SANSKRUT TRADECOM PRIVATE LIMITED,AHMEDABAD vs. ACIT CIRCLE 4(1)(1), AHMEDABAD

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ITA 2421/AHD/2025Status: DisposedITAT Ahmedabad22 April 2026AY 2017-184 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that since the assessee had no interest-bearing borrowings and expenses incurred did not have a proximate nexus with earning exempt income, the disallowance under Rule 8D(2)(iii) was unsustainable. The ad-hoc disallowance by the CIT(A) was also found to be without legal basis.

What were the facts?

The assessee company, engaged in investment in shares and securities, claimed exempt income and expenses. The Assessing Officer disallowed expenses under Section 14A read with Rule 8D, and also added the same to book profit under Section 115JB. The CIT(A) restricted the disallowance under Section 14A and deleted the addition under Section 115JB.

What were the issues?

Whether the disallowance of expenses under Section 14A read with Rule 8D was justified when there was no proximate nexus with exempt income and no interest-bearing borrowings. Whether an ad-hoc disallowance by the CIT(A) is legally sustainable.

Which sections of the Income-tax Act were involved?

Section 14A,Section 115JB,Section 10(38),Section 234B,Section 234C,Section 271(1)(c)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH

Before: DR. BRR Kumar & Shri T. R. Senthil Kumar

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH Before: DR. BRR Kumar, Vice President And Shri T. R. Senthil Kumar, Judicial Member

ITA No: 2421/Ahd/2025 Assessment Year: 2017-18

Sanskrut Tradecom Pvt. Ltd. ACIT 414, Sargam Marg, Opp.Cee, Circle 4(1)(1)), Bodakdev,, Ahmedabad, Vs Ahmedabad Gujarat -380054 PAN: AACCS7455E (Appellant) (Respondent) Assessee Represented: Shri Bharat S. Shah, A.R. Revenue Represented : Shri Abhijit, Sr. D.R. Date of hearing : 09-03-2026 Date of pronouncement : 22-04-2026 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:-

This appeal is filed by the Assessee as against the appellate order dated 17.10.2025 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Years 2017-18.

2.

Brief facts of the case is that the Assessee is a company engaged in investment in shares and securities. For the assessment year 2017-18,

ITA No: 2421/Ahd/2025 2 Assessment Year: 2017-18 Sanskrut Tradecom Private Limited Vs. ACIT the Assessee filed its original return of income on 13.10.2017 and thereafter filed a revised return on 04.03.2019, pursuant to the amalgamation of two companies, viz., M/s. Oras Investment Private Limited and M/s. Pratham Investment Private Limited, w.e.f. 01.04.2016 on the approval/permission granted by the Hon’ble High Court of Gujarat. The Assessee claimed exempt income comprising dividend income, tax-free bond interest and long term capital gain under section 10(38) of the Act. The Assessee claimed total expenses of Rs.92,23,945/- and wherein assessee suo-moto disallowed of Rs. 19,13,613/- under section 14A of the Act. The Assessing Officer, invoking section 14A read with Rule 8D, disallowed Rs.73,10,332/- (restricting a higher disallowance under Rule 8D(2)(iii) and also added the same amount to book profit under section 115JB of the Act.

3.

Aggrieved against the assessment order, the Assessee filed an appeal before the CIT(A), who restricted the disallowance u/s.14A adhoc disallowance at 50% made by the AO, i.e., Rs. 36,55,166/-, and deleted the addition made under the book profit under section 115JB of the Act.

4.

Aggrieved against the appellate order, the Assessee is in appeal before us, raising the following grounds of appeal: “1. On merits-Disallowance u/s 14A r.w. Rule 8D (Rs.36,55,166 sustained): The learned CIT(A) erred in upholding/estimating and sustaining disallowance of Rs.36,55,166 (50% of Rs. 73,10,332) under Section 14A r.w. Rule 8D in the absence of the mandatory, objective dissatisfaction required by Section 14A(2) after considering the accounts and the Appellant's suo-motu disallowance. The disallowance sustained is ad hoc, mechanical and contrary to settled law requiring a proximate nexus between expenditure and exempt income.

ITA No: 2421/Ahd/2025 3 Assessment Year: 2017-18 Sanskrut Tradecom Private Limited Vs. ACIT 2. Interest u/s. 234B & 234C consequential: Levy of interest u/s. 234B and 234C is purely consequential. Upon deletion of the sustained disallowance, such interest requires appropriate recomputation. 3. Penalty u/s 271(1)(c) not sustainable: Initiation of penalty u/s 271(1)(c) on the very issue of disallowance under a debatable provision (Section 14A/Rule 8D) is untenable. The Hon'ble Tribunal may kindly direct that no penalty is leviable and, in any event, that the same is not sustainable upon deletion, of additions.”

5.

Heard rival submissions and perused the materials available on record. It is an undisputed fact on record that the assessee did not have any interest-bearing borrowings and the investments were made out of its own funds. In such circumstances, no disallowance of interest expenditure can be made under Rule 8D(2)(ii). The Assessing Officer has primarily invoked Rule 8D(2)(iii) and computed disallowance at 0.5% of average investments, resulting in total disallowance of Rs. 73,10,332/-. However, it was observed that the major expenses incurred by the assessee, such as [a] Professional and legal charges [b] Consultancy charges and [c] Travel and compliance expenses which are predominantly related to amalgamation, statutory compliances and do not have any proximate nexus with the earning of exempt income namely dividend income, tax-free bond interest and long term capital gain under section 10(38) of the Act. It is a settled proposition that only those expenditures which have a proximate connection with earning exempt income can be disallowed u/s.14A of the Act, as held by the Hon’ble Supreme Court in Maxopp Investment Ltd. Thus, in absence of any demonstrated nexus, the application of Rule 8D(2)(iii) becomes unsustainable.

5.1. Ld. CIT(A), instead of adjudicating the issue in accordance with statutory provisions, has directed to make ad-hoc disallowance at 50%

ITA No: 2421/Ahd/2025 4 Assessment Year: 2017-18 Sanskrut Tradecom Private Limited Vs. ACIT of the amount computed by the Assessing Officer, resulting in a further disallowance of Rs.36,55,166/-. Such an approach is purely without any legal basis, as neither provided under section 14A nor under Rule 8D, which contemplate estimation on percentage basis without reference to accounts or nexus. Thus, the ad-hoc disallowance as directed by the CIT(A) cannot be upheld. Accordingly, the disallowance sustained by the Ld. CIT(A) is hereby deleted and the suo-moto disallowance made by the assessee is accepted.

6.

In the result, the appeal filed by the Assessee is hereby allowed.

Order pronounced in the open court on 22-04-2026

Sd/- Sd/- (DR. BRR KUMAR) (T.R. SENTHIL KUMAR) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : True Copy Dated 22/04/2026 (DS) आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद

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