ACIT , MUMBAI vs. NARESH BABUBHAI MEHTA, MUMBAI

Firstly, we shall take up ITA No. 2085/Mum/2024. The Department has raised the following grounds of appeal:

None appeared on behalf of the assessee even despite repeated calls. Neither has any application for seeking adjournment been placed on record.

The assessee filed his return of income for Assessment Year 2011-12 on 24.09.2011, declaring total income of Rs. 62,10,460/-. The original assessment under Section 143(3) of the Act was completed on 20.03.2014, determining the total income at Rs. 63,34,830/-.

Subsequently, tangible information was received from the office of the ADIT (Inv.), Unit-1(3), Mumbai, regarding a search and seizure action conducted on the Gautam Jain Group on 03.10.2013 by the Investigation Wing. The said investigation revealed that Shri Gautam Jain operated a syndicate comprising approximately 70 dummy and paper concerns engaged in providing accommodation entries, specifically issuing bogus purchase bills to interested parties in the diamond trade without actual delivery of goods. The assessee was identified as one of the beneficiaries who had obtained accommodation entries of bogus purchases amounting to Rs. 19,29,09,326/- from six entities managed and controlled by the Gautam Jain Group.

On the basis of the recorded reasons, the Assessing Officer issued notice under Section 147 of the Act on 27.03.2018. The assessee failed to furnish any return in response to the notice issued under Section 148 of the Act and also failed to comply with the statutory notices issued under Section 142(1) from time to time. In view of the assessee's non-compliance and failure to substantiate the purchase transactions, the Assessing Officer completed the reassessment under Section 144 read with Section 147 of the Act on 20.12.2018, making an addition of the entire amount of Rs. 19,29,09,326/- under Section 69C of the Act on account of bogus purchases debited to the Profit and Loss Account.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), vide impugned order dated 21.02.2024, accepted that the impugned suppliers were accommodation entry providers and that the bills were non-genuine, but proceeded to hold that the goods must have been procured from the open/grey market to execute the corresponding sales. Adopting an estimation approach, the Ld. CIT(A) restricted the addition to 25% of the bogus purchases, amounting to Rs. 4,82,27,332/-, and thereby granted relief to the extent of 75%. Aggrieved by the restriction of the addition, the Revenue is in appeal before us.

The Ld. DR strongly contended that the Ld. CIT(A) erred in restricting the addition to 25% after categorically holding the transactions to be non- genuine accommodation entries. The Ld. DR drew our attention to the findings arising from the search conducted on the Gautam Jain Group. It was submitted that Shri Gautam Jain, in his sworn statement recorded under Section 132(4) of the Act, admitted that he operated and managed these dummy concerns, with his employees being placed as dummy partners/directors, for the purpose of providing accommodation entries without conducting any real business. It was further submitted that the nominal directors/proprietors admitted under oath that they were merely name-lenders.

It was also submitted that during the search operations, no physical stock of diamonds was found at the registered or business premises of these entities. Further, the assessee remained completely non-compliant before the Assessing Officer and failed to discharge the primary onus cast upon him. No supporting evidence, such as transportation bills, delivery challans, weighment slips, quality inspection reports or confirmations from the suppliers, was produced.

The Ld. DR submitted that once the purchases are found to be bogus and are debited to the Profit and Loss Account, the provisions of Section 69C are attracted. He relied upon the decision of the Hon'ble Jurisdictional Bombay High Court in PCIT v. Kanak Impex (India) Ltd. [2025] 172 taxmann.com 283 / 474 ITR 175 (Bom), wherein the Hon'ble High Court held that where the assessee failed to participate in the reassessment proceedings and did not discharge the onus to prove the purchases or explain the source of expenditure, the Assessing Officer was justified in adding the entire value of bogus purchases under Section 69C, and the appellate authorities were not justified in restricting the addition to a gross profit/profit rate. He further submitted that the Special Leave Petition against the said decision was dismissed by the Hon'ble Supreme Court in SLP (Civil) Diary No. 47369/2025, decided on 21.11.2025. He also placed reliance upon the decisions in N.K. Industries Ltd. v. DCIT [2016] 72 taxmann.com 289 (Guj), as affirmed by the Hon'ble Supreme Court in N.K. Proteins Ltd. v. DCIT [2017] 84 taxmann.com 195 (SC), and the decision of the ITAT, Mumbai Bench, in ITO v. Romil Diam [ITA Nos. 2166 & 2167/Mum/2025, dated 10.11.2025].

With respect to cross-examination, the Ld. DR submitted that the right to cross-examine is not absolute when the assessee itself has failed to discharge the primary burden of proof by producing contemporaneous transport and delivery documentation. In this regard, reliance was placed upon the decision of the Mumbai Tribunal in Soman Sun Citi v. Jt. CIT [ITA No. 2960/Mum/2016].

We have heard the Ld. DR, perused the material available on record and considered the judicial precedents cited before us.

The primary issue requiring our adjudication in all the connected grounds is whether the Ld. CIT(A) was justified in restricting the addition on account of bogus purchases from 100%, amounting to Rs. 19,29,09,326/- , to 25%, amounting to Rs. 4,82,27,332/-, when the assessee failed to produce evidence to substantiate the purchases or discharge the onus cast upon him.

It is an undisputed fact that the assessment was reopened pursuant to information received from the Investigation Wing emanating from a search under Section 132 of the Act conducted in the case of the Gautam Jain Group. Shri Gautam Jain, in his statement recorded on oath under Section 132(4) of the Act, stated that the entities through which the assessee had obtained the purchase entries were paper entities managed and controlled by him with dummy directors, without actual stock or physical movement of diamonds. It is further noted that no diamonds or trade stock were found at the declared premises during the search.

The assessee remained non-compliant throughout the reassessment proceedings. No return was filed in response to the notice issued under Section 148 of the Act and the statutory notices issued under Section 142(1) were also not complied with. The assessee failed to produce the alleged suppliers or any delivery challans, transportation receipts, lorry receipts, weighment certificates, stock inward registers or correspondence establishing the physical receipt of goods.

The primary onus to establish the genuineness of the expenditure claimed as a deduction lies upon the assessee. Merely debiting an amount to the Profit and Loss Account, without establishing the actual movement and delivery of goods, does not, by itself, discharge such onus.

We find that the Ld. CIT(A) proceeded on the premise that the goods “must have been purchased from the open/grey market” and, accordingly, restricted the addition to 25%. Such conclusion, in the facts of the present case, is not supported by any evidence brought on record. There is no finding or material demonstrating that the assessee had actually purchased the material from third parties in the cash/grey market. When the assessee had not produced evidence establishing the receipt and consumption of goods, the Ld. CIT(A), in our considered view, could not substitute the absence of evidence with an assumption regarding purchases from the grey market.

The issue in dispute is also covered by the decision of the Hon'ble Jurisdictional Bombay High Court in PCIT v. Kanak Impex (India) Ltd. [2025] 172 taxmann.com 283 / 474 ITR 175 (Bom). The Hon'ble High Court, while dealing with circumstances where the assessee had not participated in the reassessment proceedings and had failed to prove the purchases or explain the source thereof, observed as under:

The Special Leave Petition preferred against the aforesaid judgment in Kanak Impex (India) Ltd. was dismissed by the Hon'ble Supreme Court in SLP (Civil) Diary No. 47369/2025 on 21.11.2025. Further, in N.K. Industries Ltd. v. DCIT [2016] 72 taxmann.com 289 (Guj), as affirmed by the Hon'ble Supreme Court in N.K. Proteins Ltd. [2017] 84 taxmann.com 195 (SC), the issue relating to disallowance of bogus purchases has also been considered.

The decisions in Mohommad Haji Adam & Co. and Vijay Proteins Ltd. are distinguishable on facts, particularly where the assessees had participated in the proceedings and had established the movement and physical availability of goods corresponding to the sales. In the present case, the assessee did not participate in the reassessment proceedings and failed to produce the suppliers or any delivery documentation.

In the facts and circumstances of the present case, considering the material available on record and the aforesaid judicial precedents, we find that the Ld. CIT(A) was not justified in restricting the addition to 25% of the alleged bogus purchases. The assessee failed to discharge the primary onus of substantiating the purchases and explaining the expenditure, while the Assessing Officer had made the addition of the entire amount under Section 69C of the Act.

Accordingly, the impugned order of the Ld. CIT(A) dated 21.02.2024, insofar as it restricts the addition, is set aside and the addition of Rs. 19,29,09,326/- made by the Assessing Officer under Section 69C of the Act is restored. Consequently, all the grounds raised by the Revenue are allowed.

In the result appeal filed by the Revenue stands allowed.

We notice that the present appeal has been filed by the Revenue against the order of the Ld. CIT(A) deleting the penalty imposed under Section 271(1)(c) of the Act to the extent of the quantum additions confirmed by the Ld. CIT(A) in his order dated 21.02.2024.

In this regard, we notice that the order dated 21.02.2024 has already been set aside by us in ITA No. 2085/Mum/2024, whereby the appeal filed by the Revenue was allowed and the order of the Assessing Officer was restored. Thus, in view of our findings recorded in ITA No. 2085/Mum/2024, the present appeal filed by the Revenue is also allowed.

Accordingly, the order of the Ld. CIT(A) is set aside and the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Act is restored.

In the result both the appeals filed by the Revenue stands allowed with no order as to costs.