Holding that the quantity of jewellery claimed by a taxpayer is reasonable in view of his age, family circumstances, occupation and customary gifts, the Nagpur bench of income tax appellate tribunal (ITAT) deleted a ₹3.86 lakh addition made for jewellery found during a search. The tribunal also held that diamond and precious-stone-studded jewellery cannot be kept outside the scope of CBDT instruction No1916 merely because such ornaments contain diamonds or other precious stones.
In an order last month, the bench of Anubhav Sharma (judicial member) and Khettra Mohan Roy (accountant member) said, "As regards to the item ring jhumka being 43.9gms, it is explained that the same was received as gift from his relatives on various occasions...In a Rajasthani family, males do wear a bali in the ears, ring jhumka is another form of ornament used for keeping keys. Whatever may be the case, in the instant case, the assessee has owned the item and explained the source. It is customary in Hindu traditions that gold ornaments, jewellery, personal effects are gifted on important occasions of an individual’s life starting from his birth...assessee is a 41-year-old Hindu man, married 15 years ago and has two daughters. Considering the above facts and social status and standing of assessee, ornaments of 43.9gms acquired as gifts throughout the life of assessee on various occasions seems to be reasonable and not excessive. Both items together weighing 48.9gms are within the limits prescribed by the CBDT instruction no1916 for a male member."
In a separate but connected issue, the bench ruled that the enhanced 60% tax rate under Section 115BBE of the Income Tax (I-T) Act could not be applied to the taxpayer because the search in his case took place before the enhanced rate came into force.
Search Unearthed 2,434gm of Jewellery
The case arose from a search and seizure operation conducted under Section 132 of the I-T Act on 26 July 2016 in the DP Jain group, during which Nirmal Kumar Agrawal, the assessee in the case, was also covered.
The search resulted in the discovery of jewellery weighing 2,434gm, valued at ₹90.59 lakh. Of this, 1,314gm, valued at ₹33.33 lakh, was seized. Cash of ₹7.06 lakh was also found, of which ₹5 lakh was seized.
Mr Agrawal, a practising chartered accountant (CA) and partner in SNJ & Associates, subsequently filed his return for assessment year (AY)17-18 declaring total income of ₹7.16 lakh.
The assessing officer (AO) completed the assessment under Section 143(3) and determined Mr Agrawal's total income at ₹57.16 lakh, including an addition of ₹50 lakh under Section 69A on account of what was treated as unexplained money or undisclosed income.
The commissioner of income tax (appeals) (CIT-A), however, granted substantial relief and ultimately sustained an addition of ₹386,186 relating to four items of jewellery.
These comprised jewellery with a gross weight of 158gm and net weight of 104.70gm, containing 6.90 carats of stones and diamonds. The CIT(A) had held that the source of these items remained unexplained and took the view that CBDT instruction No1916, dated 11 May 1994, dealt with gold jewellery and did not extend to diamond-studded ornaments.
Mr Agrawal challenged the addition before the tribunal.
Wife's Jewellery Could Not be Taxed In Husband's Hands
ITAT first examined two of the four disputed items, weighing 55.8gm. Mr Agrawal's wife, Astha Agrawal, had claimed ownership of a pendant set with a ruby weighing 25.5gm and a bracelet set weighing 30.3gm. The explanation given to the tax authorities was that she had received these ornaments from her parents at the birth of her two daughters.
The tribunal noted that the ownership had been consistently claimed by the wife and that the jewellery was identified in her name in the relevant search documentation. It found no evidence showing that Mr Agrawal himself had invested in these items.
The bench, therefore, held that merely finding jewellery at the family's common residence was not sufficient to treat it as an unexplained investment in the husband's hands.
It deleted the addition relating to the 55.8gm of jewellery, valued at ₹257,615.
72.6gm Already Backed by Records
The tribunal then considered the remaining jewellery claimed by Mr Agrawal. His total claimed jewellery holding was 121.5gm. Of this, 72.6 gm had already been recorded in his individual balance sheet and was acquired through banking transactions between 2008 and 2011.
The bench noted that payments for the jewellery were made through his IndusInd Bank account on 23 October 2008, 27 April 2009 and 29 August 2011. The purchases were, therefore, supported by books and banking records, and the source had already been explained before the lower authorities.
That left 48.9gm of jewellery for which the tribunal had to consider whether the assessee's explanation was sufficient.
48.9gm Held Reasonable Considering Family Circumstances
The Nagpur bench of ITAT took into account that Mr Agrawal was 41 years old, married for 15 years and had two daughters. He is a practising CA and, according to the record, came from an affluent Hindu family where jewellery was traditionally given on significant family occasions.
Against that background, the tribunal considered 48.9gm of jewellery acquired over the course of his life to be a reasonable quantity.
The bench also referred to CBDT instruction No1916 which provides guidelines concerning jewellery found during search operations. The tribunal noted that the remaining 48.9gm was below the 100gm benchmark referred to in the instruction for a male member.
Importantly, the tribunal treated the quantity already accounted for in the books and purchase records separately and did not count it against the reasonable-possession limit.
Diamond-studded Jewellery Not Automatically Outside CBDT Guideline
One of the more significant aspects of the ruling concerns the treatment of diamond jewellery. The CIT(A) had rejected the taxpayer's reliance on CBDT instruction No1916 on the ground that it referred to gold jewellery rather than diamond-studded jewellery.
The Nagpur bench of ITAT disagreed with the ruling. It held that the presence of diamonds or precious stones does not, by itself, take an ornament outside the scope of the instruction. The tribunal noted that gold jewellery commonly incorporates diamonds and other precious stones and found the narrower interpretation adopted by the CIT(A) unsustainable.
The bench specifically deleted the addition relating to a 5gm diamond-studded ring valued at ₹21,435. The tribunal also considered a 43.9gm 'ring jhumka'. The taxpayer had explained that the ornament had been received as gifts from relatives on various occasions.
The CIT(A) had questioned the explanation, in part, because the ornament was considered unusual for a male taxpayer. The tribunal rejected that reasoning, observing that men also wear ornaments and that the form and nomenclature of jewellery can vary across communities and traditions.
Taking the taxpayer's age, family circumstances, social standing and the explanation regarding gifts into account, the bench held the 43.9gm item to be reasonable as well.
With this, the entire addition of ₹3.86 lakh sustained by the CIT(A) in respect of the four items was deleted.
60% Section 115BBE Rate Not Applicable to 2016 Search
The tribunal also ruled in favour of Mr Agrawal on the tax-rate issue. The taxpayer had challenged the application of Section 115BBE at the enhanced rate of 60% for AY17-18, arguing that the search took place on 26 July 2016, before the relevant amendment came into effect.
The bench agreed. It held that the enhanced rate under Section 115BBE operates prospectively and applies from 15 December 2016. Since the search in Mr Agrawal's case took place several months earlier, on 26 July 2016, the enhanced rate could not be applied to him.
In reaching this conclusion, the tribunal referred to the Madras High Court's decision in SMILE Microfinance Ltd vs ACIT and the Rajasthan High Court's May 2026 decision in Deepak Maratha vs Union of India.
The Nagpur bench noted that the Rajasthan High Court had also treated the Taxation Laws (Second Amendment) Act, 2016, as prospective in its operation, subject to the dates specified for the respective amendments.
The ruling makes clear that the CBDT's jewellery guidelines do not apply only to plain gold ornaments when jewellery found during a search contains diamonds or other precious stones.
(ITA No530/NAG/2025 Date: 10 August 2026)
