PETAL RELATORS LLP,KANPUR vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1(1)(1), KANPUR, KANPUR

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW ‘A’ BENCH, LUCKNOW BEFORE SH. KUL BHARAT, VICE PRESIDENT AND SH. NIKHIL CHOUDHARY, ACCOUNTANT MEMBER ITA No.110/LKW/2026 A.Y. 2018-19 Petal Relators LLP, vs. The Assistant Commissioner of Flat No. E-27/17 (9-10) Income Tax, Circle-1(1)(1), Kanpur Sukhdham, Tilak Nagar, Kanpur PAN: AAQFP8166Q (Appellant) (Respondent) Assessee by: Sh. Swaran Singh, C.A. Revenue by: Sh. Amit Kumar, DR Date of hearing: 19.05.2026 Date of pronouncement: 30.07.2026 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the assessee against the orders of the ld. CIT(A), NFAC dated 26.12.2025 wherein the ld. CIT(A) has dismissed the appeal of the assessee against the orders of the Assessing Officer for the assessment year 2018-19, that was passed under section 143(3) on 28.07.2021. The grounds of appeal are as under: “1. That the notice issued under section 143(2) of the Income Tax act, 1961 is not in the format prescribed by CBDT, hence the said notice is unsustainable in law and consequently the impugned assessment order is also unsustainable in law and liable to be quashed. 2. That the Ld. A.O. has erred in law and on facts in making arbitrary disallowance of Rs 55,80,540/- under section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(ii) of LT. Rules, 1962, therefore is liable to be deleted. 3. That the Ld. CLT(A), NFAC has erred in law and on facts in sustaining the impugned assessment order ignoring the fact - i. That the Ld. A.O. has erred in law and on facts in making arbitrary disallowance of Rs 55,80,540/- under section 14A of the Income Tax Act, 1961

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19 read with Rule 8D(2)(11) of LT. Rules, 1962 ignoring the fact that total exempt income received during the year was only 26.37,044 as discussed in para 3.4 of the Assessment Order. therefore appropriate relief is allowable to the appellant. ii. That the Ld. A.O. has failed to consider and appreciate that there is a mismatch between income determined in the Assessment Order at Rs. 10,13.330/- and computation Sheet attached thereto showing total income at Rs. 41,04,308/-, therefore appropriate relief is allowable to the appellant. iii. That the Ld. A.O. has failed to consider and appreciate that the application filed us 154 of LT. Act, for rectification of mistake apparent from record and rejecting the same arbitrarily and without passing a speaking order. iv. That the Assessment to the extent stated in grounds of appeal nos. 1 2 and 3, mentioned here above, is bad in law, unsustainable and deserves to be modified. v. That without prejudice to the above grounds of appeal the assessment under appeal is insupportable in law and on facts and is also contrary to the principles of natural justice and equity. 4. That the arbitrary disallowance of Rs. 55,80,540-under section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(11) of 1.T. Rules, 1962 made by the Ld. Assessing Officer in the income of the appellant are contrary to the principles of natural justice and equity, wholly unjustified and unsustainable 5. That the arbitrary disallowance of Rs. 55,80,540/- under section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(ii) of LT Rules, 1962 made by the Ld. Assessing Officer in the income of the appellant is much too high and excessive, therefore liable to be deleted. 6. That the whole assessment is without jurisdiction, void-ab-initio and therefore, liable to be quashed. 7. That the impugned assessment order has been passed without following the laid down procedure as per provisions of Income Tax Act, 1961 and CBDT Circular Notification/Instruction, therefore the impugned assessment order is unsustainable in law and liable to be quashed.”

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19 further observed that the assessee had incurred interest expenses of Rs. 6,88,02,151/- paid or payable on various secured or unsecured loans. He came to the conclusion that the assessee had utilized its funds towards such investment, the income from which may not form part of total income of the assessee and at the same time the assessee was making the payments of interest for borrowed funds also. He also noticed that the assessee had not debited to the profit and loss account, any amount towards expenses related to exempt income. He had also not disallowed any expense towards exempt income, which in the opinion of the Assessing Officer was not justified. He, therefore, expressed his dissatisfaction with the accounts as above, and proceeded to compute the disallowance under section 14A in accordance with Rule 8D of the Income Tax Rules. Before doing so, he issued a show cause notice to the assessee. In response, the assessee submitted that the computation of disallowable expenses under Rule 8D worked out to Rs. 55,80,540/-, whereas the assessee only had exempt income of Rs. 26,37,044/-. Therefore, the as per settled position in law, the disallowance could not exceed the exempt income amounting to Rs. 26,37,044/-. The assessee placed reliance on the decisions of the Hon’ble Madras High Court in the case of PCIT vs. Investor Ventures Limited (2021) 123 taxman.com 378 (Madras); the decision of the Hon’ble Delhi High Court in the case of Joint Investment (P.) Ltd. vs. CIT (2015) 375 ITR 694 (Delhi) and the decision of the ITAT Jaipur Tribunal in the case of ACIT, Central-1 vs. Satish Kumar Agarwal (2018) 96 taxman.com 373 (Jaipur-Trib). However, the Assessing Officer did not accept the submission of the assessee. He recorded his belief that the facts of those cases were different from that of the assessee and the case of the assessee was not covered by them. In the present case, the assessee had himself given details of borrowed funds, interest paid and investment made in funds generating exempt income. As per the submission 3

