ITAT Mumbai Rules, Refund Of Capital Advance From Karta To HUF Is Capital Receipt; Commercial Use Of Capital Does Not Convert It Into Income
Sangeetha Prathap
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench “B”, has held that a refund of capital advanced by a Hindu Undivided Family (HUF) to its Karta in his individual capacity retains the character of a capital receipt and cannot be treated as income. The Tribunal further held that the commercial utilisation of the refunded amount—such as deploying it in F&O trading—does not alter its intrinsic nature. The Bench also directed that the disallowance under Section 14A read with Rule 8D cannot exceed the actual expenditure incurred by the assessee.
The appeal was decided by Shri Vikram Singh Yadav (Accountant Member) and Shri Sandeep Singh Karhail (Judicial Member) in the case of Sanjay Kothari (HUF) for Assessment Year 2018–19. The assessee had challenged the order of the CIT(A), NFAC, which had confirmed additions made by the Assessing Officer, including disallowance under Section 14A and treating ₹1,26,32,970 received from the Karta as taxable income.
During assessment, it was noticed that the assessee had earned exempt income of ₹2.34 crore but had made no disallowance under Section 14A. The Assessing Officer applied Rule 8D and computed a disallowance of ₹6,74,600, being 1% of the average value of investments. Before the Tribunal, the assessee submitted that no expenditure was incurred to earn exempt income, and in any case, the disallowance could not exceed the actual expenditure claimed in the profit and loss account. The Tribunal noted that the assessee had claimed expenses of only ₹69,455 and therefore directed the AO to restrict the disallowance to that amount after verification.
On the more substantive issue, the Tribunal examined the addition of ₹1,26,32,970—being the amount refunded by the Karta, Shri Sanjay Kothari, over and above the advance of ₹11.70 crore given to him by the HUF. The Assessing Officer had treated the excess refund as revenue income, relying on the frequency of transactions and the fact that the funds were used for F&O trading. The CIT(A) upheld this view.
Before the ITAT, the assessee contended that the excess amount received was merely a return of capital and could not be taxed as income. It was submitted that the nature of the transaction remained that of advance and refund, and the utilisation of funds in trading activities had no bearing on the character of the receipt.
The Tribunal agreed with the assessee. It held that only an amount in the nature of “income” can be taxed under the Income Tax Act, and that the transactions between an HUF and its Karta in his individual capacity must be examined on their intrinsic character. Referring to the findings in the assessment order, the Tribunal noted that the Assessing Officer himself had acknowledged that the payment and receipt were in the nature of an advance. It therefore held that: “The fact that such an advance was used by the assessee for its F&O trading cannot change the nature of the receipt. What is received as a capital receipt need not be expended only for a capital transaction. Similarly, what is received as a revenue receipt does not necessarily have to be expended for a revenue transaction.”
Since the assessee HUF and the Karta in his individual capacity are distinct taxpayers in the eyes of law, the Tribunal concluded that the excess refund retained its capital character and could not be brought to tax.
The Tribunal partly allowed the appeal, directing that the disallowance under Section 14A be restricted to ₹69,455, and deleting the addition of ₹1,26,32,970 by holding it to be a capital receipt. The appeal was thus partly allowed for statistical purposes.
Appearance
Assessee by: Ms. Shivani Shah
Revenue by: Shri Leyaqat Ali Aafaqui, Sr. AR
Cause Title: Sanjay Kothari (Huf) Vs. National Faceless Assessment Centre
Case No: ITA No.760/MUM/2025
Coram: Shri Vikram Singh Yadav (Accountant Member), Shri Sandeep Singh Karhail (Judicial Member)
