No addition for “bogus purchases” when assessee already declared higher GP – Mumbai ITAT grants major relief to diamond trader

Shail Internatinal Vs DCIT (IITAT Mumbai)

No addition for “bogus purchases” when assessee already declared higher GP – Mumbai ITAT grants major relief to diamond trader

In a significant ruling involving the diamond trade, the Mumbai ITAT held that no separate addition towards alleged bogus purchases can be sustained where the assessee has already disclosed a higher Gross Profit (GP) on such transactions than on genuine transactions. The Tribunal deleted the additions made by the AO and enhanced by the CIT(A), subject to verification of GP figures.

The reassessment proceedings were initiated on the allegation that the assessee had obtained accommodation entries and bogus purchase bills from concerns linked to the Bhanwarlal Jain Group, involving purchases aggregating to ₹2.87 crore. The AO estimated profit embedded in such purchases at 5%, resulting in an addition of ₹14.37 lakh, which was further enhanced by the CIT(A) to 6% relying upon earlier Tribunal rulings.

Before the Tribunal, the assessee demonstrated that all purchases and sales were routed through banking channels, quantitative details were fully available, and the corresponding sales were never disputed by the Revenue. More importantly, the assessee pointed out that the GP on alleged bogus purchases was 8.48%, whereas the GP on other regular transactions was only 8.18%.

The Tribunal accepted the contention that once the assessee had already declared a GP much higher than the estimated rate adopted by the department, no further addition was justified. The Bench also referred to the Task Force report relating to the diamond industry, which estimated normal profit margins in the range of 1% to 3%, whereas the assessee had already disclosed substantially higher margins.

Relying upon the Bombay High Court decisions in PCIT v. Mohammed Haji Adam & Co. and PCIT v. Dhondiram Naryan Limbhore, the ITAT reiterated that only the difference in GP between genuine and disputed purchases can at best be added, and where the GP on disputed purchases is already higher, no further addition survives.

Accordingly, the Tribunal directed deletion of the addition for AY 2009-10 and issued similar directions for AY 2011-12, observing that if the profit already declared on alleged bogus purchases exceeds the GP from normal transactions, no estimated addition can be made merely because purchases are treated as non-genuine

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The captioned appeals are preferred by the Assessee, directed against the orders of Commissioner of Income Tax (Appeal), Additional/JCIT(A) (3) Bangalore and Commissioner of Income Tax (Appeal) NFAC, Delhi, dated 10.03.2025 and 15.05.2025, for the Assessment Years (AY) 2009-10 and 2011­12, respectively. The Aforesaid cases resulted from the Assessment Orders dated 27.12.2016, passed under section 143(3) r.w.s. 147, by the Assistant Commissioner of Income Tax 23(3), Mumbai.

2. Since both the aforesaid appeals pertains to same Assessee, having identical and interconnected grounds of appeals under similar facts and circumstances, therefore, are heard together and taken up for adjudication under this common order.

3. ITA no. 3268/Mum/2025 for the Assessment Year 2009-10 has been taken up as the lead case, wherein our deliberation, discussion and the decision shall apply mutatis mutandis to the second appeal i.e. ITA no. 4428/Mum/2025 for the Assessment Year 2011-12. The grounds of appeal for the Assessment Year 2009-10 raised by the Assessee are as under:

Ground no. 1: The Ld. Jurisdictional Assessing Officer erred in addition of Rs. 14,37,188/- (5% of alleged bogus purchases amounting to Rs. 2,87,43,763/-) and the Ld. Commissioner of NFAC further enhanced the addition to Rs. 17,24,626/-(being 6% of alleged bogus purchases amounting to Rs. 2,87,43,763/-) even thought the Ld. Commissioner of NFAC has partly allowed the appeal.

The addition made by the Ld. Jurisdictional Assessing Officer and the Ld. Commissioner of NFAC needs to be deleted.

Ground no. 2: The Ld. Commissioner erred in not dropping the penalty proceedings under section 271(1)(c) of Income Tax Act, 1961.

4. Briefly stated, the Assessee firm has filed its original return of income on 30.09.2009, declaring total income of Rs. 30,52,302/-. The return was processed under section 143(1). Thereafter, the case of Assessee was selected for scrutiny Assessment u/s 143(3), which has been completed on 17.11.2011, accepting the return income of the Assessee. Subsequently, the case of Assessee was picked up for reopening Assessment u/s 147 of the Act by issue of notice u/s 148 on 16.03.2016. Reasons recorded for reopening were provided to the Assessee, in response Assessee objected, and the objections of Assessee were disposed of vide letter dated 17.08.2016, rejecting the contentions of the Assessee. Further, responses were made by the Assessee in due course, which were taken on record by ld. AO and assessment was completed. During the assessment proceedings, it is observed by the ld. AO that the Assessee is a beneficiary of accommodation entries provided by Shri Bhanwarlal Jain Group.The Assessee had received accommodation bills for purchase of materials and also had taken unsecured bogus loans from the alleged parties. The details of such accommodation entry are provided in the Assessment order and the same is extracted hereunder for the sake of completeness of facts:

11.14

5. Reference to aforesaid information, a show cause notice was issued to the Assessee, as to why purchases from the aforesaid parties being the part of Bhanwarlal Jain Group concerns should not be treated as non genuine purchase and added to the total income? Assessee responded before the ld. AO, but the submissions of Assessee could not find favour, consequently, an addition of 5% of the aforesaid amounts treating the benefit availed by the Assessee from the aforesaid accommodation entries was made. While making the aforesaid adjustment Ld. AO observed that the acceptable margin in the diamond industries ranges between 1 to 4.5%, hence, the grey market estimation would not be more than 5%. Finally, the assessment was concluded with following computation:

The total income of Assessee is assessed as under:

6. Being aggrieved with aforesaid addition, Assessee carried this matter before the Ld. CIT(A), who discussed the issue at length, considered the submissions of the Assessee, deliberated upon, but was not satisfied with the contentions raised by the Assessee, therefore had relied upon the judgment passed by the ITAT, Mumbai in the case of Maxell Diamond Pvt. Ltd. in ITA no. 135 to 137/Mum/2019, wherein Tribunal has estimated the profit upon non-genuine purchase at 6% percent, therefore, the addition has been enhanced to 6% instead of 5% adopted by AO.

7. To challenge the aforesaid funding of Ld. CIT(A), Assessee preferred an appeal before this Tribunal, which is under consideration before us.

8. At the outset, Ld. Counsel of the Assessee (AR) submitted that both the Revenue Authorities have taken adverse view against the Assessee, treating its genuine purchase as bogus or accommodation entries and have estimated the profit at 5% which is further enhanced by the Ld. CIT(A) to 6%. It was the submission that the Assessee’s firm is totally involved into export of the goods purchased and have furnished all the necessary corroborative evidences to substantiate this aspect of its business. All the entries of purchase as well as sales are made through the banking channels and sales of assessee werenever doubted by both the authorities below.

9. Ld. AR drew our attention to the impugned order of Ld. CIT(A), wherein the Assessee has clearly demonstrated that cases relied upon by the Revenue has different facts then the facts of the present case. It is further explained that, the GP % in the case of sales made out of alleged bogus purchase was 8.48%, as against the GP in case of other sales which was at 8.18%, if we see the difference in GP rate, the GP rate in the case of bogus purchases was higher than the other purchases, therefore, no further addition would be call for. Ld. AR also explained that the AO has relied upon the net profit ratio taken by the Task Force which was recommended at 1 to 3 % for diamond trading, whereas the Assessee has already shown a GP% at 8.48 %. Ld. AR also shown us the tax invoice of the seller from whom the Assessee had received purchase, placed in the Assessee’s paper book showing therein, the exact weight of diamond purchased by Assessee, which is further sold to other customer by the Assessee with the same weight. It was the submission that the issue of NP has taken up in the Task Force report dated February, 2013, they have presumed the profit margin for diamond trading and manufacturing industries at 1 to 3 % only. It is further submitted that the identical issue has been decided by the ITAT Mumbai in ITA no. 2427/Mum/2025 for the Assessment Year 2010-11 vide order dated 26.09.2025 in the case of Arham Star vs. ITO, Mumbai, wherein the Tribunal has considered all these aspects and have taken the cognizance of profit ratio taken into consideration by the Task Force report by the Government of India which was in the range of 1 to 3 %. with aforesaid submissions it was explained that, since the Assessee had already declared a GP more than what is expected by the department authorities, which is 6%, as against 8.48% by the Assessee, therefore, no further addition is called for. Regarding enhancement of the assessment, it is submitted by the Ld. AR that Ld. CIT(A) has made the enhancement of 1% in estimated GP%, with no intimation to the Assessee or show cause so as to rebut on the same. It was the prayer that the addition made by the Ld. AO, which is further enhanced by the Ld. CIT(A), both are liable to be deleted. Ld. AR also placed reliance on the decision in the case of ITO vs. R Mehta & Company in ITA no. 5301/Mum/2025 for the Assessment Year 2013-14 vide order dated 31.12.2025.

