INCOME TAX OFFICER, CHENNAI vs. PRINCE HOLDINGS MADRAS (P) LTD, CHENNAI

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ITA 3930/CHNY/2025Status: DisposedITAT Chennai05 May 2026AY 2017-1812 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the AO mechanically applied Rule 8D without recording satisfaction that the assessee's claim of no expenditure for earning exempt income was incorrect. The penalty was vitiated by non-application of mind and lack of speaking order.

What were the facts?

The assessee company, engaged in investment business, reported NIL income but had significant book profit. The AO disallowed expenses under Section 14A read with Rule 8D for earning exempt dividend income. Subsequently, the AO levied penalty under Section 270A for underreporting and misreporting of income.

What were the issues?

Whether the penalty under Section 270A for underreporting and misreporting of income was rightly levied when the disallowance under Section 14A was based on mechanical application of Rule 8D without proper satisfaction.

Which sections of the Income-tax Act were involved?

Section 14A,Section 270A,Section 143(3),Section 274

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & SHRI S.R.RAGHUNATHA

Hearing: 25.03.2026Pronounced: 05.05.2026

आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the Revenue & Cross-Objection filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter referred to as “the Ld.CIT(A)”), Delhi, dated 07.11.2024 deleting penalty levied u/s.270A of the Income Tax Act,

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 2 :: 1961 (hereinafter referred to as "the Act”) for the Assessment Year (hereinafter referred to as "AY”) 2017-18.

2.

At the outset, the Revenue’s appeal, is noted to be delayed by ‘326’ days, for which, the ITO has filed an affidavit seeking condonation of delay. Having gone through the contents of the affidavit and application for condoning the delay, we are of the view that the delay was caused not due to any deliberate omission on part of the department. Consequently, the delay of ‘326’ days in filing of the appeal stands condoned and the appeal filed by the Revenue is taken up for hearing on its merits. And CO of assessee is in support of the impugned action of Ld CIT(A).

3.

The brief facts of the case are that the assessee company is an investor engaged in the business of investment in shares, immovable property and consultancy. The assessee filed its return of income (RoI/ITR) on 30.10.2017 returning income at ₹ NIL under the normal computation, and shown book profit of ₹19,15,30,008/-. The RoI was selected for scrutiny under CASS. The, AO inter-alia, noted that the assessee had earned dividend income of ₹2.55 Crs., hence he invoked provisions of Sec.14A r.w.r.8D of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules‘) and computed the disallowance for earning of exempt income at ₹12,09,31,090/- by passing assessment order u/s.143(3) of the Act dated 16.12.2019 assessing the total loss at

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 3 :: ₹6,99,85,418/-. On appeal, the Ld.CIT(A) is noted to have given partial relief to the assessee by restricting the disallowance at ₹2.55 Crs in place of ₹12,09,31,090/- by appellate order dated 01.10.2021. Meanwhile, the AO is noted to have issued notice dated 16.12.2019 u/s.274 r.w.s.270A of the Act and levied penalty for “underreporting and misreporting of income”. And the AO is noted to have levied penalty u/s.270A of the Act by order dated 23.08.2021 of ₹7,57,12,472/- u/s.270A of the Act by holding as under:

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 4 ::

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 5 ::

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 6 :: 4. Aggrieved, the assessee is noted to have preferred an appeal before the Ld.CIT(A) who is noted to have cancelled/deleted the same by holding as under:

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 7 :: 5. Aggrieved, the Revenue is in appeal before this Tribunal.

6.

Heard both parties and perused the material available on record; it is noted that the assessee received dividend income/exempt income of ₹2.55 Crs from its investment in equity shares of M/s India Cement, which investment was made by the assessee more than a decade before. When the AO asked the assessee about incurring of expense for earning the exempt income of ₹2.55 Crs., assessee submitted that it didn’t incur any expense for earning the same. The AO taking note of the investments made by the assessee in the shares of M/s.EWS Finance & Investments Pvt. Ltd., M/s. Roopa Investment Pvt. Ltd., & M/s.Anna Investment Pvt. Ltd., assumed that the assessee must have incurred expenditure in relation to investments which yielded income which is not chargeable to tax and hence, he applied the method prescribed for it under Rule 8D and determined disallowance u/s.14A of the Act read with Rule 8D at ₹12,09,31,090/-, which disallowance has been restricted to ₹2.55 Crs by Ld CIT(A) I.e. exempt income earned by the assessee. In this regard, we first of all note that the AO in the assessment order has not recorded his ‘satisfaction’ that the claim made by the assessee that there was no expenditure incurred for earning exempt income was incorrect. In other words, the AO has invoked Rule 8D mechanically without recording his satisfaction that the assessee’s claim of incurring no expenditure for earning exempt income was incorrect. Hence, the

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 8 :: mechanical application of Rule 8D as done in this case for making disallowance u/s.14A of the Act itself is fragile. However, since assessee has not appealed before this Tribunal on the quantum disallowance u/s 14A read with Rule 8D, we need not dilate on the same. The aforesaid observation is made in order to appreciate the foundational fact on the basis of which penalty has been initiated/levied, which is found to be not on a strong foundation. Having said so, we note that the AO has determined the expenditure related to income not includable in total income [by applying Rule 8D] by not accepting the assessee’s assertion that there was no expenditure attributable to earning of exempt income. The AO accepted the assessee’s contention there was no expense incurred as per Clause (2)(i) of Rule 8D, but computed annual average of monthly average as on 31.03.2017 at ₹12,09,31,090/- and thus, estimated 1% of the expenditure attributable to earning exempt income as per Clause 2(ii) of Rule 8D at ₹12,09,31,090/-, which disallowance was restricted by the Ld.CIT(A) at ₹2.55 Crs. [i.e. exempt income earned by the assessee]. From a perusal of the computation made by the AO [applying the method prescribed under Rule 8D], it is seen that the AO has taken the details furnished by the assessee, which are discernable from the financials filed by the assessee. Hence, the action of the AO to levy penalty u/s.270A of the Act alleging assessee to have “underreported income in consequence of misreporting thereof” by referring to sub-clause (a) of Sub-Section (9)

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 9 :: of Section 270A of the Act i.e. ‘misrepresentation or suppression of facts” is per-se misplaced, and hence can’t be accepted.

7.

A reading of the penalty order supra, shows that the AO has merely reproduced relevant portions of provisions of Section 14A and Rule 8D and stated that he has disallowed ₹12,09,31,090/-; and thereafter reproduced Section 270A(9)(a) of the Act and then states that “this issue is fully governed by this provisions of Section 270A of the Act as the assessee has misrepresented the facts by claiming expenses against exempt income”. Such a finding of the AO is incomprehensible on the given facts of the case in hand. In the given facts, it is not understood ‘as to how’ the assessee misrepresented the facts, when the assessee’s claim is that it hasn’t incurred any expense to earn the exempt income. The AO’s case to levy penalty is not that assessee despite incurring of expense for earning the dividend income, has suppressed the same and mis- represented before the AO that no expenditure was incurred for earning such exempt income. Rather, the AO disallowed the expenses on estimation with the aid of Rule 8D. In this regard, the assessee has brought to AO’s notice that the dividend income was from its investment made in shares of M/s India Cements decades back, and hasn’t incurred any expenditure to earn it. Hence finding of the AO that assessee has misrepresented/suppressed the facts is baseless. In this context, we note from perusal of the assessment order that the assessee’s consistent stand

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 10 :: before the AO was that it didn’t incur any expenditure for earning exempt income. In such an event, it was incumbent upon the AO to follow the exercise as prescribed in Section 14A(2) i.e. after examining the books of accounts of the assessee record his dis-satisfaction with the correctness of the claim of the assessee, before estimating disallowance u/s 14A, invoking the method prescribed under Rule 8D. Such an exercise is sine qua non for applying the method prescribed under Rule 8D, which exercise the AO hasn’t carried out in the present case while making disallowances in this case. Moreover, while applying Rule 8D(2)(ii) as noted supra, investment figures are culled out of the financial statement filed by the assessee. Hence, the question of misrepresentation of facts doesn’t arise in the first place unless AO spells out which facts assessee misrepresented. Before levy of penalty for misrepresentation/suppression of facts, the AO ought to have examined the books of account of assessee and given a clear finding of fact that despite incurring expenditure to earn exempt income, assessee misrepresented before him that it didn’t incur any expenditure to earn the exempt income. The AO has not given any such finding which vitiates the levy of penalty. Further, a perusal of the penalty order shows total non-application of mind. Hence the penalty levied by the AO can’t be sustained for the reason that the order is not a speaking order. The AO has made more or less a computerized approach while levying penalty, which action cannot be countenanced. It should be

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 11 :: borne in mind that reason is the heart-beat of every judgment, without the same, it becomes life less (refer Ram Phal v. State of Haryana & Ors reported in [2009] (3) SCC 258). The AO’s action of levy of penalty without giving any reason is arbitrary exercise of power and abuse of process of law. Application of mind is demonstrated by disclosure of mind, and disclosure of mind is demonstrated by recording reasons (refer Maya Devi v. Raj Kumari Batra reported in (2010) 9 SCC 486, failure to give reasons amounts to denial of justice (refer Mangalore Ganesh Beedi Works v. CIT AIR 2005 SC 1308. Therefore, in the light of the aforesaid discussion, we find that penalty levied by the AO suffers from the infirmity of non-application of mind.

8.

Further, it is noted that the Ld.CIT(A) has relied on the decision of the Hon’ble Madras High Court in the case of Prem Brothers infrastructures LLP (supra) wherein it was held that when the assessee had furnished all details of transaction relating to disallowance made u/s.14A of the Act and the AO as well as the assessee had used the same details to arrive at different quantum of disallowance, it can’t be held that the assessee has misreported its income. In this case, it is noted that the assessee had furnished all details of transaction relating to disallowance made u/s.14A of the Act and the AO has calculated the disallowance by using the same details as furnished by the assessee to disallow more than ₹12 Crs. whereas the assessee had asserted to have not incurred any

ITA No.3930/Chny/2025 & CO No.14/Chny/2026 (AY 2017-18) M/s. Prince Holdings Madras (P) Ltd. :: 12 :: expenditure which claim of the assessee has not been found by the AO after examining the books as required u/s.14A (2) of the Act as incorrect and has merely applied Rule 8D to estimate the disallowance. Hence, considering the totality of the facts of the case, we find that the action of the Ld.CIT(A) deleting the penalty levied by the AO u/s.270A of the Act doesn’t require any interference and hence it is upheld.

9.

In the result, appeal filed by the Revenue as well as the Cross- Objection filed by the assessee are dismissed.

Order pronounced on the 05th day of May, 2026, in Chennai. Sd/- Sd/- (एस. आर. रघुनाथा) (एबी टी. वक�) (S.R.RAGHUNATHA) (ABY T. VARKEY) लेखा सद�/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai, �दनांक/Dated: 05th May, 2026. TLN आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF

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