Mumbai ITAT Restricts Addition on Alleged Bogus Diamond Purchases to 2% Following Earlier Orders in Assessee’s Own Case

Star Brillian Vs ACIT (ITAT Mumbai)

Mumbai ITAT Restricts Addition on Alleged Bogus Diamond Purchases to 2% Following Earlier Orders in Assessee’s Own Case

The Mumbai ITAT upheld the order of the CIT(A) restricting the addition on alleged bogus diamond purchases to 2% of the disputed purchases, following its own decisions in the assessee’s earlier assessment years. Although the reopening was based on information received from the Rajendra Jain group search, the Tribunal noted that the assessee had produced purchase and sale invoices, stock records, confirmations, PAN, income-tax returns of suppliers, bank statements, affidavits, customs-verified export documents, and proof of payment through account-payee cheques. Since the corresponding sales were accepted and the evidences substantiated the transactions, only the profit element, if any, embedded in such purchases could be brought to tax. Consistent with its earlier rulings, the Tribunal held that 2% of the disputed purchases represented a fair estimate of such profit.

The Tribunal declined to adjudicate the assessee’s challenge to the reopening under section 147, as the substantive issue had already been decided in its favour. It also treated the grounds relating to interest as consequential and the penalty proceedings as premature. Consequently, the assessee’s appeal was partly allowed, while the Revenue’s cross-appeal challenging the reduction of the addition from 5% to 2% was dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The above captioned appeal has been preferred by the assessee and Cross appeal by the Revenue against the order passed by the Learned Commissioner of Income-tax, Appeal, Addl./JCIT(A)-3, Hyderabad [hereinafter referred to as “CIT(A)”] pertaining to order passed u/s. 143(3) r.w.s. 147 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Year [A.Y.] 2008-09.

2. The grounds of appeal are as under:

ITA No.1757/MUM/2026(Assessee)

1. The Learned Assessing Officer (AO) erred in facts and in law in reopening and assuming jurisdiction under section 147 of the Act beyond four years and learned CIT(A) erred in upholding the validity of reopening without appreciating the following:

a. The learned AO erred in reopening assessment without due application of mind and without forming his own opinion that the income has escaped assessment merely on the basis of the order of the DGIT (Inv.) / higher authorities.

b. Not providing the photocopy of reasons of reopening as mandated by the law.

2. The learned CIT(A) erred in sustaining an addition to the extent of 2% of the alleged transactions by disregarding the ITAT order in our own case in appeal numbers 1551 and 1552/Mum/2020 dated 15.03.2024 for assessment years 2009-10 and 2013-14, wherein the ITAT confirmed the genuineness and deleted the entire addition on the same issue. Therefore, this case is squarely covered by the said order and the entire addition ought to be deleted in line with the final ITAT order in the earlier year.

3. Without prejudice to the above, the Learned CIT(A) erred in facts and in law in partly sustaining the addition to the extent of the estimated rate of 2% of the alleged purchases of Rs. 2,39,62,057/- made during the year under consideration disregarding the documentary evidences submitted by the appellant.

4. The Learned CIT(A) erred in facts and in law

a. In not providing any information, statements, details, evidences and any other information which is alleged to be in possession of or relied upon by the income tax department inspite of assessee’s repeated requests for the same.

b. In not providing statement dated 11-10-2013 of various groups as recorded in para 6.10 of the assessment order and not providing any proof as to how the assessee or the supplier are related to the Bhanwarlal Jain Group as alleged in the assessment order.

c. In not providing an opportunity to assessee to cross-examine the alleged parties who are alleged to have given the statement against the assessee inspite of the repeated requests by the assessee for the same.

5. The learned CIT(A) erred in disregarding the personal appearance before AO and confirmation of transactions by Mr. Rajendra Jain and documentary proof submitted by the assessee to showing the genuineness of purchase including external evidences including confirmation / affidavits and other records from the alleged party from whom purchases are made and sustaining addition to the extent of 2% of alleged purchases based on surmises and conjectures.

6. Without prejudice to the above grounds of appeal the learned assessing officer and CIT(A) erred in not appreciating the fact that the assessee has traded in these goods and there cannot be any sales without the corresponding purchases.

7. Without prejudice to the above, the learned AO and CIT(A) NFAC erred in adding 2% of Rs. 64,97,241/- to the income on purchases from Avi Exports inspite of bringing to his notice that the assessee had purchased only goods worth Rs 6,43,271/- from Avi Exports and providing all evidence including affidavit of the partner, without appreciating that the said purchases were not the assessee’s purchases.

8. The learned CIT(A) erred in not providing any opportunity of personal hearing to the appellant before passing the order sustaining partial addition.

9. The Learned CIT(A) erred in appreciating the fact that since the assessee has paid the adequate amount of advance tax and filed the return within due date and therefore no interest can be charged u/s 234A, 234B or 234C.

10. The learned assessing officer erred in initiating penalty u/s 271(1)(c). CIT(A) erred in not granting any relief inspite of the fact that the addition is sustained on estimation basis and therefore there is neither concealment nor furnishing of inappropriate particulars of income.

3. Brief facts of the case are that the assessee, a partnership firm engaged in business of manufacturing and trading of diamonds and jewellery, filed its return of income declaring total income of Rs. 86,58,770/-. A Search & Survey operation was conducted in the case of Shri Rajendra Jain Group, Shri Sanjay Choudhary Group and Shri Darmi Chand Group and Others on 03.10.2013 by DGIT(Inv.), Mumbai. It was found that several concerns were being managed and controlled by Shri Rajendra Jain and his associates through dummy or name-lending directors, partners, and proprietors. Statements recorded during the course of search revealed that these entities were allegedly engaged in providing bogus purchase bills and accommodation entries in the diamond trade. Post search, information was received by the AO from DGIT(Inv.), Mumbai that the assessee had taken accommodation entries of purchases from certain parties namely, Moulimani Rs. 44,18,588/-, Sun Diam Rs. 96,48,752/-, Sparsh Exports Pvt. Ltd. Rs 10,27,140/-, Vitrag Jewels 23,70,336/- and Avi Exports Rs.64,97,241/-aggregating to Rs. 2,39,62,057/-.The AO after discussing the modus operandi in the diamond trade, concluded that the diamond dealers obtain the bills from entry providers to complete the trading activity in respect of the diamonds sold in his books of accounts. In such a scenario, the margin for the assessee in the grey market would be not more than 5% which was the same margin that was being adopted for purchases made from dealers in the grey market by assessee and for which bogus bills were procured. Accordingly, the profit margin embedded in these transactions was taken at 5% of the value of the purchases of made from the parties mentioned above and the said amount of Rs. 11,98,103/- was added to the total income of the assessee for the assessment year under consideration.

4. Aggrieved, the assessee filed appeal before the ld.CIT(A) contesting the addition and claiming that in support of the above purchase, it had submitted statement showing details of purchases and corresponding details of sales against each purchase, details of all the Purchase Invoices with the corresponding Sale Invoices with the corresponding purchase invoice, copy of purchase and sales register for the entire year including quantity details. The sales from the alleged purchases were exported and the goods had been duly verified by the customs authorities. The assessee further submitted copy of assessee’s ledger account in their books duly certified by the party, copy of extract of their sales register showing their sales to the assessee duly certified by the party, copy of their PAN card, copy of the return of income filed by them, bank statement of the parties highlighting the payments received from the assessee by them. Further, in case of Sun Diam, it also provided copy of stock register, Sales Tax RC and copy of IEC registration, copy of the affidavits given by M/s Sun Diam, Avi Exports, Vitrag Jewels and Moulimani Impex stating that the transactions were genuine and having details of all the transactions during the year (including VAT amount) and all the payments made by us to them during the year. Further, the purchase by the parties which were by way of imports the goods had also been verified by the customs authorities. These details submitted by the assessee clearly showed that the purchase are genuine and the third party had confirmed the transaction. The AO had used data collected behind assessee’s back without providing same to the assessee and without providing an opportunity to the assessee to cross examine the people who had given the statement against assessee and therefore, the assessment was bad in law.

5. The ld.CIT(A) after considering the submissions and identical facts involved, took note of the order passed by the Hon’ble ITAT, E Bench, Mumbai vide ITA No.1551/MUM/2020 for A.Y.2009-10 and ITA No.1552/MUM/2020 for A.Y.2013- 14 in the case of assessee itself which was placed before him claiming that in both these assessment years, the Gross Profit @ 8% was estimated towards purchases made from the same group i.e. Rajendra Jain group, etc. by the respective AOs. The ld. CIT(A)-59, in their order reduced the GP addition to 3% for both the assessment years. The Hon’ble ITAT, considering the entire facts of the case, submissions before them and available material has held that “This profit percentage was reduced to 3% by the Ld.CIT(A) for both the years. It is only an estimation of profit that had been made by both the lower authorities in the instant case. The report of the Task group for diamond sector submitted to Department of Commerce suggested that the net profit that could be derived in diamond manufacturing ranges from 1.5% to 4.5% and in trading activity thereof, the profitability range is 1% to 3%. Considering the same, we deem it fit to estimate the profit percentage embedded in the value of disputed purchases at 2% which, in our considered opinion, would meet the ends of justice.”

5.1 In the light of such order in assessee’s own case on identical facts and the circumstances of the case, the ld.CIT(A) concluded that from the overall facts and material available on record, the irregularity in purchases had not been ruled out. At the same time, on the same set of facts, the Hon’ble ITAT in the case of assessee itself had determined the addition of disputed purchases at 2% instead of 8% adopted by the AO and reduced to 3% by the Ld.CIT(A). Accordingly, respectfully following the judgement of Hon’ble ITAT, E Bench, Mumbai, as above, he held that the GP addition was directed to be reduced to 2%. Thus, the assessee got partial relief.

6. Before us, the ld.AR has contended that the said purchases were genuine and all the relevant evidences were furnished before the AO. On the other hand, the ld.DR pleaded for restoring the assessment order claiming that there was no justification for the appellate authority to apply a reduced percentage.

7. We have heard rival submissions and perused the materials available on record. As narrated in details in the assessment and appellate orders, during assessment proceedings, the assessee produced the books of accounts and records containing details of purchases, sales, bank statements and creditors before the AO. The confirmations from all the creditors were called for which were also duly filed before him. It is not in dispute that assessee had indeed made payments for those purchases to the concerned suppliers by account payee cheques. It is not in dispute that assessee had furnished the details of corresponding sales made out of disputed purchases by producing the relevant sale invoices, ledger copy of the parties, bank statement showing payments made through account payee cheques, stock register, copy of affidavits of persons confirming the transactions with the assessee, confirmation from parties confirming sales made to assessee alongwith their copy of ITR, their bank statements, PAN, their affidavit confirming the genuineness of transactions etc. However, the AO still doubted the transaction and proceeded to estimate the profit element embedded in the value of such disputed purchases at 5% which was reduced to 2% by the ld. CIT(A) following the ITAT order(supra) in assessee own case. We find no infirmity in the conclusion drawn by the appellate authority which is therefore, upheld. Accordingly, the ground no.2 of the appeal is allowed.

8. In so far as other grounds of appeal on legality of reopening u/s 147 of the Act and also alternative propositions advanced, we do not see any reason to adjudicate on them having allowing the ground no.2 wherein the assessee placed reliance on ITAT order(supra) upholding the appellate order. The ground relating to charging of interest in consequential while ground relating to initiation of penalty u/s 271(1)© is premature requiring no adjudication at this stage.

9. In the result, appeal of the assessee is partly allowed.

10. ITA 2392/MUM/2026(Revenue)

11. In the Cross appeal, the Revenue has contested the appellate order on the ground that the appellate authority was not justified in scaling down the percentage to 2% only. Since we have already held that the ld.CIT(A) had rightly reduced the percentage in the light of the ITAT order in the case of assessee for AYs 2009-10 and 2013-14,we find no merit in the Cross appeal which is accordingly, dismissed.

12. Consequently, the appeal of the assessee stands partly allowed while the cross appeal of the Revenue is dismissed.

Order pronounced in the open court on 24/06/2026.