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Judgment
PER S. RIFAUR RAHMAN, AM :
This appeal is filed by the Revenue against the order of the Ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)] dated 10.10.2025 for the Assessment Year 2017-18.
Brief facts of the case are, assessee is an individual engaged in the business of trading of gold, silver and diamond jewellery in the name and style of Shree Jewellers. It filed original return of income for AY 2017-18 on 07.11.2017 declaring total income of Rs.14,72,080/-. Based on the information received from the office of DDIT (Inv.), Unit-7(4), Delhi that assessee has taken accommodation entries in the form of fictitious purchases amounting to Rs.86,18,315/- from J.P. Jewellers, a concern of Mohit Garg who routed through Shri Rajeev Singh Kushwaha, an entry operator. The name of the assessee was figured during search and seizure proceedings in the case of Mohit Garg and others wherein it was observed that several shell concerns were utilized to provide bogus sale/purchase bills in lieu of commission. Based on the above information, the AO recorded the reasons and initiated the proceedings under section 147 of the Income-tax Act, 1961 (for short ‘the Act’) after due approval from competent authority. Accordingly, notice u/s 148 was issued and served on the assessee.
In response, assessee filed the return of income on 10.05.2021 declaring the income as per original return of income. Notices under section 143(2) and 142(1) were issued along with questionnaires. In response, during assessment proceedings, assessee submitted documents including banks statement, Balance Sheet, Profit and Loss account, purchase bills and stock ledger. It was submitted that purchase of Rs.86,18,315/- were made from J.P. Jewellers of which jewellery worth Rs.26 lakhs was retained and balance worth of Rs.60,18,405/- were returned on account of design issue. Further it was claimed that the purchases are genuine and made through banking channel and duly recorded in their books. After considering the same, AO acknowledged that assessee has purchased jewellery vide Voucher No.383 & 386 to the extent of Rs.60,18,405/- during the month of September 2016 were returned after considerable gap of two months i.e. in November 2016 for the reason ‘design not approved, goods returned’. With regard to above, AO observed that the bills produced by the assessee are nothing but cooked bills for the purpose of accommodation entries. In the absence of valid and authentic documents, he came to the conclusion that assessee failed to substantiate the claim for the purchases from the entity, J.P. Jewellers. After rejecting the submissions of the assessee in the absence of substantive supporting documents and evidences in support of assessee’s claim, he treated the above purchases as accommodation entry in the form of fictitious purchases and proceeded to make the addition u/s 69C of the Act.
Aggrieved, assessee preferred an appeal before the ld. CIT (A) and filed detailed submissions which are reproduced at pages 4 to 8 of the impugned order. After considering the same, ld. CIT (A) deleted the addition and partly allowed the grounds on merits by observing as under :-
“ After careful consideration of the assessment order, the grounds of appeal taken by the appellant, and the detailed submissions along with supporting evidences placed on record, it is seen that the appellant has submitted that the purchases were genuine and duly supported by invoices, ledger accounts, bank statements, and stock registers. It has been explained that jewellery worth Rs.86,18,315/- was purchased, out of which goods worth Rs.60,18,405/- (covered by bills no. 383 & 386) were subsequently returned on 03.11.2016 due to design and quality issues. The return was duly recorded in the stock register and supported by accounting entries. The balance purchase of Rs. 26,00,000/- was retained, duly reflected in stock and sales, and payment for the same was made through banking channels. The appellant has also placed reliance on VAT records, Form 2A matching, and judicial precedents in support of her claim.
On perusal of the evidences, it is observed that:
1.The purchases and return of goods are duly recorded in the regular books of account and supported by stock registers, which were not rejected by the Assessing Officer.
2.Payment of Rs. 26,00,000/- for the retained stock was made through account payee banking channels.
3.The claim of return of goods amounting to Rs.60,18,405/- is supported by contemporaneous entries in stock ledger and appears consistent with the trade practices prevalent in jewellery business, where designs are displayed and returned if not found suitable.
4.VAT credit was duly allowed by the VAT authorities, which also substantiates the genuineness of the underlying transaction.
In the facts and circumstances of the case, the blanket addition of Rs.86,18,315/-made by the Assessing Officer under section 69C of the Act cannot be sustained in its entirety. It is pertinent to note that once goods have been returned, such transactions cannot be treated as bogus purchases so as to suggest inflation of expenditure or suppression of profits, since no corresponding claim of expenditure has been made to reduce the taxable income. However, while the genuineness of M/s J.P. Jewellers has been questioned in departmental enquiries and independent confirmation is not on record, the appellant has produced verifiable evidence that goods corresponding to Rs. 60,18,4051- were actually returned. The explanation is, therefore, accepted to the extent of purchases returned and relief is allowed for Rs.60,18,405/-.
In view of the above discussion, out of the total addition of Rs. 86,18,3151- made by the Assessing Officer, the appellant is entitled to relief of Rs. 60,18,405/- on account of purchases returned.
With regard to the balance amount of Rs.26,00,000/-, it is observed that the said amount is duly recorded in the books of accounts, and the payment has been made through electronic banking channels. The appellant has maintained a proper stock register in which the receipt of stock corresponding to this purchase is duly reflected. Further, the subsequent sale of such stock has also been recorded, and the Assessing Officer has not disputed the sales.
It is a settled principle that when stock is duly reflected in the books and stock register, and the sale proceeds arising from such stock are accepted and taxed by the department, the corresponding purchase cannot be treated as non-genuine. If the Assessing Officer's contention-that the purchases are bogus-is to be accepted, then a logical question arises: how can stock alleged to be never purchased be sold and generate taxable income?
In this context, reliance is placed on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. (ITA No. 5604 of 2010), wherein the Court held that purchases could not be disallowed as bogus merely because the suppliers failed to appear before the authorities. The Court emphasized that where the assessee had produced confirmations, invoices, stock records, and bank statements showing payment by account-payee cheques, such purchases could not be disbelieved solely due to non-verification of vendors. The Court further observed that when sales were accepted, the corresponding purchases could not be treated as fictitious.
Similarly, in the present case, the appellant has submitted:
•A stock register showing inward entry of goods against the said purchase of Rs.26,00,000/-,
•Electronic payment records,
•Subsequent sale duly recorded in the same register.
However, in view of the finding of AO and investigation about supplier, the appellant can't prove genuineness to the full satisfaction case of the AO. And alternatively, the appellant has also accepted in his plea that Gross Profit of the said purchase of Rs.26,00,000/-, may be added. He had also submitted the GP ratio of the last three years that is around 11 %.
In view of the factual matrix, the legal position, and the plea of the appellant, in my opinion, GP of 15% would be appropriate on the said purchase of Rs.26,00,000/- which works out to be Rs.3,90,000/-.
This ground of appeal is accordingly partly allowed.
Aggrieved with the above order, Revenue is in appeal before us raising following grounds of appeal :-
“1.Whether on the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) is justified in restricting the addition to Rs. 3,90,000/- and deleting the addition of Rs.82,28,315 / - ignoring the fact that the addition of Rs.86,18,315/- was made by the AO on account of accommodation entry taken by the assessee in form of fictitious purchase from shell entity- J.P. Jewellers from its then proprietor Sh. Mohit Garg.
3.Whether on the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) is justified in accepting the submission of the assessee that goods amounting to Rs. 60,18,405/- were actually returned by the assessee ignoring the findings of the AO that those were bogus transactions between the assessee and M/s J.P Jewellers(which is a shell entity) in the form of accommodation entry.
3.Whether on the facts and in the circumstances of the case as well as in law, the Ld.CIT(A) has also erred in adding only gross profit of the purchase amounting to Rs.26,00,000/-, ignoring the findings of the AO that the whole amount of Rs.26,00,000/- was accommodation entry taken by the assessee in form of fictitious purchase from shell entity J.P. Jewellers.”
At the time of hearing, ld. DR of the Revenue brought to our notice pages 1 to 5 of the assessment order and submitted that the purchases taken by the assessee from Mohit Garg is nothing but accommodation entry and he objected to the claim of the assessee that the assessee has returned the goods due to quality issues. Further ld. DR brought to our notice page 13 of the first appellate order wherein the ld. CIT (A) has accepted the claim of the assessee towards return of jewellery and sustained the GP @ 15% on the value of stock accepted by the assessee. Ld. DR submitted that whole purchases are non-genuine and sustaining only 15% on the partial purchase is not proper and objected to the findings of the ld. CIT (A).
On the other hand, ld. AR of the assessee heavily relied on the findings of the ld. CIT (A) and submitted that AO has not made any enquiry and further no opportunity was granted to the assessee to cross examine. In this regard, he relied on the decision of coordinate Bench in the case of ACIT vs. The Indure Private Limited in ITA No.4640/Del/2014 order dated 31.12.2025.
Considered the rival submissions and material placed on record. We observed that based on the information available with the Assessing Officer, he noted that assessee has taken accommodation entries from JP Jewellers to the extent of Rs.86,18,115/-. On perusal of the actual purchases recorded by the assessee in her books of account, we noticed that assessee has returned substantial amount of jewellery amounting to Rs.60,18,405/- in the month of November 2016 on the quality issue. The AO has rejected the above claim by the assessee for the reason that jewellery was returned after a gap of two months. Further ld. CIT (A) has appreciated the documents submitted before him and in our view, rightly came to the conclusion that purchases returned cannot be considered as actual purchases. From the record submitted before us, assessee has accepted Rs.26 lakhs worth of jewellery in her books of account, therefore, we can only treat Rs.26 lakhs as actual purchases made by the assessee from JP Jewellers even though the same are claimed to be accommodation entry. Since the AO has not disturbed the sales, ld. CIT (A) found it appropriate to sustain 15% of the purchase value as gross profit. In our considered view, the assessee has properly recorded in her books of account the actual value of purchases. If the purchases treated as bogus without disturbing the sales, the only action available is to sustain the gross profit and not to add whole amount of purchase. Therefore, after considering the detailed findings of the ld. CIT (A), we do not see any reason to disturb the findings of the ld. CIT (A) and upheld the same
In the result, the appeal filed by the Revenue is dismissed.