ACIT CIRCLE 3(2)(1), MUMBAI vs. INNOWAVE IT INFRASTRUCTURES LIMITED, PUNE

आयकरअपीलीयअिधकरण�ायपीठमुंबईम�। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY, JM & SHRI ARUN KHODPIA, AM I.T.A. No. 5968/Mum/2025 (Assessment Year: 2018-19) ACIT Circle 3(2)(1), Mumbai Innowave IT Infrastructures Limited Room No.608, 6th Floor, Aayakar 504, Pentagon P-3, Magarpatta City, Vs. Bhavan, M.K. Road, Churchgate, Hadapsar, Pune-411028 Mumbai-400020 PAN: AACCA6545R Revenue - अपीलाथ� / Appellant Assessee -��थ�/ Respondent :

Assessee by : Shri Jitendra Singh Revenue by : Shri A.R. Dhyani, CIT DR : 17.06.2026 Date of Hearing : 08.09.2026 Date of Pronouncement

O R D E R Per Arun Khodpia, AM: This appeal is preferred by the Revenue, directed against the order of the Commissioner of Income Tax Appeals, National Faceless Appeal Centre (NFAC), Delhi [in short, “the Ld. CIT(A)”], dated 04.07.2025 for the Assessment Year (AY) 2018-19, arises from the assessment order under section 143(3) of the Income Tax Act, 1961 [in

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited short, “the Act”] dated 08.11.2021, passed by National e-Assessment

Centre, Delhi [in short, “the Ld. AO”].

17.11.2018 declaring total income of Rs.8,81,59,272/-. The assessment

was completed determining total assessed income of Rs.79,66,82,340/-

. The assessee filed a writ petition against the assessment order before

the Hon’ble Bombay High Court. In disposal of the writ petition,

Hon’ble High Court set aside the assessment on 28.09.2021 with

direction for de novo assessment within 6 weeks.

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited 3.1 In compliance, the assessment was completed afresh on 08.11.2021 assessing the total income at Rs.35,04,54,346/-. The assessee preferred an appeal before the Ld. CIT(A) against the major additions made in the de novo assessment u/s 143(3) dated 08.11.2021, wherein various additions were made on account of – (i) disallowance u/s 37 for Rs. 16,66,68,445/- on account of exorbitant cost of project as against respective revenue receipts; (ii) addition on account of ROC expenses amounting to Rs.3,91,682/- treated as capital expenditure whereas the assessee claimed the same as revenue expense; (iii) assessee’s claim of donation expenses amounting to Rs.12,25,000/- for which no documentary evidence could be furnished by the assessee so as to allow deduction u/s 80G of the Act; (iv) addition u/s 37(1)(3) by disallowing the claim of assessee regarding interest expenditure of Rs.2,87,09,947/- as the assessee has taken unsecured loans and also extended loans to some parties for which no details were furnished before the Ld. AO. Therefore, the proportionate interest has been disallowed u/s 37 of the Act; (v) disallowance on account of increase in salary expenses for Rs.6,53,00,000/-.

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited 4. Being aggrieved with the aforesaid additions/disallowances, assessee preferred an appeal before the Ld. CIT(A), who had deleted all the additions/disallowances made by the Ld. AO, thus the Revenue is in appeal before us.

5.1 The Ld. CIT–DR submitted that the aforesaid approach of the Ld. CIT(A), including the reliance placed upon certain judicial

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited pronouncements, was not sustainable on the facts of the present case. It was submitted that during the course of assessment proceedings, the assessee had furnished a comparative chart in respect of the MCGM project for FYs 2016-17 and 2017-18; however, the said comparative details did not establish either the genuineness or the business justification of the expenditure claimed. According to the Ld. CIT–DR, there was no meaningful comparison of the sale of services or expenditure incurred during the relevant years, nor was any comparison of the gross profit margin furnished. It was further submitted that the assessee had not furnished supporting details or documentary evidence substantiating the expenditure incurred on the said project. The reply/chart submitted by the assessee during the assessment proceedings was also not supported by primary documentary evidence to establish the genuineness and justification of the expenditure. It was, therefore, contended that the Ld. AO was justified in examining the allowability of the expenditure under section 37 of the Act and disallowing the same. Accordingly, it was submitted that the deletion of the addition by the Ld. CIT(A) deserved to be reversed.

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited 5.2 With regard to the addition on account of proportionate interest expenditure, the Ld. CIT–DR submitted that the Ld. AO had rightly examined the utilization of borrowed funds with reference to the entries appearing in the books of account. It was pointed out that, on one hand, the assessee had borrowed funds on interest, whereas, on the other hand, it had advanced a substantial amount of ₹20,28,18,699/- without charging any interest. According to the Ld. CIT–DR, the Ld. AO had, therefore, rightly examined the nexus and utilization of the borrowed funds and disallowed the proportionate interest expenditure.

5.2.1 It was further submitted that the Ld. CIT(A), while deleting the disallowance, had relied upon the decision of the Hon'ble Bombay High Court in Reliance Utilities and Power Ltd. v. CIT [313 ITR 340 (Bom.)]. According to the Ld. CIT–DR, the factual matrix in the said decision was materially distinguishable from that obtaining in the present case and, therefore, the ratio of the said decision could not be mechanically applied. The deletion of the proportionate interest disallowance was accordingly opposed.

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited 5.3 Adverting to the ground relating to disallowance of salary expenditure of ₹6.53 crores under section 37 of the Act, the Ld. CIT– DR submitted that the findings of the Ld. CIT(A) were not sustainable in view of the substantial increase in the salary expenditure vis-à-vis the corresponding increase in the project receipts. It was pointed out that the increase in the sale of the project was only to the extent of ₹10.37 crores, whereas the salary cost had increased by ₹9.64 crores. According to the Ld. CIT–DR, the disproportionate increase in salary expenditure vis-à-vis the increase in project receipts warranted proper substantiation and examination of the expenditure claimed.

5.3.1 It was further submitted that, despite sufficient opportunities being afforded during the assessment proceedings, the assessee had failed to furnish concrete and cogent documentary evidence justifying such substantial increase in the salary component. It was, therefore, contended that the Ld. AO was justified in disallowing the salary expenditure under section 37 of the Act and that the order of the Ld. CIT(A) deleting the said disallowance based on findings against the actions of AO without any inference qua the merits of the disallowance is liable to be set aside. 7

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited 6. We have considered the rival submissions and perused the material available on record. Our adjudication to the aforesaid three issues raised by the Revenue before us would be as under:

6.1 Ground 1: From the record, it is evident that the Ld. AO had disallowed the project expenditure primarily on the ground that the details furnished by the assessee were not supported by documentary evidence establishing the genuineness and business justification of the expenditure. The Ld. AO, after affording opportunity to the assessee, proceeded to determine the disallowance by adopting an estimated basis with reference to the profitability of other projects.

6.1.1 On the other hand, the Ld. CIT(A), while deleting the aforesaid addition, has substantially dwelt upon the manner in which the assessment proceedings were conducted. The Ld. CIT(A) observed, inter alia, that the projects considered by the Ld. AO were diverse in nature and, therefore, the profit rates of other projects could not appropriately be substituted for the actual results of the MCGM project. The Ld. CIT(A) further observed that the Ld. AO had neither examined the receipts and expenditure of the individual projects nor

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited made any reference to the Verification Unit under section 144B of the Act. It was also observed that the assessee was hampered in furnishing voluminous data and books of account through the faceless assessment mechanism. The Ld. CIT(A) further proceeded on the premise that, before making an estimation, the Ld. AO ought to have rejected the books of account under section 145(3) of the Act.

6.1.2 In our considered view, the aforesaid approach of the Ld. CIT(A) does not adequately address the substantive issue arising for consideration, as whether the expenditure claimed by the assessee in respect of the project was duly supported by relevant details and documentary evidence and whether such expenditure was genuine and incurred wholly and exclusively for the purposes of business. The appellate proceedings are not confined merely to examining the procedural or methodological deficiencies pointed out in the assessment order. 6.1.3 The powers of the first appellate authority are co-terminus with those of the Ld. AO, subject to the statutory framework governing appellate proceedings, and the Ld. CIT(A) is empowered under section 250 of the Act to make such

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited further enquiry as he considers necessary or to direct the Ld. AO to make such enquiry and furnish the result thereof.

6.1.4 In this context, the finding of the Ld. CIT(A) that the Ld. AO had not rejected the books of account under section 145(3) of the Act, by itself, does not conclude the specific issue relating to the allowability of the expenditure in question. The assessment order records a specific deficiency, qua non-furnishing of adequate supporting evidence in respect of the expenditure claimed. The question, therefore, required examination of the primary records and supporting material relating to the expenditure rather than being concluded merely on the basis of the alleged deficiency in the approach adopted by the Ld. AO.

6.1.5 At the same time, the estimation adopted by the Ld. AO with reference to the profitability of other projects, particularly when the assessee has contended that the projects were different in nature, also requires appropriate examination. The material presently available does not enable us to ascertain whether the expenditure claimed in respect of the project was supported by adequate evidence, nor does

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited the order of the Ld. CIT(A) record any categorical finding upon such verification. The Ld. CIT(A), instead of confining the appellate adjudication to the alleged deficiencies in the assessment proceedings, was required to exercise the statutory powers available under section 250 of the Act and undertake such enquiry or verification as was necessary for determination of the issue on merits.

6.1.6 The aforesaid legal position is supported by the decision of the Hon'ble Bombay High Court in CIT v. Premkumar Arjun Das Luthra (HUF) [(2016) 69 taxmann.com 407 (Bom.)], wherein the Hon'ble Court, while considering the scope of appellate powers of the CIT(A), has explained the obligation of the first appellate authority to adjudicate the appeal on merits and the co-terminus nature of its powers with those of the Ld. AO. The relevant observations relied upon by the Revenue have been reproduced (supra).

6.1.7 In view of the aforesaid discussion, we find that the issue relating to the allowability of project expenditure requires examination of the relevant records and supporting evidence qua each component of expenditure claimed by the assessee, including the

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited material necessary to establish its genuineness and its nexus with the business/project. Such exercise has not been undertaken in the manner required for arriving at a reasoned determination of the issue. At the same time, the basis adopted by the Ld. AO for estimation of the disallowance also requires examination in the light of the nature and circumstances of the respective projects.

6.1.8 Accordingly, without expressing any opinion on the merits of the claim of expenditure or the quantum of disallowance, the issue relating to disallowance of project expenses amounting to ₹16,66,68,445/- is restored to the file of the Ld. CIT(A) for fresh adjudication in accordance with law, after affording reasonable opportunity of being heard to the assessee and after making such enquiry/verification as may be considered necessary under the provisions of the Act. Ground No. 1 of the Revenue's appeal is accordingly allowed for statistical purposes.

6.2 Ground No. 2 of the Revenue's appeal relates to disallowance of interest expenditure amounting to ₹2,87,09,947/-.

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited 6.2.1 From the assessment order, it is observed that the assessee had incurred interest expenditure of ₹3,03,38,073/- on unsecured loans aggregating to ₹21,43,20,438/-. At the same time, the assessee had advanced an amount of ₹20,28,18,699/- without charging any interest. The Ld. AO was of the view that the aforesaid interest-free advances were not made out of the assessee's own funds but were attributable to the interest-bearing borrowings and, accordingly, treated the advances as having been made for non-business purposes. On this basis, the Ld. AO worked out proportionate disallowance of interest amounting to ₹2,87,09,947/-.

6.2.2 The matter was examined by the Ld. CIT(A), who, upon perusal of the financial statements of the assessee, noted that the assessee had share capital and reserves aggregating to ₹38,36,02,874/-, which were substantially higher than the interest-free advances of ₹20,28,18,699/-. The Ld. CIT(A), therefore, applied the principle laid down by the Hon'ble Bombay High Court in Reliance Utilities and Power Ltd. v. CIT [313 ITR 340 (Bom.)], wherein it has been held that where an assessee possesses sufficient interest-free funds to meet the investments/advances, a presumption arises that such investments 13

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited or advances were made out of the interest-free funds available with the assessee. The said principle has subsequently been affirmed by the Hon'ble Supreme Court in CIT v. Reliance Industries Ltd. [410 ITR 466 (SC)].

6.2.3 We have considered the rival submissions and perused the material available on record. The Ld. CIT(A), after examining the financial position of the assessee, has recorded a categorical finding that the assessee possessed own funds, comprising share capital and reserves, of ₹38,36,02,874/-, as against interest-free advances of ₹20,28,18,699/-. Thus, on the facts recorded by the Ld. CIT(A), the availability of interest-free own funds was in excess of the interest-free advances in question.

6.2.4 The principle laid down by the Hon'ble Bombay High Court in Reliance Utilities and Power Ltd. (supra), and affirmed by the Hon'ble Supreme Court in CIT v. Reliance Industries Ltd. (supra), is that where sufficient interest-free funds are available with the assessee to meet the corresponding investments or advances, a presumption arises that such investments or advances have been made out of the

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited interest-free funds. Applying the aforesaid principle to the factual finding recorded by the Ld. CIT(A), we find that the interest-free own funds available with the assessee exceeded the amount of interest-free advances.

6.2.5 In the absence of any material brought on record by the Revenue to dislodge the aforesaid factual finding or to establish a specific nexus between the interest-bearing borrowings and the interest-free advances, we find no infirmity in the conclusion reached by the Ld. CIT(A). Accordingly, the deletion of the proportionate interest disallowance of ₹2,87,09,947/- is upheld. Ground No. 2 of the Revenue's appeal is accordingly dismissed.

6.3 Ground No. 3 of the Revenue's appeal relates to the disallowance of salary expenditure. On examination of the order of the Ld. CIT(A), we find that, while deleting the impugned disallowance, the Ld. CIT(A) has substantially proceeded on observations regarding the manner in which the Ld. AO had dealt with the issue, rather than recording a categorical finding, based on examination of the relevant

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited material, as to the allowability and genuineness of the salary expenditure claimed by the assessee.

6.3.1 As regards the aforesaid aspect, we have already considered the scope and manner of exercise of appellate powers by the Ld. CIT(A) while adjudicating Ground No. 1 of the present appeal. The issue involved in the present ground also requires examination of the claim of expenditure on the basis of the relevant facts, supporting documents and evidence furnished by the assessee. Accordingly, our observations and findings recorded while adjudicating Ground No. 1 shall apply mutatis mutandis to the present ground.

6.3.2 In view thereof, without expressing any opinion on the merits of the claim or the quantum of disallowance, the issue relating to the disallowance of salary expenditure is restored to the file of the Ld. CIT(A) for fresh adjudication in accordance with law, after affording reasonable opportunity of being heard to the assessee and after duly examining the relevant facts and supporting evidence furnished by the assessee. The Ld. CIT(A) shall exercise the appellate powers vested in him under section 250 of the Act, which are co-

ITA No. 5968/Mum/2025 Innowave IT Infrastructures Limited terminus with the powers of the Ld. AO, to the extent permissible under law, and shall record a reasoned finding on the issue. Ground

No. 3 of the Revenue's appeal is accordingly allowed for statistical purposes.

6.4 Ground No.4 of the appeal is general in nature, thus, needs no adjudication.

Order pronounced in the open court on 08-09-2026.

Sd/- Sd/- (ARUN KHODPIA) (NARENDER KUMAR CHOUDHRY) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated : 08-09-2026. Ankit K., Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT

BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai 17