Income Tax Act, 1961 – s.14A – Interpretation of – Assessees 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 – Whether proportionate disallowance of interest paid by the banks is called for u/s.14A 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 – Held: Proportionate disallowance of interest is not warranted, u/s.14A 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 – High Court erred in endorsing the proportionate disallowance made by the Assessing Officer u/s.14A to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by assessee – Though an assessee definitely has the obligation to provide full material disclosures at the time of filing of Income Tax Return but there is no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it.
Tax/Taxation – In taxation regime, there is no room for presumption and nothing can be taken to be implied. Allowing the appeals filed by the assessee, the Court HELD:1. In a situation 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. [Para 17][162-C-D]
2. The disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under Section 14A of the Income Tax Act, 1961. In other words, if investments in securities is made out of common funds and the assessee has available, non-interestbearing funds larger than the investments made in tax-free securities then in such cases, disallowance under Section 14A cannot be made. [Para 20][163-E]
3. 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 assessee. Though an assessee definitely has the obligation to provide full material disclosures at the time of filing of Income Tax Return but there is no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it. [Para 22][164-B-C; 164-E-F]
4. The Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. Reverting back to the situation here, the 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. [Paras 25, 26][167-B-C, E-F]
5. 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. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents have failed to substantiate their argument that assessee was required to maintain separate accounts. [Paras 27, 28][167-G; 168-B]
6. 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. Just as the Government does not wish for 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 generation of revenue. [Para 29][168D-F] HDFC Bank Ltd. v. Deputy Commissioner of Income Tax (2016) 383 ITR 529 (Bom) : 2016 SCC Online Bom 1109 ; CIT vs. Suzlon Energy Ltd. (2013) 354 ITR
630 (Guj) : 2013 SCC Online Guj 8613 ; CIT vs. Microlabs Ltd. (2016) 383 ITR 490 (Karn) : 2016 SCC Online Kar 8490 ; and CIT v. Max India Ltd. (2016) 388 ITR 81 (P & H) : 2016 SCC Online P&H 6788 – approved.
SA Builders v. CIT (2007) 1 SCC 781 : [2006] 10 Suppl. SCR 1077; and Honda Siel Power Products Ltd. v. DCIT (2012) 12 SCC 762 – distinguished.
Rajasthan State Warehousing Corporation v. CIT (2000) 242 ITR 450 SC : (2000) 3 SCC 126 : [2000]
1 SCR 1113 ; Commissioner of Income Tax (Large Tax Payer Unit) v. Reliance Industries Ltd. (2019) 410 ITR
466 SC : (2019) 20 SCC 478 ; Maxopp Investment Ltd. v. CIT (2018) 15 SCC 523 : [2018] 2 SCR 783 ; Godrej and Boyce Manufacturing Company Ltd.v. DCIT (2017) 7 SCC 421 : [2017] 3 SCR 602 ; and CIT v. Nawanshahar Central Cooperative Bank Ltd. (2007) 15 SCC 611 : (2007) 160 TAXMAN 48 (SC) – referred to.
Pr. CIT v. Bombay Dyeing and Mfg. Co. Ltd I.T.A. No.1225 of 2015 [Decision of Bombay High Court] and Pr. CIT, v. State Bank of Patiala 2017 (393) ITR
476 (P&H) – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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