ADDL CIT 5(2), MUMBAI vs. MEHUL IMPEX LTD, MUMBAI

The appeal filed by the revenue is directed against the order dated 14-09-2010 passed by Ld CIT(A)-9, Mumbai and it relates to the assessment year 2007-08. The revenue is aggrieved by the decision rendered by Ld CIT(A) on the following issues:- (a) Addition made on account of under valuation of sales. (b) Disallowance of labour charges.

The assessee company is engaged in the business of export, import, processing, trading of diamonds. The AO noticed that the assessee has sold 36958.87 carats of diamonds to a concern named M/s Gitanjali Gems Ltd @ Rs.875/- per carat, where as the average import price of diamonds was Rs.939/-. It is stated that both the companies are having common directors. Hence the AO took the view that the assessee has understated Rs.84/- per carat and accordingly made an addition of Rs.31,04,454/- towards suppression of sales. The AO further noticed that the labour charges booked by the assessee have increased during the year and the same was disproportionate to the increase in the sales. Accordingly, the AO disallowed a sum of Rs.19,81,784/- by adopting some methodology.

The Ld CIT(A) deleted the addition made towards suppression of sales by accepting the explanation of the assessee that the assessee has sold low quality diamonds to M/s Gitanjali Gems Ltd and further the AO should have made corresponding adjustment to the closing stock. With regard to the labour charges the Ld CIT(A) granted partial relief by holding that the addition should be restricted to Rs.6/- per carat.

We heard the parties and perused the record. With regard to the first issue, we notice that the Ld CIT(A) has granted relief by accepting the explanation of the assessee that the diamonds sold to M/s Gitanjali Gems Ltd is of low quality items. At the time of hearing, the Ld A.R was specifically asked to produce evidence to substantiate the said claim of low quality diamonds. The Ld A.R submitted that the diamonds are imported in lots and thereafter, they are sorted out by segregating them into different qualities. Though the import price is constant in respect of the entire lot, the assessee would be realising different rates on the basis of the quality of diamonds. When the Ld A.R was asked for sorting report, he submitted that the assessee should be provided an opportunity to furnish the same as additional evidence. Since the evidences, if any, that may be furnished by the assessee requires examination of the tax authorities, the bench proposed to set aside this issue to the file of the Ld CIT(A) and the Ld A.R readily agreed to the same. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to his file with the direction to examine this issue afresh. If the assessee filed