1.
DISALLOWANCE U/S 14A
SOUTH INDIAN BANK LTD.
V.
COMMISSIONER OF INCOME-TAX
[2021] 130 TAXMANN.COM 178 (SC)
.

2.
LEGENDS USED
AO Assessing Officer
CIT Commissioner of Income Tax
CIT(A) Commissioner of Income Tax (Appeals)
HC High Court
ITAT Income Tax Appellate Tribunal
SC Supreme Court
SLR Statutory liquidity Ratio

3.
PRESENTATION SCHEMA
Facts of the Case Issues & Orders of the Case Contention of the Parties
Observations by Honourable SC Conclusion

4.
FACTS OF THE CASE

5.
GENERAL FACTS
Assessee
• The assessees are scheduled banks and in course of their banking business
• Engage in the business of investments in bonds, securities and shares which earns
interest and dividend on the same.
Subject
mater
• Scheduled banks earned income from investments made in tax-free securities.
• Interest free funds available with assessees were larger than investments made in said
securities.
Facts
• The case pertains to AY 2011-12
• Separate accounts were not maintained by assessee for investments and other
expenditures incurred for earning tax-free income.
• Therefore, proportionate disallowance on expenditure could not be made u/s 14A

6.
ISSUES AND ORDERS OF THE
CASE

7.
ISSUES
Whether Section 14A enables the
Department to make disallowance
on expenditure incurred for earning
tax free income in cases where
assessees, do not maintain separate
accounts for the investments and
other expenditures incurred for
earning the tax-free income.
If the investments are made out of mixed
income, and there are sufficient interest free
funds to meet the investment, whether it
will be presumed that the investments were
made fully out of interest free funds.

8.
ORDERS
• The appeal was rejected
stating that the assessee
had not maintained
separate account.
CIT(A)
• It allowed the appeal in
favour of assessee and
held that the disallowance
is not warranted.
ITAT
• The appeal was rejected
on the grounds as held by
CIT.
High Court

9.
CONTENTIONS OF THE
PARTIES

10.
CONTENTIONS OF ASSESSEE
Interest free funds are
sufficient to meet the
investment made in
tax-free securities.
Interest paid by the
assessee on its
borrowings should not
be considered as
expenditure relating to
tax-free income
Assessee has the right
to decide from which
part of the fund, the
investment is made
and revenue is not
permitted to estimate
the proportionate
part.
Therefore, no
disallowance would be
attracted u/s 14A of
the Act.

11.
CONTENTIONS OF REVENUE
Actual expenditure figures
are not available for making
disallowance u/s 14A
No separate accounts are
maintained for making
investment in tax-free
securities and purchase are
made from the mixed
account
Proportionate disallowance
of interest attributable to
funds invested shall be
calculated according to the
average cost of the deposit.

12.
OBSERVATIONS BY
HONOURABLE SC

13.
OBSERVATIONS
As the assessee bank is having surplus reserves, the investments were not made out
of interest bearing funds alone
When interest free funds available with assessee are sufficient to meet the
investment made, the investments are presumed to be made out of such funds.
There is no separate law which obligates the assessee to maintain separate
accounts for different kind of funds.
Assessee bank is having indivisible business, and according to the nature of such
business, the investments made in tax-free securities would be in the nature of
stock-in-trade.

14.
FINAL RULING
.
14A disallowance is not maintainable
merely on the failure of Assessee
Proportionate disallowance is not
warranted where interest free funds
available exceeds the tax free
investments
The appeals are answered against the
revenue and in favour of assessee.

15.
CONCLUSION

16.
KEY TAKEAWAYS
Section 14A, does not enable the Department
to make disallowance on expenditure
incurred for earning tax free income where
separate accounts were not maintained for
the investments and expenditures incurred
for earning the tax-free income as no laws
mandate that.
In 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 tax payer and the Government should
endeavour to keep it convenient and simple
to achieve maximization of compliance

17.
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