M/S. KRINAL GEMS,SURAT vs. DY. CIT, CENTRAL CIRCLE-1, SURAT

आदेश / O R D E R Per, B. M. Biyani, A.M.:

The captioned two (2) appeals are directed by assessee against two (2) separate orders of first-appeal, both dated 17.09.2025 and passed by

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M/s. Krinal Gems ITA No.1077 & 1078/SRT/2025 (AY 2009-10 & 2010-11) learned Commissioner of Income-tax (Appeal)-4, Surat [“Ld. CIT(A)”], which in turn arises out of respective penalty-orders dated 24.01.2023 passed by learned Assessment Unit of Income-tax Department [“Ld. AO”] u/s 271(1)(c) of Income-tax Act, 1961 [“the Act”] for assessment-year [“AY”] 2009-10 and 2010-11.

(i) The assessee-firm is engaged in the business of diamond.

(ii) For AY 2009-10 and 2010-11 under consideration, the assessee filed returns u/s 139 which were assessed. Subsequently, the cases of assessee were re-opened for assessment u/s 147 based on the information collected by tax authorities in a search conducted upon “Bhanwar Lal Jain Group” revealing that the said group was involved in providing accommodation by issuing non-genuine bills. The assessee was also identified as one of the beneficiaries of such accommodation. During assessment proceedings, the Ld. AO observed that the assessee made bogus purchases of Rs. 2,15,78,821/- in AY 2009-10 and Rs. 4,90,96,724/-. Ultimately, while completing re- opened assessment, the AO made addition of 100% of bogus purchases in respective years. The assessee carried matter in appellate proceedings whereupon the Ld. CIT(A) reduced addition to 5% of bogus purchases but on further appeal by revenue, the ITAT

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M/s. Krinal Gems ITA No.1077 & 1078/SRT/2025 (AY 2009-10 & 2010-11) upheld 6% addition. This resulted in sustenance of addition of Rs. 12,94,729/- in AY 2009-10 and Rs. 29,45,804/- in AY 2010-11.

(iii) Simultaneous with completion of assessment as aforesaid, the Ld. AO also initiated penalty proceeding u/s 271(1)(c) against assessee. Ultimately, the AO passed penalty-orders dated 24.01.2023 imposing a penalty of Rs. 4,00,071/- in AY 2009-10 and Rs. 9,10,253/- in AY 2010-11 qua the additions finally sustained. Aggrieved by penalties so imposed, the assessee filed appeals to Ld. CIT(A) but did not get any success. Now, the assessee has come in present appeals challenging the penalties imposed by AO and upheld by CIT(A).

“7. We have heard rival submissions and perused the materials available on record. In this case, the assessee explained, that assessee had manufactured polished diamond purchase from M/s Mahalaxmi Gems Pvt. Ltd. Stock Register reflecting whole process of manufacturing diamond was also submitted before the AO. Further, various documents including affidavit, source of sale, copy of invoices etc., filed by the assessee. However, the AO, was not satisfied with the contention of the assessee and made addition of Rs.2,08,19,384/- as bogus purchases. On appeal, Ld. CIT(A) restricted the addition made by the AO to Rs. 10,40,969/- by estimating disallowance of

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M/s. Krinal Gems ITA No.1077 & 1078/SRT/2025 (AY 2009-10 & 2010-11) unverifiable purchases at 5% of total purchases. The assessee during the penalty proceedings also, informed the disallowance is restricted to Rs. 10,40,969/, based on the estimation made by Ld. CIT(A). 7.1. Further, the assessee also produced copies of purchase bills, bank statement showing payment made to supplier, confirmation of impugned party from whom said purchase have been made and also affidavit of Sh. Bhanwarlal Jain and Sh. Gautamkumar Jain retracting statement given during search on whose basis addition was made by the AO. However, the AO was not satisfied with the reply of the assessee and imposed the penalty of Rs.3,50,389/ for furnishing inaccurate particulars. 8. It is well settled principle of law, by Jurisdictional High Court, penalty imposed on bogus purchase, which was reduced based on estimation was deleted in the case of Vijay Proteins Ltd. (Supra) as follows:- 18. In so far as T.A. No. 243/2002 is concerned, the question law raised therein is already concluded by a decision of this Court rendered in T.A. No.461/2000 & allied matters, as stated herein above. Paras-6 & 6.1 of the said decision are relevant for our purpose, which read thus; "6. Heard both the parties and gone through the material available on record. In the instant case, we are of the opinion that assessment made is just and proper. The statements made in the affidavits are not based on any record or corroborated with cogent evidence. The presumption raised by the papers which were seized from the custody of the appellant had not been rebutted. Therefore, the issues raised in appeals no. 464 of 2000 are required to be answered in the affirmative and against the 461 to assessee. 6.1 So far as the issue involved in appeals no. 833 to 836 of 2005 is concerned, in view of the decisions cited hereinabove by learned advocate for the appellant we are of the opinion that the penalty has been wrongly imposed under Section 271 (1) (c) of the Act. In the case of Krishi Tyre Retreading and Rubber Industries (supra), it has been held that as the addition had been sustained purely on estimate basis and no positive fact or finding had been had been found so as to even make the addition which was a pure guess work, no penalty under section 271 (1) (c) of the Act could be said to be leviable on such guess work or estimation. We therefore answer the issue involved in appeals no. 8.33 to 836 of 2005 in the negative and in favour of the assessee." 18.1 At this juncture, it would be relevant o refer to a decision of the Apex Court in the case of Asst. Commissioner of Income-tax v. Gebilal Kanhaialal, HUF, [2012] 348 ITR 561 (SC) wherein, it has been held that the only condition which was required to be fulfilled for getting the

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M/s. Krinal Gems ITA No.1077 & 1078/SRT/2025 (AY 2009-10 & 2010-11) immunity, after the search proceedings got over, was that the assessee had to pay the tax together with the interest undisclosed income up to the date of payment. Clause (2) did not prescribe the time limit within which the assessee should pay tax on income disclosed in the statement u/s. 132 (4) and thus, the assessee was entitled to immunity under clause (2) of Explanation 5 to section 271 (1) (c). 19. In view of the above, the question raised in T.A. No.243/2002 is answered in favour of the assessee and against the Revenue. Since we are following the view taken by the jurisdictional Court and the Hon'ble Apex Court in the above-referred Tax Appeal, no further elaborate reasons are assigned by us in this case. 9. Similarly, Jurisdictional High Court in the case of Commissioner of Income Tax Vs. Whitelene Chemicals reported in [2013] 32 taxmann.com 192 (Gujarat) held as follows:- IT: Penalty under section 271(1)(c) could not be imposed merely because books of account maintained by assessee were rejected and its profit was estimated on basis of fair gross profit ratio 10. The case laws relied by the Revenue are from Mumbai Tribunal, whereas Jurisdictional High Court decisions are in favour of the assessee. Therefore, respectfully following the decisions of the Jurisdictional High Court, the penalty levied on estimation of income is hereby dismissed. 11. In the result, the appeal filed by the assessee in ITA No.948/SRT/2025 is allowed.”

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M/s. Krinal Gems ITA No.1077 & 1078/SRT/2025 (AY 2009-10 & 2010-11) 6. We have heard the learned Representative of both sides and considered their rival submissions and perused the case record including the documents brought to our notice. We have also considered the facts of issue in the light of judicial precedents.

“4. We have heard the submissions of the learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the revenue. The Id. AR of the assessee submits that the assessee has neither concealed the income nor furnished inaccurate

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M/s. Krinal Gems ITA No.1077 & 1078/SRT/2025 (AY 2009-10 & 2010-11) particulars thereof. The Assessing Officer merely made disallowances of purchases on the basis of allegation of bogus purchases which were based on the information about the search carried out on Bhanwarlal Jain Group in Mumbai. The Assessing Officer made 100% of disallowance of purchases shown from Ankita Exports and Megha Gems. However, on appeal before the ld. CIT(A), the addition was restricted to Rs.62,34,360/- which is 12.5% of the disputed/bogus purchases. The ld. AR of the assessee submits that on further appeal by revenue before the Tribunal, th addition was restricted to 5% of Gross profit. The ld. AR of the assessee submits that it is settled position under law that no penalty under Section 271(1)(c) of the Act is leviable on the addition made on estimated/ ad hoc basis. The entire penalty is to be deleted. 5. On the other hand, the Id. Sr. DR for the revenue supported the orders of lower authorities. The Id. Sr. DR for the revenue submits that the penalty to the extent of bogus purchases confirmed by the ld. CIT(A) may be upheld. 6. We have considered the submissions of both the parties and perused the record carefully. There is no dispute that initially, the Assessing Officer made disallowances / addition of Rs. 4.98 crores on the basis of information of Investigation Wing, Mumbai that the assessee is one of the beneficiaries of purchases shown from Ankita Exports and Megha Gems which are managed by Bhanwarlal Jain Group. There is no further dispute that on appeal before the ld. CIT(A), the quantum addition was restricted to 12.5%. We find that on further appeal before the Tribunal, the addition instead of restricting to the bogus purchases, the gross profit of assessee was restricted to 5%. Thus, admittedly, the ultimate addition was restricted on ad hoc basis. It is settled position under law that no penalty on the addition made on ad hoc basis, is to be levied. Similar view has been taken by Hon'ble Jurisdictional High Court in CIT Vs Subhash Trading Co. (1996) 86 Taxman 30 (Guj), Navjivan Oil Mills Vs CIT (2002) 124 Taxman 392 (Guj), CIT Vs Valimkbhal H Patel (2006) 280 ITR 487 (Guj) and in ITO Vs Bombaywala Readymade Stores (2015) 55 taxmann.com 258 (Guj). So far as reliance on various case laws relied by Id CIT(A) in his order, we find that the facts in all such case laws are at variance and the decisions of all such cases are not at all applicable as far as facts of the present case is concerned. Thus, we do not find any justification in levying such penalty under section 271(1)(c). 7. Thus, we direct the Assessing Officer to delete the entire penalty levied vide order dated 09/03/2018. In the result, the grounds of appeal raised by the assessee are allowed. 8. In the result, this appeal of assessee is allowed.”

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M/s. Krinal Gems ITA No.1077 & 1078/SRT/2025 (AY 2009-10 & 2010-11) consistency require us to follow the aforesaid decisions, and we find no justifiable reason to deviate from the view already taken by Co-ordinate Benches. Respectfully following the same, we hold that the penalty imposed by the Ld. AO and sustained by the Ld. CIT(A) is unsustainable in law. Accordingly, we direct the Ld. AO to delete the impugned penalties.

Order pronounced in open court on 30/10/2026

Sd/- Sd/- [ SUCHITRA KAMBLE ] [ B.M. BIYANI ] JUDICIAL MEMBER ACCOUNTANT MEMBER //True Copy// Place: Surat िदनांक/Dated : 30/10/2026 *Kishore, Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order Digitally signed by HEMA KISHORE HEMA KISHORE JAKKA JAKKA Date: 2026.10.30 16:37:41 +05'30' Assistant Registrar Income Tax Appellate Tribunal Surat Bench, Surat

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