JAWAHAR DIAMONDS,MUMBAI vs. INCOME TAX OFFICER 41(1)(2), BANDRA KURLA COMPLEX

The Revenue has raised the following grounds of appeal:

The assessee has raised the following grounds of appeal:

The assessee is a partnership firm engaged in the business of dealing in diamonds as a reseller. The assessee filed its original return of income for the assessment year 2013-14 on 28.09.2013, declaring a total income of Rs.4,23,670/-. The Assessing Officer received information from the ADIT (Investigation), Unit-4, Surat, vide communication dated 08.12.2020, concerning transactions Seven Star Jewels, a proprietary concern of Shri Tara Chand Paldecha. According to the information received, the said account was opened on 24.08.2007 and, during the period up to 31.05.2013, total credits of approximately Rs.871.31 crore and total debits of approximately Rs.860.33 crore were noticed therein. The information further alleged that the account was funded through transfers from certain associated entities and that no satisfactory response regarding the source and purpose of the funds and transactions was received during the enhanced due diligence proceedings.

Officer alleged that the assessee had entered into accommodation transactions aggregating to Rs.1,92,98,203/- with M/s Seven Star Jewels and its associated concerns, namely, M/s Kinjal Gems Pvt. Ltd., M/s Shree Bhairav Star Jewels Pvt. Ltd. and M/s Sankit Diamonds.

A notice under the unamended section 148 of the Act was issued to the assessee on 15.05.2021. The assessment order records that, following the judgment dated 04.05.2022 of the Hon’ble Supreme Court concerning notices issued under the unamended reassessment provisions after 31.03.2021, the notice dated 15.05.2021 was treated as a show-cause notice under section 148A(b) of the Act. A communication dated 20.05.2022, together with the information and material available with the Assessing Officer, was accordingly furnished to the assessee, calling upon it to submit its response within the stipulated period. According to the Assessing Officer, the assessee did not submit a reply within the time so allowed.

Thereafter, the Assessing Officer passed an order under section 148A(d) of the Act on 28.07.2022 and issued a fresh notice under section 148 of the Act on the same date, after obtaining the approval of the specified authority. In response to the notice, the assessee filed its return of income declaring the same total income of Rs.4,23,670/- . A notice under section 142(1) of the Act was issued on 24.01.2023. The assessee furnished its reply on 30.01.2023. Subsequently, a final show-cause notice dated 12.05.2023 was issued, proposing to treat the amount of Rs.1,92,98,203/- as unexplained cash credit under section 68 of the Act. The assessee furnished its response to the said show-cause notice on 13.05.2023. 8. In the course of the reassessment proceedings, the assessee submitted that its transactions with M/s Seven Star Jewels, M/s Kinjal Gems Pvt. Ltd., M/s Shree Bhairav Star Jewels Pvt. Ltd. and M/s Sankit Diamonds were genuine business transactions involving the purchase and sale of diamonds. It was contended that the assessee had no responsibility or means to ascertain the overall volume of transactions undertaken by those parties, the balances maintained in their bank accounts, or the source and purpose of every transaction independently carried out by them.

The assessee furnished signed and sealed copies of the ledger accounts of the four parties, copies of its bank statements highlighting the corresponding receipts and payments and the quantitative particulars of stock forming part of its audited accounts. According to the regular banking channels.

The assessee further submitted that, having regard to the nature of the diamond trade, transportation receipts of the kind ordinarily available in the transportation of bulky goods would not be available. It was submitted that the corresponding sales and purchases had been recorded in the books of account and that the quantitative details contained in the audit report substantiated the movement and availability of stock. According to the assessee, the quantity of goods shown as sold could not have been traded if the corresponding purchases or sales were treated as non-genuine.

As regards the validity of the reassessment proceedings, the assessee contended that the proceedings had been initiated merely on the basis of general information and suspicion emanating from an investigation conducted in the case of third parties. It was submitted that there was no statement of any of the concerned parties specifically denying the transactions entered into with the assessee. No such statement or adverse material was furnished to the assessee, nor was any opportunity of cross-examination provided.

The assessee contended that the transactions could not be treated as accommodation entries merely because the counterparties were alleged to be suspicious entities. It was also submitted that section 69A had no application since the assessee had furnished its explanation concerning each transaction. The assessee, therefore, addition or penalty proceedings be initiated.

The Assessing Officer did not accept the explanation furnished by the assessee. As regards the challenge to the reopening, the Assessing Officer observed that the assessee had not filed any objection in response to the show-cause notice dated 20.05.2022 issued under section 148A(b) of the Act. According to the Assessing Officer, the notice under section 148 had been issued only after passing the order under section 148A(d), after obtaining the requisite approval and after affording an opportunity to the assessee under section 148A(b) of the Act. The Assessing Officer, therefore, rejected the objection raised by the assessee against the reassessment proceedings.

On the merits of the addition, the Assessing Officer observed that the assessee had not denied having entered into transactions aggregating to Rs.1,92,98,203/- with M/s Seven Star Jewels and its associated concerns. The Assessing Officer acknowledged that the assessee had furnished copies of the bank statements and ledger accounts to support its claim that the transactions represented genuine purchases and sales. He, however, held that the mere fact that the amounts were received or paid through banking channels and that confirmations had been furnished was insufficient to establish the genuineness of the transactions.

The Assessing Officer further observed that the identity and creditworthiness of the parties and the genuineness of the transactions were required to be established beyond doubt. Relying or bogus entities engaged in providing accommodation entries.

The Assessing Officer further recorded that there were substantial circular transactions in the bank account of the assessee and that the account of M/s Jawahar Diamonds had allegedly been used as a transit point for the transfer of funds. On that basis, he concluded that the transactions with the four entities represented accommodation entries. The judicial precedents relied upon by the assessee were held to be inapplicable to the facts of the case.

The Assessing Officer consequently treated the entire amount of Rs.1,92,98,203/- as unexplained cash credit under section 68 of the Act and brought the same to tax under section 115BBE of the Act. The total income of the assessee was accordingly determined at Rs.1,97,21,870/-. The Assessing Officer also initiated penalty proceedings under section 274 read with section 271(1)(c) of the Act.

Aggrieved by the reassessment order, the assessee instituted an appeal before the learned CIT(A) on 21.06.2023. The assessee challenged the addition of Rs.1,92,98,203/- made under section 68 of the Act and contended that the credits and debits appearing in its books of account and bank accounts stood fully explained. The assessee further contended that the stock quantities disclosed by it could not have been traded if the corresponding sales were regarded as bogus and that the Income-tax Department had not brought any corroborative material on record in support of the addition.

Before the learned CIT(A), the assessee reiterated that it was engaged in the business of reselling diamonds and that the transactions with the four parties were genuine business transactions. The assessee furnished its computation of income, audited financial statements, audit report, ledger accounts of the concerned parties and copies of the bank statements reflecting the relevant payments and receipts. The submissions reproduced in the impugned appellate order describe the concerned entities as parties to whom the assessee had actually sold goods. The amount mentioned in that part of the appellate order is Rs.1,92,89,203/-, whereas the addition made in the assessment order and adjudicated by the learned CIT(A) was Rs.1,92,98,203/-.

The assessee submitted that the Assessing Officer had made the addition solely on the basis of information received from the Investigation Wing, Surat, without furnishing the underlying information or conducting any independent inquiry concerning the assessee’s transactions. It was contended that no statement of any counterparty denying the transactions with the assessee had been brought on record or confronted to the assessee. No opportunity to cross-examine the concerned parties had been granted. The assessee further submitted that the transactions were duly supported by the banking trail, ledger confirmations and quantitative stock records. The books of account had not been rejected, the corresponding sales had been accepted and no discrepancy had been pointed out in the quantitative particulars. It was, therefore, contended that the entire amount could not be treated as unexplained cash credit under section 68 of the Act.

After considering the assessment order and the written submissions, the learned CIT(A) observed that the information received by the Assessing Officer was not entirely general in nature. According to the learned CIT(A), the Investigation Wing report contained specific information that M/s Seven Star Jewels and certain related concerns were engaged in providing accommodation entries through banking channels without any actual transfer of goods.

The learned CIT(A) further observed that the assessee could not produce the concerned parties for verification and that notices issued under section 133(6) of the Act remained uncomplied with. He, therefore, held that the information received from the Investigation Wing and the absence of direct verification lent support to the doubts expressed by the Assessing Officer regarding the transactions.

At the same time, the learned CIT(A) noticed that the assessee had maintained regular books of account, that the payments and receipts were routed through banking channels, that the stock records had not been rejected and that the sales disclosed by the assessee had been accepted by the Department. He further observed that the Assessing Officer had neither invoked section 145 of the Act nor demonstrated that the overall trading results disclosed by the assessee were inconsistent or artificially inflated.

The learned CIT(A) held that, where the purchases or sales were recorded in the books and the corresponding quantitative results had been accepted, the entire amount of the transactions could not be assessed as unexplained income under section 68 or section 69C of the Act. According to him, only the profit element embedded in the non-genuine or unverifiable transactions could reasonably be brought to tax.

In arriving at the aforesaid conclusion, the learned CIT(A) referred to the decisions in CIT v. Simit P. Sheth (2013) 356 ITR 451 (Guj), CIT v. Bholanath Polyfab (P) Ltd. (2013) 355 ITR 290 (Guj) and Principal Commissioner of Income-tax-17 v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bombay). He observed that, where the sales were accepted, it could not be inferred that the assessee had effected the sales without making corresponding purchases, and that only the profit attributable to the alleged non-genuine transactions could be assessed.

Having regard to what he described as the nature of the diamond trade, the gross profit disclosed by the assessee in the normal course and the judicial precedents in similar cases, the learned CIT(A) estimated the profit element at 6% of the disputed turnover of Rs.1,92,98,203/-. He accordingly restricted the addition to Rs.11,57,892/- and directed deletion of the balance addition of Rs.1,81,40,311/-. The substantive ground raised by the assessee was thus partly allowed.

As regards the challenge to the initiation of penalty proceedings under section 271(1)(c) of the Act, the learned CIT(A) held that the initiation of penalty proceedings was only a preliminary step and did not give rise to an appealable cause of action until an order imposing penalty was passed. The said ground was accordingly dismissed as premature. The appeal of the assessee was thus partly allowed.

Being aggrieved by the relief granted by the learned CIT(A), the Revenue is in appeal before us seeking restoration of the entire addition of Rs.1,92,98,203/-. The assessee is also in appeal before us challenging the validity of the reassessment proceedings as well as the addition of Rs.11,57,892/- sustained by the learned CIT(A). Thus, both the parties are in appeal before us against the respective parts of the impugned appellate order.

The learned Departmental Representative relied upon the assessment order and submitted that the addition of Rs.1,92,98,203/- made by the Assessing Officer under section 68 of the Act deserved to be restored. He contended that the assessee had failed to establish the identity and creditworthiness of the concerned parties and the genuineness of the transactions. He accordingly supported the findings recorded by the Assessing Officer and relied upon the grounds raised by the Revenue.

The learned Authorised Representative, on the other hand, submitted that the addition of Rs.1,92,98,203/- was made solely on the basis of information received from the ADIT (Investigation), Unit- 4, Surat. He submitted that the assessee had entered into both sale and purchase transactions with the concerned parties and that the Assessing Officer had treated the entire aggregate amount transacted with those parties as unexplained cash credit under section 68 of the Act, without separately examining the nature and character of each transaction.

We have considered the rival submissions and perused the assessment order, the impugned appellate order, the ledger accounts and the profit and loss account placed before us. The controversy is whether the Assessing Officer was justified in treating the entire amount of Rs.1,92,98,203/- as unexplained cash credit under section 68 of the Act and, if not, whether the learned CIT(A) was justified in estimating the profit element at 6% of the said amount.

The addition made by the Assessing Officer was based substantially upon information received from the ADIT (Investigation), Unit-4, Surat. According to the information, M/s Seven Star Jewels and its associated concerns, namely, M/s Samkit Diamonds, M/s Kinjal Gems Pvt. Ltd. and M/s Shri Bhairav Star Jewels Pvt. Ltd., were allegedly engaged in providing accommodation entries. The Assessing Officer adopted Rs.1,92,98,203/- as the aggregate value of transactions entered into by the assessee with these concerns.

The assessment order, however, does not contain any party-wise or transaction-wise working of Rs.1,92,98,203/-. It does not specify whether the amount represents purchases, sales, receipts, payments or an aggregation of different categories of transactions. The figure was taken from the information received from the Investigation Wing and thereafter repeated in the show-cause notice, the discussion and the computation of income without being reconciled with the books of account of the assessee.

The learned AR invited our attention to the ledger accounts of the four concerned parties. On examination, we find that the assessee maintained separate ledger accounts for sales and purchases. The details emerging from the ledger accounts are tabulated below: Sr. Party and ledger Purchases Sales No. description 1 Seven Star Jewellers Rs.20,09,717/- (Purchase) 2 Seven Star Jewels (Sales) Rs.59,65,042.54/- 3 Samkit Diamond (Purchase) Rs.35,17,911/- 4 Samkit Diamond (Sales) Rs.8,92,234/- 5 Kinjal Gem (Purchase) Rs.12,69,777/- 6 Kinjal Gems Pvt. Ltd. (Sales) Rs.30,38,805/- 7 Shri Bhairav Star Jewels, Rs.57,55,177/- Mumbai (Purchase) 8 Shri Bhairav Star Jewels, Rs.2,35,935/- OMP (Purchase) 9 Shri Bhairav Star Jewels Rs.32,62,796/- Pvt. Ltd. (Sales) Total Rs.1,27,88,517/- Rs.1,31,58,877.54/-

In computing the sales of M/s Shri Bhairav Star Jewels Pvt. Ltd. at Rs.32,62,796/-, the closing balance of Rs.33,157/- appearing in the ledger has been excluded, since such closing balance does not represent a sale transaction. The two purchase ledgers relating to the said party, amounting to Rs.57,55,177/- and Rs.2,35,935/-, have been aggregated at Rs.59,91,112/-.

The aforesaid reconciliation shows that the purchases from the four parties aggregated to Rs.1,27,88,517/-, whereas the sales made to them aggregated to Rs.1,31,58,877.54/-. The combined value of purchases and sales was Rs.2,59,47,394.54/-. None of these figures corresponds to the amount of Rs.1,92,98,203/- adopted by the Assessing Officer. The amount added by the Assessing Officer exceeds the total purchases by Rs.65,09,686/- and exceeds the total sales by Rs.61,39,325.46/-.

The ledger accounts further contain the dates of the respective transactions, the nature of each entry, the sales or purchase voucher number and the corresponding receipt or payment through the assessee’s disclosed HDFC Bank account. The ledger accounts separately identify the sales, purchases, receipts, payments and discount entries. The Assessing Officer has not pointed out any specific defect in these ledger accounts or identified any particular credit entry that remained unexplained.

The Assessing Officer has also not examined the individual sale and purchase transactions before treating the aggregate amount reported by the Investigation Wing as unexplained cash credit. There is no transaction-wise finding that the goods recorded in the books were not purchased or sold. The Assessing Officer did not reject the books of account under section 145 of the Act and did not disturb the quantitative particulars of opening stock, purchases, sales and closing stock.

Section 68 of the Act operates where a sum is found credited in the books of an assessee and no satisfactory explanation regarding its nature and source is furnished. In the present case, the assessee explained that the credits represented sale proceeds arising from its business transactions. The corresponding sales were recorded in the regular books of account and the receipts were reflected through the banking channels. Once the sales and the quantitative trading results were accepted, the entire sale proceeds could not simultaneously be entities.

At the same time, the information received from the Investigation Wing and the absence of direct verification from the counterparties created a doubt regarding the complete genuineness of the transactions. In such circumstances, while the addition of the entire amount cannot be sustained, complete deletion would also not be justified. The appropriate course would be to estimate the profit element reasonably attributable to the transactions with the concerned parties.

