DY.COMMISSIONER OF INCOME-TAX, 5(3)(1), MUMBAI vs. SUASHISH DIAMONDS LTD., MUMBAI

Suashish Diamonds Ltd. 3 & 5248/MUM/2024 assessment, and statutory notices under the Income-tax Act, 1961 (hereinafter referred to as "the Act") were duly issued and complied with. During the course of assessment proceedings, the Assessing Officer noted that the assessee had reported a Long-Term Capital Gain (LTCG) of ₹9,92,94,883/- in respect of the sale of 5,683 square feet out of a total saleable area of 9,089 square feet of office premises bearing No. EC8010, along with one garage out of seven garages and corresponding split equity shares in Bharat Diamond Bourse (BDB), Mumbai. For computing the indexed cost of acquisition, the assessee considered the date of tentative/provisional allotment by BDB, vide letter dated 28.01.1992 (PB-149), as the date of acquisition of the said office space. The assessee claimed total payments towards the cost of acquisition amounting to ₹6,27,03,548/- for the office premises and ₹24,50,000/- for the seven garages. The total indexed cost of acquisition was accordingly computed at ₹23,82,67,253/-. However, the Assessing Officer took the view that the letter dated 28.01.1992 was merely a letter of intent and did not confer any enforceable right or title upon the assessee. It was further observed that the right to the property crystallised only upon issuance of the final allotment letter dated 27.08.2010, which allocated a specific office space along with the corresponding equity shares in BDB. The Assessing Officer therefore adopted Financial Year 2010-11 as the base year for the purpose of indexation. As the assessee had sold only a portion of the property during the year under consideration,

Suashish Diamonds Ltd. 4 & 5248/MUM/2024 the Assessing Officer allowed proportionate indexed cost of acquisition of ₹6,17,07,495/- against the assessee‘s claim of ₹14,81,92,846/-, thereby disallowing the balance indexed cost amounting to ₹8,64,85,351/-.

3. In the course of appellate proceedings before the learned Commissioner of Income Tax (Appeals) [CIT(A)], the assessee contended, inter alia, Firstly, during the period between Financial Year 1991-92 (being the year of application and provisional allotment) and Financial Year 2010-11 (being the year of completion of construction and final allotment), certain allottees/members of the Bharat Diamond Bourse (BDB) had transferred their allotted rights or area to third parties or other members of the BDB, with the approval of the BDB Managing Committee. It was thus contended that such transfer of rights would not have been permitted had the original allottees not possessed any enforceable or transferable rights in the office premises from the date of provisional allotment. Secondly, it was submitted that many of the original allottees/members had availed working capital loans from banks by offering their respective rights in the BDB premises as security. According to the assessee, this indicates that financial institutions recognized the provisional allotment or membership rights in the BDB office space as having sufficient legal or beneficial interest so as to be treated as loanable property. Also before the Ld. CIT(A), the assessee relied on the decision of Hon‘ble Bombay High

Suashish Diamonds Ltd. 5 & 5248/MUM/2024 Court in the case of Vembu Vaidyanathan (2019) 413ITR248 (BOM), wherein it is held that appellant gets title of the property on the basis of the allotment letter and payment of installment was only a follow up action and taking delivery of possession is only a formality. The assessee also relied on decision of the coordinate bench of the Bangalore Tribunal in the case of Shri Mahendra Singh Ram Singh vs ITO (ITA No. 32/Bang/2018), wherein also similar finding has been given. After considering submission of assessee, the Ld. CIT(A) deleted the disallowance observing as under:

“7.2.19. I have considered carefully the submissions of the assessee and the findings of the AO. The AO in his assessment order was of the opinion that indexation should be calculated from the year in which final allotment of the property was vested to the assessee i.e. F.Y 2010-11. The detailed findings and rebuttals of the AO to assessee's contention have been discussed in the preceding paras. 7.2.20. The facts of the case and the judicial pronouncements in similar facts of the case as that of the assessee have been perused and examined carefully. The relevant judgments of the jurisdictional Tribunal are discussed here as under:

1. 1. In Suresh Brothers v. ACIT [IT Appeal No. 553 (Mum.) of 2016, the Hon'ble ITAT Mumbal while dealing with a case involving Bharat Diamond Bourse where the facts of the case are similar with that of the assessee has held that that the date of acquisition of the property under consideration was to be reckoned from the date of the allotment letter.

2. In Sumit Export Vs ACIT [2023] 148 taxmann.com 475 (Mumbai - Trib.), the Hon'ble Mumbai Tribunal has held- "Where assessee had been issued provisional allotment of office space in year 1998 and subsequently it made several payments though final allotment letter was issued on 29-7- 2010, date of acquisition of office premises was to be reckoned from date of allotment i.e., in year 1998-99, and Suashish Diamonds Ltd. 6 & 5248/MUM/2024 thus sale of said office premises on 19-5-2012 would result in long term capital gains."

10. In the face of the undisputed facts discussed in the preceding paras we are of the considered view that the date of allotment in this case i.e. 28.01.1992 is the date of acquisition which is to be taken for computing the capital gain. The AO as well as the Ld. CIT(A) have erred in taking 15.09.2010 the date of registration of the agreement in favour of the assessee as date of acquisition to compute the capital gain. So in view of the matter the impugned order passed by the Ld. CIT(A) is hereby set aside and the addition made by the AO and confirmed by the Ld. CIT(A) is deleted. The AO is directed to compute the capital gain by taking the date of acquisition of the property by the assessee as 28.01.1992." 7.2.21. In light of the various pronouncements of the jurisdictional Tribunals and the decision rendered by the Hon'ble Bombay High Court in the case of PCIT vs Vembu Vaidyanathan [(2019) 413 ITR 248 (Bom.)] wherein it has been held that the assessee gets title of property on the basis of allotment letter and payment of instalment was only a follow up action and taking delivery of possession is only a formality, I am of the view that the calculation of indexed cost of acquisition by the AO from financial year 2010-11 is not as per law and incorrect and thus liable to be deleted. Thus, AO is Suashish Diamonds Ltd. 7 & 5248/MUM/2024

directed to delete the addition of Rs.8,64,85,351/-. Accordingly, Ground of appeal

1 is hereby allowed.”

4. Aggrieved with the above findings of the ld CIT(A), the Revenue is in appeal before us by way of raising grounds as reproduced above. Before us the Ld. counsel for the assessee filed a paper book containing pages 1-194. Ld. counsel for the assessee also filed a copy of the registered sale deed of the office premises dated 13.05.2016 and 27.02.2017, which was not filed before the lower authorities.

4.1 The ground Nos. 1 and 2 of the appeal of the Revenue relate to the sole issue of date from which the cost of acquisition should be indexed. The Revenue, in its grounds of appeal, has contended that the Bharat Diamond Bourse (hereinafter, "BDB") itself acquired leasehold rights over the subject land from the Mumbai Metropolitan Region Development Authority (MMRDA) only on 31.03.2010. It is only thereafter, according to the Revenue, that BDB proceeded to allot office spaces to its members, represented by an appropriate number of equity shares. In the present case, the said equity shares were issued to the assessee on 27.08.2010, the date on which the final allotment of the specific office space was effected. Learned Departmental Representative (Ld. DR) has drawn attention to page 149 of the assessee‘s paper book, which contains a copy of the provisional allotment letter pertaining to an area of 9,500 square feet in the proposed BDB complex. Reference was made to the express terms of the said letter, which unequivocally

Suashish Diamonds Ltd. 8 & 5248/MUM/2024 states that the communication was merely in the nature of a "letter of intent" and did not amount to a firm or binding allotment. It was further pointed out that, at the time of such provisional allotment, BDB had not yet acquired possession of the land from the MMRDA, nor had any building plans been approved. Accordingly, the Ld. DR submitted that no legal or proprietary rights could be said to have accrued in favour of the assessee at that stage—particularly when the BDB had itself clarified in the said communication that no right was, or was intended to be, created against it. The Ld. DR further referred to the assessment order, particularly page 16, wherein it is recorded that the assessee was allotted Office No. EC8010 (the subject property, part of which was subsequently sold) only on 03.12.1999, by way of a lottery system. It was argued that this was the first instance where a specific office unit was earmarked in favour of the assessee, although even at that stage, no explicit transfer of ownership or legal title was conferred. The Ld. DR emphasized that BDB, being a company registered under Section 25 of the Companies Act, 1956, had structured the office allotments through the issuance of equity shares. The office space allotted was merely the underlying asset linked to such shares, and it was only upon issuance of the equity shares on 27.08.2010 that enforceable rights in the office space and garages became vested in the assessee. It was further submitted that the capital asset held by the assessee, as on the date of sale, was in fact the equity shares themselves—albeit with an underlying interest in the office

Suashish Diamonds Ltd. 9 & 5248/MUM/2024 premises and garages. The transaction in question, although executed as a transfer of the physical property, necessarily involved a simultaneous transfer of the equity shares to the purchaser, who was also inducted as a member of the BDB. It was argued that the assessee did not have an unrestricted right to sell the office space to any third party; transfer of shares—and thereby, the associated premises—could occur only upon the transferee‘s admission as a member of the BDB. The Ld. DR also sought to distinguish the decision in Vembu Vaidyanathan relied upon by the learned CIT(A), by submitting that the said judgment dealt with the allowability of deduction under Sections 54 and 54F of the Act, and not with the question of the appropriate date for computing the indexed cost of acquisition. Furthermore, it was submitted that the question whether the capital asset transferred by the assessee was the equity share (with office space as the underlying asset) or the office space itself had not been considered in the decisions cited by the assessee or relied upon by the CIT(A). Lastly, it was emphasized that during the Financial Year 1992-93—when the assessee claims to have acquired rights in the property—BDB had neither acquired leasehold rights from MMRDA, nor had any construction activity commenced. In fact, no building plans had been sanctioned at that time. In such circumstances, the Ld. DR argued that any claim of an existing or accruing right to immovable property in favour of the assessee was entirely illusory and lacked any foundation in fact or law.

Suashish Diamonds Ltd. 10 & 5248/MUM/2024 4.2 Per contra, learned counsel for the assessee placed reliance on the decisions referred to by the learned Commissioner of Income Tax (Appeals) and submitted that in each of those cases, the date of allotment has been judicially recognised as the date of acquisition of the capital asset for the purposes of computing indexed cost of acquisition under the Act. It was thus contended that the benefit of indexation ought to be granted from the year in which the initial allotment of the property was made in favour of the assessee. The learned counsel further submitted that, as per the definition of "capital asset" under Section 2(14) of the Income-tax Act, 1961, what is relevant is the date on which the property is "held" by the assessee. Emphasis was laid on the term "held," which, according to the counsel, does not necessitate legal ownership in the strict sense but includes beneficial interest in the property. It was further submitted that there is no dispute as to the fact that the property in question was provisionally allotted to the assessee vide letter dated 28.01.1992. According to the learned counsel, the assessee thereby acquired rights and interest in the property sufficient to constitute "holding" within the meaning of the Act, and therefore, indexation of the cost of acquisition must be reckoned from Financial Year 1991- 92, being the year of allotment. In support of this proposition, learned counsel reiterated reliance on the well-reasoned findings recorded by the learned CIT(A), and urged that the same deserve to be upheld.

Suashish Diamonds Ltd. 11 & 5248/MUM/2024 4.3 We have heard the rival submissions of the parties and perused the material available on record. The assessee, in the present case, has sold a portion of the equity shares held in the Bharat Diamond Bourse (BDB), along with the corresponding office premises and garages allotted to him therein, to purchasers who subsequently became members of the BDB. The assessee disclosed long-term capital gains arising from such sale and, while computing the same, claimed the benefit of indexed cost of acquisition. It is not in dispute that the computation of the sale consideration and the basic cost of acquisition is accepted by both parties. The sole point of controversy pertains to the year from which indexation of the cost of acquisition ought to be allowed. According to the assessee, indexation should be reckoned from the assessment year corresponding to the date of allotment letter dated 28.01.1992. The Assessing Officer, however, has taken the view that indexation should commence only from the date on which the equity shares were actually allotted to the assessee, namely 27.08.2010, in conjunction with the formal allotment of the corresponding office space and garages in the BDB. The BDB is admittedly a company registered under Section 25 of the Companies Act, 1956 (now Section 8 of the Companies Act, 2013).

