ITO 23(1)(1), MUMBAI, MUMBAI vs. M/S CHINAR GEMS, MUMBAI

The only issue that arises for our consideration in the present cross appeals pertains to the addition on account of alleged bogus purchases by the assessee, and therefore, these appeals were heard together and decided by way of this consolidated order. With the consent of the parties, the cross- appeal for the assessment year 2010-11 is considered as a lead case, and the decision rendered therein shall apply mutatis mutandis to the cross-appeal for the assessment year 2011-12.

In its appeal for the assessment year 2010-11, the assessee has raised the following grounds:

On the facts and circumstances of Appellant's case and in law the Id. CIT (A) erred in confirming the addition of gross profit on alleged bogus purchase to the extent of 7% amounting to Rs.5,89,656/- u/s 69C of the Act, for the reasons stated in the impugned order or otherwise.

Grounds No. 1 and 2, raised in the assessee’s appeal, challenging the initiation of proceedings under section 147 of the Act, were not pressed during the hearing. Accordingly, these grounds are dismissed as not pressed.

The other grounds raised in the assessee’s appeal and all the grounds raised in the Revenue’s appeal pertain to the addition made under section 69C of the Act on account of alleged bogus purchases by the assessee. Therefore, all these grounds are considered together.

The brief facts of the case pertaining to these grounds are that the assessee is engaged in the business of trading of cut and polished diamonds and is also a commission agent in the name and style of Chinar Gems. For the assessment year 2010-11, the assessee filed its return of income on 29/09/2010, declaring a total income of INR 1,60,090. Subsequently on the basis of the information received from the DGIT (Investigation), Mumbai, regarding the search and seizure action conducted in the case of Shri Bhanwarlal Jain and his son, who indulge in providing accommodation entries like bogus purchases through various bogus concerns, it was noticed that assessee is one of the beneficiary of accommodation entry transaction of bogus purchases of INR 84,23,658 through Daksh Diamonds, which is one of the group concern of Shri Bhanwarlal Jain. Accordingly, notice under section 148 of the Act was issued on 31/03/2017 and proceedings under section 147 of the Act were initiated. The assessee vide letter dated 01/04/2017 requested to treat the return filed on 29/09/2010, as the return filed in response to notice issued under section 148 of the Act. Thereafter, statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the ITAs No.1439, 1440, 2236 & 2240/Mum/2025 (A.Ys. 2010-11 & 2011-12) 6 assessee. In response to the statutory notices, the assessee submitted that it had purchased the diamonds from Daksh Diamonds and all the payments were made through banking channel. Further, the assessee also placed on record the bills issued by Daksh Diamonds. During the reassessment proceedings, in order to verify the genuineness of the purchase transaction of the assessee with Daksh Diamonds, notice under section 133(6) of the Act was issued to Daksh Diamonds to furnish all the relevant documents, which was duly responded by Daksh Diamonds and all the relevant details as sought in the notice issued under section 133(6) of the Act were furnished. Thereafter, the assessee was given an opportunity to produce the party.

The Assessing Officer (“AO”), vide order dated 29.12.2017 passed under section 143 (3) read with section 147 of the Act, disagreed with the submissions of the assessee and held that the genuineness of the transaction has not been proved by the assessee and on the contrary the parties with whom the transaction was made has been admitted by Shri Bhanwarlal Jain and his son to be bogus entity engaged in providing accommodation entry transactions. The AO further held that the assessee has not controverted the findings of the Investigation Department about the bill providers. It was further held that even though the assessee filed documents, copies of bills and confirmations, the involvement and dealings of the assessee with the hawala/accommodation entry racket cannot be ruled out. Accordingly, the AO treated the entire purchases of INR 84,23,658 made by the assessee from Daksh Diamonds to be not genuine bogus purchases and treated as unexplained expenditure under section 69C of the Act.

The learned CIT(A), vide impugned order, upheld the initiation of reassessment proceedings under section 147 of the Act. On merits, the learned CIT(A) affirmed the findings of the AO in treating the purchases as bogus. However, the learned CIT(A), agreeing with the submission of the assessee that the AO has not disputed the sales made by the assessee and also not disputing the fact that there cannot be any sales without purchases, proceeded to restrict the addition only to the amount of profit element embedded in the purchases. Accordingly, accepting the calculation of the assessee in respect of additional gross profit margin, the learned CIT(A) made the addition of 7% of the bogus purchases, i.e. INR 5,89,656, being 7% of INR 85,83,748 and directed the AO to delete the balance addition of INR 78,34,002. Being aggrieved, both assessee and the Revenue are in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, on the basis of the information received from the Investigation Wing that the assessee is a beneficiary of accommodation entry transaction of bogus purchases from entities manage and controlled by Shri Bhanwarlal Jain and his son, proceedings under section 147 of the Act were initiated. It is evident from the record that the AO on the basis of the statement recorded during the search and seizure action conducted on Bhanwarlal Jain group and information/documents found during concluded that all the transactions with the entities operated and managed by Shri Bhanwarlal Jain and his family are all bogus in nature. Since the assessee, during the year under consideration,

It is evident from the record that in its appeal before the learned CIT(A), the assessee reiterated the submissions made before the AO and submitted that the assessee purchased cut and polished diamonds from Daksh Diamonds and the payment in respect of the same was made through banking channel. Further, the assessee emphasised on the aspect that during the reassessment proceedings in order to verify the genuineness of the purchase transaction, notice under section 133(6) of the Act was issued to Daksh Diamonds, which was duly responded and all the relevant documents were furnished. Further in order to prove the genuineness of the transaction, the assessee furnish the confirmation letter from Daksh Diamonds, return of income filed by Daksh Diamonds for the year under consideration, audited accounts of Daksh Diamonds, bank statement highlighting the payments received from assessee, sales bill and stock register. After perusing all the details filed by the assessee, the learned CIT(A) though did not find any infirmity in the action of the AO in treating the purchases as bogus, however, agreed with the submission of the assessee that no sales can be made without purchases, and therefore, only profit element embedded in the purchases can be added. The learned CIT(A) also noted the fact that the AO has not disputed the sales made by the assessee, which has been duly declared by the assessee in its return of ITAs No.1439, 1440, 2236 & 2240/Mum/2025 (A.Ys. 2010-11 & 2011-12) 9 income. Accordingly, agreeing with the calculation of additional gross profit margin made by the assessee, the learned CIT(A) restricted the addition to 7% of the bogus purchases and directed the AO to delete the balance addition.

During the hearing before us, the learned Authorised Representative (“learned AR”) reiterated the submission made before the lower authorities and made reference to all the documentary evidences filed before the lower authorities in support of its submission that all the purchases were genuine. However, no material was produced contrary to the findings of the learned CIT(A) that the purchases are not bogus. At the same time, it is pertinent to note that the AO has not disputed the sales made by the assessee. Therefore, from the material available on record it is evident that the assessee has failed to prove the genuineness of the purchases made from the supplier. Thus, it appears to be a case of bogus bills arranged from the aforesaid entities and materials purchased from somewhere else at a lower cost. Thus, we are of the considered view that a reasonable disallowance of the purchases would meet the possibility of revenue leakage.

During the hearing, the learned Departmental Representative (“learned DR”) by placing reliance upon the decision of the Hon’ble Jurisdictional High Court in PCIT v/s Kanak Impex (India) Ltd, reported in [2025] 172 Taxmann.com 283 (Bom.), submitted that since the assessee could not prove the genuineness of the purchase transaction, the entire amount should be disallowed without granting any deduction.

