Sanjay Kothari (HUF) Vs National Faceless Assessment Centre (ITAT Mumbai)
ITAT Mumbai Restricts 14A Disallowance to Actual Expenses of ₹69,455 & Deletes ₹1.26 Cr Addition Treating Excess Refund of Advance as Capital Receipt
Assessee–HUF filed appeal against the NFAC order sustaining two additions: (i) ₹6,74,600 u/s 14A r.w. Rule 8D, & (ii) ₹1,26,32,970 treating excess refund of advance from its Karta (Mr. Sanjay Kothari, individual) as taxable income.
1. Section 14A / Rule 8D Disallowance – Partly Allowed
The assessee earned exempt income of ₹2.34 crore but made no 14A disallowance. AO recorded detailed satisfaction citing common portfolio, trading activity, & indirect expenses such as demat/STT/interest. Applying Rule 8D(2)(ii), he computed disallowance at 1% of average investments, i.e., ₹6,74,600.
Before ITAT, assessee invoked the proviso to Rule 8D(2), arguing disallowance cannot exceed actual expenditure claimed (₹69,455). ITAT accepted this legal plea & restricted the 14A disallowance to ₹69,455, subject to verification.
2. Addition of ₹1.26 Crore – Fully Deleted
Assessee–HUF had advanced ₹11.70 crore to its Karta in his individual capacity & received ₹12.93 crore back, resulting in an “excess” refund of ₹1.26 crore. AO treated this differential as income, alleging frequent inter-account movements.
ITAT held:
- HUF & its Karta (individual) are distinct taxpayers; inter-se advances retain their nature as capital transactions.
- AO himself accepted the existence of an advance; only the differential repayment was taxed without evidence of income character.
- Utilisation of advance for F&O business does not alter the nature of the receipt.
- Only income can be taxed; here the refund is capital in nature.
- Thus, entire addition of ₹1,26,32,970 was deleted.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