4.4 Since the issue in dispute is relating to indexed cost of acquisition, it is relevant to refer the section 48 of the Income Tax

Suashish Diamonds Ltd. 12 & 5248/MUM/2024 Act, 1961, which prescribes the mode of computation of capital gains. It permits deduction from the full value of the consideration received or accruing as a result of the transfer of a capital asset, of (i) the expenditure incurred wholly and exclusively in connection with such transfer, and (ii) the cost of acquisition of the asset and the cost of any improvement thereto. For the purposes of computing long-term capital gains, the cost of acquisition and cost of improvement are to be substituted by the indexed cost of acquisition and the indexed cost of improvement, as defined in the Explanation to Section 48. The indexed cost of the acquisition as defined in explanation below sec. 48 of the Act is reproduced as under: “Explanation- For the purposes of this section,- (i) …… (ii) …… (iii) “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee³ or for the year beginning on the 1st day of April, [1981], whichever is later; (iv) …… (v) ……” 4.5 Thus, while computing indexed cost of acquisition, for generating a factor to be multiplied with the cost of acquisition, the cost inflation Index for the year in which property is sold, is divided by the cost inflation index when the property is held by the assessee. The expression "held" is central to the resolution of the present dispute. Mere payment of an advance does not, by itself, vest the assessee with an asset capable of being said to be "held."

Suashish Diamonds Ltd. 13 & 5248/MUM/2024 Hence, it becomes necessary to examine, on the facts of this case, the year in which the asset in question came to be held by the assessee.

4.6 The Hon‘ble Jurisdiction High Court in the case of PCIT Vs Vembu Vaidyanathan (supra) has held that the assessee gets title of property on the basis of the allotment letter and payment of installment was only a follow up action and taking delivery of possession is only a formality. Further in the case of Suresh Brothers v. ACIT (supra) also the sale office space in Bharat Diamond Bourse is involved wherein also the Tribunal held that date of acquisition of the property under consideration is to be taken from the date of allotment letter. In the case of Sumit Export Vs ACIT (supra), the Tribunal considered the provisional allotment of the office space in BDB in the year 1998, though installment were paid up to the final allotment letter dated 29/07/2010. The Tribunal in the facts of the case considered date of acquisition of the office premises from the date of allotment in the year 1998-99. In D.K. Brothers Vs ITO (supra) also, the Tribunal following the various decision including the decision of Hon‘ble Bombay High Court in the case of Vembu Vaidyanathan (supra), considered the date of allotment as the date of the acquisition for the purpose of computing capital gain.

Suashish Diamonds Ltd. 14 & 5248/MUM/2024 4.7 In the background of these judicial pronouncements, we must evaluate the facts of the present case. Three dates are of significance:

4.8 The assessee contends that the letter dated 28.01.1992 created enforceable rights in the office premises. However, on a perusal of the material on record, it appears that on the said date, the subject property—namely, the office premises No. EC8010—was not in existence. The allotment letter explicitly stated that it did not confer any rights against the BDB or its proposed complex.

4.9 As regards the date 03.12.1999, there is a dearth of evidence on record to demonstrate whether, on that date, the construction of the office premises was sufficiently advanced so as to render the allotment effective in conferring a substantive right of possession or enjoyment.

Suashish Diamonds Ltd. 15 & 5248/MUM/2024 4.10 It is only on 27.08.2010 that the office premises bearing No. EC8010, measuring 6362 sq. ft. carpet area and 9089 sq. ft. built- up area, along with 9089 equity shares of BDB, were finally allotted and handed over to the assessee. This is evident from the sale agreement placed before us for the first time, which records that occupancy rights were granted by virtue of the said allotment and that possession had been delivered, subject to the Articles of Association of BDB and terms of the lease deed executed with MMRDA on 31.03.2010.

4.11 Before us the assessee filed a copy of the sale agreement of the said property. The relevant part of which is reproduced as under: “(a) BHARAT DIAMOND BOURSE, is a Company registered under provisions of Section 25 of the Companies Act, 1956 (hereinafter referred to as the "Said BDB"), with the main object of establishing a Bourse for the promotion of exports of Gem & Jewellery from India and to provide for this purpose, infrastructure and other facilities its India for Indian and overseas buyers and sellers of Gem & Jewellery. The paid BDB has in pursuance of its Memorandum and Articles of Association acquired the said Plot defined below for the construction of the Bourse comprising of buildings thereon to be used and occupied in accordance with the provisions of the Articles of Association of the said (b) The Said BDB had by two Agreements to Lease dated 1st day of March, 1993 and 18th day of May, 1993 with Mumbai Metropolitan Region Development Authority (MMRDA) acquired lease of two pieces of the land which were duly amalgamated Into Plot No. C-28 at G Block Bandra Kurla Complex, situated and lying in CTS No. 4207, Village Kolekalyan, Taluka Andheri Registration District of Mumbai Suburban (hereinafter Bertie Said Plot") and more particularly described in the First Schedule hereunder. In pursuance to the above two agreements, said BDB has executed and registered the Lease Deed dated 31st March, 2010, with MMRDA in respect of the said Plot, under Registration No. BDR9-03277-2010 on 31 March, 2010. (c) The said BDB has constructed a commercial office complex comprising of eight towers known as "Bharat Diamond Bourse Complex" on the said Plot having several offices and premises therein to be Suashish Diamonds Ltd. 16 & 5248/MUM/2024 occupied and used in terms of the objects, articles, rules and regulations of the said BDB and MMRDA and has obtained Occupancy Certificate ("OC") in respect of the buildings constructed by them. (d) Vide an Allotment Letter dated 27.08.2010, (hereinafter referred to as the "Said Allotment Letter") executed between the said BDB and the Vendor/Transferor herein, the Said BDB have allotted to the Vendor/Transferor Office premises Bearing No. EC8010, admeasuring 6362 sq. ft. Carpet Area equivalent to 9089 sq. ft. Saleable/Built up Area in E Tower, Central Wing, on the 8th Floor in the building known as "Bharat Diamond Bourse Complex" constructed in the year 2009 on all that piece and parcel of Land bearing Plot No. C-28 at G-Block Bandra Kurla Complex, situated and lying in CTS No. 4207, Village Kolekalyan, Taluka Andheri, Registration District of Mumbai Suburban (hereinafter the office premises and the said Shares are collectively referred to as "the Said Entire Premises") and more particularly described in the Second Schedule hereunder. The said allotment letter has been duly registered with the Sub- Registrar of Assurance at Mumbai under Serial No. BDR9-08981- 2010 on 27.08.2010. (e) The BDB have also allotted (1) Block of Shares comprising of 9089 Equity Shares having race value of Rs.1,000/- each bearing Distinctive Nos. 0897751 to 0906839 (both inclusive) held under Share Certificate No. E/1450 in respect of the premises allotted to the Vendor/Transferor and which is more particularly described in the third schedule hereunder (hereinafter the Block of Shares for the Said premises are collectively referred to as "the Said Shares"). (f) By virtue of the Said Allotment Letter and the allotment of the Said Shares, the Vendors/Transferor has been granted occupancy right and use of the Said Entire Premises, The Said BDB have delivered and handed over to the Vendor/Transferor, vacant, quiet and peaceful possession of the Said Entire Premises. The Vendor/Transferor thus became owner of and are seized and possessed of or otherwise well and sufficiently entitled to the Said Entire Premises and the Said Shares pertaining thereto, subject to the provisions of the Articles of Association of the Company and as per the Terms and conditions of the Lease Deed dated 31st March, 2010. ………………………………….”

4.12 From the terms of the said agreement, it is evident that the assessee's rights in the property emanated from the allotment of equity shares, which in turn were inseparably linked to the Suashish Diamonds Ltd. 17 & 5248/MUM/2024 underlying asset—i.e., the office premises. Thus, the real issue that arises is whether the assessee held capital assets in the form of equity shares representing rights in the office premises, or whether he held the office premises independently of the shares. If the capital asset transferred was in the nature of equity shares, then indexation must correspond to the period from which the shares were held. Conversely, if it is established that the assessee held rights in the office space independent of such shareholding, the question of indexation from an earlier date may arise.

4.13 In the absence of conclusive findings by the lower authorities on the nature of the capital asset held and transferred by the assessee, and the exact date from which such asset was "held," we deem it just and appropriate to remit the matter to the Assessing Officer for fresh adjudication. The Assessing Officer shall, after verifying the records of the Bharat Diamond Bourse, ascertain the nature of the asset held by the assessee—whether in the form of equity shares or office premises—and the precise date from which such asset can be said to have been held by the assessee, and thereafter re-adjudicate the issue in accordance with law.

4.14 The impugned order passed by the Learned Commissioner of Income Tax (Appeals) is accordingly set aside, and the matter is restored to the file of the Assessing Officer for de novo adjudication in the light of the observations hereinabove.

Suashish Diamonds Ltd. 18 & 5248/MUM/2024 4.15 The assessee‘s grounds of appeal are allowed for statistical purposes. for assessment year 2022-

23. The relevant grounds raised by the revenue are reproduced as under: “1. Whether on facts and circumstances of the case and in law, the CIT(A) erred in allowing the assessee's appeal and deleting the addition made by AO estimating income of the assessee based on net profit margin basis after rejection of books of accounts and invoking the provisions of Section 145(3)Ground 2. Whether on facts and circumstances of the case and in law, the CIT(A) erred in allowing the assessee's appeal stating that AO has not come to a finding or observation where the correctness and completeness of the books of account could be doubted and incorrectness and incompleteness of the books of account have not been proved with documentary evidences ignoring the fact that the AO has mentioned various discrepancies and defects in the assessment order and then rejected books of accounts of the assessee."

3. Whether on facts and circumstances of the case and in law, the CIT(A) erred in allowing the assessee's appeal that interest income on fixed deposits should be considered under business income and ignoring the fact the interest income from FDR and Security deposits is not related to the business of the assessee and it is in the nature of income from other sources on the fixed deposits and security deposits in the nature of investments/advances out of the funds available with the assessee."

5.1. The assessee filed its return of income for the assessment year under consideration on 30.11.2022, declaring a total income of ₹183,30,54,080/-. The return was selected for scrutiny under the provisions of the Income-tax Act, 1961, and statutory notices were duly issued and complied with by the assessee. The assessment was completed under Section 143(3) of the Act, determining the total income at ₹344,45,50,400/-, which included, inter alia,

Suashish Diamonds Ltd. 19 & 5248/MUM/2024 additions on account of (i) low profit margins, and (ii) certain income shown under the head ―Profits and Gains of Business or Profession‖ that, according to the Assessing Officer, was liable to be assessed under the head ―Income from Other Sources.‖ Being aggrieved, the assessee preferred an appeal before the learned Commissioner of Income Tax (Appeals) [CIT(A)], who granted substantial relief by deleting the impugned additions. The Revenue, being dissatisfied with the order passed by the CIT(A), has preferred the present appeal before the Tribunal on the grounds as reproduced hereinabove.

I. Low Net Profit Despite Reduced Raw Material Consumption 8.1 The first discrepancy pertains to the assessee reporting lower net profit for the year under consideration, notwithstanding a Suashish Diamonds Ltd. 20 & 5248/MUM/2024 reduction in the quantity of diamond and gold consumed as compared to the previous assessment year (AY 2021–22). The assessee explained that while the quantity consumed had reduced, the per-unit cost of gold and diamonds had escalated significantly, leading to increased raw material costs. It was contended that there was a 49.60% increase in raw material costs vis-à-vis the preceding year. The AO, however, contested this explanation, observing that the market price of diamonds had increased merely by 5–6% per carat and gold by 3–5% per gram. The learned Commissioner of Income Tax (Appeals) [CIT(A)] rejected the AO‘s observations on the ground that the alleged price increase relied upon by the AO was unsupported by any documentary evidence.

8.2 In our considered view, the finding of the CIT(A) appears to lean in favour of the assessee, although the assessee itself failed to furnish any cogent documentary evidence substantiating the claim of a 49.60% increase in the cost of raw materials. Thus, the finding of the CIT(A) on this issue, in the absence of adequate substantiation, cannot be sustained.

II. Reporting Discrepancies in the Tax Audit Report and Escalated Expenditures 8.3 The second defect noted by the AO arises from the disclosures in Form 3CD of the Tax Audit Report, wherein the column pertaining to ―quantity manufactured‖ was erroneously reported as ‗Nil‘. The assessee clarified that the error was inadvertent and that Suashish Diamonds Ltd. 21 & 5248/MUM/2024 it continued to manufacture finished goods during the relevant year, which were subsequently sold. Supporting documents and production details were submitted.

