Gujarat High Court Rejects Revenue's Claim for 6% Profit Addition on Sales in Bogus Purchase Proceedings — PCIT vs Center Point Gems Pvt. Ltd.

Background and Context

The Gujarat High Court recently rendered a significant ruling in a batch of tax appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961, pertaining to Assessment Year 2012-13. The appeals collectively challenged a common order passed by the Income Tax Appellate Tribunal, Surat Bench. The central question before the High Court was whether, having sustained an addition at 6% on alleged bogus purchases, the Tribunal was further obligated to estimate profitability at 6% on sales booked through the same alleged bogus parties.

The ruling carries considerable practical significance for diamond sector assessees and, more broadly, for all cases where Revenue seeks to levy additions on both the purchase and sales sides of transactions flagged as non-genuine.

Facts of the Case

Background of the Assessees and Reassessment Proceedings

The respondent-assessees were Private Limited Companies engaged in the diamond trade who had originally filed their returns of income for A.Y. 2012-13. Their cases were selected for scrutiny, and assessment orders were passed under Section 143(3) of the Income Tax Act, 1961.

Subsequently, an investigation was carried out by the DDIT, Investigation Unit-2, Surat in connection with the case of Shri Afroz Mohammed Hassan Fatta and Group. Alongside this, the Customs Department and the Enforcement Directorate conducted separate investigations relating to foreign remittances made against fake import documents. On the basis of the information gathered through these parallel investigations, notices under Section 148 of the Act were issued to reopen the already-completed assessments.

Following reassessment proceedings, the Assessing Officer passed orders under Section 143(3) read with Section 147, treating purchases made from certain entities linked to the Afroz Mohammed Hassan Fatta Group as bogus and making additions under Section 69 of the Act as unexplained investments.

Transaction Details in the Lead Matter

In the lead matter — Tax Appeal No. 419 of 2026 — the assessee M/s. Glorious Diamond Pvt. Ltd. had entered into the following transactions:

The Assessing Officer treated the entire purchase amount as bogus and made a 100% addition under Section 69 as unexplained investment.

Proceedings Before the Commissioner of Income Tax (Appeals)

CIT(A)'s Findings on Bogus Purchases

The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal. The CIT(A) returned a finding that purchases from four entities — M/s MB Offshore Distributors Pvt. Ltd., M/s RA Distributors Pvt. Ltd., M/s Ramshyam Exports Pvt. Ltd., and M/s Ridhi Exim Pvt. Ltd. — were not bogus, since no such purchases had been debited in the assessee's books of account.

However, purchases from M/s. Metro International and M/s. Franklin International totalling Rs. 13,64,90,501 were treated as non-genuine. The CIT(A) also returned a separate finding that no addition could be made in respect of the sales transaction with M/s Rhiday Gems Pvt. Ltd. amounting to Rs. 1,67,517.

Application of the Task Group Report — Diamond Sector Benchmarks

For determining the quantum of addition on the bogus purchases, the CIT(A) drew upon the Task Group Report for the Diamond Sector, which had been submitted to the Department of Commerce. This report indicated that:

• Net profit in diamond manufacturing ranges between 1.5% to 4.5%
• Net profit in diamond trading ranges between 1% to 3%