ARHAM STAR,MUMBAI vs. ITO WARD 19(2)(2), PIRAMAL CHAMBER

4. The NFAC failed to appreciate that the Report of the Task Group for Diamond Sector (issued by the Govt. of India) itself shows that GP rate for entities engaged in trading of diamonds was only 2%. Hence, the addition, if any, ought to have been restricted to 2% of the impugned purchases. 2.1. All the grounds raised by the assessee relate to disallowance made towards purchases, which have been alleged to be bogus by the ld. Assessing Officer.

3.2. In the impugned assessment order, ld. Assessing Officer has laid emphasis on the modus operandi of the Bhawarlal Jain and his syndicate about their indulgence in providing accommodation entries. Ld. Assessing Officer had asked for confirmation letters and to demonstrate as well as correlate the purchases with the sales made by the assessee, which were duly complied with. Assessment was completed by making the disallowance of the entire alleged purchases as bogus, amounting to Rs. 46,46,495/-. Ld. Assessing Officer thus, made the disallowance of the 100% of the purchase amount which was alleged to be bogus.

3.3. In the first appeal, assessee reiterated its submissions made in the course of assessment proceedings along with corroborative documentary evidences. Further, assessee also asserted that the disallowance was made on the basis of statement given by the persons in whose case, search and survey action was undertaken in the Bhawarlal Jain group. Assessee submitted that merely on the basis of statement given at the time of search and survey, such a disallowance cannot be made without any corroborative documentary evidence, pointing out and establishing a live nexus with the indulgence of the assessee. Assessee has correlated the alleged purchases which have been held to be bogus with the sales made by it which are export sales, for which all the documentary evidences are placed on record, forming part of the paper book. Ld. Assessing Officer in the course of assessment has not doubted on the sales made by the assessee.

3.4. Further, assessee contended by placing reliance on the decision of Hon'ble Jurisdictional High Court of Bombay in the case of PCIT vs. Mohammad Haji Adam and Company [2019] 103 taxmann.com 459 (Bom), whereby it was held that the disallowance ought to be restricted to the positive difference if any, between the gross profit element in the undisputed purchases and that on the disputed purchases. For this, assessee furnished its workings to demonstrate how the GP was earned on the disputed purchases and that earned on the undisputed purchases. The same is extracted below: GP working on the alleged bogus purchases - Sales against alleged bogus purchases Rs. 48,68,837/- - Alleged bogus purchases Rs. 46,46,495/- - GP on sales made from alleged bogus purchases - Rs. 2,22,342/- -GP % on sales made from alleged bogus purchases = 2,22,342 x 100 = 4.566% 48,68,837 - Total sales Rs. 1,81,23,299/- - Sales from undisputed purchases - Rs. 1,81,23,299-Rs. 48,68,837 = Rs. 1,32,54,462/ -Total purchases -Rs. 1,72,74,763/- - Undisputed purchases Rs. 1,72,74,763-Rs. 46,46,395=Rs. 1,26,28,268/- - GP % on undisputed purchases = 1,32,54,462-1,26,28,268 x 100=4.724% 1,32,54,462 3.5. Based on the above workings, assessee thus, in the alternate submitted that at best the disallowance which can be made or the addition which can be made in respect of the difference in gross profit is of Rs. 8,075/-, by following the ratio laid down by the Hon'ble High Court of Bombay in the case of Mohammad Haji Adam and Company (supra). Ld. CIT(A) did not find favour with the submissions made by the assessee and dismissed the appeal by sustaining the disallowance made by Ld. Assessing Officer.

4.1. Ld. Counsel for the assessee also pointed to the decision of Hon'ble Jurisdictional High Court of Bombay in the case of PCIT vs. Kanak Impex India Ltd. [2025] 172 taxmann.com 283 (Bom), wherein addition to the extent of 100% of the bogus purchases u/s.69C was upheld. Ld. Counsel made the submissions distinguishing the facts of the said decision with the case of the assessee, by pointing out the factual position and the provisions of law, details of which are extracted below: “In the case of Kanak Impex (supra), the ITAT had accepted the case of the Department that the purchases were indeed bogus. The assessee had not filed any appeal against the said finding of the ITAT, and hence, the same had become final (This is clear from the Question of Law framed by the Hon'ble High Court in para 2 r/w para 10 of the judgement) The assessee in that case had not appeared before the assessing officer and therefore there were no details/ evidence before the Department to substantiate the purchases. Thus, that was a case where the assessee did not file any material/ evidence to substantiate its case (Para 4 r/w 17 r/w para 38 of the judgement). As against this, in the present case, the Appellant has filed all details/ evidence and the same have not been found to be incorrect. - Before the ITAT, the assessee in that case had not canvassed any submission on the genuineness of the purchases (Para 39 of the judgement). Whereas, in the present case, the case of the Appellant is that its purchases are genuine and the documentary evidence to show the same is already on record - The conclusions arrived at in that case were on account of the failure of the assessee to appear in the reassessment proceedings and file proper evidence (para 32 to 35 of the judgement). - In fact, the grounds on which the judgement in the case of Mohd Hajı Adam & Co. (supra) was distinguished in para 35 of the judgement, do not exist in the present case The addition was made by the assessing officer under section 69C and the question before the High Court was applicability of section 69C (Para 36), whereas, in the present case, the AO has made disallowance of purchases i.e. disallowance u/s 37(1). It is a settled position of law that if a disallowance/addition has been made by the assessing officer under one provision, and the ITAT does not agree with the disallowance/ addition, then the ITAT cannot uphold the same disallowance/ addition under some other provision (Para 13 to 19 of Smt. Sarika Jain v. CIT [2018] 407 ITR 254 (All.).”

iv. Bank statements showing payment made towards the purchases from Mohit Enterprises and Nice Diamonds & Payments received for corresponding export sales made from SR Exports HK Ltd. v. Copy of Bank Realisation advice for export receipt from SR Exports HK Ltd. vi. Copy of Bank Realisation advice for export receipt from Lotus Gems BVBA along with Copy of Bank Statement highlighting the said receipt.

6.1. Ld. Assessing Officer has not pointed out any deficiency or discrepancy in these details and documents However, and contrary to the submissions made by assessee, ld. Assessing Officer has observed in para 9 of his order that assessee has tried to substantiate the claim of genuineness of the purchases with the help of book entries and documents prepared by itself. According to him, making of entries in the books of accounts and related documentation are only unilateral acts, which do not conclusively establish the genuineness of the purchases. He further observes that mere documentation either in the form of bank account entries or otherwise cannot make fictitious transactions real. He thus, rejected the submissions made by the assessee and treated the purchase transactions from the two said parties as bogus, making the addition of the entire purchase.

6.2. Further, decision in the case of Kanak Impex India Ltd. (supra) also doesn't come to support the case of the Revenue, since it is squarely distinguishable on the facts, details of which are already extracted above. We have perused the above judgment and observed that in para 4, Hon’ble Court noted the factual position that assessee did not appear before the ld. Assessing Officer during the course of assessment proceedings and failed to prove the genuineness of the purchase. The said assessment was completed ex parte u/s. 144 r.w.s 147 of the Act. Hon’ble Court also observed in para 17 about the non-appearance of assessee before the ld. Assessing Officer for which there is no justification. Again, it noted in para 29 that the assessee chose not to attend the reassessment proceedings even though the notices were sent by post, email and affixture. Accordingly, in para 13, Hon’ble Court concluded that assessee having not joined the reassessment proceedings, the contention raised by the assessee are to be rejected. Observation of the Hon’ble Court while rejecting the contention of the assessee are: “30. We fail to understand that the respondent-assessee having consciously and intentionally decided not to join the investigation, cannot now contend that the appellant-revenue should have given them all the details before making the addition. In our view, such a conduct of the respondent-assessee cannot be accepted. It was incumbent upon the respondent-assessee to have joined the re-assessment proceedings, discharge the initial onus of proving the purchases and seek details, if any.”

7.1. We note the submission made the ld. Counsel of the assessee that profit ratio in the diamond sector in which the assessee deals in is in the range of 1% to 3% as noted in the Task Force Report by the Government of India.

7.2. Also, assessee has furnished the working of its profit ratio on the undisputed purchases and the impugned purchases alleged as bogus. Details of working are already extracted above. Based on these working, assessee submitted that addition of Rs. 8,075/- can be sustained for the difference in gross profit by following the ration laid down by the Hon'ble High Court of Bombay in the case of Mohammad Haji Adam and Co. (supra). Considering the facts on record and working so furnished as well as following the said decision, we hold to sustain addition of Rs. 8,075/- on account of difference in profit on the undisputed purchases and the alleged bogus purchases. Assessee gets relief for the balance amount for the addition was made by the ld. Assessing Officer. Grounds raised by the assessee are thus, partly allowed.