ITAT Deletes ₹2.49 Crore Bogus Purchase Addition in Raj Diamonds Case

Background

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has deleted an addition of ₹2.49 crore made by the Assessing Officer (AO) against M/s. Raj Diamonds for the Assessment Year 2018-19, holding that the reassessment proceedings were based merely on suspicion without concrete evidence. The appeal was filed by the Revenue challenging the order of the Commissioner of Income Tax (Appeals) [CIT(A)] who had earlier restricted the addition to ₹18.37 lakh based on an estimated gross profit rate. The assessee had also filed a cross-objection contesting even this partial addition. The case originated after the Income Tax Department received a Suspicious Transaction Report (STR) indicating that certain entities, including M/s. Tanman Jewels Pvt Ltd and M/s. Vallabh Diamonds Pvt Ltd, were allegedly engaged in providing accommodation entries to route unaccounted money. Based on this information, the AO reopened the assessment and alleged that Raj Diamonds had made bogus purchases amounting to ₹2.49 crore from these entities. However, during the proceedings, the assessee produced extensive documentary evidence including purchase invoices, ledger accounts, confirmations from suppliers, bank statements reflecting payments through banking channels, GST returns, and stock registers. The Tribunal noted that neither the AO nor the CIT(A) found any defects in these documents or in the audited books of accounts.

Findings

The Tribunal observed that the reassessment had been initiated merely on the basis of suspicion derived from the STR and not on any substantive evidence indicating escapement of income. It held that reopening a completed assessment only for verification of transactions was not permissible under the law, particularly after the amendments introduced by the Finance Act, 2021 which require credible information suggesting income escapement. The Bench further noted that the AO himself had acknowledged movement of goods and payments through banking channels, and therefore the allegation of bogus purchases was not substantiated.

In its final ruling, the ITAT held that suspicion cannot replace proof and that the Revenue failed to establish that the purchases were non-genuine. Consequently, the Tribunal set aside the order of the CIT(A) and directed the Assessing Officer to delete the entire addition of ₹2,49,23,294. The Revenue’s appeal was dismissed, while the assessee’s cross-objection was allowed.