From the perusal of the decision of the Hon’ble Jurisdictional High Court in Kanak Impex (supra), we find that in the facts of that case pursuant to the information received from the Sales Tax Department, proceedings under section 147 of the Act were initiated on the basis that the taxpayer is a beneficiary of accommodation entry transaction in the form of bogus purchases. During the assessment proceedings, despite several notices, the taxpayer did not file any response. Further, the notices issued under section 133(6) of the Act at the address of the persons from whom the taxpayer had purchased the goods were also returned “unserved”. As the taxpayer did not appear before the AO during the reassessment proceedings, and also failed to prove the genuineness of the purchase transaction, the AO made the addition of the entire amount of bogus purchases. In further appeal, the learned CIT(A) estimated 12.5% of the bogus purchases as an addition to be made instead of confirming the entire bogus purchases, placing reliance upon the decision of the Hon’ble Gujarat High Court in CIT v/s Simit P Sheth, reported in [2013] 356 ITR 451 (Guj.). The Tribunal, in further appeal, by placing reliance upon the decision of the Hon’ble Jurisdictional High Court in Mohd. Haji Adam, reported in [2019] 103 Taxmann.com 459 (Bom.), dismissed the appeal filed by the Revenue and directed the AO to restrict the addition to the extent of bringing the gross profit rate of disputed purchases to the same rate as that of the other purchases. The Hon’ble Jurisdictional High Court, allowing the appeal filed by the Revenue, held that the onus of proving the genuineness of the expenditure claimed as a deduction is on the taxpayer. The Hon’ble High Court held that the primary onus is on the assessee to discharge his burden to prove the purchases, which the assessee has claimed as a deduction under ITAs No.1439, 1440, 2236 & 2240/Mum/2025 (A.Ys. 2010-11 & 2011-12) 11 the Act for arriving at the taxable income. The Hon’ble High Court held that the genuineness of the purchases would, inter alia, also include an explanation with regard to the source of payment for such purchases. It was held that, in the facts of the case, the taxpayer did not appear before the AO during the reassessment proceedings to prove the deduction claimed for purchases, and there was no justification to establish the purchases. The Hon’ble High Court held that there is no justification in the findings of the learned CIT(A) in restricting the disallowance to 12.5% of such purchases once it came to the conclusion that the taxpayer failed to prove the genuineness and source of purchases, and also confirmed its involvement in the modus operandi. It was further held that the Tribunal also misdirected itself by approaching the issue with the erroneous belief that it was estimating profit. Thus, the Hon’ble High Court held that if this approach of the CIT(A) and the Tribunal is accepted, then it would be contrary to the provisions of section 69C of the Act, which mandates the taxpayer to explain the source of expenditure. Since in the facts of the case the taxpayer did not attend the reassessment proceedings and there was no explanation of the source of expenditure incurred for making the bogus purchases, the Hon’ble Jurisdictional High Court in Kanak Impex (supra) restored the addition made under section 69C of the Act.

In the present case, as noted above, the notices issued under section 133(6) of the Act were duly responded to by Daksh Diamonds from whom the assessee made the alleged purchases. Both AO as well as the learned CIT(A) have duly noted the above fact. Further, there is no dispute regarding the fact that the payments for these purchases were made by the assessee through

Therefore, in view of the facts and circumstances as noted above, we do not find any infirmity in restricting the addition to 7% of bogus purchases, which is based on the computation of additional gross profit margin in the trade submitted by the assessee before the learned CIT(A). Accordingly, the impugned order on this issue is upheld. As a result, the grounds no. 3 and 4 raised by the assessee, and all the grounds raised by the Revenue in its appeal are dismissed.

In the result, the cross-appeal for the assessment year 2010-11 is dismissed.

Since in the cross-appeal for the assessment year 2011-12, both parties have raised similar grounds which arise out of the same factual matrix, therefore, our findings/conclusion as rendered in the cross-appeal for the ITAs No.1439, 1440, 2236 & 2240/Mum/2025 (A.Ys. 2010-11 & 2011-12) 13 assessment year 2010-11 shall apply mutatis mutandis to the cross-appeal for the assessment year 2011-12. Accordingly, the grounds raised by the assessee and the Revenue in their respective appeal for the assessment year 2011-12 are dismissed.

In the result, the cross-appeal for the assessment year 2011-12 is dismissed.

To sum up, the cross-appeals for the assessment years 2010-12 and 2011-12 are dismissed. Order pronounced in the open Court on 14/08/2025