DCIT CENTRAL CIRCLE-1(1), MUMBAI, MUMBAI vs. MYDLUST DIAMONDS, MUMBAI

The assessee is a firm engaged in the business of diamonds. It filed its original return of income on 26.09.2012 declaring total income at Rs. 75,62,080/-, which was processed under section 143(1) of the Act. Subsequently, information was received from the Directorate of Investigation, Mumbai, that a search and survey action carried out on 03.10.2013 in the case of Shri Bhanwarlal Jain group had revealed that the said group was engaged in providing accommodation entries through various benami concerns in the nature of bogus purchases and unsecured loans. Based on such information, the Assessing CO-346/Mum/2025 Mydlust Diamonds Officer formed a belief that income chargeable to tax had escaped assessment. Accordingly, after obtaining approval from the competent authority, notice under section 148 dated 15.03.2019 was issued. In response, the assessee filed return of income on 03.05.2019 declaring income at Rs. 75,62,080/-. Thereafter, notices under sections 143(2) and 142(1) along with questionnaire were issued and complied with.

During the course of assessment proceedings, the Assessing Officer observed that the assessee had obtained accommodation entries in the form of bogus purchases aggregating to Rs. 1,39,63,663/- from three parties, namely Daksh Diamonds, Impex Gems and Jewel Diam. The Assessing Officer relied upon the findings of the Investigation Wing, statements recorded under section 132(4), and the modus operandi of the Bhanwarlal Jain group to conclude that the said parties were merely entry providers and not genuine suppliers. The assessee submitted that it was engaged in the business of import, processing and export of diamonds, and that all purchases were duly recorded in the books of account, which were audited. It was contended that the purchases were supported by invoices, stock registers, quantitative details and banking transactions. The assessee also submitted that the goods purchased were duly consumed in manufacturing and corresponding sales/export were effected, thereby establishing the genuineness of transactions. The assessee further contended that the statements of third parties relied upon by the Assessing Officer were general in nature and CO-346/Mum/2025 Mydlust Diamonds not specific to the assessee, and no opportunity of cross- examination was provided. It was also submitted that confirmations, affidavits, bank statements and income tax returns of the suppliers were furnished, thereby discharging the primary onus.

The Assessing Officer, however, rejected the submissions of the assessee holding that mere documentary evidences such as invoices and bank payments do not establish genuineness when surrounding circumstances indicate otherwise. It was observed that the supplier concerns were part of a syndicate engaged in providing bogus bills and had no real business activity, no stock, and were controlled by Shri Bhanwarlal Jain. The Assessing Officer further held that the assessee failed to prove the genuineness of purchases with credible evidence and that the preponderance of probability was against the assessee. Accordingly, relying on the decision of the Hon’ble Supreme Court in the case of N.K. Proteins Ltd., the Assessing Officer treated the entire purchases of Rs. 1,39,63,663/- as bogus and made addition under section 69C. The total income was assessed at Rs. 2,15,25,740/-.

Aggrieved, the assessee preferred appeal before the CIT(A). The assessee reiterated the submissions made before the Assessing Officer and further elaborated that the entire addition was made merely on the basis of third-party statements without independent enquiry. It was contended that the purchases were CO-346/Mum/2025 Mydlust Diamonds genuine as supported by quantitative reconciliation, stock registers, export documentation and banking channels. The assessee also submitted that even assuming the purchases to be non-genuine, only the profit element embedded therein could be taxed and not the entire purchase amount. It was further contended that no evidence was brought on record to show that cash had flown back to the assessee.

The learned CIT(A), after considering the submissions and material on record, held that the purchases could not be accepted as fully genuine in view of the investigation findings; however, at the same time, it was not possible to hold that no purchases were made at all, particularly when sales were not doubted. The CIT(A) thus held that only the profit element embedded in such purchases is liable to be taxed. Accordingly, the CIT(A) restricted the addition to 9.07% of the alleged bogus purchases, resulting in addition of Rs. 12,66,504/- and granted relief to the assessee to the extent of the balance addition.

