ITAT Mumbai Deletes Bogus Purchase Additions in Diamond Firm Case — Retracted Statement of Single Party Not Sufficient Basis for Addition

Background and Overview

The Income Tax Appellate Tribunal (ITAT), Mumbai, in the matter of Star Brillian Vs ITO, delivered a significant ruling concerning the validity of additions made on account of alleged bogus purchases. The Tribunal dealt with two appeals pertaining to Assessment Years (AYs) 2009-10 and 2013-14, both raising an essentially identical legal question. Given the overlapping issues, the Tribunal decided to take up both appeals together and dispose of them through a consolidated order.

The assessee — a partnership firm operating in the import, export, and manufacture of diamonds, as well as dealing in precious stones and jewellery — had been subjected to reassessment proceedings on the basis of intelligence gathered from search and survey operations conducted by the Directorate General of Income Tax (Investigation), Mumbai. The DGIT's findings implicated the assessee in allegedly procuring accommodation entries through purchases from seven named entities.

What emerged from the proceedings, and ultimately before the Tribunal, was a critical question of evidentiary standards: Can an addition for bogus purchases be sustained solely on the basis of a statement that has since been formally retracted by its maker? The Tribunal answered with a clear and unequivocal no.

Factual Matrix: AY 2009-10 — ITA No. 1551/Mum/2020

Origins of the Reassessment

The assessee had originally filed its return of income on 30th December, 2009, disclosing a total income of ₹26,80,000/-. A prior reassessment under Section 147(3) of the Income-tax Act, 1961 had already been completed on 23rd December, 2011, fixing the total income at ₹49,28,400/-.

Subsequently, on 3rd October, 2013, the DGIT (Investigation), Mumbai, conducted search, survey, and seizure operations in the case of Mr. Rajendra Jain, Sanjay Choudhury, and the Dharmchand Group. The investigation revealed that Mr. Rajendra Jain was allegedly operating multiple entities used as conduits for providing accommodation entries. Based on this intelligence, the revenue authorities formed the view that the assessee had availed bogus purchase entries from seven different parties, with the aggregate purchase amount stated to be ₹9,86,03,864/-.

Consequently, the case was reopened by issuance of notice under Section 148 of the Income-tax Act, 1961 on 21st March, 2016, following proper recording of reasons and receipt of prior approval. In response, the assessee reiterated its original return filed on 30th September, 2009. Notices were subsequently issued under Section 142(1) as well as Section 143(2) of the Act.

Assessing Officer's Action

Despite receiving detailed submissions from the assessee, the Assessing Officer (AO) declined to accept the explanations furnished. Placing sole reliance on the statement of Mr. Rajendra Jain recorded during the search proceedings, the AO estimated an addition of ₹49,30,193/-, representing 5% of the aggregate purchase value attributed to the concerned entities. The consequent assessment order, passed on 27th December, 2016, determined the total income at ₹98,58,590/-.

Proceedings Before CIT(A)

Aggrieved by the AO's order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-59, Mumbai. On the question of reopening, the CIT(A) ruled against the assessee. However, on the substantive question of the addition, the assessee placed before the CIT(A) an extensive array of documentary evidence, including:

  • Detailed purchase records along with corresponding sale details mapped against each purchase transaction
  • Copies of purchase invoices matched with corresponding sale invoices, along with purchase and sale registers for the entire year
  • Ledger accounts of all concerned parties along with bank statements
  • Export documentation that had been verified and authenticated by customs authorities
  • PAN details, income tax returns, bank statements, and sworn affidavits of all alleged suppliers confirming that goods had indeed been supplied