ITAT Chandigarh Deletes ₹1.12 Cr Addition – Accepts Revised Income Declared in Mining Case

ACIT Vs Northern Royalty Company (ITAT Chandigarh)

Assessee Company, engaged in mining activities under licences from the Haryana Government, was part of the Majha Group subjected to a search u/s 132 on 05.04.2018. Based on seized digital & physical records, proceedings were initiated u/s 153C & AO completed assessment estimating net profit at 25% on gross receipts of ₹36.78 crore, resulting in an addition of ₹3.68 crore.

On appeal, CIT(A) held that the comparables used by AO were not functionally similar, reduced the rate to 18%, & restricted the addition to ₹1.12 crore. Revenue appealed against this reduction, while Assessee filed a cross-objection contending that even 18% was unjustified.

Assessee’s Arguments

• Assessee belonged to a group of nine mining entities maintaining separate books though consolidated data was found during search.
• It had already declared higher profits of 14–15% in a revised return, much above the actual NP rate emerging from seized records (1.47%).
• CIT(A) wrongly disallowed genuine expenses such as mining instalments, VAT, CSR, environmental protection, & labour welfare costs, which were duly recorded & supported by seized data.
• If all recorded expenses were considered, the profit rate would be below 1.5%, & no further addition was warranted.
• Approval u/s 153D for the assessment was mechanical, being granted in a single day for multiple group cases without application of mind.

Tribunal’s Findings/ Decision

• Bench noted that identical issues had already been adjudicated in Karaj Singh vs ACIT (ITA No.726/Chandi/2022), involving the same group & seized material.
• After analyzing the group’s combined financial data, Tribunal observed that net profit rate from seized material was only 1.47%, far below the 18% estimated by CIT(A).
• The profit rate declared by Assessee in its revised return (14–15%) was substantially higher than actual results reflected in seized data.
• Tribunal also emphasized the principle of consistency, noting that for AY 2017-18, NP rate of 2.28% had been accepted under identical business conditions; therefore, applying 18% in the current year was unjustified.
• ITAT deleted the addition of ₹1.12 crore sustained by CIT(A).
• Directed AO to accept the revised return of income filed by Assessee.
• Revenue’s appeal was dismissed, & Assessee’s cross-objection was partly allowed (as legal grounds became infructuous).

Tribunal reaffirmed that profit estimation must reflect business realities & seized evidence. When declared profits are significantly higher than the profit indicated by seized data, no further addition can stand. Arbitrary enhancement of NP rate, without new incriminating material, violates the principles of consistency & natural justice.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

1. Aforesaid appeal by revenue for Assessment Year (AY) 2018-19 arises out of an order of learned Commissioner of Income Tax (Appeals)-3, Gurgaon [CIT(A)] dated 26-09-2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 153C of the Act on 04-09-2021 making certain additions in the hands of the assessee. The Ld. CIT(A) partly allowed the appeal of the assessee against which the revenue is in further appeal before us whereas the assessee has preferred cross-objections assailing the addition as sustained by Ld. CIT(A). The revenue is aggrieved by reduction in profit rate from 25% to 18% by Ld. CIT(A). The assessee is aggrieved by enhancement of profit rate to 18% as against profit rate of approx. 15% as offered by the assessee. The assessee has also raised legal grounds assailing the jurisdiction of Ld. AO. Having heard rival submissions and upon perusal of case records, our adjudication would be as under.

2. The impugned assessment on the assessee stem from search action by department u/s 132 on Majha group of cases on 05-04-2018 wherein certain incriminating documents pertaining to assessee were found. Accordingly, requisite satisfaction was drawn by Ld. AO of searched person as well as AO of the assessee and notice u/s 153C was issue to the assessee on 28-09-2020. The Ld. AO made addition on the basis of digital records and other incriminating material found during search which is subject matter of revenue’s appeal as well as cross-objection of the assessee. Similar assessments were framed on all the entities of the group. The present appeal & cross-objection was heard along with other appeals of the assessee-group. It was admitted position that facts as well as issues are substantially the same in all the appeals and therefore, our adjudication in lead appeal would have an equal application on the other appeals also. The lead order has been passed by us in the case of Shri Karaj Singh (ITA No.726/Chandi/2022 & Co. No.16/Chandi/2024) the ratio of which would accordingly, apply to the present appeal & cross-objection also.

4. In the assessment order, Ld. AO estimated assessee’s income at 25% on gross receipts of Rs.36.78 Crores. After adjusting the declared profit by the assessee in the revised return of income, Ld. AO made addition of Rs.367.81 Lacs. The Ld. CIT(A), vide para 6.9 of the impugned order, reduced the estimation to 18% which restricted the impugned addition to the extent of Rs.112.26 Lacs. Aggrieved, the revenue as well as the assessee is in further appeal before us.

5. We find the identical issue has been adjudicated by us in the case of Shri Karaj Singh (ITA No.726/Chandi/2022 & Co. No.16/Chandi/2024) as under: –

4. From the facts, it emerges that the assessee-group having nine entities is engaged in mining activities. These nine entities are holding separate mining licenses from state government and are preparing separate books of accounts reporting separate profits. However, consolidated financial data was being maintained for all these nine entities. The assessee-group was subjected to search action on 05-04-2018 wherein various loose papers as well as accounting data relating to business of assessee as well as other mining entities in physical form and pen-drive was found and seized from the corporate office at #1060, Sector-17, HUDA, Jagadhari. Considering the same, the assessee-group filed return of income declaring business income. The present assessee declared income of Rs.48.60 Lacs including business income of Rs.28.16 Lacs. However, during the course of assessment proceedings, the assessee agreed to offer additional income and filed revised return of income despite its claim that such additional income was never actually realized by them. The Ld. AO enhanced the declaration so made by the assessee to 25%, inter-alia, by considering three comparable entities. However, Ld. CIT(A) observed that the entities selected by Ld. AO were not comparable entities and Ld. CIT(A) worked out NP rate of 17.16% by making various adjustments to the profits on the basis of entries found noted in the seized document. Finally, Ld. CIT(A) upheld application of Net Profit Rate of 18% is impugned before us. The issue before us, thus, is in a narrow compass and related with determination of estimated profit rate earned by the assessee in the background of material seized during search action. At the outset, we concur with the approach of Ld. CIT(A) in rejecting comparable entities of the assessee as well as selected by Ld. AO since the additions are to be based on seized material as found during the search and the same could not be estimated by taking mean profit rate of other entities as disclosed by them in their audited financial statements. It is another fact that the comparable entities as selected by the assessee as well as by Ld. AO are not even otherwise functionally comparable with the functions of the assessee and therefore, the approach of Ld. CIT(A), to that extent, could not be faulted with.

5. The undisputed fact that emerges is that though Ld. CIT(A) has computed NP rate of 17.16% but, finally, it has applied NP rate of 18%. This is in sharp contrast to the fact that for immediately preceding AY 2017-18, Ld. CIT(A) himself estimated substantially lower NP rate of the assessee at 2.28% whereas there is no change in assessee’s business model. The approach of Ld. CIT(A) is contradictory to the rule of consistency and such vast variation in NP rates of two consecutive years, under identical business conditions, could not be sustained in law. The assessee initially reflected NP rate of 5.85% which has later been substantially enhanced to 14.05% despite the fact that the assessee is having much lower profit as per seized document.

6. It has been stated by Ld. AR that to estimate the NP rates, Ld. CIT(A) has made computations from combined seized material which include Profit & Loss Account as found in the pen-drive in the name of M/s GM & Co. and mining details as noted in the loose papers. However, there is no entity-wise bifurcation of financial data separately for each of the nine entities. The prime grievance of the assessee is that even by considering the seized material as found during the search, the profit rate would only be 1.47% and not 17.16% as computed by Ld. CIT(A). As against this, the assessee has already declared substantially higher profit rate of more than 14% to put a quietus to the issue. As per Ld. AR, the Ld. CIT(A) erred in not allowing actual expenses such as Mining fees paid to Government, VAT paid, new mining point setup expenses as noted in the seized material as well as Labour welfare expenses, environment protection expenses etc. as recorded in regular audited books of accounts. The Ld. AR further contended that when the income is estimated, no such adjustment is to be made for probable disallowances u/s 40A(3) / 40(a)(ia) in terms of decision of Jurisdictional High Court in the case of Santosh Jain (296 ITR 324) & Aggarwal Engg. Co. (302 ITR 246). Another argument is that there is no unaccounted profit earned on unaccounted sales. The combined regular sales of mining entities were Rs.77.43 Crores which substantially matches with the seized material after making allowance of discount as offered by the assessee group to its customers. On these facts, Ld. AR asserted that the additional profit already offered by the assessee is much in excess of profit emerging from seized materials found during search and impugned addition as sustained in the impugned order deserve to be deleted. On the issue of allowance of discount expenses of Rs.153.55 Crores while estimating business profit at 18%, Ld. AR stated that when Ld. AO assessed profit at 25%, he himself allowed the discount while estimating the profit and thus, the same could not be disputed by revenue. If discount is excluded from the computations, the same would yield unrealistic profit rate of 84% which is not, at all, possible in this line of business.

7. The Ld. AR reiterated legal ground of mechanical approval u/s 153D on the ground that the assessee had submitted voluminous replies during the course of assessment proceedings. The Ld. AO forwarded draft assessment order and complete assessment record to Ld. Addl. CIT on 18-06-2021 seeking approval u/s 153D. This approval was granted on the very next day i.e., on 19-06-2021 in a non-speaking manner and without spelling out any reasons or comments on the findings in the draft order or the seized material or findings of investigation wing in appraisal report. Moreover, on the same day, Ld. Addl. CIT approved draft assessment order in more than 20 other cases of the same group wherein different issues, voluminous submissions and abundant seized material was involved. This would show that Ld. Addl. CIT granted approval u/s 153D in a non-speaking and mechanical manner without due application of mind on the seized material and without considering the submissions of assessee. Such an approval is bad-in-law and would render assessment null and void. Reference has been made to the decision of Chandigarh Tribunal in the case of SP Singla Constructions Pvt. Ltd (ITA No.140-145/Chd/2024 dated 17-01-2025) wherein, on similar facts, the assessment was quashed and additions were set aside. Similar reliance has been placed on the decision of Delhi Tribunal in the case of Sushen Mohan Gupta (ITA 2999/Del/2024 dated 20-05-2025) quashing assessment on similar grounds.

8. The Ld. AR has tabulated the comparative figures as per Income Tax Returns, seized material as per orders of lower authorities as under:-

COMPARATIVE FIGURES ASS PER ITR, SEIZED MATERIALS, AO ORDER AND CIT(a) FOR AY 2018-19 IN  CASE OF ALL 9 MINING ENTITIES

The Ld. AR thus submitted that net mining sales (after discount as per seized material) was Rs.77.43 Crores which matches with the regular mining sales as disclosed by the nine mining entities. The Ld. AR also stated that Ld. CIT(A) did not allow full mining installment of Rs.98.74 Crores as recorded in the books of accounts of nine mining entities. Out of Rs.98.74 Crores, Ld. CIT(A) did not allow installment to the extent of Rs.28.04 Crores as tabulated below: –

COMPARATIVE FIGURES OF MINING INSTALLMENTS AS PER P&L OF MINING ENTITIES & ALLOWED BY CIT(A) AY 2018-19

9. In yet another tabulation, Ld. AO reconciled the consolidated Profit as per seized material (as per assessee) with profit calculated by CIT(A) for mining entities as under: –

In above tabulation, Ld. AR demonstrated that by considering the expenses as recorded in the seized material and expenses as debited in the regular books of accounts, the profit rate as earned by all the mining entities would only be 1.47% whereas all these entities have already declared NP rates in the range of 14% to 15% which are substantially higher than this profit.

10. To further support his argument, Ld. AR also tabulated comparative chart of profit computed by CIT(A) for all mining entities and as computed by the assessee for this year as under: –

COMPARITIVE CHART OF PROFIT COMPUTED BY CIT(A) AND AS PER ASSESSEE FOR AY 2018-19
(CONSOLIDATED FOR ALL 9 MINING ENTITIES)

The Ld. AR thus demonstrated that going by the seized document and regular books, the profit earned by the ground is merely in the range of less than 1.5%.

11. After going through above tabulations, we find substance in the plea / working of Ld. AR. It could be seen that considering the expenses found recorded in the seized material as well as in the regular books of accounts (allowed partially by Ld. CIT(A) while arriving at profit rate of 17.16%), the aggregate net profit margin for the group as a whole is less than 1.5%. If the material is considered in toto, the NP rate for all the entities work out to be 1.47% which is substantially lower than the declared profit of 14% to 15% by the assessee group in the revised return of income. This being the case, the profit declared in the revised return of income is to be accepted and in our considered opinion, no further addition is warranted in the hands of the assessee. The profit rate declared by the assessee is substantially higher. Pertinently, profit rate of less than 3% has been accepted in immediately preceding year in assessee’s case and such higher estimation of 18%, under identical business conditions, could not be sustained in law. In other orders, we delete the impugned addition of Rs.86.27 Lacs as sustained in the impugned order and allow the corresponding grounds of assessee’s cross-objection. The revenue’s ground of appeal stands dismissed.

6. Facts being pari-materia, the same, we delete the impugned addition of Rs.112.26 Lacs as sustained by Ld. CIT(A) in the impugned order. The Ld. AO is directed to accept the revised return of income as filed by the assessee. The assessee succeeds on merits. The legal grounds as urged by the assessee qua mechanical approval u/s 153D have been rendered infructuous. The revenue’s appeal stand dismissed.

7. The revenue’s appeal ITA No. 730/Chandi/2022 stands dismissed. The assessee’s cross-objection CO. 38/Chandi/2024 stands partly allowed in terms of our above order.

Order pronounced on 08/10/2025