DEPUTY COMMISSIONER OF INCOME TAX , KOLKATA vs. SNOWFALL COMMOTRADE PVT LTD , KOLKATA

Being aggrieved and dissatisfied, the revenue has preferred the present appeal by raising the following grounds of appeal:

6. Contrary to that, the ld. AR supports the impugned order thereby submitting that it is a settled issue that in any case of disallowance made u/s 14A, it should be made only in respect of those investments which yielded dividend income during the relevant year. The ld. AR further submits that the payments for purchase of shares were made through banking channel and the details of purchase along with evidences for payment of purchase of shares in the form of bank statements were also furnished before the Assessing Officer. He submits that the Assessing Officer himself has stated that the assessee had paid more than fair market value hence the question of any disallowance should not be arisen. The ld. AR further submits that the assessee C.O. 85/Kol/2025 M/s Snowfall Commotrade Pvt. Ltd submitted the details such as PAN and address in respect of transaction of shares. His submission is that the Assessing Officer alleged in the assessment order that investment has been made in five unknown companies all having same address but did not make any enquiry in respect of the companies and the Assessing Officer has not mentioned under which provision the said disallowance has been made.

7. Upon hearing the submissions of the counsels of the respective parties, we have perused the facts of the case and find that it is an undisputed fact that during the year, the assessee earned Rs.6,04,443/- as ‘exempted dividend income’ and there was no material brought on record to demonstrate any nexus between the expenditure claimed and the exempt income earned by the assessee. It is also not in dispute that that disallowance u/s.14A can only be made in respect of those investments which have actually yielded exempt income during the relevant assessment year. We further find that during the relevant year the assessee made investments in unquoted shares with the companies namely Kanchan Stocks Pvt. Ltd., Stylo Commotrade Pvt. Ltd., Superb Finance Pvt. Ltd., Support Holdings Pvt. Ltd., & Unique Stocks Pvt. Ltd. During the proceedings, all the payments for purchase of shares were made through banking channel and the details of purchase of shares in the form of bank statements were also furnished before the Assessing Officer and in respect of transaction of shares, the assessee also furnished PAN and full address. We find that the Assessing Officer himself noted that the assessee paid more than the fair market value and the Assessing Officer has not mentioned under which provision the said disallowance has been made. We also find that the total income returned for Asst. Yr.2015-16 by these five companies are as under:

C.O. 85/Kol/2025 M/s Snowfall Commotrade Pvt. Ltd a) Kanchan Stocks Pvt. Ltd. … Rs.94,26,258.00 b) Stylo Commotrade Pvt. Ltd. … Rs.45,00,666.00 c) Superb Finance Pvt. Ltd. … Rs.93,03,582.00 d) Support Holdings Pvt. Ltd. … Rs.96,28,736.00 e) Unique Stocks Pvt. Ltd. … Rs.93,21,157.00 7.1 We have gone through the order passed by the ld. CIT(A) and find that the ld. CIT(A) has discussed everything and the relevant portion of the order of the ld. CIT(A) is as under:

“5. Discussion and appellate decision:- The issue-wise decision is as under:- (i) Decision on the issue of disallowance u/s.14A of the I.T. Act:- Submission filed by the appellant has duly considered in the light of the facts of the case. This is undisputed fact that during the year, the appellant has earned Rs.6,04,443/- as ‘exempted dividend income’. The assessee suo-moto has not disallowed any expenditure u/s.14A of the Act on the ground that it has not incurred any direct/indirect expenditure because dividends were generally received through ECS and no specific expenditure was incurred for collecting & deposing the dividend in Bank A/c. On perusal of the assessment order, it is observed that the Ld. A.O., without recording any satisfaction as required u/s.14A(2), proceeded straightaway to apply Rule 8D for computing disallowance. The A.O. failed to examine or record dissatisfaction with the assessee's claim regarding the expenditure incurred in relation to income not forming part of the total income. There is also no material brought on record to demonstrate any nexus between the expenditure claimed and the exempt income earned by the assessee. The Hon’ble Delhi High Court in CIT vs. Om Prakash Khaitan (376 ITR 390) and the Hon’ble Punjab & Haryana High Court in CIT vs. Abhishek Industries Ltd. (380 ITR 652) have categorically held that the recording of satisfaction by the A.O. is a sine qua non for invoking Section 14A and applying Rule 8D. In the absence of such satisfaction, the mechanical invocation of Rule 8D cannot be sustained.

Furthermore, it is now a settled law that disallowance u/s.14A can only be made in respect of those investments which have actually yielded exempt income during the relevant assessment year. This view is fortified by the decision of the Special Bench of the Hon’ble ITAT, Delhi in ACIT vs. Vireet Investment Pvt. Ltd. (165 ITD 27), wherein it was held that only those investments that have earned dividend income during the year can be considered for the purpose of disallowance u/s.14A. The assessee has submitted a working for disallowance u/s.14A, and based on such working, the amount disallowable comes to Rs.3,250.97. The same appears reasonable and in consonance with the judicial principles laid down. In view of the above facts and judicial pronouncements, the disallowance made by the A.O. u/s.14A is restricted to Rs.3,250.97 only. Hence, this ground of appeal is partly allowed. (ii) Decision on the issue of addition on account of bogus investment:- I have carefully considered the submissions made by the appellant, supporting documentation, including bank statements and details of share transactions. The appellant has demonstrated that payments for the purchase of shares were made through proper banking channels. The transaction is supported by evidence such as bank statements, share purchase details, PANs, and addresses of the concerned companies. These documents were submitted before the A.O., thereby establishing prima facie genuineness of the transaction. The A.O. invoked the valuation provisions under Rule 11UA to determine the fair market value of shares and proceeded to make an addition of Rs.6,16,71,539/-, treating it as a case of overvaluation. However, Rule 11UA is applicable in cases where Section 56(2) is attracted - specifically, where shares are received either without consideration or at a value less than the fair market value. In the present case, the appellant purchased shares at a value higher than the fair market value. Hence, the foundational requirement for invoking Section 56(2) and thereby Rule 11UA is absent. The application of these provisions in this scenario is legally untenable. The A.O. alleged that investments were made in companies with a common address and labelled the transaction as bogus. However, there is no record of any inquiry or independent verification being carried out by the A.O. to examine the existence, operations, or financials of the said companies. The addition appears to be based on mere suspicion, without C.O. 85/Kol/2025 M/s Snowfall Commotrade Pvt. Ltd factual support or investigation, which is not sustainable in law. Further, the A.O. has not identified any specific provision of the Act under which the disallowance is made. Furthermore, the addition was made under the head "business expenditure," while the appellant neither claimed the impugned amount as expenditure in the books of accounts nor in the computation of total income. As such, there exists no legal or accounting basis for the disallowance. Therefore, the addition appears to be made on conjectures and presumptions without affording the appellant an effective opportunity or without establishing contrary evidence. In view of the above facts and legal analysis, it is held that the addition of Rs.6,16,71,539/- made by the A.O. is without legal justification and is not sustained. The transaction of share purchase by the appellant is supported by adequate documentation and has not been rebutted by the A.O. with any contrary material. Therefore, the decision is made in favour of the appellant, and the disallowance is hereby deleted. Hence, the grounds of appeal on this issue are allowed. (iii) Decision on the issue of challenging of issue of notice u/s.143(2) of the I.T. Act:- The validity of a notice u/s.143(2) is governed by the provisions of the Income-tax Act and not by internal instructions alone. As long as the notice has been issued within the time limit prescribed u/s.143(2) and served properly, it cannot be deemed invalid merely due to procedural lapses or non-mention of guidelines from internal instructions. Hence the additional grounds raised by the appellant are dismissed..”

8. Going over the above discussion, we do not find any infirmity in the impugned order of the ld. CIT(A) and accordingly, the appeal filed by the revenue is hereby dismissed.

Kolkata, the 15th January, 2026.