In a relief to South Indian Bank, the Apex Court held that the Section 14A Disallowance is not maintainable merely on the failure of Assessee to Maintain Separate Accounts For Expenditures Incurred For Tax-Free Income.
The assessees, South Indian Bank are scheduled banks and in course of their banking business, they also engage in the business of investments in bonds, securities, and shares which earn the assessees, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI, etc. which are tax-free.
The assessee clarified that none of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee. In other words, the expenditure incurred towards interest paid on funds borrowed such as deposits utilized for investments in securities, bonds, and shares which yielded the tax-free income, cannot conveniently be related to a separate account, maintained for the purpose. The situation is the same so far as overheads and other administrative expenditure of the assessee.
The question raised was whether Section 14A enables the Department to make disallowance on expenditure incurred for earning tax-free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income.
The court heard Mr. S. Ganesh, Mr. S.K. Bagaria, Mr. Jehangir Mistri, and Mr. Joseph Markose learned Senior Counsel appearing for the appellants and Mr. Arijit Prasad on behalf of Revenue.
The division bench of Justice Sanjay Kishan Kaul and Justice Hrishikesh Roy concluded 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.
“Echoing what was said by the 18th-century economist, it needs to be observed here that in the taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay is a matter of planning for a taxpayer and the Government should endeavor to keep it convenient and simple to achieve the maximization of compliance. Just as the Government does not wish for the avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on the generation of revenue,” the court noted.
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