Krinal Gems Vs DCIT (ITAT Surat)
Summary: The Income Tax Appellate Tribunal, Surat Bench, in Krinal Gems Vs DCIT, allowed two appeals filed by a diamond manufacturing partnership firm against penalties imposed under Section 271(1)(c) of the Income-tax Act, 1961, for Assessment Years 2007-08 and 2008-09. The Tribunal held that a penalty for furnishing inaccurate particulars of income could not be sustained merely because an addition relating to allegedly bogus purchases had been retained on an estimated basis. It followed the jurisdictional Gujarat High Court decisions in Vijay Proteins Ltd. Vs CIT and CIT Vs Whitelene Chemicals, which recognised that estimated additions, without sufficient positive findings establishing concealment or furnishing of inaccurate particulars, do not automatically justify penalty. Both appeals were allowed by a common order dated 18 June 2026.
For Assessment Year 2007-08, the assessee filed its return on 26 October 2007 declaring income of Rs.24,79,196. The assessment was subsequently reopened on information suggesting that the assessee had received accommodation entries involving purchases from M/s Mahalaxmi Gems Pvt. Ltd. The firm was engaged in manufacturing polished diamonds for local sales and exports. The disputed purchases amounted to Rs.2,08,19,384 against total purchases of Rs.12,24,90,725, representing approximately 17% of the purchases recorded during the relevant financial year. The assessment proceedings resulted in a disputed purchase addition calculated at Rs.52,04,846, being 25% of the alleged unverifiable purchases. The Assessing Officer subsequently imposed a penalty of Rs.3,50,389 under Section 271(1)(c), which the Commissioner of Income Tax (Appeals) confirmed.
The assessee maintained that it had furnished supporting documents establishing the purchase and manufacturing transactions. These included purchase invoices, bank statements evidencing payments to the supplier, purchase confirmations, stock records reflecting the processing of rough diamonds into polished diamonds, affidavits and documents relating to sales. It also relied upon affidavits of Shri Bhanwarlal Jain and Shri Gautamkumar Jain retracting statements given during search proceedings. The assessee contended that the disputed additions were ultimately based on an estimated percentage of purchases rather than a definitive finding that the relevant income particulars had been concealed or inaccurately furnished. The Tribunal’s narration records that the CIT(A) had restricted an addition to Rs.10,40,969 by applying a 5% estimate, although another portion of the order refers to 25% disallowance of Rs.52,04,846. The figures are reproduced as stated in the judicial order.
Before the Tribunal, the assessee’s authorised representative, Shri Sapnesh Sheth, relied on several High Court and Tribunal decisions dealing with penalty arising from estimated income additions. Particular reliance was placed on Vijay Proteins Ltd. Vs CIT, Tax Appeal No.243 of 2002, decided on 9 December 2014, and Manish Dhirajlal Mehta, Legal Heir of Late Dhirajlal C. Mehta Vs CIT, Tax Appeal Nos.833 to 836 of 2005, decided on 5 November 2014. The assessee argued that the Gujarat High Court had rejected penalties where additions arising from alleged bogus purchases or unaccounted gross profit were sustained only by estimation. Reliance was also placed on Krishi Tyre Retreading & Rubber Industries, reported in 360 ITR 580 (Rajasthan), where the High Court held that penalties could not be imposed merely upon additions determined through estimation without supporting positive findings.
The assessee additionally cited the Mumbai Tribunal decisions in Balaji Motion Pictures Ltd. and Ajay L. Lohia, together with High Court decisions in CIT Vs Raj Bans Singh, CIT Vs Smt. K. Meenakshi Kutty, Harigopal Singh Vs CIT and CIT Vs Ravail Singh & Co.. These authorities were relied upon for the proposition that a mere estimated addition does not conclusively establish the statutory ingredients of concealment penalty. The assessee emphasised that the disputed transactions had been recorded in its books and were supported by purchase, payment and stock documentation. It accordingly requested deletion of the penalty rather than reconsideration of the underlying quantum addition.
