ITAT Mumbai Restricts Bogus Purchase Addition to Profit element 

In a consolidated ruling for AYs 2010-11 & 2011-12, Mumbai ITAT dismissed cross-appeals by Chinar Gems & the Revenue over additions on alleged bogus diamond purchases from Daksh Diamonds, part of the Bhanwarlal Jain accommodation entry network.

AO, relying on Investigation Wing findings & statements from the Jain group, treated the entire purchases of ₹84.23 lakh (AY 2010-11) as bogus u/s 69C. Assessee had furnished bills, bank payments, confirmations, audited accounts & stock records, with Daksh Diamonds even responding to notices u/s 133(6). AO held that Assessee has not controverted the findings of the Investigation Department about the bill providers. It was further held that even though the assessee filed documents, copies of bills & confirmations, the involvement & dealings of the assessee with the hawala/accommodation entry racket cannot be ruled out.

While CIT(A) upheld the bogus purchase finding, he restricted the addition to 7% of the purchase value (₹5.89 lakh), noting sales were accepted & only the profit element could be taxed.

Before the Tribunal, Revenue cited the Bombay High Court ruling in PCIT v. Kanak Impex [2025] 172 Taxmann.com 283 (Bom) to press for 100% disallowance. Tribunal distinguished the facts in the decision of the Kanak Impex. In the said case, pursuant to the information received from the Sales Tax Department, proceedings u/s 147 were initiated on the basis that the taxpayer is a beneficiary of accommodation entry transaction in the form of bogus purchases. During the assessment proceedings, despite several notices, the taxpayer did not file any response. Further, the notices issued u/s 133(6) at the address of the persons from whom the taxpayer had purchased the goods were also returned “unserved”. As the taxpayer did not appear before the AO during the reassessment proceedings & also failed to prove the genuineness of the purchase transaction, AO made the addition of the entire amount of bogus purchases. In further appeal, CIT(A) estimated 12.5% of the bogus purchases as an addition to be made instead of confirming the entire bogus purchases, placing reliance upon the decision in CIT v/s Simit P Sheth, reported in [2013] 356 ITR 451 (Guj.). The Tribunal, in further appeal, by placing reliance upon the decisio in Mohd. Haji Adam, reported in [2019] 103 Taxmann.com 459 (Bom.), dismissed the appeal filed by the Revenue & directed the AO to restrict the addition to the extent of bringing the gross profit rate of disputed purchases to the same rate as that of the other purchases. The Jurisdictional High Court, allowing the appeal filed by the Revenue, held that the onus of proving the genuineness of the expenditure claimed as a deduction is on the taxpayer. The Hon’ble High Court held that the primary onus is on the assessee to discharge his burden to prove the purchases, which the assessee has claimed as a deduction under the Act for arriving at the taxable income. High Court held that the genuineness of the purchases would, inter alia, also include an explanation with regard to the source of payment for such purchases. It was held that, in the facts of the case, the taxpayer did not appear before the AO during the reassessment proceedings to prove the deduction claimed for purchases, & there was no justification to establish the purchases. Hence there is no justification in the findings of the learned CIT(A) in restricting the disallowance to 12.5% of such purchases once it came to the conclusion that the taxpayer failed to prove the genuineness & source of purchases & also confirmed its involvement in the modus operandi. It was further held that the Tribunal also misdirected itself by approaching the issue with the erroneous belief that it was estimating profit. Thus, the Hon’ble High Court held that if this approach of CIT(A) & the Tribunal is accepted, then it would be contrary to the provisions of section 69C, which mandates the taxpayer to explain the source of expenditure. Since in the facts of the case the taxpayer did not attend the reassessment proceedings & there was no explanation of the source of expenditure incurred for making the bogus purchases, the Hon’ble Jurisdictional High Court restored the addition made u/s 69C.