business purposes of the assessee in the capacity as the director of the assessee company and the AO has not brought on record any personal element of Shri Shreyans Dhadda in the said travelling and therefore, the AO was not justified in making the addition on this account. Hence, the addition sustained by the learned CIT(A) is reversed. Thus, ground Nos. 4 and 4.1 of the assessee and ground No. 5 of the CO of the assessee are allowed.

36. In ground Nos. 5, 6, 7, 8 and 9, the assessee is aggrieved against the charging of interest under Sections 234B, 220(2) of the Act and computing the total income at Rs. 1,87,68,801 against returned income at Rs. 2,92,390 and not giving of credit of tax of Rs. 1,15,500 and holding the tax and interest payable at Rs. 1,30,24,353.

37. After hearing the parties and on perusal of the facts, we find that the issues raised in the ground Nos. 5, 6, 8 and 9 are consequential and as regards the credit of tax of Rs. 1,15,500 in ground No. 7 of the assessee, the AO is directed to allow the same after examining the claim of the assessee. Thus, ground No. 7 of the assessee is allowed for statistical purposes.

38. The ground No. 10 is general in nature and does not require any adjudication.

39. In the result, the appeal of the assessee in ITA No. 172/Jp/2005 is partly allowed, the appeal of the Revenue in ITA No. T16/Jp/2005 is dismissed and the CO of the assessee bearing No. 22/Jp/2005 is allowed....