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IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE PUSHPA SATHYANARAYANAT.C.A.No.299 of 2019 The Commissioner of Income Tax,Chennai. .. AppellantVersus M/s.PVP Ventures Ltd,KRM Centre, 9[th] Floor,No.2, Harirngton Road, Chepet,Chennai 600 031PAN AAACS310IP .. Respondent Prayer:- Tax Case Appeal filed under Section 260-A of the IncomeTax Act, 1961, against the order of the Income Tax AppellateTribunal, ''B'' Bench, Chennai dated 19.09.2018 inI.T.A.No.593/Chny/2018 preferred against the order of theCommissioner of Income Tax(Appeals)-3, chennai-34, dated30.11.2017 made in ITA.No.269/16-17/A3, against the order of theDeputy Commissioner of Income Tax Corporate Circle 5(2), Chennai34 dated 14.12.2016, made in PAN.No. For Appellant : Ms.R.HemalathaSenior Standing counsel For Respondent:Mr.R.Sivaraman [Order of the Court was made by T.S.SIVAGNANAM, J.] This appeal, filed by the Revenue, under Section 260A of theIncome Tax Act, 1961 ('the Act' for brevity) is directed againstthe order dated 19.09.2018 passed by the Income Tax AppellateTribunal Bench 'B', Chennai ('the Tribunal' for brevity), inI.T.A.No.593/Chny/20185 for the assessment year 2014-15. Theappeal was admitted on 04.06.2019 with the following SubstantialQuestion of Law: 1/5 https://hcservices.ecourts.gov.in/hcservices/ ''Whether on the facts and in the circumstancesof the case, the Tribunal was right in restricting theamount of disallowance made under Section 14A readwith Rule 8D to the extent o exempt income earnedduring the assessment year especially when the Statutedoes not provide for any such restriction and theassessing officer is bound to apply the provision ofsection 14A read with Rule 8D?'' 2. We have elaborately heard Ms.R.Hemalatha, learned SeniorStanding counsel for the appellant / Revenue and Mr.R.Sivaraman,learned counsel for the respondent / assessee. The Tribunalconsidered the correctness of the order passed by theCommissioner of Income Tax (Appeals)-3, Chennai, dated13.11.2017 by which the CIT (A) partly allowed the assessee'sappeal and restricted the disallowance to the extent of exemptincome by taking note of the earlier decision of the ChennaiBench of the Tribunal in Royala Corporation Limited inITA.No.908/MDS/2015 and the Revenue challenging the said orderbefore the Tribunal, which confirmed the order passed by the CIT(A), the correctness of which has been questioned in this appealand therefore the substantial question of law to be decided inthis appeal. 3. We did not go much into the issue as the same has beenconsidered by the Division Bench of this Court, for which one ofus (Hon'ble Mr.Justice T.S.SIVAGNANAM) is a party in the case ofCommissioner of Income Tax, Corporate Circle – III(1), Chennai-600 034 VS. M/s.Tidel Park Limited, No.4, Rajiv Gandhi Salai,Taramani, Chennai – 600 013 (T.C.A.No.732 and 733 of 2018) dated07.07.2020. The Substantial Question of Law framed forconsideration in this appeal is identical to the question no.2framed for consideration in the above decision. The Appeals weredismissed and the Substantial Question of Law was decidedagainst the Revenue with the following reason: 4. We take up for consideration the substantialquestion of law no.2 referred above. The tribunal inparagraph No.8.1, held that the Assessing Officer isnot justified in making excessive disallowance and thatthe CIT(A) rightly restricted the disallowance to theextent the dividend income declared by the assessee. Infact the tribunal records that the revenue could notcontrovert the findings rendered by the High Court ofDelhi in the case of Joint Investments Private LimitedVs. CIT, reported in (2015) 372 ITR 0694 (Del). 2/5 3/5 decision the Division Bench of the Delhi High Courtreferred the decision in the case of Commissioner ofIncome Tax VI Vs. Taikisha Engineering India Limited[ITA No.115/2014 decided on 25.11.2014] 4. We take up for consideration the substantialquestion of law no.2 referred above. The tribunal inparagraph No.8.1, held that the Assessing Officer isnot justified in making excessive disallowance and thatthe CIT(A) rightly restricted the disallowance to theextent the dividend income declared by the assessee. Infact the tribunal records that the revenue could notcontrovert the findings rendered by the High Court ofDelhi in the case of Joint Investments Private LimitedVs. CIT, reported in (2015) 372 ITR 0694 (Del). 2/5 3/5 decision the Division Bench of the Delhi High Courtreferred the decision in the case of Commissioner ofIncome Tax VI Vs. Taikisha Engineering India Limited[ITA No.115/2014 decided on 25.11.2014] 6. Further, the Bombay High Court in the case ofGodrej & Boyce Manufacturing Company Limited, MumbaiVs. Deputy Commissioner of Income Tax, reported in(2010) 328 ITR 0081, has elaborated the procedure to befollowed by the Assessing Officer under Section 14A inthe following terms. “The following principles would emerge from s.14A : (a) the mandate of s. 14A is to preventclaims for deduction of expenditure in relationto income which does not form part of the totalincome of the assessee; (b) sec. 14A(1) isenacted to ensure that only expenses incurredin respect of earning taxable income areallowed; (c) the principle of apportionment ofexpenses is widened by s. 14A to include eventhe apportionment of expenditure betweentaxable and non-taxable income of anindivisible business; (d) the basic principleof taxation is to tax net income. Thisprinciple applies even for the purposes of s.14A and expenses towards non-taxable incomemust be excluded; (e) once a proximate causefor disallowance is established which is therelationship of the expenditure with incomewhich does not form part of the total income—adisallowance has to be effected. Allexpenditure incurred in relation to incomewhich does not form part of the total incomeunder the provisions of the Act has to bedisallowed under s. 14A. Income which does notform part of the total income is broadlyadverted to as exempt income as an abbreviatedappellation. Under sub-s. (2), the AO isrequired to determine the amount of expenditureincurred by an assessee in relation to suchincome which does not form part of the totalincome under the Act in accordance with suchmethod as may be prescribed. The method, havingregard to the meaning of the expression'prescribed' in s. 2(33), must be prescribed byrules made under the Act. What merits emphasisis that the jurisdiction of the AO to determinethe expenditure incurred in relation to such income which does not form part of the totalincome, in accordance with the prescribedmethod, arises if the AO is not satisfied withthe correctness of the claim of the assessee inrespect of the expenditure which the assesseeclaims to have incurred in relation to incomewhich does not form part of the total income.Moreover, the satisfaction of the AO has to bearrived at, having regard to the accounts ofthe assessee. Hence, sub-s. (2) does not ipsofacto enable the AO to apply the methodprescribed by the rules straightaway withoutconsidering whether the claim made by theassessee in respect of the expenditure incurredin relation to income which does not form partof the total income is correct. The AO must, inthe first instance, determine whether the claimof the assessee in that regard is correct andthe determination must be made having regard tothe accounts of the assessee. The satisfactionof the AO must be arrived at on an objectivebasis. It is only when the AO is not satisfiedwith the claim of the assessee, that thelegislature directs him to follow the methodthat may be prescribed. Sub-s. (3) of s. 14Aprovides for the application of sub-s. (2) alsoto a situation where the assessee claims thatno expenditure has been incurred by him inrelation to income which does not form part ofthe total income under the Act.7. The above legal position has been rightly followed bythe tribunal while deciding the assessee's case andtherefore, rightly dismissed the appeal filed by therevenue. Thus, we find that the Substantial Question ofLaw No.2 has to be answered against the revenue and infavour of the assessee. sk https://hcservices.ecourts.gov.in/hcservices/ ToThe Commissioner of Income TaxChennai. 2.The Income Tax Appellate TribunalB bench Chennai 3.The Deputy Commissioner of Income TaxCorporate Circle 5(2) Chennai-34 +1 cc to Mr.T.Ravikumar Advocate sr28529 T.C.A.No.299 of 2019ssv(co)aa21/10/2020 5/5