No Addition for ‘Bogus Purchases’ When Exports, Stock Records and Quantitative Tally Match

Nirjay Diamond Vs DCIT (ITAT Mumbai)

No Addition for ‘Bogus Purchases’ When Exports, Stock Records and Quantitative Tally Match

The Mumbai ITAT deleted an addition of ₹2.18 crore made by estimating 12.5% profit on alleged bogus purchases from entities linked to the Bhanwarlal Jain Group, holding that the Revenue cannot disregard documented purchases merely on the basis of general investigation reports when the assessee has established a complete trail of goods and exports.

The assessee, a partnership firm engaged in manufacturing and export of polished diamonds and semi-precious stones, had made purchases aggregating to ₹17.42 crore from four parties. Though the Assessing Officer doubted the genuineness of these purchases because the suppliers allegedly figured in the list of accommodation entry providers, the assessee produced purchase invoices, bank statements, stock records, quantitative reconciliations, export invoices, shipping bills, export realization certificates, supplier confirmations and affidavits linking the purchases directly to export sales.

The Tribunal noted that the books of account were never rejected, stock registers were accepted, no discrepancy was found in quantitative records and the corresponding export sales had been fully accepted by the Department. It further observed that no material was brought on record to show that payments made through banking channels had returned to the assessee or that the export transactions were sham. Mere non-appearance of suppliers in response to summons could not override the extensive documentary evidence furnished by the assessee.

The ITAT also found the estimation of profit at 12.5% to be completely ad hoc, particularly when the assessee had already disclosed gross and net profit margins higher than industry norms. Holding that the assessee had successfully discharged the burden of proving the genuineness of purchases and that the Revenue had failed to bring any cogent contrary evidence, the Tribunal directed deletion of the entire addition of ₹2.17 crore.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the assessee against the impugned order dated 29.01.2026 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for the Assessment Year 2013-14 arising out of the assessment framed under section 143(3) of the Income Tax Act, 1961.

2. The assessee has challenged the action of the learned CIT(A) in confirming the addition of Rs.2,17,78,954/-, being 12.5% of purchases aggregating to Rs.17,42,31,637/-, which were treated by the Assessing Officer as purchases from alleged accommodation entry providers.

3. The relevant facts, in brief, are that the assessee is a partnership firm engaged in the business of manufacturing and export of polished diamonds and semi-precious stones. During the year under consideration, the assessee filed its return of income declaring total income of Rs.85,46,463/-. During the course of scrutiny assessment proceedings, the Assessing Officer examined the details of purchases made by the assessee and noticed that the assessee had recorded local purchases aggregating to Rs.17,42,31,637/- from the following parties:

4. The Assessing Officer observed that the aforesaid concerns allegedly figured in the list of entities stated to be controlled by the Bhanwarlal Jain Group, which according to the Investigation Wing was engaged in providing accommodation purchase bills without actual delivery of goods. Based upon information received from the Investigation Wing, Mumbai, the Assessing Officer entertained a doubt regarding the genuineness of the purchases shown from the aforesaid parties and initiated further verification.

5. During the course of assessment proceedings, the assessee was called upon to furnish complete details relating to the purchases including copies of purchase invoices, ledger accounts, details of payments, bank statements, stock records and quantitative details. The assessee furnished the details called for and also submitted that the purchases were duly recorded in the books of account, payments had been made through banking channels and the goods purchased had ultimately been exported. It was specifically pointed out that each purchase could be correlated with corresponding export sales and complete quantitative records were maintained.

6. The Assessing Officer thereafter issued summons under section 131 to the suppliers. According to the Assessing Officer, one of the summons was returned unserved and though summons issued to the remaining parties were stated to have been served, none of the parties appeared personally before him. Based on such non­compliance and the information received from the Investigation Wing, the Assessing Officer issued a show-cause notice proposing to treat the purchases as non-genuine.

7. In response thereto, the assessee submitted detailed explanations and documentary evidences. The assessee furnished quantitative reconciliation showing supplier-wise purchases, quantity in carats, purchase values and corresponding export sales. Copies of purchase invoices, sale invoices, shipping bills, export realization documents, stock records and bank statements were filed. The assessee further contended that the entire allegation was founded merely on generalized information received from the Investigation Wing and no material specifically implicating the assessee had been confronted. The assessee also requested that copies of statements and materials relied upon by the Department be furnished and opportunity of cross-examination be granted wherever any third-party statement was proposed to be used against it.

8. The Assessing Officer, however, was not satisfied with the explanation. According to him, the suppliers were identified by the Investigation Wing as accommodation entry providers and the assessee had failed to produce them for verification. At the same time, the Assessing Officer accepted that the corresponding sales had been effected and that the purchases could not be disallowed in entirety. Relying upon certain judicial precedents dealing with unverifiable purchases, he held that only the profit element embedded in such purchases was liable to be brought to tax and accordingly estimated the same at 12.5% of the purchases amounting to Rs.17,42,31,637/-. The addition was thus worked out at Rs.2,17,78,954/-.

9. Before the learned CIT(A), the assessee reiterated that the purchases were supported by purchase invoices, quantitative records, stock registers, banking transactions, export documentation and supplier confirmations. It was submitted that the books of account had not been rejected, no discrepancy had been found in the stock records and the export sales corresponding to the purchases stood fully accepted. The assessee further submitted that affidavits from suppliers confirming the transactions had also been furnished and that no addition could be sustained merely on the basis of generalized information received from third parties. The learned CIT(A), however, was not convinced and upheld the addition made by the Assessing Officer holding that the purchases remained unverifiable and that estimation of profit at 12.5% was justified.

10. Aggrieved by the aforesaid findings of the learned CIT(A), the assessee is in further appeal before us. The learned counsel for the assessee reiterated that complete documentary evidence supporting the purchases had been furnished before the lower authorities. He drew our attention to the quantitative reconciliation, stock registers, export invoices, shipping bills, export realization certificates, supplier confirmations and affidavits placed in the paper book. It was submitted that the assessee had disclosed gross profit of approximately 6.14% and net profit of approximately 3.67%, which according to the learned counsel was higher than the margins generally prevailing in the diamond industry. Reliance was also placed upon the decisions of the coordinate benches of the Tribunal in D. Manish & Company vs. DCIT in ITA No. 5758/Mum/2025 and DCIT vs. D. Manish & Company in ITA No. 5875/Mum/2025 dated 23.12.2025 and Perry Impex vs. DCIT in ITA Nos. 6799 & 6800/Mum/2024 dated 27.02.2025. The learned Departmental Representative, on the other hand, strongly relied upon the orders of the authorities below.

11. We have heard the rival submissions, perused the orders of the authorities below and carefully examined the material placed before us. The sole controversy involved in the present appeal is whether the learned CIT(A) was justified in sustaining the addition of Rs.2,17,78,954/-, being 12.5% of purchases aggregating to Rs.17,42,31,637/-, alleged to have been made from four parties stated to be concerns connected with the Bhanwarlal Jain Group and engaged in providing accommodation entries.

12. At the outset, it is necessary to note that this is not a case where the Assessing Officer has treated the entire purchases as non-existent or has disputed the sales disclosed by the assessee. In fact, the assessment order itself records that the assessee is engaged in the business of manufacturing and export of polished diamonds and semi-precious stones and has maintained quantitative tally of purchases and sales. The Assessing Officer has nowhere rejected the books of account under section 145 of the Act. The stock register maintained by the assessee has also not been disturbed. Significantly, the corresponding export sales have been accepted and no addition whatsoever has been made on account of sales. The very basis on which the Assessing Officer proceeded to estimate the profit element instead of disallowing the entire purchases is an implicit acceptance of the fact that goods corresponding to such purchases were available with the assessee and that the resultant sales had in fact taken place.

13. The material placed before us further demonstrates that the assessee had furnished exhaustive documentary evidence in support of the purchases. The record reveals that the assessee had filed purchase invoices, ledger accounts, bank statements evidencing payments through banking channels, quantitative details of purchases and corresponding export sales, stock registers, export invoices, shipping bills, export realization documents and detailed reconciliation linking the purchases with subsequent exports. The paper book also contains a chart showing supplier-wise purchases, quantity in carats, corresponding export invoices and export realizations. The assessee had thus attempted to establish not merely the accounting entries but the complete movement of goods from the stage of purchase up to the stage of export. Despite such extensive documentation, neither the Assessing Officer nor the learned CIT(A) has pointed out any discrepancy in the quantitative records, stock reconciliation, export documentation or sales realization.

14. A particularly significant aspect emerging from the record is that the assessee had furnished detailed quantitative reconciliation demonstrating a direct nexus between the impugned purchases and subsequent export sales. The quantitative tally maintained by the assessee has not been found to be incorrect. No discrepancy in stock has been pointed out. No shortage or excess stock has been found. No material has been brought on record to establish that the goods reflected in the purchase invoices were never received by the assessee. In a business dealing with diamonds, where inventory is maintained in terms of carats and quantitative reconciliation assumes critical importance, such contemporaneous records carry considerable evidentiary value. Once the movement of goods is demonstrated through quantitative records and the corresponding exports are accepted, the allegation that the purchases themselves were non-genuine requires much stronger evidence than mere third-party information.

15. The entire case of the Revenue rests upon information received from the Investigation Wing regarding certain concerns allegedly controlled by the Bhanwarlal Jain Group. Such information may undoubtedly justify initiation of inquiry and verification. However, the addition cannot ultimately rest merely on generalized information relating to third parties. The assessee had specifically requested the Assessing Officer to provide copies of the material relied upon, statements recorded during investigation proceedings and opportunity to cross-examine the persons whose statements were sought to be used against it. The record shows that no specific material implicating the assessee was confronted. It is not the case of the Revenue that any statement specifically names the assessee as a beneficiary of accommodation entries. Apart from the general information received from the Investigation Wing and the fact that certain suppliers did not appear in response to summons, no independent evidence has been brought on record to demonstrate that the purchases recorded by the assessee were fictitious or that the corresponding exports were sham transactions.

16. We also find that the assessee had furnished confirmations and affidavits from suppliers affirming the transactions and delivery of goods. The authorities below have discarded these evidences primarily on the ground that the suppliers did not appear before the Assessing Officer. While non-appearance of suppliers may justify closer scrutiny, such circumstance by itself cannot constitute conclusive proof that the purchases were non-genuine, particularly when the transactions are supported by invoices, banking records, quantitative reconciliation, stock registers and accepted export sales. The Revenue has not brought any material on record to demonstrate that the payments made through banking channels were returned to the assessee in cash or by any other mode. Nor has any material been produced to establish that the affidavits and confirmations furnished by the suppliers were false or fabricated.

17. Another factor which assumes considerable significance is the profitability disclosed by the assessee. The material placed before us indicates that the assessee had disclosed gross profit of approximately 6.14% and net profit of approximately 3.67% during the year under consideration. The learned counsel also drew our attention to the report of the Government Task Force relating to the diamond industry, wherein the normal profit margin in the trade has been noted to be in the range of about 2% to 3%. The Revenue has not brought any material on record to demonstrate that the trading results declared by the assessee were abnormal or suppressed. On the contrary, the profitability disclosed by the assessee is stated to be higher than the margins generally prevailing in the industry. Once the declared profit itself is not shown to be deficient, the very foundation for estimating an additional profit element on alleged accommodation purchases becomes considerably weak.

18. Our view is further fortified by the decisions of the coordinate benches relied upon by the learned counsel. In D. Manish & Company vs. DCIT in ITA No. 5758/Mum/2025 and DCIT vs. D. Manish & Company in ITA No. 5875/Mum/2025, order dated 23.12.2025, the Mumbai Bench of the Tribunal, while dealing with similar allegations concerning purchases from concerns alleged to be accommodation entry providers in the diamond trade, found that the assessee had furnished purchase invoices, stock registers, quantitative details, bank statements, confirmations and affidavits from suppliers together with corresponding export documents. The Tribunal held that where quantitative records are maintained, export sales are accepted, books of account are not rejected and no evidence exists to show that payments have reverted back to the assessee, no addition can be sustained merely on the basis of generalized third-party information. Similar principles were reiterated by the coordinate bench in Perry Impex vs. DCIT in ITA Nos. 6799 & 6800/Mum/2024, order dated 27.02.2025, wherein emphasis was laid upon accepted sales, quantitative reconciliation and absence of any cogent evidence establishing that the purchases were fictitious. The ratio emerging from these decisions squarely supports the assessee’s case before us.

19. Viewed in totality, we find an inherent contradiction in the approach adopted by the authorities below. On one hand, they accept the quantitative records, stock position and corresponding export sales; on the other hand, they proceed to estimate a profit element of 12.5% without demonstrating any nexus between such estimation and the actual facts of the assessee’s business. The rate of 12.5% has been adopted in a purely ad hoc manner without examining the assessee’s own profitability, past history or prevailing industry margins. Once the quantitative records remain intact, the books of account stand accepted, the stock register is not disturbed, the corresponding exports are accepted and the assessee has already disclosed profitability higher than industry norms, there remains no factual basis for sustaining the impugned addition.

20. Having regard to the entirety of facts and circumstances, namely, acceptance of export sales, maintenance of quantitative tally, availability of stock records, one-to-one correlation between purchases and exports, payments through banking channels, confirmations and affidavits of suppliers, absence of rejection of books of account, absence of any material specifically implicating the assessee and the profitability already disclosed by the assessee, we are of the considered opinion that the assessee has discharged the burden cast upon it to establish the genuineness of the purchases. The Revenue has failed to bring any cogent material demonstrating that the goods reflected in the impugned purchase invoices were never received by the assessee or that the corresponding exports were not genuine. The addition sustained merely on assumptions, generalized investigation reports and estimated profit theory cannot therefore be upheld.

21. Accordingly, we direct the Assessing Officer to delete the addition of Rs.2,17,78,954/- sustained by the learned CIT(A). The grounds raised by the assessee are allowed.

22. In the result, the appeal of the assessee is allowed.

Order pronounced on 8th June, 2026.