The Revenue, represented by Senior Departmental Representative Ms. Neerja Sharma, defended the orders of the lower authorities. It relied on the Mumbai Tribunal decisions in Piyush Amritlal Mehta Vs ITO, ITA No.8563/Mum/2025, dated 1 April 2026, and Sandeep Kewalchand Mehta Vs ACIT, ITA No.6465/Mum/2024, dated 19 February 2025. The Revenue contended that the penalties were justified in the circumstances of the purchase transactions. The Tribunal, however, distinguished the authorities cited by the Revenue on the ground that the binding decisions of the jurisdictional Gujarat High Court supported the assessee’s position regarding penalties imposed on estimated additions.
The Tribunal examined the Gujarat High Court’s decision in Vijay Proteins Ltd., which reproduced the reasoning concerning penalties in Tax Appeal Nos.833 to 836 of 2005. The High Court had referred to Krishi Tyre Retreading & Rubber Industries and held that, where additions were sustained purely on estimates and no positive fact or finding established concealment, penalty under Section 271(1)(c) could not be levied merely on conjecture or estimation. The reproduced passage also referred to ACIT Vs Gebilal Kanhaialal HUF, (2012) 348 ITR 561 (Supreme Court), concerning immunity under Explanation 5 to Section 271(1)(c). The Tribunal treated the Gujarat High Court’s reasoning regarding estimated additions as directly relevant to the present penalty appeals.
The Tribunal further relied on Commissioner of Income Tax Vs Whitelene Chemicals, reported in (2013) 32 taxmann.com 192 (Gujarat). In that decision, the Gujarat High Court held that a penalty under Section 271(1)(c) could not be imposed merely because the assessee’s books of account had been rejected and its profit estimated by applying a fair gross profit rate. Applying the jurisdictional precedents, the Surat Tribunal concluded that there was no reason to sustain the penalty arising from the estimated additions. It accordingly allowed ITA No.948/SRT/2025 for Assessment Year 2007-08. Since the facts in ITA No.949/SRT/2025 for Assessment Year 2008-09 were similar, the Tribunal applied its decision mutatis mutandis and allowed that appeal as well.
The decision reinforces the distinction between an addition made in assessment proceedings and the independent statutory requirements for imposing a concealment penalty. An assessment addition based on the estimation of profit from allegedly non-genuine purchases may be sustained for determining taxable income, but such estimation does not, without more, conclusively establish concealment or furnishing of inaccurate particulars under Section 271(1)(c). The Tribunal’s decision was based on the particular evidence and the binding jurisdictional precedents; it does not establish that every addition involving bogus purchases is automatically immune from penalty. Both penalty appeals were allowed, while the underlying quantum additions were not deleted through these proceedings.
Cases Discussed
1. Vijay Proteins Ltd. Vs CIT (Gujarat High Court); Tax Appeal No.243 of 2002; 09/12/2014 — Principal jurisdictional precedent followed by the Tribunal. The Gujarat High Court’s discussion supports non-levy of penalty where the addition is sustained on estimation without positive findings sufficient to establish concealment.
2. Manish Dhirajlal Mehta, Legal Heir of Late Dhirajlal C. Mehta Vs CIT (Gujarat High Court); Tax Appeal Nos.833 to 836 of 2005; 05/11/2014 — Relied upon for deletion of penalty imposed on estimated unaccounted gross profit.
3. Krishi Tyre Retreading & Rubber Industries (Rajasthan High Court); 360 ITR 580 — Followed for the principle that penalties cannot be imposed solely on additions sustained by estimation without positive findings. Its reasoning is reproduced in the jurisdictional Gujarat High Court judgment.
4. Balaji Motion Pictures Ltd. (ITAT Mumbai); ITA No.7643/Mum/2016; 03/01/2018 — Cited by the assessee concerning deletion of penalty on alleged bogus purchases. The decision is also discussed in the TaxGuru-hosted Balaji Telefilms judgment.
