Refund Of Capital Advance From Karta To HUF Is Capital Receipt; Commercial Use Of Capital Does Not Convert It Into Income: ITAT Mumbai
On November 17th, 2025 the Bench of Shri Vikram Singh Yadav (Accountant Member) and Shri Sandeep Singh Karhail (Judicial Member) of the ITAT Mumbai partly allowed the appeal holding that the disallowance under Section 14A (Expenditure for exempt income) r/w Rule 8D cannot exceed the actual expenditure of ₹69,455 incurred by the assessee, and that the excess refund of...
On November 17th, 2025 the Bench of Shri Vikram Singh Yadav (Accountant Member) and Shri Sandeep Singh Karhail (Judicial Member) of the ITAT Mumbai partly allowed the appeal holding that the disallowance under Section 14A (Expenditure for exempt income) r/w Rule 8D cannot exceed the actual expenditure of ₹69,455 incurred by the assessee, and that the excess refund of ₹1,26,32,970 received on return of capital advance retained its character as a capital receipt and could not be taxed as income.
The assessee had preferred an appeal before ITAT, Mumbai being aggrieved by the Order passed by the CIT(Appeals), whereby the CIT(A) further affirmed the order passed by the Assessing Officer, observing that the excess refund of advance received from the Karta, Shri Sanjay Kothari (in his individual capacity), as taxable income in the hands of the HUF.
The assessee argued before the ITAT that such a disallowance has no basis, as the assessee did not incur any expenditure for earning the exempt income, and the disallowance cannot exceed the total expenditure that has been claimed by the assessee.
The ITAT, considering that the assessee claimed an expenditure of Rs. 69,455/- in its profit and loss account, partly allowed the appeal by directing the AO to restrict the disallowance made under Section 14A r/w Rule 8D to that extent.
The assessee argued that HUF had given a loan/advance of ₹11.70 crore to Shri Sanjay Kothari in his individual name. Later, ₹12.93 crore was returned to the HUF, which meant ₹1.26 crore was received over and above the original advance. The assessee stated that this extra amount was not “income” but merely a return of capital, and therefore it should not be taxed.
The ITAT held that only income can be taxed, a capital refund cannot be treated as income, and thereby deleted the addition of ₹1,26,32,970, allowing the appeal. The Court observed:
“Further, the fact that such an advance was used by the assessee for its F&O trading cannot change the nature of the receipt as the receipt of a sum of money and its payment by a person can be of a different nature. Thus, it is not necessary that what is received as a capital receipt should be only expended for a capital transaction. Similarly, what is received as a revenue receipt does not necessarily have to be expended for a revenue transaction by the taxpayer.”
In view of the above, the bench partly allowed the appeal preferred by the assessee.
CORAM: SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER
SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER
CASE NUMBER: ITA NO. 760/MUM/2025 (A.Y. 2018-19)
CASE TITLED: SANJAY KOTHARI (HUF) VS. NATIONAL FACELESS ASSESSMENT CENTRE