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Facts
The revenue's appeals concern bogus purchases made by the assessee from M/s Prime Star, a group concern identified as a paper entity providing accommodation entries. The Assessing Officer made a 100% addition of these purchases, but the CIT(A) restricted the addition to 3% for AY 2012-13 and 10% for AY 2014-15.
Held
The Tribunal held that the CIT(A)'s restriction of disallowance to 3% (and 10% for the other year) was justified, considering previous ITAT decisions and High Court judgments on similar issues. The Tribunal found the reliance on the Kanak Impex case by the revenue to be distinguishable on facts.
Key Issues
Whether the restriction of disallowance to a percentage of bogus purchases by the CIT(A) is justified, or if the entire amount should be added back as per the AO's order, considering various High Court and Supreme Court precedents.
Sections Cited
143(3), 147, 250, 254(1), 37, 68, 69C, 74(1A)
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Order under section 254(1) of Income Tax Act PER ARUN KHODPIA, ACCOUNTANT MEMBER: These appeals by the revenue are emerged from the order of Commissioner of Income Tax Appeals, NFAC (in short ‘Ld. CIT(A)’) u/s 250 of the Income Tax Act, 1961 (in short ‘The Act’) dated 16-01-2025 and 26-12- 2-24 for the assessment year 2012-13 and 2014-15, respectively, arises from the orders 143(3)/147 of the Act dated 16-12-2019 and 25-05-2023 passed by Income Tax Officer, 19(3)(3), Mumbai and National Faceless Assessment Unit (in Short ‘Ld AO). and 2049/MUM/2025 Shemon Jewels 2. Since, both the captioned appeals pertains to same assessee, having similar facts and circumstances under common ground of appeal by the revenue, these are heard together and disposed of by this common order.
The grounds of appeal
in the lead matter, reads as under:
1. “Whether the facts and circumstances of this case and in law, Id. CIT(A) has erred in restricting bogus purchase only to the extent upto 3% as against the 100% addition made by the AO, on account of bogus purchases transaction of Rs. 1,23,69,248/- with M/s Prime Star, identified as bogus/paper entity of Mr. Bhanwarlal Jain Group ?” 2. “Whether on the facts and circumstances of the case and in law, Ld CIT(A) has erred in restricting bogus purchase only to the extent upto 3% as against 100% addition of Rs. 1,23,69,248/-by ignoring the fact that action of Assessing officer was based on the information & discreet report of the DGIT (Investigation Wing) Mumbai, who has proved beyond doubt post search and seizure operations with the evidences & recorded statements of Mr. Bhanwarlal Jain that M/s Prime Star, was one of the paper company out of many concerns, managed & controlled with a sole purpose of providing accommodation entries of bogus purchases/sales & loans and the assessee firm was found to be one of beneficiary who has obtained accommodation entries of bogus purchases of diamonds without actual delivery and thus transaction were undertaken to generate paper tail only ?
