Deputy Commissioner of Income-tax Archives - Tax Heal

Weighted Deduction Under Section 35(2AB) Is Limited to DSIR Approval, but Unapproved Portion Is Deductible Under Section 37(1)

Ashwani Kumar — Mon, 27 Jul 2026 05:53:38 +0000

Weighted Deduction Under Section 35(2AB) Is Limited to DSIR Approval, but Unapproved Portion Is Deductible Under Section 37(1)

Issue

Whether an in-house scientific research expenditure disallowed for weighted deduction under Section 35(2AB) due to partial approval by DSIR in Form 3CL is still allowable as a normal business expenditure under Section 37(1).

Facts

Assessee & Claim: The assessee-company maintained an approved in-house R&D facility and claimed a weighted deduction of 150% on revenue expenditure under Section 35(2AB) for Assessment Year 2020-21 based on Form 3CLA.
DSIR Approval: The Department of Scientific and Industrial Research (DSIR), via Form 3CL, approved only a part of the total expenditure as eligible revenue expenditure.
AO Action: During assessment under Section 143(3), the Assessing Officer disallowed 150% of the difference between the claimed expenditure and the DSIR-approved amount.

Decision

Weighted Deduction Restricted: The weighted deduction under Section 35(2AB) must be strictly confined to the revenue expenditure quantified and approved by DSIR in Form 3CL.
Allowability under Section 37(1): The remaining unapproved revenue expenditure cannot be summarily rejected; it is allowable as a regular business expenditure under Section 37(1) if incurred wholly and exclusively for business purposes.
The issue was decided partly in favour of the assessee.

Key Takeaways

Dual-Tier Claim: Partial DSIR approval restricts the extra weighted benefit under Section 35(2AB), but it does not forfeit the assessee’s right to claim the base revenue expenditure under general business deduction provisions.
Role of Form 3CL: While Form 3CL is binding for calculating the quantum of weighted deduction under Section 35(2AB), it does not restrict the Assessing Officer from examining whether unapproved R&D expenses qualify under Section 37(1).

IN THE ITAT BANGALORE BENCH ‘B’

TTP Technologies (P.) Ltd.

Deputy Commissioner of Income-tax

Prashant Maharishi, Vice President
and SANDEEP SINGH KARHAIL, Judicial Member

IT Appeal No. 863 (Bang) of 2026
[Assessment year 2020-21]

JULY 6, 2026

Sachin Mehta and C. R. Krishna, CAs for the Appellant. Pradeep S., Addl. CIT for the Respondent.

ORDER

Sandeep Singh Karhail, Judicial Member.- The assessee has filed the present appeal against the impugned order dated 09/12/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], which in turn arose from the assessment order passed under section 143(3) of the Act, for the assessment year 2020-21.

2. In this appeal, the assessee has raised the following grounds: –

1. Disallowance under section 14A of Rs. 14,06,904/-

1.1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in disallowing a sum of Rs. 14,06,904/- under section 14A of the Income Tax Act, 1961.

1.2. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact that the amount of Rs. 14,06,904 had already been disallowed in the computation of total income under the head Any other item or items of addition under section 28 to 44DA and further disallowance in this regard has resulted in double disallowance.

2. Disallowance under section 35(2AB) should be restricted to Rs. 20,36,890/- and not Rs. 61,10,670/-

2.1. On the facts and circumstances of the case the learned Commissioner of Income tax (Appeals) erred in disallowing the research and development expenditure claimed of Rs. 40,73,780/-under section 35(2AB).

2.2. On the facts and circumstances of the case, the learned Commissioner of Income tax (Appeals), erred in not appreciating the fact that the expenditure incurred towards scientific research for which deduction under section 35(2AB) was not allowed does not tantamount expenditure not allowable. The amount of expenditure which was not eligible under section 35(2AB) is eligible under section 37 of the Act and the amount to be disallowed is Rs.20,36,890/- and not Rs. 61,10,670/-. The detail is as under:

S. No.	Particulars	As per ROI filed	As per Form 3CL	Difference
1	Amount of revenue expenditure incurred in respect of scientific research	7,54,09,780	7,13,36,000	40,73,780
2	Amount of deduction @150%	11,31,14,670	10,70,04,000	61,10,670
	Excess deduction			20,36,890

3. Disallowance under section 80G of Rs. 28,35,150/-

3.1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), erred in not allowing deduction under section 80G of Rs. 28,35,150/- on the ground that the amount incurred is in respect of corporate social responsibility and the same is not eligible for deduction under section 80G.

2.2. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), erred in not appreciating the fact that the donations were made to registered trusts under section 12A of the Income Tax Act, 1961 consequent to which such donations are eligible for deduction under section 80G.

3. Ground No. 1, raised in assessee’s appeal, pertains to disallowance under section 14A of the Act.

4. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee company is engaged in the business of manufacturing and exporting radiators for Power Transformers. During the year under consideration, the assessee filed its return of income on 15/02/2021, declaring a total income of INR 33,91,89,900. The return filed by the assessee was processed vide intimation dated 24/11/2021 issued under section 143(1) of the Act, accepting the returned income. Subsequently, the return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. Vide order dated 30/08/2022 passed under section 143(3) read with section 144B of the Act, the Assessing Officer (“AO”) disallowed the deduction claimed under section 35(2AB) of the Act and the deduction claimed under section 80G of the Act in respect of Corporate Social Responsibility (“CSR”) expenses. As per the assessee, while assessing the total income at INR 34,95,42,624, the AO considered the total income computed under section 143(1) at INR 34,05,96,804 as against INR 33,91,89,900, which is due to the adjustment of INR 14,06,904 proposed under section 143(1)(a)(iv) on account of disallowance under section 14A of the Act. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the said adjustment was not ultimately made and vide intimation dated 24/11/2021 issued under section 143(1) of the Act, the returned income of the assessee at INR 33,91,89,900 was accepted.

5. Having considered the submissions and perused the material available on record, we find merit in the contentions of the learned AR, as vide intimation issued under section 143(1) of the Act, the total income of the assessee was computed at the returned income, and the adjustment proposed on account of disallowance under section 14A of the Act was not made. Therefore, we direct the AO to compute the total income of the assessee, considering the returned income at INR 33,91,89,900 as the base amount. As a result, Ground No.1 raised in assessee’s appeal is allowed.

6. Ground No.2, raised in assessee’s appeal, pertains to the disallowance of weighted deduction under section 35(2AB) of the Act.

7. The brief facts of the case pertaining to this issue are that during the year under consideration, the assessee claimed a weighted deduction of INR 11,31,14,670 (150% of the revenue expenditure of INR 7,54,09,780) based on Form 3 CLA filed by the accountant. The Ministry of Science and Technology, Department of Scientific and Industrial Research (“DSIR”) vide Form No. 3CL dated 24/11/2021, approved a revenue expenditure of only INR 7,13,36,000. Accordingly, the AO vide order passed under section 143(3) of the Act disallowed 150% of the difference of INR 40,73,780, i.e. amounting to INR 61,10,670. In the appellate proceedings before the learned CIT(A), the assessee, in the alternative, claimed that the expenditure not eligible under section 35(2AB) of the Act is still a valid business expenditure allowable under section 37 of the Act. Therefore, the assessee claimed that the disallowance should be restricted to only 50% weighted portion, i.e. INR 20,36,890.

8. The learned CIT(A), vide impugned order, disagreed with the submissions of the assessee and held that the DSIR is the “prescribed authority” as per Rule 6 of the Income Tax Rules, 1962 (“the Rules”), and therefore, is authorised to quantify the expenditure eligible for weighted deduction. The learned CIT(A) further held that the AO’s role is limited to allowing the weighted deduction on the quantum of expenditure as certified by the DSIR in Form No. 3CL. The learned CIT(A) also rejected the alternative contention of the assessee on the basis that, having failed the test of section 35 of the Act, the assessee cannot be permitted to recharacterize the unapproved portion of expenditure on scientific research as general expenditure under section 37 of the Act. The learned CIT(A) held that the non-approval of expenditure by the DSIR is the definitive finding that the said expenditure does not qualify as eligible R&D expenditure. Being aggrieved, the assessee is in appeal before us.

9. We have considered the submissions of both sides and perused the material available on record. In the present case, it is undisputed that the assessee has an approved in-house R&D facility. In its return of income, the assessee claimed 150% weighted deduction on revenue expenditure of INR 7,54,09,780 incurred on its R&D facility under section 35(2AB) of the Act. However, DSIR vide Form No. 3CL dated 24/11/2021, approved a revenue expenditure of only INR 7,13,36,000. Thereby, a weighted deduction amounting to INR 61,10,670 was disallowed by the AO under section 35(2AB) of the Act.

10. Before proceeding further, it is pertinent to analyse certain provisions of the Act and the Rules, which are relevant for the adjudication of the issue raised in this appeal. Section 35(2AB)(1) of the Act, as it stood in the relevant year, reads as follows:-

“(2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred:

Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred.

Explanation.—For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).”

11. The relevant rules, so far as they concern deduction under section 35(2AB) of the Act, are provided in Sub-Rule (1B), (4), (5A) and 7A of Rule 6 of the Income Tax Rules, 1962 (“the Rules”). These rules read as follows:-

“(1B) For the purposes of sub-section (2AB) of section 35, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research.”;

“(4) The application required to be furnished by a company under sub-section(2AB) of section 35 shall be in Form No.3CK.”;

“(5A) The prescribed authority shall, if he is satisfied that the conditions provided in this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, pass an order in writing in Form No. 3 CM:

Provided that a reasonable opportunity of being heard shall be granted to the company before rejecting an application.

“(7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely:-

(a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature;

(b) The prescribed. authority shall submit its report in relation to the approval of inhouse Research and Development facility in Form No. 3CL to the Director General (Income Tax Exemptions) within sixty days of its granting approval;

(c) The company shall maintain a separate account for each approved facility; which shall be audited annually and a copy thereof shall be furnished to the Secretary, Department of Scientific and Industrial Research by 31st day of October of each succeeding year;

Explanation:-For the purposes of this sub-rule the expression “audited” means the audit of accounts by an accountant, as defined in the Explanation below sub-section (2) of section 288 of the Income-tax Act, 1961.

(d) Assets acquired in respect of development of scientific research and development facility shall not be disposed off without the approval of the Secretary, Department of Scientific and Industrial Research”

12. In the present case, the deduction under section 35(2AB) of the Act was restricted on the basis that the said expenditure was not approved by the DSIR for weighted deduction under section 35(2AB) of the Act. It is pertinent to note that there was an amendment with effect from 01/07/2016 to Rule 6(7A)(b) of the Rules, whereby it has been laid down that the prescribed authority, i.e., DSIR shall quantify the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under section 35(2AB) of the Act in Part-B of Form No. 3CL.

13. Therefore, we are of the considered view that the said amendment is clearly applicable to the year under consideration, being post 01/07/2016. Thus, the assessee is only entitled to claim a weighted deduction under section 35(2AB) of the Act in respect of the expenditure approved by the DSIR in Form No. 3CL.

14. As regards the alternative claim of the assessee for the allowability of expenditure under section 37 of the Act, we are of the considered view that in Form No. 3CL, the DSIR only quantifies the expenditure incurred by the assessee on in-house R&D facility and thus only said expenditure is eligible for computation of weighted deduction under section 35(2AB) of the Act. However, at the same time, the expenditure which is not quantified by the DSIR in Form No. 3CL does not cease to be an expenditure incurred wholly and exclusively for the purpose of the business and allowable under section 37 of the Act. Therefore, we are of the considered view that the learned CIT(A) erred in outrightly rejecting the alternative claim of the assessee merely on the basis that once an expenditure fails to qualify the test of section 35, the said expenditure cannot also be allowed under section 37 of the Act. Accordingly, we direct the AO to allow the balance revenue expenditure, which was not approved by the DSIR in Form No. 3CL, under section 37 of the Act. Accordingly, Ground No. 2 raised in assessee’s appeal is partly allowed.

15. Ground No. 3, raised in assessee’s appeal, pertains to the denial of deduction claimed under section 80G of the Act on CSR expenses.

16. We have considered the submissions of both sides and perused the material available on record. The only grievance of the assessee is against the denial of deduction under section 80G of the Act in respect of CSR expenditure. In the present case, it is undisputed that the assessee has not claimed the CSR expenditure under section 37(1) of the Act, and its claim is only restricted to section 80G of the Act. We find that a similar issue came up for consideration before various coordinate benches of the Tribunal. We find that in Allegis Services (India) v. CIT [IT Appeal No. 1693 (Bang.) of 2019], the deduction in respect of CSR expenditure under section 80G of the Act was denied by the Revenue on a similar basis as in the present case. While deciding the issue in favour of the taxpayer, the coordinate bench of the Tribunal, vide order dated 29/04/2020, observed as follows: –

“We have perused submissions advanced by both sides in light of records placed before us.

10. Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 01/04/2014.

Finance (No.2) Act, 2014 inserted new Explanation 2 to sub- section (1) of section 37, so as to clarify that for purposes of sub- section (1) of section 37, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

11. This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years.

12. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head Income form Business and Profession’. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under:

“The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act.

Therefore, in order to provide certainty on this issue, it is proposed to clare that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein.”

13. From the above it is clear that under Income tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, ‘Income from Business and Profession” to those, who pursue corporate social responsibility projects under following sections.

• Section 30 provides deduction on repairs, municipal tax and insurance premiums.

• Section 31, provides deduction on repairs and insurance of plant, machinery and furniture.

• Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like know-how, patents, trademarks, licenses.

• Section 33 allows development rebate on machinery, plants and ships.

• Section 34 states conditions for depreciation and development rebate.

• Section 35 grants deduction on expenditure for scientific research and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved universities/research institutions or company also qualifies for deduction. In-house R&D is eligible for deduction, under this section.

• Section 35CCD provides deduction for skill development projects, which constitute the flagship mission of the present Government.

• Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for employees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax.

Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under:

• Section 80G(2) provides for sums expended by an assessee as donations against which deduction is available.

(a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister’s National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1)(i).

(b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i).

Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G.

14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, ‘Income form Business and Profession”, whereas monies spent under section 80G are claimed while computing “Total Taxable income” in the hands of assessee. The point of claim under these provisions are different.

15. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, “Income from Business and Profession”.

16. For claiming benefit under section 80G, deductions are considered at the stage of computing “Total taxable income”. Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, “Income form Business and Profession”. The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing “Total Taxable Income” cannot be denied to assessee, subject to fulfilment of necessary conditions therein.

17. We therefore do not agree with arguments advanced by Ld.Sr.DR.

18. In present facts of case, Ld. AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, “Income from Business and Profession”. It has been submitted that some payments forming part of CSR were claimed as deduction under section80G of the Act, for computing “Total taxable income”, which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.

19. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act.

20. Under such circumstances, we are remitting the issue back to Ld.AO for verifying conditions necessary to claim deduction under section 80G of the Act. Assessee is directed to file all requisite details in order to substantiate its calim before Ld.AO. Ld.AO is then directed to grant deduction to the extent of eligibility.”

17. We further find that the coordinate bench of the Tribunal in Societe Generale Securities India (P.) Ltd. v. Pr. CIT [2023] [2024] 204 ITD 796 (Mumbai – Trib.), while affirming the claim of deduction under section 80G of the Act in respect of CSR expenditure, observed as follows: –

“6. After computing the business income, while computing the total income of the assessee, the assessee is invoking the benefit under Chapter VIA by claiming deduction of the sums under section 80G of the Act. According to the revenue, when once such sum went to satisfy the requirement of section 135 of the Companies Act, the benefit gets exhausted and such an amount is no more available for the purpose of claiming deduction under section 80G of the Act. There is no express provision to support the contention of Revenue. On the other hand, section 80G (2) (iiihk) and (iiihl) of the Act expressly provide that such sums donated for Swatch Bharath Kosh and Clean Ganga Fund shall be the amounts other than the sums spent by the assessee in pursuance of CSR, meaning thereby the donations made towards Swatch Bharath Kosh and Clean Ganga Fund spent as a part of CSR are not qualified for deduction under section 80G of the Act. Out of so many entries under section 80G(2) of the Act, only donations in respect of two entries are restricted if such payments were towards the discharge of the CSR. The Legislature could have put a similar embargo in respect of the other entries also, but such a restriction is conspicuously absent for other entries. The irresistible conclusion that would flow from it is that it is not the legislative intention to bar the payments covered by section 80G(2) of the Act which were made pursuant to the CSR, and other than covered by section 80G(2)(iiihk) and (iiihl) of the Act. As stated above, clue can be had from the restrictions by way of section 80G (2) (iiihk) and (iiihl) of the Act. Explanation 2 to section 37(1) of the Act which denies deduction for CSR expenses by way of business expenditure is applicable only to extent of computing ‘business income’ under Chapter IV-D of the Act and; it could not be extended or imported to CSR contributions which was otherwise eligible for deduction under Chapter VI-A of the Act.

7. Where the deduction under section 80G of the Act is also disallowed, since CSR qualifying donations are not ‘voluntary contributions’, it will be a double jeopardy in the case of assessee. Assessee cannot be denied the benefit of claim under Chapter VIA of the Act, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, it would lead to double disallowance, which is not the intention of Legislature at all. Legislature on this matter simply dealing with the computation of total income under chapter IVD pertaining to “Income under the head Business and Profession” and not at all dealt with the eligibility of assessee to claim deduction u/s. 80G of the Act, falling in chapter VIA of the Act. It is further observed that genuineness of the transactions and identity of the donees are also not under challenge. All the payments were made through proper banking channel and appropriate donation receipts were also produced before the lower authorities and before us also.”

18. Further, the coordinate bench of the Tribunal in Alubound Dacs India (P.) Ltd. v. Dy. CIT 207 ITD 393 (Mumbai – Trib.), held that the expenditure towards CSR activities is an allowable deduction under section 80G of the Act. The relevant findings of the coordinate bench, in the decision, are reproduced as follows:-

“11. We have heard the rival submissions and perused the materials available on record. The only moot question to be decided here is whether the expenditure towards CSR activities are an allowable deduction u/s. 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs.500 crores or more or turnover of Rs.1000 crores or more or net profit of Rs.5 crores or more have to mandatorily comply with the CSR provisions specified u/s. 135(1) of the Companies Act, 2013. The above mentioned companies are liable to spend atleast 2% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs.30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s. 80G of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure’ u/s. 37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u/s. 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified u/s. 80G of the Act would be entitled to deduction provided the conditions stipulated u/s. 80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s.80G of the Act. The decision relied upon by the ld. A.O. in the case of PVG Raju, Raja of Vizianaram (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s. 80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming u/s. 80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s. 80G of the Act.

12. On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s. 80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O. to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.”

19. Thus, respectfully following the aforementioned decisions, we are of the considered view that the claim for deduction under section 80G of the Act in respect of CSR expenses cannot be denied. In the present case, the lower authorities denied the deduction claimed by the assessee under section 80G of the Act without verifying the conditions as laid down in the said section. Therefore, respectfully following the aforesaid decisions rendered by the coordinate bench of the Tribunal, we remit this issue to the file of the jurisdictional AO to verify the conditions necessary for claiming deduction under the said section. The assessee is also directed to file all the details for the purpose of claiming a deduction under section 80G of the Act. We further direct that if the conditions as laid down in section 80G are found to be satisfied, then a deduction be granted to the assessee. With the above directions, the impugned order on this issue is set aside. As a result, Ground No. 3 raised in assessee’s appeal is allowed for statistical purposes.

20. In the result, the appeal by the assessee is partly allowed for statistical purposes.

CIT(A) Order Dismissing Appeal In Limine Without Requested Hearing Violates Natural Justice Requiring Remand

Ashwani Kumar — Sat, 25 Jul 2026 06:19:00 +0000

CIT(A) Order Dismissing Appeal In Limine Without Requested Hearing Violates Natural Justice Requiring Remand

Issue

Violation of Natural Justice in Delay Condonation Order: Whether a dismissal order passed in limine by the CIT(A) rejecting an application for condonation of delay without granting a requested personal/virtual hearing violates principles of natural justice, requiring the matter to be remanded for fresh adjudication.

Facts

Proceedings under Section 201: For AY 2016–17, proceedings were initiated against the assessee regarding failure to deduct tax at source under Section 195 on payments made to foreign entities, and an order was passed treating the assessee as an “assessee in default.”
High Court Writ Petition: The assessee initially challenged the Section 201 order by filing a writ petition before the High Court, which was eventually dismissed.
Delayed Appeal Filing: Following the dismissal of the writ petition, the assessee filed an appeal before the CIT(A) along with a delay condonation application for 1,649 days, citing time spent pursuing the writ remedy as the cause.
Denial of Personal Hearing: Despite repeated requests from the assessee for a personal or virtual hearing, the CIT(A) issued notices but failed to grant any oral hearing.
Dismissal In Limine: The CIT(A) rejected the condonation application and dismissed the appeal in limine as time-barred.

Decision

Violation of Natural Justice (Matter Remanded): Held YES. Dismissing the delay condonation application without granting the personal/virtual hearing repeatedly requested by the assessee constitutes a clear violation of natural justice. [Paras 6 and 6.2]
Remand for Fresh Consideration (Matter Remanded): Held YES. The order of the CIT(A) was set aside, and the matter was remanded to the CIT(A) for fresh adjudication after providing a fair opportunity of hearing to the assessee. [Paras 6 and 6.2]

Key Takeaways

Mandatory Hearing on Condonation Applications: Appellate authorities cannot summarily reject delay condonation applications in limine without offering a personal or virtual hearing when explicitly requested.
Protection Against Procedural Injustice: Passing adverse appellate orders based solely on written submissions while denying oral hearing requests vitiates the order and warrants a complete remand for fresh adjudication.

IN THE ITAT HYDERABAD BENCH ‘A’

Dr. Reddy’s Laboratories Ltd.

Deputy Commissioner of Income-tax

VIJAY PAL RAO, Vice President
and MADHUSUDAN SAWDIA, Accountant Member

IT Appeal No. 1451 (HYD) of 2026
[Assessment year 2016-17]

JULY 3, 2026

Salil Kapoor and Soumya Singh, Advs. for the Appellant. B K Vishnu Priya, CIT-DR for the Respondent.

ORDER

Vijay Pal Rao, Vice-president.- This appeal by the Assessee is directed against the Order dated 04.02.2026 of the learned Addl./JCIT(A), Thane arising from Order passed by the Assessing Officer u/sec.201(1) and 201(1A) of the Income Tax Act [in short “the Act”], 1961, for the assessment year 2016-2017.

2. The assessee has raised the following grounds of appeal:

“On the facts and in circumstances of the case and in law, the learned CIT(A) has:

Violation of principles of natural justice

1. erred in dismissing the appeal in limine, filed by the Appellant as barred by limitation without appreciating the fact that the Appellant had challenged the underlying order under section 201(1) and 201(1A) r.w.s 195 of the Act passed on 14 December 2018 (received by the Appellant on 18 December 2018), by way of Writ Petition before Hon’ble Telangana High Court, which was dismissed vide order dated 21 June 2023 on the ground of alternate remedy available to the Appellant, and pursuant to said High Court order, the said appeal was filed before the CIT(A), with only delay of 2 days (beyond prescribed 30 days from receipt of High Court order), that too due to confusion on date of service of High Court order and was without any ulterior motive or with a view to taking undue advantage.

2. erred in violating the principles of natural justice by not providing the Appellant an opportunity of being heard by way of Video conferencing to explain the case.

3. erred in violating the provisions of section 250(6) of the Act by not adjudicating each of the grounds under appeal individually on merits.

4. erred in confirming the action of the learned AO in treating the Appellant as ‘assessee in default under section 201(1) of the Act for non-deduction of tax at source under section 195 of the Act in respect of payments amounting to INR 2,44,16,00,000 and INR 1,15,04,00.00 made to UCB Biopharma SRL, Belgium and UCB Farchim SA, Switzerland respectively.

Order Passed u/s 201(1)/1(A) of the Act is barred by limitation:

5. erred in upholding the action of the Ld. AO in passing the order under section 201(1)/1(A) of the Act after one year from the end of financial year in which proceedings was initiated which is squarely covered by the decision of Mumbai Special bench in case of Mahindra & Mahindra Ltd.

Non adjudication of the ground on merits

6. erred in not adjudicating the ground on merits relating to the action of the Ld. AO in concluding that the payments made to UCB Farchim SA, Switzerland and UCB Biopharma SRL, Belgium qualify as ‘royalty under the Act and Double Taxation Avoidance Agreement (‘DTAA’) without appreciating that the payments were made towards transfer and assignment of ‘trademarks and taxable as capital gains exclusively in Switzerland and Belgium in terms Article 13(6) of the India-Switzerland and India-Belgium DTAA respectively.

The Appellant craves leave to add, amend, delete, rectify, substitute and modify any of the aforesaid grounds or add a new ground or grounds at any time before or at the time of hearing before the Hon’ble Income-tax Appellate Tribunal.”

3. In ground no.1 the assessee has raised the issue of violation of principles of natural justice.

4. The learned Counsel for the Assessee has submitted that the learned CIT(A) has dismissed the appeal of the assessee in limine on the ground of barred by limitation without giving an opportunity of hearing to the assessee. He has pointed out that the assessee has explained the cause of delay in Form-35 as well as in the application before the learned CIT(A). The reason for delay was duly explained by the assessee that initially the assessee challenged the Order of the Assessing Officer passed u/sec.201(1) and 201(1A) of the Act before the Hon’ble Supreme Court in WP No.1513/2019. He has further submitted that initially the Hon’ble High Court granted stay against the recovery arising from the said order passed by the Assessing Officer however, finally the writ petition of the assessee was dismissed by the Hon’ble Supreme Court vide Judgment dated 21.06.2023 by giving a liberty to the assessee to seek remedy as provided under the Act. Thereafter, the assessee filed an appeal before the learned CIT(A) challenging the Order of the Assessing Officer passed u/sec.201(1) and 201(1A) of the Act however, the appeal of the assessee was dismissed in limine. The learned Counsel for the Assessee has submitted that the assessee has filed reply to the notice issued by the learned CIT(A) and also demanded an opportunity of personal hearing virtually but despite the repeated the request the learned CIT(A) has not granted an opportunity of hearing to the assessee and dismissed the appeal on the ground of limitation. Thus, it is a clear violation of principles of natural justice. He has further submitted that even otherwise when the assessee was availing an alternative remedy before the Hon’ble High Court by filing writ petition, then the time taken in pursuing the said remedy shall be excluded for the purpose of limitation. In support of his contention, he has relied upon various judgments as under:

Collector, Land Acquisition v. MST Katiji [1987] 167 ITR 471 (SC);

ii.

Shakti Tubes Ltd. v. State of Bihar [2009] 1 SCC 786 ;

iii.

Virsinh Chandrasekhar Jadhavrao v. ITO 2026 SCC Online ITAT 4186 ;

iv.

Sree Rayalaseema Green Energy Ltd. v. CIT [IT (SS) A. No. 13 (Hyd.) of 2010, dated 31-1-2013];

Urachikottai Primary Agricultural Cooperative Credit Society Ltd. v. DCIT [IT Appeal No. 650 (CHNY.) of 2025, dated 31-7-2025];

vi.

Bank of India v. Asstt. CIT 196 ITD 1 (Mumbai – Trib.)

4.1. Thus, not granting a personal opportunity of hearing despite various requests made by the assessee renders the impugned order of the learned CIT(A) not sustainable in law and liable to be set aside. Learned Counsel for the Assessee has thus submitted that the assessee may be given an opportunity to present its case and explain the cause of delay before the learned CIT(A).

5. On the other hand, the learned DR has submitted that there is an inordinate delay of 1649 days in filing the appeal and assessee has failed to explain the sufficient cause for such an inordinate delay. The learned CIT(A) has given the finding that the assessee has taken a general plea without explaining the delay to the satisfaction of the learned CIT(A). Thus, he has objected to grant of further opportunity to the assessee. He has further contended that the assessee is a big corporate house and having the services of the legal as well as tax experts therefore, the assessee cannot take the plea that the appeal could not be filed before the learned CIT(A) due to alternative remedy pursued by the assessee before the Hon’ble High Court.

6. We have considered the rival submissions as well as relevant material on record. There is no dispute that there was a delay of 1649 days in filing the appeal before the learned CIT(A) and the assessee explained the cause of delay in Form-35 that the assessee was exploring alternative remedies and consequently, the assessee filed a writ petition before the Hon’ble High Court on 05.01.2019. Subsequently, the Hon’ble High Court stayed the demand vide Order dated 15.02.2019 however, finally the writ petition filed by the assessee was dismissed by the Hon’ble High Court vide Judgment dated 21.06.2023 and the same was communicated to the Assessing Officer and accordingly, the assessee filed the appeal before the learned CIT(A). The assessee has explained the cause of delay that assessee was exploring the alternative remedy before the Hon’ble High Court and time consumed in the proceedings before the Hon’ble High Court may be excluded from the limitation. Further, the delay is due to alternative remedies pursued before the Hon’ble High Court may be considered as ‘sufficient and justifiable cause’ and therefore, the same may be condoned. The learned CIT(A) has declined to condone the delay in filing the appeal and dismissed the appeal of the assessee in limine. At the outset, we note that the learned CIT(A) has given details of the notices issued by it to the assessee in Para no.3.1 and also acknowledged the response of the assessee made vide letters dated 21.02.2025, 12.03.2025 and 04.11.2025. In these letters as evident from the record the assessee requested for personal hearing virtually. However, the learned CIT(A) has not afforded the personal hearing to the assessee before passing the impugned order and therefore, the assessee was not given an opportunity to explain the cause of delay in filing the appeal before the learned CIT(A). The delay due to time consumed in pursuing the alternative remedy before the Hon’ble High Court by filing a writ petition can be considered as ‘sufficient cause’ depending upon the facts and circumstances of the case. However, the learned CIT(A) has not given any finding as to how the reasons explained by the assessee are not ‘reasonable or sufficient cause’ for the delay in filing the appeal. Since the Order was passed by the learned CIT(A) without giving an opportunity of personal hearing which was demanded repeatedly by the assessee vide their letters filed in response to the notices issued by the learned CIT(A) therefore, we find that the impugned order was passed in violation of principles of natural justice. For ready reference, we reproduce the relevant part of the reply of the assessee dated 21.02.2025 as under:

Request for virtual hearing and video conferencing

We request your Honour to kindly provide an opportunity of virtual hearing and video conferencing to the Appellant to enable the Appellant to explain its case and put forth arguments and contentions.”

6.1. Similarly, in other replies also the assessee has demanded an opportunity of virtual hearing through videoconference. Thus, it is manifest from the record that despite the repeated request the learned CIT(A) has not given an opportunity of personal hearing/virtual hearing and dismissed the appeal of the assessee. Accordingly, in the facts and circumstances of the case, without expressing any view either on the cause of delay explained by the assessee or on the merits of the matter, we are of the considered view that the learned CIT(A) is not justified in dismissing the appeal of the assessee in limine without affording an opportunity of hearing to the assessee. It is pertinent to note that even as per the e-appeals Scheme, 2023 Notified on 29.05.2023 the hearing shall be conducted through videoconference or videotelephone including use of any telecommunication application and a person shall not be required to appear either personally or through Authorised Representative but the appellant or his Authorised Representative may request for personal hearing so as to make his oral submissions or present his case before the Appellate Authority. The Appellate Authority shall allow the request of the personal hearing and communicate the date and time of hearing to the appellant provided in Para-13 of the said Scheme as under:

“13. No personal appearance under the Scheme

(1) A person shall not be required to appear either personally or through authorised representative in connection with any proceedings under this Scheme.

(2) The appellant or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the JCIT (Appeals) and the concerned JCIT (Appeals) shall allow the request for personal hearing and communicate the date and time of hearing to the appellant.

(3) Such hearing shall be conducted through video conferencing or video telephony, including use of any telecommunication application software which supports video conferencing or video telephone, to the extent technologically feasible, in accordance with the procedure laid down by the Board.

(4) Any examination or recording of the statement of the appellant or any other person shall be conducted by the JCIT (Appeals) under this Scheme, exclusively through video conferencing or video telephony, including use of any telecommunication application software which supports video conferencing or video telephony, to the extent technologically feasible, in accordance with the procedure laid down by the Board.

(5) The Board shall establish suitable facilities for video conferencing or video telephony including telecommunication application software which supports video conferencing or video telephony at such locations as may be necessary, so as to ensure that the appellant, or his authorised representative, or any other person is not denied the benefit of this Scheme merely on the ground that such appellant or his authorised representative, or any other person does not have access to video conferencing or video telephony at his end.”

6.2. Accordingly, in view of facts and circumstances as discussed above, the impugned order of the learned CIT(A) is set aside and the matter is remanded to the record of the learned CIT(A) for fresh adjudication of the appeal of the assessee after affording an opportunity of personal hearing to the assessee.

7. In the result, appeal of the Assessee is allowed for statistical purposes.

Consolidated Satisfaction Note Covering Multiple Years Invalidates Section 153C Assessment Proceedings

Ashwani Kumar — Sat, 25 Jul 2026 05:33:27 +0000

Consolidated Satisfaction Note Covering Multiple Years Invalidates Section 153C Assessment Proceedings

Issue

Validity of Section 153C Assessment Proceedings Based on a Consolidated Satisfaction Note: Whether the initiation of proceedings and subsequent additions made under Section 69A (read with Section 153C) are legally valid when the Assessing Officer records a single, common satisfaction note covering multiple assessment years (AY 2015–16 to 2020–21) instead of recording a separate satisfaction note for each individual assessment year.

