Case Law Details
ACIT Vs Mahamaya Steel Industries Ltd. (Chhattisgarh High Court)
The appeal was filed under Section 260A of the Income Tax Act, 1961, raising the question of whether the Income Tax Appellate Tribunal (ITAT) was justified in deleting an addition of ₹19,09,67,165 made by the Assessing Officer (AO) on the ground of alleged suppressed yield and unaccounted production and sales.
The assessee, engaged in manufacturing steel products, was subjected to search and seizure proceedings, and an assessment order was passed under Section 153A read with Section 143(3) for the assessment year 2013–14. The AO made additions based on an estimated production yield of 89% in the Steel Melting Shop (SMS) division, comparing it with earlier years and industry averages. The AO rejected the assessee’s books of accounts, citing lower declared yield (82.42%) and insufficient explanation for reduced gross and net profit.
Read SC Judgment in this case: SC Dismisses Revenue Appeal as Assessment Based on Guesswork Without Proof
The assessee challenged this before the Commissioner of Income Tax (Appeals) [CIT(A)], who set aside the addition. The CIT(A) observed that the AO had not identified any specific defect or irregularity in the books of accounts, bills, vouchers, or supporting documents. The AO had relied solely on past assessment orders and assumed industry yield, without presenting any material evidence or seized documents to substantiate claims of unaccounted production or sales. The CIT(A) also noted that conclusions from earlier search assessments, which themselves had been deleted, could not be applied to subsequent assessment years, as each year must be assessed independently. Further, the assessee had provided explanations for variations in yield and profit, including increased costs of raw materials, power, and challenging market conditions.
The Revenue appealed to the ITAT, which upheld the CIT(A)’s findings and dismissed the appeal. The ITAT noted that the AO had merely relied on prior assessments without establishing a factual basis for adopting the 89% yield. It also referred to earlier decisions in the assessee’s own case for previous assessment years, where similar additions had been deleted. The ITAT found no reason to deviate from those findings.
Before the High Court, the Revenue contended that the additions were justified based on evidence from search proceedings and that the CIT(A) and ITAT had erred in deleting them. The assessee argued that the additions were based on suspicion and conjecture without supporting evidence, relying on the Supreme Court’s ruling in Dhakeswari Cotton Mills Ltd., which held that assessments cannot be based on pure guesswork without material evidence.
The High Court examined the record and concurred with the findings of the CIT(A) and ITAT. It observed that the AO’s addition was based solely on estimated yield and past assessments, without any adverse material or evidence to support allegations of unaccounted production. The Court reiterated that, while the AO is not bound by strict rules of evidence, assessments must be based on some material and cannot rest on mere suspicion or guesswork.
The Court held that both appellate authorities had correctly found the addition to be baseless and unsupported by evidence. The rejection of books of accounts was also held to be invalid in the absence of identified defects or discrepancies. The Court further noted that the concurrent findings of the CIT(A) and ITAT were factual in nature, based on evidence on record, and were neither perverse nor contrary to law.
Accordingly, the High Court dismissed the appeal, answering the substantial question of law in favour of the assessee and against the Revenue. The parties were directed to bear their own costs.
FULL TEXT OF THE JUDGMENT/ORDER OF CHHATTISGARH HIGH COURT
1. This appeal preferred under Section 260A of the Income Tax Act, 1961 (for short, ‘the IT Act’) was admitted for hearing on 27-8-2024 by formulating the following substantial question of law: –
“Whether on the facts and in law, the Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 19,09,67,165/- by the Assessing Officer on the ground that the assessee had suppressed its yield and had indulged in unaccounted production and sales?”
2. The aforesaid question of law arises on the following factual backdrop: –
3. The respondent herein/assessee is engaged in the manufacturing of re-rolled products such as heavy steel structural, joist and girder. Search and seizure on the premises of the assessee was conducted on 21-6-2011, assessment was completed on 30-3-2016 and order was passed under Section 153A read with Section 143(3) of the IT Act for the assessment year 2013-14. The Assessing Officer has made an addition on account of unaccounted sales based on an estimated production yield of 89% in the assessee’s SMS Division. The Assessing Officer adopted an estimated yield ratio and proceeded to calculate alleged unaccounted production and consequential sales, resulting in substantial additions over multiple years. The Assessing Officer has made addition of T 19,09,67,165/-by recording following finding:-
“5.2 I have carefully perused the submission of the assessee. However, the submission of the assessee is not acceptable for the following reasons:
(i) The assessee has failed to justify the reasons convincingly for low yield in SMS Division in the F.Y. under consideration as compared to the average annual yield.
(ii) Further, the assessee also failed to explain the reasons for low G.P. and N.P. in the year under consideration satisfactorily despite the fact that many factors crucial for determination of G.P. & N.P. were not adverse in the year under consideration.
Therefore, the contention of the assessee not to reject the books of account is not accepted.
(iii) As regards submission on low yield the contention of the assessee is also far from satisfactory. During the year under consideration the assessee has shown the yield in the SMS Division at 82.42% which indeed is very low as compared to the average annual yield of 89% adopted by the erstwhile A.O. while completing the assessment of last 7 A.Ys including the Block Period from A.Y. 2006-07 to 2011-12 and 2012-13. The basis of adopting yield of 89% has been discussed at length in the assessment order for the above A.Ys. Therefore, the contention of the assessee on account of yield % is not accepted.”
4. Feeling aggrieved and dissatisfied with the order of the Assessing Officer making addition under Section 153A of the IT Act, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) and the CIT (Appeals) by order dated 2-2-2018 allowed the appeal and set-aside the addition of unaccounted sales made by the Assessing Officer. The CIT (Appeals) has summarised the allegations made by the AO in paragraphs 10 & ii of its order as under: –
“10. Vide this office letter dated 7.12.2017 in F. No. CIT(A)-II/RPR/Appeal Proceed/2017-18 dated 07.12.2017 the AO was asked to explain the basis behind adoption of yield at 89%. Vide her letter dated 21.12.2017 the AO enclosed the assessment order of the appellant for the AY 2006-07 to 2012-13 and relied upon the findings and conclusions by her predecessor in the search assessment proceedings completed in the case of the appellant. I also observe that the addition made in the search assessments by adopting 89% yield in the SMS division stands deleted by my ld. Predecessor in his order. As regards decline in GP rate the appellant contended that the Iron and steel sector had been going through a challenging phase owing to sluggish domestic demand and constrains of iron ore supply along with rise in steep rising iron ore prices. It was brought to my notice that the cost of power in SMS division has increased by nearly 56% in comparison to the FY 2009-10 and in the case of rolling mill division it has increased by nearly 52%. My attention was also invited to the increase in cost of raw material and inputs in the rolling mill division such as blooms and billets as well as the increase in the cost of inputs of SMS division.
I observe that the AO has made the addition by estimating the yield at 89% of the total raw material consumed in the SMS division after rejecting the books fo accounts of the appellant. The only reason for rejection of books of accounts adduced by the AO is that the appellant had declared yield in the SMS division less than 89%. In the opinion of the AO as can be seen, the yield of the appellant company should have been same in all the years as the nature of the business is the same as it was during the period covered under the search proceedings. In the assessment order the AO has not brought on record any irregularity or defect in the books of accounts bills and vouchers and other documentary evidences pertaining to the year under consideration. What can be noticed from the assessment order is that the AO has based his assessment on the outcome of the search assessment proceedings for the search period covered during action u/s. 132 of the Act and extended the same to the impugned assessment year i.e. 2013-14 which in my opinion had no bearing for the assessment proceedings of the impugned AY.