3. “Whether on the facts and circumstances of the case and in law, Lá CIT(A) has erred in restricting bogus purchase only to the extent upto 3% as against 100% addition of Rs. 1,23,69,248/, without appreciating the fact that during the Search operations conducted, no stock of diamonds or related materials pertaining to business was found and during the re assessment proceedings, the assessee has also failed to prove genuineness and creditworthiness of transactions as well as party vindication, by not producing the documents/evidences/delivery challans, stock registers etc, before Assessing officer ?" 2
4. “Whether on the facts and circumstances of the case and in Inus, the Ld CITIA) has erred ins restricting bogus purchase only to the extent upto 3%, by estimating the income of bogus Purchases on the basis of comparing of bogus purchases with the purchases in the regular books of accounts ignoring that the fact of procuring bogus invoices leads to the un-certified inflation of purchase price by the assessee which cannot be compared with the regular GP of the books of accounts?" 5." Whether in the facts and circumstances of the case, the Ld CIT(A) was justified in holding that income from bogus purchase transaction should be restricted to 3% of total value of bogus purchase transactions, although there was no dispute that the bogus purchases were made and so act of infraction of law was committed by the assessee on provision of section 74(1A) of the Maharashtra Value Added Tax Act 2002 and such purchases are not allowable as per express provisions u/s. 37 of the Act?" 6. “Whether in the facts and circumstances of the case, the Ld.CIT(A) is perverse in not considering the order of Hon'ble Gujarat High Court in case of M/s. N.K. Industries Ltd (2016)72 Taxman.co 289 (Guj.) relating on similar issue of bogus purchase, which have been confirmed by the Hon'ble Supreme Court by dismissing SLP in SLPICC) of 963/2017 dated 16 01 2017?" 7. “Whether on the facts and circumstances of the case and in law, the decision of the Ld. CIT(A), is right in view of the latest decision of the Hon'ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Va. Dy. CIT (2016) 292 CTR (Gul) 354, Dated. 16.01.2017, wherein the Hon'ble Court has held that Once a findings of act has been given that entire purchases shown on the basis of fictitious invoices and debited in the P & L account are established as bogus, then restricting the addition to a curtained percentage goes against the principles of section 68 and 69C of the Income Tax Act, 1961 ?" 8. “Whether on the facts and circumstances of the case and in law, the decision of the Ld. OIT(A), is right in view of the decision of the Hon'ble High Court Mumbai, in the case of Pr. Commissioner of Income-Tax-5, Mumbai Vs. Kanak Impex (India) Ltd ((2025)172 Taxmann.com 283 (Bombay) Dated. 03.03.2025, wherein the decision of 100% addition made by AO has been allowed, by rejecting the ITAT's decision of estimating the profit rate @12.5% on bogus purchases and thereby impliedly grant deduction of such unexplained expenditure incurred u/s. 69C of the Act, eventhough the assessee failed to discharge its onus to prove the genuineness of alleged purchases and has offered no explanation of the sources of expenditure incurred on account of such purchases?” 8." Whether on the facts and circumstances of the case and in law, the order of the Ld. CIT(A) perverse in not considering that the order of Hon'ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Vs. Dy. CIT (2016) 292 CTR (Guj.) 354, Dated. 16.01.2017, which is on the similar issue of 3 and 2049/MUM/2025 Shemon Jewels bogus purchases, was already the law of the land when the Ld. CIT(A) has pronounced it's order on 16:01.2025?” 9." Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in restricting the addition without appreciating the fact that in the case of M/s. Swetamber Steels Ltd. (Supra), the Hon'ble ITAT, Ahmadabad had confirmed the disallowance of the bogus purchase, by stating that the purchases shown from respective parties were found non genuine and the decision of the ITAT was upheld by Hon'ble Gujarat High Court and also by the Hon'ble Supreme Court?"
10. The appellant craves, leave to amend or alter any grounds or add a new ground which may be necessary. A copy of the CIT(A)'s order was received on 16.01.2025 in this office of PCIT-19, Mumbai. The last date of filling an appeal is 31.03.2025. The appeal should be filed IMMEDIATELY.”
The brief facts of the case are that the assessee’s purchases for Rs. 1,23,69,248/- from M/s Prime Star, a group concern of Bhanwar Lal Jain Group, who were involved in providing accommodation entries are considered as bogus purchases and a 100% addition of impugned purchases was made by the Ld. AO after considering the response of assessee and discussing report of investigation wing along with modus operandi adopted in such performance of transactions and rejected books of the assessee u/s 145(3) of the Act. Assessee preferred appeal before the Ld.CIT(A), who decided the appeal of assessee by computing the profit of assessee @3% for AY 2012-13 and 10% for AY 2014- 15. The relevant observations of Ld.CIT(A) while deciding the appeal of assessee are as under: 7.3.2 As regards the quantum of addition to be made, I am in agreement with the submission of the appellant that the AO has not disputed the sales made by it and since there can be no sales without purchase only the profit element embedded in the purchases may be added back. The AO has however added and 2049/MUM/2025 Shemon Jewels back the entire amount. The appellant has submitted copies of assessment order for AY 2014-15 of assessee’s own case and various jurisdictional decisions of the Hon’ble ITAT, Mumbai as well as Hon’ble Bombay High Court wherein it has been held that the margin of diamond trading is between 1 to 3% and hence an addition of 3% was held to be just and fair to plug the leakage of revenue on account of bogus purchase having been made by the appellant. I am in agreement with the views of the ITAT and Bombay High Court with respect to the percentage of bogus purchase to be added back in lieu of the embedded profit and hold that addition @ 3% of the bogus 3,71,077/-, being 3% of the bogus purchase and the balance amount of Rs.1,19,98,171/- is deleted. This ground of appeal
is therefore partly allowed.