Facts

Search and Initiation: A search operation was conducted on a third party, following which proceedings under Section 153C were initiated against the assessee-HUF and assessee-individual for AY 2015–16 to 2020–21.
Additions Made: During the assessment, the Assessing Officer (AO) made additions under Section 69A on account of alleged unsecured loans, unexplained bank deposits, and unexplained business receipts.
Consolidated Satisfaction Note: Upon examining the procedural records, it was revealed that the AO had prepared a single, common/consolidated satisfaction note covering all six assessment years together, rather than evaluating and recording satisfaction individually for each assessment year.
Assessee’s Challenge: The assessees challenged the validity of the proceedings, arguing that the failure to record a year-specific satisfaction note goes to the root of jurisdiction, rendering the Section 153C assessments void.

Decision

Proceedings Vitiated (In favor of Assessee): Held YES. The entire assessment proceedings initiated under Section 153C were completely vitiated due to the AO’s failure to record a separate satisfaction note for each assessment year. [Para D]
Invalid Assumption of Jurisdiction (In favor of Assessee): Held YES. The assumption of jurisdiction and subsequent initiation of assessment proceedings under Section 153C were held to be illegal and invalid. [Para D]

Key Takeaways

Year-Wise Satisfaction Note is Mandatory: For validly assuming jurisdiction under Section 153C, the Assessing Officer must record a distinct, independent satisfaction note for each relevant assessment year separately.
Consolidated Satisfaction Notes Are Fatal Flaws: Preparing a single, omnibus, or bundled satisfaction note across multiple years is a jurisdictional defect that cannot be cured, invalidating all consequential assessment orders and additions.

IN THE ITAT LUCKNOW BENCH ‘A’

Shiv Kumar Gupta HUF

Deputy Commissioner of Income-tax/ACIT

Kul Bharat, Vice President
and Anadee Nath Misshra, Accountant Member

IT (SS) Appeal No. 985 (Lkw) of 2025 and others
[Assessment years 2015-16 to 2020-21]

JULY 20, 2026

Akshay Agarwal, Adv. for the Appellant. B. Shriniwas Kumar, CIT(DR) for the Respondent.

ORDER

Anadee Nath Misshra Accountant Member.-These appeals have been filed by two different assessees against the respective impugned appellate order of learned Commissioner of Income Tax (Appeals). The assessees have raised similar grounds in these appeals, except that there is variation in disputed amounts as stated in the grounds of appeals. For the sake of convenience, ITA No. 985/Lkw/2025 for AY 2017-18 is treated as lead case. The assessee has raised the following grounds of appeal:

“1 . That the learned CIT (A) has erred in confirming the addition of Rs.9,00,000/- as unsecured loan given during the year by the appellant towards the income of appellant on protective basis. The addition made on presumption is illegal & void. The assessment made on the protective and substantive basis without application of mind by the learned Assessing Officer. The addition made u/s 69A of the IT Act, 1961 on protective basis.

2. That the learned CIT (A) has erred in confirming the addition of Rs.4,77,600/- as unexplained bank deposits made during the year by the appellant u/s 69A ignoring the fact that such amount was deposited having the legitimate and disclosed source of income.

3. That the learned CIT (A) has erred in confirming the addition of Rs.12,51,297 /- as income from unexplained sources u/s 69A ignoring the fact that such amount was disclosed having the legitimate source of income.

4. The learned CIT (A) has erred on facts and law while confirming the addition of Rs.17,28,897/- (4,77,600+12,51,297) invoking section 69A of the Act, which is against the spirit of said section since said amount was already recorded in regular bank account disclosed to the Department through ITR before the search.

5. That the learned CIT(appeal) has erred in passing the order u/s 250 as he confirmed both protective and substantive assessment.

6. Because the Approval u/s 153D has been given without application of mind and the impugned order passed deserves to be dropped.

7. That any other relief which your goodself may deem fit.

(A.1) Both the assessees have also raised common additional grounds in all the respective appeals. For the sake of convenience, the additional grounds of appeal in ITA No. 985/Lkw/2025 for AY 2017-18 are as follows:

“(1) That the order passed u/s 153C is without jurisdiction as no incriminating material was found during the search proceedings. The addition has been made u/s 153C on presumption basis on protective basis without having any incriminating material on record.

(2) That the reasons recorded u/s 153C as satisfaction for reopening of the case is defective and bad in law. The common reasons are recorded for all the years without having any incriminating material against the assessee.”

(A.2) At the time of hearing before us, representatives of both sides, the learned counsel for the assessee and the learned Departmental Representative for Revenue agreed that the appeal vide IT(SS) A No. 985/Lkw/2025 for AY 2017-18 in the case of Shiv Kumar Gupta HUF v. DCIT/ACIT, Circle- 2, Lucknow may be taken as lead case. They were further in agreement that facts and circumstances in the remaining appeals are in para materia with the aforesaid appeal vide IT(SS)A No. 985/Lkw/2025 and that the decision in appeal vide IT(SS)A No. 985/Lkw/2025 will also apply, mutatis mutandis, in the other appeals.

(B) In the aforesaid appeal vide IT(SS)A No. 985/Lkw/2025, the assessment order dated 25.03.2023 was passed under section 153C of the Income Tax Act, 1961 (the Act) whereby the assessee’s total income was determined at Rs. 26,28,897/- (rounded off to Rs. 26,28,900). In the aforesaid assessment order, additions of Rs. 9,00,000/-, Rs. 4,67,600/- and Rs. 12,51,297/- were made on account of interest, deposits in the Bank Account, and unexplained business receipts respectively. The assessee’s appeal against the aforesaid additions was dismissed by the learned CIT(A) vide impugned appellate order dated 24.10.2025. The present appeal has been filed by the assessee against the aforesaid impugned appellate order of the learned CIT(A). The grounds of appeal have already been referred to in foregoing paragraphs (A) and (A.1) of this order. In support of admission of additional grounds, the following written submissions were made from the assessee’s side:

Accordingly, the aforesaid ground is purely a legal plea and deserves to be admitted by this Hon’ble Tribunal in view of the decision as stated below.

1-	National Thermal Power Co. Ltd. v. CIT 229 ITR 383 (In the Supreme Court of India)	Held, that the Tribunal had jurisdiction to examine a question of law which arose from the facts and found by the Income Tax Authorities and having a bearing on the tax liability of the Assessee.
2-	Orissa Cement Ltd. v. CIT [2001] 250 ITR 856 (In the Delhi High Court)	Held, that the Tribunal had the discretion to allow or not to allow a new ground to be raised but where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings, there was no reason as to why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the Tax Liability of an assessee. The Tribunal had jurisdiction to consider the new grounds raised by the Assessee on the merits. Tribunal to consider new grounds on the merits. National Thermal Power Co. Ltd. v. Commissioner of Income Tax(1998) 229 ITR 383 (SC) followed- C.I.T. (Additional) v. Gurjargravures Pvt. Limited (1978) 111 I.T.R. 1 (SC) and Jute Corporation of India Limited v. Commissioner of Income Tax (1991), 187 I.T.R. 688 (SC) referred to.
3-	Wilson Industries v. CIT [2003] 259 ITR 318 (In the Madras High Court)	Held (1) That it is open to the appellate Forum to consider a fresh ground if sought to be raised by the Parties, if no new facts are required to be ascertained. It was, therefore, open to the Tribunal to permit the Revenue to raise the Ground before the Tribunal. National Thermal Power Co. Ltd. v. Commissioner of Income Tax (1998) 229 I.T.R. 383 (S.C.).
4-	Vimal Kishore Kapoor v. ITO [IT Appeal Nos. 658 and 730 (All) of 1996] Kanpur in the Income Tax Appellate Tribunal Lucknow Bench Lucknow .	We have considered the rival submissions and perused the Appeal record carefully. The Ground involved is purely a legal ground and in view of the decision of the Apex Court in the case of N.T.P.C. v. Commissioner of Income Tax. The Ground which is purely a legal one in nature to be allowed to be raised. Accordingly, we allow the ground to be raised and argue. Fix 13.10.2003 for argument of the Appeal on Merit.
5-	V.K. Brahmankar v. Jt. CIT [2004] 90 TTJ 821 I.T.A.T. Indore Bench	Income Tax (Appellate Tribunal Rules 1963, r.11; in favour of: Assessee Appeal (Tribunal) Additional Grounds admissibility additional grounds bearing on the matter under consideration for which no fresh material outside the record is required or which are purely legal in nature, are allowable-Ahmedabad Electricity Co. Limited v. Commissioner of Income Tax (1992) 106 C.T.R. (Bom)(FB) 78; (1993) 199 I.T.R. 351 (Bom) (FB), N.T.P.C. Limited v. Commissioner of Income Tax (1999) 157 C.T.R. (SC) 249: (1998) 229 I.T.R. 383 (SC), C.I.T. v. Rayala Corporation (P) Limited (1995) 215 1.T.R. 883(Madras) and C.I.T. v. Bhopal Sugar Industries (1997), 143 C.T.R. (M.P.) 240; (1998) 233 I.T.R. 429 (M.P.) relied on.
6-

(B.1) No objection was expressed from the side of Revenue, to admission of additional grounds.

(B.2) In view of foregoing paragraphs (B) and (B.1) of this order, and after due consideration of written submissions made from the side of the assessee, the additional grounds are admitted.

(C) At the time of hearing, the learned Counsel for the assessee submitted that no incriminating materials against the assessee were found in the course of search under section 132 of the Act. Further, he submitted, the assessee’s case fell in the category of unabated assessment. He also contended that the issue is settled in favour of the assessee, by orders of Hon’ble Supreme Court in the cases of Pr. CIT v. Abhisar Buildwell (P.) Ltd 454 ITR 212 (SC) and Dy. CIT v. U. K. Paints (Overseas) Ltd 454 ITR 441 (SC) wherein it was held by Hon’ble Supreme Court, that no addition can be made, in the cases falling in the category of completed or unabated assessments, in the absence of any incriminating material found in the case of the assessee during search under section 132 of I.T. Act. He also submitted that Coordinate Bench of Income Tax Appellate Tribunal, Lucknow has, in similar facts and circumstances, following the aforesaid orders of Hon’ble Supreme Court in the case of Abhisar Buildwell (P.) Ltd (supra) andU. K. Paints (Overseas) Ltd. (supra); has passed several orders in favour of the assessee and against the revenue including in the case of Smt. Shashi Agarwal v. Dy. CIT 209 ITD 360 (Lucknow–Trib). The learned Counsel for the assessee also drew our attention to order of Co-ordinate Bench of ITAT, Lucknow in the case of Adhyatm Jain v. Dy. CIT [2026] 216 ITD 173 (Lucknow–Trib) in support of his contention that no addition could be made in the absence of incriminating material, irrespective of whether addition was made on substantive basis, or protective basis. The learned Departmental Representative submitted that the additions have been made on the basis of Bank Account statement of the assessee, seized in the course of search under section 132 of the Act. Therefore, he submitted, it would be incorrect to say that no incriminating material was found in the course of search under section 132 of the Act. In his rejoinder the learned counsel for the assessee submitted that the Bank statements seized in the course of search under section 132 of the Act were pertaining to the bank accounts already taken into consideration for the computation of the assessee’s income shown in return of income. He also submitted that every document seized in the course of search under section 132 of the Act cannot be said to be incriminating material. When the assessee’s has Bank Account, transactions wherein have already been considered in income shown by the assessee in return of income, it is to be expected that Bank Account statement would be found in the course of search under section 132 of the Act. Unless it is established, however, that the Bank Account statement seized at the time of search under section 132 of the Act was pertaining to Bank Account that was not already taken into consideration for calculating the assessee’s income. In the present case, he submitted, the Bank Account statement seized at the time of search under section 132 of the Act was pertaining to a Bank Account which was already considered in computing the assessee’s income shown in return of income. He also submitted that there were no materials on record to show that the Bank Account statements seized under section 132 of the Act were not considered already for computation of the assessee’s income. He also submitted that there was no material on record to show that any transactions reflected in the Bank Account statements were not already considered for calculating the assessee’s income shown in the return of income. Therefore, he submitted, the Bank Accounts statement seized under section 132 of the Act cannot be considered as incriminating material. The learned Departmental Representative for Revenue reiterated that the additions were made on the basis of Bank Account statement seized in the course of search under section 132 of the Act, therefore, it cannot be said that no incriminating material was found in the course of search under section 132 of the Act. However, the learned Departmental Representative did not bring any materials for our consideration to show that the Bank Account statements seized under section 132 of the Act pertained to Bank Accounts which were not already considered for computation of the income of the assessee. He also failed to bring any materials for our consideration to show that any of the transactions reflected in the Bank Account statement were not already considered for computation of the assessee’s income. The learned Counsel for the assessee also drew our attention to the fact that a common satisfaction Note was prepared by the Assessing Officer for all the six Assessment Years (AY 2015-16 to 2020-21), for assuming jurisdiction and initiation of proceedings u/s 153C of I.T. Act, leading to assessment order u/s 153C of I.T. Act. He also drew our attention to order of Hon’ble Karnataka High Court, in the case of Dy. CIT v. Sunil Kumar Sharma 469 ITR 197 (Kar) for the proposition that separate satisfaction Note is required to be recorded u/s 153C of I.T. Act for each Assessment Year, and if a consolidated satisfaction Note is recorded for different Assessment Years, the entire assessment proceedings get vitiated. He also submitted that the order of Hon’ble Karnataka High Court was upheld by Hon’ble Supreme Court in decision Dy. CIT v. Sunil Kumar Sharma 469 ITR 271 (SC). The learned Departmental Representative for Revenue relied on the orders passed by the Assessing Officer and the learned CIT(A).

(D) It is not in dispute that common satisfaction Note was prepared by the Assessing Officer for six Assessment Years (2015-16 to 2020-21). Therefore, respectfully following the aforesaid orders of Hon’ble Karnataka High Court and Hon’ble Supreme Court, in Sunil Kumar Sharma (supra) it is held in the present appeals also, that the entire assessment proceedings were vitiated because of failure of the Assessing Officer to record separate satisfaction Note for each Assessment Year; and that assumption of jurisdiction and initiation of assessment proceedings u/s 153C of I.T. Act were invalid. Accordingly, the assessment order passed u/s 153C of I.T. Act is annulled, and the impugned appellate order of learned CIT(A) is set-aside. Since the assessment order has been annulled, other issues in dispute are merely academic in nature which need not be decided; hence not being decided.

(E) As referred to in foregoing paragraph (A.2) of this order Representatives of both sides were in agreement that the decision in the aforesaid appeal vide IT(SS) A No. 985/Lkw/2025 for AY 2017-18 would also apply mutatis mutandis to other appeals being considered in this order. Accordingly, we annul the respective assessment orders passed under section 153C of the Act in the case of M/s Shiv Kumar Gupta HUF and in the case of Paras Gupta for AYs 2015-16 to 2020-21. The impugned appellate orders of learned CIT(A) are set-aside.

(E.1) In result, grounds of appeals in all the appeals are allowed, in accordance with the aforesaid directions. For statistical purposes, all the appeals are allowed.

Section 54 Exemption Applies to Multiple Residential Properties Transferred When Capital Gains Reinvested in Equal or Fewer Houses

Ashwani Kumar — Fri, 24 Jul 2026 05:52:22 +0000

Section 54 Exemption Applies to Multiple Residential Properties Transferred When Capital Gains Reinvested in Equal or Fewer Houses

Issue

Whether an assessee who transfers multiple residential houses and incurs long-term capital gains is entitled to claim exemption under Section 54 for investing in a corresponding number of new residential houses (not exceeding the number of houses sold), without clubbing the gains to restrict exemption to a single house or cap it under the ₹2 crore proviso limit.

Facts

Property Sale: During Assessment Year 2020-21, the assessee sold 17 residential flats, giving rise to long-term capital gains on each transfer.
Reinvestment Claim: The assessee invested the capital gains arising from these sales into the purchase/construction of 5 new residential houses in India and claimed exemption under Section 54.
Disallowance by AO: The Assessing Officer (AO) clubbed the capital gains arising from the multiple transfers and restricted the Section 54 exemption to only 1 residential house.

Decision

Multiple Sales Entitle Exemption for Multiple Acquisitions: Long-term capital gains arising from the transfer of each residential house independently qualify for exemption under Section 54 if reinvested in a new residential house. Selling multiple houses allows claiming exemption for purchasing up to an equal number of new houses. (In favour of assessee)
No Statutory Mandate to Club Gains: In the absence of a specific restriction under Section 54, capital gains from separate residential house transfers cannot be aggregated/clubbed to limit the assessee’s exemption to a single house. (In favour of assessee)
Applicability of Proviso Limit: The ₹2 crore threshold under the first proviso to Section 54 applies to capital gains arising from the transfer of a single residential house, and cannot be combined across multiple independent house sales to restrict relief. (In favour of assessee)
Restriction Overturned: Since the assessee sold 17 flats and purchased only 5 houses (well within the maximum limit of 17), the AO’s action in restricting exemption to 1 residential house was held illegal and unsustainable. (In favour of assessee)

Key Takeaways

One-to-One / Many-to-Fewer Principle: Section 54 permits an assessee to claim exemption for purchasing/constructing up to N new residential houses if N or more residential houses are sold during the relevant period.
Proviso Limits Apply Per Unit Transferred: The ₹2 crore cap introduced under the first proviso to Section 54 governs individual residential property transactions, not the aggregate capital gains from multiple distinct property sales.
No Artificial Aggregation: Assessing Officers cannot combine independent capital gains from separate transfers to artificially curtail Section 54 statutory rollover benefits.

