INCOME TAX OFFICER-23(3)(1), MUMBAI, MUMBAI vs. TISYA JEWELS, MUMBAI

The assessee is a trader of diamonds and deals in diamond studded jewellery. In various grounds of appeal,the Revenue has contested the action of the ld.CIT(A) in restricting the addition amounting to Rs 51,28,755/- @ 12% as against 100% made by the AO in respect of alleged bogus purchases of Rs.51,28,755/- made from M/s. ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai Kangan Jewels and M/s. Maniprabha Impex Private Limited which are stated to bepaper entities/concerns, involved in providing bogus bills, without any actual supply of materials to the assessee firm. He reduced the disallowance without any justification and not appreciating the facts narrated by the AO and also the fact that the addition was based on information/report received from the DDIT Investigation Wing, Mumbai. It was found that Sanjay Choudhary, Rajendra Jain and Dharmilchand Groups, all hawala traders indulged in the practice of providing accommodation entries of issuing bogus Sales/Purchase bill without supplying any goods and the assessee firm was found to be one of the beneficiaries of such practice, which had obtained accommodation entry of Rs.51,28,755/- from Kangan Jewels and Maniprabha Impex Private Limited, both paper concerns, without actual delivery or supply of materials to suppress the true profit. He further failed to appreciate thatduring the course of search proceedings, Mr. Rajendra Jain in his recorded statement had admitted that both the above concerns were only paper co., controlled and managed by his syndicates and no actual sales purchases were executed through any of them and the assessee firm was one of the beneficiaries availing accommodation entries from them for bogus purchases totalling Rs.51,28,755/-. Moreover, the assessee could neither produce the quantitative tally of day to day ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai purchases, Sales, Stocks, Delivery Challans and corresponding values nor could produce the parties for verification, in spite of opportunity provided by the AO. The ld.CIT(A) further ignored that the assessee failed to prove the genuineness of the alleged transactions as well as creditworthiness of the parties from whom the alleged purchases were purportedly made.

According to the assessment order, the Rajendra Jain group was found running a web of concerns for providing accommodation entries in the form of bogus unsecured loan, and bogus sales through non-existent companies or only paper companies without any real business. The AO observed that modus operandi of such paper companies comprised of importing rough, cut and polished diamonds for other clients who did not want to show import in their ownbooks.Physical delivery was immediately made to these actual importers after clearance of the consignment.They provided bogus bill/accommodation entries for commission to various parties who normally purchased Diamonds in cash from undisclosed parties and needed bills to show purchase against sales in their account. There were many players in diamond market who purchased diamonds fromthe grey market and were in need of bogus purchase bills to regularise their ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai corresponding sales. There were others who want accommodation entries of bogus purchase to reduce their tax liability by increasing expenses.These entry providers were facilitators.Benami concerns of Rajendra Jain and other group imported diamond on behalf of real importers to whom diamonds were handed over out of books.But in regular books of account of the benami concerns, the imported diamonds still appeared as stock. This was the reason why during search no stock of diamonds were found from them. Against bogus stock, bogus sale bills were issued to beneficiary parties who were in the need of taking accommodation entries of bogus purchases. For this purposes, cheques were issued by the benami concerns of Rajendra Jain and others.Subsequently, cash was returned back to these beneficiaryparties after deducting commission on the same. The AO in para 6.7 of the order has narrated the admission of above modus operandi by Rajendra Jain in whose case search u/s 132 of the Act was conducted on 03.19.2013 wherein he admitted the above modus operandi in response to various queries.

1 Further, as per para 9 of the order, the AO issued notices u/s 133(6) of the Act to the above two parties which werereturned back unserved with the remark ‘Not Known'. He later asked the assessee to ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai produce them with variou etails vide but the assessee did not produce them. Accordingly, he concluded that the purchase transactions were non-genuine.He also applied provisions of section 145(3) of the Act and rejected the books of account. The purchases were treated as accommodation bills only without getting the actual materials.As per para 12 and clauses a) to d), he further stated that before himstock register was not produced and the assessee had failed to prove the corresponding sales. No one to one correlation of purchase and sale was made nor proved that the goods were part of closing stock. He noted that the assessee, being a manufacturer of diamond studded jewellery wherein the assessee bought cut and polished diamonds (finished goods), it needed to show one-to-one co-relation between its purchases and sales, or atleast it should prove that the purchases were part of closing stock, if not sold during the year. For this, it must maintain the day-to-day stock register. All the purchases debited in books needed to be entered in the stock register and the sale should invariably be shown against these purchases. In the year-end, the balance of the stock should match with the closing stock valuation shown by the assessee. Not only the quantity but also the rates for purchases and sales needed to be commensurate with. The assessee had indulged in non-genuine transactions. The intention of indulging in such ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai activity was to suppress the true profits and to reduce the tax liability. Therefore, addition of entire amount of bogus entries was considered. The Hon'ble Supreme Court, in the case of NK Proteins Ltd. v. Dy CIT (2017-TIOL23-SC-IT) CC_Nos.769 of 2017 dated 16.1.2017, had dismissed the SLP filed by the assessee and confirmed the decision of Gujarat High Court for addition of entire income on account of bogus purchases. Hence, following the decision of the Hon'ble Supreme Court in the case of N.K. Proteins Ltd. v. DCIT(supra), the entire amount of bogus purchaseentries of Rs.51,28,755/- (from Maniprabha Impex Rs.18,45,399/- and from M/s. Kangan Jewels Pvt. Ltd. Rs.32,83,356/- and claimed as expenses in the books of account was disallowed and added to assessee's total the purchase from the above named partiesas bogus expenses debited to the books of accounts in toto.

