ACIT, CIRCLE 5(2)(1) MUMBAI, MUMBAI vs. PODDAR GEMS LIMITED , MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No.8732/MUM/2025 (Assessment Year:2016-2017) Assistant Commissioner of Income Tax, Circle-5(2)(1), Mumbai …………. Appellant Poddar Gems Limited, Vs Bharat Diamond Bourse BandraKurla Complex, Mumbai-400051 …………. Respondent [PAN:AAACP7070Q] Appearance For the Appellant/Assessee : Shri. Himanshu Gandhi For the Respondent/Department : Shri. Virabhadra Mahajan Date Conclusion of hearing : 01.04.2026 Pronouncement of order : 05.06.2026 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. The present appeal preferred by the Revenue is directed against the Order, dated 08/09/2025, passed by National Faceless Appeal Centre (NFAC), [hereinafter referred to as the ‘CIT(A)’] whereby the Learned CIT(A) had allowed the appeal against preferred by the Assessee against the Assessment Order dated 19/12/2018 passed under Section 143(3) of the Act [hereinafter referred to as ‘the Act’],for the Assessment Year 2016-2017.

ITA No.8732/Mum/2025 Assessment Year 2016-2017 2. “Whether the Learned CIT (A) was Justified in disregarding the legal principle laid down by the Hon'ble Supreme Court in PCIT vs. NRA Iron and Steel Pvt. Ltd. (103 taxmann.com 48) that the assesses bears the burden of proving identity, creditworthiness and genuineness of the transactions to the satisfaction of the Assessing Officer?” 3. “Whether the Learned CIT (A) erred in holding that the existence of corresponding sales automatically establishes the genuineness of purchases, without appreciating that such sales could also have been made out of unaccounted purchases regularized through accommodation bills?” 4. “Whether the Learned CIT(A) failed to appreciate that non- compliance of notice u/s. 133(6), non-availability of supplier, and linkage of Gitanjali Gems Ltd. with financial frauds constitute sufficient ground to doubt the genuineness of the purchases, justifying the addition made u/s. 69 of the Act?” 5. “Whether the Learned CIT (A) erred in law in allowing the set-off of brought forward business losses against income assessed u/s. 69 of the Act, ignoring the legislative intent of Section 115BBE to tax such unexplained income at a higher rate without any deduction or set-off?” 6. “Whether the Learned CIT(A) failed to appreciate that income assessed u/s 69 represents unexplained investment which does not partake the character of business income, and hence cannot be adjusted against brought forward business losses under Section 72 of the Act?” 7. “Whether the Learned CIT(A) erred in law and on facts in deleting the disallowance made under Section 14A read with Rule 8D(2)(ii), despite the fact that the Assessee had utilized interest- bearing borrowed funds for investments yielding exempt income?” 8. “Whether the Learned CIT (A) misapplied the ratio of Maxopp Investment Ltd. vs. CIT (402 ITR 640, SC) by holding that Section 14A is not applicable to shares held as stock in-trade, contrary to the settled legal position that the section applies to all expenses incurred in relation to earning exempt income irrespective of the nature of the holding?”

ITA No.8732/Mum/2025 Assessment Year 2016-2017 declaring loss of INR.59,46,623/-. The case of the Assessee was selected for regular scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee has made purchases of INR.5,55,55,971/- from Gitanjali Gems Ltd. [for short ‘Gitanjali’] Notice under Section 133(6) of the Act was issued to Gitanjali which were received unserved. As a result, the Assessee was asked to establish the genuineness of the transaction. In response, vide a Letter, dated 19/12/2018, the Assessee placed before the Assessing Officer following documents/details: Documents  Chart showing purchases made  Relevant extract of quantitative stock register evidencing receipt of goods from Gitanjali  Chart showing subsequent quantitative and value wise sales  Ledger account of Gitanjali in books of accounts. Copy of relevant bank statement  Purchase invoice cum delivery challan  Confirmation letter from Gitanjali  Copies of ledger account of Gitanjali of subsequent assessment year showing payment made to them Details  All the purchases are duly accounted for and out of the same the assessee has subsequently sold  VAT paid on purchases  Abnormal outstanding of trade payable from Gitanjali was due to dispute about quality of goods supplied by them in the year under consideration and earlier assessment year  Gitanjali had financial crisis and the company got closed. No employees of Gitanjali are working presently to receive the notice. Gitanjali had been referred to National Company Law Tribunal The Assessing Officer was not convinced with the above documents/details furnished by the Assessee and concluded that the Assessee had failed to discharge the onus cast upon the Assessee to

ITA No.8732/Mum/2025 Assessment Year 2016-2017 establish genuineness of the transaction since the Assessee had failed to provide evidences to corroborate the genuineness of the purchases. The Assessing Officer also observed that Gitanjali Gems Ltd. was controlled by Mr. Mehul Chokshi who had been absconding due to alleged fraud. The mere fact that the purchasers are supported by purchase bills and purchase consideration has been discharged through banking channel was not sufficient to hold that the purchases were genuine. Therefore, the Assessing Officer proceeded to make an addition of INR.5,55,55,917/- in the hands of the Assessee under Section 69 of the Act observing that the Assessee had purchased diamonds out of books of accounts and had subsequently, obtained bills from Gitanjali Gems Ltd.

The Assessing Officer also made a disallowance of INR.1,42,00,000/- under Section 14A read with Rule 8D(2)(ii) of the Act observing that Assessee had utilized interest bearing loans for purchase of shares resulting in exempt income.

