SRI RADHAA TEXTILES,VELLAKOVIL vs. DCIT CENTRAL CIRCLE I COIMBATORE, COIMBATORE

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ITA 4230/CHNY/2026Status: DisposedITAT Chennai06 November 2026AY 2023-246 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal noted that the assessee did not advance arguments on the first two grounds (Ground Nos. 2 & 3) concerning additions on account of interest on diversion of funds. Consequently, these grounds were dismissed. Regarding the disallowance of production wages (Ground No. 4), the Tribunal acknowledged that the assessee failed to provide primary evidence like muster rolls or verifiable wage registers for cash payments to over 200 casual laborers. However, it also recognized that yarn manufacturing is labor-intensive and the assessee reported a substantial turnover. The Tribunal agreed that the entire production wages claimed in cash could not be accepted without supporting records. While the CIT(A) restricted the ad-hoc disallowance to 10%, the Tribunal found this to be on the higher side, considering the turnover, gross profit ratio, and net profit ratio over the preceding four years. In the interest of justice, the Tribunal restricted the ad-hoc disallowance to 7.5% of the production wages claimed, which amounted to Rs. 46,84,110/-. The balance disallowance of Rs. 15,61,370/- was deleted. Thus, this ground was partly allowed.

What were the facts?

The assessee, M/s. Sri Radhaa Textiles, filed an appeal against the order of the Commissioner of Income Tax (Appeals), Chennai-20, for Assessment Year 2023-24. The appeal challenged additions made by the Assessing Officer (AO) and sustained in part by the CIT(A). Specifically, the assessee disputed additions of Rs. 7,40,219/- and Rs. 2,58,000/- on account of interest on diversion of funds, and an estimated disallowance of production wages. The AO had disallowed 20% of production wages, which the CIT(A) reduced to 10%. The assessee argued that the disallowance was baseless and without comparable data. The AO had disallowed production wages due to large cash withdrawals and the assessee's inability to provide individual laborer particulars, despite claiming over 200 casual laborers were engaged and paid in cash.

What were the issues?

1. Whether the addition of Rs. 7,40,219/- on account of interest on diversion of funds to partners is legally sustainable under the Income Tax Act, 1961? 2. Whether the addition of Rs. 2,58,000/- on account of interest on diversion of funds to the son of the partners is legally sustainable under the Income Tax Act, 1961? 3. Whether the estimated disallowance of production wages, partly sustained by the First Appellate Authority, is justified under Section 37 of the Income Tax Act, 1961? Assessee's Contentions: For issues 1 and 2, the assessee argued that the First Appellate Authority erred in not considering their submissions properly. For issue 3, the assessee contended that the AO's basis for disallowing 20% of production wages was baseless and lacked comparable data, and the CIT(A)'s sustenance of 10% was also erroneous. Revenue's Contentions: The revenue relied on the order of the CIT(A) for all issues.

Which sections of the Income-tax Act were involved?

Section 37,Section 250

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI

Before: SHRI GEORGE GEORGE K & SHRI GAGAN GOYAL

Hearing: 05.11.2026Pronounced: 06.11.2026

आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), Chennai-20 dated 23.07.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2023-24

ITA No.4230/CHNY/2026 - 2 - Sri Radhaa Textiles 2. The assessee has raised the following grounds:- 1) The Impugned Order is bad, erroneous and unsustainable in law. 2) Addition of Rs.7,40,219/- Interest on account of diversion of funds to partners The First Appellate Authority erred in not considering the submissions made-copy attached- in proper perspective. 3) Addition of Rs.2,58,000/- Interest on account of diversion of funds to son of the partners The First Appellate Authority erred in not considering the submissions made-copy attached- in proper perspective. 4) Estimated disallowance of production wages. While the basis of estimated disallowance at 20% on the total production wages by the Assessing Officer is baseless and without any comparable data, so is the sustenance of the same at 10% by the First Appellate Authority.

3.

Though the assessee has raised three issues in its grounds of appeal (Ground Nos.2 to 4), at the time of hearing, the Ld. AR did not advance any arguments in respect of the first two issues (Ground Nos.2 & 3). Accordingly, the same are dismissed. Ground No.4 is adjudicated as under:

Disallowance of production wages u/s.37 of the Act:- 4. During the course of assessment proceedings, the AO noticed that huge cash withdrawals from the bank account of the assessee firm is booked as production wages ‘expenses’ in its books of accounts. The assessee was directed by the AO to submit the list of parties to which the production wages were paid with names, wages, contract number and mode of payment. The

ITA No.4230/CHNY/2026 - 3 - Sri Radhaa Textiles assessee in its reply submitted that more than 200 casual labourers were working for them and frequently casual labourers were changed and new persons were admitted for working. Hence, payments were made mainly through cash. The assessee candidly admitted that it was unable to give the individual labourer particulars, however furnished the chart of details of turnover, gross profit ratio, net profit ratio and production wages ratio to turnover of the last four years. It was submitted by reference to the table, the expenses are commensurate with the volume of business and due to inflation, shortage of labourers, wages debited under the production wages had slightly increased during the year 2022-23 compared to other years. However the submission of the assessee was rejected and AO disallowed on adhoc basis 20% of the production wages claimed in the P&L account being Rs.1,24,90,916/- as not allowable deduction u/s.37 of the Act.

5.

Aggrieved, the assessee preferred an appeal before the CIT(A). The CIT(A) partly allowed the appeal on this issue by restricting the adhoc disallowance to 10% as against 20% made by the AO, observing that the disallowance made by the AO at 20% was highly excessive. Accordingly, the CIT(A) directed the AO to delete the disallowance of Rs.62,45,480/-.

ITA No.4230/CHNY/2026 - 4 - Sri Radhaa Textiles 6. Aggrieved by the sustenance of disallowance to the extent of Rs.62,45,480/-, assessee raised this issue before the Tribunal. The Ld.AR reiterated the submissions made before the income-tax authorities.

7.

The Ld. DR, on the other hand, relied on the order of the CIT(A).

8.

We have heard rival submissions and perused the material on record. The assessee claimed to have engaged more than 200 casual labourers and paid wages in cash. However, the assessee failed to furnish primary evidences such as muster rolls, worker identity cards or verifiable wage registers. At the same time, it is not disputed that the manufacture of yarn is a labour-intensive activity and the assessee has reported a turnover of Rs.27.67 crores, which would necessarily involve substantial labour expenditure. The CIT(A), considering the above facts, restricted the adhoc disallowance from 20% made by the AO to 10%. We agree that, in the absence of supporting primary records, the entire production wages claimed in cash cannot be accepted. However, on examining the turnover, gross profit ratio, net profit ratio and production wages vis-à-vis turnover for the preceding four years, we find that the disallowance sustained by the CIT(A) at 10% is

ITA No.4230/CHNY/2026 - 5 - Sri Radhaa Textiles also on the higher side. The gross profit ratio for the relevant assessment year is 9.24% as against 8.15% in the immediately preceding year. Considering the overall facts and circumstances of the case, and in the interest of justice and fair play, we are of the considered view that an adhoc disallowance of 7.5% of the production wages claimed in the Profit & Loss Account would be reasonable. Accordingly, the disallowance is restricted to 7.5% of Rs.6,24,54,800/-, which works out to Rs.46,84,110/-. The balance disallowance of Rs.15,61,370/- is deleted. Accordingly, this ground is partly allowed.

9.

In the result, the appeal filed by the assessee is partly-allowed.

Order pronounced in the open court on 6th November,2026 at Chennai.

Sd/- Sd/- (गगन गोयल) (जॉज� जॉज� के) (GAGAN GOYAL) (GEORGE GEORGE K) लेखा सद�य/ACCOUNTANT MEMBER उपा�य� /VICE PRESIDENT चे�नई/Chennai, �दनांक/Dated, the 6th November, 2026 RSR, Sr.PS

ITA No.4230/CHNY/2026 - 6 - Sri Radhaa Textiles

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त /CIT, Coimbatore 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF. By Order Digitally signed by REKHA REKHA SENTHIL RAJ SENTHIL RAJ Date: 2026.11.10 13:13:31 +05'30'

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