Per contra Ld. DR representing the Revenue submitted as under.

The reassessment proceedings were triggered by search, based on Investigation wing material revealing a largescale accommodation entry racket in the diamond trade. The assessee was found to be one of the beneficiaries who had sourced goods from the grey marked while booking bills from Bhawarlal Jain Group concerns. Both the AO and the Ld. CIT(A) have sustained this finding on the basis of cogent evidence and have taxed only the embedded profit element, the rate of which has been judiciously fixed by the appellate authority. The additions are thus legally and factually sustainable.

Revenue’s Prayer: In view of the above facts and legal position, the Revenue respectfully prays that the Hon’ble Tribunal may be pleased to dismiss the assessee’s appeal and uphold the order of the Ld. CIT(A), NFAC sustaining the addition of Rs. 17,24,626/-.

10. We have considered the rival submissions, perused the material available on record and the decisions/case laws referred to and relied upon. Admittedly the addition in present case have been made on account of bogus purchases and profit on such transaction was estimated at 5 % by the AO which was further enhanced by the CIT(A) to 6 %. On perusal of the Assessment order it can be seen that the sales/turnover of the Assessee has not been disturbed by the AO, only the GP has been estimated on the alleged bogus transactions. Similar issue has been dealt with by the Tribunal in the case of Arham Star (Supra) wherein the gross profit on the alleged purchases which are shown at rate of 4.724% on the undisputed purchases was taken as the benchmark and the difference between the GP percent of bogus purchases which was 4.566% and GP percent on undisputed purchases for 4.724% was taken as the amount to be added to the income of Assessee.In present case as the Assessing Officer has made an addition of 5%, which is enhanced and confirmed to 6% by the Ld. CIT(A), whereas the Assessee had already declared a profit of 8.48% on the alleged bogus purchasesagainst the GP ratio of 8.18% on normal transactions, which is a fact emerging from submissions of the assessee in the order of Ld. CIT(A), though has not been commented upon by the ld. CIT(A). Further, the profit ratio 1 to 3 % has been recommended by the Task Force report of Government of India, whereas,the Assessee had already shown a higher percent of GP at 8.84%, therefore, no further addition on account of estimation can be made. This view is fortified by the decisions of Hon’ble Jurisdictional High Court in the case of PCIT v. Mohammed Haji Adam & Co. (2019) 103 taxmann.com 459 (Bombay) and PCIT v. Dhondiram Naryan Limbhore (2023) 153 taxmann.com 539 (Bombay).

11. In view of aforesaid deliberations, facts and circumstances of the present case we are of the considered opinion that, once the Assessee had already declared a GP ratio of 8.84% on the alleged bogus purchases, no further addition is warranted. Accordingly, the addition made by the AO and confirm by the CIT(A) are liable to be set aside subject to verification of GP already offered for taxation by the assessee by the ld. AO.

12. Since, the substantive quantum addition in the present appeal has been directed to be deleted by us, in terms of our aforesaid observations, therefore, the other contentions, if any, raised by the Assessee in present appeal remains academic only, therefore, are not adjudicated separately.

13. The facts and circumstances of ITA no. 4428/Mum/2025 for the Assessment Year 2011-12 are at parity with the ITA no. 3268/Mum/2025, therefore, our decision in ITA no. 3268/Mum/2025 shall apply mutatis mutandis to the appeal for Assessment Year 2011-12 also accordingly, the addition made by the AO at 5%,whereas the Assessee had declared the GP at 4.95%.We direct to recompute the estimated addition based on GP%, following the principles as per decision of Hon’ble Bombay High Court in the case of PCIT v. Mohammed Haji Adam & Co. (2019) 103 com 459 (Bombay). Consequently, if the profit already shown on the transaction earmarked as bogus is higher than the normal/genuine transactions,no further addition is made, but in a case inverse the difference of GP% between normal and bogus transactions would be the estimated addition on the amount of bogus purchases. Accordingly, the substantive addition made for the year 2011-12 is directed to re-workout. Assessee is directed to furnish necessary information before the ld. AO in set aside proceedings.

14. In result ITA no. 3268/Mum/2025 and ITA no. 4428/Mum/2025 filed by the Assessee are allowed / allowed for statistical purposes in terms of our aforesaid observations.

Order pronounced in the open court on 05.05.2026