Vora Brothers Vs ACIT (ITAT Mumbai)
Bogus Diamond Bill, Real Diamonds and Accepted Sales: ITAT Rejects 100% Purchase Addition, Sends Profit Calculation Back
The Disputed Diamond Purchases
Vora Brothers, a partnership firm trading in diamonds, recorded purchases of 466.74 carats worth ₹66,74,382 from Nazar Impex Pvt. Ltd. Information received from the Investigation Wing concerning the Rajendra Jain/Sanjay Choudhary group led the Assessing Officer to treat the supplier’s bill as an accommodation entry.
The officer found the purchase from Nazar Impex unverifiable and rejected the firm’s books under section 145(3). But he also recorded an important fact: the diamonds appeared in the stock register, corresponding sales had been shown, and the sales were accepted. In his view, the firm had obtained the diamonds from the grey market and used Nazar Impex’s bill to account for them.
On that basis, the Assessing Officer did not add the full purchase price. He estimated the profit or cost benefit embedded in the disputed purchase at 12.5%, making an addition of ₹8,34,298.
The Commissioner (Appeals) took a much stricter view. After issuing an enhancement notice, he increased the addition to ₹66,74,382, the entire amount of the purchase bill. Relying on the Bombay High Court’s decision in PCIT v. Kanak Impex (India) Ltd., he reasoned that the firm had failed to prove physical delivery of diamonds from Nazar Impex. In particular, he found no delivery challans, transport or angadia records, stock inward evidence or independent acknowledgment linking the goods to that supplier.
The firm challenged the enhancement before the Tribunal.
The Assessee’s Case: Sales Cannot Come from Nowhere
Vora Brothers argued that its purchase entries were supported by its books and stock register and that the corresponding diamonds had been sold. The Assessing Officer himself had accepted the sales and limited his addition to an estimated profit element. According to the firm, the Commissioner (Appeals) could not disallow 100% of the purchase value while leaving the related sales undisturbed.
The firm relied on PCIT v. Mohammad Haji Adam & Co. and also cited PCIT v. Amcon Constructions. It argued that the proper approach was to determine the difference between the gross profit on the disputed purchases and the gross profit otherwise earned on comparable purchases. It proposed an addition of ₹1,50,174, calculated by applying a 2.25% difference to the disputed purchase value, instead of either the officer’s 12.5% estimate or the Commissioner (Appeals)’s full addition.
That calculation was the firm’s submission. The Tribunal did not adopt it as the final taxable amount.
What the Tribunal Decided
The Tribunal examined the Assessing Officer’s own findings. He had treated Nazar Impex’s bill as an accommodation bill, but had also found that diamonds were entered in the stock register, corresponding sales were recorded and sale proceeds were realised. He had inferred that the goods were sourced from the grey market. The Commissioner (Appeals) had not disturbed the rejection of the books under section 145(3).
In those circumstances, the Tribunal held that the exercise required was to determine the appropriate profit that the firm should have reported and the extent to which that profit had been understated. The Commissioner (Appeals)’s enhancement to the entire purchase value could not stand on the approach adopted in this case.
At the same time, the Tribunal did not simply restore the Assessing Officer’s 12.5% addition. Nor did it accept the firm’s suggested 2.25% differential. It sent the matter back to the Assessing Officer to determine a reasonable gross profit and bring the differential to tax.
The Tribunal identified possible bases for that exercise: the firm’s past accepted results, comparable data from others in the same business, or internal comparisons with its other purchases, as emphasised in Mohammad Haji Adam & Co. The appeal was partly allowed for statistical purposes, reflecting that the amount of the addition remains to be worked out.
Why the Distinction Matters
This order draws a distinction between the identity of the billed supplier and the existence of the goods sold. The Tribunal accepted that the Nazar Impex bill was an accommodation bill. Its decision did not declare the purchase from that company genuine. But the Assessing Officer’s findings also recognised that goods entered the firm’s trading stream and generated recorded sales.
The resulting task was therefore an estimate grounded in evidence, not an automatic choice between disallowing the entire bill and applying an unexplained percentage. The Tribunal required the officer to determine the appropriate gross profit on a reasonable basis.
Author’s Comments
The practical value of the ruling lies in its treatment of the Assessing Officer’s factual findings. Once the assessment itself records stock entries, corresponding sales and realisation of proceeds, a full purchase addition requires careful reconciliation with those accepted facts.
Equally, a taxpayer cannot assume that accepted sales entitle it to the precise margin it proposes. Vora Brothers sought a differential addition of ₹1.50 lakh, but the Tribunal ordered a fresh calculation using relevant comparisons. The ₹66.74 lakh enhancement has been displaced, while the final profit addition remains undecided.
For practitioners, the order underlines the need to put both sides of the transaction on record: evidence concerning the supplier and evidence of stock movement, sales and margins. Where books are rejected, the profit estimate should be supported by past results or meaningful comparable data, rather than resting on a rate alone.
Cases Discussed
- PCIT v. Kanak Impex (India) Ltd., [2025] 474 ITR 175 (Bombay High Court) — relied upon by the CIT(A) while enhancing the addition to 100% of the disputed purchase value; the assessee contended that the decision was distinguishable on the facts.
- PCIT v. Mohammad Haji Adam & Co., [2019] 103 taxmann.com 459 (Bombay High Court) — relied upon for determining the profit element where disputed purchases exist but corresponding sales are accepted; the Tribunal referred to its emphasis on internal comparable purchase data.
- PCIT v. Amcon Constructions, ITA No. 46 of 2024, dated 13.03.2026 (Bombay High Court) — cited by the assessee as reaffirming the principle relied upon in Mohammad Haji Adam & Co.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This is an appeal filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals) 51, Mumbai [‘Ld.CIT(A)’], dated 16.01.2026, pertaining to Assessment Year (AY) 2011-12.
2. Briefly, the facts of the case are that the assessee is a partnership firm engaged in the business of trading in diamonds. For the year under consideration, the assessee had shown purchase of 466.74 carats of diamonds amounting to Rs.66,74,382/- from M/s NazarImpex Pvt. Ltd. The Assessing Officer, on the basis of information received from the Investigation Wing in respect of Rajendra Jain/Sanjay Choudhary group, treated the said purchase as a non-genuine/accommodation-bill purchase. The Assessing Officer rejected the books of account of the assessee under section 145(3) of the Act and taking note of the corresponding sales claimed by the assessee, the Assessing Officer restricted the addition to the profit element embedded in the disputed purchases and estimated the same at 12.5%, resulting in an addition of Rs.8,34,298/-.
3. Being aggrieved, the assessee thereafter carried the matter in appeal before the ld. CIT(A). The Ld. CIT(A) enhanced the addition to Rs.66,74,382/-, being 100% of the disputed purchase value, by invoking section 251(2) of the Act and relying upon the decision of the Hon’ble Bombay High Court in the case of PCIT v. Kanak Impex (India) Ltd.
4. Aggrieved by the said enhancement, the assessee is in appeal before the Tribunal.
5. During the course of hearing, the ld. AR submitted that the impugned purchases were duly recorded in the books of account and the corresponding goods were entered in the stock register and subsequently sold. It was submitted that the corresponding sales have not been disputed by the AO. Therefore, according to the ld. AR, once the corresponding sales have been accepted, the entire purchase value cannot be brought to tax as unexplained income. The Ld. AR further submitted that the AO himself, after examining the facts, had restricted the addition to the profit element by applying a rate of 12.5% and had not treated the entire purchases as unexplained. It was contended that there was no justification for the Ld. CIT(A) to subsequently enhance the addition to 100% of the purchase value, particularly when the corresponding sales and movement of goods had not been disturbed. Reliance was placed upon the decision of the Hon’ble Bombay High Court in PCIT v. Mohammad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bombay), wherein, according to the ld. AR, it has been held that where the purchases are treated as non-genuine but the corresponding sales are accepted, the addition is required to be restricted to the profit element embedded in such purchases. It was submitted that the said principle is applicable to the facts of the present case which also stand reaffirmed in the recent decision of the Hon’ble Bombay High Court in case of PCIT vs Amcon Constructions (ITA No. 46 of 2024 dated 13.03.2026). It was submitted that the assessee had disclosed a GP rate of 10.25%, whereas the AO had estimated the GP at 12.5%. Therefore, it was submitted that if any addition is considered warranted, the same should be restricted to the differential GP of 2.25% on the disputed purchases of Rs.66,74,382/-which works out to Rs.1,50,174/-.
6. As regards the decision relied upon by the Ld. CIT(A) in PCIT v. Kanak Impex (India) Ltd., [2025] 474 ITR 175 (Bombay), it was submitted that the said decision is distinguishable on facts and cannot be applied without considering the specific factual position in the present case, particularly the acceptance of the corresponding sales and the quantitative details recorded by the assessee.
7. It was accordingly submitted that the enhancement made by the Ld. CIT(A) to the entire purchase value of Rs.66,74,382/- is not justified and prayed that the same be deleted. It was submitted that the addition be restricted to the profit element embedded in the impugned purchases in accordance with the ratio laid down by the Hon’ble Bombay High Court in Mohammad Haji Adam & Co. (supra) and in any case, not exceeding 12.5% determined by the AO.
8. The ld. DR has been heard, who has relied on the order passed by the ld. CIT(A) and reference was drawn to the findings of the ld. CIT(A) at para 6.10 to 6.13 which reads as under:
“6.10 I have carefully considered the submissions made by the appellant in response to the enhancement show-cause notice and its attempt to distinguish the decision of the Hon’ble Bombay High Court in Principal Commissioner of Income Tax vs. Kanak Impex (India) Ltd. I am unable to accept the appellant’s contention that the said decision is not applicable to the facts of the present case. A perusal of material on record shows that, notwithstanding the production of certain documents such as purchase invoice, ledger account, bank statements and export-related documents, the appellant has failed to establish the core requirement of proving actual physical delivery of diamonds from M/s. NazarImpexPvt. Ltd. The documents relied upon by the appellant merely evidence book entries, banking transactions and subsequent export activity, but do not demonstrate the physical movement of goods from the said supplier to the appellant. The reliance placed by the appellant on export documents and realization of sale proceeds is misplaced. These documents, at best, establish that the appellant exported diamonds and received consideration therefor, but they do not establish that the diamonds exported were procured from M/s. NazarImpexPvt. Ltd., particularly when the purchase is supported by a single consolidated invoice for the entire transaction, unaccompanied by any delivery challans, transport or angadia records, stock inward evidence or independent acknowledgment of receipt. Similar to the facts in Kanak Impex (India) Ltd., the appellant has not been able to substantiate the genuineness of the purchases with cogent and independent evidence, and the documentary material relied upon does not go beyond self-serving records maintained by the appellant.
6.11 The distinction sought to be drawn on the ground that certain documents were furnished during reassessment proceedings is also without merit. The Hon’ble High Court in Kanak Impex (India) Ltd. has laid down that where the assessee fails to prove the genuineness of purchases and the existence of the supplier as a real trading entity, the entire purchase amount is liable to be disallowed. In the present case, M/s. NazarImpexPvt. Ltd. has been found, pursuant to search proceedings, to be an accommodation entry provider issuing bogus bills without delivery of goods, and the appellant has failed to rebut these findings by establishing actual delivery. Therefore, the mere furnishing of invoices and bank payment details does not take the appellant’s case outside the ambit of the ratio laid down in Kanak Impex (India) Ltd.
6.12 It is my considered belief that while the factual foundation in Kanak Impex leading to the purchases being held as bogus was peculiar to that case, the underlying principle laid down by the Court is of universal application: when purchases are proved to be bogus and the assessee fails to establish actual receipt of goods, the entire purchase amount represents unexplained expenditure and is mandatorily disallowable under section 69C and restricting the disallowance to a mere profit element would defeat the statutory scheme and judicial mandate. Accordingly, in the absence of proof of actual delivery or consumption of goods, the entire purchase amount must be brought to tax.
6.13 The arguments of the appellant are therefore rejected and the entire purchase of Rs.66,74,382/- made by the appellant from M/s Nazar Impex Pvt Ltd is treated as bogus purchase and the addition done by the AO is enhanced to Rs.66,74,382/-. These grounds of appeal of the appellant are dismissed.”
9. The ld AR has in turn drawn our reference to the findings of the Assessing officer and relevant findings read as follows:
“4.5. The submission / details furnished by the assessee as also the materials available on record have been carefully perused and considered. From the above discussions, the followings facts emerge
(i) The Income tax Department has conducted search & seizure action in the case of the Group concerns of Shri Rajendra Jain and conclusively proved that these parties are engaged in the business of providing accommodation entries only as can be seen from the discussions in the preceding paragraphs. The parties are issuing bills without delivering any goods and services.
(ii) Evidently, the assessee had adopted a modus operandi to reduce its true profits by inflating its expenses including purchase expenses by taking accommodation entries from such parties.
(iii) Thus, in the books of accounts of the assessee, the purchases to the extent made from the above said parties remained unverifiable and hence I arrive at a conclusion that the purchases shown by the assessee in the books of accounts are inflated and bogus purchases are debited to trading account to suppress the true profits to be disclosed to the department.
(iv) The onus was upon the assessee to establish the genuineness of purchases made by the assessee.
(v) Mere filing of evidences in support of purchases and payments made through account payee cheques cannot be conclusive in a case where genuineness of transaction is in doubt.
BY.2011-12: u/s.143(3) r.w.s.147
4.6. From the above discussion, one can safely conclude that the assessee had obtained only the bills from M/s Nazar Impex Pvt.Ltd. will out actually getting the material. Thus, the bills issued by this party are nothing but accommodation entries. Accordingly, as the purchases booked by the assessee are not verifiable, the books of accounts of the assessee are not reliable. It is evicent that the books of the accounts maintained by the assessee do not reflect correct or complete financial picture of the assessee. Therefore, I am not satisfied with the correctness or completeness of the books of the accounts of the assessee Hence, the books of account of the assessee are hereby rejected within the provisions of section 145(3) of the IT Act, 1961.
4.7 However, it is also a matter of fact that the material so debited against purchases from these concerns have been entered into the stock register and the assessee has shown corresponding sales against the said purchases debited. This could only mean that the diamonds were bought by the assessee from grey market (which is a very common practice prevalent in Surat and Mumbai), without bill, and to adjust this transaction into the books of accounts, the assessee must have obtained bills from Rajendra Jain Group concern. In such scenario, where, on one hand the genuineness of the purchase party is doubted but the genuineness of purchase on a whole cannot be doubted. The courts have taken a view that only the profit margin embedded in such a transaction could be taxed. This is a fairly accepted principle and the same would also apply in this case. However, what would be the fair margins in such transaction, is the moot question.
4.8 In this regard, two aspects need to be taken into consideration in such circumstances. First is, these diamonds in the grey market are always cheaper than the diamonds sourced from the genuine dealer. This is because, the genuine dealer would charge his incidental cost including the whole administrative cost and other taxes while selling the diamond in the market, whereas the petty dealers in the grey market do not carry such incidental charges on such sales, wherein they are only looking for a quick profit. Secondly, there is always an element of discount in the case of instant cash purchase. This is a common practice followed in the diamond market, and the entities operating in the market would always look for reaping such benefits.
4.9 The assessee has shown percentage of Gross profit at 10.21% during the year under consideration. In view of the discussion at foregoing paras, it is held that the assessee has inflated the purchases price /cost saved in buying from unaccounted sources, which requires disallowance. Accordingly ends of justice will be met if 12.5% of the non-genuine purchases is disallowed. Therefore, an amount of Rs. 8,34,298/- (being 12.5% of Rs.66,74,382/-) is hereby disallowed and added to the total income of the assessee, Penalty proceedings u/s.271(1)(c) r.w. Explanation- 1 are initiated separately for furnishing inaccurate particulars of income leading to concealment of income chargeable to tax.”
10. We have heard the rival contentions and perused the material available on record. We find that it is a case where the assessee has taken accommodation bills from Nazar ImpexPvt Ltd, however the goods have been purchased from the grey market and have been found entered in the stock register and corresponding sales have been recorded and sale proceeds have been realized. The AO, basis the fact that the purchases from the said entity are not verifiable reached an opinion that the books of accounts so maintained by the assessee doesn’t reflect correct and complete financial position and the books of accounts were accordingly rejected by the Assessing officer invoking provisions of section 145(3) of the Act. The said findings of the Assessing officer have not been disturbed by the ld CIT(A). In such a situation, where the books of accounts have been rejected, what is required is to determine the appropriate percentage of profits which the assessee should have reported and has been understated by it and the determination of such profits has to be basis on some reasonable and rationale basis. For the purposes, one can refer to past accepted results of the assessee or third party comparable data engaged in similar line of business or one can draw support from the decision of the Hon’ble Bombay High Court in case of Mohammad Haji Adam & Co (supra)wherein the emphasis has been laid on the internal comparable data in terms of other purchases so made by the assessee. The matter is accordingly set-aside to the file of the AO to determine the appropriate gross profit and bring the differential to tax in the hands of the assessee.
11. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the Open Court on 24.09.2026.
