100% Bogus Purchase Disallowance Invalid When Sales Are Genuine; Addition Restricted to Profit Element.

Issue

Can the tax department disallow 100% of alleged “bogus purchases” (accommodation entries) under Section 69C, even when the assessee provides a complete documentary trail (purchase bills, bank payments, shipping bills) and the corresponding export sales are accepted as genuine by the department?

Facts

The assessee, a diamond manufacturing and trading firm, filed its return for AY 2010-11.
The case was reopened based on information from the Investigation Wing (following a search on the Bhawarlal Jain group) alleging the assessee had taken bogus accommodation purchase entries from two parties (Mohit Enterprises and Nice Diamonds) aggregating to ₹46.46 lakhs.
In response, the assessee furnished a complete documentary trail:
- Purchase bills, stock register, and sales/purchase registers.
- Bank statements proving payments were made through banking channels.
- Export invoices, shipping bills, and bank realization certificates correlating the “disputed” purchases to genuine export sales.
The Assessing Officer (AO) disallowed 100% of the purchase cost, treating it as unexplained expenditure.
The AO’s disallowance was based on the modus operandi of the Bhawarlal Jain syndicate and not on any specific discrepancies found in the assessee’s own documents.
Crucially, the AO did not dispute the genuineness of the corresponding export sales.

Decision

The court ruled partly in favour of the assessee.
It held that it is an admitted position that the sales have not been doubted.
The court established a clear principle: “without purchases, there cannot be any sales.” Since the export sales were genuine and fully documented, the corresponding purchases cannot be 100% bogus (i.e., the assessee must have procured the goods from somewhere).
Therefore, the 100% disallowance of the purchases was held to be unsustainable.
The addition was restricted to the profit element only, calculated as the difference between the gross profit on undisputed purchases and the gross profit on these disputed purchases.

Key Takeaways

Sales Acceptance is Key: An Assessing Officer cannot accept the sales from a transaction as genuine while simultaneously disallowing 100% of the purchases that led to those sales.
100% Disallowance is Punitive: When sales are not in doubt, a 100% disallowance of purchases is deemed punitive. The assessee has procured the goods, albeit from a source other than the one named in the bogus invoice (e.g., the grey market).
Correct Disallowance is the Profit Element: In such bogus purchase cases, the correct approach is to restrict the disallowance to the profit element or the G.P. rate differential. This represents the likely profit earned by the assessee by sourcing goods from the grey market and evading taxes.
Discharge of Onus: A complete documentary trail (bills, banking, stock movement) shifts the burden back to the AO. The AO cannot then rely solely on third-party information (like a search in another group) without finding a specific flaw in the assessee’s own evidence.

IN THE ITAT MUMBAI BENCH ‘A’

Arham Star

Income-tax Officer^*

SAKTIJIT DEY, Vice President
and Girish Agrawal, Accountant Member

IT Appeal No. 2427 (MUM) of 2025
[Assessment year 2010-11]

SEPTEMBER 26, 2025

Rahul Sarda, Adv. for the Appellant. Surendra Mohan, Sr. DR for the Respondent.

ORDER

Girish Agrawal, Accountant Member.- This appeal filed by assessee is against the order of CIT (A), National Faceless Appeal Centre (NFAC), Delhi vide order no. ITBA/NFAC/S/250/2024-25/1075308198(1), dated 30/03/2025 passed against the assessment order by Income-tax Officer, 19(1)(1), Mumbai, u/s.144 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 22.12.2017 for Assessment Year 2010-11.

2. Grounds taken by the assessee are reproduced as under:

The NFAC failed to appreciate that the purchases made by the Appellant were genuine and supported by documentary material including the corroboration of sales made from such purchases, and there was not material to show that the purchases were not genuine, and hence, the same could not have been disallowed.

The NFAC erred in upholding the addition on the basis of generalized statements in the assessment order without the Assessing Officer having conducted any enquiry in the matter.

The NFAC failed to appreciate that addition, even if any, could have been made only to the extent of the positive difference, if any, between the gross profit element in the undisputed purchases and the disputed purchases as per the ratio of the judgement of the Hon’ble Bombay High Court.

The NFAC failed to appreciate that the Report of the Task Group for Diamond Sector (issued by the Govt. of India) itself shows that GP rate for entities engaged in trading of diamonds was only 2%. Hence, the addition, if any, ought to have been restricted to 2% of the impugned purchases.

2. 1. All the grounds raised by the assessee relate to disallowance made towards purchases, which have been alleged to be bogus by the ld. Assessing Officer.

3. Brief facts of the case are that assessee filed its original return on 04.09.2010 reporting total income at Rs.4,74,220/-. Assessee is a partnership firm carrying on the business of manufacturing and trading of cut and polished diamonds. Assessee carried the business in the name of M/s. S. Manish and Company, subsequently its name was changed to M/s. Arham Star, by way of a supplemental deed of partnership evidencing the name change which is placed on record in the paper book containing 165 pages. Case of the assessee was reopened by issuing notice under section 148 dated 31.03.2017 which was based on search and survey action conducted in the case of Shri Bhawarlal Jain and others on 03.10.2013 by DGIT(Inv), Mumbai. Post this search, ld. Assessing Officer of the assessee received information from the Investigation Wing of the department, Mumbai that assessee had taken accommodation entries of purchases from the following two parties in the year under consideration, details of which are tabulated below:

Sr.No.	Name of the hawala parties	Bill Amount (Rs.)
1	MOHIT ENTERPRISES	16,97,110/-
2	NICE DIAMONDS	29,49,385/-
	TOTAL	46,46,495/-

3.1. Assessee interalia, was asked to substantiate the purchases and demonstrate the sales made from the said purchases which were alleged to be bogus, details of which are tabulated above. In the course of assessment proceedings, assessee furnished voluminous documentary evidences to substantiate the claim of genuineness of the purchases so made. Assessee submitted the copies of purchase bills for both the parties. Assessee also demonstrated from the bank statement that payments were made through proper banking channels. Assessee also demonstrated the corelation of sales made out of the purchases which were export sales made to S.R. Exports (HK) Ltd. and Lotus Gems BVBA. Against these export sales, realizations were made through banking channels and the export collection payment invoices issued by State Bank along with details of realization from exports were also placed on record. Assessee also furnished stock register to demonstrate the quantitative details maintained by it. Sales registers and purchase registers were also furnished for recording of sales and purchases and mapping of the alleged purchase with the sales made by the assessee. Despite these elaborate submissions made by the assessee, without finding any fault or discrepancy or deficiency in these documents, ld. Assessing Officer proceeded to complete the assessment by holding the alleged purchases as bogus.

3.2. In the impugned assessment order, ld. Assessing Officer has laid emphasis on the modus operandi of the Bhawarlal Jain and his syndicate about their indulgence in providing accommodation entries. Ld. Assessing Officer had asked for confirmation letters and to demonstrate as well as correlate the purchases with the sales made by the assessee, which were duly complied with. Assessment was completed by making the disallowance of the entire alleged purchases as bogus, amounting to Rs. 46,46,495/-. Ld. Assessing Officer thus, made the disallowance of the 100% of the purchase amount which was alleged to be bogus.

3.3. In the first appeal, assessee reiterated its submissions made in the course of assessment proceedings along with corroborative documentary evidences. Further, assessee also asserted that the disallowance was made on the basis of statement given by the persons in whose case, search and survey action was undertaken in the Bhawarlal Jain group. Assessee submitted that merely on the basis of statement given at the time of search and survey, such a disallowance cannot be made without any corroborative documentary evidence, pointing out and establishing a live nexus with the indulgence of the assessee. Assessee has correlated the alleged purchases which have been held to be bogus with the sales made by it which are export sales, for which all the documentary evidences are placed on record, forming part of the paper book. Ld. Assessing Officer in the course of assessment has not doubted on the sales made by the assessee.

3.4. Further, assessee contended by placing reliance on the decision of Hon’ble Jurisdictional High Court of Bombay in the case of PCIT v. Mohammad Haji Adam and Company (Bombay), whereby it was held that the disallowance ought to be restricted to the positive difference if any, between the gross profit element in the undisputed purchases and that on the disputed purchases. For this, assessee furnished its workings to demonstrate how the GP was earned on the disputed purchases and that earned on the undisputed purchases. The same is extracted below:

GP working on the alleged bogus purchases

–

Sales against alleged bogus purchases Rs. 48,68,837/

–

Alleged bogus purchases Rs. 46,46,495/

–

GP on sales made from alleged bogus purchases – Rs. 2,22,342/-

–

GP % on sales made from alleged bogus purchases

–

Total sales Rs. 1,81,23,299/

–

Sales from undisputed purchases – Rs. 1,81,23,299-Rs. 48,68,837 =”Rs.” 1,32,54,462/

–

Total purchases -Rs. 1,72,74,763/

–

Undisputed purchases Rs. 1,72,74,763-Rs. 46,46,395=”Rs.” 1,26,28,268/

3.5. Based on the above workings, assessee thus, in the alternate submitted that at best the disallowance which can be made or the addition which can be made in respect of the difference in gross profit is of Rs. 8,075/-, by following the ratio laid down by the Hon’ble High Court of Bombay in the case of Mohammad Haji Adam and Company (supra). Ld. CIT(A) did not find favour with the submissions made by the assessee and dismissed the appeal by sustaining the disallowance made by Ld. Assessing Officer.

4. Before us, ld. Counsel for the assessee reiterated the submissions made before the authorities below. He further contended that the profit ratio in the diamond sector in which the assessee deals in is in the range of 1% to 3% as noted in the Task Force Report by the Government of India. Copy of the said report is placed on record. Based on this, he claimed that disallowance at the rate of 100% is unjustified, since assessee has already reported a much higher percentage of gross profit, details of which are already extracted above.

4.1. Ld. Counsel for the assessee also pointed to the decision of Hon’ble Jurisdictional High Court of Bombay in the case of PCIT v. Kanak Impex India Ltd. (Bombay)/[2025] 474 ITR 175 (Bombay), wherein addition to the extent of 100% of the bogus purchases u/s.69C was upheld. Ld. Counsel made the submissions distinguishing the facts of the said decision with the case of the assessee, by pointing out the factual position and the provisions of law, details of which are extracted below:

“In the case of Kanak Impex (supra), the ITAT had accepted the case of the Department that the purchases were indeed bogus. The assessee had not filed any appeal against the said finding of the ITAT, and hence, the same had become final (This is clear from the Question of Law framed by the Hon’ble High Court in para 2 r/w para 10 of the judgement)

The assessee in that case had not appeared before the assessing officer and therefore there were no details/ evidence before the Department to substantiate the purchases. Thus, that was a case where the assessee did not file any material/ evidence to substantiate its case (Para 4 r/w 17 r/w para 38 of the judgement). As against this, in the present case, the Appellant has filed all details/ evidence and the same have not been found to be incorrect.

–

Before the ITAT, the assessee in that case had not canvassed any submission on the genuineness of the purchases (Para 39 of the judgement). Whereas, in the present case, the case of the Appellant is that its purchases are genuine and the documentary evidence to show the same is already on record

–

The conclusions arrived at in that case were on account of the failure of the assessee to appear in the reassessment proceedings and file proper evidence (para 32 to 35 of the judgement).

–

In fact, the grounds on which the judgement in the case of Mohd Haji Adam & Co. (supra) was distinguished in para 35 of the judgement, do not exist in the present case

The addition was made by the assessing officer under section 69C and the question before the High Court was applicability of section 69C (Para 36), whereas, in the present case, the AO has made disallowance of purchases i.e. disallowance u/s 37(1). It is a settled position of law that if a disallowance/addition has been made by the assessing officer under one provision, and the ITAT does not agree with the disallowance/ addition, then the ITAT cannot uphold the same disallowance/ addition under some other provision (Para 13 to 19 of Smt. Sarika Jain v. CIT [2018] 407 ITR 254 (All.).”

5. Per Contra, ld. Sr. DR relied upon the decisions of the authorities below. He also placed strong reliance on the decision of Kanak Impex India Ltd. (supra). He submitted that the onus was on the assessee to prove the genuineness of the purchases, which he failed to do so and therefore, the addition so made, is justified. He also referred to the provisions of section 69C, whereby the additions were sustained by the Hon’ble High Court.

