Diamond Trader Faced 100% Bogus Purchase Addition of Rs. 45.35 Lakh; ITAT Restricts Disallowance to Just 5%

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed the appeal filed by Rajesh Brothers for Assessment Year 2012-13 and reduced the addition made on alleged bogus purchases.

The Income Tax Department had reopened the assessment based on information received from the Investigation Wing that the assessee had shown purchases from concerns linked to the Bhanwarlal Jain Group, which was allegedly engaged in providing accommodation entries without actual supply of goods. The AO treated purchases of Rs. 45,35,071 from three parties, Meenaxi Diamonds Pvt. Ltd., Prime Star, and Mayur Exports, as non-genuine and disallowed the entire amount.

Before the Tribunal, the assessee argued that all purchases were genuine and supported by documentary evidence. It was submitted that the corresponding sales, including exports of cut and polished diamonds, were never disputed by the department. The assessee also pointed out that in its own case for Assessment Year 2011-12, only 3% of such purchases had been disallowed.

The Commissioner of Income Tax (Appeals) upheld the action of the Assessing Officer by observing that the invoices filed by the assessee were deficient in several respects. According to the CIT(A) the invoices appeared to be printed out of a common format and were without transportation details and without specific details of the diamonds. Thus, relying on the Bombay High Court decision in Kanak Impex, the CIT(A) upheld the addition.

But the ITAT found the facts of the present case to be different. The Tribunal observed that diamonds are products of the highest value and that their carriage does not necessarily require lorry receipts or similar transport documents. It also noted that the assessee had produced evidence in respect of purchases and sales were not disputed by the department.

The Tribunal further noted that even the CIT(A) had accepted the possibility that the exports could have been made from unrecorded purchases or existing stock. Therefore, disallowing the entire purchase amount was not justified. According to the Tribunal, only the profit element embedded in such purchases should be brought to tax to prevent possible revenue leakage.

Taking into account the overall facts and the department’s own approach in the assessee’s earlier year, the ITAT held that a 5% disallowance of the disputed purchases would be reasonable. Accordingly, it directed the AO to restrict the addition to 5% of Rs. 45,35,071 instead of disallowing the entire amount.

As a result, the assessee’s appeal was partly allowed.