KHEMANI DISTRIBUTORS & MARKETING LIMITED,SURAT vs. DCIT, CIRCLE-1(1)(1), SURAT

PDF · subscribers
ITA 90/SRT/2026Status: DisposedITAT Surat22 October 2026AY 2016-1711 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal noted that the assessee's contentions involved factual aspects requiring verification of the Balance Sheet, bank statements, and details of individual investments. Specifically, the availability of interest-free funds, the source and timing of investments, and the nature of investments considered by the AO needed examination. The Tribunal observed that the lower authorities had not examined these factual claims in light of the documents relied upon by the assessee. The revenue also conceded that the facts and contentions advanced by the assessee before the Tribunal had not been examined by the AO due to the assessee's lack of effective representation during assessment proceedings. Therefore, considering the rival contentions and the need for factual verification, the Tribunal restored the matter to the file of the AO for fresh adjudication. The AO was directed to examine the assessee's claims regarding interest-free funds, source of investments (including IPO proceeds), and the nature of investments, and then determine the disallowance in accordance with law. The assessee was directed to cooperate and furnish necessary evidence. No final opinion on the merits was expressed.

What were the facts?

The assessee, Khemani Distributors & Marketing Limited, filed its return for Assessment Year 2016-17 declaring Nil income. The case was selected for scrutiny, and the Assessing Officer (AO) completed the assessment under Section 144 of the Income-tax Act, 1961, after disallowing Rs. 74,14,455/- under Section 14A read with Rule 8D. The assessee's appeal to the Commissioner of Income-Tax (Appeals)-NFAC, Delhi, was dismissed, upholding the AO's order. The assessee is now appealing this decision to the Income Tax Appellate Tribunal (ITAT). The primary reason for the AO's best judgment assessment was the assessee's failure to provide necessary documents and books of accounts.

What were the issues?

1. Whether the disallowance of Rs. 74,14,455/- under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962, is sustainable on the facts and in the circumstances of the case? Assessee's Contentions: - The AO erred in confirming the disallowance. The assessee argued that it had interest-free funds (share capital, reserves, and surplus amounting to Rs. 18.23 crore) exceeding its average investments (Rs. 9.83 crore), thus no interest expenditure should be disallowed. Reliance was placed on *Principal Commissioner of Income-tax-4, Ahmedabad Vs. Sintex Industries Ltd.*, *South Indian Bank Ltd. Vs. Commissioner of Income-tax*, and *Commissioner of Income-tax Vs. Gujrat State Fertilizer & Chemicals Ltd.*. - A major portion of the investment was made on March 30, 2016, utilizing IPO proceeds, and therefore, no disallowance for interest or administrative expenses should be made. - The quantum of disallowance was incorrect as the AO included investments in Birla Sunlife SA and ICICI Prudential Liquid Mutual Fund, which are taxable and do not yield exempt income. Revenue's Contentions: - The assessee failed to submit documentary evidence that investments were made from own funds and did not provide a cash flow statement or nexus analysis to prove that interest-bearing funds were not diverted. - The reliance on *Sintex Industries Ltd.* was misplaced as the assessee's investment was a high percentage (50%) of its interest-free funds, unlike the 10% in *Sintex Industries Ltd.*. - The standard disallowance of 0.5% for administrative expenses was justified as the assessee used its office and incurred expenses for managing investments.

Which sections of the Income-tax Act were involved?

Section 14A,Section 144,Section 143(2),Section 142(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, SURAT BENCH, SURAT

Before: MS. SUCHITRA KAMBLE & SHRI B.M. BIYANI

For Appellant: Shri Mehul Shah, CA
For Respondent: Shri Ashish Kumar, Sr. DR
Hearing: 18.08.2026Pronounced: 22.10.2026

आदेश / O R D E R Per B.M. Biyani, A.M.: Feeling aggrieved by the order of first appeal dated 12.12.2025 passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“Ld. CIT(A)”], which in turn arises out of the assessment-order dated 27.12.2018 passed by learned Assistant Commissioner of Income-tax, Circle (1)(1)(2), Surat

Page 1 of 11

[“Ld. AO”] u/s 144 of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2016-17, the assessee has filed this appeal raising following effective ground:

“On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of assessing officer in disallowing expenditure of Rs. 74,14,455/- u/s 14A of the Act.” 2. The background facts leading to present appeal are such that the assessee-company filed its return of AY 2016-17 declaring a total income of Rs. Nil. The case of assessee was selected for scrutiny assessment and the Ld. AO issued notices u/s 143(2)/142(1). Finally, the Ld. AO completed assessment u/s 144 after making a disallowance of Rs. 74,14,455/- u/s 14A of the Act read with Rule 8D of Income-tax Rules, 1962. Aggrieved, the assessee carried matter in first-appeal whereupon the Ld. CIT(A) passed following order dismissing assessee’s appeal.

“4.3 This appeal is directed against the assessment order passed under Section 144 of the Income Tax Act, 1961, for A.Y. 2016-17. The Assessing Officer (AO) determined the total income at Rs. 57,22,396/- after making a disallowance of Rs. 74,14,455 under Section 14A read with Rule 8D. The case was selected for complete scrutiny through CASS. Despite the issuance of multiple statutory notices under Sections 143(2) and 142(1), the appellant failed to provide necessary documents or books of accounts. Consequently, the AO was compelled to finalize the assessment under Section 144 to the best of his judgment. 4.4. I have carefully considered the Assessment Order, the Statement of Facts, and the written submissions filed by the appellant. While the appellant claims that investments were sourced from capital and reserves (Rs.27.12 crores), they failed to provide a fund-flow statement or a "nexus" analysis during the assessment proceedings to prove that interest-bearing borrowed funds were not diverted. In the absence of books of accounts (due to non-compliance u/s 144), the AO's conclusion that a portion of the Rs.2.10 crore interest expenditure is attributable to exempt income is a reasonable "Best Judgment". Section 14A(2) mandates that the AO shall determine disallowance if not satisfied with the correctness of the assessee's claim. Since the appellant provided no documentary evidence or accounts to the AO, the AO's "dissatisfaction" is legally well-founded. The appellant's argument that "no human agency" or cost was involved because dividends were credited via ECS is rejected. Managing a portfolio of over Rs.11.57 crores requires management time, office infrastructure, and accounting efforts, all of which constitute "expenditure in relation to" exempt income. The appellant's reliance on cases like PCIT vs. Sintex Industries Ltd. is misplaced because those cases were decided on a factual finding of available surplus. In the present case, by failing to comply with notices and failing to produce accounts, the appellant prevented the AO from verifying such facts. The AO correctly applied the formulaic approach of Rule 8D: • Interest Disallowance: Rs.69,22,865. • Administrative Disallowance (0.5%): Rs.4,91,590. The assessment order under Section 144 and the subsequent disallowance under Section 14A are hereby upheld. 5. In the result, the appeal stands dismissed.” [Emphasis supplied] Still aggrieved, the assessee has come in present appeal before us.

3.

We have heard learned Representatives of both sides and perused the case record including the orders of lower authorities as well as the documents filed in Paper-Book.

4.

Ld. AR for assessee at first invited our attention to the working made by Ld. AO as per Rule 8D, in para 4.14 of assessment-order, the same is re- produced below for an immediate reference:

5. Referring to above working, the Ld. AR submitted that the Ld. AO has made disallowance of interest component of Rs. 69,22,865/- and ½% standard disallowance of Rs. 4,91,590/- on account of administrative expenses. However, the disallowance made by Ld. AO was not warranted because of two reasons:

(i) That, the assessee was having interest-free funds more than the investments made. To demonstrate this, Ld. AR drew us to the Balance-Sheet of assessee available at Page 28 of Paper-Book. Ld. AR pointed out that the interest-free funds available to assessee from share capital, reserve and surplus were Rs. 18.23 crore [(9,34,84,687 + 27,12,16,109)/2] whereas the average investment made by assessee was Rs. 9.83 crore [(8,08,40,198 + 11,57,95,938)/2]. Ld. AR relied upon certain decisions, namely Principal Commissioner of Income- tax-4, Ahmedabad Vs. Sintex Industries Ltd. (2017) 82 taxmann.com 428 (Gujrat); South Indian Bank Ltd. Vs. Commissioner of Income-tax (2021) 130 taxmann.com 178 (SC); Commissioner of Income-tax Vs. Gujrat State Fertilizer & Chemicals Ltd. (2025) 180 taxmann.com 321 (Gujrat).

(ii) That, the major portion of investment was made on 30.03.2016, which is almost the end of the previous year, by utilizing proceeds of IPO. To demonstrate this, Ld. AR drew us to Pages 39 to 42 of Paper-Book where the a/c statements of Kotak Bank are placed in which the

Page 5 of 11

credit entries of IPO proceeds received and debit entries of investments subsequently made are reflected. Therefore, when the substantial investment itself was made on almost last day of previous year, no disallowance ought to be made for interest as well as standard ½%.

6.

Without prejudice to above, the Ld. AR submitted that the quantum of disallowance made by Ld. AO also suffers from following mistakes:

(i) That, in relation to the component of interest, the Ld. AO has computed the “Average value of investment, income from which does not form part of total income, as appearing in the balance sheet of the assessee, on the first day and last day of the previous year” at Rs. 9,83,18,068/-, by adopting the figures of Rs. 8,08,40,198/- as on the first day of the previous year and Rs. 11,57,95,938/- as on the last day of the previous year. While doing so, the Ld. AO has not taken into account the nature and character of investment of Rs. 11,57,95,938/-. The Ld. AR filed following details of investment and invited our attention to same, submitting that the investments in Birla Sunlife SA and ICICI Prudential Liquid Mutual Fund are taxable and do not generate exempted income:

(ii) That, in relation to the component of standard disallowance for administrative expenses, the Ld. AO has again taken ½% of Rs. 9,83,18,068/-, without excluding the investments not yielding exempt income.

Per contra, the Ld. DR for revenue made following submissions: 7.

(i) That, in Para 4.1 of assessment-order, the Ld. AO has noted that the assessee failed to submit any documentary evidence that the investment was made out of own funds. The Ld. CIT(A) has also, in Para 4.4 of impugned order of first-appeal, emphasized that the assessee failed to provide a cash flow statement or a “nexus” analysis during the assessment proceedings to prove that the interest-bearing funds were not diverted.

Page 7 of 11

(ii) That, the Ld. CIT(A) has noted that the reliance of assessee on Sintex Industries Ltd. (supra) was misplaced. Ld. DR referred the argument of Ld. AR (as noted by us in earlier para) and claimed that in assessee’s case, the interest-free funds were Rs. 18.23 crore whereas the investment was Rs. 9.83 crore, thus the assessee’s investment was as high as 50% of interest-free funds available whereas in Sintex Industries Ltd. (supra), the investment was just 10% of the interest- free funds. Therefore, the decision of Sintex Industries Ltd. (supra) will not apply.

(iii) That, the Ld. AO has noted in Para 4.11 & 4.12 of assessment-order that for the purpose of making investment, control of investment and purchase/sale of shares/mutual funds, the assessee has used its office and incurred expenses. Further, the assessee has to keep track of investments and the income earned from those investments, which again involves considerable attention. Therefore, the standard disallowance of ½% as per Rule 8D made by Ld. AO is justified.

8.

Having submitted thus, the Ld. DR submitted that the facts, figures and contention now being advanced by Ld. AR before the Bench had not been examined by the Ld. AO owing to the assessee's lack of effective representation during assessment proceedings. Accordingly, the Ld. DR submitted that the matter may be restored to the file of the Ld. AO for fresh adjudication.

Page 8 of 11

9. We have considered the rival contentions of both sides and perused the orders of the lower authorities as well as the material available on record to which our attention has been drawn. The core issue involved in the ground raised by the assessee is whether the disallowance of Rs. 74,14,455/- made u/s 14A read with Rule 8D of the Income-tax Rules, 1962, is sustainable on the facts and in the circumstances of the case?

10.

We find that the contentions of the assessee, as recorded in paras 6 and 6 above, involve factual aspects which require verification with reference to the Balance Sheet, Bank statements and details of individual Investments. In particular, the availability of interest-free funds, the source and timing of investments, and the nature of investments considered by the Ld. AO require examination before the disallowance can be determined in accordance with law. Further, the assessee has placed reliance upon documents forming part of the Paper-Book in support of its contentions. However, the relevant factual claims have not been examined by the lower authorities in the light of those documents. The Ld. DR has also prayed for restoring the matter to the file of Ld. AO. In these circumstances, and considering the submissions made by both sides, we deem it appropriate to restore the matter to the file of the Ld. AO for fresh adjudication. The Ld. AO shall examine the assessee's contention regarding the availability of interest- free funds and the source of investments, including the claim that substantial investments were made out of IPO proceeds received shortly

Page 9 of 11

before the investments. The Ld. AO shall also verify the nature of the investments included in the computation under Rule 8D and determine the amount of disallowance, if any, in respect of both interest expenditure and administrative expenditure, in accordance with the applicable provisions of law and in the light of judicial precedents as may be relied upon by the assessee. The assessee shall furnish the requisite details and documentary evidence and extend full cooperation in the fresh proceedings. The Ld. AO shall afford the assessee a reasonable opportunity of being heard before passing the order. We clarify that we have not expressed any final opinion on the merits of the assessee's claims, which shall be examined independently by the Ld. AO.

11.

In result, this appeal is allowed for statistical purposes.

Order pronounced in open court on 22/10/2026

Sd/- Sd/- (SUCHITRA KAMBLE) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat दिन ांक /Dated : 22/10/2026 Kishore/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT

Page 10 of 11

(4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPYAssistant Registrar Income Tax Appellate Tribunal Surat Bench, Surat

Page 11 of 11

More judgments on Section 14A

All 15,875 judgments and leading authorities on Section 14A →

Recent GST High Court judgments

Search GST case law →