ITA No.8732/Mum/2025 Assessment Year 2016-2017 between the purchase and sales. The aforesaid submission found favour to the Learned CIT(A). The Learned CIT(A) deleted the addition made by the Assessing Officer under Section 69 of the Act observing that the Assessing Officer had failed to bring on record any evidences who disprove the case set up by the Assessee. To the contrary, the Assessing Officer had himself acknowledged that sales were made by the Assessee out of the purchases reflected in the books of accounts. The purchases and sales were duly recorded in the books of accounts. As a result, the Learned CIT(A) deleted the addition made by the Assessing Officer and allowed Assessee to set off brought forward losses. Further, the Learned CIT(A) also granted relief to the Assessee be deleting the disallowance of INR.1,42,00,000/- under Section 14A read with Rule 8D(2)(ii) of the Act.

Ground No. 1 to 4 and Ground No. 5 & 6 8. Ground No. 1 to 4 raised by the Revenue are directed against the order of the Learned CIT(A) deleting the addition of INR.5,55,55,917/- made by the Assessing Officer under Section 69 of the Act.

ITA No.8732/Mum/2025 Assessment Year 2016-2017 reason to interfere in the order passed by the Learned CIT(A) deleing the addition made under Section 69 of the Act. The circumstances in which the notice issued under Section 133(6) of the Act was not served and/or not responded to was also explained by the Assessee before Learned CIT(A). The contention of the Assessee that Gitanjali was being prosecuted for financial frauds and has been preferred to NCLT under insolvency proceedings has not been disputed by the Revenue. In our view, there is nothing on record to show connection between the financial frauds committed by Gitanjali with the purchases made by the Assessee from Gitanjali. The Assessing Officer and the CIT(A) have failed to point out any infirmity in the supporting documents furnished by the Assessee. Therefore, we do not find any merit in the contention advanced by the Revenue in Ground No. 1 to 4. Accordingly, we decline to interfere with the order passed by the Learned CIT(A) deleting the addition of INR.5,55,55,917/- made under Section 69 of the Act. Thus, Ground No. 1 to 4 raised by the Revenue are dismissed.

Ground No. 7 & 8 11. Ground No. 7 & 8 raised by the Revenue are related to disallowances made by the Assessing Officer under Section 14A read with Rule 8D(2)(ii) of the Income Tax Rules, 1962 [for short ‘IT Rules’] which was deleted by Learned CIT(A).

ITA No.8732/Mum/2025 Assessment Year 2016-2017 earned by the Assessee was incidental to its trading business and provisions contained in the Rule 8D would not be apply to shares held by the Assessee as stock-in-trade. However, we note that Learned CIT(A) has in Paragraph 6.4.7 recorded as under:

“6.4.7 In the present case, the AO has failed to record the mandatory dissatisfaction required under section 14A(2) before invoking Rule 8D. Instead, he has proceeded directly to a formula-based disallowance. It is further significant that the Assessee had itself disallowed Rs. 94,000/- towards administrative expenditure under section 14A of the Act. That disallowance appears fair and proportionate in light of the minimal effort involved in earning dividend income, which was incidental.” (Emphasis Supplied)

“7. “Whether the Learned CIT(A) erred in law and on facts in deleting the disallowance made under Section 14A read with Rule 8D(2)(ii), despite the fact that the Assessee had utilized interest-bearing borrowed funds for investments yielding exempt income?”

ITA No.8732/Mum/2025 Assessment Year 2016-2017 same would be of no aid to the Revenue as the disallowance made by the Assessing Officer under Section 14A of the Act without recording proper dissatisfaction would not survive in view of the judgment of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC). We note that in Paragraph 6.4.4 the Learned CIT(A) has recorded specific contention raised by the Assessee regarding non-recording of dissatisfaction by the Assessing Officer before invoking the provisions contending Rule 8D of the IT Rule and the same reads as under:

“6.4.4 The appellant has further submitted that the AO has not recorded satisfaction in the impugned order that he is not satisfied with the correctness of the claim of disallowance made u/s 14A by the appellant in return of income. Hence, the disallowance made by the A.O cannot be sustained.”

ITA No.8732/Mum/2025 Assessment Year 2016-2017 the Learned CIT(A). As a result, the contentions raised by the Revenue by way of Ground No. 7 & 8 have been rendered academic in the present case. Given the aforesaid, we decline to interfere with the order passed by the Learned CIT(A) leaving open the issues raised by the Revenue. In terms of the aforesaid, Ground No. 7 and 8 raised by the Revenue are dismissed.

Order pronounced on 05.06.2026.

Sd/- Sd/- (Vikram Singh Yadav) (Rahul Chaudhary) Accountant Member Judicial Member म ुंबई Mumbai; दिन ुंकDated : 05.06.2026 Tanmay, Sr.PS आदेशकीप्रतितितिअग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी/ The Appellant 2. प्रत्यर्थी/ The Respondent. 3. आयकरआय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT दिभ गीयप्रदिदनदध ,आयकरअपीलीयअदधकरण ,म ुंबई/ DR, ITAT, 5. Mumbai ग र्डफ ईल / Guard file. 6.

आिेश न स र/ BY ORDER, सत्य दपिप्रदि //True Copy// उप/सह यकपुंजीक र /(Dy./Asstt.Registrar) आयकरअपीलीयअदधकरण, म ुंबई / ITAT, Mumbai