We have also examined the profit and loss account for the year ended 31.03.2013. The material figures disclosed therein are as under:

The gross profit of Rs.16,78,956.29/- works out to approximately 7.22% of the total sales. The net profit of Rs.14,36,603.24/- before partners’ interest and remuneration works out to approximately 6.18% of the sales. After the deduction of partners’ interest and remuneration, the net profit rate is approximately 1.82%.

The profit and loss account further shows commission income of Rs.9,68,619/-. Such commission income is a substantial component of the assessee’s income and is equivalent to approximately 67.42% of the net profit before appropriation. The overall net profit reflected in the profit and loss account, therefore, cannot be attributed exclusively to trading in diamonds. The commission income has materially contributed to the net profit disclosed by the assessee.

The learned CIT(A), having regard to the nature of the diamond trade and the financial results of the assessee, estimated the profit element at 6%. The Revenue has not brought on record any comparable case, past assessment history, industry data or other cogent material to establish that the rate of 6% is inadequate. The rate adopted by the learned CIT(A) broadly corresponds to the disclosed net profit rate of 6.18% before partners’ interest and remuneration. Considering that the net profit also includes a substantial amount of commission income, the rate of 6% cannot be regarded as unreasonably low.

The Hon’ble jurisdictional High Court in PCIT v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bom.) held that where the assessee was a trader, the sales were accepted and there was no discrepancy between the purchases and sales, the entire purchase amount could not be treated as income. The principle emerging from disputed transactions can be brought to tax.

The Revenue has relied upon the dismissal of the special leave petition in the case of N.K. Proteins Ltd. In the said case, there was a categorical factual finding that the purchases were supported by fictitious invoices and that the entire fictitious purchase amount had been debited to the trading account. The jurisdictional High Court in Mohommad Haji Adam & Co. considered the corresponding decision of the Gujarat High Court and the dismissal of the special leave petition and held that the said decision could not be applied without reference to the facts of the particular case.

In the present case, the Assessing Officer has not undertaken a transaction-wise inquiry, has not identified any particular unexplained credit and has not demonstrated that no goods were purchased or sold. The books of account and stock records were not rejected. The corresponding sales were accepted and the assessee furnished the ledger accounts and banking particulars. The decision relied upon by the Revenue is, therefore, distinguishable on facts.

We accordingly uphold the conclusion of the learned CIT(A) that the entire amount of Rs.1,92,98,203/- cannot be treated as the income of the assessee and that only the profit element embedded in the disputed transactions can be brought to tax. We also uphold the rate of 6% adopted by the learned CIT(A).

However, the learned CIT(A) applied the rate of 6% to the unreconciled figure of Rs.1,92,98,203/-. The said amount does not accounts. Since the addition was made under section 68 in respect of credits which, according to the assessee, represented sale proceeds, the rate of 6% should appropriately be applied to the actual sales made to the four concerned parties.

The sales made to the four parties aggregate to Rs.1,31,58,877.54/-. The profit element at 6% thereof is computed as - Rs.1,31,58,877.54×6%=Rs.7,89,532. 65. The amount is rounded off to Rs.7,89,533/-.

We, therefore, modify the order of the learned CIT(A) and restrict the addition to Rs.7,89,533/- as against Rs.11,57,892/- sustained by him. The assessee is consequently entitled to further relief of Rs.3,68,359/-. The Assessing Officer is directed to recompute the total income accordingly.

The Revenue has failed to establish that the entire amount of Rs.1,92,98,203/- constituted unexplained income of the assessee or that the rate of 6% adopted by the learned CIT(A) was inadequate. Grounds Nos.1 to 8 raised by the Revenue are accordingly dismissed.

The substantive grounds raised by the assessee concerning the quantum of addition are partly allowed in the terms indicated above. The challenge to the rate of 6% is rejected, while the computation base is restricted to the actual sales of Rs.1,31,58,877.54/-. The assessee’s Ground Nos.1 and 2 concerning the validity of the reassessment proceedings shall be dealt with separately.

In the result, the appeal filed by the Revenue in ITA No.7728/Mum/2025 is dismissed. The appeal filed by the assessee in ITA No.8484/Mum/2025, insofar as it concerns the substantive addition, is partly allowed.

ITAT, Mumbai 6. गाड" फाईल / Guard file.