PALANPUR ENGG & FABRICATIONS LIMITED,MUMBAI vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 8(2), MUMBAI, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH MUMBAI BEFORE MS. KAVITHA RAJAGOPAL, JUDICIAL MEMBER & SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No. 2248/Mum/2026 (Assessment Year: 2018-19) Palanpur Engg & ACIT Central Circle – Fabrications 8(2) Limited Vs. 6th Floor, Aayakar 83, 8th Floor, Bajaj Bhavan, Mahrashi Bhavan, Nariman Karve road, Mumbai- Point, Mumbai – 400 020 400 021 PAN/GIR No. AAACP7692J (Applicant) (Respondent) Assessee by Shri B. N. Rao a/w Ms. Monu Verma, Ld. ARs Revenue by Shri Virabhadra Mahajan, Ld. DR Date of Hearing 18.05.2026 Date of Pronouncement 23.07.2026 आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM: This appeal by the assessee is directed against the order dated 12.01.2026 passed by the learned Commissioner of Income Tax (Appeals)-48, Mumbai [hereinafter referred to as "the CIT(A)"]

2 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited under section 250 of the Income-tax Act, 1961 [hereinafter referred to as "the Act"] for the assessment year 2018-19, arising out of the assessment order dated 16.04.2021 passed by the Assessing Officer under section 143(3) of the Act. Facts of the Case 2. The assessee is a company engaged in the business of manufacturing forging and allied engineering products catering to the requirements of its parent company as well as outside customers. Apart from its business income, the assessee also had income from investments, interest from bank and capital gains. For the assessment year under consideration, the assessee filed its return of income on 27.10.2018, declaring total income of Rs. 13,87,32,630/-. The case was selected for scrutiny under CASS under the complete scrutiny category. Statutory notice under section 143(2) of the Act was issued on 22.09.2019 and notices under section 142(1) of the Act were also issued calling for the requisite details. In response thereto, the authorised representative of the assessee furnished the details called for through e-proceedings. 3. During the course of assessment proceedings, the Assessing Officer recorded that the assessee had earned tax-free income by way of long-term capital gains amounting to Rs. 1,08,30,900/- and that the assessee had made a disallowance of Rs. 61,104/- in Form No. 3CD, being direct costs stated to have been incurred in relation to the investments. The assessee claimed that no other

3 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited expenditure had been incurred in relation to such investments. The Assessing Officer, however, was of the view that investment activity necessarily involved administrative time and exertions on the part of the directors and personnel of the company, including surveillance of NAV movements and taking decisions regarding continuation or disposal of investments at an appropriate time. The assessee was, therefore, called upon to furnish a working of disallowance under section 14A of the Act. According to the assessment order, the assessee furnished a working for an amount of Rs. 5,00,000/- proposed to be disallowed. The authorised representative submitted before the Assessing Officer that the figure of proposed addition was high. The Assessing Officer, however, held that the proposed disallowance could not be considered unreasonable and consequently made a further disallowance of Rs. 5,00,000/- under section 14A of the Act. 4. The Assessing Officer further noticed that the assessee had made a provision of Rs. 10,78,570/- towards payment of leave encashment to its employees as on 31.03.2018. Against the said provision, an amount of Rs. 8,34,340/- was stated to have been disbursed before the due date for filing the return of income. The balance amount of Rs. 2,44,230/- was, therefore, disallowed under section 43B of the Act. Accordingly, as against the returned income of Rs. 13,87,32,630/-, the Assessing Officer made a disallowance of Rs. 5,00,000/- under section 14A and a disallowance of Rs. 2,44,230/- under section 43B and completed

4 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited the assessment under section 143(3) of the Act vide order dated 16.04.2021, determining the total income at Rs. 13,94,76,860/-. 5. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A).Before the CIT(A), the assessee, inter alia, challenged the additional disallowance of Rs. 5,00,000/- made under section 14A of the Act and submitted that it had itself disallowed an amount of Rs. 61,104/- towards expenditure relating to the investments. It was also submitted that the assessee was an engineering industry manufacturing steel and alloy forged engineering items mainly used in the automobile industry and had no bank borrowings. The assessee contended that the further ad hoc disallowance of Rs. 5,00,000/- was unwarranted and deserved to be deleted. 6. The CIT(A), however, upheld the disallowance. The CIT(A) observed that even if no direct external expenditure was claimed, the process of investment, holding and sale involved utilisation of the company's resources, including the time of directors and staff, for monitoring NAV and market conditions. According to the CIT(A), the attribution of only Rs. 61,104/- towards expenditure was insufficient and unreasonable. The CIT(A) further observed that a corporate entity managing a portfolio yielding substantial exempt income necessarily utilised its infrastructure, top management time and administrative machinery, which constituted "embedded costs".

5 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited 7. As regards the assessee's contention that the Assessing Officer had failed to record dissatisfaction with the correctness of the suo motu disallowance, the CIT(A) held that the observations in paragraph 5 of the assessment order regarding involvement of administrative time and exertions of directors constituted a valid recording of dissatisfaction. The CIT(A) further held that the additional disallowance of Rs. 5,00,000/- was reasonable having regard to the magnitude of the exempt income and the administrative overheads of a limited company. The disallowance was accordingly confirmed and the relevant ground was dismissed. The CIT(A) also dismissed the other grounds raised before him and, consequently, dismissed the appeal of the assessee. 8. Aggrieved by the aforesaid order of the CIT(A), the assessee is in appeal before us and has raised the following grounds of appeal: 1. The Ld Commissioner Income Tax (Appeal) erred in upholding addition of Rs. 5,00,000 made by the Assessing Officer under section 14A of the Act disregarding the disallowance already made by the appellant. 2. The Appellant craves leave to add to, alter, modify, vary OR DELETE any of the grounds taken above. 9. During the course of hearing before us, the learned AR submitted that the assessee had, in the computation of income, suo motu disallowed an amount of Rs. 61,104/- under section 14A of the Act. The learned AR further submitted that, in fact, no exempt income had been earned by the assessee during the year under consideration.

6 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited 10. In support of the aforesaid contention, the learned AR invited our attention to the financial statements placed at page Nos. 9, 19 and 22 of the paper book and submitted that the assessee had made investments only in mutual funds and that such investments were entirely out of its own funds. It was further submitted that the assessee had no borrowings, as was evident from the notes forming part of the accounts. 11. The learned AR further submitted that the lower authorities had proceeded on an incorrect factual premise that the assessee had earned exempt long-term capital gains. It was clarified that the amount referred to by the lower authorities did not represent long-term capital gains. According to the learned AR, the assessee had earned short-term capital gains of Rs. 1,08,14,848/-, which were set off against short-term capital loss of Rs. 1,11,46,128/-, resulting in a net short-term capital loss. It was thus submitted that no exempt income had arisen to the assessee during the year under consideration. 12. In support of his submissions, the learned AR relied upon the decision of the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. v. Deputy Commissioner of Income-tax, [2017] 81 taxmann.com 111 (SC) / [2017] 247 Taxman 361 (SC) / [2017] 394 ITR 449 (SC).The learned AR also relied upon the decision of the Hon'ble jurisdictional Bombay High Court in Principal Commissioner of Income-tax-3, Mumbai v. Reliance Capital Asset Management Ltd., [2017]

7 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited 86 taxmann.com 200 (Bom.) / [2017] 251 Taxman 68 (Bom.) / [2018] 400 ITR 217 (Bom.). 13. On the strength of the aforesaid submissions and judicial precedents, the learned AR contended that the further ad hoc disallowance of Rs. 5,00,000/-, over and above the suo motu disallowance of Rs. 61,104/- already offered by the assessee, was unsustainable and ought to be deleted. 14. Per contra, the learned DR relied upon the orders of the Assessing Officer and the CIT(A). The learned DR invited our attention to the finding recorded by the CIT(A) that the assessee had earned long-term capital gains during the year and submitted that the CIT(A) was justified in upholding the disallowance made by the Assessing Officer under section 14A of the Act. 15. In response, the learned AR reiterated that the amount referred to by the lower authorities was not long-term capital gain but short-term capital gain of Rs. 1,08,14,848/-, which had been set off against short-term capital loss of Rs. 1,11,46,128/-, ultimately resulting in a net short-term capital loss. 16. We have considered the rival submissions and perused the material placed on record. The solitary substantive issue before us is whether the CIT(A) was justified in sustaining the further disallowance of Rs. 5,00,000/- made by the Assessing Officer under section 14A of the Act, over and above the suo motu disallowance of Rs. 61,104/- made by the assessee.

8 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited 17. We find that the entire basis adopted by the Assessing Officer for making the additional disallowance, and by the CIT(A) for sustaining the same, was that the assessee had earned exempt income by way of long-term capital gains. The Assessing Officer recorded the amount of such alleged long-term capital gains at Rs. 1,08,30,900/-. The learned DR also placed reliance upon the findings recorded by the lower authorities in this regard. 18. The learned AR, however, has specifically clarified before us that the aforesaid factual premise is incorrect. It was demonstrated that the assessee had not earned any exempt long- term capital gain during the relevant year. According to the details referred to before us, the assessee had earned short-term capital gain of Rs. 1,08,14,848/-, which was set off against short- term capital loss of Rs. 1,11,46,128/-, resulting in a net short- term capital loss. The learned AR has also referred to the relevant financial statements at page Nos. 9, 19 and 22 of the paper book to demonstrate that the investments were only in mutual funds, the investments were made out of the assessee's own funds and there were no borrowings. 19. We find that the above factual clarification goes to the root of the controversy. Section 14A operates in relation to expenditure incurred in connection with income which does not form part of the total income under the Act. The Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. (supra) has, in this context, observed:

9 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited "A plain reading of section 14A would go to show that the income must not be includible in the total income of the assessee. Once the said condition is satisfied, the expenditure incurred in earning the said income cannot be allowed to be deducted." (para 24) 20. Thus, the existence of income which does not form part of the total income is foundational to the application of section 14A in the factual context under consideration.

10 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited of the appellant's working of the claim. He has not specifically rejected that working and has not provided any reason for doing so." (para 20) 23. It was further held:

"The Commissioner was of the view that before proceeding to compute the disallowance under Section 14A as per Rule 8D, the Assessing Officer should consider the working of expenses made by the assessee and when he is not satisfied with the said working and terms it as incorrect, based on objective criteria and for cogent reasons, he can then proceed to work out the disallowance under Section 14A as per Rule 8D of the Rules." (para 20) 24. In the present case, apart from the general observation that investment activity requires administrative time and effort of the directors and employees, we do not find any specific expenditure identified by the Assessing Officer as having been incurred in relation to exempt income so as to justify the further ad hoc disallowance of Rs. 5,00,000/-. More importantly, the very assumption of earning exempt long-term capital gains, which formed the foundation for the impugned disallowance, has been shown before us to be factually incorrect.

11 ITA No. 2248/Mum/2026 Palanpur Engg & Fabrications Limited disturbed. Accordingly, Ground No. 1 raised by the assessee is allowed.

Order pronounced on 23/07/2026 as per Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963.

Sd/- Sd/- (KAVITHA RAJAGOPAL) (MAKARAND VASANT MAHADEOKAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 23/07/2026 Dhananjay, Sr.PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. संबंधधत आयकर आयुक्त / The CIT(A) आयकर आयुक्त(अपील) / Concerned CIT 4. धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई/ DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. 6. आदेशानुसार/BY ORDER, सत्याधपत प्रधत //True Copy// 1. उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai