Gujarat High Court affirms 6% addition on bogus purchases in diamond trade cases

Overview of the decision

The Gujarat High Court, in a group of tax appeals led by Dilkhush Annraj Babel Vs ITO, upheld the Income Tax Appellate Tribunal’s common order confirming a 6% addition on alleged bogus purchases in diamond trading cases linked to the Pravin Kumar Jain accommodation entry group.

The Court held that:

  • There were concurrent factual findings by the Commissioner of Income Tax (Appeals) and the Tribunal.
  • The estimation of income by applying a 6% rate on disputed purchases was justified.
  • No substantial question of law arose under Section 260A of the Income Tax Act 1961.

The assessees had raised multiple legal challenges, including:

  • Validity of reassessment under Section 147 instead of resort to Section 153C
  • Rejection of books of account
  • Estimation of profit on alleged bogus purchases
  • Alleged denial of cross-examination
  • Alleged violation of principles of natural justice

The High Court rejected all such contentions and dismissed the appeals.

Factual background and assessment proceedings

Business activity and information from Investigation Wing

The assessees in this batch of appeals were all engaged in trading in diamonds.

For the relevant Assessment Years, the Assessing Officer reopened the assessments under Section 147 based on specific information received from the Director of Income Tax (Investigation), Mumbai. The information indicated that:

  • The assessees were beneficiaries of bogus purchase bills.
  • These bills were issued by concerns controlled by Pravin Kumar Jain Group.
  • A search and seizure operation under Section 132 had been conducted on this group on 01.10.2013.

The search allegedly revealed that:

  • The group operated multiple concerns (firms, companies, proprietary concerns).
  • These concerns had no genuine business activity.
  • Their core activity was to provide accommodation entries in the form of:
    • Unsecured loans
    • Bogus purchase bills
    • Bogus sale bills
    • Funding for parties who did not want to import diamonds in their own names

Reopening of assessment under Section 147

Based on this material, the Assessing Officer:

  1. Formed a reason to believe that income had escaped assessment to the extent of purchases and/or sales recorded through entities of the Pravin Kumar Jain Group.
  2. Recorded reasons for reopening in each case.
  3. Issued notices under Section 148.
  4. Supplied reasons to the assessees and disposed of their objections by a speaking order.

The assessee’s stand was that:

  • Purchases were genuine.
  • Supporting documentation such as purchase bills, confirmations, ledger accounts, stock registers and corresponding sales invoices were on record.
  • Payments were made through account payee cheques.

The Assessing Officer, however, relying heavily on the search findings and Investigation Wing report, treated all purchases made from the identified entities as bogus and:

  • Disallowed the entire quantum of such purchases as non-genuine in each case.

Proceedings before CIT(A): partial relief by restricting addition to 5%

Challenge to reopening and additions

The assessees filed appeals before the CIT (Appeals) challenging:

  • The validity of reopening under Section 147.
  • The merits of the additions treating the purchases as bogus.

They produced documents including:

  • Confirmations from suppliers
  • Ledger accounts
  • Purchase bills
  • Corresponding sale invoices
  • Quantitative details and stock records

The CIT (Appeals) called for a remand report from the Assessing Officer and then adjudicated.

Findings of CIT(A) on reopening

The CIT (Appeals):

  • Accepted the validity of reopening under Section 147.
  • Followed earlier appellate orders in similar cases arising from the same search group.
  • Observed that quashing the reassessment on technical grounds would effectively confer an undeserved benefit to the assessee due to any lapse by the Assessing Officer, which would be inequitable for the Revenue.

Findings of CIT(A) on bogus purchases and estimation

On the quantum side, the CIT (Appeals) made important findings: