Receipt Remains Capital or Revenue Regardless of Utilisation: ITAT
The Income Tax Appellate Tribunal (ITAT), Mumbai, has ruled in favour of an HUF, reducing the disallowance on exempt income and clarifying the nature of the refund of an advance payment made by the HUF to its Karta.
The case of the assessee, Sanjay Kothari (HUF), was selected for scrutiny, and during the proceedings, the AO observed that the assessee had earned an exempt income of Rs. 2,34,87,124. The assessing officer used section 14A read with Rule 8D and disallowed Rs. 6,74,600 based on 1% of the average value of investments.
Additionally, during the year, the assessee HUF made an advance payment of Rs 11.70 crore to Mr Sanjay Kothari in his individual capacity. The AO observed that the assessee received an amount of Rs 12,93,62,970 against the said advance given of Rs 11,70,30,000. The assessee claimed that the difference amount is not taxable, as the amount of refund of advance is a capital receipt. However, the AO made an addition of Rs 1,26,32,970, arguing that the assessee did not submit enough proof to substantiate its claim that the refund was a capital advance. The assessee challenged these two additions before the CIT(A), but it upheld the AO’s order. Therefore, the assessee HUF filed an appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai.
The assessee argued that no expenditure was incurred to earn exempt income, so there was no basis to make the disallowance. They further submitted that the disallowance as calculated under Rule 8D cannot be more than the total expenditure claimed by the assessee. The ITAT agreed with the assessee’s argument that the disallowance cannot be more than the total expenditure claimed by the assessee. Based on the same, the Tribunal directed the AO to restrict the disallowance to the expenditure claimed by the assessee.
Regarding the second addition, the assessee argued that the excess refund was a capital receipt and not taxable. The ITAT observed that the payment and receipt between the assessee HUF and Mr Sanjay Kothari were in the nature of advances. It was concluded that the excess refund received was a capital receipt as the HUF and Mr Sanjay Kothari, being the Karta of the HUF, are two different taxpayers in the eyes of the law. Therefore, the ITAT deleted the addition of Rs 1,26,32,970.
Case Citation: Sanjay Kothari (HUF) Vs NFAC (ITAT Mumbai); ITA No.760/MUM/2025; 17/11/2025; 2018-19