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19 dated 20.04.2021, the assessee had stated that it had made investment from which exempt income was earned and that it had paid total interest of Rs. 6,88,02,151/- out of which proportionate interest comes to Rs. 3,27,13,878/-. Thus, the Assessing Officer observed that the proportionate interest for exempt income was higher than the proposed disallowance computed under Rule 8D of the Income Tax Rules. Accordingly, he disallowed the disallowable expenses as computed under rule 8D, and added it back to the returned income of the assessee, (which was a loss). 3. Aggrieved with the said assessment order, the assessee filed an appeal before the ld. CIT(A). The learned CIT(A) held that a plain reading of section 14A and Rule 8D made it clear that even if the assessee did not receive any exempt income or did not claim any expenditure in relation to the exempt income earned, the ld. AO had the power to estimate the expenditure made to earn the exempt income. Such disallowance should not exceed the expenditure claimed by the assessee and did not have any connection with the exempt income earned. Accordingly, he rejected the contention of the assessee and confirmed the addition made by the Assessing Officer as per the provisions of Rule 8D of the Income-tax Rules. The appeal of the assessee was, therefore, dismissed. 4. The assessee is aggrieved by the dismissal of its appeal and has accordingly preferred the present appeal before us. Shri Swarn Singh, C.A. (hereinafter referred to as the learned AR) submitted that the total amount of exempt income earned by the assessee was only Rs. 26,37,044/-. It was submitted that the extent of disallowance could not exceed the amount of exempt income which was a matter which had been considered by various courts and it had been concluded that the disallowance had to be restricted to the extent of exempt earned. The ld. AR placed reliance on the decisions

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19 of the Hon’ble Madras High Court in the case of PCIT v. Investor Ventures Ltd. (2021) 123 taxmann.com 378 (Madras), the decision of the Hon'ble Delhi High Court in the case of Joint Investments Pvt. Ltd. v. CIT (2015) 375 ITR 694 (Delhi) and the decision of the ITAT Jaipur Bench in the case of ACIT, Central Circle-1 vs. Satish Kumar Agarwal (2018) 96 taxman.com (Jaipur- Trib.), wherein this matter had been considered and decided in favour of the assessee. The learned AR also drew our attention to the judgment of the Income Tax Appellate Tribunal, Lucknow Bench "B" in ITA No. 433/Lkw/2020, in the case of ACIT, Range-1, Lucknow vs. M/s. Mahendra Educational Pvt. Ltd., wherein the Tribunal, after considering the recent amendment to the Income Tax Act and various decisions rendered by various courts had held that the Explanation to Section 14A of the Income- tax Act inserted by Finance Act 2022, was prospective and could not be applied to Assessment Year 2017-18. The learned AR pointed out that at page 13 of its order in paragraph E.1, the Hon'ble ITAT had referred to various judicial precedents on which it was relying including the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. Commissioner of Income Tax (2015) 378 ITR 33 Delhi and PCIT v. GVK Project and Technical Services Ltd. (2019) 106 taxmann.com 180 (Delhi). The Bench had also placed reliance on the decision of the Punjab & Haryana High Court in the case of Pr. CIT vs. State Bank of Patiala 391 ITR 218 (P&H) and the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Shivam Motors (P.) Ltd. in ITA No. 88/2014. Since the Hon’ble was the jurisdictional High Court, the ld. AR submitted that, its ratio was binding upon all authorities and the AO could not have made an addition in excess of exempt income earned in view of the aforesaid decisions. He, therefore, prayed for relief in this regard. The ld. AR did not press ground nos. 1, 6 & 7 of the grounds of appeal. 5

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19 5. On the other hand, Sh. Amit Kumar, Sr. DR (hereinafter referred to as the ld. DR) drew our attention to the Explanation inserted by Finance Act, 2022 in amendment of section 14A of the Act which stated that the provisions of section 14A applied and were deemed to have applied to all cases where income not forming part of total income under this Act had not approved or arisen or had not been received during the previous year relevant to the assessment year and the expenditure had been incurred during the said previous year in relation to such income not forming part of total income. The ld. DR submitted that the language of the expalantion showed that it has retrospective effect and therefore, it was applicable to the present case for the assessment year 2018-19. It was further submitted that all the judgments cited by the assessee were prior to this amendment and therefore, were no longer binding precedents. It was, therefore, prayed that the disallowance may be upheld. 6. We have duly considered the facts and circumstances of the case and the arguments advanced by both parties. We note that the Hon’ble Supreme Court in the case of PCIT, Patiala vs. State Bank of Patiala (2018) 99 taxman.com 286 (SC) dismissed the SLP against the judgment of the Hon’ble High Court of Punjab & Haryana, wherein it had been held that the assessment order could not be held to be erroneous under section 263, where the AO restricted the disallowance under section 14A to the amount of exempt dividend income, even though he had completed the disallowance under Rule 8D to be at a higher figure. In PCIT-2 v. Caraf Builders & Constructions (P.) Ltd., (2019) 101 taxman.com 167 (Delhi), the Hon’ble High Court of Delhi has held as under:- "25. Total exempt income earned by the respondent-assessee in this year was Rs.19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should be enhanced from Rs.75.89

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19 crores to Rs.144.52 crores. Upper disallowance as held in Pr. CIT u. McDonalds India (P.) Ltd. ITA 725/2018 decided on 22nd October, 2018 cannot exceed the exempt income of that year. This decision follows the ratio and judgement of the Supreme Court in the case of Maxopp Investments Ltd. υ. CIT [2018] 402 ITR 640/254 Taxman 325/91 taxmann. com 154 and the earlier judgements of the Delhi High Court in Cheminvest v. CIT [2015] 378 ITR 33/234 Тахтап 761/61 taxmann.com 118and CIT v. Holcim (P.) Ltd. [2015] 57 taxmann.com 28 (Delhi). Relevant portion of the judgement in McDonalds India (P.) Ltd. (supra) reads:- '8. The decision in the case of Maxopp Investment Ltd. (supra) is significant and does answer the question in issue. This decision does not support the Revenue as the Assessing Officer in the case of Maxopp Investment Ltd. (supra) had himself restricted the disallowance to the extent of exempt income. After referring to Walford Share and Stock Brokers P. Ltd. (supra) it was held-"Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income." 9. The position becomes clear and beyond doubt when we refer to the factual position in the appeal preferred by the Revenue against the decision of the Punjab and Haryana High Court in the case of Pr. CIT v. State Bank of Patiala [2017] 391 ITR 218/245 Taxman 273/78 taxmann.com 3 which was also decided with the decision in Maxopp Investment Ltd. (Supra). In State Bank of Patiala (Supra) the Assessing Officer had applied Rule 8D of the Income Tax Rules 1962, but had restricted the disallowance to the amount claimed as exempt income. The Commissioner of Income-tax (Appeals) had enhanced and increased this disallowance as per Rule 8D of the Income Tax Rules, 1962. The said disallowance was more than exempt income. The Tribunal had reversed the finding of the Commissioner of Income-tax(Appeals) and restored the disallowance as made by the Assessing Officer i.e. restricted the disallowance to the extent of exempt income. Decision in the case of State Bank of Patiala (supra) of the Punjab and Haryana High Court was affirmed by the Supreme Court as the correct conclusion, though the Supreme Court did not agree with the reasoning of the Punjab & Haryana High Court on the theory of dominant intention. It was held that the view of the Commissioner of Income Tax (Appeals) disallowing expenditure beyond and above the exempt income earned by applying Rule 8D was clearly untenable and rightly rejected by the Tribunal." 7. The said judgments have been followed by the plethora of judgments from the ITAT all over the country including that of the Lucknow Bench in

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19 the case of M/s Mahendra Educational (P.) Ltd. (supra) that had been cited by the ld. AR. We further note that in the said order of the Coordinate Bench of the ITAT Lucknow, the ITAT had examined the issue whether the explanation to section 14A, that was inserted by the Finance Act, 2022 was retrospective or prospective and cited various judgments of the Hon’ble High Courts of Delhi, Gauhati and Calcutta to the effect that the amendments are prospective and cannot be held to apply to any year previous to 1.04.2022. Thus, for the year in question, the decision of the various Courts including the Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. Commissioner of Income Tax (supra) and the Hon’ble Allahabad High Court in the case of CIT vs. Shivam Motors (P.) Ltd. (supra) continued to hold the field. Accordingly, respectfully following the aforesaid judgments and the order of the Coordinate Bench in the case of M/s Mahendra Educational (P.) Ltd. (supra), we hold that no disallowance over and above the amount of exempt income is permissible and we accordingly allow ground nos. 2 to 5 of the appeal. Ground nos. 1, 6 & 7 have not been pressed and are accordingly dismissed as such. 8. In the result, the appeal of the assessee is held to be partly allowed. Order pronounced on 30.07.2026 in the Open Court. Sd/- Sd/- [KUL BHARAT] [NIKHIL CHOUDHARY] VICE PRESIDENT ACCOUNTANT MEMBER DATED: 30/07/2026 Sh

ITA No. 110/LKW/2026 Petal Relators LLP A.Y. 2018-19