South Indian Bank Limited Vs CIT
Civil Appeal No 9606 of 2011
Forum-Supreme Court of India
Date-9th September, 2021

Sub-Whether proportionate disallowance of interest paid by the banks is called for 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 when assessee had sufficient interest free own funds which were more than the investments made”

In a land mark judgement the Supreme Court of India allowed the appeal of the bank by settling the long drawn battle between the assessee and the department by holding that when where the assessee has mixed fund (made up partly of interest free funds and partly of interest- bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. The apex court considered catena of decisions including the case of CIT Vs Reliance Industries Limited(410 ITR 466), Maxopp Investments Limited Vs CIT(2018) 15 SCC 5239(SC). The Apex court laid emphasis on the fact that the law does not require separate accounts to be maintained for the earning of exempt and non exempt income and thus the argument of the department on these lines was brushed aside. Finally in Para 29 of the decision, the Court quoted from 18th Century Economist Adam Smith’s book -The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.”

This judgement will to put an end lot of disputes revolving around Section 14A.

Ramesh Patodia
11-09-2021