SPARK GEMS,MUMBAI V. ITO, WARD 19(3)(4), MUMBAI, PIRAMAL CHAMBER, MUMBAI

ITA 3651/MUM/2025

AI Insights

The case involves Spark Gems, the appellant, contesting an order from the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, which sustained an addition of Rs. 27,90,528 on account of alleged bogus purchases of cut and polished diamonds from M/s Prime Star. The Income Tax Officer had initially made this addition following a search and seizure operation that revealed the involvement of the assessee in transactions with entities linked to fraudulent financial activities. The Tribunal's decision was influenced by a similar previous case involving the same parties and circumstances, where it was determined that only a gross profit rate should be applied to such purchases rather than treating them as entirely bogus.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 717057 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-08-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: 2013-2014
• Appeal Filed On: 23-05-2025
• Other Referred Cases: ITA No. 3650/MUM/2025
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ADITYA RAI
• Assessee Lawyers: SANJUKTA SAMANTARA
• Keywords: Set aside; Documents seized; Bogus purchase; Tax effect; Principle of natural justice; Search and seizure; Accommodation entries; Presumptive income; Bogus
• Section: 147; 148; 144; 44AD

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH ‘J(SMC)’, MUMBAI BEFORE SHRI AMIT SHUKLA, HON’BLE JUDICIAL MEMBER AND SHRI ARUN KHODPIA, HON’BLE ACCOUNTANT MEMBER ITA No. 3651/MUM/2025 (A.Y. 2013-14) Spark Gems 6/36, Dariya Mahal, ‘A’ Wing 80, Nepeansea Road, Mumbai – 400006. PAN: AAAFS 5688 J vs ITO, Ward-19(3)(4), Mumbai Piramal Chamber, Lalbaug, Mumbai – 400012. (Appellant) (Respondent) Present for: Assessee by : Ms. Sanjukta Samantara, Advocate Revenue by : Shri Aditya Rai, Sr. DR Date of Hearing : 13.08.2025 Date of Pronouncement : 18.08.2025 O R D E R PER ARUN KHODPIA, AM: The captioned appeal is filed by the assessee, directed against the order of Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi (In short “ld. CIT(A)/NFAC”) dated 17.05.2024, for the A.Y. 2013-14, which in turn arises from the order u/s 144 r.w.s. 147 dated 19.12.2017 passed by ITO – 19(3)(4), Mumbai. The ground of appeal assailed by the assessee in the present appeal reads as under: “1. The order passed by the learned Commissioner of Income Tax, Appeals NFAC is erroneous, unjustified, unwarranted, bad in law and against the principles of natural justice. 2. The learned Commissioner of Income Tax, Appeals NFAC erred in sustaining the addition made of Rs. 27.90,528/- 100% on account of alleged bogus purchase of cut and polished diamonds from M/s Prime Star. (Tax Effect Rs. 8,62,273/-) 3. The learned Commissioner of Income Tax, Appeals - NFAC, failed to understand that the Cut and Polished Diamonds have been exported out of India and as such it would not have been possible without the said purchase from M/s Prime Star of Rs. 27,90,528/- Printed from counselvise.com ITA Nos.3651/Mum/2025 Spark Gems 2 4. Without prejudice to ground no. 2 & 3 hereinabove, the learned Commissioner of Income Tax. Appeals-NFAC erred in confirming the disallowance @ 100% of the alleged bogus purchase from M/s Prime Star. 5. Without prejudice to ground no.4 hereinabove, the learned Commissioner of Income Tax, Appeals NFAC failed to appreciate that without purchase, there can not be sales (in the instant case exports). So the learned CIT-A, NFAC should have directed the AO to make addition @ G.P. Rate and not the entire alleged bogus purchase. 6. The learned Commissioner of Income Tax Appeals, NFAC erred in holding that the appellant was liable to get its books audited as the total turnover for the year was Rs. 69,99,303/- which exceeded Rs. 60 Lakhs. In fact, the limit was raised to Rs. 1 Crore w.e.f. FY 2012-13 and since the appellant firm had offered 8% net profit of the turnover u/s 44AD, it was not required to maintain the books and addition on account of alleged bogus purchase could not have been made. It is prayed that order of the learned Commissioner of Income Tax, Appeals – NFAC be quashed and additions made by the learned AO and sustained by the learned CIT (Appeals) of Rs. 27,90,528/- be deleted so as to meet the ends of justice. The appellant craves leave to add, amend, alter or withdraw all or any of the above grounds of appeal.” 2 Brief facts of the case are that, the assessee had filed its return of income for the year under consideration on 07.04.2014 declaring total income at Rs. 1,33,980/-. The case, thereafter, was reopened u/s 147 of the Act by issuance of notice u/s 148 dated 31.03.2017. The reason for reopening as recorded by the AO was that a search and seizure action was conducted on Shri Bhanwarlal Jain and his group concerns on 03.10.2013 by from the DIGT (Inv.), Mumbai. During the course of search proceedings, it was established that the group concerns are all paper companies / firms / proprietorship concern with no real business activities, operating solely with the purpose of facilitation of fraudulent financial transactions which includes, among others, providing of accommodation entries in the form of unsecured loans to interested parties, issuing of bogus sale bills to various parties and providing Printed from counselvise.com ITA Nos.3651/Mum/2025 Spark Gems 3 bogus front to concerns which do not want to import diamonds in their own hands / books of accounts. On going through the documents forwarded by the DGIT (Inv.), Mumbai, it was found that the assessee herein has obtained accommodation entries of bogus purchases from various concerns of Shri Bhanwarlal Jain and others during the financial year 2012-13 relevant to A.Y. 2013-14, the details of which are given as under: Name of the hawala party Amount (Rs.) Prime Star 27,90,528/- 3. The aforesaid issue has been enquired from the assessee by issuance of queries, however, the assessee did not respond to any of the notices / letters till the date of passing of the impugned assessment order. Accordingly, the ld. AO culminated the proceedings by passing of a best judgment assessment u/s 144 of the Act and an addition of 100% on account of non-genuine purchase for Rs. 27,90,528/- was made in the hands of assessee. 4. Aggrieved with the aforesaid addition, assessee preferred an appeal before the First Appellate Authority, wherein the appeal of assessee has been dismissed by the ld. CIT(A) by recording the following analysis and decision: “3.1 For the Assessment Year 2013-14, the assessee had submitted a belated return on 07.04.2014, declaring its total income for Rs.1,33,978/-. In such return of income the gross turnover was disclosed for Rs.69,99,303/- from which applying the provisions of section 44AD, the assessee disclosed the Net Profit @8% for Rs.5,59,944/- as the income from the business. Reducing from such figure the salary paid to the persons for Rs.4,25,966/-, the assessee disclosed its total income for Rs.1,33,978/-. It may be mentioned here that in terms of section 44AB, Section 44AD and Section 44AA there had been a violation of all these 3 provisions of the Act, as the assessee's turnover for the year of Rs.69,99,303/- exceeded the statutory amount of Rs.60,00,000/-. Printed from counselvise.com ITA Nos.3651/Mum/2025 Spark Gems 4 Therefore, the assessee firm was not entitled for any exemption from keeping books of accounts or disclosing income under the presumptive taxation scheme u/s.44AD. It was also liable for compulsorily getting its account audited for taxation purpose u/s.44AB. Therefore, there have been many violations on part of the assessee and its disclosure made through the return of income. 3.2 Under the above background, on being informed by the Investigation Wing at Mumbai of the Income Tax Department, the Assessing Officer reopened the case of the assessee for A.Y.2013-14 by issue of notice u/s. 148 on 31.03.2017. There had been no compliance on part of the assessee in response to such notice and the Assessing Officer finally assessed the case by making an addition of Rs.27,90,528/- treating purchase of the same amount of polished diamond as bogus purchase. entry. Aggrieved with the order, the assessee had filed an appeal where the only ground taken had been that the action of the Assessing Officer in treating the entire purchase of Rs.27,90,528/- as bogus purchase is not correct. 3.3 During the appeal proceedings, the assessee further took additional ground challenging the legality of the reopening proceedings. 3.4 For matter of clarity, the additional ground taken by the assessee is taken up first. It has come to my knowledge that under exactly similar sets of facts, the case of the assessee had been reopened in the immediately preceding year of A.Y.2012-13 too. The assessee had challenged such order through an appeal before the CIT(A). Accordingly, perusing the grounds taken by the assessee and discussing many judicial pronouncements, the CIT(A) in the case of A.Y.2012-13 found the reopening proceedings to be valid in law. Following the similar decision, the additional ground taken by the assessee is dismissed and the proceedings u/s. 147 is sustained in law. 3.5 Coming to the issue on merit, it is seen that under the exact similar circumstances, certain purchase of polished diamond was treated as bogus purchase in A.Y.2012-13 too. The brief discussion on the facts of the case is that through search & seizure action dated 03.10.2013 the Investigation Wing of the Income Tax Department, at the premises of one Shri Bhanwarlal Jain and his group concern, the Department found irrefutable evidence that Shri Jain through his associate entities have given accommodation entry of bogus purchase of polished diamond without making any actual delivery of such goods. The beneficiary had issued payment against the bills raised by the various entities controlled by Shri Jain through banking channel and the cash was refunded to the beneficiary after reducing the commission for such accommodation entry provided by Shri Jain and his associates. One of such associate entities was a concern name M/s. Prime Star. It was also found from the documents seized from the Jains that such entity Prime Star had given accommodation entry of bogus purchase of polished diamond to the assessee firm for a value of Rs.27,90,528/- during the year. In the appeal the assessee has submitted that the purchase from Prime Star was a genuine purchase and submitted copy of the ledger account and the corresponding bill raised by Printed from counselvise.com ITA Nos.3651/Mum/2025 Spark Gems 5 Prime Star. From the submitted ledger, it is seen that Prime Star was not a regular supplier of polished diamond to the assessee. The only time of purchase was made for the value of the Rs.27,90,528/- for diamond measuring 330.24 ct. on 22.02.2013. Up to 31.03.2013 no payment against such purchase was made. In the appeal papers, the assessee has not submitted any documents to show that payment for the purchase was ever made afterwards. Although in the invoice [duplicate) submitted by the assessee, it shows that goods were delivered in Mumbai, no documentary evidence of such delivery was submitted. It was also seen from the assessment order that there was admission by Shri Bhanwarlal Jain that he had 70 numbers of bogus entity under his control who had provided accommodation entry to the beneficiaries and none of them had any stock of diamond on the date of search. 3.6 Under the above factual matrix of the case, I completely agree with the Assessing Officer that the above-mentioned purchase was not genuine and therefore I do not find any reason for deletion of such disallowance of purchase made by the Assessing Officer in the assessment order u/s.147 r.w.s.144. The disallowance is, therefore, upheld and the appeal of the assessee is dismissed.” 5. At the outset, the ld. Counsel of the assessee (in short “ld. AR”) submitted that the order passed by ld. CIT(A) is erroneous, unjustified, unwarranted, bad in law and against the principle of natural justice. It was the submission that the ld. CIT(A) had erred in sustaining the addition @ 100% on account of alleged bogus purchase of cut and polished diamonds from M/s. Prime Star, whereas while dealing with the issues of similar addition in assessee’s own case for A.Y. 2012-13, ITAT, Mumbai (G) Bench vide order dated 13.12.2024 has held that, the entire purchases could not have been added, because the source of purchase are books, at the most some GP rate should have been applied. The ld. AR reiterated the observations of ITAT, Mumbai, which are culled out hereunder for the sake of clarity: “5. After hearing the ld. DR and on perusal of the order of ld. CIT(A) and assessment order, it is seen that, firstly the information received by the ld. AO to reopen the case u/s.148 itself was vague that assessee has made bogus purchase of Rs. 7,59,16,324/-, from 7 other suppliers, Printed from counselvise.com ITA Nos.3651/Mum/2025 Spark Gems 6 when fact of the matter is that assessee has made purchases only from M/s Impex Gems and the payment against such purchase was stated to be on 21/03/2012, through RTGS and the said Impex Gems gave a confirmation of receipt of such RTGS amount. Thus while recording the reasons ld. AO did not even verify the return income of the assessee and the trading account. If the assesse only made local purchase of Rs.24,72,470/-, then what was the information and material that assessee has made bogus purchases of Rs.7.84 Crores. The only purchase as noted by the ld. CIT(A) was from M/s Impex Gems of Rs.22,26,470/- and there were no other purchases from any such 7 other companies controlled by Shri Bhawarlal Jain. The whole premise and basis to acquire jurisdiction was vague and wrong assumption of facts. Since assessee had not filed any cross appeal or cross objection against the order of Ld. CIT (A) and we also tried to enquire