ITAT Deletes Penalty on Estimated Bogus Purchase Addition in Diamond Trade Case

 ITAT Deletes Penalty on Estimated Bogus Purchase Addition in Diamond Trade Case

A diamond trader engaged in manufacturing, importing, exporting, and trading, filed his return for AY 2012-13 declaring an income of Rs. 3.12 lakh. During the assessment, the AO relied on findings from the search on the Bhanwarlal Jain accommodation-entry group and concluded that the assessee had taken bogus purchase bills worth Rs. 1.11 crore from Euro Diam and Little Diam. Despite the assessee producing purchase bills, bank statements, and confirmations, the AO treated the entire purchase as bogus and made a full addition. The CIT(A) upheld the addition.

Thereafter, the AO levied penalty under Section 271(1)(c) for concealment on the full amount, which the CIT(A) later restricted to tax on 5% of purchases. Aggrieved, the assessee appealed the penalty before the ITAT.

Core Issue: Whether penalty under Section 271(1)(c) can be sustained when the underlying addition is made purely on an estimated percentage of alleged bogus purchases.

ITAT Decided: The Tribunal observed that in the earlier quantum proceedings it had already held that the purchases were made, though possibly not from the named parties, and only the profit element could be taxed at 5%. The Bench noted that a penalty cannot follow when additions rest solely on an estimate or ad-hoc disallowance without any concrete evidence of concealment.

Relying on binding High Court rulings such as Hari Gopal v. CIT and CIT v. Sangrur Vanaspati Mills Ltd., the Tribunal held that Section 271(1)(c) requires a clear act of concealment or inaccurate particulars, neither of which was present here. Since the disallowance represented only an estimated profit portion, the statutory condition for penalty was not met. Therefore, the penalty was deleted in full.

To Read Full Judgment, Download PDF Given Below