TRUSTAR DIAMOND,BANDRA EAST vs. WARD 19(3)(5), MUMBAI

The brief facts as culled out from the proceeding before the lower authorities are that the assessee is engaged in the business of exports of diamond and precious stones. The assessee has filed return of income for the A.Y 2009-10 on 04.09.2013, declaring total income of Rs. 8,29,510/- and the return was processed u/s 143(1) of the Act. Subsequently the case was selected for scrutiny on the information received from DGIT(Inv.), Mumbai that the assesses was involved in taking entries of non genuine purchases. Therefore, a search and seizure action has been carried out in the case of Shri Bhanwarlal Jain and his group concern on 03.10.2013. During the course of search, it was revealed that these group concerns were merely providing accommodation entries through various benami concerns operated and managed by Shri Bhanwarlal Jain and his son and these concerns are indulged into fraudulent transactions of issuing accommodation /hawala entries which purportedly shows transaction of purchase and sale of materials and bogus unsecured loans and advances. It is alleged that the assessee was one of the beneficiary of bogus purchases through bogus bills and conducting various non genuine transactions from the following parties. Sr. No. Name of the hawala entries Amount 1 Man Diamond 7308204 2 Milan & Co. 3347800

During the course of scrutiny, assessee was asked to explain as to why the purchases from the above parties should not be treated as non-genuine. In response, the assessee furnished the copy of invoices of the parties, statement of bank account of assessee, stock register of assessee and export invoice of purchase from the above parties. The AO after considering the reply filed by the assessee and considering the fact that the assessee has recorded such purchases in the books of accounts, and after taking the profit element embedded in such purchases, passed assessment order u/s 143(3) of the Act determining the total income of Rs. 18,60,620/-. Further the penalty proceedings were initiated for furnishing inaccurate particulars of income leading to concealment of income chargeable to tax and levied penalty of Rs. 3,74,900/- i.e. 100% of tax sought to be evaded. 4. The said assessment order was challenged by assessee before the Ld. CIT(A) who confirmed the action of AO and dismissed the appeal of assessee by observing as under:-

Thus aggrieved by the order of Ld. CIT(A) the present appeal has been filed and following ground has been raised by the appellant / assessee.

The Hon'ble CIT(Appeal) has erred in law and facts in sustaining the penalty us 271(1) (c) for AY 2009-10, though the firm was not in existence in FY 2008-09 and there were no transactions on the basis of which the penalty was imposed.

The Hon'ble CIT(Appeal) erred in law and in facts in levying penalty u/s 271(1)(c) of Income Tax Act, 1961 for AY 2009-10, ignoring the fact that the additions were made for AY 2013-14 on mere estimations and presumptions. The Hon'ble CIT(A) has erred in ignoring the decisions of Hon'ble ITAT on levy of penalty u/s 271(1)(c).

The Hon'ble CIT(Appeal) erred in law and in facts in not considering case laws of Juri ictional Mumbai Income Tax Appellant Tribunal in the case of M/s. Chempure vs. ITO- 14(3)(1) [ITA nos. 451, 452, 453/M/2006], though the facts of Chempure vs. ITO and appellant facts are identical and the case law was submitted before the Ld. AO.

The appellant reserves its right to add, amend or alter any of the Grounds of Appeal on or before the date of hearing and during the course of hearing.

We have heard the Ld. AR and the Ld. DR and examined the record. The Ld. AR at the very outset submitted that since admittedly the addition was made on 6 Trustar Diamond estimation basis, therefore imposing of the penalty was not legally justified and was against the settled principle of law and the various legal precedents of different Tribunals as well as various Hon’ble High Courts. The Ld. AR has referred the judgment of the Coordinate Bench of this Tribunal in the case of KP Sanghvi & Sons LLP Vs. ACIT in ITA No. 3565/Mum/2023 order dated 29.02.2024 and also in the case of ITO Vs. Ashok Industrial Corporation in ITA No. 4160/Mum/2024 order dated 30.12.2024. In support of his above arguments, he has also referred the case of ITA No. 961 to 963/Mum/2023. For the sake of brevity we may refer order the ITA No. 3565/Mum/2023 (supra) and would like to refer relevant portion of the judgment extracted herein below: “7. The learned Authorised Representative ('ld. AR' for short) for the assessee contended that it is a settled proposition of law that when addition has been made on estimate basis, no penalty can be levied u/s. 271(1)(c) of the Act. The Id. AR relied on the decision of the co-ordinate bench in the case of Mun Gems vs. Asst. CIT [2023] 108 ITR(T) 276 (Mum-Trib), M/s. V. K. Ispat & Alloys (in ITA No. 2326 & 2325/Mum/2022 ITA No. 3565/Mum/2023 (AY.2011-12) KP Sanghvi & Sons LLP vs. Asst. CIT vide order dated 24.01.2023 and Shri Poonam K. Prajapati vs. ITO (in ITA No. 1953/Mum/2022 vide order dated 30.11.2022).

The learned Departmental Representative ('ld.DR' for short), on the other hand, controverted the said fact and relied on the orders of the lower authorities.

We have heard the rival submissions and perused the materials available on record. It is observed that the assessee is alleged to have purchased cut and polished diamonds from 7 Trustar Diamond

In the above factual matrix, the ld. AR had relied on the following decisions where the co-ordinate benches have held that the penalty u/s. 271(1)(c) of the Act cannot be levied, where addition has been made on estimate basis on alleged bogus purchases. The ld. AR brought our attention to the operative part of the order of the co-ordinate bench in the case of M/s. V. K. Ispat & Alloys (supra) which we have extracted hereunder for ease of reference:

We are of view that the penalty u/s. 271(1)(c) of the Act cannot be levied where the addition is made on estimated basis. From the above observation and by respectfully following the above decisions, we hereby delete the penalty levied by the A.O. and find no justification in the order of the ld. CIT(A)”.

As the facts of this appeal are identical to the above said decision, we hereby hold that the penalty u/s. 271(1)(c) of the Act cannot be levied where the addition has been ITA No. 3 565/Mu m/2023 (A.Y.2011-12) KP Sanghvi & Sons LLP vs. Asst. CIT made on estimate basis on the gross profit on alleged

In the result, the appeal filed by the assessee is allowed”.

On the other hand Ld. DR supported the orders passed by the lower authorities stating that since the assessee has not been able to show the genuineness of the purchases and hence he has to be held responsible for furnishing inaccurate particulars of income and as such penalty imposed is justified.

What is concealment of income or inaccurate particulars of such income as contemplated by Section 271(1)(c), has been explained by the Hon'ble Supreme (P.) Ltd. as reported in 322 ITR 158 wherein it has been held as under: -

On perusal of the case in hand we have noticed that the initial return was filed u/s 143 of the Act and the same was processed and accepted u/s 143(1) of the Act. The case was selected for scrutiny assessment on the basis of information received from DGIT (Inv.), Mumbai, who on the basis of search action upon Bhanwarlal Jain group was of the opinion that the assessee was beneficiary of accommodation entries of bogus purchases provided by Bhanwarlal Jain group. During the course of scrutiny the assessee supplied all necessary documents showing the genuineness of the purchases and the documents find mentioned in para 4.3 of the assessment order. The AO was of the view that the genuineness of the purchase parties are doubted but the genuineness of the purchases on a whole cannot be doubted in this case, therefore only the profit margin embedded in such a transaction could be taxed. He further observed that this is a fairly accepted principle and the same would apply in the case of the assessee. The AO after analyzing the entire material was of the opinion that the profit margin embedded in theses transaction is taken at 3% of the value of the purchases made from the 7 parties mentioned in para no. 4 of the assessment order. Accordingly, the said amount is added to the total income of the assessee for the year under consideration and penalty proceedings were initiated. 10. The 100% penalty of Rs. 3,74,900/- was levied vide penalty order dated 29.03,2019. Against which the assessee filed appeal which was dismissed by the Ld. CIT(A) vide impugned order dated 10.02.2025 confirming the penalty so imposed at Rs. 3,74,900/- and did not agree with the contention of the assessee and distinguished the case relied by Ld. AR including the ITAT Mumbai Benches cases. In this given background, it was argued before us by the Ld. AR that addition has been made on estimation basis, therefore penalty u/s 271(1)(c) cannot be levied. The Ld. AR has relied upon the recent order of Juri ictional 4967/Mum/2024, 4968/Mum/2024 order dated 06.11.2024) also reported 2024 (11) TMI 366-ITAT Mumbai and one of us was Member of the Bench which decided this appeal and the para no. 5 and 5.1 containing the finding of the Tribunal which supports the contention of Ld. AR are extracted below:- 5.1. In the instant case, the AO has added 100% value of bogus purchases. However, the Ld.CIT(A) has restricted the addition to the extent of 12.5%, meaning thereby the addition has been sustained by the Ld.CIT(A) on estimated basis. The Hon‟ble Rajasthan and Punjab & Haryana High Courts have expressed the view that the penalty u/s. 271(1)(c) of the Act is not leviable when the addition is made on estimation basis. Accordingly, following the above said decision, we hold that the penalty u/s. 271(1)(c) of the Act is not leviable in the present cases. Accordingly, we set aside the order passed by the Ld.CIT(A) in both the years under consideration and direct the AO to delete the penalties levied in both the years. 11. Moreover, the facts and circumstances of the present case are squarely covered by the judgment of the Coordinate Bench referred and relied by the Ld. AR and we respectfully follow the Ld. Coordinate Bench in ITA No. 3565/Mum/2023 (supra) and are of considered opinion that the revenue has failed to show that the assessee has concealed the particulars of income or has furnished inaccurate particulars of such income and thus the case of the assessee is not covered u/s 271(1)(c) of the Act. Accordingly the penalty imposed on accepting addition made on estimation basis is not sustainable. The grounds of appeal are accordingly decided in favour of the assessee. We accordingly direct the Ld. AO to delete the penalty amount. 12. In the result, the appeal is accordingly allowed in the above terms. Order pronounced in the open court on 27.05.2025. (VIKRAM SINGH YADAV) (RAJ KUMAR CHAUHAN) ACCOUNTATN MEMBER JUDICIAL MEMBER

अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. संबंधधत आयकर आयुक्त / The CIT(A) 4. आयकर आयुक्त(अपील) / Concerned CIT 5. धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, सत्याधपत प्रधत //// 1. उि/सहायक िंजीकार ( Asst.