Krinal Gems Vs Income Tax Unit (ITAT Surat)
No Section 271(1)(c) Penalty on Estimated Bogus Purchase Additions: ITAT Deletes ₹13.10 Lakh Penalties
Introduction
The Income Tax Appellate Tribunal (ITAT), Surat Bench, deleted penalties aggregating to ₹13,10,324 under section 271(1)(c) after finding that the underlying additions relating to alleged bogus purchases had ultimately been sustained on an estimated basis.
In M/s. Krinal Gems vs. Income Tax Unit, the AO had initially disallowed the entire disputed purchases. The CIT(A) reduced the additions to 5%, while the Tribunal, in the quantum proceedings, ultimately sustained 6%.
The Bench, comprising Judicial Member Suchitra Kamble and Accountant Member B.M. Biyani, followed the assessee’s own earlier-year decisions and other coordinate Bench rulings to hold that the penalties were unsustainable.
Background of the Case
The assessee-firm was engaged in the diamond business. It filed returns for AYs 2009-10 and 2010-11, which were assessed.
Subsequently, the assessments were reopened under section 147 based on information gathered during a search on the Bhanwar Lal Jain Group. According to the information, the group provided accommodation entries through non-genuine purchase bills, and the assessee was identified as a beneficiary.
During reassessment, the AO treated purchases of ₹2,15,78,821 for AY 2009-10 and ₹4,90,96,724 for AY 2010-11 as bogus.
The AO initially added 100% of these purchases to the assessee’s income. However, the additions underwent substantial modification during appellate proceedings.
Additions Ultimately Restricted to 6%
In the quantum appeals, the CIT(A) restricted the additions to 5% of the disputed purchases.
On further appeals by the Revenue, the Tribunal sustained additions at 6%, resulting in final additions of:
- ₹12,94,729 for AY 2009-10.
- ₹29,45,804 for AY 2010-11.
The AO also initiated penalty proceedings under section 271(1)(c). Through separate orders dated 24 January 2023, penalties of ₹4,00,071 and ₹9,10,253, respectively, were imposed with reference to the additions finally sustained.
The CIT(A) upheld both penalties through orders dated 17 September 2025, leading to the present appeals.
Assessee’s Submissions
The assessee argued that the issue was already covered in its favour by the Surat Tribunal’s decision in its own case for AYs 2007-08 and 2008-09.
Those appeals, bearing ITA Nos. 948 & 949/SRT/2025, had been decided on 18 June 2026. The coordinate Bench had deleted penalties relating to additions sustained through estimation of disputed purchases.
The earlier decision discussed the Gujarat High Court rulings in Vijay Proteins Ltd. and CIT vs. Whitelene Chemicals. These authorities supported the proposition that an estimated addition does not, merely by its sustenance, justify a penalty under section 271(1)(c).
The assessee accordingly sought deletion of the penalties for the two years under consideration.
Revenue’s Arguments
The Revenue contended that the dispute involved bogus purchases supported by non-genuine bills, rather than a simple ad hoc adjustment.
Its representative argued that although the additions had been quantified through estimation, the underlying allegation concerned accommodation purchases. Therefore, according to the Revenue, section 271(1)(c) remained applicable.
The Revenue urged the Bench to uphold the penalties despite the favourable coordinate Bench decision cited by the assessee.
Tribunal’s Findings
The Tribunal observed that the additions had moved from 100% at the assessment stage, to 5% before the CIT(A), and finally to 6% before the Tribunal.
Consequently, the additions had undergone a series of estimations at different appellate levels. The Tribunal applied the principle that penalty under section 271(1)(c) was not exigible where the addition was made or sustained on an ad hoc or estimated basis.
It further noted that identical facts concerning estimated additions for alleged bogus purchases had already been examined in the assessee’s own earlier-year appeals.
The Bench also referred to Shri Ramprakash Vijayvergia vs. ITO, decided on 16 April 2024, and Santosh Singh Hukam Singh vs. ITO, decided on 25 November 2025.
These coordinate Bench rulings had similarly granted relief against penalties arising from estimated additions.
Judicial Discipline and Consistency
The Tribunal recorded that the Revenue had not identified any distinguishing factual feature or subsequent judicial pronouncement taking a contrary view.
Accordingly, judicial discipline and consistency required the Bench to follow the existing decisions. It found no justifiable reason to depart from the view already adopted by coordinate Benches.
The Tribunal therefore held that the penalties imposed by the AO and sustained by the CIT(A) were unsustainable in law.
Final Outcome
Both appeals were allowed, and the AO was directed to delete the penalties totalling ₹13,10,324.
The ruling concerns the penalty consequences of estimated additions. The quantum additions sustained at 6% were not deleted through these penalty appeals. The Tribunal granted relief because the final additions rested on estimation and the issue was covered by consistent judicial decisions.
Cases Discussed
- M/s. Krinal Gems Vs Income Tax Unit (ITAT Surat); ITA Nos. 948 & 949/SRT/2025; 18.06.2026; AYs 2007-08 and 2008-09 — own earlier-year decisions followed; exact independent TaxGuru case page not verified.
- Vijay Proteins Ltd. (Gujarat High Court); Tax Appeal No. 243/2002 (as identified in reproduced extract) — discussed for estimated-addition penalty.
- CIT Vs Whitelene Chemicals (Gujarat High Court); Tax Appeal No. 496/2012; 15.01.2013 — estimated profit after rejection of books did not by itself warrant penalty.
- Asst. Commissioner of Income-tax Vs Gebilal Kanhaialal HUF (Supreme Court); (2012) 348 ITR 561 — cited in reproduced Gujarat High Court extract concerning Explanation 5 immunity.
- Shri Ramprakash Vijayvergia Vs ITO (ITAT Surat); ITA No. 125/SRT/2024; 16.04.2024 — relied upon for non-levy of penalty on estimated purchase addition.
- Santosh Singh Hukam Singh Vs Income-tax Officer (ITAT Surat); ITA No. 655/SRT/2025; 25.11.2025 — coordinate Bench decision followed.
FULL TEXT OF THE ORDER OF ITAT SURAT
The captioned two (2) appeals are directed by assessee against two (2) separate orders of first-appeal, both dated 17.09.2025 and passed by learned Commissioner of Income-tax (Appeal)-4, Surat [“Ld. CIT(A)”], which in turn arises out of respective penalty-orders dated 24.01.2023 passed by learned Assessment Unit of Income-tax Department [“Ld. AO”] u/s 271(1)(c) of Income-tax Act, 1961 [“the Act”] for assessment-year [“AY”] 2009-10 and 2010-11.
2. The background facts leading to present appeal are as under:
(i) The assessee-firm is engaged in the business of diamond.
(ii) For AY 2009-10 and 2010-11 under consideration, the assessee filed returns u/s 139 which were assessed. Subsequently, the cases of assessee were re-opened for assessment u/s 147 based on the information collected by tax authorities in a search conducted upon “Bhanwar Lal Jain Group” revealing that the said group was involved in providing accommodation by issuing non-genuine bills. The assessee was also identified as one of the beneficiaries of such accommodation. During assessment proceedings, the Ld. AO observed that the assessee made bogus purchases of Rs. 2,15,78,821/- in AY 2009-10 and Rs. 4,90,96,724/-. Ultimately, while completing re- opened assessment, the AO made addition of 100% of bogus purchases in respective years. The assessee carried matter in appellate proceedings whereupon the Ld. CIT(A) reduced addition to 5% of bogus purchases but on further appeal by revenue, the ITAT upheld 6% addition. This resulted in sustenance of addition of Rs. 12,94,729/- in AY 2009-10 and Rs. 29,45,804/- in AY 2010-11.
(iii) Simultaneous with completion of assessment as aforesaid, the Ld. AO also initiated penalty proceeding u/s 271(1)(c) against assessee. Ultimately, the AO passed penalty-orders dated 24.01.2023 imposing a penalty of Rs. 4,00,071/- in AY 2009-10 and Rs. 9,10,253/- in AY 2010-11 qua the additions finally sustained. Aggrieved by penalties so imposed, the assessee filed appeals to Ld. CIT(A) but did not get any success. Now, the assessee has come in present appeals challenging the penalties imposed by AO and upheld by CIT(A).
3. Presently, the issue before us is the penalties imposed by Ld. AO u/s 271(1)(c) and upheld by Ld. CIT(A).
4. The Ld. AR for assessee submitted that the impugned issue is covered by decision in assessee’s own case for AY 2007-08 & 2008-09 decided by co- ordinate bench of ITAT, Surat in ITA Nos. 948 & 949/SRT/2025, order dated 18.06.2026 in assessee’s favour. The relevant paras of ITAT’s order are re-produced below:
“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. In so far 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. 8.33 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 T.A. 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.”
5. Per contra, Ld. DR for revenue submitted that it is not a simple case of adhoc/estimated addition, it is a case of bogus purchases made by assessee by obtaining non-genuine bills from suppliers although the addition has been made on estimation basis. Therefore, the penalty u/s 271(1)(c) is certainly triggered and the lower authorities are right in imposing/upholding penalty. Ld. DR submitted even if there is a favourable decision of co-ordinate bench as relied by Ld. AR, this bench should give a considerate thought and uphold the action of lower-authorities.
6. We have heard the learned Representative of both sides and considered their rival submissions and perused the case record including the documents brought to our notice. We have also considered the facts of issue in the light of judicial precedents.
7. It is an undisputed fact that initially the Ld. AO made addition of 100% of purchases, which the Ld. CIT(A) reduced to 5% in first appeal and ultimately, the ITAT, Surat has upheld 6% in next appeal. Thus, the addition has undergone a series of estimation at all levels. It is a settled proposition of law that penalty u/s 271(1)(c) of the Act is not exigible where the addition is made/sustained on adhoc/estimated basis. We find that this very issue arising from identical facts relating to estimated additions on account of alleged bogus purchases, has already been examined and settled in assessee’s own case for earlier years (re-produced above). Further, the identical issue has also been settled in favour of assessees by at least two orders of the Co-ordinate Benches of ITAT, Surat, viz. (i) ITA No. 125/SRT/2024 – Shri Ramprakash Vijayvergia Vs. ITO, dated 16.04.2024 and (ii) ITA No. 655/SRT/2025 – Santosh Singh Hukam Singh Vs. Income-tax Officer, dated 25.11.2025. We re-produce below the relevant paras from order of ITA No. 125/SRT/2024 – Shri Ramprakash Vijayvergia:
“4. We have heard the submissions of the learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the revenue. The Id. AR of the assessee submits that the assessee has neither concealed the income nor furnished inaccurate particulars thereof. The Assessing Officer merely made disallowances of purchases on the basis of allegation of bogus purchases which were based on the information about the search carried out on Bhanwarlal Jain Group in Mumbai. The Assessing Officer made 100% of disallowances of purchases shown from Ankita Exports and Megha Gems. However, on appeal before the ld. CIT(A), the addition was restricted to Rs.62,34,360/- which is 12.5% of the disputed/bogus purchases. The ld. AR of the assessee submits that on further appeal by revenue before the Tribunal, th addition was restricted to 5% of Gross profit. The ld. AR of the assessee submits that it is settled position under law that no penalty under Section 271(1)(c) of the Act is leviable on the addition made on estimated/ ad hoc basis. The entire penalty is to be deleted.
5. On the other hand, the Id. Sr. DR for the revenue supported the orders of lower authorities. The Id. Sr. DR for the revenue submits that the penalty to the extent of bogus purchases confirmed by the ld. CIT(A) may be upheld.
6. We have considered the submissions of both the parties and perused the record carefully. There is no dispute that initially, the Assessing Officer made disallowances / addition of Rs. 4.98 crores on the basis of information of Investigation Wing, Mumbai that the assessee is one of the beneficiaries of purchases shown from Ankita Exports and Megha Gems which are managed by Bhanwarlal Jain Group. There is no further dispute that on appeal before the ld. CIT(A), the quantum addition was restricted to 12.5%. We find that on further appeal before the Tribunal, the addition instead of restricting to the bogus purchases, the gross profit of assessee was restricted to 5%. Thus, admittedly, the ultimate addition was restricted on ad hoc basis. It is settled position under law that no penalty on the addition made on ad hoc basis, is to be levied. Similar view has been taken by Hon’ble Jurisdictional High Court in CIT Vs Subhash Trading Co. (1996) 86 Taxman 30 (Guj), Navjivan Oil Mills Vs CIT (2002) 124 Taxman 392 (Guj), CIT Vs Valimkbhal H Patel (2006) 280 ITR 487 (Guj) and in ITO Vs Bombaywala Readymade Stores (2015) 55 taxmann.com 258 (Guj). So far as reliance on various case laws relied by Id CIT(A) in his order, we find that the facts in all such case laws are at variance and the decisions of all such cases are not at all applicable as far as facts of the present case is concerned. Thus, we do not find any justification in levying such penalty under section 271(1)(c).
7. Thus, we direct the Assessing Officer to delete the entire penalty levied vide order dated 09/03/2018. In the result, the grounds of appeal raised by the assessee are allowed.
8. In the result, this appeal of assessee is allowed.”
8. The Revenue has not brought to our notice any distinguishing feature in the facts of the present case or any subsequent judicial pronouncement taking a contrary view. Therefore, judicial discipline and the principle of consistency require us to follow the aforesaid decisions, and we find no justifiable reason to deviate from the view already taken by Co-ordinate Benches. Respectfully following the same, we hold that the penalty imposed by the Ld. AO and sustained by the Ld. CIT(A) is unsustainable in law. Accordingly, we direct the Ld. AO to delete the impugned penalties.
9. Resultantly, these appeals are allowed.
Order pronounced in open court on 30/10/2026
