SHYAM STEEL MANUFACTURING LIMITED,NEW TOWN vs. DCIT, CENTRAL CIRCLE 2(1),, KOLKATA

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ITA 2730/KOL/2025Status: DisposedITAT Kolkata18 May 2026AY 2023-202433 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal found that the AO mechanically applied Rule 8D(2)(ii) without proper satisfaction and that the exempt income arose from passive investments. The Tribunal directed the AO to delete the entire addition made under Section 14A.

What were the facts?

The Assessing Officer (AO) made an addition under Section 14A for expenses related to exempt income, disallowing Rs. 9,87,837/-. The assessee had voluntarily disallowed Rs. 49,560/-. The CIT(A) restricted the addition to Rs. 7,02,462/-.

What were the issues?

Whether the disallowance under Section 14A was justified when the exempt income was from passive investments and the AO mechanically applied Rule 8D without proper satisfaction.

Which sections of the Income-tax Act were involved?

Section 14A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “D” BENCH, KOLKATA

For Appellant: Shri S.K. Tulsiyan
For Respondent: Shri Sanat Kumar Raha, CITDR
Hearing: 22.04.2026Pronounced: 00.00.2026

Per Rajesh Kumar, AM:

These two cross appeals preferred by the assessee and revenue against the separate orders of the Commissioner of Income Tax

2.

At the outset, we note that the appeal of the revenue is barred by limitation by 31 days. At the time of hearing the ld. DR explained the reasons for the delay in filing the appeal. The Ld. AR did not raise any objection in condoning the delay. After hearing the rival contentions and perusing the materials available on record, we find that the delay is for bonafide and genuine reasons and hence, we condone the delay and adjudicate the appeal of the revenue along with the appeal of the assessee.

ITA No.2730/KOL/2025 (Assessee’s Appeal) ITANo.3288/Kol/2025 (Revenue’s Appeal):

3.

The ground no. 1 assessee’s appeal is general ground and does not require any adjudication.

4.

Ground No.2 of assessee’s appeal is relating to partial confirmation of the addition to the tune of Rs.7,02,462/- as against total addition made by the AO u/s.14A of the Act at Rs.9,87,837/-.

5.

The facts in brief are that during the course of assessment proceedings the AO, on examination of books of accounts of the assessee, found that the assessee company has made certain investments which has potential to generate exempt income. He further noted that during the relevant previous year, the assessee has earned interest income of Rs.26,70,379/- from Tax free Bond and exemption has been claimed as per the provisions of the Act. The AO called upon the assessee to state whether the amount

6.

In appeal, the ld. CIT(A) restricted the addition to Rs.7,02,462/- and sustained the remaining addition.

7.

After hearing the rival contentions of the parties and perusing the material available on record, we find that the assessee has sold tax free bonds of Rs.1053.69 lakhs which was coming from the earlier years. We note that an employee Shri Ravi Sharma used to look after the investments whose 15 days gross salary of

"In the first instance, it needs to be recognised that as per section 14A(1), deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. [Para 32]" 8. Similar view has been taken by the Hon'ble Apex Court in the case of Godrej & Boyce Manufacturing Co. Ltd vs DCIT (2017) 394 ITR 449 pronounced on 08-05-2017 wherein it was held that-

x) We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub- sections (2) and (3) of Section 144 of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee. as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness.. of the claim of the assessee. It is only thereafter that the provisions of Section 144(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. x) In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the

10.

The issue raised in ground no. 3 in assessee’s appeal is with regard to part confirmation of disallowance by the ld. CIT(A) of to the tune of Rs.12,90,56,191/- out of the total addition made by the of ₹ 58,84,91,524/-in respect of purchases u/s.69C of the Act treating the same as unexplained expenditure. The revenue has challenged the part deletion of addition to the tune of Rs.58,84,91,524/- vide ground no. 1,3,4,5,6, & 7 in the cross appeal.

11.

The facts in brief are that the assessee filed its return of income on 30.10.2023 declaring total income of Rs.1,49,17,05,540/-. The assessee company belongs to Shyam Steel Group which is one of the leading TMT Bar producer in India, manufacturing TMT bar, Billets, Sponge Iron and Ferro Alloys. The assessee is a regular income tax assessee and is also registered under the GST Act. The GST returns and ITR returns are being filed regularly by the assessee year after year. The accounts of the assessee are

12.

In appellate proceedings, the ld. CIT(A) partly allowed the appeal of the assessee applying GP rate @21.93% thereby sustaining the addition to the tune of Rs.12,90,56,191/- and deleting the remaining addition of ₹ 45,94,35,333/-. Ld. CIT(A) held that the purchases by the assessee could not be doubted on the ground that the material purchased by the assessee were consumed in the manufacturing process. The CIT(A) also held that the AO had doubted the sales after considering the documentary evidences produced by the assessee. However Ld. CIT(A) held that the assessee has made purchases from elsewhere, but have obtained bills from the impugned supplier, namely M/s. Bhole Baba Trading. It was also held that the ingredient in question is 'scrap' and that is available in the grey market through rag pickers and entire transactions were used to made in cash. Thus, the purchases from M/s. Bhole Baba Trading were non-genuine/bogus in a manner that purchases were made from the parties other than that mentioned in the books of account of the assessee. The ld. CIT(A) while deleting the addition has observed and held asunder :-

3.5. The facts in the present case shows that the appellant was not in a position to prove the genuineness of the supplies made by M/s. Bhole Baba Trading. During the course of search, seized documents with Identification mark BBT/HD/01 was found in the office cum factory

3.6. On the other hand, the AO had never disputed or examined the aspect of production or manufacturing process. Assessing Officer has not pointed out any discrepancy in the assessee’s stock records. At no

3.7. On careful analysis of the finding in the above-mentioned case, it is clear that the appellant has made purchases from elsewhere, but have obtained bills from the impugned supplier, namely M/s. Bhole Baba Trading. Hence, I am of the firm belief that the appellant had made cash purchases from other parties which were notrecorded in the books. In the instant case, it is concluded that the purchases were actually made but not from the party from whom it was claimed to have been made and instead purchased from grey market without proper billing or documentation. In the instant case, the ingredient in question is ‘scrap’ and that is available in the grey market through rag pickers and entire transactions are used to made in cash. Thus, the purchases from M/s. Bhole Baba Trading were non-genuine/bogus in a manner that purchases were made from the parties other than that mentioned in the books of account of the assessee. The material was in-fact purchased from grey market at a lower rate and to cover deficiencies in record, the invoices were procured from these entry operators to reduce the profit. Apparently, there will be savings on account of taxes while procuring material from grey market and at the same time the appellant could inflate its purchase bills at its will. As the appellant has involved itself in grey market transaction, the difference between the actual cash purchase without proper billing and bill raised by M/s. Bole Baba Trading, the entry operator is dis-allowable u/s 37 of the Act, being excess deduction on account of inflated purchases. That being the position, on the basis of principles laid down by the judicial

3.8. Reliance is placed on the factually similar case where the Hon’ble Apex Court in the case of Commissioner of Income Tax vs. Clarity Gold (P.) Ltd. [2018] 99 taxmann.com 47 (SC)/[2018] 259 Taxman 137 (SC)[24-09-2018] has held that - “Section 145 of the Income-tax Act, 1961 - Method of accounting (Estimation of income) - Assessment years 2004-05 to 2010-11 - Assessee company derived its income from business of manufacturing of jewellwery and in trading of gemsstones - A search was carried out in case of assessee - In response to notice issued undersection 153A, assessee filed its returns declaring certain taxable income - Assessing officer completed assessment under section

3.9. It will be correct in coming to the conclusion that the purchases cannot be rejected without disturbing the production in case of a manufacturer. Accordingly, in the interest of revenue, it will be just fair and reasonable to estimate a ratio as certain percentage of purchases of appellant which are non-genuine/bogus, so that the excess deduction claimed can be disallowed. The material i.e. scrap is such that it would be very difficult to get standard rate as there is no standard of quality. Therefore, it would be logical and fair to make a dis-allowances of deduction by making an addition to the extent of a rate equal to the GP rate as estimated element of saving on account of such purchases. It is noticed that during the relevant assessment year, the assessee company had Turnover of Rs. 1893,91,90,954/- and earned gross profit of Rs. 415,31,94,686/- with G.P. percentage at 21.93%. This rate is also justified because such rate would certainly be higher than the rate of saved taxes (rate of GST only is 18%). Therefore, after considering all facts and circumstances as discussed in above paragraphs, it is concluded that nongenuine/bogus purchases/inflated purchase contain 21.93 % of inflation (embedded in such purchases). Accordingly, excess deduction is calculated @21.93% of bogus/non-genuine purchase of Rs. 58,84,91,524/- i.e., Rs. 12,90,56,191/- and

14.

Ld. AR further submitted that during the course of search on Bholebaba Trading on 16.06.2023, the assessee was made aware of that Shri Sourav Roy, Proprietor of M/s Bolebaba Trading has filed an affidavit dated 04.03.2025, wherein he has confirmed that

15.

Ld. AR also submitted that in the present case, the AO has not brought on record any material to controvert the presumption as per the Act and disproved the sales made by M/s Bholebaba Trading without any reasons. The documents found during the course of search in the case of Bholebaba Trading clearly evidenced the fact that actual purchases of scrap were made by it in cash and thereafter these were sold to the assessee and the

16.

Ld. DR, on the other hand, relied on the order of the AO by submitting that Shri Rabisankar Roy in his statement has stated that M/s Bhole Baba Trading received RTGS payments mainly from Shyam Steel group of companies through banking channel

17.

After considering the rival contentions of the parties and perusing the material on record including the written submissions filed by the assessee, We note that the assessee is engaged in the business of manufacturing of TMT Rebar, Billets, Sponge Iron and Ferro Alloys. We find that a search action was o conducted on the assessee u/s 132(1) of the Act on 15.6.2023 and a search u/s 132(1) of the Act was also conducted on M/s Bholebaba Trading the supplier on 16.06.2023. We note that the CIT(A) has observed that the purchases by the assessee cannot be doubted on the ground that the materials purchased by the assessee in the form of scraps were consumed in the manufacturing process and the AO has not doubted the corresponding sales after considering the documentary evidences furnished by the assessee. We have noted that Ld. CIT(A) further observed that the assessee has made purchases from elsewhere, but have obtained bills from the impugned supplier, namely M/s. Bhole Baba Trading. The ld.

19.

We also find merit in the contention of the assessee that the supplier M/s Bholebaba Trading purchases scrap in cash which had not been disputed by the AO. Besides there was no seized documents found during the course of search in respect of BholebabaTradings which proved otherwise.

20.

We also find merit in the contention of the assessee that section 292C of the Act provides a rebuttable presumption with respect to books of account, other documents, or assets found in the possession of a person during the course of search or requisition . It merely presumes that the documents found in possession of a person belong to that person and are true as to their contents. In the present case, the documents recovered from Bholebaba's premises are rather corroborate the fact that Bholebaba was engaged in genuine business activity involving physical procurement and sale of scrap to the assessee. The case of the assessee finds support from the decision of the coordinate

22.

So far as the fourth allegation of the ld. CIT(A) is concerned, that the nongenuine bogus purchases/inflated purchase contain 21.93 % of inflation (embedded in such purchases), we note that before adopting the GP rate and confirming the addition, the books of accounts of the assessee were not rejected by the learned CIT(A). The ld. CIT(A) has accepted that scrap was purchased by the assessee and was consumed in the production process of Billets. We observe that ld. CIT(A) further observed that the sales of the assessee were not disputed by the learned AO. In this backdrop of factual matrix adopting the GP rate without rejecting the books of accounts is not as per law, moreso when the sales were duly recorded in the books and the profit on such sales was duly shown/credited to the Profit and Loss A/c and offered to tax. The case of the assessee is squarely covered by the decision of the Hon'ble Delhi High Court in the case of PCIT vs Forum Sales (P.)

"19. A plain reading of the aforementioned provisions would indicate that the AO wields an authority to make additions on the basis of estimation of income upon fulfillment of the conditions mentioned in Section 145(3) of the Act. Once the AO is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under section 144 of the Act. At this juncture, what needs consideration is the question whether such an addition must be made only after the rejection of the books of account by the AO. 20. The Division Bench of the High Court of Bombay in the case of Pr. CIT v. Swananda Properties (P.) Lad [2019] 111 taxmann.com 94/267 Taxman 429/2019 SCC OnLine Bom 13359, had an occasion to consider the said question and the same was accordingly answered as under:-

"11. We note that the books of account of the respondent were rejected by the Commissioner of Income-tax (Appeals) under section 145(3) of the Act. However, the Tribunal found in the impugned order that the invocation of section 145(3) of the Act is unjustified as no defect was noted in the books of account th disregard the same. We note that the Commissioner of Income- tax (Appeals) in his order while rejecting the books of account does not specify the defect in the record. The basis of the rejection appears to be best judgment of assessment done by him. The rejection of the books should precede the best judgment assessment. On facts, the Revenue has not been able to show any defect in the respondent's records which would warrant rejection of the books and making a best judgment assessment. Thus, on facts the view taken by the Tribunal is a possible view. Therefore, no substantial question of law arises. Thus not entertained."

"4(c). Therefore, it is sine qua non that the Assessing Officer to come to a conclusion that the hooks of account maintained by the assessee are incorrect, incomplete or unreliable and reject the books of account before the proceeding to make his own assessment. In the instant case, there is no reference in the assessment order of the Assessing Officer regarding rejection of books of account." [Emphasis supplied] ➤ Reliance is also placed on the recent judgment of the jurisdictional Hon'ble ITAT, Kolkata in the case of Pravesh Kumar Jaiswal vs ITO pronounced on 16-10-2025 wherein it was held that, "6. We have considered the rival submissions and perused the records. The addition in this case has been made merely on the ground that the suppliers did not respond to notices under section 133(6) and that their GST registrations were cancelled or suspended. It is well settled that an assessee cannot be penalized for non-compliance of third parties over whom he has no control. 23. We also find merit in the contention of the assessee that once the books of accounts are not rejected by invoking section 145(3) of the Act and corresponding sales are not doubted, the corresponding purchases cannot be disallowed. The Assessing Officer has not found any defect in quantitative tally or discrepancy in the books of accounts. The addition was made purely on presumptions, surmise and not based on any tangible material. The Hon'ble jurisdictional High Court and several coordinate Benches have consistently held that when payments are made through banking channels and sales are accepted,

"Where purchases made by assessee-trader were duly supported by bills and payments were made by account payee cheque, seller also confirmed transaction and there was no evidence to show that amount was recycled back to

26.

Considering the facts of the instant case, we are of the view that addition of Rs.58,84,91,524/- was made by the learned AO entirely on surmises and conjectures which can not be sustained and has to be deleted which has been repeatedly held by the Hon'ble Apex Court and other High Courts holding that additions cannot be made on mere surmises, suspicions and conjectures. The case of the assessee fiund support from the decision of the Hon'ble Apex Court in the case of Omar Salay Mohamed Sait vs CIT reported in [1959] 37 ITR 151 (SC) wherein it was held that-

"The Tribunal had not applied its mind to the evidence which was there on the file of the appellant in the shape of information gathered subsequently and it had improperly rejected that evidence. That being the position the revenue could not very well resist the order which the Supreme Court proposed to made, setting aside the order of the Tribunal and remanding the matter back to it for dealing with the same in accordance with lave, after taking into consideration all the circumstances, the whole evidence which was available in the file of the appellant and such further evidence as the parties might be advised to lead before it. The Tribunal is a fact finding Tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before it the Supreme court will not interfere. It is necessary, however, that every fact for and against the assessee must have been considered with due case and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what

"It is, therefore, clear that the Tribunal in arriving at the conclusion it did in the present case indulged in suspicions, conjectures and surmises and acted without any evidence or upon a view of the facts which could not reasonably be entertained or the facts found were such that no person acting judicially and properly instructed as to the relevant law could have found, or- the finding was, in other words, perverse and this court is entitled to interfere," 28. Considering the facts in the present case in the light of the above decisions, we are inclined to modify and set aside the order of the ld. CIT(A) and direct the AO to delete the entire addition.The ground no. 3 of the assessee;s appeal is allowed while ground no. 1,3,4,5,6, & 7 of the revenue appeal are dismissed.

30.

After considering the rival contentions of the parties and perusing the material on record, we find that the AO has made the addition in respect of difference between the consideration as per the sale deed and value as per stamp valuation authority of ₹7,63,521/- u/s.56(2)(x)(b) of the 50C of the Act despite the assessee specifically requesting the AO to refer the matter to the DVO during the course of assessment proceedings. We also note that the ld. CIT(A) after appreciating all the facts has deleted the addition. Therefore the ld. CIT(A) has taken a correct on the issue which does not require any interference on our part. Therefore, we are inclined to uphold the order of the ld. CIT(A) on this issue by dismissing the ground raised by the revenue. The ground no. 2 in the revenue’s appeal is dismissed.

34.

In the result, the appeal of the assessee is allowed and the appeal of the revenue is dismissed.

Order pronounced in the open court on 18.05..2026.

Sd/- Sd/-

Sd/- Sd/- (PRADIP KUMAR CHOUBEY) (RAJESH KUMAR) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Kolkata, Dated: 18.05.2026

Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT DR, ITAT, 4. 5. Guard file. BY ORDER, True Copy//

Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Kolkata

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