Ram Rattan, Accountant Member -
(1.) A Special Bench has been constituted by the Hon'ble President, the Tribunal to dispose of this appeal by the revenue arising out of the order of the Commissioner (Appeals) Rajasthan-II, Jaipur. The relevant accounting period ended on Diwali 1976 (20-10-1976).
(2.) Shri P.C. Hadia, the IAC, Jaipur and Shri H.R. Lodha, the senior departmental representative put up appearance on behalf of the revenue, while Shri N.M. Ranka and J.K. Ranka, advocates appeared for the assessee. Shri R.L. Goyal and Shri Sunil Goyal appeared as interveners.
One of the grievances by the revenue is that the learned Commissioner has erred in deleting the addition of the closing stock.
(3.) THE facts briefly stated are that the assessee-firm derives income from dealing in precious and semi-precious stones. It sells such ready goods after purchase from the market as well as out of its own manufacture. Goods are also sold through the agency of others mostly the sister concerns. It also undertakes to sell goods of others, again mostly of its sister concerns, as commission agents. THE sister concerns mainly are K.D. Jhaveri, Jaipur and Mahendra Jewellers, Jaipur. THE assessee is mainly an exporter of precious stones. In the jewellery account, on total sales of Rs. 10,18,213 gross profit shown is at Rs. 4,05,603 which reflects a rate of about 40 per cent. THE value of the closing stock shown in this account is Rs. 25,58,907. THE ITO has observed that proviso to Section 145(1) of the Income-tax Act, 1961 ('the Act') is applicable in the case of the assessee as held by the Tribunal in the assessee's appeal [IT Appeal No. 946 (Jp.) of 1979] for the assessment year 1975-76. THE ITO has further observed that 'admittedly, the assessee has been valuing its closing stock at cost.' He also observed that this method has been followed by the assessee year after year. Since the actual cost of each item in the closing stock was not easily ascertainable, the assessee has been working out the value of the closing stock on the basis of the export price. For the assessment year under appeal the export price of the closing stock including the goods in hand in India, according to the assessee, was Rs. 49,29,162. THEre was, thus, difference of Rs. 23,70,255 in the export value of the goods in the closing stock and the value actually shown in the closing stock. THE rate of disparity, thus, works out to 48 per cent. In other words, the export price is reduced by 48 per cent to arrive at the value of the closing stock. According to the ITO, the assessee has been manipulating the value of its closing stock by applying different disparity rates in different years with a view to keep its income at a low level. He also observed that disparity rate had no relation with gross profit shown by the assessee that is to say the gross profit rate shown by the assessee was 40 per cent, while the disparity rate was 48 per cent. He, therefore, held that the assessee had undervalued the closing stock by adopting higher disparity rate. He considered disparity rate of 40 per cent as reasonable as held by the Tribunal in the case of the assessee itself for the assessment year 1975-76. THE other aspect which according to the ITO resulted in under valuation of closing stock was the export value of the closing stock adopted by the assessee. He noted that the assessee had valued its closing stock lying abroad at the rate of Rs. 7.50 per dollar up to 30-6-1976 and thereafter at Rs. 8.50 per dollar. According to the ITO the exchange rate of dollar on the closing date of the accounting period, viz., 21-10-1976 was Rs. 8.95 per dollar and, therefore, there was no reason why the assessee should have valued the closing stock at lesser rate of exchange for the dollar while converting the value in Indian rupee. He, therefore, adopted the export price of the closing stock at Rs. 54,61,251 (by taking the exchange rate of Rs. 8.95 per dollar) against the value taken by the assessee at Rs. 49,29,162. THE ITO worked out the undervaluation of closing stock by the assessee at Rs. 7,17,844 and made addition to the declared profits, accordingly. He calculated the additions, thus: