RADIANT GEMS ,MUMBAI V. THE INCOME TAX OFFICER WARD 34(3)(2), MUMBAI

ITA 2074/MUM/2025

AI Insights

The case involves M/s. Radiant Gems appealing against penalties imposed for the assessment years 2012-13 and 2013-14, which were based on estimated profit margins added to their income. The Income Tax Officer (ITO) initially estimated a profit margin of 12.5% on the turnover, which was later reduced to 3% by the CIT(A) and upheld by the ITAT. The main legal issue was whether penalties under section 271(1)(c) could be levied on such estimated additions. The Tribunal referenced several similar cases where penalties were not imposed on estimated additions, leading to the decision to allow the appeals and delete the penalties.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 714534 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2012-2013
• Other Referred Cases: Trustar Diamond Vs. ITO, Viramabhai Ajabbaji Patel Vs. ITO, Litura Electrical Technologies Pvt Ltd. Vs. JCIT, ITO Vs. M/s Mamta jewelers, ACIT Vs. Colo Color Pvt Ltd, DCIT Vs. Man Industries (I) Ltd, Supertech Construction Co. Vs. ACIT, CIT vs. Krishi Tyre Retreading and Rubber Industries
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANNAVARAMKOSURI
• Assessee Lawyers: DINKLE HARIYA
• Keywords: Set aside; Bogus purchase; Accommodation entries; Bogus
• Section: 271(1)(c)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH MUMBAI BEFORE HON’BLE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER & SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 2074 & 2075/Mum/2025 (Assessment Year: 2012-13 & 2013-14) M/s. Radiant Gems DC-2240, Bharat Diamond Borse, G Block, BKC, Bandra (E), Mumbai – 400051. Vs. ITO, Ward 34(3)(2) Kautilya Bhavan, C-41 to C-43, G Block, BKC, Bandra (E), Mumbai – 400051. PAN/GIR No. AAJFR3662E (Applicant) (Respondent) Assessee by Dinkle hariya, Adv Revenue by Shri Annavaram Kosuri, Sr. AR Date of Hearing 17.07.2025 Date of Pronouncement 04.08.2025 आदेश / ORDER PER SANDEEP GOSAIN, JM: The present appeals have been filed by the assessee challenging the common impugned order dt. 05.03.2025 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National faceless Appeal Centre (NFAC) / CIT(A) for the assessment year 2012-13 & 2013-14. 2. Since all the issues involved in these two appeals are common and identical, therefore, they have been clubbed, heard together and consolidated order is being passed for Printed from counselvise.com 2 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. the sake of convenience and brevity. We shall take ITA No. 2074/Mum/2025, A.Y 2012-13 as lead case and facts narrated therein. ITA No. 2074/Mum/2025, A.Y 2012-13 3. The effective ground raised by the assessee relates to challenging the order of Ld. CIT(A) in sustaining the penalty when the impugned additions were solely based on ‘Estimated Profit Margin’ embedded in the purchases. 4. We have heard the counsels for both the parties, perused the material placed on record, judgments cited before us and also the orders passed by the revenue authorities. From the records we noticed that as per the facts of the present case the additions in this case were made by the AO by estimating the profit margin of 12.5% of the turnover and accordingly additions to the total income of the assessee were made. 5. On appeal Ld. CIT(A) restricted the addition @ 3% of the purchases and ultimately ITAT also upheld the said addition made by Ld. CIT(A). 6. Now the question for consideration before us is as to whether penalty can be levied u/s 271(1)(c) of the Act on the additions based on estimation. In this regard reliance is being placed upon the decision of the Coordinate Bench of ITAT in the case of Trustar Diamond Vs. ITO, ITA No. Printed from counselvise.com 3 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. 1542/Mum/2025, Viramabhai Ajabbaji Patel Vs. ITO, ITA No. 544/Mum/2025, Litura Electrical Technologies Pvt Ltd., Vs. JCIT, ITO Vs. M/s Mamta jewelers, ITA No. 4918/Mum/2019, ACIT Vs. Colo Color Pvt Ltd, and DCIT Vs. Man Industries (I) Ltd. in ITA No. 617 & 618/Mum/2025, A.Y: 2012-13 & 2013-14, wherein the operative portion of the said order is reproduced herein below: 7. We have heard rival submissions of the parties and perused the relevant materials on record. In the course of assessment proceedings addition was made in respect of purchases from M/s Harmony Exim Pvt. Ltd. amounting to Rs.9,14,75,919/-, in view of statement of the supplier manager and director of the company. However, the said addition has been restricted to 5% by the Tribunal. The relevant finding of the Tribunal is reproduced as under: “126. We have heard the rival parties and perused the materials on records. Undisputed facts are that the assessee as well as M/S Harmoney Exim Pvt. Ltd have admitted to fact that these were accommodation entries only and no physical delivery of materials were made to the assessee. However the assesse filed various documents viz. Ledger account of Harmony Exim Pvt. Ltd, copy of Store issue report wherein HR coil purchase from M/s Harmony Exim Pvt. Ltd. were shown to be issued for production / manufacturing of spiral pipes, copy of inspection report was also filed before AO, copy of lorry receipt in respect of goods transported from Mumbai to Anjar and stock register showing month wise receipt and consumption of HR Coil. Under these circumstances the only possibility is that though the purchases are held to be bogus but certainly the purchases were made from some other source Printed from counselvise.com 4 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. in the grey market. Such purchases can not be ruled out as the materials were used in the manufacturing process, the inspection report whereof was on the records and stock register showing monthwise receipt and consumption of materials. So under these circumstances it is settled position now that entire alleged bogus purchases can not added to the income of the assessee as it would affect the profits of the assesse unrealistically and unreasonably. Therefore under such circumstances only profit margin on those bogus purchases can at the most be added. Accordingly we set aside the order of id CIT(A) on this issue and direct the AO to apply a profit rate of 5% on the bogus purchases of Rs.9,14,75,919/-. The appeal of the assesse is partly allowed.” 7.1 The Ld. CIT(A) deleted the penalty observing mainly for the reason that addition was upheld on the estimation basis. The relevant finding of the Ld. CIT(A) is reproduced as under: “7.2.1 Decision- During the search action, evidences were gathered which suggested that the appellant had taken accommodation entries of purchases amounting to Rs 9,14,75,919- from a concern named M/s Harmony Exim Pvt ltd. Based on this evidences, entire purchases of Rs 9,14,75,919 were added to the income of the appellant. The said addition was confirmed by the CIT(A). Hon’ble ITAT while deciding the issue restricted the addition to 5% of the purchases. The relevant extract of the order of ITAT is reproduced as under: “126. We have heard the rival parties and perused the materials on records. Undisputed facts are that the assesse as well as M/S Harmoney Exim Pvt. Ltd have admitted to fact that these were accommodation entries only and no physical Printed from counselvise.com 5 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. delivery of materials were made to the assesse. However the assesse filed various documents viz. Ledger account of Harmony Exim Pvt. Ltd, copy of Store issue report wherein. HR coil purchase from M/s Harmony Exim Pvt. Ltd. were shown to be issued for production / manufacturing of spiral pipes, copy of inspection report was also filed before AO, copy of lorry receipt in respect of goods transported from Mumbai to Anjar and stock register showing month wise receipt and consumption of HR Coil. Under these circumstances the only possibility is that though the purchases are held to be bogus but certainly the purchases were made from some other source in the grey market. Such purchases can not be ruled out as the materials were used in the manufacturing process, the inspection report whereof was on the records and stock register showing monthwise receipt and consumption of materials. So under these circumstances it is settled position now that entire alleged bogus purchases can not added to the income of the assessee as it would affect the profits of the assesse unrealistically and unreasonably. Therefore under such circumstances only profit margin on those bogus purchases can at the most be added. Accordingly we set aside the order of ld CIT(A) on this issue and direct the AO to apply a profit rate of 5% on the bogus purchases of Rs.9,14,75,919/-. The appeal of the assesse is partly allowed.” Hon’ble ITAT has observed that the purchases form Ms Harmony Exim Pvt ltd were bogus, but the purchases would have been made from some other source in grey market. Since the appellant has shown consumption of the material and corresponding sales, the profit margin was worked out at 5% of such purchases. Printed from counselvise.com 6 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. 7.2.2 As regards filing of inaccurate particulars, I am of the view that the appellant had filed inaccurate particulars of purchases in its books of account. However, it has been held that the purchases were made, not from the parties shown by the appellant but from the grey market. Further, the income arising out of such purchases has been estimated at 5% of such purchases. Appellant has cited number of judicial pronouncements including that of Jurisdictional Mumbai ITAT, wherein it is held that the penalty should not be levied on estimated additions. I find that the present case gets covered by the case laws relied upon by the appellant. 7.3 Considering the overall facts of the case, I hold that the penalty u/s 271(1)(c) cannot be sustained in this case as the penalty is calculated on estimated income.” 7.2 Before us, the Ld. counsel for the assessee has relied on the Tribunal in the case of ITO v. IORA Diamonds Pvt. Ltd. in ITA Nos. 6396, 6395 & 6397/Mum/2024 for assessment years 2008-09 to 2010-11 wherein the Tribunal has deleted the penalty levied on estimation of the addition. The relevant para is reproduced as under : “5. We have heard both the sides and perused the material on record. We find that the CIT(A) has deleted the penalty by following the decision of the Tribunal in the case of Supertech Construction Co. Vs. ACIT [ITA No. 910/Mum/2023, dated 05/12/2023] and judgment of the Hon'ble Rajasthan High Court in the case of CIT vs. Krishi Tyre Retreading and Rubber Industries [360 ITR 580]. The relevant extract of the decision of CIT(A) reads as under: \"8. Decision: 8.1. The instant appeal has been filed against the order u/s.271(1)(c) dated 05- 01-2022 for Printed from counselvise.com 7 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. A.Y.2008-09. In the assessment order the AO had made addition of Rs. 3,42,644/- being 12.5% of bogus purchases. The above estimated addition was reduced by CIT(A) by reducing the percentage of estimation from 12.5% to 8%. The above order was confirmed by Hon. ITAT. The AO has levied penalty of Rs. 67,762/- u/s 271(1)(c) on the above addition, against which the appellant has filed the instant appeal. 8.2 I have considered the submissions filed by the appellant Assessment Year 2008-2009, 2009- 2010 & 2010-2011 during the appellate proceedings, which have been extracted in the preceding para. In the case of Supertech Construction Co. Vs. ACIT, In ITA No. 910/Mum/2023, Hon. ITAT, Mumbai vide order dated 05.12.2023 has held that penalty u/s 271(1)(c) is not imposable on bogus purchase addition. The Hon. Rajasthan High Court in the case of CIT Vs. Krishi Tyre Retreading and Rubber Industry has held that, where addition is made purely on estimation basis, no penalty u/s 271(1)(c) of the Act is leviable. There are catena of decisions by different High Courts and various benches of ITAT wherein penalty u/s 271(1)(c) of the Act levied on the basis of estimated addition has been held to be unsustainable. Thus, in the facts of the instant case, penalty levied u/s 271(1)(c) of the Act levied based on estimated addition of bogus purchases is unsustainable. The assessing officer is directed to delete the penalty. The grounds of appeals are allowed. 9. In the result, the appeal is allowed. 9. In the result, the appeal is allowed.\" 6. There is nothing on record to persuade us to take a view different from the above view taken by the CIT(A). The Learned Authorized Representative for the Appellant has also placed on record the Printed from counselvise.com 8 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. decisions of Mumbai Bench of the Tribunal in the case of (a) Fancy Diamonds India Pvt. Ltd. Vs. DCIT 5(1)(1), Mumbai [ITA No.961 to 963/Mum/2023, Assessment Years 2010-11 to 2012-13, dated 20/06/2023] and (b) M/s. Vijay Jewellers Vs. Deputy Commissioner of Income Tax 19(3), Mumbai [ITA No.4203 & 4304/Mum/2024, Assessment Years 2012-13 & 2011-12, dated 03/10/2024] whereby, in identical facts and circumstances, the Tribunal had deleted penalty levied under Section 271(1)(c) of the Act on the ground that addition was made on estimate basis. In view of the above, we decline to interfere with the order passed by the CIT(A) deleting the penalty levied under Section 271(1)(c) of the Act, and therefore, Ground No.1, 2 and 3 raised by the Revenue are dismissed.” 7.3 Respectfully following the finding of the Tribunal (supra), we uphold the finding of the Tribunal on the issue in dispute, the ground of appeal of the Revenue are accordingly dismissed. 7. As discussed earlier, the additions in this case were made by the AO by estimating the profit margin @ 12.5% of the turnover and Ld. CIT(A) as well as ITAT, restricted the addition @ 3% of the purchases. Since the penalty was levied on the basis of additions made on “estimation basis”, therefore respectfully following the findings of the Coordinate Bench of the Tribunal (supra), we are of the view that no penalty can be levied on the additions made on “estimation basis”, thus we allow this ground raise by the assessee. Printed from counselvise.com 9 ITA No.2074 & 2075/Mum/2025 Radiant Gems, Mumbai. ITA No. 2075/Mum/2025 8. As the facts and circumstances in this appeal is identical to ITA No 2074/Mum/2025 for the A.Y 2012-13 (except variance in figures) and the decision rendered in above paragraph would apply mutatis mutandis for this appeal also. Accordingly, the grounds of appeal of the present appeal also stands allowed. 9. In the result, both the appeals filed by the assessee are allowed. Order pronounced in the open court on 04.08.2025 Sd/- Sd/- (GIRISH AGRAWAL) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 04/08/2025 KRK, PS Printed from counselvise.com "