An addition for unaccounted sales based on an estimated production yield, without any supporting evidence, is not legally sustainable.

Issue

Can the books of account of a manufacturing business be rejected and a significant addition for unaccounted sales be made based solely on a hypothetical or estimated production yield adopted by the Assessing Officer, especially when there is no other corroborative or adverse material on record?

Facts

Following a search operation, the Assessing Officer (AO) made a large addition for unaccounted sales to the assessee, a company engaged in manufacturing steel products.
The entire basis for this addition was the AO’s own estimation. The AO adopted a theoretical production yield of 89% for the assessee’s SMS Division. Based on this assumption, the AO calculated what the production should have been, treated the difference from the books as unaccounted production, and then deemed this to have been sold outside the books of account.
As a consequence of this estimation, the AO also held that the assessee’s books of account were unreliable and rejected them under Section 145(3) of the Income-tax Act, 1961.
The assessee provided explanations for the actual, lower yield, which were supported by a certificate from a registered valuer.
The Commissioner (Appeals) and the Income Tax Appellate Tribunal (ITAT) both gave concurrent findings in favour of the assessee. Both authorities concluded that there was a complete absence of any adverse material to support the AO’s theory and that the addition was based on mere mathematical assumptions and guesswork, not on any cogent evidence of actual unaccounted sales.

Decision

The High Court ruled in favour of the assessee, dismissing the revenue’s appeal against the Tribunal’s order.

The court held that the concurrent findings of the two lower appellate authorities (that the AO’s addition was baseless and made without any evidence) were pure findings of fact.
It observed that these factual findings were properly based on the evidence that was on record and were not perverse in any way.
Therefore, the case did not give rise to any substantial question of law that would require the High Court’s intervention.

Key Takeways

Estimation Cannot Be the Sole Basis for an Addition: An Assessing Officer cannot reject books of account and make a substantial addition based on a purely theoretical or estimated production yield without bringing any positive, corroborative evidence on record to show that there were, in fact, actual unaccounted sales or suppressed production.
Rejection of Books Must Be Justified with Specific Defects: The power to reject books of account under Section 145(3) is not an arbitrary one. The AO must provide specific reasons and point out tangible defects in the books; they cannot reject them simply because the declared profit or yield is lower than what they personally expect.
The Importance of Concurrent Factual Findings: When two independent appellate authorities (like the CIT(A) and the ITAT) arrive at the same conclusion on a question of fact after examining the evidence, the High Court is generally very reluctant to interfere with that finding unless it can be shown to be completely perverse or based on no evidence at all.
The Burden of Proof is on the Revenue: The burden to prove that sales have been suppressed or that books of account are incorrect lies with the revenue department. This burden is not discharged by simply applying a hypothetical formula without any supporting real-world evidence.

HIGH COURT OF CHHATTISGARH

Deputy Commissioner of Income-tax

Mahamaya Steel Industries Ltd.

SANJAY K. AGRAWAL and Sanjay Kumar Jaiswal, JJ.

TAX Case No. 9 of 2021

SEPTEMBER 4, 2025

Amit Chaudhari, Senior Standing Counsel and Vijay Chawla, Adv. for the Appellant. Sumit Nema, Sr. Adv. and Anand Dadariya, Adv. for the Respondent.

ORDER

Sanjay K. Agrawal, J. – This appeal preferred under Section 260A of the Income Tax Act, 1961 (for short, ‘the IT Act’) was admitted for hearing on 27-2-2023 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.16,61,91,372/- 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 27-3-2014 and order was passed under Section 153A read with Section 143(3) of the IT Act for the assessment year 2010-11. 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 16,61,91,372/-by recording following finding:-

“1.2 Thus based on the evidences found during the search and seizure action, following conclusions can be drawn: –

(1) During the search and seizure action short stock of finished goods and raw material totaling to Rs. 79,18,418 was found.

(2) The actual production shown by the assessee company is much less than the installed capacity and even the capacity utilization varies from year to year.

(3) There is no uniform/scientific methodology for measurement of input of raw material. The burning losses are reported based on estimation and not actual.

(4) In the SMS division there is wide variation in consumption of sponge iron vis a vis production of finished goods in different months of the year.

(5) In the SMS division there is no co relation between the consumption of raw material, electricity and finished goods whereas, by and large the production process, the production set up and the sources of raw materials supplies remain the same.

(6) In the SMS division of the company there is wide variation in the consumption of electricity vis a vis production of finished goods, in different months

(7) The figures of production and consumption of SMS division shown in the books of accounts of the assessee do not reflect its true state of affairs.

(8) In the rolling mill division there is wide variation in the consumption of electricity vis a vis production of finished goods in different months of a year.

(9) In the rolling mill division there is wide variation in the consumption of furnace oil vis a vis production of finished goods in different months of a year.

(10) In the rolling mill division there is wide variation in the consumption of raw material vis a vis production of finished goods in different months of a year.

(11) In the rolling mill division there is no co relation between the consumption of raw material, electricity and furnace oil with the finished goods whereas, by and large the production process, the production set up and the sources of raw materials supplies remain the same.

(12) The figures of production and consumption of rolling mil division shown in the books of accounts of the assessee do not reflect its true state of affairs.

(13) The input of raw material is not properly measured and burning loss reported are based on estimation. The entry of burning loss in the books of account is based on the information given by the production department and the information available with the production department is based on estimation.

(14) The SMS division shows yield in the vicinity of 84% which is quite low as compared to the yield being shown by other manufactures of CG.

Therefore, based on these evidences, the only logical conclusion that can be drawn is that the books of account of the assessee company are unreliable as they do not reflect the true and correct affairs of its business activities and hence deserved to be rejected.”

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 17-7-2014 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 paragraph 7.13 of its order as under: –

“7.13 The findings of the A.O at Para 1.2 on Page no.14 of the assessment order are discussed hereunder:-

(1) Regarding stock, as stated supra, the A.O. has not drawn any adverse inference as regards difference in inventory.

(2) Regarding capacity utilization, the allegation of the A.O that the actual production is much less than the installed capacity has been negated by the appellant by placing on record actual production data i.e. quantitative information with reference to weighted installed capacity based on actual number of days during which the production process was going on. On the matter of capacity utilization, I do find that the assumption of the A.O that the factory will remain in operation for 365 days is quite hypothetical as the A.O. has completely ignored the fact that there would be weekly offs / holidays apart from national holidays and routine maintenance. I am convinced with the explanation tendered by the appellant regarding capacity utilization and in view thereof, I am of the considered opinion that the capacity utilization cannot be said to be lower as presumed by the A.O. on the basis of incorrect interpretation of facts.

(3) Regarding uniform methodology for measurement of inputs, in my considered view, the same is not fatal and that per se is not sufficient to reject the books of accounts and this fact cannot be given undue significance in isolation while ignoring the yield, GP and NP rate declared by the appellant based on audited account. This issue regarding “estimation” has been discussed in detail in the subsequent paras.

(4) Regarding variation in consumption of sponge iron, power in the SMS Division, in my considered view, the same may lay foundation for raising suspicion, however, at the same time, it is settled principle of law that suspicion, howsoever grave it may be, cannot take place of the evidence. On an independent appreciation of reasons explained by the appellant for variation in yield i.e. for variation in consumption of sponge iron and power in SMS Division, I find that the explanation of the appellant to be convincing, particularly, when the appellant has brought on record certificate from registered valuer which is placed in the paper book at Page no.261 of Volume 8 of the Paper Book in the case of Abhishek Steel Industries Limited which is also part of the Mahamaya Group of companies.

The A.O. has not brought on record any evidence to disbelieve the certificate of registered valuer who is duly approved u/s 34AB of the Wealth Tax Act, 1957 vide order dated 06.07.2011. As per the said certificate of the registered valuer, the average yield in SMS Division for manufacturing of Blooms and Billets using sponge iron as raw material may vary from 80 to 86% and the power consumption for production of Blooms and Billets in SMS Division may vary from 800 to 1500 KW for production of each MT of Blooms and Billets. The quantitative details of consumption of sponge iron and power were found to be within the reasonable range as certified by the registered valuer.”

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. Mr. 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 16,61,91,372/- 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 Ltd. v. CIT [1954] 26 ITR 775 (SC)/(1954) 2 SCC 602. 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 16,61,91,372/- 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: –

“8. We have perused the case records and heard the rival contentions. We have also analyzed the judicial pronouncements placed before us. The facts on records clearly demonstrates that the Assessing Officer has failed to bring any cogent reasons/evidences for making addition in the case of the assessee. He has arrived at various mathematical calculations and has derived the yield at 89%. All these were done by the Assessing Officer without bringing on record any single document which indicates that the assessee has suppressed its yield or has indulged in any unaccounted sales. It is also on record that though the Assessing Officer has estimated production at 89% in SMS division and had made various mathematical calculations at Pages 7 to 11 of the assessment order regarding Rolling Mill Division, however, it is seen from the assessment order that the Assessing Officer has not drawn any adverse inference as regards Rolling Mill Division and nor did the Assessing Officer find yield of Rolling Mill Division to be lower. The Assessing Officer has not substantiated the relevance and significance of these mathematical calculations pertaining to Rolling Mill Division.

8.1 We further observe that the Ld. CIT(A) on his own conducted specific enquiry in order to find out the percentage of yield declared by the other assessee engaged in similar line of business. It is noted from such comparison that the yield declared by the different assessees in the same year is not uniform, conversely every assessee declared different yield. Not even a single comparable instance was found declaring yield of 89%. That further, action of the Assessing Officer in rejecting the books of accounts merely due to the reason that the yield achieved by the assessee is less than the yield percentage i.e. 89% which has not been achieved even by other assessees engaged in similar line of business. The Assessing Officer has not brought on record the manner in which he has worked out yield of 89% in SMS Division.

9. In the case of M/s. Ramesh Steel Industries v. DCIT- 1(1), Raipur, ITA No.48 of 2015, the Hon’ble Chhattisgarh High Court has held and observed that “the power of the Assessing Officer under Section 145(3) is not absolute but was regulated and circumscribed by statutory provisions.” That further “power consumption in an industry may vary for various reasons. Under Section 145(3) of the Income Tax Act, the jurisdiction of the Assessing Officer arises if he was not satisfied about the correctness of the accounts of the assessee. However, the Assessing Officer should give specific reasons for rejecting books of accounts.”

10. In the instant case, the Assessing Officer calculated yield of 89% and has also calculated consumption of power and difference thereto pertaining to production and has held that the books of accounts are therefore not reliable and rejected the books of account while resorting to Section 145(3) of the Act. As per the legal principles laid down by the Hon’ble Chhattisgarh High Court (supra.) that this power is not unfettered and it has to be used judicially by giving specific reasons which in the instant case, the Assessing Officer has not complied with.

13. It is apparent from the record that the Assessing Officer has not brought on record any evidence stating lower or suppression of sales by the assessee. He tried to support his case by showing deficiency in power consumption by the assessee. But the Hon’ble High Courts have held without any direct corroborative evidences on low yield or suppressed sales, the disparity of power consumption cannot be the sole ground or reason for making addition by the Assessing Officer.”

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. CIT 1994 SCC Online Lah 38: (1994) 12 ITR 393 (Lah).”

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 2010-11 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).