SHRI HITESH UGAMRAJ MEHTA,MUMBAI vs. ASSESSING OFFICER- 23.1.6, MUMBAI

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ITA 223/MUM/2026Status: DisposedITAT Mumbai09 September 202611 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the ad-hoc disallowance was unsustainable as it was based on suspicion without concrete evidence of cash returning to the assessee. The Tribunal noted that the karigars were independent entities and their banking transactions were their own concern.

What were the facts?

The assessee, a jewellery manufacturer, claimed labour charges paid to karigars. The Assessing Officer (AO) made an ad-hoc disallowance of 50% of these charges, suspecting cash withdrawals by karigars indicated a return to the assessee. The CIT(A) confirmed a 10% disallowance.

What were the issues?

Whether an ad-hoc disallowance of labour charges is justified based on cash withdrawal patterns of payees without proof of funds returning to the assessee. Whether the assessment proceedings were conducted without proper opportunity and evidence.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 143(3),Section 144B,Section 133(6),Section 131,Section 44AB,Section 145(3),Section 44AD,Section 234A,Section 234B,Section 234C,Section 234D

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI

Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL

For Respondent: Smt. Sujatha Iyyanger, Sr. DR
Pronounced: 09.09.2026

INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: E BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA 223/MUM/2026 िनधा�रण वष�/Assessment Year: 2022 - 2023) Shri Hitesh Ugamraj Mehta Assessing Officer- 23.1.6 603, Ranibow Plaza, 6th Floor, 46 Piramal Chambers, Champa Galli, Zaveri Bazar, Vs. Near Bharatmata Cinema, Parel Mumbai-400002, Maharashtra Mumbai-400012, Maharashtra अपीलाथ� Appellant ��थ� Respondent

Permanent Account Number of Assessee: ACJPM9327M

अपीलाथ� �ारा/Appellant represented by: Shri Hansraj Sanghvi, CA ��थ� �ारा/Respondent represented by: Smt. Sujatha Iyyanger, Sr. DR

सुनवाई की तारीख / Date of conclusion of hearing: 18.06.2026 घोषणा की तारीख / Date of pronouncement: 09.09.2026 आदेश / ORDER O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by assessee is against the order of the Ld. CIT (A), National Faceless Appeal Centre (NFAC), Delhi, Order No. ITBA/NFAC/S/250/2025-26/1082454734(1) dated 11.11.2025 passed against the assessment order by Assessment Unit, Income Tax Department, u/s. 143(3) r.w.s. 144B of the Income-tax Act, 1961 (‘the Act’) dated 18.03.2024, for Assessment Year 2022-23

2.

Assessee has raised the following grounds of appeal:

1) 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.2722135 being 10 percentage out of total labour charges paid of Rs.27221352 and making addition to total income of the appellant. Provisions of the Act ought to have been properly construed and regard being had to facts of the case disallowance of Rs.2722135 out of labour charges should not have been confirmed. Reasons assigned by him are wrong and insufficient to justify disallowance of Rs.2722135 being 10% percentage out of labour charges paid by the appellant. 2) 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.2722135 being 10 percentage out of labour charges paid on suspicion whims assumption and conjectures and without bringing any cogent material evidences on record is liable to be deleted 3) The learned Commissioner of Income Tax Appeals erred in confirming order made under section 143 3 of the Act which is without jurisdiction illegal bad in law ultra virus and without allowing reasonable opportunity of the hearing and without appreciating facts submission and evidences in their proper perspective without providing draft assessment order is liable to be annulled 4) The learned Commissioner of Income Tax Appeals erred in confirming notice issued under section 143 2 of the Act as valid one though the same is not in conformity with instruction issued by Central Board of Direct Taxes F No 225 157 2017 ITA II dated 23 06 2017 which is binding on him and therefore notice issued under section 143 2 of the Act is without jurisdiction invalid and make subsequent assessment also invalid and liable to be annulled 5) The learned Assessing Officer erred in charging interest under section 234A. 234B and 234C and 234D of the Act 3. Brief facts as culled out from the records are that assessee is proprietor of M/s Gudhiya Gold Creations, engaged in the business of manufacturing and trading in gold jewellery. Apart from manufacturing on his own account, assessee also receives gold bars/alloy from other dealers in the market for converting the same into gold ornaments as per design shown by such dealers, for which assessee charges labour charges from them and for this purpose, assessee in turn issues such gold bars/alloy to various karigars (laborers) for converting the same into gold ornaments, against payment of labour charges to those karigars. Assessee filed his return of income on 06.11.2022, reporting total income at Rs.32,32,820/-. Case was selected for complete scrutiny for the reason that the gross total income was significantly low compared to the turnover declared, and assessee had shown high liabilities in the balance sheet vis-à-vis the income/receipts declared. Statutory notices under the Act were issued and were duly responded to by the assessee.

3.1. During the course of assessment proceedings, ld. Assessing Officer examined the labour charges of Rs.2,72,21,352/- claimed by assessee, paid to 27 karigars for converting gold bars into gold ornaments, complete details whereof, including name, PAN and TDS deducted, had already been furnished by the assessee. On perusal of the bank statements of the recipients, which too had been furnished by assessee along with confirmations, copies of ITR acknowledgements, TDS certificates, issue and receipt vouchers and his own bank statements, ld. Assessing Officer observed that in respect of more than 50% of the persons to whom labour charges were paid, the amount credited to their bank accounts stood withdrawn in cash on the same day, or on the 2nd/3rd day thereafter. On this singular circumstance, and without identifying any specific transaction, date or party as bogus, and without causing any independent enquiry to be made under section 133(6) or section 131 with any of the karigars, ld. Assessing Officer drew an inference that the cash so withdrawn was “returned back to the assesse” and held that the labour charges of Rs.2,72,21,352/- were “not found genuine”. It was further observed that assessee had “failed to prove the direct nexus between the expenses and revenue generation” and had “failed to produce complete documentary evidence” in support of the claim. On this basis, an ad-hoc disallowance equivalent to 50% of the labour charges, i.e. Rs.1,36,10,676/- was made under section 37(1) of the Act “to cover up the leakage of revenue” and the total income was assessed at Rs.1,68,43,496/-.

4.

Before ld. CIT(A), assessee reiterated that: a) the karigars to whom labour charges were paid were neither family members nor relatives of assessee, nor were their business affairs within the control of assessee, so that assessee could not influence them or compel any adjustment of labour charges; b) assessee could not be expected to keep track of, or explain, the manner in which the karigars conducted their own banking transactions; c) assessee, being a businessman making payments strictly through account-payee cheques as mandated by law, was concerned only with retaining proof of payment and not with what the recipients did with the money thereafter; d) the reason for cash withdrawals could be explained only by the karigars themselves, the probable explanation being that the cash was required by them to pay their own workers and to meet their business and household expenditure; and e) the allegation that the cash was returned to assessee was based purely on suspicion, without any material whatsoever on record to substantiate it and that suspicion, however strong, cannot take the place of evidence, relying on Umacharan Shah & Bros. v. CIT [1959] 37 ITR 271 (SC) and Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC). 4.1. It was further submitted that the books of account, duly audited under section 44AB of the Act, had not been rejected nor any defect pointed out therein; that the recipients were independent, PAN-holding (and in several cases GST-registered) assessees who had filed confirmations; that similar labour charges had been allowed as a matter of consistency in preceding and succeeding years; and that no enquiry under section 133(6)/131 of the Act had been made by ld. Assessing Officer with any of the karigars before drawing the adverse inference.

4.2. Further, in the course of first appellate proceedings, additional evidence filed by assessee under Rule 46A of the Income-tax Rules, 1962 was forwarded to the Jurisdictional Assessing Officer (‘JAO’) for a remand report. In the remand report, ld. JAO strongly defended the addition, contending that the disallowance was not ‘ad-hoc’ but was founded on a ‘specific investigative finding’, and went on to submit that even a disallowance upto 100% of the labour charges was legally sustainable on the facts and that the Revenue's restriction of the disallowance to 50% was, if anything, an act of leniency towards assessee. Ld. JAO, however, admitted in the remand report that “the Department does not have a written confession from the karigars nor a documented cash trail back into assessee’s own bank account”.

4.3. Assessee, in rejoinder, pointed out that no notice under section 133(6) or summons under section 131 of the Act had been issued to any of the karigars either during the assessment or during the remand proceedings and drew a specific contrast with assessee’s own case for AY 2023-24, where ld. Assessing Officer had issued notices under section 133(6) of the Act to the karigars concerned, all of whom had confirmed having carried out labour work for assessee, received payment through banking channels and explained the cash withdrawals as being necessitated by their own business requirements, with none of them admitting to having returned any cash to assessee.

4.4. Ld. CIT(A) after considering the grounds of appeal, statement of facts, written submissions, assessment order, remand report, rejoinder and the material on record, restricted the disallowance to 10% of the labour charges, i.e. Rs.27,22,135/- and granted relief for the balance. The relevant finding of ld. CIT(A) reads as under: “In view of the facts and circumstances of the case, the expenses incurred by the appellant towards labour charges cannot be said to be non-genuine completely as the appellant was engaged in regular business of gold jewellery in which labour charges are integral part of business which is not denied by the AO also. However, to meet both the ends of justice, 10% of disallowance which amounts to Rs. 27,22,135/- is being disallowed and rest of the addition is being deleted. Accordingly, the AO is directed to confirm the addition to the extent of Rs.27,22,135/- being 10% of Rs.2,72,21,352/- and give relief for remaining amount. Thus, the ground nos. 1 & 2 are partly allowed.”

4.5. Aggrieved by the disallowance sustained to the extent of 10%, assessee is in appeal before the Tribunal.

5.

Before us, ld. Counsel for assessee submitted that the sole substantive grievance in the grounds raised is against the sustenance by ld. CIT(A) of the ad-hoc disallowance of 10% of the labour charges out of the disallowance originally made by ld. Assessing Officer.

6.

We have heard the rival submissions and perused the material on record, including the assessment order, the order of ld. CIT(A), the remand report and the paper-book filed before us. It is not in dispute that assessee had during the assessment proceedings itself furnished a complete list of the 27 karigars to whom labour charges aggregating to Rs.2,72,21,352/- were paid during the year, together with their PAN, the amount paid and the TDS deducted thereon, followed by confirmations, copies of ITR acknowledgements, bank statements of the karigars, assessee’s own bank statements to cross-verify the payments and issue/receipt vouchers evidencing the movement of gold bars/alloy to the karigars and receipt of finished ornaments therefrom. It is equally not in dispute that ld. Assessing Officer neither rejected the books of account of assessee under section 145(3) of the Act, nor pointed out any defect in the documentary evidence so furnished, nor doubted the corresponding stock statement, turnover or gross profit disclosed by assessee.

6.1. The sole basis of disallowance, both before ld. Assessing Officer and on a reduced scale before ld. CIT(A) is the circumstance that in respect of more than half of the 27 karigars, the amount credited to their bank accounts was withdrawn in cash on the same day, or within a day or two thereafter. We find that this circumstance, by itself, was treated by ld. Assessing Officer as sufficient to draw the inference that the cash so withdrawn was returned to assessee, notwithstanding that: i. all payments were made by account-payee cheques with due deduction of tax at source; ii. the recipients are independent, PAN-holding parties, unconnected with assessee; iii. the karigars had furnished confirmations denying the return of any cash; and iv. at no stage, neither during assessment nor during remand proceedings, did ld. Assessing Officer cause any notice to be issued under section 133(6) or summons under section 131 of the Act to any of the karigars, nor was any field verification of the kind undertaken in the succeeding year caused to be made. Ld. JAO’s own remand report candidly records that “the Department does not have a written confession from the karigars nor a documented cash trail back into assessee’s own bank account”. 6.2. This assumes significance when the facts of the year under consideration are contrasted with those obtaining in assessee’s own case for the immediately succeeding assessment year, i.e. AY 2023-24. In that year, out of total labour expenditure of Rs.4,92,34,244/- claimed by assessee, ld. Assessing Officer had invoked section 133(6) of the Act to obtain the bank statements of the labour contractors, on the basis whereof five specific karigars, namely, Sanjit Paria, Madan S. Pramanik, Rabikanta Madan Pal, Dipankar Narayan Maity and Nisithkumar B. Manna, exhibiting a similar pattern of immediate cash withdrawal were identified and the matter was further referred to the Verification Unit under the faceless assessment set-up, which deployed inspectors to physically verify the karigars’ addresses. On this more elaborate factual foundation, ld. Assessing Officer made a 100% disallowance of the labour charges paid to those five karigars, aggregating to Rs.1,67,19,404/-, which ld. CIT(A) restricted to 10%, i.e. Rs.16,71,940/-. In the year presently under appeal, by contrast, ld. Assessing Officer has made a general, undifferentiated, ad-hoc disallowance of 50% of the entire labour charges paid to all 27 karigars, without identifying even a single karigar, transaction or date as bogus, and without any enquiry under section 133(6)/131 of the Act or reference to any verification mechanism whatsoever. The disallowance in the year under consideration thus, rests on a materially weaker evidentiary foundation than that for AY 2023-24.

7.

On identical facts arising in assessee’s own case for AY 2023-24, the Coordinate Bench of ITAT, Mumbai in ITA No.8939/Mum/2025, order dated 30.03.2026, deleted the disallowance of labour charges sustained by ld. CIT(A) in its entirety, inter alia, observing as under: “6.4 Having considered the submissions of assessee and finding of ld. CIT(A) on issue in dispute, we are of the opinion that Firstly, assessee has produced an exhaustive trail of documentation, including ‘Karigar’ issue/receipt vouchers, labor 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 discrepancy in the stock statements. It is a settled principle that labor charges are an integral and inextricable component of a jewellery manufacturing business; without such expenditure, the reported turnover – which the Revenue has accepted – could not have been achieved. 6.5 Secondly, all five labor contractors responded to notices under Section 133(6), confirming the transactions. They are independent tax-paying entities who file returns under Section 44AD. Ld. CIT(A) correctly noted that the immediate withdrawal of cash is a commercial necessity in this sector to pay small-scale artisans who do not operate within the formal banking system. The Revenue’s suspicion, however strong, cannot take the place of proof. There is no evidence on record to establish that the cash withdrawn by the contractors ever flowed back to assessee. 6.6 Thirdly, assessee has successfully demonstrated that the VU’s field inquiries were flawed … In a trade where artisans often operate from modest, rented premises in congested by-lanes, a mere ‘not found’ report, without granting assessee an opportunity to produce the parties, cannot be the sole basis for disallowance. 6.7 Lastly, we find a fundamental contradiction in the findings of ld. CIT(A). On one hand, ld. CIT(A) accepted assessee’s explanations regarding the industry’s modus operandi, the creditworthiness of the contractors, and the lack of evidence regarding round-tripping. On the other hand, he chose to sustain a 10% disallowance on a purely ad-hoc basis. It is a well-entrenched legal maxim that disallowance cannot be founded upon conjectures, surmises, or ‘split-the- difference’ logic. Once ld. CIT(A) concluded that the expenditure was genuine and necessary for the business, and that the AO had failed to prove the ‘bogus’ nature of the transactions, there remained no legal or factual basis to maintain a 10% disallowance. An ad-hoc addition, in the absence of a specific finding of inflated expenses or non-business purposes, is arbitrary and bad in law. 6.8 In view of the above, we find the ad-hoc disallowance of ₹16,71,940/- to be unsustainable. The order of ld. CIT(A) is modified to this extent, and the addition is hereby deleted. Grounds 1 and 2 are allowed.”

8.

We are of the considered view that the ratio of the aforesaid decision of the Coordinate Bench applies to the facts of the present appeal on all fours and indeed with greater force for the following reasons: (i) in both years, assessee furnished complete documentary evidence in the form of PAN details, confirmations, ITR acknowledgements, bank statements of the karigars, his own bank statements, TDS certificates and issue/receipt vouchers evidencing the movement of gold and ornaments;

(ii) in both years, the books of account, duly audited under section 44AB of the Act, were neither rejected nor was any defect pointed out therein;

(iii) in both years, the sole basis of disallowance is the pattern of same- day/near-same-day cash withdrawal by the karigars, unaccompanied by any material establishing that such cash flowed back to assessee; and

(iv) whereas in AY 2023-24 ld. Assessing Officer had, at least, made a specific disallowance qua five identified karigars after obtaining their bank statements under section 133(6) of the Act and causing field verification, in the year under consideration ld. Assessing Officer has made a general ad-hoc disallowance of 50% of the entire labour charges paid to all 27 karigars without identifying a single defaulting party and without any enquiry whatsoever under section 133(6)/131 of the Act. If the disallowance made and sustained in AY 2023-24, notwithstanding the enquiry conducted therein, was held by the Coordinate Bench to be unsustainable, the disallowance made in the year under appeal, unsupported by any comparable enquiry, cannot stand on any higher footing.

8.1. We further note that ld. CIT(A) while sustaining the disallowance at 10% has himself recorded a categorical finding that the expenses incurred by assessee towards labour charges “cannot be said to be non- genuine completely” and that labour charges are an “integral part of business which is not denied by the AO also”. Having recorded such a finding and there being no specific finding of inflation of expenses, diversion of funds to assessee, or any material establishing round- tripping, there remained no legal or factual basis to sustain even a 10% ad-hoc disallowance.

8.2. It is a settled position of law, as reiterated by the Coordinate Bench (supra) that suspicion however strong cannot take the place of proof and that an ad-hoc addition, in the absence of a specific finding of inflated expenses or non-business purpose, is arbitrary and unsustainable in law.

8.3. Respectfully following the decision of the Coordinate Bench of ITAT, Mumbai in assessee’s own case for AY 2023-24 (supra) and for the reasons discussed hereinabove, we hold that the ad-hoc disallowance of Rs.27,22,135/-, being 10% of the labour charges of Rs.2,72,21,352/-, as sustained by ld. CIT(A), is not tenable. Accordingly, the entire addition is hereby deleted. Grounds in this regard raised by the assessee are allowed. Other grounds raised by the assessee are accordingly rendered academic and needs no separate adjudication in view of our afore stated finding.

9.

In the result, appeal of the assessee is allowed. Order pronounced in the open court on 09 September, 2026.

Sd/- Sd/- Amit Shukla Girish Agrawal Judicial Member Accountant Member Dated: 09 September, 2026 MP, Sr. PS Copy to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,

(Dy./Asstt.Registrar) ITAT, Mumbai

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