Aggrieved by the order of CIT(A), the revenue is in appeal before us and has raised following grounds of appeal:

The assessee has raised the following grounds of Cross Objection:

Thus, the controversy before us arises from the addition made on account of alleged bogus purchases and the extent to which such addition is liable to be sustained, along with the legal grounds raised by the assessee challenging the validity of reassessment proceedings.

Before us, the learned Departmental Representative (DR) submitted that the assessee is one of the beneficiaries of accommodation entries provided by the concerns belonging to the Bhanwarlal Jain group, which were admittedly engaged in issuing non-genuine purchase bills. He contended that the Assessing Officer had rightly relied upon the investigation findings and CO-346/Mum/2025 Mydlust Diamonds statements recorded during search proceedings to establish that the purchases claimed by the assessee were not genuine. It was thus submitted that the learned CIT(A) erred in granting substantial relief by restricting the addition, and that the entire amount of Rs. 1,39,63,663/- ought to have been sustained as unexplained expenditure under section 69C of the Act. The learned DR further placed reliance on the judicial precedents including the decision of Hon’ble Apex Court and Jurisdictional High Court in case of and submitted that in cases involving accommodation entries and bogus purchases, the entire amount is liable to be added as unexplained expenditure. The learned DR specifically placed reliance on the decision of the Hon’ble jurisdictional High Court in the case of Principal Commissioner of Income Tax vs. Kanak Impex (India) Ltd.(IT APPEAL NO. 791 OF 2021)and submitted that the issue involved in the present case is squarely covered in favour of the Revenue.

On the other hand, the learned Authorised Representative (AR), reiterating the factual matrix as placed on record, submitted that the assessee had duly discharged the onus cast upon it by furnishing complete documentary evidences in support of the impugned purchases. He invited our attention to the detailed index of documents placed in the paper book, which, inter alia, comprised ITR acknowledgements and tax audit reports of the suppliers, account confirmations, purchase invoices, bank statements evidencing payment through banking channels, and affidavits of the concerned parties. It was contended that all these CO-346/Mum/2025 Mydlust Diamonds documents were filed before the Assessing Officer as well as the learned CIT(A), and no defect whatsoever has been pointed out in any of these evidences. The learned AR further submitted that the assessee had also furnished a one-to-one correlation between purchases and corresponding sales/exports, demonstrating that the goods allegedly purchased from the said parties were in fact processed and sold. Referring to the quantitative details, it was submitted that the carat-wise purchases were fully matched with the sales effected during the year, thereby establishing that the purchases were not merely book entries but were backed by actual movement of goods. It was thus contended that when the sales have been accepted by the Assessing Officer and no discrepancy has been found therein, the corresponding purchases cannot be treated as non-genuine. The learned AR emphasised that the Assessing Officer has not doubted the sales at any stage nor has he pointed out any inflation in sales or suppression thereof. It was therefore argued that in the absence of any adverse finding on the sales side and in view of the complete documentary evidences furnished by the assessee, the addition made merely on the basis of third-party information and general statements is unsustainable in law.

On the legal grounds challenging the validity of reassessment proceedings, the learned AR submitted that the notice issued under section 148 dated 15.03.2019 was invalid in law, as the same was not duly authenticated and did not bear any signature. It was contended that such a notice, lacking CO-346/Mum/2025 Mydlust Diamonds proper execution, is void ab initio and cannot confer valid jurisdiction upon the Assessing Officer to initiate proceedings under section 147 of the Act. The learned AR further pointed out that a subsequent notice dated 16.03.2019 was issued with digital signature; however, the defect in the earlier notice goes to the root of jurisdiction. It was thus submitted that the initiation of reassessment proceedings itself being invalid, the consequent assessment framed under section 147 read with section 143(3) of the Act is liable to be quashed.

Without prejudice, it was submitted that even in cases where purchases are doubted, the settled legal position is that only the profit element embedded therein can be brought to tax and not the entire purchase amount. The learned CIT(A), having accepted this proposition, has already restricted the addition to 9.07%. It was therefore prayed that even such estimation is unwarranted in the facts of the present case and the addition sustained deserves to be deleted in entirety.

We have carefully considered the rival submissions, perused the orders of the lower authorities and the material placed on record. The core issue for our consideration is whether, in the facts and circumstances of the present case, the learned CIT(A) was justified in restricting the addition on account of alleged bogus purchases to 9.07% as against 100% disallowance made by the Assessing Officer under section 69C of the Act. CO-346/Mum/2025 Mydlust Diamonds

At the outset, it is observed that the addition has been made by the Assessing Officer primarily on the basis of information received from the Investigation Wing and statements recorded in the case of Bhanwarlal Jain group, without bringing on record any independent material to directly establish that the purchases effected by the assessee are non-genuine. It is also an undisputed fact on record that the assessee has furnished voluminous documentary evidences in support of the purchases, including purchase invoices, confirmations, bank statements, ITR details of suppliers and affidavits, and no specific defect has been pointed out in these documents by the Assessing Officer.

Further, the assessee has demonstrated a complete quantitative reconciliation by establishing one-to-one correlation between purchases and corresponding sales/exports. The sales declared by the assessee have been accepted by the Assessing Officer and no adverse inference has been drawn in this regard. In such a factual matrix, it would be incongruous to hold that the purchases are entirely non-genuine when the corresponding sales have been accepted.

We find that the learned CIT(A), after appreciating the entire factual matrix, has recorded a balanced finding that while the purchases from the impugned parties could not be accepted as fully genuine in view of the surrounding circumstances and investigation inputs, at the same time, the existence of sales and quantitative reconciliation indicates that the assessee must have CO-346/Mum/2025 Mydlust Diamonds procured the goods from some source. Accordingly, the learned CIT(A) has held that only the profit element embedded in such purchases can be brought to tax. In this regard, the relevant findings of the learned CIT(A) are reproduced as under:

9 Before me, the appellate has submitted that the onus lying upon the appellant was casted when the necessary information and documents such as purchase orders, invoices, ledger, confirmations and bank statement confirming the payment. It submitted that since the appellant has casted the onus lying upon him, no addition can be made out of suspicion. Various Courts have held that there cannot be sales without purchase and hence, when sale is offered to taxation then deduction of consequent purchase cannot be denied. The A.O. can at the most doubt the profit margin in transaction and nothing else. It is also argued that since sales have been accepted the purchases cannot be doubted, since there cannot be sales without purchase. In the present case, AO has not rejected the sales and has made addition of the entire amount.

10 The appellant has relied upon various decisions of Hon’ble Courts that addition should be restricted to the rate of gross profit and that only profits embodied on sale proceeds can be taxed.

11 In this regard reliance is placed on the decision of Hon’ble Bombay High court in the case of PCIT Vs M/s. Mohommad Haji Adam & Co. [2019] 103 taxmann.com459 (Bombay) wherein it was held that the Tribunal had correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The relevant excerpts of the judgment dated 11.02.2019of the Hon’ble Bombay High Court are reproduced hereunder: - “8 In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee’s additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CO-346/Mum/2025 Mydlust Diamonds CIT(A) and the Tribunal would suggest that the department had not disputed the assessee’s sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra)cannot be applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under- “So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 %gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes to 5.66 %. Therefore, considering 5.66 % of Rs.3,70,78,125/- which comes toRs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue. 9 In these circumstances, no question of law, therefore, arises. All Income Tax Appeals are dismissed, accordingly. No order as to costs.”

12 In the present case it is noted that the GP on total turnover is calculated at9.07 %. Accordingly following the decision of jurisdictional High court in similar cases, the GP is calculated at 9.07%. Thus GP calculated at 9.07% of Rs1,39,63,663/- amounting to Rs 12,66,504/- is upheld and the remaining amount is deleted. CO-346/Mum/2025 Mydlust Diamonds

The above findings, in our considered view, are based on proper appreciation of facts and are in consonance with the settled judicial position that in cases where purchases are doubted but sales are accepted, only the profit element embedded therein can be taxed.

Coming to the reliance placed by the learned DR on the decision of the Hon’ble jurisdictional High Court in the case of Kanak Impex (India) Ltd., we find that the said decision is clearly distinguishable on facts. In the said case, the Hon’ble High Court has recorded a categorical finding that the assessee had failed to appear before the Assessing Officer during reassessment proceedings and had not discharged the onus of proving the genuineness of purchases at any stage. The Court has also noted that even before the appellate authorities, the assessee had not substantiated the purchases and the finding of involvement in accommodation entries was not rebutted. More importantly, the Hon’ble High Court in the said case has emphasized that the assessee had failed to explain the source of expenditure and had not produced any evidence to substantiate the purchases, thereby attracting the rigours of section 69C in full. In such peculiar facts, the Court held that estimation of profit was not justified. However, in the present case, the factual position is materially different. The assessee has participated in the proceedings, furnished complete documentary evidences including confirmations, bank statements and affidavits, and has also demonstrated one-to-one correlation between purchases and CO-346/Mum/2025 Mydlust Diamonds sales. The sales have been accepted and no defect has been pointed out in the quantitative records. Thus, the primary onus cast upon the assessee stands discharged, which was not the case in Kanak Impex. Further, in the present case, there is no finding by the Assessing Officer that the entire expenditure represents unexplained outflow of unaccounted money. The addition is based on presumption arising from third-party information, without any direct evidence of cash movement or unaccounted expenditure. Therefore, the strict application of section 69C, as in the case of Kanak Impex, is not warranted on the facts of the present case. Thus, the decision relied upon by the learned DR does not advance the case of the Revenue, being clearly distinguishable on facts as well as on the nature of evidence available on record.

In view of the foregoing discussion, we find no infirmity in the order of the learned CIT(A) in restricting the addition to 9.07% of the alleged bogus purchases. The same represents a reasonable estimation of profit element embedded in such transactions and calls for no interference.

Accordingly, the grounds raised by the Revenue are dismissed. Adjudication of Cross Objection

Ground Nos. 1 to 3 challenge the validity of reassessment under section 147. The contention that proceedings ought to have CO-346/Mum/2025 Mydlust Diamonds been initiated under section 153C is rejected, as no material belonging to the assessee was shown to have been found during search. The reopening is based on independent information from the Investigation Wing, which constitutes tangible material. The objection regarding unsigned notice dated 15.03.2019 is also rejected in view of subsequent valid notice and participation by the assessee. These grounds are dismissed.

Ground No. 4 alleging violation of natural justice is not sustainable, as the addition has not been confirmed in full and has been restricted to estimation of profit element. No prejudice is demonstrated. This ground is dismissed.

Ground Nos. 5 and 6 relating to sustenance of addition at 9.07% and alleged double addition are rejected. The estimation represents profit element and no evidence of double taxation is shown.

Ground No. 7 is general and requires no adjudication.

Accordingly, the Cross Objection of the assessee is dismissed.

In the result, the appeal of the Revenue is dismissed and the Cross Objection filed by the assessee is also dismissed. Order pronounced in the open court on 12.05.2026. (AMIT SHUKLA) (MAKARAND VASANT MAHADEOKAR) CO-346/Mum/2025 Mydlust Diamonds JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 12/05/2026 Dhananjay,PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. संबंधधत आयकर आयुक्त / The CIT(A) आयकर आयुक्त(अपील) / Concerned CIT 4. धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई/ DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. 6. आदेशानुसार/BY ORDER, सत्याधपत प्रधत //// 1. उि/सहायक िंजीकार ( Asst.