2021 (9) TMI 566 - SC - Income Tax

Disallowance u/s 14A - Exempted Income - proportionate disallowance of interest paid by the banks for investments made in tax free bonds/ securities which yield tax free dividend and interest to assessee Banks - whether assessee had sufficient interest free own funds which were more than the investments made? - whether Section 14A, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessee like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income? - HELD THAT:- Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular - when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular.

The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.

The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel [2011 (7) TMI 275 - SC ORDER] to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance - Decided in favour of the assessee.