securities which yield tax free dividend and interest to assessee Banks when assessee had sufficient interest free own funds which were more than the investments made ? -SC

The Court of Accounts has dismissed appeals filed by the Department of Revenue against South Indian Bank's interpretation of the Income Tax Act. The issue involves whether proportionate disallowance of interest paid by the banks for investments in tax free bonds/securities is required under section 14A of the Act. If an assesses incurs any expenditure for earning tax-free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assesses is disentitled to deduction. High Courts have correctly interpreted the scope of Section 14A in their decisions favoring the assesses. The High Court endorsed the proportionate disallowance made by the Assessing Officer under Section 14A of the Income Tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by assesses.

The action in Honda Siel (supra) related to re-opening of assessment where full disclosure was not made. In absence of any statutory provision which compels assesses to maintain separate accounts for different types of funds, the judgment cited by the learned ASG will have no application.

SEPTEMBER 09,2021

SOUTH INDIAN BANKLTD. VERSUS COMMISSIONER OF INCOME    TAX