6. Aggrieved with the order of Ld. CIT(A) granting relief to the assessee, revenue preferred the present appeal.
7. The department is represented by Ld. Sr DR, whereas there was representation on behalf of the assessee.
8. Ld. Sr. DR strongly supported the order of Ld. AO, placed reliance on the decision of Hon’ble Bombay High Court in the case of Kanak Impex (India) Ltd. (2025) 474 ITR 175 (Bombay), wherein Hon’ble Court had held that addition of entire amount of bogus purchase from hawala operators in the hands of assessee was justified due to failure of assessee to prove said purchases. Accordingly, it is prayed that the addition made of 100% in the assessment order is correct and CIT(A)’s order to be set aside.
9. We have considered the submissions of revenue, perused the material available on records and orders of authorities below. Regarding reliance of revenue on the case of Kanak Impex (supra), we find that the same is distinguishable on facts, as in the said case assessee was non-compliant before and 2049/MUM/2025 Shemon Jewels the AO and was unable to come forth with any explanation qua the issue. Further the identical issue dealt with pertaining to purchases from Bhanwar Lal Jain Group, in many other cases as decided by the jurisdictional income tax appellate tribunal after considering judgments of Hon’ble Courts, had allowed the estimation of profit to be taxed in the hands of assessee. On this issue judgment of Hon’ble Gujarat High Court in the case of PCIT Vs. Keshri Exports (2024) 168 Taxmann.com 528 (Gujarat) would be relevant, being decided on identical facts, wherein alleged purchases were made from the concerns of Bhanwar Lal Jain Group, the same group involved in the present matter. Hon’ble High Court in the said matter, referring to the identical decision of their coordinate bench in the case of PCIT Vs. M/s Surya Impex (Tax Appeal No. 674 of 2022) has held that, the conclusion arrived at by the Tribunal of restricting disallowance at 6% was based on facts before it, which was duly analyzed. Accordingly entire purchase bill could not be added to the income of assessee; disallowance was to be restricted at 6% of bogus purchase.
10. Adverting to the facts of present case, we are of the considered opinion that, Ld. CIT(A) had after due examination of the facts have restricted the disallowance at 3%, which is upheld by ITAT Mumbai in number of similar cases. Thus, the same does not call for any interference. We, therefore, approve the findings of Ld. CIT(A).
In result appeal of revenue in ITA 2048/MUM/2025, stands dismissed.
ITA 2049/MUM/2025, having identical facts and circumstances except quantum of disallowance for Rs. 1,03,08,077/-, involvement of party i.e. M/s Impex Gems and restriction of disallowance at 10% of the bogus purchases. Therefore, any absence of any contradicting material and fact on records brought by the revenue before us, we are inclined to approve the order of Ld. CIT(A) for AY 2014-15 also, in parity with our aforesaid decision for AY 2012-13 in . Accordingly appeal of revenue for AY 2014-15 is also liable to be dismissed and we do so.
In combined result both captioned appeals in 2029/MUM/2025 of revenue are dismissed, in terms of our aforesaid observations.
Order pronounced in open court on 19.09.2025.