2021 Supreme(SC) 492

SUPREME COURT OF INDIA
SANJAY KISHAN KAUL, HRISHIKESH ROY, JJ.
SOUTH INDIAN BANK LTD. - APPELLANT
VERSUS
COMMISSIONER OF INCOME TAX - RESPONDENT
CIVIL APPEAL NO. 9606 TO 9615 OF 2011, 2963, 3367 OF 2012, CIVIL APPEAL NO. OF 2021,[ARISING OUT OF SLP(C) NO. 32761 OF 2018]
DECIDED ON : 09-09-2021

IMPORTANT POINTS
(1) 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 Assessee, exceeded their investments.
(2) In taxation regime, there is no room for presumption and nothing can be taken to be implied. Tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and Government should endeavour to keep it convenient and simple to achieve maximization of compliance.

Headnote:

(A) Income Tax Act, 1961 – Section 14A – Investments made in tax free bonds/ securities which yield tax free dividend and interest to assessee Banks – Scope of proportionate disallowance of interest paid by banks – Section 14A relates to expenditure incurred in relation to income which are not includable in Total Income and which are exempted from tax – Section 14A had been incorporated in Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for concerned assessee – Expenditure incurred towards interest paid on funds borrowed such as deposits utilized for investments in securities, bonds and shares which yielded tax-free income, cannot conveniently be related to a separate account, maintained for the purpose – Situation is same so far as overheads and other administrative expenditure of assessee – In absence of separate accounts for investment which earned tax free income, Assessing Officer made proportionate disallowance of interest attributable to funds invested to earn tax free income – Assessees in these appeals had earned substantial tax-free income by way of interest from tax free bonds and dividend income which also is tax free – Since actual expenditure figures are not available for making disallowance under Section 14A, Assessing Officer worked out proportionate disallowance by referring to average cost of deposit for relevant year – In respect of payment made out of mixed fund, it is assessee who has such right of appropriation and also right to assert from what part of fund a particular investment is made and it may not be permissible for Revenue to make estimation of a proportionate figure – If investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than investments made in tax-free securities then in such cases, disallowance under Section 14A cannot be made – Shares and securities held by a bank are stock in trade and all income received on such shares and securities must be considered to be business income – Section 14A would not be attracted to such income. (Paras 5, 7, 8, 17 and 25)

(B) Income Tax Act, 1961 – Section 14A – Investments made in tax free bonds/ securities which yield tax free dividend and interest to assessee Banks – Scope of proportionate disallowance of interest paid by banks – 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 Assessee, exceeded their investments – In taxation regime, there is no room for presumption and nothing can be taken to be implied – Tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and Government should endeavour to keep it convenient and simple to achieve maximization of compliance – Just as Government does not wish for avoidance of tax equally it is responsibility of 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 generation of revenue. (Paras 27 and 29)

Facts of the case:

Question of law to be answered in the present batch of appeals is on interpretation of Section 14A of the Income Tax Act as to 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. Question therefore to be answered is whether Section 14A, enables 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 tax-free income.

Findings of Court:

Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, 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.

Result : Appeals allowed.