6. We have heard both the parties and perused the material on record. We have also given our thoughtful consideration to the judicial precedents relied upon by both the parties. Admittedly, it is a fact on record that assessee has made detailed submissions along with corroborative documentary evidences to establish the genuineness of the purchases made by it, which have been alleged to be bogus by the ld. Assessing Officer. The details of documents furnished by the assessee to support the contentions made is listed below:

Stock Register along with Sale & Purchase Register for Assessment Year 2010- 11

ii.

Purchase bill of Nice Diamonds along with its corresponding subsequent Export Sale invoice & Shipping Bill to SR Exports HK Ltd.

iii.

Purchase bill of Mohit Enterprises along with its corresponding subsequent Export Sale invoice & Shipping Bill to Lotus Gems BVBA.

iv.

Bank statements showing payment made towards the purchases from Mohit Enterprises and Nice Diamonds & Payments received for corresponding export sales made from SR Exports HK Ltd.

Copy of Bank Realisation advice for export receipt from SR Exports HK Ltd.

vi.

Copy of Bank Realisation advice for export receipt from Lotus Gems BVBA along with Copy of Bank Statement highlighting the said receipt.

6.1. Ld. Assessing Officer has not pointed out any deficiency or discrepancy in these details and documents However, and contrary to the submissions made by assessee, ld. Assessing Officer has observed in para 9 of his order that assessee has tried to substantiate the claim of genuineness of the purchases with the help of book entries and documents prepared by itself. According to him, making of entries in the books of accounts and related documentation are only unilateral acts, which do not conclusively establish the genuineness of the purchases. He further observes that mere documentation either in the form of bank account entries or otherwise cannot make fictitious transactions real. He thus, rejected the submissions made by the assessee and treated the purchase transactions from the two said parties as bogus, making the addition of the entire purchase.

6.2. Further, decision in the case of Kanak Impex India Ltd. (supra) also doesn’t come to support the case of the Revenue, since it is squarely distinguishable on the facts, details of which are already extracted above. We have perused the above judgment and observed that in para 4, Hon’ble Court noted the factual position that assessee did not appear before the ld. Assessing Officer during the course of assessment proceedings and failed to prove the genuineness of the purchase. The said assessment was completed ex parte u/s. 144 r.w.s 147 of the Act. Hon’ble Court also observed in para 17 about the non-appearance of assessee before the ld. Assessing Officer for which there is no justification. Again, it noted in para 29 that the assessee chose not to attend the reassessment proceedings even though the notices were sent by post, email and affixture. Accordingly, in para 13, Hon’ble Court concluded that assessee having not joined the reassessment proceedings, the contention raised by the assessee are to be rejected. Observation of the Hon’ble Court while rejecting the contention of the assessee are:

“30. We fail to understand that the respondent-assessee having consciously and intentionally decided not to join the investigation, cannot now contend that the appellant-revenue should have given them all the details before making the addition. In our view, such a conduct of the respondent-assessee cannot be accepted. It was incumbent upon the respondent-assessee to have joined the re-assessment proceedings, discharge the initial onus of proving the purchases and seek details, if any.”

7. We are unable to agree with the approach adopted by ld. Assessing Officer as well as ld. CIT(A), since it is an admitted position that sales have not been doubted. Without purchases, there cannot be any sales. No adverse inference has been made by the ld. Assessing Officer insofar as export of diamonds are concerned for which all the documentary evidences are placed on record. They are third party documentary evidences and not self-created or generated documents of the assessee as alleged by the ld. Assessing Officer.

7.1. We note the submission made the ld. Counsel of the assessee that profit ratio in the diamond sector in which the assessee deals in is in the range of 1% to 3% as noted in the Task Force Report by the Government of India.

7.2. Also, assessee has furnished the working of its profit ratio on the undisputed purchases and the impugned purchases alleged as bogus. Details of working are already extracted above. Based on these working, assessee submitted that addition of Rs. 8,075/- can be sustained for the difference in gross profit by following the ration laid down by the Hon’ble High Court of Bombay in the case of Mohammad Haji Adam and Co. (supra). Considering the facts on record and working so furnished as well as following the said decision, we hold to sustain addition of Rs. 8,075/- on account of difference in profit on the undisputed purchases and the alleged bogus purchases. Assessee gets relief for the balance amount for the addition was made by the ld. Assessing Officer. Grounds raised by the assessee are thus, partly allowed.

8. In the result, appeal of the assessee is partly allowed.