ITO 19.3.1 MUMBAI, MUMBAI vs. SWETAL DIAMONDS, MUMBAI

IN THE INCOME-TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER ITA 2359/MUM/2026 (A.Y. 2011-12) & ITA 2353/MUM/2026 (A.Y. 2012-13) Income Tax Officer – 19(3)(1) v/s. Swetal Diamonds 405, Piramal Chambers, बनाम 3rd Floor, Manu Mansion, 477 Lalbaug, Parel, Mumbai– SVP RD, Opera House, 400012, Maharashtra Mumbai –400 004, Maharashtra स्थायी लेखा सं./जीआइआर सं./ PAN/GIR No: AAXFS0069A Appellant/अपीलाथी .. Respondent/प्रतिवादी

Assessee by : Shri Hari Raheja, AR Revenue by : Shri Swapnil Choudhari,(Sr. DR)

Date of Hearing 19.05.2026 Date of Pronouncement 30.06.2026 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :-

The above captioned appeals have been preferred by the Revenue against the orders of even date as passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to order passed u/s.

P a g e | 2 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 143(3) r.w.s. 147 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Years [A.Ys.] 2011-12 and 2012-13. Since the issues involved are common apart from some minor figurative differences and also the fact that appeals were heard together, they are being taken up together for adjudication vide this composite order for the sake of brevity. Appeal for AY 2011-12 is being taken up first as Lead case as below.

P a g e | 3 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 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. CIT(A) 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. CIT(A) 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. CIT(A) has failed to appreciate the decision of the of the Hon'ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Vs. Dy. CIT (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. CIT(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

P a g e | 4 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 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?” 3. Briefly stated facts are that the assessee is a Partnership firm. The original return of income was filed declaring income of Rs.4,52,520/-. Subsequently the case was reopened by issuing notice u/s.148 of the Act. The reasons recorded by AO stated that a search and seizure action was conducted on Rajendra Jain Group on 03.10.2013 by the Investigation Wing, Mumbai. During the course of such action, it was revealed that the group concerns were merely providing accommodation entries through various benami concerns operated and managed by it. It was found that various concerns of above mentioned group had shown bogus sales to the assessee in their books of account. The assessee submitted that the purchases made from Aadi Impex and Kalash Enterprises of Rs. 67,26,499/- and Rs.67,42,882/- respectively aggregating to Rs.1,34,69,381/-were genuine purchases duly supported by bills. Payments had been made by payees account cheques. However, the AO went ahead treating the entire purchase of Rs Rs.1,34,69,381/-as bogus accommodation entry adding to the income.

P a g e | 5 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 4. Before the ld.CIT(A), the assessee reiterated that the transactions were genuine. It had produced before the Assessing Officer a) Purchase bills b) Bank Statement c) Purchase register d) Product-wise stock register e) Sales register who did not find any fault in maintaining the primary books of accounts. Corresponding sales against the purchases made from the above two parties were corresponding sales which were duly credited in Profit and Loss Account. The Assessing Officer had not doubted the sales and not made any adjustment of the sales credited in the Profit and Loss Account. Therefore, it was submitted that if the purchases are bogus, how could there be sales and if the sales are genuine. Before the AO full and complete details regarding Aadi Impex, Prop. Mr. Anup Yogendra Jain and Kalash Enterprises were submitted. The above two concerns were regularly assessed to tax and they had shown the sales made to the assessee in their books of accounts. Copy of ledger account was also filed. Books of accounts are subject to Tax Audit Report and the entire quantity tally was given in Tax Audit Report which showed that the quantity completely tallied and quantity would tally only if the purchases made from these parties were taken into consideration. This also proved without any iota of doubt that the purchases made were genuine

P a g e | 6 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds purchases. The assessee had declared Gross Profit of 10.25% which was very much reasonable and comparable with the G.P. declared by other firms in the business of diamond trade. Reliance was placed on the assessment orders for AYs 2009-10 and 2014-15 wherein the Assessing Officer after discussing all the issues made addition of 3 percent on purchases made from Aadi Impex. It was submitted that the facts and circumstances for assessment years 2009-10 and 2014-15 were similar to the facts of assessment year under consideration. The parties and groups involved were also same. The materials purchased from the parties were of similar nature. Therefore, there was no justification in making addition of 100 percent of purchases during the year which ought to be deleted.

P a g e | 7 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds Rajendra Jain Group concerns. As the assessee had demonstrated corresponding sale against the purchase from the group concerns, one could only conclude that that the purchases were made by the assessee from grey market and bills were obtained from Rajendra Jain group concerns. The whole process starts when a diamond dealer procures the diamonds from grey market, to meet his sales obligation (mostly export sales). Now, the entities operating in the grey market deal in cash and don't issue receipts. The diamond dealer, who procures diamond in such a fashion, then sells the diamond and receives the sale proceeds through proper banking channel. Now to complete the chain of transaction (i.e. to book the purchases against the sale proceeds received), the diamond dealer, obtains the bills from entry providers, such as (Rajendra Jain, Sanjay Choudhary and Dharmi Chand) group entities, by two modes mentioned above. It is for this reason that in most of such transactions, the cheques are issued to (Rajendra Jain, Sanjay Choudhary and Dharmi Chand) group entities, once the sale proceeds are received by the diamond dealer. In such cases, the diamond dealer has no other option but to take a bill from the entry providers as he needs to complete the trading activity in respect of the diamonds sold in his books of accounts.

P a g e | 8 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 5.1 He further noted that in the order of assessment, for A.Y 2008-09, 2009-10 & 2014-15, the AO in respect of purchases from the same Rajendra Jain, Sanjay Choudhary and Dharmi Chand group have considered the profit margin embedded in these transactions. In the A.Y 2009-10 & 2014-15, the AO had considered the profit margin embedded in these transactions at 3% of the value of the purchases made from Aadi Impex. In the impugned year also, the firm Aadi Impex appeared. Considering the facts of the case and that on similar issue for A.Y. 2009- 10 & 2014-15, the AO was directed to consider the addition at 3% being the profit margin embedded in the purchases made from Aadi Impex of Rs. 67,26,499/- and Kalash of Rs. 67,42,882/-,totaling Rs. 1,34,69,381/-.

P a g e | 9 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds submitted that the CIT(A) partially allowed the appeal, restricting the addition to 3% of the purchase value based on prior year assessments, i.e. AY 2008-09, AY 2009-10 and AY 2014-15 having similar facts and circumstances for purchases made from the same entities/group entities. Relevant extract of order of the ld.CIT(A) order are: “In the order of assessment, for A.Y 2008-09, 2009-10 & 2014-15, the AO in respect of purchases from the same Rajendra Jain, Sanjay Choudhary and Dharmi Chand group have considered the profit margin embedded in these transactions. In the A.Y 2009-10 & 2014-15, the AO has considered the profit margin embedded in these transactions at 3% of the value of the purchases made from Aadi Impex. In the impugned A.Y also, the firm Aadi Impex appears. Considering the facts of the case and that on similar issue for A.Y. 2009-10 & 2014-15, the AO is directed to consider the addition at 3% being the profit margin embedded in the purchases made from Aadi Impex of Rs. 67,26,499/- and Kalash of Rs. 67,42,882/- totalling Rs. 1,34,69,381/-.” 7.1 The ld.AR has submitted the assessee had completely discharged its initial burden of proof by submitting all requisite contemporaneous documentary evidence during the assessment proceedings. Evidence placed on record included Purchase bills, Bank statements reflecting payments via account payee cheques, Purchase registers, Product-wise stock registers, Sales registers, Sales bills, party- wise ledger statements, etc. It filed the following before the AO. Sr. No. Particulars 1 Financial Statements and Tax Audit Report 2 Quantitative Details of Stock (Tax Audit Report) 3 Details of Gross Profit Ratio (Tax Audit Report)

P a g e | 10 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 4 Purchase Register 5 Sales Register 6 Party wise ledger statement for purchases made from Aadi Impex, Kalash and Sparsh 7 Purchase Bills 8 Details of all purchases including quantity and type 9 Details of all sales including quantity and type 10 Statements matching individual purchases with corresponding sales 11 Bank Statements 12 Sales Bills 13 Stock Statement 14 Details of Aadi Impex: Confirmation of Account, Ledger Statement, Bank Statement, ITR, PAN card, etc. for the respective assessment year 15 Details of Kalash Enterprises: Confirmation of Account, Ledger Statement, Bank Statement, ITR, PAN card, etc. for the respective assessment year 16 Details of Sparsh: Confirmation of Account, Ledger Statement, Bank Statement, ITR, PAN card, etc. for the respective assessment year 7.2 It was further contended that the AO failed to point out any specific defects, discrepancies, or falsities in these primary books of account and documents. Moreover, the assessee had demonstrated a one-to-one nexus between the impugned purchases and corresponding sales. The sales generated from these specific purchases had been credited to the Profit and Loss Account and accepted as genuine by the AO without any adjustment. It is a settled principle that sales cannot be effected without corresponding purchases. If the Department accepts the sales as genuine, the corresponding purchases cannot be treated as bogus. Its books of accounts are statutorily audited. The quantitative tally of stock, as reported in Annexure I of the Tax Audit Report, perfectly matches.

P a g e | 11 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 7.3 It was further submitted that the assessee declared a Gross Profit which was reasonable and comparable (if not superior) to prevailing industry standards in the diamond trade as per the Gross Profit rate as recorded in the books of accounts: Assessment Gross Profit Additions Additions CIT(A) Order Year % (as per made by accepted by books of AO Appellant accounts) AY 2009-10 10.26% 3% Yes Ν.Α. AY 2011-12 10.25% 100% Not Accepted; CIT(A) restricted the Appeal filed addition to 3% AY 2012-13 10.49% 100% Not Accepted; CIT(A) restricted the Appeal filed addition to 3% AY 2014-15 11.02% 3% Yes Ν.Α. Any further estimated addition (even at 3%) artificially inflates the GP to an abnormal and practically unachievable rate within the competitive diamond industry.

7.4 Reliance was also placed on various coordinate bench decisions of ITAT, Mumbai involving similar transaction decided in favour of respective assessees i.e. case of M/s. A.J.M. & Co. v. DCIT (ITAT Mumbai, ITA No. 4567/Mum/2017), Heena Gems vs. ACIT (ITAT Mumbai) in ITA Nos. 4145 & 4177/Mum/2023 dated 22.07.2024), ITO vs. S.P. International (ITAT Mumbai) in ITA No. 6580/Mum/2024 dated 17.02.2025) where on identical set of facts and circumstances, similar additions were deleted.

P a g e | 12 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 8. We have carefully considered all relevant facts of the case and find no infirmity in the appellate order. It is apparent that the entire addition was initiated based on general statements recorded by the DGIT (Inv.) during a search on third parties. The AO merely relied on these borrowed findings and failed to conduct any independent inquiry or bring on record any corroborative material specifically proving that the assessee received any cash back in lieu of cheques. In the assessment orders for AY 2009-10 and AY 2014-15, the AO added GP of 3% on purchases made from Aadi Impex. All purchase entities mentioned were from the same Rajendra Jain, Sanjay Choudhary and Dharmi Chand group entities. The additions made by the AO of 3% GP in AY 2009-10 and AY 2014-15 were accepted by the assessee and no appeal was filed for the mentioned assessment years by the Revenue. In light of such factual matrix and the comprehensive documentary evidences submitted by the assessee before the lower authorities, we conclude that the addition at the rate of 100% was not justified and has been rightly scaled down to 3% instead. The appellate order is, therefore, upheld dismissing the grounds of appeal.

P a g e | 13 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds 10. ITA 2353/MUM/2026(AY 2012-13)

Order is pronounced in open court on 30/06/2026.

Sd/- Sd/- AMIT SHUKLA PRABHASH SHANKAR (न्यातयक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)

Place: म ुंबई/Mumbai दिनाुंक /Date 30.06.2026 Lubhna Shaikh / Steno

P a g e | 14 ITA No. 2359 & 2353/Mum/2026 A.Y. 2011-12, 2012-13 Swetal Diamonds आदेश की प्रतितलतप अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त / CIT 4. दिभागीय प्रदिदनदि, आयकर अपीलीय अदिकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यादपि प्रदि //True Copy// आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अतधकरण/ ITAT, Bench, Mumbai.