8.4 The AO further observed a substantial increase in the head ―Other Expenditure,‖ which rose to ₹92.05 crores in the current year from ₹65.31 crores in the preceding year—an increase of 41%. Specific heads such as ―stores and spares‖ and ―miscellaneous expenses‖ showed increases of 79% and 52.4%, respectively. The assessee allegedly failed to satisfactorily explain this disproportionate rise. The CIT(A), however, held that the AO had not challenged the authenticity of the bills and vouchers submitted by the assessee and therefore held the AO‘s conclusion to be inconclusive for purposes of rejecting the books of account.

8.5 We are unable to subscribe fully to the reasoning advanced by the CIT(A). In our view, the onus squarely lies on the assessee to justify the significant increase in expenses, particularly when such increases are juxtaposed with a declining net profit margin. The failure to discharge this burden cannot be brushed aside solely on the ground that the vouchers were not found to be prima facie suspicious.

III. Discrepancies in Quoting PANs and Alleged Bogus Expenses 8.6 The third and more serious defect noted by the AO concerns the uniform usage of a common PAN (‗AAAAA1111A‘) against

Suashish Diamonds Ltd. 22 & 5248/MUM/2024 various expenditure entries claimed from multiple entities, raising serious doubts as to the genuineness of such claims. The assessee‘s explanation that the same was used as a placeholder for parties not having PANs—including foreign entities and government institutions—was not accepted by the AO. The Ld. CIT(A) noted that AO could have made verification of those bills and vouchers furnished by the assessee and in absence of which, books cannot be considered as incomplete and cannot result in rejection.

8.7 But from the table of expenses along with PAN reproduced by the assessing officer in the assessment order, we find that there are multiple entries of individual names against those also the assessee reported same standard PAN which raises doubt on the genuineness of the expenses and the onus was on the assessee to explain the same and this onus cannot be shifted on to the assessing officer by the Ld. CIT(A). Further the assessing officer specifically pointed out discrepancy of the PAN related to motor car expenses/Petrol charges. Relevant part of the discrepancy is the reproduced as under: “The nature of expenses and profile of the person does not match with the PAN details. For example, the assessee produced a PAN- AAFFS7449Q and motor car expense/Petrol charges (Rs. 5,59,166/-) have been correlated to it but after verifying of the same PAN, a discrepancy/manipulation was noticed. As per data available with the department, this PAN (mentioned in the relevant portion of the ledger) belongs to an Ice Factory located in Gujarat and there is no relation with the expenses claimed by the assessee even geographical distance also not matched. The assessee misused many PANs to book bogus expenditure. Such expenditures are treated as unexplained u/s 69C of the Act.

Suashish Diamonds Ltd. 23 & 5248/MUM/2024

There are such many instances where assessee mentioned a random PAN to prove a bogus expense like genuine. While it never been incurred.” 8.8 We find from above that the AO pointed out glaring discrepancies, including a case where a PAN (AAFFS7449Q) linked to an ice factory in Gujarat was cited in support of motor car and petrol expenses amounting to ₹5,59,166/-. Upon verification, it was found that there was no nexus, geographical or commercial, between the said PAN-holder and the nature of expenses claimed by the assessee. The AO thus concluded that multiple such instances amounted to fabrication and held the expenses as unexplained under Section 69C of the Act.

8.9 We find considerable merit in the observations made by the AO. The onus to establish the veracity and genuineness of such expenditures, particularly when common or incorrect PANs are cited repeatedly, cannot be shifted onto the AO. The explanation furnished by the assessee remains unconvincing, and the CIT(A) has not adequately dealt with this issue in a manner commensurate with its gravity. We find that Ld. CIT(A) has simply ignored the above defects pointed out by the assessing officer and rejected the finding of the assessing officer of defects pointed out for rejecting books of account. The relevant findings of the Ld. CIT(A) is reproduced as under:

Suashish Diamonds Ltd. 24 & 5248/MUM/2024

“7.2.20. I have considered the facts of the case. As already discussed above, the AO could further proceed to make further inquiries and bring on record that this expense claimed was indeed bogus. The finding of the AO is hereby held inconclusive and not a reason for rejecting books of account. Further, the AO could have verified with the bills and vouchers furnished by the assessee. 7.2.21. ……… 7.2.22. Considering the detailed discussions as above and following the judgments of the various courts (supra), I am of the view that the AO has not come to a finding or observation where the correctness and completeness of the books of account could be doubted. The Hon'ble courts have delivered judgments whereby books of account cannot be rejected in absence of defects pointed out in stock statement, purchases and sales, bank statement etc. The findings of the AO are held lacking in detailed analyses and inconclusive. The AO while accepting the method of accounting followed and the Accounting standards maintained by the assessee as seen in the preceding para. 7.2.3. cannot proceed to reject the books of account where the incorrectness and incompleteness of the books of account have not been proved with documentary evidences. In view of the detailed observations and discussions above, I am of the view that the computation of profit at 60% of Rs. 751,20,13,809/- lacks logical basis and not. sustainable as per detailed discussions above. Thus, addition of Rs. 1,59,73,45,631/- to the total income is hereby deleted. Accordingly Grounds of appeal 1, 2 and 7 are hereby allowed.”

8.10 Having regard to the totality of the facts and circumstances, we are of the considered view that the defects pointed out by the AO are material and substantial and do impinge upon the correctness and completeness of the books of account. Accordingly, we uphold the rejection of the assessee‘s books of account under the provisions of the Act.

8.11 However, we find that the AO, while applying a net profit estimation, has erroneously included other income alongside business income. Since the discrepancies pertain solely to business

Suashish Diamonds Ltd. 25 & 5248/MUM/2024 income, the comparison for estimation purposes must be restricted to business results alone for the relevant and preceding years.

8.12 In view thereof, we deem it appropriate to restore the issue of estimation of gross/net profit to the file of the AO for a fresh determination, confined to business income, in accordance with law and after granting due opportunity of hearing to the assessee.

8.13 Consequently, Grounds Nos. 1 and 2 of the Revenue‘s appeal are partly allowed for statistical purposes.

Suashish Diamonds Ltd. 26 & 5248/MUM/2024

The AO thus did not accept the claim of the assessee and held that the interest on fixed deposits/security deposits, is Income from other sources. It is noticed that as per Financial statements of the assessee, total interest income from fixed deposits/security deposits is Rs. 1,40,96,541/-(1,39,67,722+1,28,819), therefore, this income was considered as income of the assessee from other sources. Thus the AO held that the interest income of Rs.1,40,96,541/- as Income of the assessee from Other sources instead of business income and added to the total income of the assessee as Income from Other Sources.” 9.1. The learned Commissioner of Income Tax (Appeals) [CIT(A)] observed that the fixed deposits in question were made by the assessee as a prerequisite for availing credit and overdraft facilities from banks in connection with its business operations. Since the deposits were intrinsically linked to the conduct of the business, the interest earned there from was rightly treated as business income. Similarly, the deposit placed with Diamond India Limited (DIL) was necessitated by the requirement to import precious metals, as DIL had been notified as a nominated agency by the Director General of Foreign Trade (DGFT), Government of India, for the purpose of such imports and for the supply of silver alloy to exporters. The deposits were, therefore, maintained in the ordinary course of business. Accordingly, the interest income of ₹1,40,96,541/- arising from the said fixed deposits and the deposit with DIL was held to be taxable under the head "Profits and Gains of Business or Profession."

9.2. We have heard the rival submissions advanced by the parties and carefully perused the material placed on record. It emerges from the record that the assessee has satisfactorily demonstrated

Suashish Diamonds Ltd. 27 & 5248/MUM/2024 that the interest income earned on fixed deposits and on security deposits was intrinsically connected with the conduct of its business, and therefore rightly assessable under the head ―Profits and Gains of Business or Profession.‖ It is further observed that even if such interest income were to be reclassified under the head ―Income from Other Sources,‖ the consequential reduction in business income would be offset by a corresponding increase under the latter head. Such recharacterisation would, therefore, have no impact on the assessee‘s total taxable income, rendering the exercise revenue-neutral. In view of the foregoing, we find no infirmity in the well-reasoned conclusion arrived at by the learned Commissioner of Income Tax (Appeals) on this issue. Accordingly, Ground No. 3 raised by the Revenue stands dismissed.

Order pronounced by way of display of result on notice board under Rule 34(4) of ITAT Rules, 1963 on 29/05/2025.