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

ITA 3103/MUM/2025Status: DisposedITAT Mumbai04 August 2025AY 2019-2020 pages
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What did the Tribunal hold?

The Tribunal held that the disallowance under Section 14A can only be made to the extent of exempt income earned. Since the assessee had not earned any exempt income during the relevant assessment year, the disallowance made by the AO was rightly deleted by the CIT(A). The Tribunal further noted that the amendment to Section 14A by the Finance Act, 2022, inserting an Explanation, was held to be prospective in nature by various judicial decisions, including the ITAT Mumbai in Bajaj Capital Ventures (P) Ltd. and the Delhi High Court in Era Infrastructure (India) Ltd. Therefore, the amendment was not applicable to the assessment years in question. Regarding the disallowance under Section 36(1)(iii), the Tribunal, following the jurisdictional High Court's decision in CIT vs. Pruthvi Brokers and Shareholders, held that the CIT(A) was not justified in rejecting the assessee's claim merely on the ground that it should have been made by way of a revised return. The Tribunal set aside the CIT(A)'s order on this issue and remanded it back for deciding on merits after providing an adequate opportunity of hearing to the assessee.

What were the facts?

The assessee, Phulchand Exports Private Limited, is in the business of trading and export of iron ore, metals, and commodities. A search and seizure action under Section 132 of the Income Tax Act, 1961, was conducted on October 24, 2018. The Assessing Officer (AO) issued a notice under Section 153A. The assessee declared a total income of Rs. 1,53,94,250/-. The AO assessed the total income at Rs. 11,44,26,980/-, making disallowances under Section 14A read with Rule 8D amounting to Rs. 77,87,780/- and under Section 36(1)(iii) amounting to Rs. 6,65,38,828/-. The assessee appealed to the Commissioner of Income-tax (Appeals) [CIT(A)], who deleted the disallowance under Section 14A and restricted the disallowance under Section 36(1)(iii). The Revenue has filed appeals against the CIT(A)'s order for Assessment Years 2018-19 and 2019-20, and the assessee has also filed an appeal for Assessment Year 2018-19.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the learned CIT(A) has erred in restricting the 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 and the amendment by way of insertion of Explanation to Section 14A by the Finance Act, 2022? (Assessee's contention: The CIT(A) erred in restricting the disallowance. Revenue's contention: The CIT(A) erred in restricting the disallowance, overlooking CBDT Circular No. 5/2014 and the amendment to Section 14A by Finance Act, 2022. The amendment is retrospective.) 2. Whether, on the facts and circumstances of the case and in law, the learned CIT(A) is justified in deleting the disallowance made under Section 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 the assessee has failed to substantiate that interest-free advances were given out of own funds as no supporting documents like fund flow statement etc. were furnished? (Assessee's contention: The CIT(A) was justified in deleting the disallowance. Revenue's contention: The CIT(A) erred in deleting the disallowance as the assessee failed to substantiate the source of interest-free advances.)

Which sections of the Income-tax Act were involved?

Section 14A,Section 36(1)(iii),Section 132,Section 153A,Section 143(3)

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Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR

For Appellant: Shri Shankarlal Jain & Shri Satish Kumar
For Respondent: Shri R.A Dhyani, (CIT-DR)
Hearing: 15.07.2025Pronounced: 04.08.2025

Heard together (3 matters)

ITA No. 2415/MUM/2025
ITA No. 3102/MUM/2025
ITA No. 3103/MUM/2025

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