Chhattisgarh High Court Quashes Addition for Alleged Suppressed Production Based Only on Estimated Yield

Background and Context

The Chhattisgarh High Court in DCIT-2(1) Vs Mahamaya Steel Industries Ltd. examined whether the Revenue could sustain a substantial income tax addition solely on the strength of an estimated production yield, unsupported by specific incriminating material. The dispute arose under Section 260A of the Income Tax Act 1961, with the Revenue contesting the deletion of an addition of ₹15,94,08,394 made on account of alleged unaccounted sales in the assessee’s steel manufacturing business.

The core issue was whether an Assessing Officer (AO) could:

  • Reject regularly maintained books of account invoking Section 145(3), and
  • Estimate production yield at 89% by comparing it with other manufacturers,
  • Then treat the difference between declared yield and estimated yield as unaccounted production and sales,

without backing this approach with concrete, transaction-specific evidence or credible material discovered during a search.

The High Court ultimately upheld the orders of the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT), both of which had deleted the addition.

Facts Leading to the Dispute

  • The assessee company, Mahamaya Steel Industries Ltd., is engaged in the manufacture of re-rolled steel products such as heavy structural steel, joists, and girders.
  • A search and seizure operation under the Income Tax Act was conducted at the assessee’s premises on 21 June 2011.
  • For Assessment Year (AY) 2016-17, the assessment was completed on 27 December 2018 under Section 153A read with Section 143(3) of the Income Tax Act 1961.

Basis of the Addition by the AO

In the course of the assessment for AY 2016-17, the AO:

  1. Focused on the Steel Melting Shop (SMS) Division of the assessee.
  2. Alleged that the assessee had:
    • Shown a lower production yield, and
    • Consequently suppressed production and engaged in unaccounted sales.
  3. Carried out a comparative study of yield percentages reported by other steel units engaged in manufacturing MS Ingots/Billets.
  4. Noted that some other units showed yield as high as 97%.

Relying on this comparative exercise, the AO:

  • Rejected the assessee’s books of account under Section 145(3).
  • Completed the assessment under Section 144.
  • Estimated the assessee’s production yield at 89%.
  • Treated the shortfall between the declared yield and this estimated 89% yield as:
    • Unaccounted production; and
    • Deemed unrecorded sales.

This exercise resulted in an addition of ₹15,94,08,394 to the assessee’s income.

Judicial Precedent Relied on by AO

The AO also referred to the Supreme Court decision in Melton India v. Commissioner Trade Tax, U.P., contending that:

  • Excessive power consumption could prima facie indicate suppression of production; and
  • On the basis of the principle of “preponderance of probabilities”, turnover could be enhanced even without strict adherence to evidentiary rules.

On this reasoning, the AO asserted that:

  • The books were unreliable;
  • It was justified to estimate yield at 89%; and
  • The corresponding differential represented unaccounted sales of ₹15,94,08,394.

CIT(A) Proceedings and Findings

The assessee challenged the assessment order before the CIT(A).

Reference to Earlier Assessment Years

The CIT(A):

  • Noted that in the assessee’s own case for AY 2013-14 in Appeal No. CIT(A)-II/RPR/A.No.104/17-18 dated 02.02.2018, a similar issue involving adoption of 89% yield had already been examined.
  • In that earlier year, the addition based on 89% estimated yield was deleted.

CIT(A)’s Key Conclusions

The CIT(A), by order dated 22 October 2019, held: