DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -3(3), MUMBAI vs. PRATEEK APPARELS PRIVATE LIMITED, KARNATAKA
IN THE INCOME-TAX APPELLATE TRIBUNAL“C” BENCH,
MUMBAI
BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER
&
SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER
Deputy
Commissioner of Income Tax, Central Circle –
3(3), 404, 4th Floor, Kautilya
Bhavan,
Bandra
Kurla
Complex, Bandra East, Mumbai
– 400 051, Maharashtra v/s.
बनाम
Prateek
Apparels
Private
Limited
113, Krishna Reddy Industrial
Area, 7th Miles Kudlu Gate,
Hosur Road, Bengaluru – 560
068, Karnataka
स्थायी लेखा सं./जीआइआर सं./PAN/GIR No: AAACP7190B
Appellant/अपीलार्थी
..
Respondent/प्रतिवादी
Appellant by :
Shri Shankarlal Jain & Shri Satish Kumar
Respondent by :
Shri R A Dhyani, (CIT DR)
Date of Hearing
15.07.2025
Date of Pronouncement
04.08.2025
आदेश / O R D E R
PER BENCH
The above captioned appeals have been filed by the Revenue against the orders of even date passed by the Learned Commissioner of Income-tax
(Appeal)CIT(A)-51, Mumbai [hereinafter referred to as “CIT(A)”]
pertaining to the assessment order passed u/s. 153Ar.w.s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment
Years [A.Y.] 2014-15 and 2018-19. Since the issues are interlinked and also P a g e | 2
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Prateek Apparels Private Limited, Mumbai the fact that appeals were heard together, they are being taken up together for adjudication vide this composite order for the sake of brevity.
2. ITA No. 2936/MUM/2025 (A.Y. 2014-15)
Grounds of appeal are as below:
“On the facts and in the circumstances of the case, the ld.CIT(A) erred in holding that assessment or re-assessment u/s 153A of the Income Tax Act, 1961 is to be restricted only to the incriminating material found during the search when provisions of section 153A of the Income Tax Act, 1961 requires the total income to be brought under tax without any restrictions and incriminating material in form of business transfer agreement entered by the assessee for sale of its retail business in slump sale to Future Group was found & seized during the course of search. 2. “On the facts and in the circumstances of the case, the theld.CIT(A) erred in not appreciating the provisions of section 153A of the Income Tax Act, 1961 which requires the total income to be brought to tax without any restrictions. 3. “On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 10,00,000/- made on account of slump sale ignoring the fact that Supreme Court in case of M/s Kesarwani Zarda Bhandar Sahson Allahabad (Civil Appeal Nos. 7738-7739/2021, 7732- 7735/2021 and 7740/2021) has held that for unabated year once during search undisclosed income is found on unearthing the incriminating material during the search, the AO would assume juri iction to assess or reassess the total income even in case of completed/unabated assessments and incriminating material in form of business transfer agreement entered by the assessee for sale of its retails business in slum sale to Future Group was found & seized during the course of search. 4. “On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Rs. 64,95,363/- made u/s 36(1)(iii) of the Income Tax Act, 1961 ignoring the fact that Supreme Court in case of M/s Kesarwani Zarda Bhandar Sahson Allahabad (Civil Appeal Nos. 7738- 7739/2021, 7732-7735/2021 and 7740/2021) has held that for unabated year once during search undisclosed income is found on unearthing the incriminating material during the search, the AO would assume juri iction to assess or reassess the total income even in case of completed/unabated assessments and addition u/s 36(1)(iii) of the Income Tax Act, 1961 was based on statement recorded during the search u/s 132(4) of the Income Tax Act, 1961 of Mr. Sanjay Dalmia (Director of P a g e | 3
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Prateek Apparels Private Limited, Mumbai assessee company) wherein he failed to explain the business rationale of interest free loans given.
5. “On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Rs. 1,77,98,925/- made on account of set off brought forward loss ignoring the fact that assessee has failed to submit detail in support of its claim during the assessment proceeding.”
Facts of the case are that the assessee is engaged in business of manufacturing and trading of garments and retailing of apparels, footwear and leather goods etc. It filed original return declaring total income of Rs. 2,82,23,130/-. The assessment order u/s. 143(3) was passed assessing total income at Rs. 3,49,94,070/-. The Ld. CIT(A) allowed the appeal of the assessee. A search & seizure action u/s 132 of the Act was carried out in Phulchand Group on 24.10.2018. The assessee was also covered under the said search action. Consequent to the search and seizure action, consequent to notice u/s.153A of the Act assessment was made making certain disallowances as below. 3.1 Slump Sale–As per the assessment order, during the course search action, a business transfer agreement entered by the assessee for its retail business was found and seized. It sold its retail business in slump sale to Future Group for consideration of Rs. 1 cr. During the course of assessment proceedings, the assessee was asked to furnish details of slump sale along with break-up of assets and liabilities as given with Form 3CEA. As per submission filed, the value of other assets as per books of account was of Rs. 12.38 cr. and value of other assets as per
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Form 3CEA was of Rs. 12.47 cr. The difference was towards the deposits with landlord as while computing the net worth under form 3CEA the Auditor has considered the deposit of Rs. 10 lakhs which related to warehouse deposits and this deposit could not be transferred to Future
Group as the landlord did not agree to transfer the lease. After considering the said deposit of Rs. 10 lakhs, he concluded that the net worth of the undertaking for the purpose of computing capital gains under the Act was reduced by Rs. 10,00,000/-. Accordingly, an addition of Rs. 10,00,000/- was made to the total income of the assessee.
3.2 Disallowance u/s. 36(1)(iii)-During the course of search proceedings, statement of Sh. Sanjay Dalmia, Director of the assessee company was recorded u/s. 132(4) of the Acton 25.10.2018 where he was asked to provide the purpose of advancing loans to various related/unrelated entities. In his statement, he was unable to recall the purpose of granting loans to the entities. On verification of books of accounts, it was noticed that the assessee had given loans and advances to certain entities on which no interest has been charged. In response, the assessee submitted that the advances were given for business purpose out of its own funds and no borrowed funds had been utilized.
The interest free fund given were only Rs. 5.40 cr. The assessee’s own capital and Reserves and surplus was to the tune of Rs. 112.20 cr. No P a g e | 5
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Prateek Apparels Private Limited, Mumbai fresh interest free loans and advances were given during the year. The AO observed that the assessee had not submitted any documentary evidence to show that the advances had been given for business purpose.
On one hand, the assessee had debited substantial interest on loans to the tune of Rs. 15,13,96,319/- and it had given interest-free advance for non-business purpose. Accordingly, disallowance u/s. 36(1)(iii) was worked out at Rs. 64,95,363/- @ 12% on the loan amount of Rs.
5,41,28,021/- and was added to the total income of the assessee.
3.3 It was further noticed by the AO that the assessee had claimed set-off of brought forward business loss/depreciation of Rs.
1,77,98,925/- pertaining to A.Ys 2008-09 and A.Y. 2009-10. However, no details had been furnished that the loss was available to the assessee for set-off after taking in account assessment. In view of this, no set-off of brought forward business loss/depreciation of Rs. 1,77,98,925/- was allowed to the assessee.
In the subsequent appeal, the assessee contented the additions and disallowances made were legally not tenable as assessment u/s 153A of the Act was made though no incriminating materials were found or seized. 5. We find that the ld.CIT(A) deleted all the above additions on the basis that search assessment for year was unabated(completed).
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Therefore, applying the ratios of judgment of hon’ble Supreme Court in the case of Abhisar Buildwell alongwith other decisions, he held that additions could be made only on the basis of incriminating materials found during search. According to him no incriminating material was seized during search. After a detailed analysis of various decisions, he held that since the assessment for year was an unabated assessment and no incriminating material relevant to this assessment year was found during the course of the search, the AO could not have made any additions in respect of this assessment year. In view of this legal position, following the binding judgment of the Hon’ble Supreme Court in the above cited case, it was held that additions arising out of any incriminating material found during the course of search and seizure action could only be made in the instant year. He deleted all the additions accordingly.
The ld.DR has however, relied on the assessment order claiming that certain business agreement seized during search was not discussed in the assessment order made originally. Therefore, the said agreement was in the nature of incriminating materials seized during search even though it was part of normal business document.
Before us, the ld.AR has demonstrated that during original assessment proceedings, the same document was furnished before the P a g e | 7
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AO. No adverse inference was also drawn by him in the scrutiny assessment order. It is stated that the assessee submitted that Audit
Report in Form 3CEA was e-filled on 27-11-2014 and after due consideration assessment order u/s 143(3) was completed dated 02-12-
2016. Agreement being in original proceeding the same now seized is not an incriminating material and it being so, original assessment order is final and there is no abatement as held in Abhisar Buildwell P Ltd
[2023] 149 taxmann.com 399 in which it was held:
(i) that in case of search under section 132 or requisition under section 132A, the AO assumes the juri iction for block assessment under section 153A.
(ii) all pending assessments/reassessments shall stand abated:
(iii) in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume the juri iction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments.
Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 requisition under section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers or under sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved.
7.1 It is further pointed out that the Special Bench of Mumbai
ITAT in the case of All Cargo Global Logistics Ltd. [2012] 23
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Prateek Apparels Private Limited, Mumbai taxmann.com 103 (Mum) (SB) has followed the above decision and the above decision of the Special Bench has been upheld by the hon’ble
Bombay High Court in the case of Continental Warehousing
Corporation (Nhava Sheva) Ltd. [2015] 58 taxman.com 78. 7.2 On merits also, it was contented that in respect of disallowance of interest u/s 36(1)(iii) of the Act, it is stated that before the AO it was submitted that the advances are given for business purpose out of its own funds and no borrowed funds have been utilized.
The interest free fund given was only Rs.5.40 crores. The assessee’s own capital and reserved and surplus which was much more. No fresh interest free loans and advances are given during the year. The assessee placed reliance on various judgements wherein it was held when assessee’s own funds being many times more than the funds advanced free of interest no disallowance out of interest was called for by the AO.
Further, these advances were given in earlier years and also that they did not arise out of any incriminating material found during the course of search. The ld.CIT(A) held that the addition u/s 36(1)(iii) did not arise out of any incriminating material. Accordingly, it was deleted. He allowed other grounds also on the same basis.
8. We do not find any infirmity in the conclusion drawn by the ld.CIT(A) deleting the additions which had no co-relation with seized
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Prateek Apparels Private Limited, Mumbai incriminating materials. The alleged agreement being claimed to be incriminating materials is baseless and devoid of any merit since the said agreement could not be considered incriminating since it was fully disclosed even in the original assessment proceedings. Other additions are also made without any supporting incriminating material in hand.
The assessment has been done in the light of the provisions of section 153A of the Act apparently without any basis. It is undisputed that the original assessment was completed prior to the date of search, and no assessment proceeding under section 143(3) was pending at the time of search. Therefore, as per settled law, additions under section 153A can only be made based on incriminating material. While the hon'ble
Supreme Court Abhisar Buildwell(supra) permitted the AO to consider both seized material and other available information, the precondition remains that the AO must first establish that incriminating material was actually found in the case of unabated assessments. In the present case, the AO has not demonstrated any cogent incriminating material linking the assessee to the additions made. Therefore, we uphold the appellate order. Accordingly, the grounds of appeal of the Revenue are dismissed.
9.ITA No. 3099/MUM/2025 (A.Y. 2018-19)
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“On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) of the Income Tax Act, 1961 holding that no disallowance can be made if the surplus fund is in excess of the interest free advances and ignoring the fact that assessee has failed to substantiate that interest free advances has given out of owned funds as no supporting documents like fund flow statement etc has been furnished.” 2. “On the facts and in the circumstances of the case, the Ld. CIT(A) erred in restricting disallowance made under section 14A of the Income Tax Act, 1961 to the extent of exempt income earned by the assessee during the year by overlooking the clarification of legislative intent provided by the CBDT vide Circular No. 5/2014 dated 11.02.2014 and to this effect even an amendment was made by Finance Act, 2022 by way of insertion of Explanation to Section 14A of the LT. Act, 1961?” 3. “On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition made on account of CWIP written off amounting to Rs. 1,21,65,389/- treating it allowable as revenue expenditure/business loss u/s 37(1) or section 28 of the Income Tax Act, 1961 ignoring the fact that loss incurred from abandoned project is a capital loss & not a business loss and loss incurred in earlier years, making it a prior period expenditure, not allowable in the current year.
