Calcutta High Court strikes down reassessment based on suspicion and third-party investigation: PCIT vs Purple Suppliers Pvt. Ltd.

1. Background and procedural history

In PCIT Vs Purple Suppliers Pvt. Ltd., the Calcutta High Court dealt with three connected appeals filed by the Revenue under Section 260A of the Income Tax Act 1961. The appeals challenged a common order of the Income Tax Appellate Tribunal, “A” Bench, Kolkata in ITA Nos. 757/Kol/2022, 758/Kol/2022 and 759/Kol/2022, relating to assessment years (AYs) 2011-12, 2012-13 and 2013-14.

The core controversy was the legality of reassessment proceedings initiated under Sections 147 and 148 on the footing that purchases made by the assessee from Sancheti Diamonds Pvt. Ltd. were sham transactions. The High Court heard all three departmental appeals together and disposed them of through a single judgment, treating ITAT/84/2025 (AY 2011-12) as the lead matter since the questions of law raised were identical.

The assessee, a Private Limited Company, was engaged in wholesale trading of jewellery and diamonds. It had filed returns of income for all three relevant years:

  • For AY 2011-12, the return was processed under Section 143(1);
  • For AYs 2012-13 and 2013-14, the assessments were completed under Section 143(3) following scrutiny.

Subsequently, based on information from the Investigation Wing, Mumbai, the Assessing Officer (AO) issued notices under Section 148 for all three years, completed reassessment under Section 143(3) read with Section 147, and made additions under Section 69C treating purchases from Sancheti Diamonds Pvt. Ltd. as bogus.

The reassessment orders were affirmed by the Commissioner of Income Tax (Appeals), NFAC, Delhi [CIT(A)] on 3.11.2022. The assessee carried the matter in appeal before the Tribunal, which allowed the appeals and invalidated the reassessment. Aggrieved, the Revenue approached the High Court.

2. Questions of law before the High Court

The Revenue proposed several substantial questions of law, of which the following were central:

  1. Whether the Tribunal was correct in law in holding that the reopening was based on “borrowed satisfaction” despite the AO allegedly recording independent satisfaction.

  2. Whether the Tribunal erred in not upholding the CIT(A)’s decision which had validated reopening and confirmed the disallowance relating to purchases from Sancheti Diamonds Pvt. Ltd., treated as bogus.

  3. Whether the Tribunal failed to follow the binding decision of the Supreme Court in Priya Blue Industries P Ltd. Vs. ACIT (2022) 138 com 69 (SC) by holding that an investigation report was insufficient basis for reopening.

  4. Whether the Tribunal was justified in quashing reassessment under Section 147 without adjudicating on the merits in the context of alleged bogus purchases.

  5. Whether the Tribunal failed to appreciate that, on circumstantial evidence and the principle of preponderance of probabilities (as applied in Swati Bajaj (2022) 139 com 352 (Calcutta)/(2022) 116 ITR 56 (Calcutta)), the transactions were not merely suspicious but actually bogus.

The High Court heard arguments from both sides: the standing counsel for the department and senior counsel appearing for the assessee.

3. Factual matrix: nature of business and transactions with Sancheti

The assessee was carrying on wholesale jewellery and diamond trading. It had extensive dealings with Sancheti Diamonds Pvt. Ltd., both on the purchase side and the sales side.

Key aspects noted:

  • The Investigation Wing, Mumbai reported that Sancheti had:

    • Very high turnover with very low profit;
    • No appropriate business infrastructure or premises; and
    • A key person who made a statement suggesting that Sancheti was engaged in providing accommodation entries for bogus purchases.

  • Based on this report, the AO concluded that the assessee had entered into allegedly bogus purchase transactions with Sancheti in all three AYs and reopened the assessments.

  • The AO furnished reasons for reopening to the assessee, which filed detailed objections. These objections were rejected through a speaking order, and reassessment was completed with additions under Section 69C for alleged bogus purchases.

Crucially, the Tribunal (and later the High Court) focused on the fact that while the AO doubted the genuineness of purchases from Sancheti, he simultaneously accepted substantial sales made by the assessee to the same party.

Illustratively: