Shyam Steel Industries Ltd. Vs DCIT (ITAT Kolkata)
Additions for alleged cash coal purchases and under-invoiced mill-scale sales deleted in absence of corroborative evidence: Kolkata ITAT
The Kolkata Bench of the Income Tax Appellate Tribunal has deleted additions arising from alleged unrecorded coal purchases and under-invoicing of mill-scale sales, holding that additions cannot be sustained merely on the basis of third-party documents, CCTV footage, a retracted statement, conjectures or presumptions, without corroborative material.
Alleged unrecorded coal purchases
A search conducted in the case of the Majee Group allegedly revealed that the assessee had purchased 9,253.55 metric tonnes of coal, valued at approximately ₹4.44 crore, in cash and outside its books.
Relying primarily upon a third-party document marked “SMVD-06”, the Assessing Officer treated the entire alleged purchase value as unexplained expenditure under Section 69C.
In appeal, the CIT(A) observed that the entire purchase amount could not be added because:
- No corroborative seized material had been produced;
- The coal was allegedly consumed in manufacturing sponge iron;
- The assessee’s books had not been rejected;
- No abnormality was found in its production, consumption or input-output ratios; and
- The sales and GST returns had not been disputed.
Nevertheless, the CIT(A) presumed that the possibility of some unaccounted coal trading could not be ruled out. He, therefore, applied the assessee’s net profit rate of 5.25% to the alleged purchases and sustained an addition of approximately ₹23.29 lakh.
Profit estimation based on a mere possibility impermissible
The Tribunal noted that the AO had accepted the assessee’s production, sales and consumption figures and had not rejected its books of account. The alleged cash purchases were inferred primarily from documents recovered during a search of a third party, without independent corroboration against the assessee.
Having expressly found that no corroborative evidence supported the alleged purchases, the CIT(A) could not sustain a profit addition merely by observing that the possibility of unaccounted trading could not be ruled out.
The Tribunal held that such a conclusion was based entirely on conjectures and surmises. Following its earlier decision in Shakambhari Ispat & Power Ltd., it directed the AO to delete the entire addition.
Alleged under-invoicing of mill-scale sales
The second addition arose from CCTV footage showing the company’s cashier handing over a bag containing approximately ₹17 lakh to the company’s president.
During the search, the president allegedly stated that certain mill-scale sales were under-invoiced to generate cash for salary payments. On this basis, the AO presumed that the assessee generated average unaccounted cash of ₹16.50 lakh per month.
After applying an annual inflation factor, the AO estimated suppressed turnover of ₹1.48 crore for the relevant year. Applying a gross profit rate of 19.16%, he made an addition of approximately ₹28.33 lakh.
The assessee contended that the statement had been retracted shortly after it was recorded. It explained that the ₹17 lakh formed part of the cash balance regularly maintained at the factory and had been handed over merely for safekeeping because the cashier was leaving the premises.
The cash book showed a factory cash balance of ₹23 lakh, besides petty cash of approximately ₹4.65 lakh. The assessee also stated that a minimum cash reserve of ₹15 lakh was routinely maintained for emergencies.
The CIT(A) rejected the application of the gross profit rate but sustained ₹7.76 lakh, being 5.25% of the alleged suppressed turnover.
Retracted statement required independent corroboration
The Tribunal found that the assessee had furnished the retraction affidavit and cash books before the AO through its submission dated March 13, 2025. The AO’s observation that these materials had not been produced was, therefore, factually incorrect.
It further found that:
- The cash reflected in the CCTV footage was supported by the assessee’s books;
- No document or evidence establishing under-invoiced sales was recovered;
- The CCTV footage merely showed the physical transfer of cash and did not prove its alleged source;
- The statement relied upon by the AO had been retracted; and
- No independent material corroborated the contents of that statement.
Referring to the CBDT Circular dated March 10, 2003, the Tribunal reiterated that tax authorities should focus upon collecting credible evidence during search proceedings instead of obtaining confessional statements regarding undisclosed income.
It also relied upon the Supreme Court decisions in Omar Salay Mohamed Sait v. CIT and Lal Chand Bhagat Ambica Ram v. CIT, which recognise that additions cannot be founded upon mere suspicion, conjecture or presumption.
Accordingly, the Tribunal deleted the addition relating to alleged under-invoicing as well.
Decision
The Tribunal allowed the assessee’s appeals for both assessment years and directed the AO to delete the additions relating to:
- Alleged unaccounted coal purchases; and
- Alleged under-invoicing of mill-scale sales.
The ruling underscores that even an estimated profit addition requires a proved factual foundation. Once the books, production, consumption and sales stand accepted, neither third-party papers nor a retracted statement can justify an addition without evidence connecting the alleged transaction with the assessee.
Cases Discussed
- Shakambhari Ispat & Power Ltd.
- CIT v. President Industries
- Omar Salay Mohamed Sait v. CIT
- Lal Chand Bhagat Ambica v. CIT
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT KOLKATA
These appeals preferred by the assessee are against the orders of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (hereinafter referred to as the “ld.CIT(A)”], even dated 22.04.2026 for the Assessment Years (AY) 2019-20 and 2020-21 respectively.
2. The issue raised by the assessee in Ground No.1 is general in nature, does not require any adjudication.
3. The issue in Ground No.2 is against the order of ld. CIT(A) sustaining the addition of Rs.23,23,359/- by applying Net Profit (NP) at the rate of 5.25% on account of alleged bogus purchases from Majee Group of Rs.4,43,68,734/-.
4. The facts of the case in brief are that the assessee filed its return of income on 30.11.2019, declaring total income of Rs.133,67,24,010/- under normal provisions and book profit of Rs.168,66,08,136/- u/s 115JB of the Income-tax Act, 1961 (In short, ‘the Act’), which was processed u/s 143(1) of the Act. The assessee is engaged in the business of manufacturing of Iron ore pellet, sponge iron, billet, TMT bars, Ferro Alloys and power generation etc. A search action u/s 132 as well as survey u/s 133A of the Act were carried out on 15.06.2023 in financial year 2023-24 by the DDIT (Inv.), Unit – 2(4), Kolkata in case of “Shyam Steel Group”. The assessee also covered u/s 132 of the Act during the search and several documents/materials were impounded. Accordingly, the case of the assessee was re-opened by issuing notice u/s 148 of the Act on 10.04.2023 after passing order u/s 148A(A) on 10.04.2023 after taking into the reply of the assessee to the notice u/s 148A(b) of the Act. The Assessing Officer (In short, ‘the AO’) observed from the report of the DDIT (Inv.), Unit – 2(4), Kolkata that on the basis of search conducted on 05.11.2020 at the premises of “Majee Group”, the said part was supplying coal to various entities and assessee was one of the beneficiaries of huge quantity of coal from “Majee Group”. The AO had estimated the quantity of 9,253.55 metric tons, the value there of was estimated at Rs.4,43,68,734/-. The AO, accordingly, added the same u/s 69C of the Act as unexplained expenditure in the assessment framed u/s 147 r.w.s. 143(3) of the Act, dated 26.03.2025.
5. In the appellate proceedings, the ld. CIT(A) after taking into account the reply and submissions of the assessee, partly allowed the appeal by directing the AO to estimate the net profit @ 5.25% of the said unaccounted purchases, thereby sustaining the addition to the tune of Rs.23,29,359/- and the remaining was deleted to the tune of Rs.4,20,39,375/-. The ld. CIT(A) noted the entire alleged purchases of coal cannot sustained unless corroborated by the seized documents. Moreover, the coal was consumed in the manufacturing of sponge iron. The AO has neither rejected the books of account nor demonstrated any abnormality in production, consumption, or input output ratios. The ld. CIT(A) also noted that the AO has not disputed the quantum of the sales vis-à-vis GST returns filed by the appellant, showing both input output credits. However, the ld. CIT(A) thereafter noted that some possibilities of some unaccounted trading activity of coal could not be entirely ruled out and thus, partly allowed the appeal.
6. We have heard rival submissions and perused the materials available on record. We find that following a search action was conducted u/s 132 of the Act on the assessee, various incriminating materials were found and seized. Accordingly, the case of the assessee was re-opened u/s 147 of the Act by issuing notice u/s 148 of the Act after procedure laid down u/s 148A of the Act. The AO, during the course of proceedings, noted that the assessee has purchased some coal on cash basis which are not recorded in the books of account as revealed during the course of search in case of “Majee Group”. We note that the AO primarily relied on the documents marked as ‘SMVD-06’ found by the Investigation Wing, in which the assessee-company was stated to be one of the beneficiaries. The AO estimated the quantity purchased of coal at 9,253.55 metric tons estimatedly valued at Rs.4,43,68,734/-. We also note that AO has accepted the sales/consumption of coal as well as production made by the assessee. The books of account were also not rejected. The AO merely relied on the evidences found in the search of third party, which were unsubstantiated. The ld. CIT(A) in the appellate proceedings, categorically recorded a finding, the addition made by the AO by treating the alleged cash purchases and unexplained expenditure is not sustainable on the ground that there was no corroborative seized materials and evidences brought on record by the AO. We also note that manufacturing of sponge Iron was fully by accepted by the AO. The AO has also not rejected the books of account by demonstrating any abnormality in the production or input-output ratio. Having recorded all these findings by the ld. CIT(A) , he assumed and presumed that the assessee might have made some sales of coal outside the books which is hypothetical and only presumptions and thus directed the AO to apply a rate of profit of 5.25% on the alleged unrecorded cash purchases of coal. Therefore, we are inclined to set-aside the order of ld. CIT(A). In our opinion, the conclusion drawn by the ld. CIT(A) is purely on conjecture and surmises and sans any basis. The issue is squarely covered by the decision of this Tribunal in case of M/s Shakambhari Ispat & Power Limited, ITA No. 931/Kol/2025, order dated 02.01.2026 wherein an identical issue has been decided by this Tribunal in favour of the assessee. We, therefore, respectfully following the same, modify the order of ld. CIT(A) and direct the AO to delete the addition. The ground no. 1 is allowed.
7. The issue in Ground No.2 is against the order of ld. CIT(A) part confirming the addition of Rs.7,76,160/- as alleged undisclosed business income on account of under invoicing of sale of mill scales calculated arbitrarily based on the net profit percentage of 5.25% for the year when it was duly explained that there was no under invoicing sale of mill scales as alleged by the AO.
8. The facts of the case in brief are that during assessment, the assessee was asked to explain as to why the amount of Rs.1,47,84,000/- should not be treated as income, alleging it represented cash generated through under-invoicing of mill scale sales on the premise that CCTV footage on 05.06.2023, at 2:57:33 PM, showed Shri Niraj Patwari, the cashier of the company, handing over a bag containing Rs.17 lacs approx. to Shri Deepak Chowdhary, the President of the company. The AO noted that Shri Deepak Chowdhary has admitted in his statement recorded u/s 132(4) of the Act that the company sells Mill Scale to different local vendors in regular course of business and some of such sales were under-invoiced to meet cash requirements for payment of salary. The assessee was asked to explain as to why a sum of Rs.1,47,84,000/- 1 should not be added to the income of the assessee as cash generated from under invoicing of sale of mill scales. In arriving at these figures, the learned AO assumed inflation @ 6% year on year basis and average cash generated per month of Rs.16.50 lacs. In reply, the assessee submitted that there was no under invoicing of sale of mill scales as alleged in the notice. Shri Deepak Chowdhary has retracted the statement and clarified that the source of the cash of Rs.17,00,000/- was the available cash balance at the factory in Durgapur, which was handed over to him by Shri Niraj Patwari for safekeeping, as Shri Niraj Patwari was leaving the premises for that day. This practice of transferring cash between Shri Niraj Patwari and Shri Deepak Chowdhary was routine one, with cash being kept with Shri Niraj Patwari and handed over to Shri Deepak Chowdhary as and when required as per the circumstances. The same cash used to be returned back to Shri Niraj Patwari when he resumed office/factory. The cash book was also submitted to evidence the sufficient cash in hand as on 05.06.2023. However, the submissions filed by the assessee were not appreciated and the learned AO with a prejudiced mind and preset notion held that there was under invoicing of sale of mill scale in AYs. 2015-16 to 2024-25. He considered it just and reasonable to apply Gross Profit (GP) to estimate the income on alleged unaccounted turnover for the year. He noted that the assessee has reported GP of 19.16% during A.Y. 2019-20 and accordingly added Rs.28,32,641/-, by applying 19.16% on Rs.1,47,84,000/- as undisclosed income.
9. In the appellate proceedings, the ld. CIT(A) partly allowed the appeal by observing and holding as under:
“After considering the assessment order as well as submission of the appellant, it has been observed that Shri Deepak Chowdhury retracted his statement on 19/06/2023, just two days after it was recorded by the search team. Further, no evidence has been detected by to search team which could conclusively prove under-invoicing of mill scale sales. However, there was an indication of cash transaction from the CCTV footage. More so, no explanation was offered by Shri Lalit Beriwala, director of the assessee company. Shri Deepak Chowdhary, president of the assessee company and Shri Niraj Patwari, cashier about the source of Rs. 17,00,000/- within the reasonable time allowed by the search team. If the cash of Rs. 17,00,000/- were part of regular books of account, it could have been explained at the time of search by producing the relevant cash book. But no such effort has been given by the appellant.
4.4 The AO, while making the addition on account of suppressed sales, relied on the judicial pronouncement, especially on the decision of the Hon’ble Gujarat High Court in CIT v. President Industries (258 ITR 654)
In the aforesaid case, the Hon’ble Court held that –
“Section 69B, read with section 256, of the Income-tax Act, 1961 Undisclosed investments – Assessment year 1994-95 – Whether amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales Held, yes –
During survey it was found that assessee had not disclosed certain sales in books of account Whether Tribunal was justified in holding that unless there was a finding that investment by way of incurring cost in acquiring goods which had been sold, had been made by assessee and that had also not been
disclosed, only net profits embedded in sales, and not wholesale proceeds itself, would be treated as undisclosed income of assessee – Held, yes”
In the said case, Hon’ble Gujarat High Court upheld the decision of the Tribunal wherein the Tribunal found that the entire sales could not have been added as income of the assessee for the assessment year in question but only to the extent the estimated profits embedded in the sales for which the net profit rate was adoptedentailing addition of income on the suppressed amount of sales. In view of the established law, the mandate is that only a net rate of profit can be applied in respect of the goods sold outside the books of account. Therefore, it is obvious that in the light of the material on record the Assessing Officer’s approach in arriving at the gross profit ratio in the present case is not proper and correct.
After following the same principle, I am of the opinion that the net profit rate is most appropriate and reasonable to arrive at the figure of unaccounted income from the estimated suppressed sales. It has been observed from the Tax audit report that the net profit ratio to turn over of the appellant company during the relevant previous year was 5.25%. Therefore, estimated profit is calculated @5.25 % on the suppressed amount of sales of Rs. 1,47,84,000/- i.e. Rs.7,76,160/- and addition to that extent is confirmed and the remaining addition of Rs.20,56,481/- is hereby deleted.
As a result, the appeal on this ground is partly allowed.”
10. We find that in this case during the course of search, statement of Shri Deepak Chowdhury was recorded on 19.06.2023, which was retraced just two days after it was recorded by the search team. Further, no evidence has been detected by search team, which could conclusively prove the under-invoicing of mill scale sales. We note that it was admitted that company sells mill scale to local vendors and some of the sales were under-invoiced for payment of salary. Based on the said statement, the AO opined that cash required to be paid monthly to employees, ranged between sum of Rs.15 to 18 lakh, which was generated out of under-invoicing of mill scale sales. The AO estimated cash of Rs.15 lakh and Rs.18 lakh was to be the average rate of Rs.16.5 lakh per month every year. The AO noted that the retraction statement and cash flow were not produced by the assessee. The AO estimated the unaccounted turnover at Rs.1,47,84,000/- and applied a GP rate 19.16% and accordingly, added Rs.28,32,614/- to the income of the assessee. We note that the him , was wrong as assessee vide submission dated 13.03.2025 furnished retraction affidavit/cash books before the AO. We also note that the source of cash of Rs.17 lakh, which was handed over to Deepak Chowdhury by Shri Niraj Patwari for safe keeping, while leaving the premises was out of cash available in the books maintained by the assessee and this is a common practice between Shri Niraj Patwari and Deepak Chowdhury as and when the situation arises and the same was returned back to Shri Niraj Patwari when he resumes office/factory. The cash balance at the factory stood at Rs.23,00,000/- with a petty cash balance of Rs.4,64,556/-. We also note that minimum cash reserve of Rs.15,00,000/- is always maintained at the factory for emergency purposes and therefore, the cash of Rs.17,00,000/- was in question was part of the available cash balance at the factory premises. We also note that AO has not brought any evidence of under-invoicing mill sales scale and totally relied on the CCTV footage which was also wrongly interpreted by the AO. Therefore, we find that the addition made by the AO is wholly on the basis of retracted statement which is wrong and cannot sustained. The issue is squarely covered by the CBDT Circular No. F.No.286/2/2003-IT(Inv.), dated 10.03.2003 (vide page no.21 of paper book). In our opinion, the statement has no evidentiary value unless the material is brought on record substantiating the contents of the statements. Therefore, the addition made by the AO and as partly confirmed by the ld. CIT(A) is only on the basis of presumption and surmises and cannot be sustained. The case is squarely covered by the decision of Hon’ble Apex Court in case of Omar Salay Mohamed Sait vs. CIT reported in [1959] 37 ITR 151 (SC) and also in Lal Chand Bhagat Ambica vs. CIT [1959] 37 ITR 288 (SC) wherein after following the decision of Omar Salay Mohamed Sait (supra) has been followed and it has been held that no addition can be made on the basis of mere surmises ,conjectures and presumptions .Therefore, considering the said facts, we are inclined to modify the order of ld. CIT(A) and AO is directed to delete the addition. Accordingly, Ground No. 2 is allowed.
ITA No.2244/Kol/2026 (A.Y. 2020-21):
11. The issue raised in this appeal is substantially similar to one as decided by us in ITA No.2243/Kol/2026 for A.Y. 2019-20. Therefore, our decision in ITA No.2243/Kol/2026 (supra) would apply, mutatis mutandis, to this appeal as well. Accordingly, the AO is directed to delete the additions made. The appeal filed by the assessee in ITA No.2244/Kol/2026 for A.Y. 2020-21 is also allowed.
12. In the result, the appeals of the assessee are allowed.
The order is pronounced in the open Court on 11/09/2026.