In this year, the return of income was filed declaring total income at Rs.94,73,890/-which was later revised to Rs.94,78,890/-. It was processed u/s 143(1) of the Act determining total income at Rs.3,01,04,508/-. Consequent to search and seizure action notice u/s.153A of the Act was issued and various notices were issued. The assessment was completed by making the addition on account of (i) Disallowance u/s 36(1)(iii) amounting to Rs.64,29,336/-, (ii) Disallowance u/s 14A r.w.r 8D amounting to Rs.5,61,439/- and (iii) Disallowance of CWIP written off amounting to Rs.1,21,65,389/-. The total income was assessed at Rs.4,92,60,670/-.
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Ground no.1 of the appeal pertains to the disallowance of Rs.64,29,336/- out of interest paid under provision of section 36(1)(iii). Facts of the case are already discussed in para 3.2 above. In response to the query made by the AO, it was submitted that the advances were given for business purpose out of its own funds and no borrowed funds have been utilized. The interest free fund given was only Rs.5.40 crores. The assessee’s own capital and reserved and surplus was to the tune of Rs.113 crores. No fresh interest free loans and advances are given during the year. The assessee placed reliance on various judgements. Thus, when its own funds being many times more than the funds advanced free of interest no disallowance out of interest was called for by the AO. 12. In the subsequent appeal, before the ld.CIT(A) the same contentions were made relying on judgment of hon’ble Supreme Court in South Indian Bank Ltd. v. CIT (2021) 438 ITR 1 (SC) and Reliance Industries Ltd. v. CIT (2019) 410 ITR 466 (SC), where sufficient own funds are available, a presumption arises that investments are made from such funds, and no interest disallowance is warranted. Further, there is no material on record to establish any nexus between the borrowed funds and interest free advances. Accordingly, the addition made towards interest disallowance under Section 36(1)(iii) amounting to Rs.64,29,336/- was deleted.
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During hearing before us, the ld.AR reiterated the same contentions as made before the authorities below. He further submitted that in the year of advance capital and free reserves were much higher to interest free advances. It is submitted that assessee’s own capital as on 31.03.2018 was Rs.21,00,00,100/- and reserves and surplus was Rs.91,44,60,845/- making total interest free funds of Rs.112,44,60,945/- as against capital and free reserves as on 31.03.2017 of Rs.112,30,75,200/-.No borrowed fund was used for advancing loans. It was submitted that the AO has relied upon the decision of Punjab High Court in case of Punjab Stainless Steel Ltd 324 ITR 396 (Delhi) and of High Court of Madras in case of K. Somasundaram & India Ltd 398 ITR 209 (P&H). The Tribunal in that case held interest free funds available were sufficient for interest free loans and advances and no interest disallowance was upheld. The High Court on appeal held that no question of law arises and upheld the decision of ITAT. Similarly, in case of Holy Faith International Pvt. Ltd 407 ITR 425 (P&H), the assessee in that case made certain investments by way of share application and claimed to be out of its own interest free funds. The Department disallowed the interest. The Court held that in P a g e | 13
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Prateek Apparels Private Limited, Mumbai case of Hero Cycles 379 ITR 347 (SC) the decision in case of Abhishek Industries is being overruled. The court held that in view of the sufficient funds of the assessee and decision of Abhishek Industries being overruled, no disallowance can be upheld. Thus, in subsequent decisions the concept of no disallowance of interest in case of own funds being higher to interest free loans advanced is approved by P&H High
Court and decision relied by Ld. AO stands overruled. The High Court of Bombay considered a similar issue in the case of Reliance Utilities &
Power Ltd. 313 ITR 340 (Bom). In this case, the assessee advanced certain funds interest free to sister concerns. If there are funds available both, interest-free and over draft and/or loans are taken, then a presumption would arise that investments would be out of the interest- free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. In the instant case said presumption was established considering the findings of fact, both by the CIT(A) and the Tribunal. In case of Golden Tobacco Ltd. 399
ITR 653 (Bom), it was observed by appellate authorities that interest cannot be disallowed as loans were advanced in earlier years when sufficient general reserves were available. In this case the interest free advances were given of Rs.4.01 cr. The High Court of Gujarat in the case
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Prateek Apparels Private Limited, Mumbai of Gujarat Narmada Valley Fertilizers Co. Ltd. 222 Taxman 28
(Guj) held accordingly.
13.1 It is further argued that now the above issue is finally concluded in Reliance Industries Ltd 307 CTR (SC) 121 has again upheld as under:- “Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest-free funds available to the assessee were sufficient to meets its investment. Hence, it could be presumed that the investments were made from the interest-free funds available with the assessee. Reliance was also placed on the juri ictional High Court in the case of Reliance Utilities & Power Ltd. 313 ITR 340 (Bom),
South Indian Bank Ltd. v. CIT (2021) 438 ITR 1 (SC) as well.
13.2 The ld.CIT(DR) relied on the assessment order.
14. We have carefully considered all the relevant facts of the case, rival submissions, provisions of the law and legal position emerging from the above cited decisions of various courts of law including those of hon’ble Supreme Court. We find that the Reserves etc. in the form surplus fund far exceeded the borrowings. Therefore, respectfully following the decisions above, we find no infirmity in the action of the ld.CIT(A) which is therefore, upheld.
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Ground No.2 pertains to the addition of Rs.5,61,439/- u/s 14A of the Act. The AO noted that the assessee made investment in quoted/unquoted shares and in joint venture but had not made any disallowance u/s 14A. The AO further noted that investment decisions are complex in nature and require constant monitoring and hence it is imperative that certain expenses would have been incurred in arriving at investment decisions. The AO thereafter invoked Rule 8D of the Income Tax Rules and computed such expense to be Rs.5,61,439/- and added back this amount u/s 14A of the Act. The assessee on the other hand has made detailed written submissions, including that the appellant has not earned any exempt income during the year and no addition was justified. 16. The ld.CIT(A) observed that on the issue of extent of disallowance u/s 14A which can be made if the dividend income earned during the relevant year is either nil or less than the amount of disallowance computed under section 14A, this was settled by the decision of the hon’ble Supreme Court in the case of Chettinad Logistics P. Ltd. (95 taxmann.com 250) wherein the Revenue SLP against the decision of the hon’ble Madras High Court (80 taxmann.com 221) has not been admitted. In this case, the hon’ble High Court held that Rule 8D cannot override the provisions of sec. 14A. The hon’ble
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Court held that if provisions of sec 14A itself are not applicable, then there is no question of invoking Rule 8D and computing the disallowance. It was noted by the High Court that the language used in the provisions of section 14A makes it abundantly clear that the same is triggered only when there is an income which does not form part of the total income under the Act. It was held by the High Court that the provisions of section 14A of the Act cannot be invoked if no exempt income has been earned for the relevant year. Hon’ble High Court granted relief to the said assessee on the disallowance made by the AO u/s. 14A on the ground that no exempt/dividend income was earned during the relevant year. The hon’ble Bombay High Court in the case of Nirved Traders Pvt. Ltd. (ITA No. 149 of 2017) in their decision dated 23.04.2019 approved the claim that the disallowance under section 14A was to be restricted to the tax-exempt income earned during the year. Accordingly, he held that the disallowance made by the AO u/s 14A was not tenable and has to be restricted to the extent of the exempt income earned.
16.1 It was also observed by him that the Finance Act 2022
Explanation was inserted in section 14A w.e.f 01.04.2022. The legislative intent behind insertion of the aforesaid Explanation to section 14A of the Act was to clarify that notwithstanding anything to the contrary
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Prateek Apparels Private Limited, Mumbai contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.
However, the ITAT Mumbai vide its order dated 29.06.2022 in the case of Bajaj Capital Ventures (P) Ltd. (2022) 141 taxmann.com 1
(Mumbai-Trib) has held that the amendment by way of insertion of the aforesaid explanation was prospective in nature and that prior to 1.4.2022, no disallowance could be made under section 14A with respect to expenditure incurred by assessee to earn exempt income, when no exempt income was earned during relevant assessment year. The same view that the insertion of the explanation in section 14A is prospective in nature has also been held by the Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd (2022) 141 taxmann.com 289
(Delhi).He deleted the addition made in this regard submitting that as no exempt income had been earned provisions of sec 14A are inapplicable as section 14A permits disallowance of expenditure incurred “in relation to exempt income”. Rule 8D also provides for disallowance “in relation to income which does not form part of the total income”. The High Court of Bombay in case of Ballarpur Industries
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Ltd. ITA No.51 of 2016 dated 13.10.2016 concurred with the decision of Delhi High Court. Further, hon’ble Supreme Court in the case of -CIT
(central) vs Chettinad Logistic Pvt. Ltd. 248 Taxman 55 (Mad), SLP of department was rejected in 95 taxmann.com 250 (SC)
17. We find that the issue involved is no more res integra that no disallowance can be made by the AO in excess of the exempt income earned. Since the assessee has not earned any exempt income, the disallowance of Rs.5,61,439/- made by the AO was rightly deleted by the ld.CIT(A).The amendment made is also not applicable to the relevant year as held in several judicial decisions. Accordingly, there being no infirmity in the appellate order, we uphold the same dismissing the ground.
18.Ground No.3pertains to the disallowance of Capital Work-in- progress(CWIP) written off by the assessee amounting to Rs.1,21,65,389/- allowable u/s.37/28 of the Act .The AO on perusal of profit and loss account noticed that the assessee had debited an expenditure as CWIP written off amounting to Rs,.1,21,65,389/- and the same had not been added back in the computation of total income. The AO rejected the contentions that due to non-availability of sufficient funds, the project was abandoned since the assessee itself capitalized the expenses. Now, just because the project has been abandoned, the nature
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Prateek Apparels Private Limited, Mumbai of the expenses cannot change from capital to revenue in nature. The loss incurred by assessee was a capital loss and not business loss.
Moreover, the expenditure was incurred in earlier years, making it a prior period expenditure and, therefore, the same was not allowable in the current year. Reliance was placed on the decisions in the case of Superfil Products Ltd. V. Asst. CIT [2013] 31 taxmann.com 146 (Chennai
- Trib.)/[2012] 20 ITR(T) 171 (Chennai
- Trib.)/[2013]where expenditure incurred on a new project which was abandoned was not allowed by the ITAT following the decision of the Hon'ble Juri ictional
High Court in the case of EID Parry (India) Ltd. v. CIT [2002] 257 ITR
253 (Mad.) which held inter alia that expenditure incurred on that capital project was not something which could be regarded as revenue expenditure laid out exclusively and wholly for the purposes of business of the assessee as what it was trying to start was a new business for the manufacture of a new product. He also relied on the case of Mahindra
Holidays and Resorts India Ltd. 31 taxmann.com 85 (Chennai Trib.).
19. Before the ld.CIT(A),it was submitted by the assessee that it proposed to set up a garment and apparel manufacturing unit at Sira,
Bangalore titled as SIRA Project, for which it incurred expenses of Rs.1,46,65,388/- which had been capitalized as Capital Work-in- progress (CWIP) as project was under implementation. The expenses
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Prateek Apparels Private Limited, Mumbai incurred were in the nature of salaries, consultancy expenses, loan processing fees paid to bank, travelling and conveyance and lodging and boarding charges paid for labours and staff appointed for said project.
Subsequently due to non availability of sufficient funds the project was abandoned. As the project was abandoned, expenditure incurred not bringing into existence any capital asset of enduring nature the assessment year 2018-19 and the expenses were written off during the said assessment year expenses being of revenue nature are allowable u/s 37 (1)/section 28 of the Act. The proposed project being abandoned at the work-in-progress stage, the expenditure does not result in any enduring advantage and such expenditure, when written off are allowable under section 37 of the Actor alternatively as business loss u/s 28.Attention was also drawn to the judgement of hon’ble Supreme Court in Commissioner of Income Tax vs. Madras Auto Service (P)
Ltd., reported at (1998) 233 ITR 468 (SC) wherein while considering the issue, the Court found that the assessee could not have claimed it as capital expenditure, as there was no capital asset generated by spending said amount. The expenditure was held rightly classified as revenue expenditure. In the case of Manganese Ore India
Ltd.(2016) 384 ITR 413 (Bom), it was held that the decision to abandon project, balance deferred revenue expenditure relating to said
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Prateek Apparels Private Limited, Mumbai project would be deemed to arise in relevant year. The assessee was running a project which was not making profits. Therefore, it was abandoned and entire expenses, including balance deferred revenue expenditure were written off during the year. The AO disallowed the balance deferred revenue expenditure as it was not related to current year's income. The CIT(A) allowed the claim of assessee, which was affirmed by the Tribunal. On appeal, the High Court held that since the project was abandoned in the assessment year 1995-96 and the entire expenses was written off during the said assessment year, it can be safely concluded that the expenditure arose in the relevant year. Reliance was also placed on Alcove Industries Ltd65 taxmann.com 311
(Calcutta),Royal Calcutta turf club 189 TTJ 433(Kol) etc where for setting up factory for expansion of existing business abandoned allowable u/s 28. Likewise, reliance was placed on in the case of Chemplast Sanmar Ltd 412 ITR 323 (Mad) engaged in business of poly vinyl chloride, caustic soda and shipping expenditure for textile project, abandoned disallowed as capital being a new project, capital nature.one business unity of control, common funds, was held allowable.
20.1 The ld.CIT(A) observed that since the project was abandoned at the work-in-progress stage, without resulting in any enduring capital
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Prateek Apparels Private Limited, Mumbai asset, the assessee contended that the expenditure qualifies as revenue in nature and is allowable under Section 37(1) or as a business loss under Section 28 of the Act. He concluded that that no capital asset came into existence. The project was abandoned at the work-in-progress stage, and no enduring capital asset was created. As held by the Supreme
Court in CIT v. Madras Auto Service (P) Ltd. (supra), if no capital asset materializes, the expenditure cannot be classified as capital and should instead be treated as revenue expenditure. Besides, the expenses, being in the nature of salaries, consultancy fees, loan processing charges, travel, conveyance, and lodging costs for labour and staff, were directly related to business operations. Various judicial precedents, including
CIT v. Alcove Industries Ltd. and Royal Calcutta Turf Club
(supra), have held that expenditures incurred for abandoned projects are allowable as business losses or revenue expenditure. In so far as the arguments of prior period is concerned, he held that the expenditure was written off in AY 2018-19, the year in which the project was officially abandoned. Following the decision in Alcove Industries Ltd., deferred revenue expenditure relating to an abandoned project is deemed to arise in the relevant year, making the claim valid in AY 2018-19. He further held that the cases cited by the AO, such as Superfil Products Ltd.
and EID Parry (India) Ltd., were distinguishable as they involved
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Prateek Apparels Private Limited, Mumbai new projects separate from the existing business, whereas in the present case, the SIRA Project was an expansion of the assessee’s existing operations. In Chemplast Sanmar Ltd. and Organon I.P.
Ltd.(supra), courts have held that if a project is an expansion of an existing business, the related expenses are allowable. In the instant case, the assessee is in the business of garment manufacturing and trading and hence the expenses incurred for the SIRA Project was for extension of its existing business. Further, the nature of expenses debited as CWIP was of the nature of salary, loan processing fees, travelling and conveyance and such other routine business expenses. In view of the above analysis and judicial precedents, it was held that the CWIP write- off of Rs.1,21,65,389/-was allowable as revenue expenditure/business loss under section 37(1) or section 28 of the Act. Accordingly, the addition made by the AO was deleted.
Before us, the ld.AR reiterated the same arguments as made before lower authorities relying on various decisions of courts where expenses incurred on abandonment of project was held the deduction as revenue deduction. The ld.DR on the other hand relied on the AO and the grounds of appeal filed. 22. We have carefully considered all the relevant aspects of the case and find that the impugned expenditure in no case can be P a g e | 24
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Prateek Apparels Private Limited, Mumbai considered as capital in nature. Details stated above clearly show their revenue nature. The claim of the assessee is supported by a plethora of judicial decisions including those of hon’ble Apex Court and juri ictional High Court discussed above, all of which have been found to be applicable to the facts of the case by the ld.CIT(A).we do not find any infirmity in his findings and decision to allow the impugned expenditure as allowable as revenue expenditure u/s 37(1) of the Act.
The decision rendered by him is accordingly upheld dismissing the grounds in this regard by the Revenue.
In the result, appeals of the Revenue in ITA No.2936 &3099/Mum/2025 are dismissed. Order pronounced in the open court on 04.08.2025. SANDEEP GOSAIN PRABHASH SHANKAR (न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)
Place: म ुंबई/Mumbai
ददनाुंक /Date 04.08.2025
Lubhna Shaikh / Steno
आदेश की प्रयियलयि अग्रेयिि/Copy of the Order forwarded to :
1. अपीलार्थी / The Appellant
2. प्रत्यर्थी / The Respondent.
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ITA No. 2936, 3099/Mum/2025
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Prateek Apparels Private Limited, Mumbai
आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि ////
आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.