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Facts
The assessee, proprietor of M/s Rasi Blue Metal, was involved in the business of producing blue metals. The Assessing Officer (AO) disallowed quarry expenses on the basis that quarry operations were not the assessee's business. The assessee argued that these expenses were incurred for procuring raw materials as part of a business arrangement with quarry license holders. The Commissioner of Income-tax (Appeals) [CIT(A)] partly allowed the appeal, disallowing 30% of the quarry expenses, and also made an addition for undisclosed sales based on excess excavation.
Held
The Tribunal held that quarry expenses were incurred for business purposes and could not be denied as a deduction. The Tribunal also found that the CIT(A) could not have made an estimated disallowance without rejecting the books of accounts. Regarding undisclosed sales, the Tribunal noted that the estimated sales figures, even with excess excavation, were lower than the sales admitted by the assessee, thus no addition was warranted. The Tribunal also noted that the earlier appeal in MA Nos. 63-65/Chny/2025 was allowed to adjudicate these grounds.
Key Issues
1. Whether quarry expenses incurred by the assessee were for business purposes and deductible. 2. Whether an addition on account of undisclosed sales based on excess excavation was warranted given the admitted sales figures.
Sections Cited
145(3)
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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
आदेश / O R D E R
PER ABY T. VARKEY, JM:
The assessee had filed appeals challenging the order(s) dated 31.03.2023 passed by the learned Commissioner of Income-tax (Appeals)-19, Chennai [in short ‘CIT(A)’] for AYs 2016-17, 2017-18 & 2018-19.
This appeal was originally disposed of by the Coordinate Bench, vide its order dated 28.02.2025. Subsequently, the assessee moved a Miscellaneous Application submitting that the Tribunal did not adjudicate to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 2 :: the ground(s) raised by the assessee objecting to the Ld. CIT(A)’s action of restricting the disallowance of quarry expenses and unaccounted sales of blue metal. The above said miscellaneous application was numbered as M.A. Nos. 63-65/Chny/2025. Accordingly, the Tribunal, vide order dated 25.07.2025 allowed the said Miscellaneous Applications, recalled the above said order for limited purpose of adjudicating the ground(s) raised by the assessee.
We first take up the grounds raised by the assessee in their appeal(s) for AYs 2016-17 to 2018-19 relating to quarry expenses. Since the facts involved in all the years are common, we consider it fit to adjudicate these grounds together.
The facts relating to this issue are that, the assessee is the proprietor of M/s Rasi Blue Metal [in short ‘RBM’] which is involved in the business of production of blue metals of various sizes. According to the AO, the rough stones required for production of raw materials was being procured from the quarries of two persons i.e., Shri SA Subbaiah and Shri B. Kubendran. The AO, based on recorded statements, concluded that though Shri SA Subbaiah and Shri B. Kubendran were having licenses to carry out quarrying operations, however, they assisted the assessee in quarry business by being mere lessees of the quarries. The operational control of the quarries was found to be with the assessee. The AO to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 3 :: observed that this fact was corroborated from the books of accounts of M/s RBM wherein both quarrying expenses and crushing expenses were debited in the books of the assessee. The quarry expenses represented the expenses incurred for excavating rough stones from the quarries whereas crushing expenses represent expenses incurred for crushing rough stone into blue metal. The AO however was of the view that, since the quarry operation was not the business activity of RBM but that of the license holders viz., Shri SA Subbaiah and Shri B. Kubendran, the quarry expenses could not be allowed as business expenditure in the hands of assessee. The AO accordingly disallowed the entire quarry expenses debited in the books of the assessee. Aggrieved by the order of the AO, the assessee is found to have carried the matter in appeal.
Before the Ld. CIT(A), the assessee had explained that he had a business arrangement with the quarry license holders as per which the said license holders carried out the quarrying of rough stones by using the infrastructure and facilities of M/s RBM on the quarry land which incidentally belonged to the assessee. It was further explained that, the value of rough stones received by M/s RBM from quarry license holders was in lieu of the value of expenditure incurred by M/s RBM for providing the said infrastructure and other facilities to the quarry license holders.
The assessee showed that, there was no expenditure claimed in the books of M/s RBM towards purchase of rough stones from the quarry license to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 4 :: holders and that the value of the said purchases was reflected in the form of expenditure incurred towards quarrying including provision of facilities.
It was therefore submitted that, the expenditure incurred on quarrying rough stone for and on behalf of quarry license holders was the cost paid for procuring rough stones, which were crushed and manufactured into blue metals of different sizes. The assessee thus contended that, considering the fact that there was no purchase cost of rough stones debited in the books of accounts, if the quarry expenses are disallowed, then it would result in an incongruous situation wherein the assessee would be said to have not incurred even a single rupee of cost of raw materials qua the blue metal manufactured and sold during these year(s).
The assessee accordingly pointed out that the disallowance would result into unreasonable gross profit margins which would not be normal in this line of business. It was thus contended by the assessee that the quarry expenses debited in the books of accounts was indeed his business expenditure and therefore claimed that it ought to be allowed in full.
It is seen that, the Ld. CIT(A) after considering the submissions of the assessee found merit in the explanation offered by the assessee. The Ld. CIT(A) observed that, both Shri SA Subbaiah and Shri B. Kubendran held valid quarry licenses issued by the State Government and that seigniorage fees was being paid by both of them to Government in respect of material excavated from the quarries. The Ld. CIT(A) also to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 5 ::
noted that both the persons had disclosed income from the said quarrying activities being carried out by them. The Ld. CIT(A) further categorically noted that, the business arrangement entered into by the assessee with the quarry license holders was evidenced by their respective statements as well and this contemporaneous fact was also evidenced from the books of accounts of the assessee, wherein no expenditure towards cost of purchase of rough stones was debited in the Profit & Loss Account. The Ld. CIT(A) therefore accepted the assessee’s plea that the quarry expenses was incurred pursuant to the business arrangement with the license holders. The Ld. CIT(A) also held that the rough stones received by the assessee from the license holders was in lieu of the quarry expenses incurred along with the facilities & infrastructure provided by the assessee to license holders and it is for that reason that, no separate cost of purchases was charged in the books of accounts. It is thus noted that the Ld. CIT(A) had given a categorical finding of fact that, the quarry expenses debited in the books of the assessee was to be regarded as expenditure incurred wholly and exclusively for the purpose of assessee’s business and hence allowed as deduction while computing business income. Though having held so, the Ld. CIT(A) was of the view that the details of quarry expenses was not fully verifiable and therefore made an estimated disallowance of 30% of quarry expenses in all the year(s) impugned before us. to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 6 ::
Being aggrieved by this order of the Ld. CIT(A), both the assessee and Revenue preferred appeal before this Tribunal. It is observed that, this Tribunal only adjudicated the grounds raised by the Revenue and while doing so, it upheld the Ld. CIT(A)’s findings to the extent that, the quarry expenses would be nothing but expenditure incurred during the course of assessee’s business to procure raw material and therefore the deduction thereof could not be denied to the assessee. Since the Tribunal omitted to take note of the grounds raised by the assessee objecting to the estimated disallowance of quarry expenses by Ld. CIT(A), it confirmed the Ld. CIT(A)’s finding allowing 70% of quarry expenses by dismissing the Revenue’s appeal. Pursuant to the order passed in the MA(s) filed by the assessee, as noted above, we now adjudicate the assessee’s ground challenging the estimated disallowance of 30% of quarry expenses by the Ld. CIT(A).
After considering the rival submissions and perusing the material placed before us, we find that the AO had disallowed the entire quarry expenses holding it to be non-business in nature. As observed above, the Ld. CIT(A) had recorded a categorical finding after analyzing the facts that the quarry expenses represented expenditure incurred by the assessee to procure raw material for manufacture of blue metals and therefore the same was held to be incurred for business purposes. This finding of the Ld. CIT(A) has been confirmed by this Tribunal as well.
to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 7 ::
Coming to the Ld. CIT(A)’s action of making estimated disallowance, we find that, the lower authorities had neither rejected the books of accounts nor invoked provisions of Section 145(3) before making the estimated disallowance. The Ld. AR for the assessee has further submitted before us contemporaneous data which shows that, after providing for the entire quarry expenses, the gross profit of the assessee across all the years was in the range of 40% which was comparatively higher than other blue metal producers. The assessee has also placed before us the details of the net profit ratio derived across several years which is found to be in the range of 17% to 19%, in comparison to 3%-7% of other blue metal producers. On these given facts, it was unsafe to allege that the assessee had debited higher or excessive quarry expenses in the books of accounts. Having regard to the foregoing details, we are of the considered view that, without rejecting the books of accounts in terms of Section 145(3), the Ld. CIT(A) could not have made disallowance of expenses on estimate. The finding of the Ld. CIT(A) is found to be influenced by conjectures and surmises and not any tangible material. For the aforesaid reasons, we delete the estimated disallowance of 30% of quarry expenses retained by the Ld. CIT(A) and allow these grounds of the assessee.
The other ground(s) raised by the assessee in AYs 2016-17 & 2017- 18, which was not adjudicated by the Tribunal in its original order related to the addition on account of undisclosed sale of blue metal. The to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 8 ::
background facts as noted are that, according to the AO, the assessee had made excess excavation of rough stones from the mines, from which it had manufactured blue metal outside the books and made undisclosed sales. In order to ascertain the quantum of excess excavation, the AO had referred the matters to the DVO, who had estimated the excess excavation of rough stones from the quarry of Shri SA Subbaiah at 22,76,306 cubic meters and gravel of 2,75,562 cubic meters, whose sales value was estimated by the AO at Rs.63.16 Crores, which was added by way of undisclosed income. Similarly, excess excavation of rough stone from the quarry of Shri B. Kubendran was estimated by the DVO at 52,528 cubic meters, whose estimated value of Rs.3.85 crores was also added to the total income of the assessee.
On appeal, the Ld. CIT(A) is found to have elaborately examined the objections of the assessee to the report of the DVO, and the examination / cross examination of the DVO. The Ld. CIT(A) also took note of the order/ report passed by the RDO u/s 36(A) of Tamil Nadu Minor Minerals Concession Rules, 1959, pursuant to the DVO’s report forwarded by the Income-tax Department. The Ld. CIT(A) observed that, the RDO had analyzed the DVO’s report and the volume of excess stone quarried was arrived at 1,02,241.39 cubic metre and the excess gravel unearthed was arrived at 71,912.62 cubic metre, whose basis may be summarized as under:-
to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 9 ::
Particulars Stones Gravel (Cubic Meter) (Cubic Meter) Volume of minerals removed without 21,66,206.00 2,75,562.00 permission as per the report Income tax department Volume of minerals dumped on the 20,63,964.61 2,03,649.38 leased/licensed spot/nearby it according to the report of Asst. Director (LSD) Pudukottai/Tahsildar Illupur and Asst.Director (G&M) Pudukottai Volume of minerals quarried and 1,02,241.39 71,912.62 taken out without permission
Going by the order of RDO, the excess quantity of 'rough stone’ excavated and removed from the quarry of Shri SA Subbaiah was held to be 1,02,241 cubic meters by the Ld. CIT(A). Consequently, the Ld. CIT(A)
held that, the unaccounted production of blue metal and the corresponding unaccounted sales of blue metal was required to be determined on the basis of the undisclosed quantity of rough stone taken out from the quarry i.e. 1,02,241 cubic meters. In so far as the excess excavation from quarry of Shri B Kubendran was concerned, considering the smallness of quantity, the Ld. CIT(A) confirmed the figure of 52,528 cubic meters as estimated by the DVO. According to Ld. CIT(A), the assessee would have received such excess excavation which was removed to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 10 :: from the quarries of Shri SA Subbaiah and Shri B. Kubendran and accordingly directed the AO to re-work the undisclosed sales made by the assessee. The Ld. CIT(A) is found to have further held that, the entire sales value could not be added as the income of the assessee and directed the AO to apply gross profit rate of 40% on such unaccounted sales to arrive at the unaccounted income of the assessee.
Being aggrieved by the order of the Ld. CIT(A), both the assessee and Revenue preferred appeal before this Tribunal. It is observed that, though the Tribunal had taken note of the grounds raised by the assessee but had only adjudicated the grounds raised by the Revenue. The Tribunal is noted to have countenanced the Ld. CIT(A)’s findings, while dismissing the grounds of the Revenue. The Tribunal is found to have concurred with the Ld. CIT(A) that, the DVO’s report was erroneous and unreliable.
Instead, the Tribunal upheld the Ld. CIT(A)’s reliance on the order/report of RDO. The Tribunal, not having taken cognizance of the assessee’s grounds, is found to have went on to countenance the Ld. CIT(A)’s view that, the excess quantity of 1,02,241 cubic meters & 52,528 cubic meters removed from the quarries of Shri SA Subbaiah and Shri B. Kubendran would have been received by the assessee, and it was presumed that, the assessee would have manufactured blue metals from the same and sold it outside the books of accounts. The Tribunal thus affirmed the estimation of profits at 40% on the unaccounted sales, estimated by Ld. CIT(A). to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 11 ::
Now, in light of the order passed in the MA(s) filed by the assessee, we take up the assessee’s ground challenging the addition of unaccounted sales retained by the Ld. CIT(A).
Heard both the parties. The Ld. AR, at the outset, pointed out that, though the assessee had raised this ground in AY 2016-17 but there was no addition by way of unaccounted sales of blue metal was made by AO in AY 2016-17 and therefore this ground of the assessee raised in AY 2016- 17 is being dismissed as infructuous. In so far as AY 2017-18 is concerned, the Ld. AR showed us that, while estimating the undisclosed sales, the AO himself had compared the estimated sales derived from the figures of excess excavation along with the reported excavation, vis-à-vis the sales disclosed in the books of accounts by the assessee and wherever the sales as per books was found to be higher, no addition on account of undisclosed sales were made in those years [AYs 2013-14, 2014-15 & 2016-17]. The Ld. AR thus explained that, if the AO recomputes the workings based on the directions of the CIT(A), then the resultant sales figure for AY 2017-18 is far less than the sales admitted by the assessee in the return of income and therefore like AYs 2013-14, 2014-15 & 2016-17, no addition on account of profit on undisclosed sales is warranted in the given facts of the case. The same was demonstrated before us by way of written submissions, whose relevant portion is extracted below:-
to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 12 ::
Revised computation for AY 2017-18 based on CIT(A)'s direction of 2,12,341 cubic meters in the case of Shri S.a Subbaiah and 52,528 cubic meters in the case of Shri B Kubendren
Quantity Sale value of Sale value of Sale value of based on Blue Metals Blue Metals Blue Metals Rough Stone from Revised workings seigniorage processed from processed from Rough Stone processed from Total revised FY quarry site of S.A (proportionate fees (para 6.5 the rough stone the rough stone from quarry site the rough stone Quantity Subbaiah basis) of page 11 of of S.A Subbaiah's of S.A Subbaiah's of B.Kubendren of assessment quarry originally quarry based on B.Kubendren's order) quantified by AO CIT(A)'s direction quarry
(cu.m) (Rs.) (cu.m) (Rs.) (A) (B) (C ) (D) ( E)=(C +D) (F) (G) = (F)/(B)*(E) (H) (I) 2010-11 1,82,396 8,192.40 - 14,91,08,730 - - 2011-12 1,09,438 4,915 - 9,38,43,085 - - 2012-13 29,183 1,311 - 2,64,83,573 - - 2013-14 58,367 2,622 - 5,76,37,413 - - 2014-15 12,54,883 56,364 - 1,23,91,96,963 - - 2015-16 43,775 1,966 1,800 3,766 4,32,27,813 37,19,096 26,486 2,61,54,925 2016-17 5,98,258 26,871 24,600 51,471 59,07,79,775 5,08,27,629 26,042 2,57,16,475 TOTAL 22,76,300 1,02,241 2,20,02,77,352 52,528 5,18,71,400
In effect the total estimated sales for the AY 2017-18 stands at Rs.7,65,44,104/- [Rs.5,08,27,629+Rs.2,57,16,475]. This amount is taken to the next tabulation for comparing and quantifying unaccounted sales.
Revised computation for the AY 2017-18 based on CIT(A)'s direction of 2,12,341 cubic meters in the case of Shri S.a Subbaiah and 52,528 cubic meters in the case of Shri B Kubendren
Unaccounted income of Total Sales of in the hands of M/s. Rasi Blue Metals for Sales as per return Blue Metals (Prop. Shri. M/s. Rasi Blue income of Shri. FY C.Vijayabaskar) from the AY Metals = C.Vijayabaskar (Prop. excess of sales of Blue Column ( C) + M/s. Rasi Blue Metals) Metals in respective FY = column ( E) Column (F) - Column (G) (Rs.) (Rs.) (Rs.) (A) (F) (G) (H) 2010-11 2011-12 2011-12 Not considered in this workings as the assessments of these years 2012-13 were held invalid by the CIT(A) and upheld by the Hon'ble ITAT in 2012-13 2013-14 2013-14 its earlier order 2014-15 2014-15 2015-16 2015-16 2,98,74,021 28,28,60,683 -25,29,86,662 2016-17 2016-17 7,65,44,104 28,30,84,074 -20,65,39,970 2017-18
Note: As the resultant amount in Column (H) is negative, there cannot be any unaccounted sale of Blue Metals for the AY 2017-18. Accordingly there is no necessity to compute any GP of 40% on the unaccounted sales as directed by CIT(A) in para 79 of his order.
Having gone through the above workings, we find merit in the submission of the assessee that, having regard to the excess excavation to 591/Chny/2023 (AYs 2016-17 to 2018-19) Dr.C. Vijayabaskar :: 13 :: estimated by the Ld. CIT(A) from the quarries of Shri Subbaiah [102241 cubic metres] and Shri Kubendran [52258 cubic metres], the resultant sales figures [aggregate of the estimated sales of reported excavation and excess excavation] is still lower than the sales admitted by the assessee in his return of income for AY 2017-18. Therefore, going by the AO’s analogy set out in the assessment orders on this issue for AYs 2013-14, 2014-15 & 2016-17, no addition on account of undisclosed sales of blue metals is warranted in the hands of the assessee in AY 2017-18. We thus allow this ground raised in AY 2017-18 and direct the AO to delete the same in full.
In view of our above findings, the other contentions raised by the assessee to the veracity of the RDO’s report and the estimation of excess excavation have been rendered academic and is thus not being adjudicated upon.
In the result, the appeal(s) of the assessee for AY 2016-17 is partly 16. allowed and the appeals for AYs 2017-18 & 2018-19 stands allowed.
Order pronounced on the 14th day of January, 2026, in Chennai.
S Sd/- Sd/- (एबी टी. वक�) (जगदीश) (JAGADISH) (ABY T. VARKEY) लेखा सद�/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai,