ITAT Mumbai Rules Out Profit Addition on Alleged Bogus Purchases in Diamond Export Business

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in Nirjay Diamond Vs DCIT has delivered an important ruling on alleged bogus purchases in the diamond trade, particularly where the assessee is an export-oriented concern maintaining complete quantitative records. The Tribunal concluded that once exports, stock registers, and quantitative tallies are accepted and no defects are found in the books, estimation of additional profit on alleged non-genuine purchases is unsustainable.

The case revolved around additions made by estimating 12.5% profit on purchases treated as suspect merely because the suppliers were named in investigation reports relating to the Bhanwarlal Jain Group. The ITAT held that in absence of concrete evidence against the assessee, such addition based purely on third-party investigation material and non-appearance of suppliers cannot be upheld.

Background of the Dispute

Profile of the Assessee and Assessment Year

• The assessee, Nirjay Diamond, is a partnership firm engaged in the manufacture and export of polished diamonds and semi-precious stones.
• The dispute pertains to Assessment Year 2013-14.
• A scrutiny assessment under Section 143(3) of the Income Tax Act 1961 was completed.
• The assessee had filed its return declaring income of Rs. 85,46,463/-.

During the assessment, the Assessing Officer (AO) focused on certain domestic purchases which, according to information from the Investigation Wing, were allegedly obtained from concerns associated with the Bhanwarlal Jain Group – a group suspected of providing accommodation entries without actual supply of goods.

Purchases Under Scrutiny

The AO noticed local purchases aggregating to Rs. 17,42,31,637/- made from the following four parties:

• Mohit Enterprises – Rs. 5,47,86,991/-
• Mayur Exports – Rs. 10,56,60,221/-
• Prime Star – Rs. 90,37,124/-
• Balaji Impex – Rs. 47,47,301/-

These entities were mentioned in investigation material as alleged accommodation entry providers. This led the AO to doubt the genuineness of purchases, even though the assessee claimed that the material purchased had been utilised in its export business.

Findings of the Assessing Officer

Reliance on Investigation Wing Reports

The AO based his suspicion primarily on information received from the Investigation Wing, Mumbai. That material suggested that entities connected with the Bhanwarlal Jain Group were in the business of issuing bogus purchase bills without authentic underlying transactions in goods.

Acting on this input, the AO:

1. Issued queries to the assessee seeking complete details regarding the impugned purchases.
2. Called for:
   • Purchase invoices
   • Ledger accounts of suppliers
   • Payment details and linked bank statements
   • Stock registers
   • Quantitative details of goods purchased and sold

The assessee produced all the above documentation. It was specifically asserted that:

• All purchases were duly recorded in the regular books.
• Payments to the suppliers were made via banking channels.
• The goods purchased formed part of the stock and were ultimately exported.
• A quantity-wise and invoice-wise linkage existed between purchases and subsequent export sales.

Summons to Suppliers and Non-Appearance

To further verify the genuineness of the purchases, the AO issued summons under Section 131 to the four suppliers:

• One summons was returned unserved.
• For the remaining suppliers, though summons were stated to have been delivered, none of them appeared before the AO.

On this basis – coupled with the investigation reports – the AO proposed to treat the purchases as non-genuine.