DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3(3), MUMBAI, MUMBAI vs. PHULCHAND EXPORTS PRIVATE LIMITED, MUMBAI

3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai आदेश / O R D E R PER BENCH :- The above captioned appeals and cross appeals have been filed by the assessee and the Revenue respectively 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 order passed u/s. 153A r.w.s. 143(3)of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Years [A.Y.] 2018- 19&2019-20. Since some of the issues are common and also the fact that appeals were heard together, they are being taken up together for adjudication vide this composite order for the sake of brevity. We take up Department appeals first.

(A.Y. 2018-19)(Revenue) 1. On facts and in circumstances of the case, the ld. CIT(A) has erred in restricting disallowance made under section 14A to the extent of tax 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 Income Tax Act, 1961.”

, if need be.

3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the disallowance made u/s 36(1)(iii) of the Act 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.

3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai 3. The assessee deals in trading and export of iron ore, metals and commodities. It filed its return of income declaring total income of Rs. 1,53,94,250/-of the Act .A search and seizure action u/s.132 of the Act was carried out in Phulchand Group at the office and residential premises on 24.10.2018, wherein the assessee was also covered under such action. The AO issued notice u/s.153A of the Act and in response, the assessee filed its return of income declaring total income at Rs. 1,53,94,250/-. The AO assessed the total income at Rs.11,44,26,980/- making disallowances i.e. (i) u/s.14A r.w.r. 8D amounting to Rs.,77,87,780/-and (ii) u/s.36(1)(iii) amounting to Rs.6,65,38,828/- vide order u/s.143(3) dated 10.05.2021.

3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai 5.2 The legislative intent behind insertion of the aforesaid Explanation to section 14A of the Act was to clarify that notwithstanding anything to the contrary 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). Accordingly, he held that for the instant year, no disallowance could be made by the AO in excess of the exempt income earned. Since the assessee had not earned any 3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai exempt income, the disallowance of Rs.77,87,780/- made by the AO was deleted.

6. Before us, the ld.AR has relied on the assessment order and the grounds of appeal while the ld.DR has reiterated the contentions as made before the ld.CIT(A) which has also been narrated in the preceding para.

7. 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 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 of appeal.

8. Ground No. 2 pertains to the disallowance of Rs. 6,65,38,828/- u/s 36(1)(iii) of the Act. On verification of balance sheet, it was noticed by the AO that the assessee had shown Long Term Borrowing of Rs.202,06,56,907/- and Short Term Borrowing of Rs.91,86,48,185/- .Further, the assessee had given interest free loans to various parties. During the year under consideration, the assessee had given loans to the tune of Rs. 100,81,83,358/- against the total borrowings amounting to Rs. 293,93,05,092/-. Thus, the interest free 3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai loans advances are approximately 34.30% of the total borrowings. The interest debited to profit and loss account was Rs. 19,39,90,754/- During the course of assessment proceedings, assessee was asked to show cause why proportionate disallowance u/s 36(i)(iii) be not made as regards the above investments. In response, the assessee in his reply had submitted that the above loans were made from its own funds and no borrowed funds had been utilized for making investments. On the loans of Rs. 100,81,83,358/-, the assesse submitted that no interest is charged. The AO observed that the loans made above were clearly not for the purpose of business and profession. The assessee had not furnished any details as to why the advances of Rs. 100,81,83,358/- were given and what was business purpose. It merely submitted that it had given advances for business purpose from own funds and no borrowed fund has been utilized for the same. However, no details/evidences like fund flow statement to substantiate the claim had been filed. As regards the interest free loans of Rs. 100,81,83,358/-, no specific submissions had been made and only general explanation was filed. Therefore, proportionate interest amount of Rs.6,65,38,828/- was disallowed as it was difficult to identify which funds had been used where which meant the assessee had mix funds. The assessee was not having separate account for surplus funds or profit earned during the year and it is a case 3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai of mixed funds. The AO noted that the theory of disallowance u/s 36(1)(iii) on proportionate basis itself is based on concept of mix funds. Hon’ble Supreme Court judgment in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC), in which the concept of “commercial expediency” was used. Accordingly, he disallowed u/s 36(1)(iii) of the Act.

9. In the subsequent appeal by the assessee, the ld.CIT(A) after taking note of the reasons stated by the AO before making the impugned disallowance and also the written submissions made in this regard by the assessee, observed that the entire addition was repetitive as on the same logic and observations, the AO made similar disallowance in the AY 2014-15.The appellant has made detailed written submission and has also submitted that this is a repeated addition and was already covered in its favour by the decision of ITAT for AY2014-15 wherein the ITAT ruled that no disallowance can be made if the surplus funds of the appellant is in excess of the interest free advances. It has been observed that in the instant year also, the surplus fund of the appellant was in excess of the interest free advances, and hence respectfully following the decision of ITAT in appellant's own case, it is held that no disallowance u/s 36(1)(iii) can be made. The ld.CIT(DR) did not controvert the contentions of the assessee in this regard. The addition of 3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai Rs.6,65,38,828/- made by as well which was deleted by the ld.CIT(A) after detailed discussion.

(A.Y. 2019- 20)(Revenue) 1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the disallowance made u/s 36(1)(iii) of the Act 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 facts and in circumstances of the case, the ld. CIT(A) has erred in restricting disallowance made under section 14A to the extent of tax 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 Income Tax Act, 1961.”

3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai 5. (A.Y. 2018-19) (Assessee) 1. Ld. CIT(A) erred in not setting off capital gain on sale of depreciable asset being sale of office premises against carry forward business loss, on the plea that the same was not claimed in return of income and such claim was only raised during assessment proceedings without appreciating the fact that a fresh claim can be made. In any case Ld. CIT(A) in the appellate proceeding ought to have held that gain arising on sale of depreciable asset is to be set off against Carry Forward Business Loss.

2. Without prejudice, Ld. CIT(A) erred in not holding that capital gain arising on sale of office premises, a long term asset, is chargeable to tax at 20% under the provisions of sec 112 of the act, merely, on plea that the same was not claimed in return of income and only raised during assessment proceedings, without appreciating the fact that a fresh claim can be made. In any case Ld. CIT(A) in the appellate proceeding ought to have held that gain arising on sale of depreciable asset is to be taxed u/s 112 at 20%.

3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai 17. The ld.CIT(A) after taking into account the submissions of the assessee observed that in the instant case itwas claiming set off of capital gains with brought forward business loss and the basis of such claim has been stated to be the decision of Mumbai ITAT in the case of M/s Digital Electronics Ltd. He observed further that this claim of the assessee could not be said to be otherwise deductible or prima facie deductible. The Act provides for a specific provision by means of Section 119(2)(b) for such further claims and hence, it was held that the fresh claim after filing of return of income was not akin to an apparent claim and hence not allowable. Accordingly, this ground of appeal was dismissed.

18. Before us, the ld.AR relied on Pruthvi Brokers and Shareholders P LTD 349 ITR 336 BOM holding that “there is no restriction on appellate authorities to consider a fresh claim not made in return. The Hon Court referred to Jute Corpn. Of India 187 ITR 688 SC, Ahmedabad Electricity Ltd 199 ITR 351 (Bom) and NTPC 229 ITR 383 SC where the Apex Court held that purpose of tax proceeding is to determine correct taxable income while the jurisdictional High Court held that a fresh claim can be made in appeal even if not considered by the AO.Hon’ble High Court of Bombay in Dattaray GopalBhotte 150 ITR 460 (Bom)quoted CBDT circular no 14-(x135) of 1955 advising As not to 3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai take advantage of the ignorance of an assessee as to his rights and all reliefs due to assessee to be allowed. 18.1 It was further submitted before the ld.CIT(A) that the Digital Electronics Ltd. 135 TTJ 419(MUM) decision being binding STCG arising on sale of depreciable asset u/s 50 is to be setoff against carry forward Business Loss. This decision is now approved in the case of Alcon Developers(2021) 432 ITR 0277 (Bom) where the High Court held, “26. In Hickson and Dadajee (P.) Ltd. (supra) the first substantial question of law was whether on the facts and in the circumstances of the case and law, the ITAT was justified in allowing set-off of brought forward business loss against deemed short-term capital gains arising from the sale of building and plant and machinery. The ITAT, in the said case, had allowed the appeal of the respondent-assessee on the issue of set-off of the brought forward losses against deemed short term capital gains arising on the sale of building, plant, and machinery following the decision of its coordinate bench in Digital Electronics Ltd. (supra). In Digital Electronics Ltd. (supra) the ITAT had held that under Section 72 of the said Act, the loss under the head “profits and gains of business or profession” can be carried forward and the same can be set off against profits of any business or profession. It was held that it was not the requirement of Section 72 of the said Act that such gain or profit must be taxable under the head “profits and gains of business or profession”.

by the assessee in seeking modification of the order of ' assessment passed by the Income Tax Officer." ' Asst. Year 2010

11. (B) It is clear, therefore, that an assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. It cannot, however, be said that they have no jurisdiction to consider the same. They have the jurisdiction to entertain the new claim. That they may choose not to exercise their jurisdiction in a given case is another matter. The exercise of discretion is entirely different from the existence of jurisdiction. [Para 11] Further the observation of the Supreme Court in the case of Jute Corpn. of India Ltd. (supra) to the effect 'if the ground so raised could not have been raised at that particular stage when the return was filed or when the : assessment order was made....' or 'that the ground became available on account of change of circumstances or law,' does not curtail the ambit of the jurisdiction of the appellate authorities stipulated earlier. They do not restrict the new/additional grounds that may be taken by the assessee before the appellate authorities to those that were not available when the return was filed or even when the assessment order was made. The appellate authorities, therefore, have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The first part viz., 'if the ground so raised could not have been raised at that particular stage when the return was filed or when the assessment order 3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai was made....' clearly relate to cases where the ground was available when the return was filed and the assessment order was made but 'could not have been raised' at this stage. The words are 'could not have been raised' and not 'were not in existence'. Grounds which were not in existence when the return was filed or when the assessment order was made fall within the second category viz., where 'the ground became available on account of change of 'circumstances or law.'[Paras 12 and 13] : It was then submitted by Mr. Gupta that the Supreme Court had taken a different view in Goetze (India) Ltd (supra). We are unable to agree. The decision was rendered by a Bench of two learned Judges and expressly refers to the judgment of the Bench of three learned Judges in National Thermal Power Comp. Ltd. (supra). The question before the Court was whether the appellant-assessee could make a claim for deduction, other than by filing a revised return. After the return was filed, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The claim, therefore, was not before the appellate authorities. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Act to make an amendment in the return of income by modifying an application at the assessment stage without revising the return. The Commissioner of Income-tax (Appeals) allowed the assessee's appeal. The Tribunal, however, allowed the department's appeal. In the Supreme Court, the assessee relied upon the judgment in National Thermal Power Co. Ltd. (supra) contending that it was open to the assessee to raise the points of law even before the Tribunal. The Supreme Court held:- Asst. Year 2010-11 "4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a > ; claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the : assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs." (Para 22) It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. (Para -: 23)"

3102, 3103 /Mum/2025 A.Y. 2018-19, 2019-20 Phulchand Exports Private Limited, Mumbai 22. Respectfully following the judgment of hon’ble Bombay High Court in the case of CIT vs. Pruthvi Brokers and Shareholders (supra), we are of the considered view that ld. CIT(A) was not justified in rejecting the claim of the assessee without going into the merits therein but merely on the ground that the claim was required to be made by way of revised return. The jurisdictional High Court decision (supra) is binding on him as also on the AO.Accordingly, we consider it appropriate to set aside his order and remand the above issues in ground no. 1 and 2, back to his file for deciding the same on merits after allowing adequate opportunity of hearing to the assessee.