GST Demand Based on Assumed Input-Output Ratio (2:1:3) Quashed; Evidence of Suppression Mandatory.

Issue

Whether an adjudicating authority can legally sustain a demand for suppressed turnover under Section 74 of the CGST Act solely by applying a theoretical input-output ratio (e.g., 2:1:3 for cement-sand-pebbles) to the inward supplies, without providing concrete evidence of actual sales suppression in the statutory returns.

Facts

Context: An inspection was conducted at the petitioner’s premises, leading to the seizure of records.
Proceedings: The department issued an intimation (Form GST DRC-01A) and Show Cause Notices (Form GST DRC-01) for the period April 2020 to May 2024. The petitioner filed a detailed reply.
The Assumption: The Adjudicating Authority passed assessment orders alleging that the petitioner’s inward supplies (purchases) were disproportionate to their outward supplies (sales).
The Calculation: This conclusion was reached by applying a theoretical mix ratio of 2:1:3 (Cement : Sand : Pebbles). Based on this formula, the authority presumed that the petitioner must have manufactured and sold more than what was reported in GSTR-1, GSTR-3B, and GSTR-9C, thereby alleging suppression of turnover.

Decision

The Madras High Court ruled in favour of the assessee (petitioner) and set aside the assessment orders.
No Evidence: The Court held that the Respondent had concluded suppression “without any evidence” and had merely relied on an assumed input-mix ratio.
Insufficient Reasons: The Court observed that theoretical ratios alone are not sufficient to sustain a demand for suppression. The department ought to have produced proof of suppression in the returns before demanding tax.
Distinction Drawn: The Court noted that there is a legal distinction between “excess availment of Input Tax Credit” (based on inputs purchased) and “suppression of outward supply” (based on sales hidden). The authority cannot automatically transmute one into the other based on assumptions.
Remand: The matter was remitted back to the authority for a fresh exercise. The petitioner was directed to file a reply with documents to substantiate their actual consumption and production.

Key Takeaways

Theoretical Ratios are Not Proof: Tax authorities cannot raise demands based on standard engineering ratios or theoretical consumption norms (like the 2:1:3 concrete mix) without corroborating evidence of actual production and clandestine removal.
Burden of Proof: To allege suppression of turnover (Section 74), the Revenue must provide tangible evidence (like seized private registers, statement of buyers, or transport documents) showing that goods were actually sold off the books.
Inward Supply $\neq$ Outward Supply: High inward supplies might indicate stock accumulation or wastage, but they do not automatically prove suppressed sales. The Assessing Officer must establish the link between the inputs and the alleged suppressed sales.

HIGH COURT OF MADRAS

Bharath Ready Mix Concrete

State Tax Officer State Tax Officer (intelligence) Inspection-1, Cuddalore^*

C. Saravanan, J.

WP Nos. 5953, 5965, 5957, 5961, 5970 of 2025
WMP NOs. 6545,6546,6547,6548, 6550,6552,6556,6558,6564,6560 OF 2025

OCTOBER 24, 2025

A.N.R. Jayaprathap for the Petitioner. V. Prashanth Kiran, Government Adv. for the Respondent.

ORDER

1. By this Common Order, all the Writ Petitions are being disposed of after hearing the learned counsel for the Petitioner and learned Government Advocate for the Respondent.

2. In these writ petitions, the petitioner has challenged the respective impugned orders all dated 26.11.2024 passed for the tax periods April 2020-March 2021 to April 2024 – May 2024.

3. The impugned orders have preceded notices in DRC-01 dated 16.09.2024 and an intimation in DRC-01A dated 05.08.2024. The petitioner also filed a detailed reply on 15.10.2024 pursuant to which the impugned order has been passed.

4. The reason in the impugned orders are almost identical. The petitioner is aggrieved by the defect No.2 in the assessment order passed for the tax period 2021-21, which are the only defects in the rest of the assessment orders vide orders dated 26.11.2024. The impugned proceedings are pursuant to an inspection held at the premises of the petitioner on 10.05.2024 when records were seized from the petitioner’s premises.

5. The respondent has come to the conclusion that there is disproportionate inward supply as compared to the outward supply of the ready mix concrete. For this purpose the respondent has arrived at the ratio of 2:1:3 for manufacturing Ready Mix Concrete with cement, sand and pebbles.

6. The respondent has arrived at the conclusion after recording the reply of the petitioner as follows:

“Adjudication Officer Findings

i. Taxpayer is submitted that the remix ratio is not correct, whereas submitted the certain ratio of certain grade of RMCs.

ii. But taxpayer is failed submit grade wise RMCs output and material consumptions thereof, which would prove the actual production of RCM for the material consumed.

iii. Hence, tax payer reply is not acceptable hence liability confirmed.”

7. In other words, the respondent has come to the conclusion that there is suppression of turnover in the returns filed in GSTR-1, GSTR-3B and GSTR-9C. Without any evidence they have come to the conclusion that there was disproportionate inward supply as compared to the outward supply of Ready Mix Concrete. The respondent should have also obtained such informations, which are relevant that there was suppression in the outward supply by recording disproportionate inward supply in the manufacture of Ready Mix Concrete, which was recorded in the returns.

8. The learned counsel for the petitioner submits that there are different rate of Ready Mix Concrete, which were manufactured and the ratio varies and that the petitioner justified the same by producing the necessary data and therefore, an opportunity be given.

9. On the other hand, the learned counsel for the respondent would submit that the impugned order does not warrant any interference as it is the well reasoned order.

10. Having considered the submissions made by the learned counsel for the petitioner and the learned counsel for the respondent, I am of the view that the reason given in the impugned orders are not sufficient to sustain the demand that was proposed in notices in DRC-01 dated 16.10.2024. As mentioned above, the respondents should have also produced proof to indicate that there was suppression in the turnover in the returns in GSTR-1, GSTR-3B and GSTR-9C before proceeding to demand tax from the petitioner.

11. Be that as it may be, there could be a case for excess availing Input Tax Credit on the inputs to come to the conclusion that there is disproportionate inward supply as compared to the outward supply reflected in the returns.

12. Therefore, the case is remitted back to the respondent to re-do the exercise afresh, subject to the petitioner filing reply and substantiate the same with necessary documents. In view of the order passed by this Court, all the coercive steps taken against the petitioner shall be vacated.

13. These Writ Petitions stand disposed of with the above observations.

No costs. Connected Writ Miscellaneous Petitions are closed.