Case Law Details
Hitesh Ugamraj Mehta Vs ACIT (ITAT Mumbai)
Ad-Hoc 10% Disallowance Deleted: ITAT Rules Suspicion Cannot Replace Proof in Labour Charges
The appeal before the Tribunal concerned disallowance of labour charges in a jewellery manufacturing and trading business for Assessment Year 2023–24.
The assessee was engaged in manufacturing and trading of gold jewellery and had declared total income of ₹23,13,320. During scrutiny, the Assessing Officer (AO) observed that the gross profit was low and examined various expenses, particularly labour charges amounting to ₹4,92,34,244. Out of this, payments to five labour contractors aggregating to ₹1,67,19,404 were treated as non-genuine. The AO’s conclusion was based on findings that these contractors withdrew cash immediately after receiving payments, were not traceable at given addresses during verification, and allegedly did not carry out genuine business activities. The AO inferred that funds were returned to the assessee and treated the expenses as bogus.
The assessee contended that payments were made through account payee cheques, supported by bills and documentary evidence, and that it could not control or monitor how contractors operated their bank accounts. The contractors responded to notices under section 133(6), stating that cash withdrawals were necessary to pay daily wage labourers, which is standard industry practice.
On appeal, the Commissioner (Appeals) accepted that labour charges are integral to the jewellery business and that such contractors often operate through informal systems. It was noted that contractors filed income tax returns, maintained accounts, and in some cases complied with GST requirements. The Commissioner observed that no evidence existed to prove that cash withdrawn was returned to the assessee and that the AO had not rejected the books of accounts. However, considering the verification findings, the Commissioner restricted the disallowance to 10% of ₹1,67,19,404, amounting to ₹16,71,940, on an ad-hoc basis.
Before the Tribunal, the assessee argued that complete documentation was furnished, including vouchers, bills, confirmations, and bank records. It was further submitted that labour charges are essential for the business and that the verification conducted by the authorities was flawed, including errors in addresses and lack of proper identification during field inquiries.
The Tribunal examined whether the ad-hoc disallowance could be sustained. It noted that the assessee had produced extensive documentation supporting the labour expenses and that the AO had not rejected the books of account or found discrepancies in stock records. The Tribunal emphasized that labour charges are integral to jewellery manufacturing and necessary for achieving the accepted turnover.
It further observed that all five contractors had responded to notices and were tax-paying entities filing returns under section 44AD. The immediate withdrawal of cash was considered a commercial necessity in the trade to pay small artisans. Importantly, there was no evidence demonstrating that the withdrawn cash was returned to the assessee.
The Tribunal also found deficiencies in the verification process, including incorrect location identification and lack of clarity regarding inquiries conducted. It held that a mere “not found” report without giving the assessee an opportunity to produce parties cannot justify disallowance.
A key finding was that the Commissioner (Appeals) had accepted the genuineness of transactions and the industry practice, yet still sustained a 10% disallowance without concrete evidence. The Tribunal held that disallowances cannot be based on suspicion, conjectures, or ad-hoc estimations without specific findings of inflation or non-business purpose.
Accordingly, the Tribunal held that the ad-hoc disallowance of ₹16,71,940 was unsustainable in law and deleted the addition in full. Since the primary addition was deleted, other grounds relating to validity of notice under section 143(2) and levy of interest were treated as academic and dismissed.
The appeal of the assessee was partly allowed.
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