ITO 23(3)(1), MUMBAI, MUMBAI vs. SAUMIL DIAMOND, MUMBAI

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ITA 2334/MUM/2026Status: DisposedITAT Mumbai31 July 20267 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The CIT(A) restricted the addition to 2% of the purchases, considering that the assessee had discharged its primary onus and the AO relied on third-party information without providing cross-examination. The Tribunal upheld this decision.

What were the facts?

The Assessing Officer (AO) made an addition of Rs. 36,35,269/- on account of bogus purchases based on an investigation report. The assessee provided bills, bank statements, confirmations, and affidavits to prove the genuineness of purchases.

What were the issues?

Whether purchases can be disallowed entirely based on an investigation report without providing cross-examination, and if not, whether the addition should be restricted to the profit element.

Which sections of the Income-tax Act were involved?

Section 68,Section 69C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCHES, MUMBAI

Before: SHRI SANDEEP GOSAIN

PER SHRI SANDEEP GOSAIN, JUDICIAL MEMBER:

This appeal is filed by the Department against the order of Ld. ADDL CIT(A)-1, BANGALURU vide DIN: ITBA/APL/S/250/2025- 26/1083760561(1) dated 17-Dec-2025 for the Assessment Year 2007. The Department has raised the following grounds of appeal:

1.

Whether on the facts and in the circumstances of the case and in law the CITA has erred in directing the AO to restrict the addition to the extent of 2 percent as compared to 100 percent addition of Rs 3635269 made by the AO on account of bogus purchases ignoring the fact that the addition was made based on credible information the DGIT Inv Mumbai

2.

Whether on the facts and in the circumstances of the case and in law the CITA while deciding the issue has ignored the fact that action of the AO was based on the information Report received from the DGIT Investigation Wing Mumbai about the hawala traders were indulged only in providing accommodation entries in the form of issuing bogus Sales Purchase bills without supplying any goods and the assessee was found to be one of the beneficiaries, who had obtained accommodation entries for bogus purchases amounting Rs 3635269 from Messers Rutuja Gems and Messers Rinkesh Impex to inflate its expenses and thereby suppress its true profit

3.

Whether on the facts and in the circumstances of the case and in law the Ld CITA has ignored that even during the Reassessment Proceedings the assessee could neither produce the quantity tally of day to day purchases Sales Stocks Delivery Challans and corresponding values nor could produce the parties for verification from whom the alleged purchases were purportedly made in spite of opportunity provided by the Assessing Officer

4.

Whether on the facts and in the circumstances of the case and in law the decision of the Ld CITA has not justified in estimating the income of bogus purchases on the basis of comparing of the bogus purchases with the purchases in the regular books of accounts ignoring that the fact of procuring bogus invoices leads to the unverified inflation of purchase price by the assessee which cannot be compared with the regular GP of the books of accounts

5.

Whether on the facts and in the circumstances of the case and in law the Ld CITA has ignored the element of reasons for procuring of bogus invoices when it is observed that the GP on these bogus invoices are almost matching with the GP as per genuine invoices and therefore such estimation of income out of bogus purchases with the GP as per regular books of accounts is not justified

6.

Whether on the facts and in the circumstances of the case and in law the Ld. CITA has failed to appreciate the decision of the of the Honourable Supreme Court in the case of Messers NK Proteins Ltd Vs DCIT 2016 292 CTR (Gul) 354, Dated. 16.01.2017, wherein Hon'ble Supreme Court has dismissed the appeal and 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 and when the purchases mode are from bogus suppliers or concerns, the entire purchases are liable to disallowed ?"

7.

"Whether on the facts and in the circumstances of the case and in law, the decision in the case of M/s. Swetamber Steels Ltd. (Supra) the Hon'ble ITAT, Ahmadabad, has been ignored by the Ld. CIT (A), which had conformed the disallowance of the bogus purchases, by stating that the purchases shown from respective parties were found non- genuine and the decision of the ITAT was upheld by Hon'ble Gujrat High Court and also by the Hon'ble Supreme Court."

8.

"Whether on the facts and circumstances of the case and in law, the decision of the Ld. CITYA) 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 ?"

The appellant craves to add, alter, classify, reclassify, delete or modify any of the above grounds of appeal and requests to consider each of the above grounds without prejudice to one another."

2.

All the grounds raised by the Revenue are interrelated and interconnected and relates to challenging the order of the Ld. CIT(A) in restricting the addition made by the AO of Rs. 36,35,269/-.

3.

In this regard, I have heard the counsels for both the parties, perused the material placed on record, the judgments cited before me, and the orders passed by the Revenue Authorities. From the records, I notice that the assessee, being a partnership firm engaged in the business of trading in polished diamonds, had made purchases from two concerns, namely M/s. Rutuja Gems and M/s. Rinkesh Impex, amounting to Rs. 36,35,269/-. As per the assessee, the said diamonds were exported to Emdico Limited and My 3 Dear Diamonds. In this regard, the assessee has maintained a stock register and has demonstrated the link between the purchases and the exports.

4.

However, the AO made an addition on account of non-genuine purchases to the extent of Rs. 36,35,269/- by placing reliance upon the investigation report of the DGIT (Investigation), wherein it was reported that the assessee had made bogus purchases, and accordingly made an addition of 100% of the said purchases. However, the Ld. CIT(A), while accepting the export sales made by the assessee, restricted the addition to Rs. 7,21,705/- by estimating the GP at the rate of 2%.

5.

In this regard, it was specifically submitted by the Ld. AR that, in order to prove the genuineness of the purchases, the assessee had placed the following documents on record:

(i) Copy of bills/vouchers.

(ii) Bank statements showing that the payments were made through account payee cheques.

(iii) Confirmation of account of M/s. Rinkesh Impex and M/s. Rutuja Gems.

(iv) Affidavits of M/s. Rinkesh Impex and M/s. Rutuja Gems.

(v) Acknowledgement of ITRs of M/s. Rinkesh Impex and M/s. Rutuja Gems.

(vi) Computation of income of M/s. Rinkesh Impex and M/s. Rutuja Gems.

(vii) Confirmation of account of M/s. Rinkesh Impex and M/s. Rutuja Gems.

(viii) Bank statements of M/s. Rinkesh Impex and M/s. Rutuja Gems.

6.

It was submitted that the assessee had discharged its primary onus of proving the genuineness of the purchases. It was further submitted that the AO had not conducted any independent or inquisitorial inquiry and had merely relied upon the Investigation Wing's report. Even the Investigation Wing's report was never supplied to or confronted with the assessee. Although the assessee had requested cross-examination of the vendors and production of their books of account, the same was not provided. This goes to show that the addition was made only on a presumptive basis. Further, the assessee had placed on record the confirmations and affidavits of the vendors, but the AO disregarded the cogent material furnished by the assessee.

9.

However, the Ld. CIT(A), after appreciating the facts of the present case, restricted the additions. The operative portion of the order of the Ld. CIT(A) is reproduced herein below:

4.4 Findings and Decision

On careful consideration of the material on record, it is noted that the Assessing Officer has accepted the sales and exports made by the appellant. The appellant has maintained quantitative stock records and has demonstrated one-to-one correlation between purchases and exports. Payments to the suppliers have been made through banking channels and confirmations along with affidavits have been furnished. The Hon’ble Bombay High Court in CIT v. Nikunj Eximp Enterprises Pvt. Ltd. (372 ITR 619) has held that when sales are accepted and purchases are supported by documentary evidence, purchases cannot be disallowed merely on the basis of suspicion regarding suppliers. The facts of N.K. Proteins Ltd. (supra) relied upon by the Assessing Officer are distinguishable, as in that case there was conclusive evidence of bogus transactions and admission by the assessee, which is absent in the present case. Further, the Assessing Officer has relied upon third-party information without furnishing the statements or granting opportunity of cross examination, despite specific request by the appellant. The Hon’ble Bombay High Court in H.R. Mehta v. ACIT (387 ITR 561) and the Hon’ble Supreme Court in Andaman Timber Industries v. CCE (281 CTR 241) have held that denial of cross examination vitiates the assessment. However, considering the consistent judicial view that where purchases are doubted but sales are accepted, addition should be restricted to the profit element embedded in such purchases, I find merit in the alternative submission of the appellant. The Hon’ble Gujarat High Court in CIT v. Simit P. Sheth (356 ITR 451) has upheld addition restricted to profit element. Further, in a series of decisions in the diamond trade such as Heena Gems v. ACIT, Choron Diamonds v. ACIT, Dev Diamonds v. ACIT and ACIT v. Vipul Diamonds, the Mumbai ITAT has consistently adopted a gross profit rate of 2%. Considering the nature of business, accepted industry margins and totality of facts, I am of the considered opinion that an addition of 2% of the disputed purchases would meet the ends of justice. Accordingly, the addition is restricted to Rs.72,705/- (2% of Rs.36,35,269/- ). 5. In the result appeal filed by the appellant is partly allowed.

10.

Even otherwise, no new facts, circumstances, or documents have been placed on record by the Ld. DR in order to controvert or rebut the lawful findings so recorded by the Ld. CIT(A). Therefore, we see no reason to interfere with or deviate from the findings so recorded by the Ld. CIT(A). Accordingly, we dismiss the grounds raised by the Revenue and uphold the order of the Ld. CIT(A).

11.

In the result, the appeal filed by the Department stands dismissed.

Order pronounced in the open court on 31.07.2026.

Sd/-

SANDEEP GOSAIN JUDICIAL MEMBER Mumbai Dated: 31.07.2026 RY-SrPS Copy to: ITO 23(3)(1), MUMBAI, ROOM NO. 525A. 5TH FLOOR, PIRAMAL 1 CHAMBER, LALBAUG, PAREL, MUMBAI, MUMBAI-400012, MAHARASHTRA

SAUMIL DIAMOND, FC-5022, BHARAT DIAMOND BOURSE, 5TH 2 FLOOR, BKC, BANDRA (E), MUMBAI, MUMBAI-400051, MAHARASHTRA

3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE

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