Only 3 Out of 26 Gold Transactions Found Bogus: ITAT Orders Re-computation Based on Gross Profit Margin [Read Order]

Shah Traders, the assessee, is a partnership firm engaged in the gold and jewelry business. For the Assessment Year 2016–17, it filed its return of income declaring Rs. 3.73 crore. The return was processed under Section 143(1) of the Income Tax Act.

Later, based on information from the Investigation Wing, Mumbai, the AO reopened the case under Section 147. The reopening was based on a survey conducted on Swastik Corporation, during which its proprietor, Mr. Bijal Ashok Shah, admitted to issuing bogus sales bills and providing accommodation entries.

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The AO argued that Shah Traders received bogus purchase bills from Swastik Corporation totaling Rs. 3.62 crore. Although the assessee submitted purchase invoices, bank payment records, stock registers, and other documentation, the AO dismissed these, stating that no evidence of actual delivery of gold or its use in manufacturing was submitted. The AO also denied the assessee’s request to cross-examine the vendor and proceeded to add the entire Rs. 3.62 crore under Section 69C, treating it as unexplained expenditure.

The assessee’s counsel argued that only three out of twenty-six transactions were even alleged to be non-genuine and that the vendor had retracted his earlier statement by filing an affidavit shortly after the survey. They argued that gold, as a standardized material, loses its identity during processing into jewelry, making it impractical to trace exact batches. They further pointed out that no addition had been made in the vendor’s hands for the same transactions during the year under consideration.

The two-member bench comprising Narendra Kumar Billaiya (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that the reopening of assessment was valid, but only two of the three disputed transactions pertained to the year under appeal, and that the assessee failed to prove actual delivery of gold for those two transactions.

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The tribunal explained that since the sales were not disputed and the entire set of transactions was not found bogus, a complete disallowance was not justified. Instead, the tribunal directed that only the profit element embedded in the non-genuine purchases should be added. Citing the Bombay High Court decision in PCIT v. M. Haji Adam & Co., the tribunal directed the AO to compute the addition based on the gross profit rate applied to such purchases, and to ensure no duplication of income already offered by the assessee.

The tribunal remanded the matter to the AO for fresh computation and allowed the appeal for statistical purposes.

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