INCOME TAX OFFICER 19(2)(2), MUMBAI vs. MUKESH KUMAR KANAIYALAL SHAH, MUMBAI

Facts

The Revenue filed an appeal against an order of the National Faceless Appeal Center (NFAC) for Assessment Year 2018-19, which had deleted an addition of Rs. 4,13,34,282/- made by the Assessing Officer (AO) under Section 69C as unexplained expenditure. The addition was for alleged bogus purchases of rough diamonds. The assessee, Mukesh Kumar Kanaiyalal Shah, engaged in diamond trading, had filed a return declaring income of Rs. 29,83,050/-. The AO received information about accommodation entries from specific entities for these purchases. The assessee denied involvement in bogus transactions. The NFAC deleted the addition, finding that the assessee had discharged its onus to prove the genuineness of the purchases. The assessee also filed cross-objections challenging the validity of the notice issued under Section 148 due to alleged improper sanction under Section 151.

Held

The Tribunal held that the sanction for issuing the notice under Section 148 of the Income Tax Act, 1961, was granted by the PCIT, Mumbai-19, on 25th April 2022, for the Assessment Year 2018-19. The Tribunal noted that this sanction was for a period beyond three years from the end of the relevant assessment year. As per Section 151 of the Act, for reopening beyond three years, the approval should have been obtained from the Pr.CCIT or CCIT, not the PCIT. Following the jurisdictional High Court of Bombay's decision in *Holiday Developers Private Limited vs. Income Tax Officer*, the Tribunal found the sanction to be invalid. Consequently, the entire reassessment proceedings, including the assessment order passed under Section 147, were quashed and set aside as being void ab initio due to lack of valid jurisdiction. Since the reassessment order was quashed on a preliminary legal ground, the Tribunal did not adjudicate the grounds raised by the Revenue regarding the addition of Rs. 4,13,34,282/- under Section 69C. The appeal filed by the Revenue was dismissed, and the cross-objections filed by the assessee were allowed.

Key Issues

1. Whether, on the facts and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 4,13,34,282/- made under Section 69C as unexplained expenditure being bogus purchases without adequately considering the absence of supporting evidence for the genuineness of the transactions? (Revenue's Ground 1) 2. Whether, on the facts and in law, the Ld. CIT(A) erred in not appreciating the ratio of the decision of the Hon'ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Vs. Dy. CIT (2016) 292 CTR (Guj.) 354, which deals with bogus purchases? (Revenue's Ground 3) 3. Whether, on the facts and in law, the Ld. CIT(A) failed to appreciate that allowing any deduction on account of bogus purchases, without concrete evidence of actual transactions, contravenes the provisions of the Income Tax Act? (Revenue's Ground 4) 4. Whether, on the facts and circumstances of the case and in law, the Ld. assessing officer has erred in issuing notice u/s 148 of the Income-tax Act, 1961 without obtaining the valid and proper sanction as mandated u/s 151 of the Act & hence, the impugned notice u/s 148 of the Act is bad in law and liable to be quashed? (Assessee's Cross Objection Ground 1) Contentions: Assessee: - The sanction for issuing the notice under Section 148 was accorded by the PCIT, Mumbai-19, on 25-04-2022 for Assessment Year 2018-19. This sanction falls beyond the three-year period from the end of the relevant assessment year. For cases beyond three years, the specified authority should have been the Pr.CCIT or CCIT, not the PCIT. Thus, the sanction is invalid, rendering the entire reassessment proceeding void. Relied on *Holiday Developers Private Limited vs. Income Tax Officer* (Bombay High Court). Revenue: - The Ld. CIT(A) erred in deleting the addition of Rs. 4,13,34,282/- without adequately considering the absence of supporting evidence for the genuineness of the transactions. - The Ld. CIT(A)'s decision was contrary to the decision of the Hon'ble High Court Mumbai in *Pr. Commissioner of Income-Tax-5, Mumbai Vs. Kanak Impex (India) Ltd* (2025) 172 Taxmann.com 283 (Bombay), where 100% addition was allowed for bogus purchases. - The Ld. CIT(A) failed to appreciate the ratio of the Hon'ble Supreme Court in *M/s. N. K. Proteins Ltd. Vs. Dy. CIT* (2016) 292 CTR (Guj.) 354. - Allowing deduction on account of bogus purchases without concrete evidence contravenes the Income Tax Act. - The tax effect of Rs. 1,24,00,285/- is above the prescribed limit, but the appeal is filed under exceptions for organized tax evasion. - The learned DR could not produce any judgment distinguishing the Hon'ble High Court of Bombay's judgment relied upon by the assessee.