T.C.A.No.1016 of 2019 IN HIGH COURT OF JUDICATURE AT MADRAS DATED : 11.09.2020 CORAM HONOURABLE MR.JUSTICE T.S.SIVAGNANAM and HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN T.C.A.No.1016 of 2019 Commissioner of Income Tax, Circle 1, Salem. .. Appellant Versus M/s.Tamil Nadu State Transport Corporation (Salem) Limited, 12, Ramakrishna Road, Salem 636 007, PAN AACT7678J Respondent Prayer:- Tax Case Appeal filed under Section 260-A of Income Tax Act, 1961, against order of Income Tax Appellate Tribunal, ''B'' Bench, Chennai dated 05.07.2019 in I.T.A.No.814/Chny/2018. For Appellant : Ms.S.Premalatha For Respondent :Mr.G.Baskar 1/6 http://www.judis.nic.in T.C.A.No.1016 of 2019 JUDGMENT [Order of Court was made by T.S.SIVAGNANAM, J.] This appeal, filed by Revenue, under Section 260A of Income Tax Act, 1961 ('the Act' for brevity) is directed against order dated 05.07.2019 passed by Income Tax Appellate Tribunal ('the Tribunal' for brevity), Bench 'B' Chennai in I.T.A.No.814/Chny/2018 for assessment year 2012-13. appeal was admitted on 12.12.2019 with following Substantial Questions of Law: 1. Whether on facts and circumstances of case, Tribunal was right in not considering fact that assessee has incurred interest expenditure and made investment more than its reserves and surpluses? 2. Whether on facts and circumstances of case Tribunal was right in confirming assessee's claim that interest expended for earning exempt income has to be allowed as business expenditure? 2. It is not in dispute by Revenue that Substantial Question of Law framed for consideration in this appeal was considered in T.C.A.No.732 and 733 of 2018 dated 07.07.2020 (Commissioner of Income 2/6 http://www.judis.nic.in T.C.A.No.1016 of 2019 Tax, Corporate Circle III(1), Chennai Vs. M/s.Tidal Park Limited (T.C.A.No.732 and 733 of 2018 dated 07.07.2020) and answered against Revenue and it is relevant to extract following from said decision: 6. Further, Bombay High Court in case of Godrej & Boyce Manufacturing Company Limited, Mumbai Vs. Deputy Commissioner of Income Tax, reported in (2010) 328 ITR 0081, has elaborated procedure to be followed by Assessing Officer under Section 14A in following terms. following principles would emerge from s. 14A : (a) mandate of s. 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of total income of assessee; (b) sec. 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) principle of apportionment of expenses is widened by s. 14A to include even apportionment of expenditure between taxable and non-taxable income of indivisible business; (d) basic principle of taxation is to tax net income. This principle applies even for purposes of s. 14A and expenses towards non-taxable income must be excluded; (e) once proximate cause for disallowance is established which is relationship of expenditure with income which does not form part of total income disallowance has to be effected. All expenditure incurred in relation to income 3/6 http://www.judis.nic.in T.C.A.No.1016 of 2019 which does not form part of total income under provisions of Act has to be disallowed under s. 14A. Income which does not formpart of total income is broadly adverted to as exempt income as abbreviated appellation. Under sub-s. (2), AO is required to determine amount of expenditure incurred by assessee in relation to such income which does not form part of total income under Act in accordance with such method as may be prescribed. method, having regard to meaning of expression 'prescribed' in s. 2(33), must be prescribed by rules made under Act. What merits emphasis is that jurisdiction of AO to determine expenditure incurred in relation to such income which does not form part of total income, in accordance with prescribed method, arises if AO is not satisfied with correctness of claim of assessee in respect of expenditure which assessee claims to have incurred in relation to income which does not form part of total income. Moreover, satisfaction of AO has to be arrived at, having regard to accounts of assessee. Hence, sub-s. (2) does not ipso facto enable AO to apply method prescribed by rules straightaway without considering whether claim made by assessee in respect of expenditure incurred in relation to income which does not form part of total income is correct. AO must, in first instance, determine whether claim of assessee in that regard is correct and determination must be made having regard 4/6 http://www.judis.nic.in T.C.A.No.1016 of 2019 to accounts of assessee. satisfaction of AO must be arrived at on objective basis. It is only when AO is not satisfied with claim of assessee, that legislature directs him to follow method that may be prescribed. Sub-s. (3) of s. 14A provides for application of sub-s. (2) also to situation where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under Act. 7. above legal position has been rightly followed by tribunal while deciding assessee's case and therefore, rightly dismissed appeal filed by revenue. Thus, we find that Substantial Question of Law No.2 has to be answered against revenue and in favour of assessee. 3. Following said decision, Tax Case Appeal is dismissed and Substantial Questions of Law are answered against Revenue. No costs. (T.S.S.,J) (V.B.S.,J) 11.09.2020 sk Index: Yes / No Internet: Yes / No T.S.SIVAGNANAM, J. AND V.BHAVANI SUBBAROYAN, J. 5/6 http://www.judis.nic.in T.C.A.No.1016 of 2019 sk To Commissioner of Income Tax, Circle 1, Salem. T.C.A.No.1016 of 2019 11.09.2020 6/6 http://www.judis.nic.in Commissioner of Income-tax, Circle 1, Salem v. Tamil Nadu State Transport Corporation (Salem) Limited