In the subsequent appeal before the ld.CIT(A), the assessee made various submissions contending that during reassessment proceedings, the assessee filed details in support of the claim for purchases, i.e. copy of purchase invoices from Kangan Jewels Pvt. Ltd. and Mani Prabha Impex Pvt. Ltd., confirmations from both the parties regarding purchase transactions,extract of stock register marking the purchases from the parties as well as the sales against the purchases, ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai copy of ledger accounts of both the parties, copy of the bank account marking the payment to parties, copy of sales invoice given to the final consumer, identifying the use of the diamonds purchased from the aforesaid parties,copy of PAN cards of both the parties,copy of ITRs of both the parties. It was stated that by producing these evidences, the assessee had discharged its onus. The AO merely on the basis of statement of Mr. Jain without conducting independent enquiries and verifying the details/documents filed by the assessee, treated the purchases from the parties as non-genuine. Whereas the assessee had clearly discharged its onus including showing that the payment was made through bank by furnishing the bank statements and in the absence of any proof by AO that cash was in fact received back by it after making the said payments to the concerns, it was submitted thatthe purchases could not be held as bogus. Besides,when the AO had relied on statements of a third party one Mr. Jain to treat purchases made by the assessee as non-genuine but had not even given copy of the full statement of the said Mr. Jain or his alleged employees or any other material / documents relied upon by him etc. to make the addition during the entire course of reassessment proceedings, the addition deserved to be deleted.The statement of Mr. Jain which was the basis of the addition did not implicate/name the assessee in any way. In light of ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai the decision of the Gujarat High Court, in the absence of such direct implications or allegation, the AO cannot use such statement to disallow the purchases especially where the assessee had filed voluminous evidences in support of the claim of purchases. In light of the retraction of statements by Mr. Dharmichand Jain who was the director of the two companies which were alleged to be bogus and Mr. Rajendra Jain (whose statement was relied upon by AO to make the addition) duly supported by affidavits filed with the tax department, applying the decisions of the Tribunal in cases relating to Mr. Rajendra Jain only, the basis for addition is lost. If the AO did not reject the sales, he could not add the alleged bogus purchases .

1 The assessee challenged the addition inter alia arguing that the AO did not provide an opportunity to cross-examine the searched party. Additionally, the statements made by Dharmichand Jain and Rajendra Jain were retracted and the AO accepted the sales recorded in the books of account, which should validate the corresponding purchases. The retraction of statements by the Rajendra Jain group was considered an afterthought, and the statements made on material evidence during the search cannot be treated as retracted unless proven otherwise. The ld.CIT(A) observed that the judicial precedents referred ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai to by the assessee were carefully perused but were found to be rendered on different facts and may not apply squarely to its case. The assessee argued that having accepted the sales in the books of account, the AOshould not have added 100% of the alleged bogus purchases. Instead, the addition should be restricted to the profit element embedded in the purchases. The assessee cited various judicial precedents and referenced the CIT(A) orders for AYs 2007-08 and 2012-13, where additions on account of bogus purchases were restricted to 12.32% and 12%, respectively. Considering the totality of facts, including that the alleged bogus purchases contributed to assessee's sales as per stock details, it wasstated that 100% addition would be excessive. The purchases from Maniprabha Impex Private Limited and Kangan Jewels Private Limited were found to be only accommodation entries and there was possibility of the assessee sourcing the goods from the grey market at a lower price and to match the grey market purchase, the assessee could have obtained bogus bills from the Rajendra Jain group searched by the Investigation directorate. Accordingly, its argument to tax only the profit element embedded in the purchases wasfound reasonable by the ld.CIT(A).Therefore, following the precedent in its own case for AYS 2007-08 and 2012-13, the AO was directed to estimate the profit at 12% ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai of the bogus purchases added and modify the assessment order accordingly.

