SC Dismisses Revenue Appeal as Assessment Based on Guesswork Without Proof

ACIT Vs Mahamaya Steel Industries Ltd. (Supreme Court of India)

The matter arose from an appeal under Section 260A of the Income Tax Act, 1961, concerning 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 account of alleged suppression of yield and unaccounted production and sales.

The assessee, engaged in manufacturing steel products, was subjected to search and seizure proceedings, following which an assessment was completed 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 prior years and industry averages. The AO rejected the books of accounts, citing a lower declared yield of 82.42% and unsatisfactory explanations for reduced gross and net profit.

Read HC Judgment in this case:  No Addition if Assessment Based on Mere Guesswork & Suspicion: Chhattisgarh HC

The assessee challenged the addition before the Commissioner of Income Tax (Appeals) [CIT(A)], who set aside the addition. The CIT(A) found that the AO had not identified any specific defect or irregularity in the books of accounts, which were supported by audited records, excise returns, VAT returns, bills, and vouchers. The AO had relied primarily on earlier assessment orders and industry averages without producing any seized material or documentary evidence to substantiate allegations of unaccounted production or sales. The CIT(A) also held that conclusions drawn in earlier search assessments, which themselves had been deleted, could not be applied to a subsequent assessment year, as each year must be assessed independently.

The Revenue appealed before the ITAT, which concurred with the CIT(A) and dismissed the appeal. The ITAT observed that the AO had merely relied on prior assessments without establishing any independent factual basis for adopting the 89% yield. It also noted that similar additions had been deleted in the assessee’s own case for earlier assessment years, and no reason was shown to depart from those findings.

Before the High Court, the Revenue argued that the additions were justified based on material gathered during search proceedings and that the CIT(A) and ITAT erred in deleting them. The assessee contended that the additions were based on suspicion and conjecture without supporting evidence and relied on the principle laid down by the Supreme Court in Dhakeswari Cotton Mills Ltd., which held that assessments cannot be based on pure guesswork without evidence.

The High Court examined the record and agreed with the findings of the CIT(A) and ITAT. It held that the AO had proceeded on the basis of suspicion and conjecture by applying an estimated yield without any supporting material. The Court reiterated that while the AO is not bound by strict rules of evidence, there must be some material to support the assessment, and mere suspicion is insufficient. It found that there was no adverse material to support allegations of unaccounted production or sales, and the rejection of books of accounts was invalid in the absence of specific defects.

The High Court concluded that the concurrent findings of the CIT(A) and ITAT were factual in nature, based on the evidence on record, and were neither perverse nor contrary to law. Accordingly, the appeal was dismissed, and the substantial question of law was answered in favour of the assessee.

Subsequently, the matter was carried to the Supreme Court through a Special Leave Petition. The Supreme Court, after hearing counsel for the petitioner, declined to interfere with the High Court’s judgment and dismissed the Special Leave Petition. As a result, the findings of the lower authorities, including deletion of the addition, were upheld.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

1. Delay condoned.

2. Having heard Mr. Karan Lahiri, learned counsel appearing for the petitioner(s), we are not inclined to interfere with the impugned judgment/order(s). The Special Leave Petition is, accordingly, dismissed.

3. Pending application(s), if any shall stand disposed of.