Facts of the Case

A search under section 132 of the Income Tax Act, 1961 was conducted on 27/08/2009 at the premises of the assessee, a partnership firm engaged in the manufacture and sale of chewing tobacco (Zarda), an excisable commodity. Pursuant to the search, assessment for AY 2010-11 was completed under section 143(3) read with section 153A, determining total income at ₹16.17 crore as against returned income of ₹1.66 crore.

The Assessing Officer made substantial additions, inter alia, on account of alleged suppressed production by adopting an estimated yield substantially higher than that disclosed by the assessee. The estimation was based on theoretical calculations relating to consumption of raw materials, evaporation, wastage, and inferred production norms. The learned CIT(A) partly allowed the assessee’s appeal by deleting a substantial portion of the addition while sustaining a part thereof. Both the assessee and the Revenue filed cross-appeals before the Tribunal.

 

Issues Involved

Whether additions on account of alleged suppressed production could be sustained when:

  • no incriminating material was found during search,
  • books of account were not rejected under section 145(3),
  • excise records and audited books supported declared production, and
  • similar yield had been consistently accepted in earlier assessment years by the Tribunal.

 

Petitioner’s (Assessee’s) Arguments

The assessee contended that the entire addition was based on conjectures and arbitrary yield estimation without any supporting search material. It was argued that the manufacturing process and yield norms had already been examined and accepted by the Tribunal for earlier assessment years (AYs 2004-05 to 2009-10). The assessee emphasized that its books were audited, excise-controlled, and consistently accepted, and that no defect warranting rejection of books under section 145(3) was pointed out. Reliance was placed on earlier coordinate bench decisions in the assessee’s own case and judicial precedents holding that search additions must be based on incriminating material.

 

Respondent’s (Revenue’s) Arguments

The Revenue supported the assessment order and contended that discrepancies in quantitative records, lack of detailed consumption data, and improbability of transportation of raw materials justified estimation of higher yield and inference of suppressed production. It was argued that the CIT(A) erred in granting relief by relying on earlier years’ data and by substituting his own estimation over that of the Assessing Officer.

 

Court Order / Findings

The Hon’ble Income Tax Appellate Tribunal, Allahabad Bench, observed that the issue of yield and alleged suppression of production in the assessee’s case had already been examined in detail by a coordinate bench for preceding assessment years, wherein the declared yield was accepted and additions were deleted.

The Tribunal held that:

  • no incriminating material relating to suppressed production was found during search,
  • the Assessing Officer did not reject the books of account under section 145(3),
  • excise records and audited accounts supported the declared production and sales, and
  • arbitrary mathematical estimations could not substitute evidence.

Applying the principle of consistency and following earlier binding decisions in the assessee’s own case, the Tribunal found no justification to sustain additions based on estimated yield. The Tribunal accordingly upheld the relief granted by the CIT(A) and deleted the remaining additions relating to alleged suppressed production. The Revenue’s appeal was dismissed and the assessee’s appeal was allowed.

 

Important Clarification

The Tribunal reiterated that in search assessments under section 153A, additions must be founded on incriminating material discovered during search. Estimated additions based on assumptions, without rejection of books and contrary to consistently accepted past results, are legally unsustainable. The decision reinforces limits on “best judgment” assessments and strengthens the doctrine of consistency in tax proceedings.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1770876217_ACITALLAHABADVS.KESARWANIZARDABHANDARALLAHABAD.pdf  

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