HITESH UGAMRAJ MEHTA ,MUMBAI vs. ASSESSING OFFICER , MUMBAI
Facts
The assessee, engaged in manufacturing and trading of gold jewellery, claimed labour charges of Rs. 4,92,34,244/-. The Assessing Officer (AO) identified five labour contractors whose bank accounts showed immediate cash withdrawals after receiving cheques, suspecting the payments were bogus. The AO made a disallowance of Rs. 1,67,19,404/-.
Held
The Commissioner of Income-tax (Appeals) restricted the disallowance to 10% of the amount related to the five contractors, amounting to Rs. 16,71,940/-, considering the nature of the jewellery business and the practices of labour contractors.
Key Issues
Whether the disallowance of labour charges is justified when payments were made by account payee cheques, and the labourers withdrew cash shortly thereafter due to the business practice of paying daily workers in cash. Additionally, the validity of the notice issued under section 143(2) was challenged.
Sections Cited
133(6), 143(2), 143(3), 44AD, 234A, 234B, 234C, 234D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI OM PRAKASH KANT & MS. KAVITHA RAJAGOPAL
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “E” MUMBAI BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) & MS. KAVITHA RAJAGOPAL (JUDICIAL MEMBER) ITA No. 8939/MUM/2025 Assessment Year: 2023-24
Hitesh Ugamraj Mehta ACIT 23(1)()6 603, Raibow Plaza, 6th Piramal Chambers, Vs. Floor, 46 Chapa Galli Lalbaug, Mumbai – Zaveri Bazar, Mumbai 400012
PAN No. ACJPM9327M Appellant Respondent : Shri Hansraj Mehta Assessee by Revenue by : Shri Hemanshu Joshi, Sr. DR
Date of Hearing : 16/03/2026 : 30/03/2026 Date of pronouncement
ORDER PER OM PRAKASH KANT, AM
This appeal by the assessee is directed against order dated 16.09.2024 passed by the Ld. Commissioner of Income-tax (Appeals) / National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2023-24. The grounds raised by the assessee are reproduced as under:
01 On the facts and circumstances of the case and in law the learned Commissioner of Income tax - Appeals erred in confirming ad-hoc disallowances of Rs. 1670940/-being 10% out of labour
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charges paid of Rs.16719404/ charges paid of Rs.16719404/- to five parties and making to five parties and making addition to total income of the appellant. Provisions of the Act addition to total income of the appellant. Provisions of the Act addition to total income of the appellant. Provisions of the Act ought to have been properly construed and re ought to have been properly construed and regard being had to gard being had to facts of the case disallowance of Rs. 1670940/-out of labour facts of the case disallowance of Rs. 1670940/ facts of the case disallowance of Rs. 1670940/ charges paid to five parties should not have been confirmed. charges paid to five parties should not have been confirmed. charges paid to five parties should not have been confirmed. Reasons assigned by him are wrong and insufficient to justify Reasons assigned by him are wrong and insufficient to justify Reasons assigned by him are wrong and insufficient to justify disallowance of Rs.1670940/ disallowance of Rs.1670940/- being 10% out of labour c being 10% out of labour charges paid to five parties by the appellant. paid to five parties by the appellant. 02 On the facts and circumstances of the case and in law the 02 On the facts and circumstances of the case and in law the 02 On the facts and circumstances of the case and in law the learned Commissioner of Income Tax learned Commissioner of Income Tax-Appeals erred in confirming Appeals erred in confirming ad-hoc disallowances of Rs. 1670940/ hoc disallowances of Rs. 1670940/-being 10% out of labour being 10% out of labour charges paid to five part charges paid to five parties on suspicion, whims, assumption and ies on suspicion, whims, assumption and conjectures and without bringing any cogent material, evidences conjectures and without bringing any cogent material, evidences conjectures and without bringing any cogent material, evidences on record is liable to be deleted. on record is liable to be deleted. 03 The learned Commissioner of Income Tax Appeals erred in 03 The learned Commissioner of Income Tax Appeals erred in 03 The learned Commissioner of Income Tax Appeals erred in confirming order made under section 143(3) of the Act which is confirming order made under section 143(3) of the Act whic confirming order made under section 143(3) of the Act whic without jurisdiction, illegal, bad without jurisdiction, illegal, bad-in-law, ultra virus and without law, ultra virus and without allowing reasonable opportunity of the hearing, and without allowing reasonable opportunity of the hearing, and without allowing reasonable opportunity of the hearing, and without appreciating facts, submission and evidences in their proper appreciating facts, submission and evidences in their proper appreciating facts, submission and evidences in their proper perspective, without providing draft assessment order is liable to perspective, without providing draft assessment order is liable perspective, without providing draft assessment order is liable be annulled. 04 The learned Commissioner of Income Tax 04 The learned Commissioner of Income Tax - Appeals erred in Appeals erred in confirming notice issued under section 143(2) of the Act as valid confirming notice issued under section 143(2) of the Act as valid confirming notice issued under section 143(2) of the Act as valid one, though the same is not in conformity with instruction issued one, though the same is not in conformity with instruction issued one, though the same is not in conformity with instruction issued by Central Board of Direct Taxes F.No.225/157/2017/ITA- II by Central Board of Direct Taxes F.No.225/157/ by Central Board of Direct Taxes F.No.225/157/ dated 23.06.2017, which is binding on him and therefore notice dated 23.06.2017, which is binding on him and therefore notice dated 23.06.2017, which is binding on him and therefore notice issued under section 143(2) of the Act is without jurisdiction, issued under section 143(2) of the Act is without jurisdiction, issued under section 143(2) of the Act is without jurisdiction, invalid and make subsequent assessment also invalid and liable invalid and make subsequent assessment also invalid and liable invalid and make subsequent assessment also invalid and liable to be annulled. 05 The learned Assessing Officer erred in charging interest under 05 The learned Assessing Officer erred in charging interest under 05 The learned Assessing Officer erred in charging interest under section 234A. 234B and 234C and 234D of the Act. section 234A. 234B and 234C and 234D of the Act. section 234A. 234B and 234C and 234D of the Act. 06. The appellant crave leave to add, amend, alter and / or vary 06. The appellant crave leave to add, amend, alter and / or vary 06. The appellant crave leave to add, amend, alter and / or vary any of the grounds of appeal before or at the time of hearing. any of the grounds of appeal before or at the time of hearing. any of the grounds of appeal before or at the time of hearing.
Hitesh Ugamraj Mehta 3 ITA Nos. 8939/MUM/2025 ITA Nos.
Briefly stated the facts of the case are that the assessee tated the facts of the case are that the assessee tated the facts of the case are that the assessee was engaged in the carrying business of manufacturing and was engaged in the carrying business of manufacturing and was engaged in the carrying business of manufacturing and trading of gold jewellery as proprietorship trading of gold jewellery as proprietorship of M/s. Gudhiya of M/s. Gudhiya Gold Creations. The assessee filed his return of income for he assessee filed his return of income for he assessee filed his return of income for the A.Y 2023-24 on 24 on 28.10.2023 declaring total income of R 28.10.2023 declaring total income of Rs. 23,13,320/-. The return filed by the assessee was selected The return filed by the assessee was selected The return filed by the assessee was selected for scrutiny assessment and statutory notices under the for scrutiny assessment and statutory notices under the for scrutiny assessment and statutory notices under the Income Tax Act, 1961 [in short ‘the Act’] were issued and Income Tax Act, 1961 [in short ‘the Act’] were issued and Income Tax Act, 1961 [in short ‘the Act’] were issued and complied. The ld ld AO was of the view that AO was of the view that gross profit declared on the business turnover was low and therefore he declared on the business turnover was low and therefore he declared on the business turnover was low and therefore he examined the various expenses incurred by the assessee examined the various expenses incurred by the assessee examined the various expenses incurred by the assessee including the labour contract expenses. The Ld.AO observed including the labour contract expenses. The Ld.AO observed including the labour contract expenses. The Ld.AO observed that the assessee had claimed labour expenditure of Rs. that the assessee had claimed labour expenditure of Rs. that the assessee had claimed labour expenditure of Rs. 4,92,34,244/- which comprised of labour expenses against which comprised of labour expenses against which comprised of labour expenses against manufacturing manufacturing of of Rs. 1,30,85,760/ Rs. 1,30,85,760/- and and other other labour labour expenses of Rs. 3,61,48,484/ expenses of Rs. 3,61,48,484/-. After analyzing the copy of . After analyzing the copy of bank statement of the labour contractors obtained from bank statement of the labour contractors obtained from bank statement of the labour contractors obtained from various banks invoking authority u/s 133(6) o invoking authority u/s 133(6) of the Act, the invoking authority u/s 133(6) o Ld.AO shortlisted five labourers who had withdrawn the cash Ld.AO shortlisted five labourers who had withdrawn the cash Ld.AO shortlisted five labourers who had withdrawn the cash from their bank accounts immediately after one or two days from their bank accounts immediately after one or two days from their bank accounts immediately after one or two days from receipt of the receipt of the cheques from the assessee. After carrying from the assessee. After carrying out detailed enquiry and investigation out detailed enquiry and investigation through verification through verification unit of faceless team, unit of faceless team, the Ld.AO held the payment to those the Ld.AO held the payment to those five labour contractors as bogus expenditure and made five labour contractors as bogus expenditure and made five labour contractors as bogus expenditure and made disallowances aggregating to Rs. 1,67,19,404/ disallowances aggregating to Rs. 1,67,19,404/-. .
Hitesh Ugamraj Mehta 4 ITA Nos. 8939/MUM/2025 ITA Nos.
On further appeal, the Ld. CIT(A) after taking into On further appeal, the Ld. CIT(A) after taking into On further appeal, the Ld. CIT(A) after taking into consideration submission of the asses consideration submission of the assessee and documents see and documents supporting justification of the labour contract expenses supporting justification of the labour contract expenses supporting justification of the labour contract expenses restricted the disallowance to the extent of 10% of the total restricted the disallowance to the extent of 10% of the total restricted the disallowance to the extent of 10% of the total disallowance of Rs. disallowance of Rs. 1,67,19,404/- and computed 1,67,19,404/ and computed said said disallowance to Rs. 16,71,940/ to Rs. 16,71,940/-. Aggrieved, the assessee is the assessee is in appeal before the Tribunal by way of raising the grounds al before the Tribunal by way of raising the grounds al before the Tribunal by way of raising the grounds herein above. 4. Before us the Ld. Counsel for the assessee submitted Before us the Ld. Counsel for the assessee submitted Before us the Ld. Counsel for the assessee submitted that the sole issue in the grounds raised by the assessee in that the sole issue in the grounds raised by the assessee in that the sole issue in the grounds raised by the assessee in respect of the 10% of the expenditure respect of the 10% of the expenditure sustained by the Ld. sustained by the Ld. CIT(A) out of disallowance made disallowance made by the Ld. AO. . The assessee also raised the grounds challenging the validity of the notice also raised the grounds challenging the validity of the notice also raised the grounds challenging the validity of the notice issued u/s 143(2) of the Act. issued u/s 143(2) of the Act. 5. The ground No. 1 & 2 of the appeal relate No. 1 & 2 of the appeal relate to disallowance of the labour charges sustained by the Ld. disallowance of the labour charges sustained by the Ld. disallowance of the labour charges sustained by the Ld. CIT(A) in respect of the five labour contract parties. The spect of the five labour contract parties. The spect of the five labour contract parties. The facts for the issue in dispute are that the Ld. AO issued facts for the issue in dispute are that the Ld. AO facts for the issue in dispute are that the Ld. AO 133(6) of the Act the Bank of all labour contractor and 133(6) of the Act the Bank of all labour contractor and 133(6) of the Act the Bank of all labour contractor and collected collected collected their their their bank bank bank statements statements statements for for for the the the year year year under under under consideration. After analyzing the bank sta fter analyzing the bank statements of the all tements of the all the labour contractors the labour contractors, the ld AO identified five part identified five parties where they had withdrawn the money by way of cash from their withdrawn the money by way of cash from their withdrawn the money by way of cash from their bank accounts within one or two days bank accounts within one or two days of receipt of the receipt of the
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cheque from the assessee. The Ld.AO was of the suspicion m the assessee. The Ld.AO was of the suspicion m the assessee. The Ld.AO was of the suspicion that said cash withdrawal must have been returned back to said cash withdrawal must have been returned back to said cash withdrawal must have been returned back to the assessee within one or two days. The Ld.AO therefore the assessee within one or two days. The Ld.AO therefore the assessee within one or two days. The Ld.AO therefore issued a show cause notice to the assessee for justifying the issued a show cause notice to the assessee for justifying the issued a show cause notice to the assessee for justifying the said labour charges. said labour charges. 5.1 The assessee replied that those labour contractors were The assessee replied that those labour contractors were The assessee replied that those labour contractors were neither the family members nor relative of the assessee and neither the family members nor relative of the assessee and neither the family members nor relative of the assessee and therefore the assessee cannot influence those parties. It was therefore the assessee cannot influence those parties. It was therefore the assessee cannot influence those parties. It was further submitted that the assessee cannot peep into the further submitted that the assessee cannot peep into the further submitted that the assessee cannot peep into the business affairs of the parties business affairs of the parties and how they managed their and how they managed their businesses and the assessee cannot be answerable to explain businesses and the assessee cannot be answerable to explain businesses and the assessee cannot be answerable to explain the transactions in their bank accounts. The assessee the transactions in their bank accounts. The assessee the transactions in their bank accounts. The assessee cannot keep track of the transactions in bank accounts of cannot keep track of the transactions in bank accounts of cannot keep track of the transactions in bank accounts of the other party fro rom whom he had obtained services of m whom he had obtained services of labour charges and made payment by account payee cheque abour charges and made payment by account payee cheque abour charges and made payment by account payee cheque as required under the provisions of the Act. The assessee as required under the provisions of the Act. The assessee as required under the provisions of the Act. The assessee had retained the copy of the bills issued by them. The had retained the copy of the bills issued by them. The had retained the copy of the bills issued by them. The assessee further submitted that the reason for withdrawals assessee further submitted that the reason for withdrawals assessee further submitted that the reason for withdrawals from the bank accounts can from the bank accounts can be explained by the respective be explained by the respective parties only who have withdrawn the cash from the bank parties only who have withdrawn the cash from the bank parties only who have withdrawn the cash from the bank accounts. 5.2 In view of the reply of the assessee the Ld.AO issued In view of the reply of the assessee the Ld.AO issued In view of the reply of the assessee the Ld.AO issued notice u/s 133(6) of the Act notice u/s 133(6) of the Act to those parties. A to those parties. All the parties replied to the notices issued by the replied to the notices issued by the Ld.AO. The main Ld.AO. The main
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contention of the parties for withdrawing cash was that they contention of the parties for withdrawing cash was that they contention of the parties for withdrawing cash was that they had to depend on their business for daily workers who had to depend on their business for daily workers who had to depend on their business for daily workers who required to pay in cash as per the industries standard but required to pay in cash as per the industries standard but required to pay in cash as per the industries standard but the Ld.AO found the reply / response submitted by all those the Ld.AO found the reply / response submitted by all those the Ld.AO found the reply / response submitted by all those labour contractors as r contractors as identically worded and therefore he did and therefore he did not believe in those replies. According to the Ld.AO those job not believe in those replies. According to the Ld.AO those job not believe in those replies. According to the Ld.AO those job workers had declared their return of income u/s 44AD of the workers had declared their return of income u/s 44AD of the workers had declared their return of income u/s 44AD of the Act only. In view of the Ld.AO the assessee having turnover Act only. In view of the Ld.AO the assessee having turnover Act only. In view of the Ld.AO the assessee having turnover exceeding Rs. 150 Crores, therefore assessee should have 150 Crores, therefore assessee should have 150 Crores, therefore assessee should have been its own manufacturing unit rather than outsourcing to been its own manufacturing unit rather than outsourcing to been its own manufacturing unit rather than outsourcing to the so many contractors. the so many contractors.
5.3 The Ld.AO further referred the matter to the verification The Ld.AO further referred the matter to the verification The Ld.AO further referred the matter to the verification unit under the faceless assessment utility. T he faceless assessment utility. The verification he verification unit deployed inspectors deployed inspectors for verification of premises of those for verification of premises of those contractors but they contractors but they reported that the parties were not found reported that the parties were not found at the addresses given in their return of income. On the at the addresses given in their return of income. On the at the addresses given in their return of income. On the basis of the report basis of the report of verification unit, the Ld.AO ultimately the Ld.AO ultimately made addition of Rs. 1,67,19,404/ of Rs. 1,67,19,404/- by observing as under: by observing as under: 6.1.11 Based on the findings outlined above, it has been observed 6.1.11 Based on the findings outlined above, it has been observed 6.1.11 Based on the findings outlined above, it has been observed that the labour parties do not reside at the latest address that the labour parties do not reside at the latest address that the labour parties do not reside at the latest address mentioned in the Income Tax Return (ITR). Furthermore, this mentioned in the Income Tax Return (ITR). Furthermore, this mentioned in the Income Tax Return (ITR). Furthermore, this address is also indicated address is also indicated in the covering letter provided by the in the covering letter provided by the labour parties in their reply. It has been confirmed that no labour parties in their reply. It has been confirmed that no labour parties in their reply. It has been confirmed that no business activities are being carried out at the said address. business activities are being carried out at the said address. business activities are being carried out at the said address. These These These discrepancies discrepancies discrepancies raise raise raise significant significant significant concerns concerns concerns about about about the the the legitimacy of the business operation legitimacy of the business operations claimed by the labour s claimed by the labour parties. From the evidence gathered, it can be ascertained that the parties. From the evidence gathered, it can be ascertained that the parties. From the evidence gathered, it can be ascertained that the
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entities involved, to whom the labour charges were paid, do not entities involved, to whom the labour charges were paid, do not entities involved, to whom the labour charges were paid, do not exist. This further casts doubt on the authenticity of the exist. This further casts doubt on the authenticity of the exist. This further casts doubt on the authenticity of the associated expenditure, which to have bee associated expenditure, which to have been fabricated in an n fabricated in an attempt to reduce the taxable profit of the assessee. The existence attempt to reduce the taxable profit of the assessee. The existence attempt to reduce the taxable profit of the assessee. The existence of these non- genuine entities, coupled with the lack of business genuine entities, coupled with the lack of business genuine entities, coupled with the lack of business activity at the provided address, strongly suggests that the activity at the provided address, strongly suggests that the activity at the provided address, strongly suggests that the transactions in question are bogus. transactions in question are bogus. 6.1.12 The reply submitted by the assessee has been carefully The reply submitted by the assessee has been carefully The reply submitted by the assessee has been carefully considered; however, it was found to be unsatisfactory. The considered; however, it was found to be unsatisfactory. The considered; however, it was found to be unsatisfactory. The assessee has failed to discharge the onus of proving the assessee has failed to discharge the onus of proving the assessee has failed to discharge the onus of proving the genuineness of the transactions. Further it can be ascertained genuineness of the transactions. Further it can be ascertained genuineness of the transactions. Further it can be ascertained from the above discu from the above discussion that the labour parties to whom the ssion that the labour parties to whom the payments were made withdrew the amounts on the same day and payments were made withdrew the amounts on the same day payments were made withdrew the amounts on the same day subsequently returned the money back to the assessee. The fact subsequently returned the money back to the assessee. The fact subsequently returned the money back to the assessee. The fact that there were same that there were same-day deposits and withdrawals raises day deposits and withdrawals raises serious suspicions about the legit serious suspicions about the legitimacy of these transactions. This imacy of these transactions. This pattern of immediate returns and withdrawals indicates that the pattern of immediate returns and withdrawals indicates that the pattern of immediate returns and withdrawals indicates that the transactions were likely structured to create a facade of legitimate transactions were likely structured to create a facade of legitimate transactions were likely structured to create a facade of legitimate payments without any actual business activity taking place. The payments without any actual business activity taking place. The payments without any actual business activity taking place. The nature of these transacti nature of these transactions, where funds are withdrawn the ons, where funds are withdrawn the same day, creates a significant red flag. This raises a query over same day, creates a significant red flag. This raises a query over same day, creates a significant red flag. This raises a query over the genuineness of the labour charges claimed by the assessee. it the genuineness of the labour charges claimed by the assessee. it the genuineness of the labour charges claimed by the assessee. it leads to the conclusion that the payments were merely fabricated leads to the conclusion that the payments were merely fabricated leads to the conclusion that the payments were merely fabricated for the purpose of redu for the purpose of reducing taxable income. 5.4 On On further further appeal appeal, the the Ld. Ld. CIT(A) CIT(A) however however after after considering the submissions of the assessee and various considering the submissions of the assessee and various considering the submissions of the assessee and various documents filed restricted the disallowance to the extent of documents filed restricted the disallowance to the extent of documents filed restricted the disallowance to the extent of 10% of the expenditure in relation to those five parties, the 10% of the expenditure in relation to those five parties, the 10% of the expenditure in relation to those five parties, the relevant finding of the Ld. CIT(A) is reproduced herein below: vant finding of the Ld. CIT(A) is reproduced herein below: vant finding of the Ld. CIT(A) is reproduced herein below:
However, it is important to understand the nature of jewellery 5. However, it is important to understand the nature of jewellery 5. However, it is important to understand the nature of jewellery business. business. business. Assessee Assessee Assessee is is is engaged engaged engaged in in in trading trading trading as as as well well well as as as manufacturing of gold jewellery manufacturing of gold jewellery. In this business, there are small . In this business, there are small and mostly illiterate labourers, who find it very difficult to and mostly illiterate labourers, who find it very difficult to and mostly illiterate labourers, who find it very difficult to
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maintain books of accounts and proper bank accounts. Their maintain books of accounts and proper bank accounts. Their maintain books of accounts and proper bank accounts. Their residences are also mostly rental premises. Hence, in order to residences are also mostly rental premises. Hence, in order to residences are also mostly rental premises. Hence, in order to ensure that all labour charges are ensure that all labour charges are being paid through bank being paid through bank accounts, mostly jewellers entered into contract with one big accounts, mostly jewellers entered into contract with one big accounts, mostly jewellers entered into contract with one big labour contractor, who in turn manages small labourers. It is the labour contractor, who in turn manages small labourers. It is the labour contractor, who in turn manages small labourers. It is the duty of main labour contractor to fulfil all documentary and legal duty of main labour contractor to fulfil all documentary and legal duty of main labour contractor to fulfil all documentary and legal requirements and get the work done. I requirements and get the work done. In this case also, same n this case also, same modus operandi is being followed. This is the reason why these modus operandi is being followed. This is the reason why these modus operandi is being followed. This is the reason why these labour contractors immediately withdraw the cash from their bank labour contractors immediately withdraw the cash from their bank labour contractors immediately withdraw the cash from their bank accounts, as soon as they receive, as they need to pay to small accounts, as soon as they receive, as they need to pay to small accounts, as soon as they receive, as they need to pay to small labourers immediately. In all these proce labourers immediately. In all these proceedings, nowhere AO has edings, nowhere AO has raised doubt about the genuineness of the labour expenses, for raised doubt about the genuineness of the labour expenses, for raised doubt about the genuineness of the labour expenses, for which bills have been submitted by these five labour contractors. which bills have been submitted by these five labour contractors. which bills have been submitted by these five labour contractors. Further, AO has accepted other labour charges i.e out of total Further, AO has accepted other labour charges i.e out of total Further, AO has accepted other labour charges i.e out of total labour charges of Rs.4,92,34,244/ labour charges of Rs.4,92,34,244/-, AO has disallowed labour s disallowed labour charges of Rs. 1,67,19,404/ charges of Rs. 1,67,19,404/- only, belonging to these five parties only, belonging to these five parties and accept all other expenses. and accept all other expenses. 