from the Registry, whether assessee has filed any appeal against order dated 16/05/2024 before this Tribunal and it was found that there was no such appeal for A.Y.2012-13 against this order. Though the ld. CIT(A) has confirmed the entire purchases of Rs.24,72,470/- debited in the books of accounts and deleted the balance addition, however, the entire purchases could not have been added, because the source of purchases are from the books, therefore, at the most some GP rate should have been applied. Since assessee has not challenged the order of the ld. CIT (A), accordingly, the order of the ld. CIT(A) confirming the addition of Rs.24,72,470/- is upheld and the balance addition deleted by the ld. CIT(A) is found to correct on facts and material on record. The department has also not brought anything on record to counter the finding of the ld. CIT (A) and has filed the second appeal raising various grounds mechanically and non application of mind whether assessee actually made any such purchases or not. Thus, the grounds raised by the Revenue are dismissed.” 6. In backdrop of aforesaid submissions, the ld. AR drew our attention to the copy of acknowledgement of ITR (page 40 of paper book), copy of computation of income showing net profit taken at 8% of the turnover calculated at Rs. 5,59,944/- (page 41 of the paper book), copy of profit and loss account showing a net loss of Rs. 2,71,962/- (page 42 of the paper book). The ld. AR also took us to the copies of tax invoice raised by M/s Prime Star and the bank statement of assessee, which are placed in the paper book of the Printed from counselvise.com ITA Nos.3651/Mum/2025 Spark Gems 7 assessee. Based on aforesaid information, it was the submission by the ld. AR that the assessee has actually booked a loss of Rs. 2.72 lac during the year under consideration, however, had offered presumptive income by taking net profit @ 8% to the tune of Rs. 5,59,944/- and offered the sane to tax, therefore, there was no intention of the assessee to prejudice the interest of revenue. In view of such facts and circumstances as the assessee have already offered its profit @ 8% for taxation to the revenue, no further disallowance would have been made. 7. Per contra, the learned Senior Departmental Representative (in short “ld. Sr. DR”) representing the revenue submitted that the ld. CIT(A) had elaborated the issue with precise findings in his order that such purchases from M/s Prime Star are bogus, being a concern of Shri Bhanwarlal Jain and group, which is undoubtedly a involved in the bogus activities, as established by the Investigation Wing. Accordingly, it was the request that the ld. CIT(A) had correctly upheld the findings of ld. AO, the same therefore, deserves to be sustained. 8. We have considered the rival submissions, perused the material available on record and the decision of ITAT, Mumbai in assessee’s own case referred to supra. Accordingly, since the issue involved in the present matter is identical to the issue in assessee’s own case for earlier A.Y 2012-13, wherein the charge of bogus purchases from M/s Impex Gems (one of the company controlled by Shri Bhanwarlal Jain) has been made by the revenue, which is identical in present case also, as M/s. Prime Star is a group concern of Shri Bhanwarlal Jain, therefore, the issue stands at same parity as that was for A.Y. 2012-13. In terms of the aforesaid Printed from counselvise.com ITA Nos.3651/Mum/2025 Spark Gems 8 facts and circumstances and the decision of Tribunal, we are of the considered view that the entire purchase could not have been added to the income of assessee, as it has been a recorded transaction in the books of the assessee, however, at the most an estimated profit on such purchases could have been added. Since in the present case, assesses itself had already offered an estimated profit of 8% on the sale, despite the fact that there were actual losses incurred by the assessee as apparent from its P&L A/c, therefore, no further addition would be warranted. We therefore find force in the argument of Ld. AR thus, coincide with the same, accordingly, set aside the impugned order of Ld. CIT(A) and direct to vacate the addition of Rs. 27,90,528/- made by the Ld. AO. 9. In result, the appeal of assessee is allowed, in terms of our aforesaid observations. Order pronounced in the open court on 18.08.2025 Sd/- Sd/- (AMIT SHUKLA) (ARUN KHODPIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai: 18.08.2025 Biswajit, Sr. P.S. Copy to: 1. The Appellant: 2. The Respondent: 3. The CIT, 4. The DR . //True Copy// [ By Order Assistant Registrar ITAT, Mumbai Benches, Mumbai Printed from counselvise.com "