Before us, the ld.DR has argued the ld.CIT(A) was not justified in restricting the addition to an estimated percentage and ignoring the fact that the assessee did not produce the parties nor they responded to notices u/s 133(6) of the Act. Thereby, the onus could not be considered to have been discharged.

Per contra the ld.AR submitted that the assessee is a trader of diamonds and deals in diamond studded jewellery. It did maintain a stock register, which was duly submitted to the AO vide letter dated 08.08.2017, marking the purchases and the sales against the purchases as well as the purchases forming part of the closing stock. This register clearly showed one-on-one co-relation between the purchases and the sales / closing stock. Therefore, the aforesaid conditions listed by the AO stand fully satisfied and therefore, the AO should not have made addition of Rs.51,28,755/- the entire amount of purchases. It is submitted that the juri ictional High Court in PCIT v. Mohammad Haju Adam & Co., Income Tax Appeal No. 1004 of 2016 dated 11.2.2019 very succinctly explained the decision of N.K. Industries Ltd. (supra) which was relied by the Revenue in that case before the High Court. ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai Before the High Court, the Revenue relied on the decision of N.Κ. Industries Ltd. v. DCIT to contend that the entire bogus purchases should be added. It also pointed out that SLP from the decision has been dismissed by the Supreme Court. Thus, after considering N.K. Industries (supra), the juri ictional High Court upheld the order of the Tribunal that the purchases could not be rejected without disturbing the sales in case of a trader. In its case also, the AO has not disputed the sales declared by it. In light of the ratio of the juri ictional High Court, the entire purchase could not be added and addition should be restricted to the extent of profit element embedded in the purchases.Attention was invited to the case of ACIT v. Choron Diamond(I) Pvt. Ltd., ITA.No.4449/MUM/2016 (order dated 30.10.2017).The juri ictional Tribunal noting the report of the Task Group on Diamond Sector restricted the addition to 2%. Applying this, it was submitted that the addition should be restricted to 2% of the disputed purchases. A similar view has been taken by the juri ictional Tribunal in Dev Diamonds v. ACIT, ITA No. 1439 / Mum / 2018 (order dated 8.8.2019).

1 Without prejudice, it is submitted that the rate of addition should not be more than 12% which is the industry standard in jewellery industry as held in CIT v. Clarity Gold (P.) Ltd., (2018) 99 taxmann.com ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai 46 (Raj HC). Further, the ld. CIT(A) in assessee's case in AY 2007-08/ AY 2012-13 had restricted the addition on account of alleged bogus purchases to 12.32% / 12%.

2 In light thereof, it is submitted that the addition should not exceed 12%.Without prejudice, it is submitted that as held in PCIT v. Mohammad Haju Adam & Co. (supra), the addition, if any, should be restricted to the difference between the gross profit rate as per the books of accounts on undisputed purchases and gross profit on sales relating to the purchases made from the disputed parties. Now, the gross profit rate on undisputed purchases was 13.39% and on disputed purchases was 0.17%. Therefore, the addition, if any, should be restricted to 13.39% of the total purchases. Since the assessee had already offered gross profit @ 0.17% on such disputed purchases, the addition should be restricted to 13.22% of Rs.51,28,755 = Rs 6,78,021/-.Thus, the AO had accepted the sales declared by the assessee in its books of account and declared in the return of income. This included sale of the alleged bogus purchases also. It is trite that no sales can be effected, if there are no purchases. A sale can be made if the goods are available with the seller. Thus, it is submitted that if the AO had not rejected the sales, he could not add the alleged bogus purchases. A perusal of the stock register would also show ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai the correlation between purchase of each item and its sale. It is reiterated that a chart showing correlation between purchases from the aforesaid parties and their submittedclearly showed that the diamonds were, in fact, purchased and then subsequently sold.

It may be stated here that in the instant case the AO has claimed that that the assessee failed to produce the alleged parties from whom the goods were purchased. Besides, the assesse did not produce the stock register for proving on to one tally of the diamonds purchased and sales. As a result, the closing stock was also not verifiable. On the other hand the ld.AR has claimed that stock register was, in fact produced and tallying of goods was done before the AO.In view of the conflicting versions the ld.DR was requested to submit a factual report from the AO in his respect. Vide a report submitted, the AO has once again confirmed that no stock register was produced before him during assessment proceedings.

1 We observe that the assessee has time and again relied on the copes of invoices, bank statements, ITRs etc to support the contention that the purchase was genuine.However,no reasons have been stated for non-production of the sellers before the AO which casts a serious doubts on the authenticity of the said purchase,more so in the light of affirmed ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai statement of the accommodation entry providers which is already narrated in the preceding paras. The assessee has in this regard claimed that the AO did not allow cross examination of the said person though he placed heavy reliance on the statement in disallowing the purchases.