6. AO has made disallowance on the ground that during spot 6. AO has made disallowance on the ground that during spot 6. AO has made disallowance on the ground that during spot verification, these labour contractors were not found by VU, but verification, these labour contractors were not found by VU, but verification, these labour contractors were not found by VU, but given the nature of business, it is a normal practice. Even in one re of business, it is a normal practice. Even in one re of business, it is a normal practice. Even in one case VU inspector himself has found another address of one of the case VU inspector himself has found another address of one of the case VU inspector himself has found another address of one of the labour contractor, namely Dipankar narayan Maity. This business labour contractor, namely Dipankar narayan Maity. This business labour contractor, namely Dipankar narayan Maity. This business runs in the very small bylanes, where labourers mostly operate runs in the very small bylanes, where labourers mostly operate runs in the very small bylanes, where labourers mostly operate from rented premises which also keeps on changing. AO has made d premises which also keeps on changing. AO has made d premises which also keeps on changing. AO has made addition on the surmises that all the cash withdrawn by these addition on the surmises that all the cash withdrawn by these addition on the surmises that all the cash withdrawn by these five labour contractors was received back by assessee, but there five labour contractors was received back by assessee, but there five labour contractors was received back by assessee, but there is no documentary evidence to prove this round tripping of funds. is no documentary evidence to prove this round tripping of funds. is no documentary evidence to prove this round tripping of funds. All these five contractors were filing their Return of income, and five contractors were filing their Return of income, and five contractors were filing their Return of income, and even submitted their profit and loss account, balance sheet and even submitted their profit and loss account, balance sheet and even submitted their profit and loss account, balance sheet and copy of ITR along with bills of labour charges, which were even copy of ITR along with bills of labour charges, which were even copy of ITR along with bills of labour charges, which were even GST compliant in case of few parties and they follow all legal GST compliant in case of few parties and they follow all legal GST compliant in case of few parties and they follow all legal procedures. Further, there was no any adverse information in es. Further, there was no any adverse information in es. Further, there was no any adverse information in possession of the AO, on the basis of which, it can be concluded possession of the AO, on the basis of which, it can be concluded possession of the AO, on the basis of which, it can be concluded that these five parties were engaged in any type of bogus billing. that these five parties were engaged in any type of bogus billing. that these five parties were engaged in any type of bogus billing. 7. In assessment order, AO has raised doubt that labour parties 7. In assessment order, AO has raised doubt that labour parties 7. In assessment order, AO has raised doubt that labour parties had sufficient balances in their bank account, then why they were ficient balances in their bank account, then why they were ficient balances in their bank account, then why they were
Hitesh Ugamraj Mehta 9 ITA Nos. 8939/MUM/2025 ITA Nos.
immediately withdrawing cash. But, it is businessman's own way immediately withdrawing cash. But, it is businessman's own way immediately withdrawing cash. But, it is businessman's own way of doing business. He cannot do business as per the whims of of doing business. He cannot do business as per the whims of of doing business. He cannot do business as per the whims of Assessing Officer. Further, the fact that they have sufficient Assessing Officer. Further, the fact that they have sufficient Assessing Officer. Further, the fact that they have sufficient balance in their bank accounts, show their creditworthiness and their bank accounts, show their creditworthiness and their bank accounts, show their creditworthiness and genuinity. 8. During the assessment proceedings, assessee has submitted all 8. During the assessment proceedings, assessee has submitted all 8. During the assessment proceedings, assessee has submitted all the relevant details along with documentary evidences and the relevant details along with documentary evidences and the relevant details along with documentary evidences and explained in detail about the nature of labour charges. Relevant explained in detail about the nature of labour charges. Relevant explained in detail about the nature of labour charges. Relevant extract of assessee's submission is reproduced as below ract of assessee's submission is reproduced as below ract of assessee's submission is reproduced as below "25.02.2025: It is submitted that assessee is engaged mainly in "25.02.2025: It is submitted that assessee is engaged mainly in "25.02.2025: It is submitted that assessee is engaged mainly in the business of trading inGold Jewellery, apart from above the the business of trading inGold Jewellery, apart from above the the business of trading inGold Jewellery, apart from above the assessee is also making jewellery on thebasis of labour charges assessee is also making jewellery on thebasis of labour charges assessee is also making jewellery on thebasis of labour charges for other parties. rties. In the process of business the assessee is purchasing gold bar In the process of business the assessee is purchasing gold bar In the process of business the assessee is purchasing gold bar from marketand issuing these gold bar alongwith alloy to karigar from marketand issuing these gold bar alongwith alloy to karigar from marketand issuing these gold bar alongwith alloy to karigar for making gold ornaments, who makes ornaments for labour for making gold ornaments, who makes ornaments for labour for making gold ornaments, who makes ornaments for labour charges. After ornaments are ready same arehanded over to charges. After ornaments are ready same arehanded over to charges. After ornaments are ready same arehanded over to assessee and labour charges are credited in his account andpaid see and labour charges are credited in his account andpaid see and labour charges are credited in his account andpaid by issuing cheques to them. This labour charges is debited in by issuing cheques to them. This labour charges is debited in by issuing cheques to them. This labour charges is debited in Profit and Loss Account under the head 'Labour (Mfg)'. Profit and Loss Account under the head 'Labour (Mfg)'. Profit and Loss Account under the head 'Labour (Mfg)'. Apart from above the assessee is also receiving gold bar and Apart from above the assessee is also receiving gold bar and Apart from above the assessee is also receiving gold bar and alloys from other p alloys from other parties for making orniaments. These gold bars arties for making orniaments. These gold bars and alloys are issued to Karigar and alloys are issued to Karigar who makes ornaments and who makes ornaments and charge labour charges from the assessee. Thislabour charges is charge labour charges from the assessee. Thislabour charges is charge labour charges from the assessee. Thislabour charges is debited in Profit and Loss Account under the head 'LabourPaid'. debited in Profit and Loss Account under the head 'LabourPaid'. debited in Profit and Loss Account under the head 'LabourPaid'. The assessee in turn hand The assessee in turn hand over these ornaments to parties and over these ornaments to parties and charges labour charges which is credited in Profit and Loss labour charges which is credited in Profit and Loss labour charges which is credited in Profit and Loss Account under the head 'Labour Charges'. Account under the head 'Labour Charges'. I am enclosing following related documents for your kind perusal: I am enclosing following related documents for your kind perusal: I am enclosing following related documents for your kind perusal: (a) Details of Labour Charges paid (a) Details of Labour Charges paid (b) Confirmations (b) Confirmations from parties to whom labour charges paid from parties to whom labour charges paid
Hitesh Ugamraj Mehta 10 ITA Nos. 8939/MUM/2025 ITA Nos.
(c) Issue vouchers issued by parties for handing over gold and (c) Issue vouchers issued by parties for handing over gold and (c) Issue vouchers issued by parties for handing over gold and alloys to us for making jewellery alloys to us for making jewellery (d) Issue vouchers issued by us for handing over gold and alloys (d) Issue vouchers issued by us for handing over gold and alloys (d) Issue vouchers issued by us for handing over gold and alloys to Karigar for making jewellery to Karigar for making jewellery (e) Receipt vouchers issued by us on receipt of gold jewellery from (e) Receipt vouchers issued by us on receipt of gold jewellery from (e) Receipt vouchers issued by us on receipt of gold jewellery from Karigar and showing labour charges payable to Karigar Karigar and showing labour charges payable to Karigar Karigar and showing labour charges payable to Karigar (f) Labour charges bill for making jewellery on behalf of parties (f) Labour charges bill for making jewellery on behalf of parties (f) Labour charges bill for making jewellery on behalf of parties (g) Receipt voucher issued by respective parties on receipt of (g) Receipt voucher issued by respective parties on receipt of (g) Receipt voucher issued by respective parties on receipt of jewellery from us lery from us (h) Issue voucher issued by us for handing over Gold Bar and (h) Issue voucher issued by us for handing over Gold Bar and (h) Issue voucher issued by us for handing over Gold Bar and alloys for making jewellery on our behalf by Karigar alloys for making jewellery on our behalf by Karigar alloys for making jewellery on our behalf by Karigar i) Receipt voucher issued by us on receipt of jewellery from i) Receipt voucher issued by us on receipt of jewellery from i) Receipt voucher issued by us on receipt of jewellery from Karigar. From these submissions and documentary evidences, submitted From these submissions and documentary evidences, submitted From these submissions and documentary evidences, submitted by assessee, it is clear that he has produced all the documentary by assessee, it is clear that he has produced all the documentary by assessee, it is clear that he has produced all the documentary evidences along with Karigar issue vouchers, Karigar receipt evidences along with Karigar issue vouchers, Karigar receipt evidences along with Karigar issue vouchers, Karigar receipt vouchers, labour charges bills, labour charges confirmations etc. vouchers, labour charges bills, labour charges confirmations etc. vouchers, labour charges bills, labour charges confirmations etc. Assessing Assessing Assessing officer officer officer has has has never never never raised raised raised any any any doubt doubt doubt about about about the the the authenticity and genuineness of these documents and has not icity and genuineness of these documents and has not icity and genuineness of these documents and has not cast any iota of doubt over the books of the assessee and stock cast any iota of doubt over the books of the assessee and stock cast any iota of doubt over the books of the assessee and stock statement of the assessee. No rejection of books has been done by statement of the assessee. No rejection of books has been done by statement of the assessee. No rejection of books has been done by AO. Further, in response to notices u/s.133(6) all five labour AO. Further, in response to notices u/s.133(6) all five labour AO. Further, in response to notices u/s.133(6) all five labour contractors replied along with documentary evidences. s replied along with documentary evidences. s replied along with documentary evidences. 9. 9. 9. Hence, Hence, Hence, considering considering considering the the the above above above factual factual factual matrix, matrix, matrix, 100% 100% 100% disallowance of labour charges, incurred on these five parties disallowance of labour charges, incurred on these five parties disallowance of labour charges, incurred on these five parties amounting to Rs. 1,67,19,404/ amounting to Rs. 1,67,19,404/- can not be said to be non can not be said to be non-genuine, as assessee was engaged in reg as assessee was engaged in regular business of Gold jewellery, in ular business of Gold jewellery, in which labour charges are integral part of business. But at the which labour charges are integral part of business. But at the which labour charges are integral part of business. But at the same time all the enquiries conducted by VU, can't be brush aside same time all the enquiries conducted by VU, can't be brush aside same time all the enquiries conducted by VU, can't be brush aside completely. Hence, in order to meet the ends of justice, 10% of completely. Hence, in order to meet the ends of justice, 10% of completely. Hence, in order to meet the ends of justice, 10% of total disallowance, amounti total disallowance, amounting to Rs. 16,71,940/ ng to Rs. 16,71,940/-, is being disallowed and rest of the addition is being deleted. Accordingly, disallowed and rest of the addition is being deleted. Accordingly, disallowed and rest of the addition is being deleted. Accordingly,
Hitesh Ugamraj Mehta 11 ITA Nos. 8939/MUM/2025 ITA Nos.
AO is directed to confirm the addition to the extent of Rs. AO is directed to confirm the addition to the extent of Rs. AO is directed to confirm the addition to the extent of Rs. 16,71,940/-, being 10% of Rs. 1,67,19,404/ , being 10% of Rs. 1,67,19,404/- and give relief for and give relief for remaining amount. Hence, these gr remaining amount. Hence, these grounds of appeal by assessee ounds of appeal by assessee are hereby partly allowed. are hereby partly allowed. 6. We have heard the rival submissions and perused the material We have heard the rival submissions and perused the material We have heard the rival submissions and perused the material on record. The core issue before us is the sustainability of an ad- on record. The core issue before us is the sustainability of an ad on record. The core issue before us is the sustainability of an ad hoc disallowance in the face of corroborated evidence of business hoc disallowance in the face of corroborated evidence of business hoc disallowance in the face of corroborated evidence of business expenditure. In the case the Ld.AO in view was of the In the case the Ld.AO in view was of the In the case the Ld.AO in view was of the suspicion of genuineness of labour charges and therefore, he suspicion of genuineness of labour charges and therefore, he suspicion of genuineness of labour charges and therefore, he carried out enquiries through issue of the notices u/s 133(6) carried out enquiries through issue of the notices u/s 133(6) carried out enquiries through issue of the notices u/s 133(6) of the Act as well as through the verification unit and on the of the Act as well as through the verification unit and on the of the Act as well as through the verification unit and on the basis of the outcome of the basis of the outcome of the verification unit the addition has verification unit the addition has been sustained.
Before us however Ld. Counsel for the assessee 6.1 Before us however Ld. Counsel for the assessee Before us however Ld. Counsel for the assessee submitted that the assessee was engaged in the business of submitted that the assessee was engaged in the business of submitted that the assessee was engaged in the business of manufacturing and trading in gold jewellary. In the process manufacturing and trading in gold jewellary. In the process manufacturing and trading in gold jewellary. In the process gold bar and same were of business the assessee purchased of business the assessee purchased gold bar and same were issued to karigars for converting same into gold ornaments. issued to karigars for converting same into gold ornaments. issued to karigars for converting same into gold ornaments. The assessee also received gold bars for converting into gold The assessee also received gold bars for converting into gold The assessee also received gold bars for converting into gold ornaments from other jewelers in the market which turn ornaments from other jewelers in the market which turn ornaments from other jewelers in the market which turn issued to karigars for converting into gold ornaments. The issued to karigars for converting into gold ornaments. issued to karigars for converting into gold ornaments. Karigars charge labour charges for converting gold bar into Karigars charge labour charges for converting gold bar into Karigars charge labour charges for converting gold bar into gold ornaments. He further submitted that labour charges gold ornaments. He further submitted that labour charges gold ornaments. He further submitted that labour charges paid to Karigars is integral part of the assessee, without paid to Karigars is integral part of the assessee, without paid to Karigars is integral part of the assessee, without incurring same the assessee cannot carry on his business. incurring same the assessee cannot carry on his business. incurring same the assessee cannot carry on his business.
Hitesh Ugamraj Mehta 12 ITA Nos. 8939/MUM/2025 ITA Nos.
6.2 Regarding the verification carried out by the verification the verification carried out by the verification the verification carried out by the verification unit, the assessee submitted that the verification was carried unit, the assessee submitted that the verification was carried unit, the assessee submitted that the verification was carried out on the basis of address provided in their reply to notice out on the basis of address provided in their reply to notice out on the basis of address provided in their reply to notice u/s 133(6) of the Act. The assessee was not informed about u/s 133(6) of the Act. The assessee was not informed about u/s 133(6) of the Act. The assessee was not informed about this fact otherwise if this fact otherwise if opportunity was given the assessee opportunity was given the assessee could have accompanied with VU officer and shown their could have accompanied with VU officer and shown their could have accompanied with VU officer and shown their present work address where they were available. present work address where they were available. present work address where they were available. 6.3 Regarding the verification carried out, Ld. Counsel for Regarding the verification carried out, Ld. Counsel for Regarding the verification carried out, Ld. Counsel for the assessee submitted that in case of Rbikanta Madan Pal the assessee submitted that in case of Rbikanta Madan Pa the assessee submitted that in case of Rbikanta Madan Pa address was mentioned as Room No. 47, Bldg O.57, Telgali, address was mentioned as Room No. 47, Bldg O.57, Telgali, address was mentioned as Room No. 47, Bldg O.57, Telgali, Vithalwadi, Mumbai, Pin Code No. 420 001, whereas the VU Vithalwadi, Mumbai, Pin Code No. 420 001, whereas the VU Vithalwadi, Mumbai, Pin Code No. 420 001, whereas the VU officer carried out the enquiry at Vithavadi, Mumbai having officer carried out the enquiry at Vithavadi, Mumbai having officer carried out the enquiry at Vithavadi, Mumbai having Pin code No. 400002, which is a town named Vithalwadi Pin code No. 400002, which is a town named Vithalwadi Pin code No. 400002, which is a town named Vithalwadi near Kalyan. The Ld. Co near Kalyan. The Ld. Counsel further submitted that the VU unsel further submitted that the VU officer has not provide the name of the persons from whom officer has not provide the name of the persons from whom officer has not provide the name of the persons from whom enquiry was made during the physical verification of the enquiry was made during the physical verification of the enquiry was made during the physical verification of the addresses. Thus according to the Ld. Counsel for the addresses. Thus according to the Ld. Counsel for the addresses. Thus according to the Ld. Counsel for the assessee the verification has been has been carried out in assessee the verification has been has been carried assessee the verification has been has been carried dark and cannot be made basis for disallowance even of the dark and cannot be made basis for disallowance even of the dark and cannot be made basis for disallowance even of the 10% in the case of assessee. 10% in the case of assessee.
6.4 Having considered the submissions of the assessee and Having considered the submissions of the assessee and Having considered the submissions of the assessee and finding of the Ld. CIT(A) on issue in dispute, we are of the finding of the Ld. CIT(A) on issue in dispute, we are of the finding of the Ld. CIT(A) on issue in dispute, we are of the opinion that Firstly, t that Firstly, the Assessee has produced an exhaustive trail roduced an exhaustive trail of documentation, including "Karigar" issue/receipt vouchers, labor of documentation, including "Karigar" issue/receipt vouchers, labor of documentation, including "Karigar" issue/receipt vouchers, labor
Hitesh Ugamraj Mehta 13 ITA Nos. 8939/MUM/2025 ITA Nos.
bills, and bank confirmations. The AO did not reject the books of bills, and bank confirmations. The AO did not reject the books of bills, and bank confirmations. The AO did not reject the books of account under Section 145(3) of the Act, nor did he find any account under Section 145(3) of the Act, nor did he find any account under Section 145(3) of the Act, nor did he find any discrepancy in the stock statemen discrepancy in the stock statements. It is a settled principle that ts. It is a settled principle that labor charges are an integral and inextricable component of a labor charges are an integral and inextricable component of a labor charges are an integral and inextricable component of a jewellery manufacturing business; without such expenditure, the jewellery manufacturing business; without such expenditure, the jewellery manufacturing business; without such expenditure, the reported turnover—which the Revenue has accepted which the Revenue has accepted—could not which the Revenue has accepted have been achieved.
6.5 Secondly, Aall five labor contractors responded to notices ll five labor contractors responded to notices ll five labor contractors responded to notices under Section 133(6), confirming the transactions. They are under Section 133(6), confirming the transactions. They are under Section 133(6), confirming the transactions. They are independent tax-paying entities who file returns under Section paying entities who file returns under Section paying entities who file returns under Section 44AD. The Ld. CIT(A) correctly noted that the immediate withdrawal 44AD. The Ld. CIT(A) correctly noted that the immediate withdrawal 44AD. The Ld. CIT(A) correctly noted that the immediate withdrawal of cash is a commer of cash is a commercial necessity in this sector to pay small cial necessity in this sector to pay small-scale artisans who do not operate within the formal banking system. The artisans who do not operate within the formal banking system. The artisans who do not operate within the formal banking system. The Revenue’s suspicion, however strong, cannot take the place of Revenue’s suspicion, however strong, cannot take the place of Revenue’s suspicion, however strong, cannot take the place of proof. There is no evidence on record to establish that the cash proof. There is no evidence on record to establish that the cash proof. There is no evidence on record to establish that the cash withdrawn by the contractors ever flowed back to the Assessee. he contractors ever flowed back to the Assessee. he contractors ever flowed back to the Assessee.
6.6 Thirdly, the Assessee has successfully demonstrated that the he Assessee has successfully demonstrated that the he Assessee has successfully demonstrated that the VU’s field inquiries were flawed, particularly regarding the VU’s field inquiries were flawed, particularly regarding the VU’s field inquiries were flawed, particularly regarding the misidentification of pin codes and locations (e.g., confusing misidentification of pin codes and locations (e.g., confusing misidentification of pin codes and locations (e.g., confusing Vithalwadi in Mumba Vithalwadi in Mumbai with Vithalwadi near Kalyan). Furthermore, i with Vithalwadi near Kalyan). Furthermore, the VU failed to provide the names of the persons interviewed the VU failed to provide the names of the persons interviewed the VU failed to provide the names of the persons interviewed during the site visits. In a trade where artisans often operate from during the site visits. In a trade where artisans often operate from during the site visits. In a trade where artisans often operate from modest, rented premises in congested by modest, rented premises in congested by lanes, a mere "not found" lanes, a mere "not found"
Hitesh Ugamraj Mehta 14 ITA Nos. 8939/MUM/2025 ITA Nos.
report, without granting the Assessee an opportunity to produce the without granting the Assessee an opportunity to produce the without granting the Assessee an opportunity to produce the parties, cannot be the sole basis for disallowance. parties, cannot be the sole basis for disallowance.
6.7 Lastly, we find a fundamental contradiction in the findings of e find a fundamental contradiction in the findings of e find a fundamental contradiction in the findings of the Ld. CIT(A). On one hand, the Ld. CIT(A) accepted the Assessee’s the Ld. CIT(A). On one hand, the Ld. CIT(A) accepted the Assessee’s the Ld. CIT(A). On one hand, the Ld. CIT(A) accepted the Assessee’s explanations regarding the industry’s modus operandi, the ons regarding the industry’s modus operandi, the ons regarding the industry’s modus operandi, the creditworthiness of the contractors, and the lack of evidence creditworthiness of the contractors, and the lack of evidence creditworthiness of the contractors, and the lack of evidence regarding round-tripping. On the other hand, he chose to sustain a tripping. On the other hand, he chose to sustain a tripping. On the other hand, he chose to sustain a 10% disallowance on a purely ad 10% disallowance on a purely ad-hoc basis. It is a well It is a well-entrenched legal maxim that disallowance cannot be founded upon conjectures, disallowance cannot be founded upon conjectures, disallowance cannot be founded upon conjectures, -the-difference" logic. Once the Ld. CIT(A) surmises, or "split- Once the Ld. CIT(A) concluded that the expenditure was genuine and necessary for the concluded that the expenditure was genuine and necessary for the concluded that the expenditure was genuine and necessary for the business, and that the AO had failed to prove the "bogus" nature of business, and that the AO had failed to prove the "bogus" nature of business, and that the AO had failed to prove the "bogus" nature of the transactions, there remained no legal or factual basis to ransactions, there remained no legal or factual basis to ransactions, there remained no legal or factual basis to maintain a 10% disallowance. An ad maintain a 10% disallowance. An ad-hoc addition, in the absence of hoc addition, in the absence of a specific finding of inflated expenses or non a specific finding of inflated expenses or non-business purposes, is business purposes, is arbitrary and bad in law. arbitrary and bad in law.
6.8 In view of the above, we find th In view of the above, we find the ad-hoc disallowance of hoc disallowance of ₹16,71,940/- to be unsustainable. The order of the Ld. CIT(A) is to be unsustainable. The order of the Ld. CIT(A) is to be unsustainable. The order of the Ld. CIT(A) is modified to this extent, and the addition is hereby deleted. Grounds modified to this extent, and the addition is hereby deleted. modified to this extent, and the addition is hereby deleted. 1 and 2 are allowed.
As the primary addition has been deleted on merits, the As the primary addition has been deleted on merits, the As the primary addition has been deleted on merits, the remaining grounds challenging the technical validity of the notice challenging the technical validity of the notice challenging the technical validity of the notice
Hitesh Ugamraj Mehta 15 ITA Nos. 8939/MUM/2025 ITA Nos.
under Section 143(2) and the charging of interest are rendered under Section 143(2) and the charging of interest are rendered under Section 143(2) and the charging of interest are rendered academic and are dismissed as infructuous. academic and are dismissed as infructuous.
In the result, the appeal of the Assessee is partly allowed. partly allowed. 8. In the result, the appeal of the Assessee is
Order pronounced in the open Court ounced in the open Court on 30/0 /03/2026.
Sd/- Sd/- Sd/ (KAVITHA RAJAGOPAL KAVITHA RAJAGOPAL) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 30/03/2026 KRK, SR. PS Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, BY ORDER, //True Copy// (Assistant Registrar) (Assistant Registrar) ITAT, Mumbai ITAT, Mumbai