IN THE ITAT BANGALORE BENCH ‘B’

Pavan Kumar Agarwal

Deputy Commissioner of Income-tax^*

Keshav Dubey, Judicial Member
and Waseem Ahmed, Accountant Member

IT Appeal No.1916 (Bang) of 2025
[Assessment year 2020-21]

JUNE 29, 2026

H. Padamchand Khincha, CA for the Appellant. Subramanian, JCIT-D.R. for the Respondent.

ORDER

Keshav Dubey, Judicial Member.- This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)-15, Bengaluru dated 24.06.2025 vide DIN: ITBA/APL/M/250/2025-26/1077710367(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2020-21.

2. The assessee has raised the following grounds of appeal:-

General

1.1

The order passed by the learned CIT(A) 15, Bangalore under section 250 of the Act dated 24.6.2025 is bad in law and liable to be quashed.

Disallowance of exemption under section 54 – Rs. 5,88,81,786

2.1

The learned DCIT, Central Circle 2(3), Bangalore erred in disallowing exemption under section 54 amounting to Rs. 5,88,81,787 and the learned CIT(A) 15, Bangalore erred in confirming the said disallowance.

2.2

The learned income tax authorities erred in restricting and allowing the exemption under section 54 to purchase of only one residential house property amounting to Rs. 5,91,80,000.

2.3

The learned income tax authorities erred in not appreciating that, during the year under consideration, the appellant sold 17 flats resulting in long term capital gains and invested the said capital gains in purchase of 4 residential properties and construction of one other residential property, thereby eligible for exemption under section 54 in respect of all 5 new residential properties.

2.4

The learned income tax authorities erred in not appreciating that (i) exemption under section 54 is allowed in respect of capital gains arising from transfer of a long term capital asset, being buildings or lands appurtenant thereto, being a residential house and the assessee purchases or constructs one residential house in India; (ii) since the appellant has sold 17 residential flats, the appellant is eligible for exemption under section 54 in respect of purchase or construction of 17 or less than 17 residential houses; (iii) amendment to section 54 limiting the exemption to purchase or construction of one residential house in India is applicable where the capital gains is arising from transfer of a residential house i.e., each residential house.

2.5

The learned income tax authorities erred in not appreciating that exemption under section 54 in respect of multiple residential houses has been allowed by the learned AO in the assessment order passed u/s 143(3) for AY 2022-23.

2.6

On facts and circumstances of the case and law applicable, exemption under section 54 amounting to Rs. 11,80,61,786 as claimed in the return of income.

Levy of Interest under section 234A and 234B

3.1

The levy of interest under section 234A and 234B is also bad in law and liable to be deleted. On facts and circumstances of the case and law applicable, interest under section 234A and 234B of the Act is not leviable. The Appellant denies its liability to pay interest under section 234A and 234B.

Prayer

4.1

In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the impugned assessment order under section 143(3) dated 30.3.2022 and the appellate order under section 250 dated 24.6.2025 be quashed or in the alternative the impugned addition of Rs. 5,88,81,786 be deleted.

3. The brief facts of the case are that the assessee is an individual and filing his return regularly. The assessee filed his return of income for AY 2020-21 on 15.02.2021 by declaring total income of Rs.1,76,90,530/-. Thereafter, the case of the assessee was selected for scrutiny proceedings under CASS with the following reasons:

(a)

Credit of Brought forward TDS

(b)

Capital Gains Deduction claimed

Accordingly, the statutory notice u/s 143(2) of the Act dated 29.06.2021 was issued and served on the assessee. Subsequently, notices u/s 142(1) of the Act was issued on various dates calling for specific details. The assessee has submitted his reply in response to the notices issued.

3.1 The assessee owned two parcels of land -one at Survey No. 71, Nallurahalli, Bengaluru and the other at Survey No. 172, Kumbena Agrahara, Bengaluru. The assessee entered into Joint Development Agreement (JDA) with M/s Red Coral Properties on 31.7.2010 for construction of residential apartments in the land situated at Survey No. 71, Nallurahalli, Bengaluru. Similarly, another JDA was entered into by the assessee with M/s Reddy Structures Private Limited on 6.11.2012 to construct residential apartments in the land situated at Survey No. 172, Kumbena Agrahara, Bengaluru. The apartment complex at Survey No. 71, Nallurahalli was named ‘Mahaveer Tranquil’ and the apartment complex at Survey No. 172, Kumbena Agrahara was named ‘Mahaveer Willet’. As per the sharing agreements, the assessee was allotted 76 apartments at ‘Mahaveer Tranquil’ and 46 apartments at ‘Mahaveer Willet’.

3.2 During the year under consideration, the assessee sold 17 flats from both the aforesaid projects resulting in long-term capital gain aggregating to Rs.11,80,61,786/-. The details of capital gain are tabulated as below:

Sl. No.	Particulars	Long term Capital Gain (Rs.)
1.	Flat 501A, Mahaveer Willet	56,34,326
2.	Flat 106B, Mahaveer Willet	33,36,568
3.	Flat 406B, Mahaveer Willet	37,85,453
4.	Flat 803B, Mahaveer Tranquil	75,71,767
5.	Flat 205B, Mahaveer Tranquil	75,55,502
6.	Flat 103A, Mahaveer Tranquil	63,87,937
7.	Flat 501E, Mahaveer Tranquil	82,66,312
8.	Flat 802E, Mahaveer Tranquil	83,62,994
9.	Flat 404E, Mahaveer Tranquil	79,59,929
10.	Flat 401A, Mahaveer Tranquil	76,92,185
11.	Flat 604D, Mahaveer Tranquil	83,21,189
12.	Flat 202C, Mahaveer Tranquil	73,44,628
13.	Flat 101D, Mahaveer Tranquil	58,51,123
14.	Flat 602B, Mahaveer Tranquil	78,64,341
15.	Flat 503D, Mahaveer Tranquil	77,95,554
16.	Flat 303D, Mahaveer Tranquil	79,16,573
17.	Flat 103C, Mahaveer Tranquil	64,15,405
	Total	11,80,61,786

3.3 The long-term capital gains computed on sale of 17 flats amounting to Rs. 11,80,61,786/- was utilized for purchase of four residential properties and construction of one residential property to claim exemption under section 54 of the Act. The details of investment in aforesaid properties are as follows:

Sl. No.	Particulars of investment	Amount invested (Rs.)
1.	Construction of property at #359	44,04,190
2.	Purchase of residential property #423	5,91,80,000
3.	Purchase of Park Square Flat #302	2,49,01,392
4.	Purchase of Park Square Flat #603	2,30,00,000
5.	Park Square Flat improvement	39,19,788
6.	Purchase of Park Square Flat #203	2,31,70,661
		11,80,61,786

3.4 The AO concluded the assessment proceedings vide order dated 30/03/2022 passed u/s 143(3) of the Act by restricting the eligibility of the deduction claimed u/s 54 of the Act to investment in only one residential property- the property which is purchased at the earliest i.e., Rs.5,91,80,000/-. The balance amount of capital gain of Rs. 5,88,81,786/- [Rs.11,80,61,786- Rs. 5,91,80,000] was added to income under the head long term capital gains.

4. Aggrieved by the aforesaid order of the AO dated 30/03/2022 passed u/s 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A)-15, Bengaluru.

5. The CIT(A)-15, Bengaluru vide order dated 24.6.2025 confirmed the action of the AO in allowing exemption under section 54 of the Act to only one residential house property and consequently dismissed the appeal of the assessee.

6. Again, aggrieved by the order of ld. CIT(A)-15, Bengaluru, the assessee has filed the present appeal before this Tribunal. The assessee has filed two paper book comprising total 537 pages containing therein various documents/record, written submissions and case laws relied upon by the assessee.

7. Before us, the ld. A.R. of the assessee CA. H Padamchand Khincha appearing for the assessee contended that the exemption under section 54 of the Act is allowable in respect of capital gains arising from transfer of each residential house. The ld. AR of the assessee relied upon the CBDT letter No 207/24/76-IT(A-II), dated 25.3.1977 to contend that capital gains arising on transfer of each residential house is eligible for exemption under section 54 of the Act. Further relying on the decision of ITAT Special Bench in the case of Jt. CIT v. Montgomery Emerging Markets Fund [2006] 100 ITD 217 (Mumbai), it is argued that capital gains arising from transfer of each and every residential house is a separate source of income and consequently exemption under section 54 of the Act should also be allowed separately for each capital gains. The memorandum explaining the provisions of Finance No 2 Bill 2014 was relied on to argue that the memorandum does not state that exemption is allowable in respect of one residential house even if the assessee has sold multiple residential houses during the year. The ld. AR of the assessee further submitted that unlike section 54EC and 54EE wherein exemption is restricted to Rs. 50 lakhs from capital gains arising from one or more capital assets during the year, section 54 of the Act does not state that exemption is limited to one residential house for capital gains arising from transfer of one or more residential house during the year. The details filed during the assessment proceedings for AY 2018-19 and the assessment order passed for AY 2018-19 and AY 2019-20 was also submitted and it was argued that the exemption under section 54 of the Act had been allowed in respect of investment in more than one residential houses. It was thus argued that a differential treatment cannot be taken for the year under consideration. Even otherwise, it was argued that multiple flats in same building should be considered as one residential house for the purposes of section 54 of the Act.

8. The ld. D.R. on the other hand relied upon the orders of the authorities below and justified the restriction of exemption under section 54 of the Act in respect of one residential house although 17 flats were sold during the year by referring to provisions of section 54 of the Act.

9. We have heard the rival submissions and perused the materials available on record. The sole issue as raised in the present appeal is with regard to the disallowance of exemption claimed under section 54 of the Act amounting to Rs. 5,88,81,787. On perusal of the assessment order, we observed that the AO had reproduced section 54(1) of the Act and affirmed that benefit of section 54 of the Act is available only against the purchase / construction of one residential property. The AO had also reproduced the relevant portion of the explanatory notes and stated that the legislative intent is very clear that the benefit of section 54 of the Act is available if and only if investment is made in one residential house within India, even if the assessee has sold multiple properties during the year. The AO also referred to the proviso to section 54(1) of the Act which allows investment in two residential houses in India provided the capital gain does not exceed Rs. 2 crores. The AO concluded that the assessee is not eligible for the benefit of this proviso as the capital gains in the case of the assessee exceeded Rs. 2 crores. Thus, the AO has allowed exemption under section 54 of the Act only in respect of one residential house property although 17 flats were sold during the year under consideration. The ld. CIT(A) has confirmed the action of the AO in restricting the investment to only on residential house property.

9.1 As per section 45 of the Act, any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as other wise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place. In the present case, the exemption is claimed by the assessee under section 54 of the Act. Section 54(1) of the Act which thus becomes relevant and as applicable for AY 2020-21 reads as under-

Profit on sale of property used for residence.

54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a longterm capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(i)

if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii)

if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain:

Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,—

(a)	the provisions of this sub-section shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted;
(b)	any reference in this sub-section and sub-section (2) to “new asset” shall be construed as a reference to the two residential houses in India:

Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year:

9.2 Thus Section 54 of the Act provides exemption in respect of capital gains arising from the transfer of a long-term capital asset, being a residential house. The capital gains arising from transfer of a long-term capital asset, being a residential house is chargeable to tax under section 45 of the Act. As discussed above section 45 of the Act which is a chargeable section provides that any profits and gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income tax under the head Capital gains. Further, Section 48 of the Act provides for computation mechanism of income chargeable under the head Capital gains. Full value of consideration received or accruing as a result of the transfer of the capital asset is the starting point for such computation. The provisions of section 45 and 48 of the Act envisages computation of capital gains for each capital asset. In other words, profits and gains arising from each and every capital asset is chargeable under the head Capital gains. In holding so, we are getting guidance & support of the decision of the ITAT Special Bench in the case of Montgomery Emerging Markets Fund(supra) wherein it was held as under.

“44. Therefore, it is very apparent that source of income does not mean head of income. The Assessing Officer has proceeded on a hypothesis as if the source of income is the head of income itself. This is not a proper construction of law provided in section 70. Short term capital gains/loss as well as long term capital gains/loss both are computed under the head “capital gains” for the aggregation of income culminating into total income which is taxable under the Income-tax Act. What is taxed by the Income-tax Act is not different sources of income independently, but income from different sources clubbed under respective heads and finally aggregated into the total income. The classification of income under different heads for computing the total income does not interfere with the independent character of different sources of income available to an assessee. Both, short term capital gains/loss and long term capital gains/loss are different sources of income, falling under the same head “capital gains”. Even under short term capital gains, different transactions will be different sources of income resulting in short term capital gains/loss. Likewise, different transactions of long term capital assets will be different sources of income for an assessee to arrive at long term capital gains/loss. This is reflected in the scheme of computation of capital gains provided in section 48 where gains or loss is computed on the basis of individual asset and transaction and not on the basis of class of assets. Therefore, we have to agree with the argument of the learned senior counsel that every transaction of a property is a different source of income for the assessee. Head of income is not the source of income. Source of income is having the direct nexus with the stream or fountain out of which the income springs to the assessee. Head of income is provided for clubbing purpose of those like minded incomes derived from different sources for the purpose of aggregation and allowable deductions.

45. We, therefore, find that there is no basis in grouping short term capital assets as a separate source of income and long term capital assets as a separate source of income. Not only short term and long term assets are different sources of income, but even the different short term assets and different long term assets involved in the respective transactions are again different sources of income. When section 70 provides that a loss falling under a source of income can be set off against income from any other source under the same head, it means that the long term capital loss being a separate source can be set off against short term capital gains, which is another separate source of income. Within the provisions of law contained in section 70, there is no further identification of sources of income against which alone loss of a particular source can be set off. What is mentioned in the law is only source of income. As far as the head of income “capital gains” is concerned, the sources could be transfer of short-term capital asset as well as transfer of long term capital assets and transfer of different assets will be different sources of income. There is no further identification or qualification with respect to any source so that the law would presume any sort of restriction on set off of loss arising from one source against income arising from any other source. Therefore, the contention of the assessee that irrespective of the identity of the source of income, it is possible for the assessee to set off the loss of a particular source against income from another source, both falling under the same head of income is tenable in law. Accordingly, the computation made by the assessee by setting off the long term capital loss against short term capital gains and in that way saving the differential tax benefit available to long term capital gains is supported by law.”

9.3 We are of the considered opinion that when section 45 and 48 of the Act are applicable in respect of profits and gains arising from each and every capital asset, then section 54 of the Act also should be understood as an exemption provision available in respect of capital gain arising from transfer of each and every long term capital asset, being a residential house. A plain reading of section 54(1) extracted above provides for exemption under the said section from capital gains arising from transfer of a long term capital asset, being a residential house. It does not provide for clubbing of capital gains arising from transfer of one or more capital assets and allowing exemption there from. In this context, the co-ordinate bench of ITAT Mumbai in the case of Rajesh Keshav Pillai v. ITO 44 SOT 617 (Mumbai) wherein it is held as under-

“4.1 A perusal of provisions of section 54(1) which has been reproduced at page 2 earlier shows that capital gain arising from transfer of a long-term capital asset being a residential house the income of which is chargeable under the head “income from house property” is exempt if the capital gain is invested in a residential house in the manner prescribed in the said section. There is no restriction placed any where in section 54 that exemption is available only in relation to sale of one residential house. Therefore, in case the assessee has sold two residential houses, being long-term assets, the capital gain arising from the second residential house is also capital gain arising from the transfer of a long-term assets being a residential house. The provisions of section therefore will also be applicable to the sale of second residential house and similarly to a third residential house and so on. Whenever the exemption available to restricted to one asset, a suitable provision is incorporated in the relevant section itself. For instance section 23(2) exempts income from a property consisting of a house or a part of house which is in occupation of the assessee or which could not be occupied by the assessee because of his employment/business/profession being carried on at some other place. Based on such provisions contained in section 23(2), income from any number of properties being residential houses which are self-occupied will have to be treated as exempt. But a restriction has been placed in section 23(4) which provides that where the property referred to in sub-section (2) consists of more than one residential houses, exemption would be available only in respect of one house and other self-occupied residential houses will be treated as let out. There is no such provision in section 54 to restrict the exemption of capital gain only to sale of one residential house. The authorities below have taken the view that whenever more than one option is given to the assessee the word used is “any”. The reference has been made to the provisions of section 54E etc. We find from perusal of the said sections that the word “any” has been used because the assessee has option to invest in any of the assets mentioned therein. For instance, section 54E provides exemption in respect of capital gain arising from transfer of a long-term capital asset if whole or any part of the net consideration is invested in any specified assets within six months from the date of transfer. Since the specified assets were more than one, the word “any” has been used because the exemption will be available if the investment is made in any of the specified assets. The situation in section 54 is different. Considering the language used in section 54(1), in our view exemption will be available in respect of transfer of any number of long-term capital assets being residential houses if other conditions are fulfilled.”

9.4 Similarly, the coordinate bench of ITAT Mumbai in the case of Shri Humayun S Rangila v. ITO [IT Appeal No 1239 (M) of 2010, dated 23.2.2011] in which the Assessee sold three residential flats and invested the capital gains into another three residential flats, held that section 54 of the Act exempts capital gain arising from sale of a long term capital asset being a residential house and therefore it will apply to sale of any residential house provided other conditions are fulfilled. CBDT letter in F No 207/24/76-IT(A-II), dated 25.3.1977 was referred by the Tribunal in which it has been mentioned that capital gain arising on transfer of each house will qualify for exemption in case the assessee had sold more than one residential house. Similarly, the co-ordinate bench of ITAT in the case of Dy. CIT v. Ranjit Vithaldas 137 ITD 267 (Mumbai), Vijay Kumar Wanchoo v. ITO 187 ITD 283 (Delhi – Trib.) allowed the exemption under section 54 of the Act where capital gains arising from sale of two flats are invested in one residential house. Thus, we are of the considered opinion that the exemption under section 54 of the Act is available in respect of capital gains arising from transfer of each and every long term capital asset, being a residential house.

9.5 Now coming to the crux of the issue i.e., exemption under section 54 of the Act is allowable for purchase or construction of one residential house in India. In our considered opinion the term ‘one residential house in India’ was brought in place of ‘a residential house’ in section 54(1) of the Act by the Finance No 2 Act 2014 w.e.f 1.4.2015. The memorandum explaining the provisions of Finance No 2 Bill 2014 provides that the rollover relief under section 54/54F is available if the investment is made in one residential house situated in India. It does not provide that exemption will be limited to one residential house in respect of long term capital gain arising from transfer of more than one residential house. Second proviso to section 54EC and 54EE of the Act specifically states that exemption under the said sections is limited to Rs. 50 lakhs in respect of capital gains arising from transfer of one or more original assets during the financial year in which the original asset or assets are transferred and in the subsequent financial year. Similarly, section 23(4) of the Act specifically provides that annual value of any two houses occupied for assessee’s own residence shall be taken as NIL and the annual value of self occupied houses in excess of 2 houses at the option of the assessee shall be computed as per section 23(1) of the Act as if such house or houses had been let. Thus, wherever legislature wanted to curtail exemption to a particular limit, it has specifically provided so. Unlike second proviso to section 54EC and 54EE of the Act, section 54 of the Act does not provide that exemption will be limited to one residential house in respect of long term capital gain arising from transfer of more than one residential house.

9.6 The first proviso to section 54 of the Act provides that the benefit of exemption is available for two residential houses in India if the amount of the capital gain does not exceed Rs. 2 crores. Second proviso to section 54 of the Act limits the above benefit only once to an assessee. Thus, the benefit under the first proviso will be applicable if the amount of capital gain from transfer of a single residential house does not exceed Rs. 2 crores. In our considered opinion the usage of definite expression ‘where the amount of capital gain does not exceed two crore rupees’ in first proviso to section 54 of the Act means that the capital gain from transfer of a single residential house does not exceed Rs. 2 crores. Neither the first proviso nor the second proviso provides for clubbing of all long term capital gains from transfer of more than one residential houses in order to compute the limit of Rs. 2 crores. It is a settled principle that intention of the legislature has to be gathered from the language used in the statute, which means that attention should be paid to what has been said as also to what has not been said. It is contrary to all rules of construction to read words into a statute, which the Legislature in its wisdom has deliberately not incorporated. [CIT v. Tara Agencies 292 ITR 444 (SC)]. Thus, in the absence of a specific provision under section 54 of the Act, long term capital gains arising from transfer of one or more residential house cannot be clubbed and exemption cannot be restricted for purchase or construction of one residential house in India.

9.7 Thus, in our considered opinion the exemption under section 54 is available in respect of capital gains arising from transfer of each and every long term capital asset, being residential house, the said exemption will be allowable for purchase or construction of one residential house in India. In other words, for long term capital gains arising from transfer of each and every residential house, exemption under section 54 of the Act is allowed if the assessee purchases or constructs one residential house in India. Similarly, long term capital gains arising from transfer of more than one residential house will be exempt under section 54 of the Act if the assessee purchases or constructs one residential house in India. However, the number of residential houses for which exemption is claimed under section 54 of the Act cannot exceed the number of residential houses transferred resulting in long term capital gains. For instance, in the present case, assessee has declared long term capital gains from transfer of 17 residential houses. Thus, the assessee will be eligible for exemption under section 54 of the Act if he purchases or constructs 17 or less than 17 residential houses in India. From the schedule of investment made in the new residential houses, it is evident that the assessee has used the capital gains on sale of 17 flats in acquiring 5 new houses/flats. The number of new residential units are less than the number of flats sold. Thus, we are of the considered opinion that the conditions of section 54 of the Act are not violated.

9.8 The Bombay High Court in Krishnagopal B. Nangpal v. Dy. CIT [2026] 484 ITR 272 (Bombay) examined the claim of exemption under section 54 of the Act for AY 1995-96 i.e., for a case prior to amendment by Finance No 2 Act 2014. The assessee therein sold his flat in Mumbai and invested in seven row houses in Pune. The Bombay High Court allowed the exemption under section 54 of the Act for all seven row houses and held that the emphasis in the unamended section 54(1) of the Act is on the residential nature of the property and the objective was never to restrict the number of residential houses purchased against capital gains. It held that the words ‘a residential house’ were merely descriptive nature of the assets sold/purchased and not restrictive of the number of assets sold or purchased. Although the above discussion is not relevant in the present case as we are considering the claim of exemption under section 54 of the Act after the amendment by Finance No 2 Act 2014 w.e.f 1.4.2015, what is relevant is para 13 of the above decision in which the Bombay High Court explained the above amendment as under-

“13. In our view, the amendment brought in by Finance (No.2) Act 2014 makes the position clear that after the amendment, the capital gains can be adjusted against purchase of only ‘one’ residential house. The word ‘a’ is consciously replaced by the legislature by the word ‘one’ by way of amendment making the intention clear that after the amendment, it is impermissible to adjust the capital gains arising out of one house towards purchase of more than one houses. If the restriction of adjustment of capital gains against only one house was already there in the unamended Section 54(1), there was no necessity of amendment by specifically using the word ‘one’.”

9.9 In view of the above, the long term capital gains arising from transfer of one residential house cannot be claimed as exempt under section 54 by investing in 2 residential houses. The amendment does not provide that long term capital gains arising from transfer of all residential houses is restricted to purchase or construction of one residential house. In the present case, assessee had sold 17 flats and consequently he is eligible for the roll over benefit under section 54 of the Act if he purchases or constructs not more than 17 residential houses. Undisputedly, in the present case the assessee had invested the amount of capital gains in purchase or construction of 5 residential houses as tabulated above. Thus, the action of the AO in restricting exemption under section 54 to only one residential house is not in accordance with law.

9.10 Further, we take a note of the interesting fact that the income tax return also provides for the claim of exemption under section 54 of the Act in respect of each and every long term capital gains. The assessee declared long term capital gain from transfer of 17 residential flats and the exemption claimed under section 54 of the Act in respect of each and every long term capital gains in the income tax return filed by the Assessee. [Placed at pages 72 to 83 of PB]. Thus, the format of the income tax return also providing for the claim of exemption under section 54 of the Act qua each long term capital gains from transfer of a residential house lends support to the argument that benefit of exemption under section 54 of the Act in the form of purchase or construction of one residential house in India is appliable for each and every long term capital gains from transfer of a residential house.

9.11 Further, it is contended that for AY 2018-19 and AY 2019-20, the assessee sold multiple flats and claimed exemption under section 54 of the Act for investing in multiple residential houses. The return of income filed for AY 2018-19 was selected for limited scrutiny to examine the issue of capital gains deduction claimed vide notice under section 143(2) of the Act dated 28.9.2019. The notices under section 142(1) of the Act dated 28.12.2019, 11.2.2020, 24.2.2020 and 18.3.2020 were also issued calling for various documents and information relating to exemption claimed under section 54 of the Act. The notice under section 142(1) of the Act dated 24.2.2020 and 18.3.2020 proposed to allow exemption under section 54 of the Act only for one residential house property with an investment of Rs. 1,60,07,000 and the remaining exemption claimed amounting to Rs. 10,63,45,775 was proposed to be disallowed. In the meantime, the notice under section 153C was issued on 4.9.2020 and the assessee filed the return of income in response to notice under section 153C of the Act on 13.11.2020. The Assessment order was passed under section 143(3) r.w.s 153C on 7.4.2021 accepting the exemption claimed under section 54 of the Act and the income returned. Similarly, for AY 2019-20, the AO passed the assessment order under section 143(3) on 9.4.2021 accepting the exemption claimed under section 54 of the Act. The addition of Rs. 8,39,000/- was made in the said order as unexplained cash under the head Income from other sources. [Placed at pages 522 to 528 of additional paper book]. Thus, the claim of exemption under section 54 of the Act in respect of multiple residential houses were already examined and allowed in the assessment orders passed in assessee’s own case for AY 2018-19 and AY 2019-20. Consequently, we are of the considered opinion that following the rule of consistency a different stand should not be taken for the year under consideration which is in our opinion is also not correct.

9.12 We are of the considered opinion that Income tax Act, 1961 is structured in a manner that computation provisions are to be applied source wise. For instance, salary from an employer, income from a house property, any profits and gains arising from the transfer of a capital asset, profits and gains from any business, income from other sources is chargeable to tax. The computation provision, say for section 22 to 26 of the Act should be applied for each property which fetches income. So would be the case for capital gains whereunder each capital asset transferred becomes the subject matter of computation. Section 45 to 55 of the Act are to be applied independently for each asset transferred. The decision of the Special Bench of ITAT in the case of Montgomery Emerging Markets Fund (supra) confirms the same. Chapter VI reinforces that computation of income has to proceed source wise. Section 70 of the Act for e.g. provides that if there is a loss from a source of income then that loss can be set off against income from another source under the same head of income. The segregation of various sources during computation and their aggregation “head wise” under section 70 reaffirms the primacy of source wise computation. Further Section 71 of the Act thereafter provides for set off of loss under one head against income under other heads (subject to certain limitations which are not relevant for the present). We are of the considered opinion that in the present case, as the assessee had capital gains from 17 flats, the computation under section 45 to 55 of the Act would have to be made for each flat independently. In the process of such computation, by the mandate of the latter part of section 45, section 54 etc would have to be given effect to. It is only thereafter that capital gains income from the particular property would be arrived at. In view of the above, the Authorities below are not correct in restricting the claim of exemption under section 54 of the Act to only one residential house and accordingly the assessee’s claim of exemption under section 54 of the Act as claimed in the return of income are allowed.

10. In the result, the appeal filed by the assessee is allowed.

TPO cannot apply domestic CUP for benchmarking export sales without geographic market adjustments.

Ashwani Kumar — Fri, 24 Jul 2026 05:25:10 +0000

TPO cannot apply domestic CUP for benchmarking export sales without geographic market adjustments.

Issue

Whether domestic sales prices can be adopted as CUP to benchmark export sales without making suitable adjustments for differences in geographic locations and market conditions under Transfer Pricing provisions.
What is the appropriate interest rate for benchmarking delayed realization of export receivables from an Associated Enterprise (AE) beyond the credit period.
Whether disallowance under Section 40(a)(ia) for provisions made towards Directors’ commission/salary is sustainable when tax is subsequently deducted under Section 192 upon actual payment.
Whether the balance 50% of additional depreciation can be claimed in the immediately succeeding assessment year if new machinery installed was used for less than 180 days in the year of acquisition.
Whether Dividend Distribution Tax (DDT) under Section 115-O is governed by tax treaty (DTAA) limits while the issue remains pending before the Supreme Court.
Whether additions on account of unutilized MODVAT/CENVAT credit under Section 145A are sustainable when the chosen accounting method is revenue neutral.
Whether a Transfer Pricing adjustment on royalty income charged from an AE can be made by the TPO without bringing any comparable uncontrolled transaction on record.
Whether Section 14A disallowance under Rule 8D requires re-examination when interest-free funds exceed investments and certain investments do not yield exempt income.

Facts

Issue I (Export Pricing): The assessee exported water-based paints to its AE in the Philippines and benchmarked the transaction using TNMM with contribution margin as the PLI. The TPO rejected TNMM and applied domestic CUP by comparing domestic sale prices in India with export prices to the AE without adjusting for market differences.
Issue II (Delayed Receivables): The assessee realized export proceeds from its AE with delays ranging from 11 to 22 days. The TPO applied the SBI Prime Lending/Base Rate to compute a notional interest adjustment.
Issue III (Directors’ Commission Disallowance): The assessee made a provision totaling ₹2.31 crores for commission payable to its MD and WTD, later paying the amounts after deducting TDS under Section 192. The AO disallowed the provision under Section 40(a)(ia) while giving credit for the previous year’s disallowance, resulting in a net disallowance of ₹12.63 lakhs.
Issue IV (Additional Depreciation): The assessee claimed the remaining 50% balance of additional depreciation in AY 2012-13 for plant and machinery acquired and put to use for less than 180 days in the preceding year.
Issue V (DDT vs. DTAA): The assessee paid DDT under Section 115-O on dividends distributed to its Japanese parent company and claimed that the tax rate should be restricted to the lower rate under the India-Japan DTAA.
Issue VI (Unutilized CENVAT Credit): The AO made additions under Section 145A for unutilized MODVAT/CENVAT credit. The CIT(A) deleted the addition following precedents that both inclusive and exclusive methods of accounting are revenue-neutral.
Issue VII (Royalty Benchmarking): The assessee charged a 1% royalty from its Nepalese AE for decorative paint technology. The TPO made an arbitrary adjustment of ₹11.22 lakhs without citing any comparable uncontrolled transactions.
Issue VIII (Section 14A Disallowance): The AO rejected the assessee’s suo motu disallowance under Section 14A and applied Rule 8D, ignoring the assessee’s contention that interest-free funds exceeded investments and that certain growth fund investments yielded no exempt income.

Decision

Issue I (TNMM vs. CUP): Domestic sales cannot be adopted as CUP for export transactions due to distinct market conditions and geographic differences; rejection of TNMM without making suitable adjustments was unjustified. (In favour of assessee)
Issue II (Receivables Interest Rate): Interest on delayed export receivables beyond the agreed credit period must be benchmarked applying LIBOR + 100 basis points rather than SBI Base Rate. (Partly in favour of assessee)
Issue III (Section 40(a)(ia) Deletion): Since tax was deducted under Section 192 on actual payment and the issue was covered by a Co-ordinate Bench decision in the assessee’s own case, the net disallowance was deleted. (In favour of assessee)
Issue IV (Additional Depreciation Claim): The balance 50% of additional depreciation is legally allowable in the immediately succeeding assessment year. (In favour of assessee)
Issue V (DDT DTAA Rate Remanded): The issue was restored to the AO to decide in accordance with the final outcome of the pending Supreme Court proceedings on Section 115-O vs. DTAA rates. (Matter remanded)
Issue VI (MODVAT Addition Deletion Upheld): The order of the CIT(A) deleting additions under Section 145A was upheld as the revenue failed to present any distinguishing facts. (In favour of assessee)
Issue VII (Royalty Adjustment Deleted): The TP adjustment on royalty was deleted because the TPO failed to conduct a legally sustainable benchmarking exercise or produce uncontrolled comparable transactions. (In favour of assessee)
Issue VIII (Section 14A Remanded): The Section 14A disallowance was remitted back to the AO for fresh adjudication to examine interest-free funds availability and non-exempt-yielding investments. (Matter remanded)

Key Takeaways

Geographic Adjustments in Transfer Pricing: Domestic sales cannot serve as an unadjusted CUP for foreign export sales due to divergent market economics and geographic differences.
LIBOR Standard for Foreign Currency Receivables: Benchmarking delayed export receivables from overseas AEs requires international benchmark rates (LIBOR + 100 bps) rather than domestic prime lending rates (SBI Base Rate).
Carry-forward of Additional Depreciation: The statutory right to claim 100% additional depreciation is not forfeited when an asset is used for less than 180 days in the year of installation; the remaining 50% claim defers automatically to the next assessment year.
Arbitrary TP Adjustments Invalid: Transfer Pricing Officers cannot arbitrarily reject benchmarking analyses or alter royalty rates without bringing genuine comparable uncontrolled transactions on record.

IN THE ITAT MUMBAI BENCH ‘I’

Kansai Nerolac Paints Ltd.

Deputy Commissioner of Income-tax^*

ANIKESH BANERJEE, Judicial Member
and ARUN KHODPIA, Accountant Member

IT Appeal Nos. 4053, 4054, 4322 & 4323 (Mum) of 2025
[Assessment years 2012-13 and 2013-14]

JUNE 2, 2026

Ms. Arati Vissanji, Adv. for the Appellant. Ashish Nagesh, Sr. DR for the Respondent.

ORDER

1. The instant appeal of the assessee and the cross appeal of the revenue filed against the order of the Ld. Commissioner of Income Tax, Appeal, 56, Mumbai [for brevity the “Ld. CIT(A)”], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for Assessment Years 2012-13 and 2013-14, date of order 14.04.2025 for both the appeals. The impugned orders emanated from the orders of the Ld. Joint Commissioner of Income Tax (OSD) – 6(3)(2), Mumbai, order passed under section 143(3) r.w.s. 144C(3) date of order 22.04.2016 and order passed by Ld. Assistant Commissioner of Income Tax Circle 6(3)(2), Mumbai date of order 21.12.2016.

2. All the appeals pertain to the same assessee and have the common issues. For convenience all the appeals are taken together and disposed of by a consolidated order. ITA No. 4053 and 4054/Mum/2025 is related to assessee’s appeal and ITA No.4322 and 4323/Mum/2025 are related to appeal filed by the revenue. ITA No.4053 and ITA No.4322/Mum/2025 for AY 2012-13 are taken as lead case and the decision rendered therein shall be applicable to other appeals mutatis mutandis.

ITA No. 4053/Mum/2025; A.Y. 2012-13 (Assessee’s Appeal)

3. The brief facts of the case are that the assessee company is engaged in business of manufacturing of paints and varnishes. As per the Tax Audit Report, there has been no change in the business of company during the year. The assessee filed the return by declaring total income of Rs. 2,63,71,76,820/-. The return was possessed u/s 143(1). The return was selected under CASS scrutiny. The Ld. AO had preferred the case to TPO u/s 92CA(1) to determine the Arms Length Price (in short ‘ALP’). The Ld. TPO passed the order u/s 92CA(3) of the Act and confirmed the addition under different heads. Finally, the Ld. AO passed the final order and confirmed the additions. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) partly allowed the appeal of the assessee. Being aggrieved, both the assessee and the revenue filed the appeal & cross appeal before us.

4. The Ld. AR advanced his arguments and filed a paper book comprising pages 1 to 108, which has been taken on record. The Ld. AR addressed the issues ground-wise and made detailed submissions in support of each ground. The grounds raised by the assessee are adjudicated hereunder:

Ground 1(a) and (b):

5. The Ld. AR contended that the assessee has made the valuation in TNMM Method for calculating the ALP in TP. The assessee has taken contribution margin of the concerned product also in domestic market as profit level indicator. The adjustment was made by the TPO by adopting CUP Method and accordingly, adjusted Rs. 8,88,796/- on account of export of water based paint. The Ld. AR contended that the assessee exported some water based paints for value of Rs. 1,02,54,000/- to Kansai Paints Philippines, Inc., Associated Enterprise (AE). The assessee in form no. 3CEB calculated the ALP of export of water based paints to AE by using TNMM by comparing contribution margin (sales minus direct cost). In respect of the same type of product or service sold to non-associated enterprise with contribution margin of sale made to the AE. Accordingly, the assessee calculated ALP of the transaction with AE amount to Rs. 26,11,447/-. The Ld. TPO not accepting the method adopted by the assessee used CUP of average sale price of the products sold to non-AE in India as ALP for export to AE and made addition Rs. 8,88,796/-.

6. The Ld. AR submitted that domestic sales and export sales operate under entirely different commercial and economic circumstances. The functions performed, risks assumed, market conditions, and terms and conditions governing the transactions are materially different, even where the same product is sold in both markets. In the absence of any comparable export transaction with a non-associated enterprise involving the same product, the CUP Method cannot be appropriately applied. Accordingly, it was contended that the TNMM constitutes the Most Appropriate Method (MAM) for determining the ALP, as against the CUP Method adopted by the Ld. TPO. The Ld. AR further submitted that the average contribution margin earned by the assessee on domestic sales made to non-associated enterprises represents a reliable Profit Level Indicator (PLI) for benchmarking the export of the same products to its AE. It was argued that the assessee had correctly determined the ALP by comparing the contribution margin earned from sales to non-AEs with that earned from exports to the AE. The Ld. AR further contended that an identical issue had been considered by the Coordinate Bench of the ITAT, Mumbai in the assessee’s own case in Kansai Nerolac Paints Ltd. v. Addl. CIT (Mumbai – Trib.)/ITA No. 3384/Mum/2014 and connected matters, vide order dated 04.12.2023. The relevant observations of the Coordinate Bench are reproduced below:

“63. We heard the parties and perused the material on record. The assessee has exported the water based paints to its AE in Philippines and benchmarked the same by applying TNMM method. Average contribution margin is used as the PLI. The TPO rejected the bench marking and applied CUP to make an additional TP adjustment. The TPO has used the same comparables used by the assessee and compared the average rate per unit of domestic sales with the rate per unit charged to AE and accordingly arrived the additional TP adjustment. The argument of the Id AR is that the domestic pricing and export pricing cannot be compared as it is by applying CUP, since the FAR of both markets are different. In this regard we notice that a similar issue has been considered by the coordinate bench in the case of Dow Chemical International (P.) Ltd. v. Dy. CIT (Mumbai – Trib.) where it has been held that –

“15. We have considered rival submissions in the light of decisions relied upon and perused the material on record. The basic dispute between the parties is with regard to the most appropriate method for benchmarking the export of finished goods to the Aes. While the assessee has applied TNMM on segmental basis, the Transfer Pricing Officer has applied CUP to determine the arm’s length price of the transaction From the material placed on record, it is very much clear that the sales made to the non-Aes situated in India have been applied as CUP to determine the arm’s length price of the transaction. From the material placed on record, it is very much clear that the sales made to the non-Aes situated in India have been applied as CUP to determine the arm’s length price of export made to the Aes. It is the case of the assessee that no comparable export sales to non- Aes are available to apply as CUP. The aforesaid factual position has not been controverted by the Revenue. Therefore, the moot point which arises for our consideration is, whether the domestic sales can be applied as CUP for determining the arm’s length price of export sales. It is fairly well settled, CUP method requires strict comparability. It cannot be denied that the pricing of a product varies on the basis of geographical location. Thus, primarily, the price of products sold in domestic market cannot be compared with the price of the product sold in foreign country due to various factors. Therefore, if the Transfer Pricing Officer selects CUP as the most appropriate method to benchmark the transaction, it is his duty to find out and bring on record price charged for uncontrolled transactions carried out under similar circumstances. If, suitable comparable uncontrolled transaction is unavailable, CUP method cannot be applied.”

64. In assessee’s case we notice that the TPO has made a direct comparison without making any adjustments to the domestic price charged for the similar product in a non-AE transaction. Applying the ratio laid down by the coordinate in the above decision in our considered view the TPO is not correct in applying CUP which requires strict comparability and given that the geographical location would have an impact on the pricing the bench marking done by the TPO is not tenable. Accordingly we see no infirmity in the decision of CIT(A) and uphold the decision of the CIT(A). This ground of the revenue is dismissed.”

7. The Ld. DR relied upon and supported the orders of the revenue authorities. However, he was unable to rebut the submissions advanced on behalf of the assessee or bring on record any distinguishing facts or contrary material warranting a different view.

8. We heard the rival submissions and perused the material available on record. The assessee exported water-based paints to its AE in the Philippines and benchmarked the international transaction by adopting the Transactional Net Margin Method (TNMM) as the MAM, using contribution margin as the PLI. The Ld. TPO, however, rejected the methodology adopted by the assessee and applied the CUP Method by comparing the average domestic sale price of similar products sold to non-Aes in India with the export price charged to the AE, resulting in a transfer pricing adjustment of Rs.8,88,796/-. The assessee consistently contended that domestic sales and export sales operate under entirely different economic and commercial circumstances. The functions performed, assets employed, risks assumed, geographical markets, pricing policies, volume considerations, and terms and conditions governing domestic transactions are materially different from those applicable to export transactions. Therefore, a simple comparison of domestic sale prices with export sale prices, without making any adjustment for such material differences, cannot satisfy the strict comparability requirements mandated under the CUP Method. We find that an identical issue arose in the assessee’s own case before the Coordinate Bench of the ITAT, Mumbai in ITA No. 3384/Mum/2014 and connected matters, vide order dated 04.12.2023 (supra). The Coordinate Bench, after considering the decision in the case of Dow Chemical International (P.) Ltd. v. Dy. CIT (Mumbai – Trib.), held that domestic sales cannot be adopted as CUP for benchmarking export sales in the absence of comparable uncontrolled export transactions. The Tribunal further observed that geographical location and market conditions have a significant bearing on pricing and, therefore, strict comparability is a prerequisite for application of the CUP Method. Since the TPO had merely compared domestic and export prices without making any adjustment for the differences in market conditions and other relevant factors, the adoption of the CUP Method was held to be unsustainable. The facts of the present case are identical to those considered by the Coordinate Bench in the assessee’s own case. The revenue has not brought on record any distinguishing feature in the facts of the year under consideration, nor has the Ld. DR been able to place any contrary judicial precedent warranting a departure from the view already taken by the Coordinate Bench. Respectfully following the binding decision of the Coordinate Bench in the assessee’s own case, we hold that the Ld. TPO was not justified in rejecting TNMM and applying the CUP Method for benchmarking the impugned international transaction. Consequently, the transfer pricing adjustment of Rs.8,88,796/- made on account of export of water-based paints to the AE is directed to be deleted.

Accordingly, Ground Nos. 1(a) and 1(b) raised by the assessee are allowed.

Ground 1 (c) and (d):

9. The Ld. AR contended that the assessee had made exports of three consignments of goods totaling of Rs. 1,02,54,000/- to AE Philippines. There has been a delay of 11, 19, 21 and 22 days in receiving the export proceeds from AE. The Ld. TPO calculated notional interest Rs. 56,377/- on account of said delay. The Ld. TPO has applied the CUP Method and proceeded to determine ALP by bench marking on basis of Prime Lending Rate or Base Rate declared by SBI on 30^th of June. Accordingly, the interest on delay in receipt of export proceeds which has lead to disallowance Rs. 56,377/-. The Ld. AR contended that the identical issue was duly considered by The Coordinate Bench of ITAT, Mumbai in assessee’s own case ITA No. 3384/Mum/2014 and connected matters, date of pronouncement 04.12.2023. The relevant observations of the bench are reproduced as below:

“26. The Id AR submitted that the assessee does not have any borrowings and that no interest on delayed payments is charged for the non-AE transactions. Given this it was submitted that there should not be any interest charged for relayed payments on AE transactions. Without prejudice the Id AR submitted that the rate applied by the revenue is the domestic rate which is not correct and that the LIBOR rate should be applied. Reliance in this regard is placed on The Bombay High Court in the case of Tecnimont (2018) . The Id AR further prayed that the TPO has considered a credit period of 30 days and prayed that a credit period of 90 days be considered.

27. The Id DR relied on the order of the CIT(A) and the assessing officer.

28. We heard the parties and perused the material on record. It is settled positions that delay in receipt of receivables from AE is an international transaction. The Hon’ble Bombay High Court in the case of Tecnimont (P.) Ltd (supra) has held that the delay in receivables is in substance amounts to granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay and that interest needs to be charged based LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE. We therefore direct the assessing officer to charge interest at the rate of LIBOT +100basis points after considering a credit period of 60 days. This ground of the assessee is partly allowed.”

10. The Ld. DR relied upon and supported the orders of the revenue authorities. However, he was unable to rebut the submissions advanced by the Ld. AR or place on record any contrary judicial precedent warranting a departure from the view canvassed by the assessee.

11. We have heard the rival submissions and perused the material available on record. The Ld. TPO made an adjustment on account of notional interest attributable to the delay in realization of export proceeds from the AE and consequently made an addition of Rs.56,377/-. We find that an identical issue has already been considered and adjudicated by the Coordinate Bench of the ITAT, Mumbai in the assessee’s own case (supra). Respectfully following the decision of the Coordinate Bench, we hold that where there is a delay in realization of receivables from the AE beyond the agreed credit period, the benchmarking of such delayed receivables should be carried out by applying the LIBOR rate plus 100 basis points. Accordingly, we direct the Ld. AO/TPO to recompute the adjustment, if any, by adopting the LIBOR rate plus 100 basis points after granting the appropriate credit period in accordance with the directions of the Coordinate Bench.

Accordingly, Ground Nos. 1(c) and 1(d) raised by the assessee are partly allowed.

Ground 2: Disallowance of commission of Rs. 12,63,000/- considering Section 40(a)(ia) of the Act.

12. The Ld. AR contended that during the impugned assessment year, the assessee had made a provision of Rs.183.60 lakh and Rs.47.73 lakh towards commission payable to the Managing Director (MD) and Whole-Time Director (WTD), respectively, both of whom were employees of the assessee-company. The said commission was actually paid in April 2012 after deducting tax at source under Section 192 of the Act, and the corresponding TDS was deposited into the Government treasury on 07.05.2012. The Ld. AR submitted that the Ld. AO disallowed the entire provision of Rs.231.33 lakh (Rs.183.60 lakh + Rs.47.73 lakh) under Section 40(a)(ia) of the Act on the ground that tax had neither been deducted nor deposited during the relevant financial year. However, the Ld. AO simultaneously allowed a deduction of Rs.218.70 lakh representing a similar disallowance made in the immediately preceding assessment year, in respect of which TDS had been deducted and deposited during the year under consideration. Consequently, the net disallowance sustained by the Ld. AO amounted to Rs.12.63 lakh. The Ld. AR further contended that the provisions of Section 40(a)(ia) are not applicable to payments covered under Section 192 of the Act, i.e., salary payments made to employees. Since the commission paid to the MD and WTD formed part of their remuneration as employees and tax had been deducted under Section 192, no disallowance under Section 40(a)(ia) could be made. The Ld. AR also submitted that an identical issue had been considered by the Coordinate Bench of the ITAT, Mumbai in the assessee’s own case in ITA No. 3384/Mum/2014 and connected matters, vide order dated 04.12.2023. The relevant observations of the Coordinate Bench are reproduced below:

“42. We heard the parties and perused the materials. The case of the revenue is that the assessee has not deducted tax at source against the provision made towards commission payable to MD and that the commission payable is liable for tax deduction under section 194H of the Act. As per the submissions of the assessee, the allowability of commission in the subsequent year has not been questioned by the department and that since the provision of Rs.75 lakhs has been reversed on 01.04.2008, credited to the P & L A/c disallowance in the year under consideration would amount to double taxation. We notice that the assessing officer has notconsidered the submission of the assessee that the provision towards commission is reversed in the subsequent and paid as part of the salary on which tax was duly deducted. In our considered view, the submissions of the assessee with regard to provision made, subsequent reversal and tax deduction on actual payment etc., needs to be factually verified in order to decide the allowability of the claim. Therefore we deem it fit to remit the issue back to the assessing officer for a de-novo verification of the issue by calling for the relevant details as may be required in this regard. The assessee is directed to submit the details and cooperate with the proceedings. It is ordered accordingly.”

13. The Ld. DR argued and stands in favour of the order of the revenue authorities. The Ld. DR invited our attention in the observations of the Ld. CIT(A) which is contended in para no. 11.4 and 11.4.1 are reproduced as below:

“11.4 Decision: I have considered the fact of the case and the observations of the AO. It is important to analyze the stands of the AO vis a vis submissions of the appellant and the same is discussed herein below:

The question involved here is paid to the directors will be considered under the ambit of Section 40. Upon plain reading of the provisions of section 40 it can be noted that the section already covers the aspect of commission or brokerage.

11.4.1 This clears the position that, any payment in the nature of commission or brokerage is covered under the provisions of the section. Further, on perusal of the provisions of section 40(a)(ia) read with Explanation to section 194H, the position is clear that the section 40(a)(ia) applies to the commission paid to a person who is acting on behalf of others. Any amount payable by the way of commission or brokerage to any director is over and above the remuneration paid by the company. Such payments are made in order to compensate the director with the services rendered by them. Thus, the position is clear that the payments are made to the director for the additional services provided by them and accordingly it ought to be covered under the provisions of section 40(a) (ia). In view of the same, the views adopted by the AO in this regards is upheld. The AO allowed deduction of Rs. 218.70 Lacs to the appellant for similar disallowance made in the immediately preceding assessment year for which TDS was deducted and deposited during the previous year 2010-11. In view of the same, this ground of appeal is dismissed.”

14. We heard the rival submissions and perused the material available on record. During the assessment proceedings, the Ld. AO disallowed the provision for commission/salary payable to the MD and WTD aggregating to Rs.2,31,33,000/- on the ground that tax had not been deducted and deposited at source, thereby attracting the provisions of section 40(a)(ia) of the Act. However, the Ld. AO simultaneously allowed a deduction of Rs. 2,18,70,000/-, which had been disallowed in the immediately preceding assessment year and for which the corresponding tax was deducted and deposited during the previous year relevant to A.Y. 2012-13. We find that the issue is squarely covered by the decision of the Coordinate Bench of the ITAT, Mumbai, in the assessee’s own case (supra). Respectfully following the said decision, we hold that the impugned disallowance is unsustainable. The Ld. DR was unable to bring any material on record to distinguish the facts of the present case from those considered by the Coordinate Bench. Accordingly, the addition of Rs. 12,63,000/- sustained by the Ld. AO is hereby deleted.

Accordingly, the assessee’s appeal Ground 2 stands allowed.

Ground 3: Additional depreciation u/s 32(1)(iia)

15. The Ld. AR contended that for encouragement of investment in plant or machinery by the manufacturing and power sector, additional depreciation of 20% of cost of new plant or machinery acquired and installed is allowed under the existing provision of section 32(1)(ii)(a) of the Act over and above the general depreciation allowance. On lines of availability of the general depreciation allowance, the second proviso to section 32(1) inter-alia provides that the additional depreciation would be restricted to 50% when the new plant and machinery acquired and installed by the assessee is put to use for the purpose of business or profession for a period of less than 180 days. The Ld. AR contended that for removal of discrimination in matter of allowing additional depreciation on plant and machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50% of additional depreciation on new plant and machinery acquired the use for less than 180 days which has not been allowed in year of acquisition and installing to such plant and machinery shall be allowed in immediate succeeding previous year. So, the Ld. AR like to pray that the plant and machinery put to use for less than 180 days in A.Y. 2011-12 the balance deduction of additional depreciation at the rate of 10% shall be allowed in A.Y. 2012-13.

16. On strengthening her argument, the Ld. AR respectfully relied on the order of Hon’ble High Court of Karnataka in case of CIT v. Rittal India (P.) Ltd. 380 ITR 423 (Karnataka) held that if plant and machinery eligible for additional depreciation u/s 32(1)(iia) is put to use for less than 180 days in said financial year and, therefore, only 50% of additional deprivation can be claimed in that year, balance 50% be availed in subsequent years.

17. The Ld. DR argued and stands in favour of the orders of the revenue authorities. The Ld. DR was unable to bring any material on record to distinguish the facts of the present case from this considered by the Hon’ble Karnataka High Court.

18. We heard the rival submissions and perused the material available on record. It is an undisputed fact that the assessee had acquired and installed new plant and machinery and was, therefore, eligible to claim additional depreciation under section 32(1)(iia) of the Act. It is also not in dispute that the said plant and machinery was put to use for less than 180 days during the relevant previous year. Accordingly, the assessee was entitled to claim only 50% of the additional depreciation in the year under consideration, with the balance 50% being allowable in the immediately succeeding assessment year. Respectfully following the judgment of the Hon’ble Karnataka High Court in the case of Rittal India Pvt. Ltd. (supra), we hold that the assessee is entitled to claim the balance 50% of the additional depreciation in the impugned assessment year. Therefore, the disallowance made by the Ld. AO amounting to Rs. 32,31,200/- is unsustainable and is hereby deleted.

Accordingly, the assessee’s Ground No. 3 stands allowed.

Ground No. 4: Applicable Rate of DDT as per treaty.

19. The Ld. AR contended that the assessee is entitled to the benefit of the tax rate prescribed under the applicable Double Taxation Avoidance Agreement (DTAA) in respect of Dividend Distribution Tax (DDT). It was submitted that the assessee had paid DDT under section 115-O of the Act at a rate higher than that permissible under the relevant DTAA. According to the Ld. AR, the tax liability on distributed dividends ought to be restricted to the rate provided under the DTAA, in view of the judgment of the Hon’ble Bombay High Court in the case of Colorcon Asia (P.) Ltd. v. Jt. CIT [2026] 486 ITR 476 (Bombay). The Ld. AR further submitted that the assessee had raised this issue by way of an additional ground before the Ld. CIT(A). The additional ground as reproduced in the appellate order reads as under:

“I. Dividend Distribution Tax should be restricted to the rate specified in DTAA:

On the facts and circumstances of the case and in law, the assessing officer ought to have restricted the levy of the dividend distribution tax, on the dividend distributed/paid to Kansai Paint Co. Ltd. Japan and other the non-resident shareholder(s), to 10% in terms of Article 10 of the double taxation avoidance agreement (DTAA) between India and Japan. in case of dividend paid to Kansai Paint Co. Ltd, Japan and the DTAAs with the respective countries in case of other non-resident shareholders instead of 16.225% charged in terms of section 115-0 of the Act.

Treaty rate to be applied for dividend distributed instead of rate prescribed in sec. 115-0.

The ground raises a purely legal issue and deserves to be admitted in the light of the Apex Court judgment in the case of NTPC 229 ITR 383.

On merits, the issue has been concluded against the appellant by the Special Bench decision in the case of Total Oil (P) Ltd., 104 ITR (T) 1.

During the previous year relevant to the assessment year, the company declared and paid dividend to its shareholders; which includes Kansai Paint Co. Ltd, Japan and other the non-resident shareholders. The company has filed its return of income showing payment of dividend distribution tax at the rate of 16.225% on dividend declared and paid during the previous year. However, Article 10 of the double taxation avoidance agreement (DTAA) between India and Japan states that tax on dividend shall not exceed 10% of the gross amount of dividend.

The scrutiny assessment was completed by the Jt. Commissioner of (OSD) 6(3)(2), Mumbai vide order under section 143(3) r.w.s 144C(3) dated 22.04.2016. Neither company nor Assessing Officer raised any issue regarding the dividend distribution tax during the assessment proceeding.

The company is raising this issue for the first time by way of an additional ground in this appeal. The appellant submit that merely because the company itself applied an incorrect rate i.e. 16.225% u/s 115-O of the Act instead of the rate prescribed in the DTAA, shall not Act as an estoppel for not claiming lower rate of tax.”

20. The Ld. AR submitted that the issue is no longer res integra and was initially decided by the Special Bench of the ITAT, Mumbai in the case of Dy. CIT v. Total Oil India (P.) Ltd. 104 ITR(T) 1 (Mumbai – Trib.), wherein it was held that the liability towards DDT was governed by the provisions of section 115-O of the Act. However, the Ld. AR pointed out that the Hon’ble Bombay High Court, in the case of Colorcon Asia Pvt. Ltd. (supra), subsequently decided the issue in favour of the assessee and held that where an Indian company distributes dividends to its UK parent company, such dividend falls within the scope of Article 11 of the India-UK DTAA and, therefore, the tax on dividend distribution under section 115-O is required to be restricted to the rate of 10% prescribed under the DTAA. It is also submitted that a Coordinate Bench of the Hon’ble Bombay High Court, in the case of Foseco India Ltd. Company v. Asstt. CIT (Bombay), has expressed a contrary view and referred the issue for consideration by a Larger Bench. It was also brought to our notice that both views have been challenged before the Hon’ble Supreme Court and the appeals have been admitted, as reported in Jt. CIT, Panji v. Colorcon Asia (P.) Ltd (SC). Accordingly, the issue is presently pending adjudication before the Hon’ble Apex Court.

21. Per contra, the Ld. DR submitted that since the issue is presently pending before the Hon’ble Supreme Court and has not yet attained finality, the matter should remain open and be decided in accordance with the law laid down by the Hon’ble Apex Court.

22. We have heard the rival submissions and perused the material available on record. The controversy before us relates to whether the rate of Dividend Distribution Tax is required to be restricted to the rate prescribed under the applicable DTAA or whether the provisions of section 115-O of the Act would exclusively govern the levy. We note that the Special Bench of the ITAT, Mumbai in the case of Total Oil India Pvt. Ltd. (supra) decided the issue against the assessee. However, the Hon’ble Bombay High Court in Colorcon Asia Pvt. Ltd. (supra) took a contrary view and held that the assessee is entitled to the benefit of the rate prescribed under the DTAA. Subsequently, another Coordinate Bench of the Hon’ble Bombay High Court in Foseco India Ltd. (supra) expressed a divergent view and referred the issue for consideration by a Larger Bench. It is an admitted position that both the competing views are presently under consideration before the Hon’ble Supreme Court. In view of the pendency of the matter before the Hon’ble Apex Court and in the interest of justice, we deem it appropriate to restore this issue to the file of the Ld. AO with a direction to decide the same afresh in accordance with the final outcome of the proceedings before the Hon’ble Supreme Court and any binding judicial precedent that may be rendered on the issue.

Accordingly, Ground No. 4 raised by the assessee is allowed for statistical purposes.

ITA No. 4322/Mum/2025; A.Y. 2012-13 (Revenue’s Appeal)

23. The revenue has challenged the order of the Ld. CIT(A) related to deleting the addition made by the Ld. AO and account of utilized by Modvat credit relying on the decision of Hon’ble High Court in case of CIT v. Diamond Dye Chem Ltd. [2017] 396 ITR 536 (Bombay) without appreciating that the said decision was based on the decision of Hon’ble Supreme Court in case of CIT v. Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC) which pertains to A.Y. 1989-90, when the provision of section 145A were not inserted. The Ld. DR submitted a brief note which is reproduced as below:

“1. Grounds of Appeal: The grounds of appeal filed by the Revenue are identical for both Assessment Year 2012-13 and Assessment Year 2013-14. They are reproduced verbatim below:

Ground 1: “Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition made by the A.O. on account of unutilized Modvat Credit relying on the decision of the Hon’ble High Court in the case of Diamond Dye Chem Ltd 396 ITR 536 (Bombay) without appreciating that the said decision was hased on the decision of the Hon’ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd 261 ITR 275 (SC) which pertained to A.Y. 1989-90 when the provisions of Section 145A were not inserted in the Statute/Act.”

Ground 2: “The appellant submits that the impugned order dated 14/04/2025 passed by the Ld. CIT(A) is bad-in-law and is liable to be quashed and/or setaside.”

2. Core Issue: The Revenue is challenging the orders of the CIT(A) dated April 14, 2025, which deleted additions of Rs. 29,05,96,117 (AY 2012-13) and Rs. 19,40,92,153 (AY 201314) made by the Assessing Officer (AO) on account of unutilized Modvat / Cenvat credit. The primary ground of appeal asserts that the CIT(A) erred in law by relying on judicial precedents that pertain to an era before Section 145A of the Income Tax Act was enacted. Section 145A, inserted with effect from April 1, 1999, strictly mandates an ‘inclusive method’ for inventory valuation, requiring any tax, duty, cess, or fee paid or incurred to be included in the valuation of goods and inventory.

3. Judgments Erroneously Relied Upon by the CIT(A): The CIT(A) deleted the additions by placing sole reliance on the Bombay High Court decision in Diamond Dye Chem Ltd., which in turn was anchored entirely upon the Supreme Court’s ruling in Indo Nippon Chemicals Co. Ltd. The Revenue submits that these rulings are inapplicable to the present Assessment Years:

CIT v. Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC) (SC) Relevant Paragraphs: In Paragraph , the Supreme Court held: “We are unable to accept the view of the Assessing Officer that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty-paid raw material, it would amount to income which is liable to be taxed under the Act. in Paragraph 5. the Court ruled that applying a ‘gross method’ at purchase and a ‘net method’ at valuation was wholly erroneous’.

Revenue’s Submission: As explicitly noted in the Revenue’s grounds of appeal, the Indo Nippon judgment pertained strictly to AY 1989-90. Because it was delivered prior to the legislative insertion of Section 145A, it holds no benchmark authority for AVs 2012-13 and 2013-14.

3.2 CIT v. Diamond Dye Chem Ltd. (Bom)/396 ITR 536 (Bom) Relevant Paragraphs: In Paragraph 4, the Court noted the assessee’s reliance on the Indo Nippon judgment. In Paragraph 5, the Court observed that the assessee adopted the ‘exclusive method’ and, following the Apex Court, held that “the income was not generated to the extent of Modvat credit”. In Paragraph 6, the Court concluded that “the amount of the un utilized Cenvat credit could not have been directly added to the closing stock”.

Revenue’s Submission: The Bombay High Court in Diamond Dye Chem merely followed the pre-amendment principles set by the Apex Court in Indo Nippon. A judicial precedent analysing a pre-amendment context cannot override the clear, unambiguous statutory mandate of Section 145A, which was specifically introduced by the Legislature to block the ‘net-of-tax’ accounting loophole.

4. Judgment Relied Upon by the Revenue: To enforce the statutory position under Section 145A, the Revenue relies on the following precedent:

4.1 Commissioner of Income-tax v. Mahalaxmi Glass Works (P.) Ltd. 318 ITR 116 (Bom)

Relevant Paragraphs: In Paragraph 2, the Hon’ble High Court explicitly addresses ‘the method of valuation of inventory as contemplated by section 145A of the Income-tax Act’, ruling that to give effect to Section 145A, a corresponding adjustment must be made. In Paragraph 3, the Court cites the Privy Council (CIT v. Ahmedabad New Cotton Mills Co. Ltd., AIR 1930 PC 56) to emphasise that ignoring true valuations misrepresents real profits. In Paragraph 5, the Court upholds the Tribunal’s approach whereby the closing stock valuation is adopted as the opening stock of the subsequent year to ensure consistency under the law.

Revenue’s Submission: This post-amendment judgment confirms that Section 145A strictly overrides general accounting conventions. If the Assessee accounts for its inventory valuation on a ‘net-of-tax’ basis, it is legally bound under Section 145A to make an upward adjustment to reflect the unutilized Modvat credit.

5. Prayer: The CIT(A)’s blanket deletion of the AO’s additions allows unutilized Modvat credit to escape tax entirely, artificially suppressing business profits, rendering the orders bad-in-law. If the Hon’ble Tribunal observes that an adjustment to closing stock requires an equitable cascading entry, the Revenue prays that the matter should not be deleted in toto. Instead, relying on the mechanism validated in Mahalaxmi Glass Works, the matter should be remanded to the Assessing Officer to ensure a synchronised, comprehensive Section 145A adjustment across all inventory parameters (opening stock, purchases, sales, and closing stock).”

24. The Ld. AR contended that the identical issue was duly considered by The Coordinate Bench of ITAT, Mumbai in assessee’s own case. ITA No. 3384/Mum/2014 and others, date of pronouncement 04.12.2023. The relevant observations of the bench in paragraph nos. 18 and 19 are reproduced as below:

“18. We heard the parties and perused the material on record. We notice that the coordinate while considering the similar issue for AY 2007-08, discussed the amended provisions of section 145A (which is relevant for the year under consideration) and held that –

It is to be noted that Section 145A of the 1961 Act was inserted by Finance (No. 2) Act, 1998 w.e.f. 1.4.1999 and later there has been substitution of Section 145A of the 1961 Act by Finance(No 2) Act, 2009, w.e.f. 01.04.2010, wherein new clause (b) is inserted in the provisions of Section 145A and new clause (a) in amended Section 145A concerns with valuation of inventory which is exactly similarly worded to Section 145A as was inserted by Finance (No. 2) Act, 1998, w.e.f. 01.04.1999 The notes on clause explain the substitution of Section 145A of the 1961 by Finance Act No.2), 2009 w.e.f. 01.04.2010 as under:

“Clause 56 of the Bill seeks to substitute section 145A of the Income-tax Act, which relates to method of accounting in certain cases.

The existing provisions contained in said section 145A provides that while computing the value of the inventory as on the 1st and the last day of the previous year, the computation according to the method of accounting regularly employed by the assessee shall be adjusted to include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force.

It is proposed to amend the said section so as to provide that the interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.”

The Memorandum to Finance Bill, 2009 also explain substitution of Section 145A as under which as we will see is concerned with insertion of new clause (b) to Section 145A of the 1961 Act, which is reproduced as under:

“Rationalization of provisions for taxation of interest received on delayed compensation or enhanced compensation

The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama Bai v. CIT (181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to taxpayers.

With a view to mitigating the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received irrespective of the method of accounting followed by the assessee.

Further, it is proposed to insert clause (viii) in sub-section (2) of section 36 to provide that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as “income from other sources” in the year in which it is received.

This amendment will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99 and subsequent assessment years.”

Thus, the amendment to Section 145A of the 1961 Act by Finance Act, 2009 w.e.f. 01.04.2010 so far as valuation of inventories was similarly worded as the provision existed vide Finance Act, 1998 wef 01.04.1999. The assessee has heavily relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. Diamond Dye Chem Limited (supra), wherein Hon’ble Bombay High Court held that the tax impact will be neutral under both inclusive and exclusive method and held that cenvat credit could not have been added to value of closing stock, by holding as under:

“5. We have considered the submissions. It is not disputed that the assessee was liable to excise duty. The assessee got credit in the excise duty already paid on the raw materials purchased by it and utilized in the manufacturing of excisable goods. The assessee was adopting the exclusive method i.e. valuing the rawmaterials on the purchase price minus (-) the Modvat credit. The same would be permissible. The Apex Court in the case of Indo Nippon Chemicals Co. Ltd. (supra) while affirming the order of High Court, has observed that the income was not generated to the extent of Modvat credit or unconsumed raw-material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw-materials, that would not amount to income which was liable to be taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same.

6. Considering the above, the amount of the un-utilized Cenvat credit could not have been directly added to the closing stock.

The assessment year under consideration before Hon’ble Bombay High Court in the case of Diamond Dye Chem Limited (supra) was AY 2008-09 which was post amendment by Finance Act, 1998 wherein Section 145A was inserted w.e.f. 01.04.1999. The Hon’ble Bombay High Court in the case of Diamond Dye Chem Limited (supra) while adjudicating appeal relied upon decision of Hon’ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Company Limited (2003) 261 ITR 275(SC), wherein Hon’ble Supreme Court in the case of Indo Nippon Chemicals Limited (supra) was seized of AY 1989-90 which was prior to introduction of Section 145A by Finance Act, 1998 w.e.f. 01.04.1999. Incidentally when earlier Hon’ble Bombay High Court was adjudicating appeal in the case of CIT v. Indo Nippon Chemicals Co. Limited reported in (2000) 245 ITR 384 (Bom) which related to AY 1989-00, it was brought to the notice of Hon’ble Bombay High Court that there was newly inserted Section 145A of the 1961 Act by Finance Act(No. 2). 1998 w.e.f. 01.04.1999, where in Hon’ble Bombay High Court held in para 10, as under:

“10. Before concluding, we may mention that, in rejoinder, the learned counsel for the department has brought to our attention section 1454 of the Act. He has also invited our attention to the Subsequent Guidance Note issued by the Institute of Chartered Accountants of India on Tax Audit under section 44AB of the Act. It was contended that even the ICAI has subsequently declared that the net/exclusive method adopted by various assessees should be applied with adjustments on account of any tax, duty, cess or fee actually paid or incurred on inputs which should be added to the cost of the inputs if not so added in the books of account. He contended that in the Subsequent Guidance Note, the ICAI once again discussed the above two methods and, in the circumstances, it was urged that the net method followed by the assessee was wrong because the assessee has followed the net method without making any adjustments as required under section 145A. In this connection, we may point of that section 145A was introduced by the Finance (No. 2) Bill 1998. Originally, the Bill contemplated the proposed amendment to apply from 1-4-1986 in relation to the assessment year 1986-87 and subsequent years. However, later on, when the said Bill was enacted into law, the provision was made applicable from 1-4-1999, i.e., assessment year 1999-2000. In this appeal, we are concerned with the assessment year 1989-90. In the circumstances, we are not inclined to go into the provisions of section 1454. We are also not examining, therefore, the Subsequent Guidance Note issued by the ICAI which is based on section 145A. The Legislature clearly intended, therefore, that the computation made by the assessees prior to the assessment year 1999-2000 should not be disturbed and, therefore, the Legislature has brought the said section 145A into force only from 1-4-1999.”

Hon’ble Bombay High Court while adjudicating appeal in the case of Diamond Dye Chem Limited(supra) did not consider the Co-ordinate Bench decision in the case of Catrini India Limited(supra) as well amended provisions of Section 145A of the 1961 Act. It relied upon decision of Hon’ble Supreme Court decision in case of Indo Nippon Chemical(supra) which is prior to insertion of Section 145A of the 1961 Act. Under these circumstances as discussed by us elaborately above, we are inclined to restore this matter back to the file of the AO for denovo determination of the issue in the light of our above discussions as well decision referred to above. The assessee will be allowed to raise its defence in denovo proceedings. The AO shall provide proper and adequate opportunity of being heard in the set aside proceedings. The grounds of appeal are allowed for statistical purposes We order accordingly.

19. Respectfully following the above decision of the coordinate bench we remit the issue back to the assessing officer with similar directions.”

25. We heard the rival submissions and considered the documents available in the record. We find that the said issue is duly considered and adjudicated by The Coordinate Bench of ITAT, Mumbai. The Ld. DR was not able to distinguish the fact relying on the order by the Ld. AR considering this we find that there is no reason for intervening the observations made by Ld. CIT(A).

Accordingly, the Grounds taken by the revenue stands dismissed.

ITA No. 4054/Mum/2025; A.Y. 2013-14 (Assessee’s Appeal)

Ground No. 1 (c) and (d): Adjustment related to royalty received from AE amount to Rs. 11,22,762/-.

26. The Ld. AR contented that Kansai Nerolac Paints Ltd. (“KNPL”) is engaged in the business of manufacturing and sale of paints in India and operates in both the decorative and industrial paint segments. It was contended that while the decorative paint market in India is predominantly controlled by Asian Paints Ltd., which commands nearly 60% of the organized market, KNPL enjoys a dominant position in the industrial coatings segment and is the market leader in automotive coatings with approximately 56% market share. The Ld. AR further submitted that Kansai Paint Nepal Pvt. Ltd. (“KPN”), a company incorporated in Nepal, is engaged in the manufacture and sale of decorative paints in Nepal and that KNPL holds 68% of the paid-up equity share capital of KPN. The Ld. AR explained that the industrial coatings business is highly technology-driven and service-intensive in nature. In order to compete effectively in such a specialized segment, manufacturers are generally required to enter into technical collaborations or joint venture arrangements with globally recognized paint technology providers. In this regard, KNPL has entered into a Technical License Agreement with Kansai Paint Co. Ltd., Japan (“KPJ”), under which KNPL is granted the right to manufacture cationic electro-deposition coatings and systems, automotive coatings, industrial coatings and architectural coatings by utilizing the proprietary technical know-how developed by KPJ. It was submitted that under the said Technical License Agreement, KNPL is authorized to manufacture specified “Licensed Products” and, in consideration for the use of such sophisticated technology and know-how, pays royalty to KPJ at the rate of 3% of the net selling price of the licensed products sold by it. The Ld. AR further submitted that KNPL has, in turn, entered into a separate Technical License Agreement with KPN, whereby KPN has been granted the right to use certain technical information and know-how owned by KNPL for the manufacture of specified decorative paint products. The list of such licensed products has already been furnished before the revenue authorities and forms part of the record. The Ld. AR emphasized that the decorative paint business is fundamentally different from the industrial coatings business. Unlike industrial coatings, decorative paints are not highly technology intensive, do not involve complex manufacturing processes, and are generally not service-oriented in nature. Industrial coatings are supplied primarily to Original Equipment Manufacturers (OEMs), which prescribe stringent quality specifications, technical standards, and performance requirements. Consequently, continuous technological support, research inputs, and specialized know-how are essential for manufacturing industrial coatings.

In contrast, decorative paints are predominantly sold through dealer networks and retail outlets catering to household consumers. The technology involved in decorative paints is comparatively less complex and does not ordinarily require extensive technical collaboration or sophisticated know-how. Therefore, the value and commercial significance of technical know-how relating to decorative paints is substantially lower than that associated with industrial coatings. Accordingly, the Ld. AR submitted that the royalty rate of 1% charged by KNPL from KPN for the use of technical know-how relating to decorative paints is commercially justified, reasonable, and commensurate with the nature of the technology transferred. The said royalty rate is significantly lower than the royalty rate of 3% paid by KNPL to KPJ for highly specialized industrial paint technology, thereby demonstrating that the international transaction has been undertaken on an arm’s length basis and does not warrant any transfer pricing adjustment.

27. The Ld. AR respectfully relied on the order of The Coordinate Bench of ITAT, Mumbai in case of Unilever India Exports Ltd. v. Asstt. CIT (Mumbai – Trib.). The relevant paragraph no. 7 is reproduced as below:

“7. We have heard the rival submissions and perused the material available on record. The grievance of the assessee pertains to the action of the Transfer Pricing Officer (TPO) in proposing an ad-hoc transfer pricing adjustment of Rs.6,97,76,862/- on account of royalty payments for central services. The assessee has appropriately benchmarked the intra-group service payments by adopting the CUP method, which is one of the prescribed methodologies under the Income-tax Rules, and has furnished documentation substantiating the rendition of services for both assessment years under consideration. The TPO, although claiming to have applied the “Other Method,” has not brought on record any comparable transaction to substantiate the determination of the arm’s length price. Instead, the TPO has resorted to an ad-hoc benchmarking approach, which is contrary to the mandate of section 92C of the Act. The Hon’ble Bombay High Court has, in several decisions, categorically held that addition-hoc transfer pricing adjustments unsupported by any of the prescribed methods are legally unsustainable. We respectfully rely upon the decision in the case of Merck Ltd. (supra).

For AYs 2012-13 and 2013-14, in the assessee’s own case in Unilever India Exports Ltd. v. Dy. CIT [IT Appeal Nos. 2096 & 6648 (Mum.) of 2017, dated 31-7-2019), the Co-ordinate Bench of the ITAT, Mumbai (J-Bench) deleted the transfer pricing adjustment arising from an identical determination of the arm’s length price by the TPO. As the facts in the present appeals are materially identical, the ratio laid down in the said decision would apply mutatis mutandis to the assessment years under consideration

Similarly, for AYs 2015-16 and 2016-17, in the assessee’s own case reported at Unilever India Exports Ltd. v. Deputy Commissioner of Income-tax (Mumbai Trib.) by order dated 31/03/2023, the ITAT, Mumbai (J-Bench) deleted the transfer pricing addition made on identical grounds. Again, as the facts are identical, the findings therein shall equally apply to the present appeals.

Furthermore, for AYs 2017-18 and 2018-19, the Tribunal has also deleted the transfer pricing additions arising from identical determinations of the arm’s length price. In light of the factual parity with earlier years and the consistent view taken by the Co-ordinate Benches in the assessee’s own cases (supra), we find merit in the assessee’s contention.

Accordingly, the ad-hoc transfer pricing adjustment of Rs.6,97,76,862/- made by the Ld. AO/TPO on account of royalty for central services is deleted. The assessee’s appeal on Ground Nos. 1 to 5 stands allowed.”

28. The Ld. DR argued and stands in favour of the order of the revenue authorities. The Ld. DR invited our attention in para no. 7.4 of the impugned appellate order. Relevant paragraph is reproduced as below:

” 7.4 Decision: The Appellant has entered into technical license agreement with AE i.e. KPN with effect from 01st September, 2012. Thus, this is the first year in which transaction of royalty has been entered into for manufacture and sale of Decorative Licensed products by KPN. The KPN to pay royalty @ 1% on net selling price of licensed products sold by KPN in Nepal. The Appellant did not benchmark this transaction and did not submit any contemporaneous documentation as required by Section 92D of the Act read with Rule 100 of the Rules. Therefore, the TPO had benchmarked the same applying the CUP method.

Further, during the course of appellate proceedings the Appellant submitted the report for royalty benchmarking and concluded that royalty rate is between 1% 2.5%. The report was conducted in the Year 2017 and it is in relation the paints/decorative paints/industrial manufacture and sale of industrial chemicals/coatings and other such similar products within the territory of Sri Lanka as against royalty charged is for Decorative licensed products and from Nepal.

As the benchmarking study submitted by the appellant is not contemporaneous in nature and for difference product and region the same has been rejected. This ground of appeal is disallowed.”

29. We heard the rival submissions and perused the material available on record. The dispute relates to the transfer pricing adjustment of Rs. 11,22,762/- in respect of royalty received by the assessee from its AE, namely Kansai Paint Nepal Pvt. Ltd. (“KPN”). We find that the assessee had entered into a Technical License Agreement with KPN, whereby KPN was granted the right to use certain technical information and know-how owned by the assessee for the manufacture and sale of decorative paint products in Nepal. In consideration thereof, the assessee charged royalty at the rate of 1% of the net selling price of the licensed products sold by KPN. The assessee has explained the commercial rationale for charging royalty at such rate by demonstrating that decorative paints are comparatively less technology-intensive than industrial coatings and do not require the same degree of technical support, quality control, and specialized know-how as industrial paint products. It was further brought on record that the assessee itself pays royalty at the rate of 3% to Kansai Paint Co. Ltd., Japan, for highly specialized industrial coating technology, thereby indicating that the royalty rate of 1% charged from KPN for decorative paint technology is commercially reasonable. We further note that the TPO/CIT(A) rejected the assessee’s benchmarking analysis primarily on the ground that the contemporaneous documentation was not furnished and that the benchmarking report relied upon by the assessee pertained to a different geographical region and product mix. However, neither the TPO nor the Ld. CIT(A) has brought any comparable uncontrolled transaction on record to demonstrate that the royalty rate charged by the assessee was not at arm’s length. The adjustment has effectively been made without identifying any reliable comparable transaction as mandated under section 92C of the Act. The Coordinate Bench of the ITAT, Mumbai in the case of Unilever India Exports Ltd. (supra) has categorically held that a transfer pricing adjustment cannot be sustained in the absence of benchmarking based on any of the prescribed methods and that ad hoc determinations of arm’s length price are contrary to the scheme of Chapter X of the Act. The Tribunal further held that, unless supported by proper comparables and a valid benchmarking analysis, such adjustments are legally unsustainable. In the present case also, the revenue has failed to bring on record any cogent material, comparable uncontrolled transaction, or scientific benchmarking analysis to justify the determination of a different arm’s length royalty rate. Merely rejecting the assessee’s benchmarking study does not empower the TPO to substitute the arm’s length price on an ad hoc basis. In our considered view, the transfer pricing adjustment made by the TPO and sustained by the Ld. CIT(A) is not supported by any legally sustainable benchmarking exercise. Accordingly, respectfully following the ratio laid down by the Coordinate Bench in the case of Unilever India Exports Ltd. (supra), we hold that the transfer pricing adjustment of Rs. 11,22,762/- on account of royalty received from the AE is unsustainable. The same is directed to be deleted.

Accordingly, the Ground No. 1 (c) and (d) of the assessee’s appeal stands allowed.

Ground No. 3: Disallowance u/s 14A amount to Rs. 37,18,703/-.

30. The Ld. AR contended that the assessee to avoid dispute and penalty calculated disallowance u/s 14A Rule 8D amount to Rs. 37,18,703/- in return of income. However, the assessee’s claim made during the assessment process for calculation of disallowance based on method approved by the Coordinate Bench of ITAT, Mumbai in assessee’s own case for A.Y. 1999-2000 and not considered by the Ld. AO. Further relation to calculation of Rule 8D(2)(ii), the Ld. AR invited our attention in APB Page 196 and it is found that the assessee’s share holder’s fund in the balance-sheet as of 31^st March, 2013 is Rs. 12,859.80 lakh whereas noncurrent investment amount to Rs. 480.98 lakh. So, the investment was made by the assessee from his own findings.

31. The Ld. DR argued and stands in favour of the revenue authorities. The Ld. DR has drawn our attention in impugned appellate order in paragraph no.13.4.2 which is reproduced as below:-

“13.4.2 Under subsection (2) of Sec 14A, the AO is required to determine the amount of expenditure incurred by an appellant in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub section (3) of Section 14A provides for the application of sub section (2) to a situation where the appellant claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. The Assessing Officer must, in the first instance, determine whether the claim of the appellant in that regard is correct and the determination must be made having regard to the accounts of the appellant. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is no satisfied with the claim of the appellant, that the legislature directs him to follow the method prescribed. The same principle was discussed by the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. In this case, since the AO was not satisfied with the claims made by the appellant. In view of above discussion, this ground of appeal is dismissed.”

32. We have carefully considered the submissions of the rival parties. The assessee has suo-moto disallowed the expenses related to exempted income amount to Rs. 37,18,703/-. It is also accepted that the Share holders’ fund is higher than the invested fund. We find that the assessee had contested the addition on basis of Rule 8D(2)(ii) of the Income tax Rule, 1962 (Rules). Further, On presumptive basis, i.e. 0.5% of the annual average value of investments yielding exempt income under Rule 8D(2)(iii) of the Rule is subject to consideration of the revenue. The Ld. AR contended that the investment of the assessee is in growth fund which is not yielding the dividend. So, we restore the ground to the file of the Ld. AO to compute the expenses related to earning exempted income u/s 14A r.w.r 8D(2)(ii) & (iii). The Ld. AO must consider the judicial rulings i.e. in the case of South Indian Bank Ltd. v. CIT [2021] 438 ITR 1 (SC), the Hon’able Supreme Court held that if an assessee can demonstrate that investments yielding exempt income were made out of their own funds and not from borrowed funds, no disallowance under Section 14A of the Act is warranted.

Further, in the case of Pr. CIT v. Punjab National Bank 449 ITR 468 (Delhi), the Hon’ble Delhi High Court ruled that Section 14A cannot be invoked in the absence of exempt income earned during the relevant financial year. No disallowance can be made merely because investments capable of generating exempt income exist.

Section 14A of the Act, read with Rule 8D of the Rules, is applicable where the assessee is unable to determine or allocate the correct expenses incurred to earn exempt income. As per the ratio laid down by above cited case laws, the disallowance u/s 14A is required to be made, when the assessee has earned any exempt income. In the instant case, it is submitted that the interest free funds available with the assessee is more than the value of investments. In that case, no disallowance out of interest expenses is called for. However, disallowance may be called for from out of administrative expenses in terms of sec.14A of the Act. For this purpose, we are of the view that the assessee may be provided with an opportunity to present the relevant facts before the AO. Accordingly, we set aside the order passed by Ld CIT(A) and restore this issue to file of the Ld. AO for examining this issue afresh. After providing adequate opportunity of being heard to the assessee. The Ld. AO may take appropriate decision. We also direct the assessee to present its working of expenses, if any, relating to exempt income.

Accordingly, the Ground No. 3 (a) and (b) taken by the assessee are allowed for statistical purposes.

33. In the result, the appeals of the assessee bearing ITA No. 4053 and 4054/Mum/2024 are partly allowed for statistical purposes and the appeals of the revenue bearing ITA No. 4322 and 4323/Mum/2025 are dismissed.