2 Considering the above stated facts, we are of the view that neither the assessee has been able to prove the purchases in view of non- production of the parties before the AO nor the AO has been fair in placing reliance on thestatements of alleged entry providers and not allowing the assessee to cross examine them.Failure on the part of the Assessing Officer to allow to the assessee an opportunity to cross- examine those alleged entry providers whose statements were made the very basis of the impugned order, amounts to violation of the principles of natural justice. We are of the considered view that the AO remained under a statutory obligation to facilitate cross-examination. The assessee could have dispelled the material that the AO acted upon to disprove the authenticity of the purchase transactions only if it was provided an opportunity to cross-examine the entry providers which had allegedly referred the name of the assessee as a beneficiary of accommodation entry. The assessee was vested with a statutory right to dispel the same by seeking cross-examination of the said person, which had wrongly ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai been declined by the A.O. Accordingly, in all fairness, the matter requires to be restored to the file of the AO with a direction to facilitate the cross examination of Shri Rajendra Jain (supra) and also, any other person/persons on whose statements adverse inferences as regards the authenticity of the purchase transactions in question, have been drawn in the case of the assessee.

In so far as the stock register is concerned, the assessee would be required to produce the same before the AO for reconciliation of purchase and sale as its claim.The said parties would also be produced for confirming the said purchasers.

Accordingly, we consider it appropriate to set aside the appellate order and send back the entire matter to the file of the AO to frame a de novo assessment after allowing adequate opportunity of hearing to the assessee to prove the genuineness of the impugned purchases. The assessee would also be allowed to cross examine the alleged entry providers directly linked to the above named purchasers. Thus, the grounds of the Revenue in this regard are allowed for statistical purposes. ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai

In ITA No. 791/Mum/2025, similar grounds have been raised by the Revenue as in ITA No. 790/M/2025. Since we have already set aside the appellate order and remitted the entire issue to the file of the AO, our decision in para 9(supra) applies mutatis mutandis to the instant appeal as well.

In the result, both the above appeals of the Revenue are allowed for statistical purposes.

The assessee has filed Cross objections vide C.O. No.67/MUM/2025 (A.Y. 2011-12) (Arising out of ITA No. 790/MUM/2025) and C.O. No.68/MUM/2025 (A.Y. 2010-11)(arising out of ITA No. 791/MUM/2025). In both the Cos. the assessee has challenged legality of reopening and also on merits contesting the action of the ld.CIT(A) to restrict the addition to 12% of the impugned purchases.

The assessee in the above Cross Objections inter alia contended that the reassessment proceedings under section 147 of the Act were initiated on the basis of the information received during the course of the search on another entity, and therefore instead of initiating proceedings under section 147 of the Act, the AO should have initiated ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai the proceedings under section 153C of the Act, in view of the non- obstante clause in section 153C(1) of the Act.

1 It appears that this ground was never agitated by the authorities below.From a plain reading of the aforesaid provisions, it is evident that for the applicability of the provision, and initiation of proceedings under section 153C of the Act, following conditions are required to be fulfilled:- (a) any money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned; (b) the AO is satisfied that the such assets or documents or books of account belongs or pertains or pertain to or any information contained therein relates to a person other than the person referred to in section 153A of the Act; (c) the seized or requisitioned assets or documents or books of account shall be handed over to the AO having juri iction over such other person; (d) the AO having juri iction over such other person is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person; (e) the AO having juri iction over such other person shall proceed against such other person and issue notice and assess or reassess income of such other person in accordance with the provisions of section 153A.

2 This ground relating to the applicability or otherwise of the provisions of the section 153C of the Act in this case, requires factual verification from the records at their end by the authorities below. Thus, we consider it appropriate to remit this ground to the file of the AO to ITA No. 790, 791/Mum/2025 CO No. 67, 68/Mum/2025 Α.Υ. 2010-11, 2011-12 Tisya Jewels, Mumbai examine merits therein and act as per law. Accordingly, the ground is allowed for statistical purposes in both the assessment years.

3 In so far as the ground on merits challenging the action of the ld.CIT(A) in restricting the addition to 12% is concerned,since we have already remitted the entire issue back to the file of the AO allowing the Revenue's appeal for statistical purposes,no adjudication is required by us at this stage.

In the result, both the Revenues appeal and Cross Objections of the assessee are allowed for statistical purposes. Order pronounced in the open court on 09/12/2025. NARENDER KUMAR CHOUDHRY (न्यायिक सदस्य /JUDICIAL MEMBER) Place: मुंबई/Mumbai दिनांक / Date 09.12.2025 Lubhna Shaikh / Steno PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER) आदेश की प्रतिलिपि अग्रेषित/