5. Ajay L. Lohia (ITAT Mumbai); ITA No.2998/Mum/2017 — Cited by the assessee in support of deletion of penalty on additions relating to alleged bogus purchases.
6. CIT Vs Raj Bans Singh (Allahabad High Court); 276 ITR 351 — Cited by the assessee against levy of penalty on estimated additions.
7. CIT Vs Smt. K. Meenakshi Kutty (Madras High Court); 258 ITR 494 — Cited in support of the assessee’s contention concerning estimated additions and penalty.
8. Harigopal Singh Vs CIT (Punjab & Haryana High Court); 258 ITR 85 — Relied upon by the assessee concerning penalty where income is estimated.
9. CIT Vs Ravail Singh & Co. (Punjab & Haryana High Court); 254 ITR 191 — Cited for the proposition that estimated additions do not, by themselves, justify concealment penalty.
10. Piyush Amritlal Mehta Vs ITO (ITAT Mumbai); ITA No.8563/Mum/2025; 01/04/2026 — Relied upon by the Revenue in support of sustaining penalty arising from bogus purchase transactions. The Surat Tribunal preferred the jurisdictional Gujarat High Court precedents.
11. Sandeep Kewalchand Mehta Vs ACIT (ITAT Mumbai); ITA No.6465/Mum/2024; 19/02/2025 — Relied upon by the Revenue concerning penalty on alleged non-genuine purchases.
12. Commissioner of Income Tax Vs Whitelene Chemicals (Gujarat High Court); Tax Appeal No.496 of 2012; 15/01/2013; (2013) 32 taxmann.com 192 — Jurisdictional precedent expressly followed by the Tribunal. Estimation of profits after rejection of books does not, by itself, justify Section 271(1)(c) penalty.
13. Asst. Commissioner of Income-tax Vs Gebilal Kanhaialal HUF (Supreme Court); (2012) 348 ITR 561 — Cited in the reproduced Gujarat High Court judgment concerning immunity under Explanation 5 to Section 271(1)(c), particularly compliance with the tax-and-interest payment condition.
FULL TEXT OF THE ORDER OF ITAT SURAT
These two appeals are filed by the Assessee as against separate appellate orders both dated 13.08.2025 passed by the Commissioner of Income Tax (Appeals)-4, Surat (hereinafter referred to as “Ld. CIT(A)”), arising out of the confirmation of penalties levied under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Years 2007-08 & 2008-09. Since the issues involved in these appeals are similar, the same are heard together for the sake of convenience and common disposal.
2. ITA No.948/SRT/2025 for AY 2007-08 is taken as the ‘lead case’. Brief facts of the case are, the assessee is a partnership firm, filed its return of income for the AY 2007-08 on 26.10.2007 declaring total income of Rs.24,79,196/-. The assessment was reopened on the ground that, the assessee was beneficiary of accommodation entries and re-assessment was completed assessing total income of Rs.76,84,040/-, and addition of Rs.52,04,846/- on account of bogus purchases made by the assessee. The Assessing Officer (ld. A.O.) initiated penalty proceedings u/s 271(1)(c) of the Act and levy the minimum penalty of Rs.3,50,389/- u/s 271(1)(c) of the Act.
3. Aggrieved against the same, assessee filed appeal before Ld. CIT(A), who has confirmed the levy of penalty by observing as follows:-
7. Further it is seen that the assessee is reported to be a manufacturer of polished diamond for the purposes of local sales and export of polished diamonds. During the F.Y. 2006-07 relevant to A.Y. 2007-08 the assessee has shown total purchase Rs. 12,24,90,725/-, out of which the above bogus purchases amounting to Rs. 2,08,19,384/- accounts for nearly 17% of the total purchases. Thus, considering the totality of facts and circumstances of the case and in view of the decision of the Hon’ble I.T.A.T., Ahmedabad in the case of Vijay Proteins Ltd. reported in 55 TTJ 76, it would be fair and reasonable to disallow 25% of the purchases of Rs. 2,08,19,384/- shown in the name of M/s. Mahalaxmi Gems Pvt. Ltd on account of unverifiable purchases. The disallowance on this account comes to Rs. 52,04,846/- [25 % of Rs. 2,08,19,384/-] The same is, therefore, added to the total income of the assessee.
