Case Law Details
PCIT Vs Kross Diamonds Pvt. Ltd. (Delhi High Court)
No Unexplained Expenditure Addition Because Purchases Were Verified Through Banking Channels; Cash Sales Below Rs. 2 Lakh Not Sufficient to Invoke Section 69C, Says Delhi High Court; Delhi High Court Dismisses Revenue Appeal Because AO Accepted Purchases as Genuine; Genuine Import Purchases Cannot Be Treated as Bogus Because Sale Proceeds Were Deposited in Cash
The matter before the Delhi High Court involved multiple appeals raising identical questions of law. The Court considered the facts from ITA No. 675/2025 concerning Kross Diamonds Pvt. Ltd., a company engaged in importing diamonds from various countries in accordance with the Customs Act, 1962 and other applicable laws.
During assessment proceedings, the Assessing Officer (AO) observed that the assessee had issued 6,358 cash sale bills, each valued below Rs. 2 lakh, aggregating to approximately Rs. 97.12 crore. The AO formed the view that since the source of purchases was the cash generated from these sales, the purchases amounting to approximately Rs. 97.13 crore were not properly explained. Consequently, the AO made an addition under Section 69C of the Income Tax Act, 1961 on the ground that the source of expenditure remained unexplained.
The assessment order specifically recorded that the AO did not doubt the genuineness of the purchases themselves and accepted that the purchases had actually been made. However, according to the AO, although the purchases were genuine, the expenditure relating to such purchases could still be disallowed because the source of funds used for the purchases allegedly remained unexplained.
The assessee challenged the assessment order before the Commissioner of Income Tax (Appeals) [CIT(A)], who allowed the appeal by order dated 10.01.2017. The Income Tax Department thereafter filed an appeal before the Income Tax Appellate Tribunal (ITAT), but the Tribunal dismissed the departmental appeal by order dated 18.12.2024.
While dismissing the appeal, the Tribunal observed that all purchases made by the assessee had been conducted through proper banking channels and after payment of applicable customs duties under the Customs Act, 1962 and other relevant rules. The Tribunal also noted that the purchases were supported by bills, vouchers, import bills, bills of entry, airline bills, customs documents, and other records. On that basis, the Tribunal held that the purchases could not be disallowed and observed that the AO had proceeded merely on assumptions and conjectures.
The Tribunal additionally questioned how the AO could regard the sales as doubtful while simultaneously accepting the purchases as genuine, particularly when the books of account had not been rejected.
Before the High Court, the Revenue argued that the CIT(A) and the Tribunal had erred in deleting the addition merely because the purchases were supported by banking records and documentation. The Revenue maintained that the AO had never disputed the genuineness of purchases but had only disallowed the expenditure because the source of funds was unexplained. The Revenue further pointed out that the cash deposited in the bank accounts originated from 6,358 cash sale transactions, all below Rs. 2 lakh, carried out within a span of 44 days with only 8 to 10 employees, which according to the Revenue raised doubts about the sales transactions.
The assessee, on the other hand, submitted that it possessed an opening stock worth Rs. 114.62 crore, which had not been disputed by the AO. The assessee further contended that all imports were genuine and fully supported by documents such as bills, payment slips, bills of entry, and courier receipts. It argued that merely because retail sales were made in cash and the cash was later deposited into bank accounts, the deposits could not be treated as unexplained.
After hearing the parties, the High Court noted that both the CIT(A) and the Tribunal had concurrently held that the AO erred in disallowing the purchases and making additions under Section 69C. The Court emphasized that even the AO himself had accepted the purchases as genuine.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. All these appeals involve common facts and propose identical questions of law, for which we are deciding them by a common order. For the purpose of clarity and convenience, facts of ITA No. 675/2025 are however, being taken into consideration.
2. The respondent/assessee deals in diamonds, which he imports from various countries in accordance with the provision of Customs Act, 1962 and other relevant law. During the course of assessment proceedings, the Assessing Officer (AO) found that the assessee had issued 6,358 bills of cash sales (each being less than Rs.2 lacs in value), amounting to total of Rs. 97,12,70,670/-. This being the position, the AO was of the view that since the source of purchase was the cash received from these sales, the purchases amounting to Rs.97,13,70,670/-, (being the amount of cash sales) was not properly explained and made addition under Section 69C of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act of 1961’).
3. While passing the assessment order the AO clearly stated that he has no doubt so far as the genuineness of purchase is concerned and accepted the factum of purchase as such, but has taken recourse to Section 69C of the Act of 1961 to disallow the expenses relating to such purchase, as according to him, the source of expenditure (being cash) not duly explained.
4. Against the assessment order so passed by the AO on 19.12.2016, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) (hereinafter referred to as VIT(A) ‘), which was allowed by the Appellate Authority vide its order dated 10.01.2017.
5. Against the order of the Appellant Authority, the Income Tax Department preferred an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as ‘Tribunal), which was rejected by the Tribunal by its impugned order dated 18.12.2024.
6. While rejecting the appeal, the Tribunal has observed that all the purchases made by the assessee were made through proper banking channels and after paying applicable duties in accordance with provision of The Customs Act 1962 and other applicable rules. The Tribunal has also recorded that all the purchases were duly supported by bills/vouchers, import bills, bills of entry, airlines bills and custom documents etc. and such purchase cannot be disallowed. The Tribunal held that the AO has proceeded on mere assumption and conjuncture.
7. Having observed so, the Tribunal has also expressed its concern that when the AO had found the purchases to be genuine, how could he take the sale to be bogus without rejecting the books of account.
8. Mr. Guarav Gupta, learned Senior Standing Counsel for the appellants submitted that the Tribunal and the CIT(A) have erred in deleting the addition made by the AO, simply because the purchases were found to be through proper banking channels and supported by documents. He argued that it is an admitted case of the AO that purchases were genuine but what he had disallowed is the expenditure of the purchase itself, because source of purchase was unexplained. Explaining the arguments, Mr. Gaurav Gupta submitted that the amount in the bank account had come from the cash sales out of the transactions (6358) which were cash bills for less than Rs.2 lacs each. He read the order of the AO and showed that all the transactions have been made only in the span of 44 days with only 8 to 10 employees were engaged, which raises a doubt about the sales affected by petitioner.
9. Learned counsel for respondent/assessee, on the other hand, submitted that the assessee had an opening stock of Rs.114.62 crores to begin with and such stock has not been disputed by AO. He further submitted that all the purchases were from abroad and all the documents, bills, payment slips, bill of entry, courier receipts etc. have been produced and as a matter of fact, the purchases have been found to be genuine by the AO. He submitted that simply because the invoices were issued to the retailers and the sales were made in cash, which cash from time to time was deposited in the bank, it does not mean that the deposits were unexplained and hence, the source of purchase was not properly explained.
10. Heard learned counsel for the parties.
11. Both the Appellant Authorities namely the CIT(A) and Tribunal have concurrently held that the AO has erred in disallowing the purchases and making addition under Section 69C of the Act of 1961. Not only the Appellate Authority even the AO himself had accepted the fact that the purchases are genuine.
12. We fail to comprehend that when the purchases have been accepted to be genuine and those purchases have been executed through proper documents and banking channels, how its source can be said to be unexplained. The AO’s stand that the money in bank accounts had come through the cash deposited out of retail sale is unexplained, is misconceived. If an assessee is allowed or permitted to sell goods in cash and there is no non-compliance of any statutory provision, the purchase cannot be disallowed. In any event, the respondent/assessee had an opening stock of Rs.114.62 crores and had imported diamonds worth Rs.97 crores. Meaning thereby, he has sold the diamonds, which he had purchased obviously for business reasons. The best case, which the AO can frame against the assessee was that identity of the sellers is not known or the persons to whom sales were made is not verifiable, but that by itself does not fall foul to any of the statutory provisions.
13. We, therefore, hardly find any substance and merit in the present appeals. The appeals are, therefore, dismissed.
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