There is no merit in the contention of the AO that the conclusions drawn in the search assessment proceedings and enhancements made, which in fact were deleted, can be made basis for assessing the income of other subsequent years without considering the facts and circumstances of earlier years or the year in question. Each year assessment is a separate assessment which attains finality for the year unless disturbed by cogent facts and materials and does not govern later years. The facts and circumstances of each year are to be considered separately and must find reference in the assessments completed.
11. I further observe that the books of accounts of the appellant was subject to tax audit and since the appellant is dealing excisable products it has filed excise returns on monthly basis as well as the VAT returns as per sales tax laws. The evidences of which were produced before the AO who examined the same including the bills and vouchers. With a view to bring on record the basis behind adoption of yield at 89% the AO was asked to convey the basis for doing so. From the remand report of the AO I find that reliance has been placed by her on the assessment order passed u/s. 153A r.w.s 143(3) for the search period i.e. AY 2006-07 to 2012-13. Importantly even in the assessment order pertaining to search period there is no reference of any seized material or any other documentary evidences to establish the fact that the appellant had indulged in unaccounted production and unaccounted sales. The additions were made mainly on the pretext that the average yield in the industry is nearly 89% and the yield declared by the appellant is low as compared to the yield shown by other manufacturers of Chhattisgarh. There could be several reasons for variation of GP and NP but the variation per se is not sufficient to draw an inference that the books of accounts are liable to be rejected u/s. 145 until and unless specific defect or irregularity are pointed out and brought on record pertaining to the books of accounts of the appellant.”
5. Questioning legality, validity and correctness of the order passed by the CIT (Appeals) deleting the addition made by the AO, the Revenue preferred an appeal before the ITAT and the learned ITAT concurred with the findings of the CIT (Appeals) and dismissed the appeal by the impugned order resulting into filing of appeal before this Court.
6. Amit Chaudhari, learned Senior Standing Counsel for the Income Tax Department i.e. the appellant herein/Revenue appearing through Video Conferencing, would submit that both the authorities were absolutely unjustified in deleting the addition of unaccounted sales based on an estimated production yield of 89% which is based on the evidence available on record as a result of search and seizure conducted and the assessment order has rightly been passed under the provisions contained in Section 153A read with Section 143(3) of the IT Act which could not have been reversed by the CIT (Appeals) and could not have been affirmed by the ITAT, therefore, the appeal be allowed.
7. Mr. Sumit Nema, learned Senior Counsel appearing on behalf of the respondent herein/assessee, would support the impugned orders passed by the CIT (Appeals) and the ITAT and submit that the aforesaid findings recorded by the two authorities deleting the addition of T 19,09,67,165/- were made only on the basis of suspicion which was totally impermissible in law in light of the decision of the Supreme Court in the matter of Dhakeswari Cotton Mills Limited v. Commissioner of Income Tax, West Bengal’. Therefore, the aforesaid findings are totally findings of fact and there is no demonstrable perversity or error apparent on the face of record cited by the appellant/Revenue warranting interference by this Court. As such, the findings with regard to unaccounted sales based on estimated production yield have rightly been set-aside by the CIT (Appeals) which has rightly been affirmed by the ITAT and therefore the present appeal deserves to be dismissed.
8. We have heard learned counsel for the parties and considered their rival submissions made herein-above and also went through the record with utmost circumspection.
9. The Assessing Officer, for the reasons noticed herein-above, made an addition of T 19,09,67,165/- on account of alleged unaccounted sales based on an estimated production yield of 89% in the Steel Melting Shop (SMS) Division of the assessee. However, for the reasons mentioned above, finding that the Assessing Officer has proceeded on the basis of suspicion and conjectures, the CIT (Appeals) has set-aside that addition, which the ITAT has concurred with by holding as under: –
“9. We have carefully considered the rival submissions and perused the orders of the authorities below as well as material placed before us by way of paper book referred to and relied upon at the time of hearing. We observe that the basis of additions towards lower yield of production by the assessee in its SMS/Furnace division is on account of comparison with average industry yield of 89% assumed by the AO. Significantly, in this regard, we observed that the CIT(A), on objection raised by the assessee to such presumed yield, wrote letter dated 07.12.2017 to the AO for the purpose of understanding the basis behind adoption of yield at 89%. The AO, however, vide letter dated 22.12.2017 merely enclosed the assessment order for AY 2006-07 to 2012-13 for the purposes of adopting such standard yield. It is evident that the AO in the instant case has merely proceeded on the findings arrived at by the AO in A.Y. 2006-07 to 2012-13. At this stage, it would be pertinent to take note of decision of the co-ordinate bench concerning A.Ys. 2009-10 to 2012-13 on the same very issue in the case of the assessee in ITA Nos. 232 to 235/RPR/2o14 order dated 07.11.2019. The coordinate bench after taking note of the relevant facts emerging on record, found substantial merit in the decision rendered by the CIT(A) in those years and thus endorsed the action of the CIT(A) in deleting such additions on account of lower yield. …
10. In the light of the view taken by the co-ordinate bench in the case of assessee in earlier assessment years, the issue is no longer res Integra. It is evident that issue is squarely covered by the decision of the co-ordinate bench in assessee’s own case for AYs. 2009-10 to 2012-13 wherein also the appeal of the Revenue was dismissed after elaborate discussion on factual and legal matrix. The revenue could not bring any cogent reason to take a departure from the earlier view. Thus, in consonance with the view expressed earlier, we do not see any merit in the plea of the Revenue for restoration of the additions deleted by the CIT(A) on this score.”
10. However, at this stage, it would be appropriate to notice the decision of the Supreme Court in Dhakeswari Cotton Mills Limited (supra) in which their Lordships of the Constitution Bench of the Supreme Court dealing with the jurisdiction while making order under Section 23(3) of the Income Tax Act, 1922 and also considering the scope of power under Section 23(3) and limits thereon, held that while making the assessment under sub-section (3) of Section 23 of the Act, the Income Tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all, and observed as under:-
“9. As regards the second contention, we are in entire agreement with the learned Solicitor General when he says that the Income Tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under sub-section (3) of Section 23 of the Act, the Income Tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under Section 23(3). The rule of law on this subject has, in our opinion, been fairly and rightly stated by the Lahore High Court in Gurmukh Singh v. CIP .”
11. Reverting to the facts of the present case in light of the principles of law relating to Section 145(3) of the IT Act and also considering the principles of law laid down by their Lordships of the Supreme Court in Dhakeswari Cotton Mills Limited (supra), it is quite vivid that the CIT(Appeals) and the ITAT, both, after objectively analysing the factual situation, found complete absence of any adverse material against the assessee which can support the allegation of the AO towards unaccounted production presumed on the basis of alleged low yield declared by the assessee. Thus, in complete absence of any adverse material, both the authorities have concurrently reached to the conclusion that the addition made by the AO is baseless and without any evidence, therefore, the rejection of books of accounts is invalid and addition made by the AO on account of alleged suppression of yield is based upon mere guess work. It was further held by the two authorities that the yield declared by the assessee is neither low nor the books maintained by the assessee could be impeached by some tangible evidence/material on record and therefore the ITAT has rightly confirmed the order of the CIT (Appeals) and proceeded to dismiss the appeal filed by the Revenue. In our considered opinion, the concurrent finding recorded by the two authorities holding that the addition made by the Assessing Officer for the assessment year 2013-14 is baseless and without any evidence/material, is a pure and simple finding of fact based on the evidence available on record, which is neither perverse nor contrary to the record. Accordingly, we proceed to dismiss the appeal and the substantial question of law is answered in favour of the assessee and against the Revenue.
12. In the result, the appeal stands dismissed leaving the parties to bear their own cost(s).
Notes:
1 (1954) 2 SCC 602
2 1944 SCC OnLine Lah 38 : (1944) 12 ITR 393 (Lah)
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