4. Aggrieved against the appellate order, assessee is in appeal before us raising following grounds of appeal:-
1. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals), NFAC has erred in confirming the action of the assessing office in imposing penalty of Rs.3,50,389/- u/s. 271(1)(c) of the I.T. Act, 1961.
2. It is therefore prayed that above penalty levied by assessing officer and confirmed by Commissioner of Income-tax (Appeals) may please be deleted.
3. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.
5. Ld. Counsel appearing for the assessee submitted that, penalty cannot be imposed on estimated addition and relied upon the following judicial precedents:-
i) Vijay Proteins Ltd. vs. CIT – [ Tax Appeal No. 243 of 2002 dated 09.12.2014]
In this case, the tribunal sustained addition on account of bogus purchase to the extent of 25% and same was reduced to 15% by Hon’ble Gujarat High court & penalty imposed on such addition of bogus purchase was deleted by High Court by observing that addition was made on basis of estimation only.
ii) Manish Dhirajlal Mehta Legal Heir of late Dhirajlal C. Mehta vs. CIT [ Tax Appeal No. 833 to 836 of 2005 dated 05.11.2014
In this case Penalty was levied in respect of alleged unaccounted G.P. earned out of alleged unaccounted sale. The penalty levied has been deleted by Hon’ble Gujarat High court on the ground that same is levied purely on addition sustained on estimated basis.
5.1. Reliance can also be placed on Rajasthan High Court decision in case of Krishi Tyre Retreading & Rubber Industries – [360 I.T.R 580 (Raj.)). In this case, Survey action u/s 133A of I.T. Act was carried out in which discrepancy found for which addition was made. The addition was challenged in appeal and same was reduced. Penalty imposed on such addition has been deleted by High Court on the ground that addition was made on estimation basis. This decision has been followed by Honourable Gujarat in case of Manish Dhirajlal Mehta (supra).
5.2. Reliance can also be placed on following decisions of ITAT Mumbai Bench wherein penalty imposed on bogus purchase has been deleted:
i)Balaji Motion Pictures Ltd. – [I.T.A No. 7643/Mum/2016 dated 03.01.2018]
ii) Ajay L. Lohia – [I.T.A No. 2998/Mum/17]
5.3. In support of the contention that penalty cannot be imposed in respect of estimated additions, reliance is further placed on the following decisions of various High Courts:-
CIT v/s Raj Bans Singh [276 ITR 351] [All]
CIT v/s Smt. K. Meenakshi Kutty [258 ITR 494] [Mad]
Harigopal Singh v/s CIT [258 ITR 85] [P&H]
CIT v/s Ravail Singh & Co. [254 ITR 191] [P&H]
6. Per contra, Ld. Sr. DR appearing for the Revenue, supported the order passed by the Lower Authorities and also relied upon Mumbai Bench decision in the cases of Piyush Amritlal Mehta Vs. ITO in ITA No.8563/Mum/2025 dated 01.04.2026 and Sandeep Kewalchand Mehta Vs. ACIT in ITA No.6465/Mum/2024 dated 19.02.2025.
7. We have heard rival submissions and perused the materials available on record. In this case, the assessee explained, that assessee had manufactured polished diamond purchase from M/s Mahalaxmi Gems Pvt. Ltd. Stock Register reflecting whole process of manufacturing diamond was also submitted before the AO. Further, various documents including affidavit, source of sale, copy of invoices etc., filed by the assessee. However, the AO, was not satisfied with the contention of the assessee and made addition of Rs.2,08,19,384/- as bogus purchases. On appeal, Ld. CIT(A) restricted the addition made by the AO to Rs.10,40,969/- by estimating disallowance of unverifiable purchases at 5% of total purchases. The assessee during the penalty proceedings also, informed the disallowance is restricted to Rs.10,40,969/, based on the estimation made by Ld. CIT(A).
7.1. Further, the assessee also produced copies of purchase bills, bank statement showing payment made to supplier, confirmation of impugned party from whom said purchase have been made and also affidavit of Sh. Bhanwarlal Jain and Sh. Gautamkumar Jain retracting statement given during search on whose basis addition was made by the AO. However, the AO was not satisfied with the reply of the assessee and imposed the penalty of Rs.3,50,389/- for furnishing inaccurate particulars.
8. It is well settled principle of law, by Jurisdictional High Court, penalty imposed on bogus purchase, which was reduced based on estimation was deleted in the case of Vijay Proteins Ltd. (Supra) as follows:-
18. Insofar as T.A. No.243/2002 is concerned, the question law raised therein is already concluded by a decision of this Court rendered in T.A. No.461/2000 & allied matters, as stated herein above. Paras-6 & 6.1 of the said decision are relevant for our purpose, which read thus;
“6. Heard both the parties and gone through the material available on record. In the instant case, we are of the opinion that assessment made is just and proper. The statements made in the affidavits are not based on any record or corroborated with cogent evidence. The presumption raised by the papers which were seized from the custody of the appellant had not been rebutted. Therefore, the issues raised in appeals no. 464 of 2000 are required to be answered in the affirmative and against the 461 to assessee.
6.1 So far as the issue involved in appeals no. 833 to 836 of 2005 is concerned, in view of the decisions cited hereinabove by learned advocate for the appellant we are of the opinion that the penalty has been wrongly imposed under Section 271 (1) (c) of the Act. In the case of Krishi Tyre Retreading and Rubber Industries (supra), it has been held that as the addition had been sustained purely on estimate basis and no positive fact or finding had been had been found so as to even make the addition which was a pure guess work, no penalty under section 271 (1) (c) of the Act could be said to be leviable on such guess work or estimation. We therefore answer the issue involved in appeals no. 833 to 836 of 2005 in the negative and in favour of the assessee.”
18.1 At this juncture, it would be relevant o refer to a decision of the Apex Court in the case of Asst. Commissioner of Income-tax v. Gebilal Kanhaialal, HUF, [2012] 348 ITR 561 (SC) wherein, it has been held that the only condition which was required to be fulfilled for getting the immunity, after the search proceedings got over, was that the assessee had to pay the tax together with the interest undisclosed income up to the date of payment. Clause (2) did not prescribe the time limit within which the assessee should pay tax on income disclosed in the statement u/s.132 (4) and thus, the assessee was entitled to immunity under clause (2) of Explanation 5 to section 271 (1) (c).
19. In view of the above, the question raised in Τ.Α. No.243/2002 is answered in favour of the assessee and against the Revenue. Since we are following the view taken by the jurisdictional Court and the Hon’ble Apex Court in the above-referred Tax Appeal, no further elaborate reasons are assigned by us in this case.
9. Similarly, Jurisdictional High Court in the case of Commissioner of Income Tax Vs. Whitelene Chemicals reported in [2013] 32 taxmann.com 192 (Gujarat) held as follows:-
IT : Penalty under section 271(1)(c) could not be imposed merely because books of account maintained by assessee were rejected and its profit was estimated on basis of fair gross profit ratio
10. The case laws relied by the Revenue are from Mumbai Tribunal, whereas Jurisdictional High Court decisions are in favour of the assessee. Therefore, respectfully following the decisions of the Jurisdictional High Court, the penalty levied on estimation of income is hereby dismissed.
11. In the result, the appeal filed by the assessee in ITA No.948/SRT/2025 is allowed.
12. ITA No.949/SRT/2025:- there is no change in the facts of the case, the decision rendered in ITA No.948/SRT/2025 will be applicable mutatis mutandis.
13. In the result, the appeal filed by the assessee in ITA No.949/SRT/2025 is also allowed.
14. In effect, both the appeals filed by the assessee are allowed.
Order is pronounced under provision of Rule 34 of ITAT Rules, 1963 on 18-06-2026.
