Delhi High Court Rules No Section 69C Addition Where Import Purchases Are Genuine and Fully Banked

Background and Context

The Delhi High Court, in PCIT Vs Kross Diamonds Pvt. Ltd., examined whether an addition under Section 69C of the Income Tax Act 1961 could be sustained where:

  • All import purchases were accepted as genuine,
  • Payments for such imports were routed entirely through banking channels, and
  • The assessee had made a large number of cash sales, each bill being below Rs. 2 lakh, with corresponding cash deposits into bank accounts.

Multiple departmental appeals, involving the same core legal issue, were clubbed together. For ease of adjudication, the Court treated ITA No. 675/2025 relating to Kross Diamonds Pvt. Ltd. as the lead matter.

Kross Diamonds Pvt. Ltd. is engaged in the business of importing diamonds from various jurisdictions in compliance with the Customs Act, 1962 and allied regulations. The controversy arose during scrutiny assessment when the Assessing Officer (AO) doubted the explanation of the source of funds used for purchases, even while expressly accepting that the purchases themselves were genuine.

Core Facts Considered by the Court

Nature of Business and Transactions

The assessee:

  • Dealt in diamonds as a regular business activity,
  • Imported diamonds from overseas suppliers,
  • Cleared such imports in accordance with Customs Act, 1962 and relevant rules, and
  • Maintained regular books of account.

During the relevant assessment year, the AO noticed:

  • 6,358 cash sale bills,
  • Each sale bill was valued at less than Rs. 2 lakh,
  • Total value of such cash sales was Rs. 97,12,70,670/-,
  • Cash collected from these sales was deposited into the assessee’s bank accounts.

The AO correlated this cash with the payments made for purchases and concluded that the source of expenditure on purchases remained inadequately explained, even though the fact of purchases was not in dispute.

AO’s Stand: Purchases Genuine but Expenditure ‘Unexplained’

The assessment order clearly recorded that:

  • The AO did not doubt the genuineness of the purchases.
  • The AO accepted that the diamonds had been actually purchased.
  • However, the AO still invoked Section 69C on the footing that the source of expenditure, i.e., the cash used for the purchases (ultimately arising from cash sales), was not satisfactorily explained.

In essence, the AO attempted to:

  • Accept the purchases as real and supported by documents, but
  • Treat the corresponding expenditure as unexplained expenditure under Section 69C,
  • On the ground that the cash deposits in the bank, arising from numerous small-value cash sales, were itself suspect.

An addition of approximately Rs. 97.13 crore was made under Section 69C on this reasoning.

Appellate Proceedings Before CIT(A) and ITAT

Decision of CIT(A)

The assessee challenged the assessment order before the Commissioner of Income Tax (Appeals) [CIT(A)].

Key contentions of the assessee included: