SOUTH INDIAN BANK LTD. versus COMMISSIONER OF INCOME TAX on 9 September 2021

154

SUPREME COURT REPORTS

[2021] 6 S.C.R.

ASOUTH INDIAN BANK LTD.

v.

COMMISSIONER OF INCOME TAX

(Civil Appeal No. 9606 of 2011)

BSEPTEMBER 09, 2021

[SANJAY KISHAN KAUL AND HRISHIKESH ROY, JJ.]

Income Tax Act, 1961 – s.14A – Interpretation of – Assesseesare scheduled banks and in course of their banking business, theyalso engage in the business of investments in bonds, securities andCshares which earn the assessees, interests from such securities andbonds as also dividend income on investments in shares ofcompanies and from units of UTI etc. which are tax free – Whetherproportionate disallowance of interest paid by the banks is calledfor u/s.14A for investments made in tax free bonds/ securities whichDyield tax free dividend and interest to assessee Banks when assesseehad sufficient interest free own funds which were more than theinvestments made – Held: Proportionate disallowance of interestis not warranted, u/s.14A for investments made in tax free bonds /securities which yield tax free dividend and interest to AssesseeBanks in those situations where, interest free own funds availableEwith the Assessee, exceeded their investments – High Court erredin endorsing the proportionate disallowance made by the AssessingOfficer u/s.14A to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintainedby assessee – Though an assessee definitely has the obligation toFprovide full material disclosures at the time of filing of Income TaxReturn but there is no corresponding legal obligation upon theassessee to maintain separate accounts for different types of fundsheld by it.

Tax/Taxation – In taxation regime, there is no room forGpresumption 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 interestbearing funds) and payment is made out of that mixed fund, theH

investment must be considered to have been made out of theinterest free fund. To put it another way, in respect of paymentmade out of mixed fund, it is the assessee who has such rightof appropriation and also the right to assert from what part ofthe fund a particular investment is made and it may not bepermissible for the Revenue to make an estimation of aproportionate figure. [Para 17][162-C-D]

2. The disallowance would be legally impermissible for theinvestment made by the assessees in bonds/shares usinginterest free funds, under Section 14A of the Income Tax Act,1961. In other words, if investments in securities is made outof common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-freesecurities then in such cases, disallowance under Section 14Acannot be made. [Para 20][163-E]

3. The High Court endorsed the proportionatedisallowance made by the Assessing Officer under Section 14Aof the Income Tax Act to the extent of investments made intax-free bonds/securities primarily because, separate account wasnot maintained by assessee. Though an assessee definitely hasthe obligation to provide full material disclosures at the time offiling of Income Tax Return but there is no corresponding legalobligation upon the assessee to maintain separate accounts fordifferent types of funds held by it. [Para 22][164-B-C; 164-E-F]

4. The Central Board of Direct Taxes (CBDT) had issuedthe Circular no. 18 of 2015 dated 02.11.2015, which had analyzedand then explained that all shares and securities held by a bankwhich are not bought to maintain Statutory Liquidity Ratio (SLR)are its stock-in-trade and not investments and income arisingout of those is attributable, to business of banking. Revertingback to the situation here, the Revenue does not contend thatthe Assessee Banks had held the securities for maintaining theStatutory Liquidity Ratio (SLR), as mentioned in the circular. Inview of this position, when there is no finding that theinvestments of the Assessee are of the related category, taximplication would not arise against the appellants, from the saidcircular. [Paras 25, 26][167-B-C, E-F]

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156SUPREME COURT REPORTS

A5. The proportionate disallowance of interest is notwarranted, under Section 14A of Income Tax Act for investmentsmade in tax free bonds/ securities which yield tax free dividendand interest to Assessee Banks in those situations where,interest free own funds available with the Assessee, exceededtheir investments. The above conclusion is reached becauseBnexus has not been established between expenditure disallowedand earning of exempt income. The respondents have failed tosubstantiate their argument that assessee was required tomaintain separate accounts. [Paras 27, 28][167-G; 168-B]

6. In taxation regime, there is no room for presumptionCand nothing can be taken to be implied. The tax an individualor a corporate is required to pay, is a matter of planning for atax payer and the Government should endeavour to keep itconvenient and simple to achieve maximization of compliance.Just as the Government does not wish for avoidance of taxequally it is the responsibility of the regime to design a taxDsystem for which a subject can budget and plan. If proper balanceis achieved between these, unnecessary litigation can be avoidedwithout compromising on generation of revenue. [Para 29][168- D-F]

HDFC Bank Ltd. v. Deputy Commissioner of IncomeETax (2016) 383 ITR 529 (Bom) : 2016 SCC OnlineBom 1109 ; CIT vs. Suzlon Energy Ltd. (2013) 354 ITR630 (Guj) : 2013 SCC Online Guj 8613 ; CIT vs.Microlabs Ltd. (2016) 383 ITR 490 (Karn) : 2016SCC Online Kar 8490 ; and CIT v. Max India Ltd.(2016) 388 ITR 81 (P & H) : 2016 SCC Online P&HF6788 – approved.

SA Builders v. CIT (2007) 1 SCC 781 : [2006] 10Suppl. SCR 1077; and Honda Siel Power Products Ltd.v. DCIT (2012) 12 SCC 762 – distinguished.

GRajasthan State Warehousing Corporation v. CIT(2000) 242 ITR 450 SC : (2000) 3 SCC 126 : [2000]1 SCR 1113 ; Commissioner of Income Tax (Large TaxPayer Unit) v. Reliance Industries Ltd. (2019) 410 ITR466 SC : (2019) 20 SCC 478 ; Maxopp Investment Ltd.v. CIT (2018) 15 SCC 523 : [2018] 2 SCR 783 ;HGodrej and Boyce Manufacturing Company Ltd.v.

SOUTH INDIAN BANK LTD. v. COMMISSIONEROF INCOME TAX

DCIT (2017) 7 SCC 421 : [2017] 3 SCR 602 ; andCIT v. Nawanshahar Central Cooperative Bank Ltd.(2007) 15 SCC 611 : (2007) 160 TAXMAN 48 (SC)– referred to.

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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) ITR476 (P&H) – referred to.

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Case Law Reference

[2000] 1 SCR 1113referred toPara 6C(2019) 20 SCC 478referred toPara 18(2016) 383 ITR 529 (Bom)approvedPara 19(2013) 354 ITR 630 (Guj)approvedPara 19(2016) 383 ITR 490 (Karn)approvedPara 19D(2016) 388 ITR 81 (P & H)approvedPara 19[2006] 10 Suppl. SCR 1077distinguishedPara 21(2012) 12 SCC 762distinguishedPara 22[2018] 2 SCR 783referred toPara 23E[2017] 3 SCR 602referred toPara 24(2007) 15 SCC 611referred toPara 252017 (393) ITR 476 (P&H)referred toPara 25

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CIVIL APPELLATE JURISDICTION : Civil Appeal No.9606of 2011.

From the Judgment and Order dated 21.10.2010 of the HighCourt of Kerala at Ernakulam in ITA No.730 of 2009.

With

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Civil Appeal No. 5610 of 2021, Civil Appeal Nos.9609, 9610, 9611,9615, 9608, 9612, 9614, 9613, 9607 of 2011 and Civil AppealNos.3367,2963 of 2012.

Vikramjit Banerjee, ASG, S. Ganesh, Jehangir Mistri, RanjitKumar, Joseph Markose, Arijit Prasad, Sr. Advs., S. Sukumaran, Anand H

ASukumar, Bhupesh Pathak, Ms. Meera Mathur, Sandeep Karhail,G. M. Kawoosa, Ashok Mathur, M. P. Vinod, E. M. S. Anam, PratapVenugopal, Ms. Surekha Raman, Akhil Abraham Roy, Vijay Valsan,M/s K J John And Co., Sidharth Sinha, Sanosh Kumar, Raj BahadurYadav, A. V. Rangam, A. Raghunath, B. V. Balaram Das, Mrs. AnilKatiyar, H. S. Parihar, Kuldeep S. Parihar, Ms. Ikshita Parihar, Advs.Bfor the appearing parties.

The Judgment of the Court was delivered by HRISHIKESH ROY, J.

1. Leave granted in SLP(C) No. 32761/2018 for analogousCconsideration with the related appeals.

2. The question of law to be answered in the present batch ofappeals is on interpretation of Section 14A of the Income Tax Act (forshort “the Act”) and the same reads as follows:

D“Whether proportionate disallowance of interest paid by the banksis called for under Section 14A of Income Tax Act forinvestments made in tax free bonds/ securities which yield taxfree dividend and interest to assessee Banks when assessee hadsufficient interest free own funds which were more than theinvestments made”E

3. While common arguments have been advanced by the learnedcounsel for the parties, to place the legal issues in the appropriateperspective, the relevant facts are adverted from the Civil Appeal No.9606 of 2011 (South Indian Bank Ltd. Vs. CIT, Trichur), for the purposeof this judgment.F

4. The assessees are scheduled banks and in course of theirbanking business, they also engage in the business of investments inbonds, securities and shares which earn the assessees, interests fromsuch securities and bonds as also dividend income on investments inshares of companies and from units of UTI etc. which are tax free.

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5. Chapter IV of the Act provides for the Heads of Income forcomputation of Total Income. In Section 14, the various incomes areclassified under Salaries, Income from house property, Profit & Gainsof business or profession, Capital Gains & Income from other sources.The Section 14A relates to expenditure incurred in relation to incomeHwhich are not includable in Total Income and which are exempted from tax. No taxes are therefore levied on such exempted income. TheSection 14A had been incorporated in the Income Tax Act to ensurethat expenditure incurred in generating such tax exempted income isnot allowed as a deduction while calculating total income for theconcerned assessee.

6. Section 14A was introduced to the Income Tax Act by theFinance Act, 2001 with retrospective effect from 01.04.1962. The newsection was inserted in aftermath of judgment of this Court in the caseof Rajasthan State Warehousing Corporation Vs. CIT[1]. The saidSection provided for disallowance of expenditure incurred by theassessee in relation to income, which does not form part of their totalincome. As such if the assessee incurs any expenditure for earning taxfree income such as interest paid for funds borrowed, for investmentin any business which earns tax free income, the assessee is disentitledto deduction of such interest or other expenditure. Although the provisionwas introduced retrospectively from 01.04.1962, the retrospective effectwas neutralized by a proviso later introduced by the Finance Act, 2002with effect from 11.05.2001 whereunder, re-assessment, rectificationof assessment was prohibited for any assessment year, up-to theassessment year 2000-2001, when the proviso was introduced, withoutmaking any disallowance under Section 14A. The earlier assessmentswere therefore permitted to attain finality. As such the disallowanceunder Section 14A was intended to cover pending assessments and forthe assessment years commencing from 2001-2002. It may be notedthat in the present batch of appeals, we are concerned withdisallowances made under Section 14A for assessment yearscommencing from 2001-2002 onwards or for pending assessments.

7. At outset it is clarified that none of the assessee banksamongst the appellants, maintained separate accounts for theinvestments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actualexpenditure incurred by the assessee. In other words, the expenditureincurred towards interest paid on funds borrowed such as deposits utilizedfor 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 same so far as overheadsand other administrative expenditure of the assessee.

1 [(2000) 242 ITR 450 SC] / (2000) 3 SCC 126.

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A8. In absence of separate accounts for investment which earnedtax free income, the Assessing Officer made proportionate disallowanceof interest attributable to the funds invested to earn tax free income.The assessees in these appeals had earned substantial tax-free incomeby way of interest from tax free bonds and dividend income which alsois tax free. It is manifest that substantial expenditure is incurredBfor earning tax free income. Since actual expenditure figures are notavailable for making disallowance under Section 14A, the AssessingOfficer worked out proportionate disallowance by referring to theaverage cost of deposit for the relevant year. The CIT (A) hadconcurred with the view taken by the Assessing Officer.C9. The ITAT in Assessee’s appeal against CIT(A) considered theabsence of separate identifiable funds utilized by assessee for makinginvestments in tax free bonds and shares but found that assessee bankis having indivisible business and considering their nature of business,the investments made in tax free bonds and in shares would thereforeDbe in nature of stock in trade. The ITAT then noticed that assesseebank is having surplus funds and reserves from which investments canbe made. Accordingly, it accepted the assessee’s case that investmentswere not made out of interest or cost bearing funds alone. Inconsequence, it was held by the ITAT that disallowance under Section14A is not warranted, in absence of clear identity of funds.E

10. The decision of the ITAT was reversed by the High Courtby acceptance of the contentions advanced by the Revenue in theirappeal and accordingly the Assessee Bank is before us to challengethe High Court’s decision which was against the assessee.F11. Since, the scope of Section 14A of the Act will requireinterpretation, the Section with sub-clauses (2) and (3) along with theproviso is extracted hereinbelow: - “14A. Expenditure incurred in relation to income notincludible in total income - (1) For the purposes of computingGthe total income under this Chapter, no deduction shall be allowedin respect of expenditure incurred by the assessee in relation toincome which does not form part of the total income under thisAct.

(2) The Assessing Officer shall determine the amount ofHexpenditure incurred in relation to such income which does not form part of the total income under this Act in accordance withsuch method as may be prescribed, if the Assessing Officer,having regard to the accounts of the assessee, is not satisfiedwith the correctness of the claim of the assessee in respect ofsuch expenditure in relation to income which does not form partof the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relationto a case where an assessee claims that no expenditure has beenincurred by him in relation to income which does not form partof the total income under this Act:

Provided that nothing contained in this section shall empower theAssessing Officer either to reassess under section 147or passan order enhancing the assessment or reducing a refund alreadymade or otherwise increasing the liability of the assessee undersection 154, for any assessment year beginning on or before the1st day of April, 2001.”

12. The sub-Section (2) and (3) were introduced to the mainsection by the Finance Act, 2006 with effect from 01.04.2007.

13. The question therefore to be answered is whether Section14A, enables the Department to make disallowance on expenditureincurred for earning tax free income in cases where assessees like thepresent appellant, do not maintain separate accounts for the investmentsand other expenditures incurred for earning the tax-free income.

14. We have heard Mr. S. Ganesh, Mr. S.K. Bagaria, Mr. JehangirMistri and Mr. Joseph Markose, learned Senior Counsel appearing forthe appellants. Also heard Mr. Vikramjit Banerjee, learned AdditionalSolicitor General and Mr. Arijit Prasad, learned Senior Counsel on behalfof the respondent/Revenue.

15. The appellants argue that the investments made in bonds andshares should be considered to have been made out of interest freefunds which were substantially more than the investment made andtherefore the interest paid by the assessee on its deposits and otherborrowings, should not be considered to be expenditure incurred inrelation to tax free income on bonds and shares and as a corollary, thereshould be no disallowance under Section 14A of the Act. On the otherhand, the counsel for the revenue refers to the reasoning of the CIT(A)and of the High Court to project their case.

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A16. As can be seen, the contention on behalf of the assessee wasrejected by the CIT(A) as also by the High Court primarily on theground that the assessee had not kept their interest free funds inseparate account and as such had purchased the bonds/shares frommixed account. This is how a proportionate amount of the interest paidBon the borrowings/deposits, was considered to have been incurred toearn the tax-free income on bonds/shares and such proportionateamount was disallowed applying Section 14A of the Act.

17. In a situation where the assessee has mixed fund (made uppartly of interest free funds and partly of interest- bearing funds) andCpayment is made out of that mixed fund, the investment must beconsidered to have been made out of the interest free fund. To put itanother way, in respect of payment made out of mixed fund, it is theassessee who has such right of appropriation and also the right to assertfrom what part of the fund a particular investment is made and it maynot be permissible for the Revenue to make an estimation of aDproportionate figure. For accepting such a proposition, it would be helpfulto refer to the decision of the Bombay High Court in Pr. CIT v. BombayDyeing and Mfg. Co. Ltd[2]where the answer was in favour of theassessee on the question, whether the Tribunal was justified in deletingthe disallowance under Section 80M of the Act on the presumption thatEwhen the funds available to the assessee were both interest free andloans, the investments made would be out of the interest free fundsavailable with the assessee, provided the interest free funds weresufficient to meet the investments. The resultant SLP of the Revenuechallenging the Bombay High Court judgment was dismissed both onmerit and on delay by this Court. The merit of the above proposition ofFlaw of the Bombay High Court would now be appreciated in thefollowing discussion.

18. In the above context, it would be apposite to refer to a similardecision in Commissioner of Income Tax (Large Tax Payer Unit) Vs.Reliance Industries Ltd[3]where a Division Bench of this CourtGexpressly held that where there is finding of fact that interest free fundsavailable to assessee were sufficient to meet its investment it will bepresumed that investments were made from such interest free funds.

2 I.T.A. No.1225 of 2015H3 (2019) 410 ITR 466 SC/ (2019) 20 SCC 478.

19. In HDFC Bank Ltd. Vs. Deputy Commissioner of IncomeTax[4], the assessee was a Scheduled Bank and the issue therein alsopertained to disallowance under Section 14A. In this case, the BombayHigh Court even while remanding the case back to Tribunal foradjudicating afresh observed (relying on its own previous judgment insame assessee’s case for a different Assessment Year) that, if assesseepossesses sufficient interest free funds as against investment in tax freesecurities then, there is a presumption that investment which has beenmade in tax free securities, has come out of interest free funds availablewith assessee. In such situation Section 14A of the Act would not beapplicable. Similar views have been expressed by other High Courts inCIT Vs. Suzlon Energy Ltd.[5], CIT Vs. Microlabs Ltd.[6] and CIT Vs.Max India Ltd.[7]Mr. S Ganesh the learned Senior Counsel while citingthese cases from the High Courts have further pointed out that thosejudgments have attained finality. On reading of these judgments, weare of the considered opinion that the High Courts have correctlyinterpreted the scope of Section 14A of the Act in their decisionsfavouring the assessees.

20. Applying the same logic, the disallowance would be legallyimpermissible for the investment made by the assessees in bonds/sharesusing interest free funds, under Section 14A of the Act. In other words,if investments in securities is made out of common funds and theassessee has available, non-interest-bearing funds larger than theinvestments made in tax- free securities then in such cases, disallowanceunder Section 14A cannot be made.

21. On behalf of Revenue Mr. Arijit Prasad, the learned SeniorAdvocate refers to SA Builders v. CIT[8]where this Court ruled on issueof disallowance in relation to funds lent to sister concern out of mixedfunds. The issue in SA Builders is pending consideration before thelarger bench of this Court in SLP (C) No. 14729 of 2012 titled asAddl. CIT v. Tulip Star Hotels Ltd. The counsel therefore, argues thatthere is no finality on the issue of disallowance, when mixed funds areused. On this aspect, since the issue is pending before a larger Bench,comments from this Bench may not be appropriate. However, at the

4 (2016) 383 ITR 529 (Bom) / 2016 SCC Online Bom 1109

5 (2013) 354 ITR 630 (Guj)/ 2013 SCC Online Guj 8613

6 (2016) 383 ITR 490 (Karn)/ 2016 SCC Online Kar 8490

7 (2016) 388 ITR 81 (P & H) / 2016 SCC Online P&H 6788

8 [(2007) 1 SCC 781]

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Asame time it is necessary to distinguish the facts of present appealsfrom those in SA Builders/Tulip Star Hotels Ltd. In that case, loanswere extended to sister concern while here the Assessee- Banks haveinvested in bonds/securities. The factual scenario is different anddistinguishable and therefore the issue pending before the larger Benchshould have no bearing at this stage for the present matters.B22. The High Court herein endorsed the proportionatedisallowance made by the Assessing Officer under Section 14A of theIncome Tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained byassessee. On this aspect we wanted to know about the law whichCobligates the assessee to maintain separate accounts. However, thelearned ASG could not provide a satisfactory answer and instead reliedupon Honda Siel Power Products Ltd. v. DCIT[9]to argue that it isthe responsibility of the assessee to fully disclose all material facts. Thecited judgment, as can be seen, mainly dealt with re-opening ofDassessment in view of escapement of income. The contention ofdepartment for re-opening was that the assessee had earned tax-freedividend and had claimed various administrative expenses for earningsuch dividend income and those (though not allowable) was allowedas expenditure and therefore the income had escaped assessment. Onthis, suffice would be to observe that the action in Honda Siel (supra)Erelated to re-opening of assessment where full disclosure was not made.An assessee definitely has the obligation to provide full materialdisclosures at the time of filing of Income Tax Return but there is nocorresponding legal obligation upon the assessee to maintain separateaccounts for different types of funds held by it. In absence of anyFstatutory provision which compels the assessee to maintain separateaccounts for different types of funds, the judgment cited by the learnedASG will have no application to support the Revenue’s contention againstthe assessee.

23. It would now be appropriate to advert in some detail toGMaxopp Investment Ltd. v. CIT[10]. This case interestingly is relied byboth sides’ counsel. Writing for the Bench, Justice Dr. A.K. Sikri notedthe objective for incorporation of Section 14A in the Act in the followingwords: - 9 [(2012) 12 SCC 762]H10 (2018) 15 SCC 523

“3…………. The purpose behind Section 14-A of the Act, bynot permitting deduction of the expenditure incurred in relationto income, which does not form part of total income, is to ensurethat the assessee does not get double benefit. Once a particularincome itself is not to be included in the total income and isexempted from tax, there is no reasonable basis for giving benefitof deduction of the expenditure incurred in earning such anincome.... . .”

The following was written explaining the scope of Section 14- A(1):

“41. In the first instance, it needs to be recognised that as perSection 14-A(1) of the Act, deduction of that expenditure is notto be allowed which has been incurred by the assessee “in relationto income which does not form part of the total income underthis Act”. Axiomatically, it is that expenditure alone which hasbeen incurred in relation to the income which is includible in totalincome that has to be disallowed. If an expenditure incurred hasno causal connection with the exempted income, then such anexpenditure would obviously be treated as not related to theincome that is exempted from tax, and such expenditure wouldbe allowed as business expenditure. To put it differently, suchexpenditure would then be considered as incurred in respect ofother income which is to be treated as part of the total income.”

Adverting to the law as it stood earlier, this Court rejected thetheory of dominant purpose suggested by the Punjab & Haryana HighCourt and accepted the principle of apportionment of expenditure onlywhen the business was divisible, as was propounded by the Delhi HighCourt.

Finally adjudicating the issue of expenditure on shares held asstock-in-trade, the following key observations were made by JusticeSikri:

“ 50. It is to be kept in mind that in those cases where sharesare held as “stock-in-trade”, it becomes a business activity ofthe assessee to deal in those shares as a business proposition.Whether dividend is earned or not becomes immaterial. In fact,it would be a quirk of fate that when the investee companydeclared dividend, those shares are held by the assessee, though AB

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Athe assessee has to ultimately trade those shares by selling themto earn profits. The situation here is, therefore, different fromthe case like Maxopp Investment Ltd. [Maxopp InvestmentLtd. v. CIT, 2011 SCC OnLine Del 4855 : (2012) 347 ITR 272]where the assessee would continue to hold those shares as itwants to retain control over the investee company. In that case,Bwhenever dividend is declared by the investee company thatwould necessarily be earned by the assessee and the assesseealone. Therefore, even at the time of investing into those shares,the assessee knows that it may generate dividend income as welland as and when such dividend income is generated that wouldCbe earned by the assessee. In contrast, where the shares areheld as stock- in-trade, this may not be necessarily a situation.The main purpose is to liquidate those shares whenever the shareprice goes up in order to earn profits.... .”

The learned Judge then considered the implication of Rule 8DDof the Rules in the context of Section 14-A(2) of the Act and clarifiedthat before applying the theory of apportionment, the Assessing Officermust record satisfaction on Suo Moto disallowance only in those caseswhere, the apportionment was done by the assessee. The following isrelevant for the purpose of this judgment:

51. ……………….It will be in those cases where the assesseeEin his return has himself apportioned but the AO was notaccepting the said apportionment. In that eventuality, it will haveto record its satisfaction to this effect. ........ .”

24. Another important judgment dealing with Section 14Adisallowance which merits consideration is Godrej and BoyceFManufacturing Company Ltd. V. DCIT[11]. Here the assessee hadaccess to adequate interest free funds to make investments and theissue pertained to disallowance of expenditure incurred to earn dividendincome, which was not forming part of total income of the Assessee.Justice Ranjan Gogoi writing the opinion on behalf of the Division BenchGobserved that for disallowance of expenditure incurred in earning anincome, it is a condition precedent that such income should not beincludible in total income of assessee. This Court accordingly concludedthat for attracting provisions of Section 14A, the proof of fact regardingsuch expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi’s judgment reads asfollow:

“36. ……… what cannot be denied is that the requirement forattracting the provisions of Section 14-A (1) of the Act is proofof the fact that the expenditure sought to be disallowed/deductedhad actually been incurred in earning the dividend income… “

25. Proceeding now to another aspect, it is seen that the CentralBoard of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015dated 02.11.2015, which had analyzed and then explained that all sharesand securities held by a bank which are not bought to maintain StatutoryLiquidity Ratio (SLR) are its stock-in-trade and not investments andincome arising out of those is attributable, to business of banking. ThisCircular came to be issued in the aftermath of CIT Vs. NawanshaharCentral Cooperative Bank Ltd.[12]wherein this Court had held thatinvestments made by a banking concern is part of their bankingbusiness. Hence the income earned through such investments wouldfall under the head Profits & Gains of business. The Punjab andHaryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala[13]while adverting to the CBDT Circular, concluded correctly that sharesand securities held by a bank are stock in trade, and all income receivedon such shares and securities must be considered to be business income.That is why Section 14A would not be attracted to such income.

26. Reverting back to the situation here, the Revenue does notcontend that the Assessee Banks had held the securities for maintainingthe Statutory Liquidity Ratio (SLR), as mentioned in the circular. In viewof this position, when there is no finding that the investments of theAssessee are of the related category, tax implication would not ariseagainst the appellants, from the said circular.

27. The aforesaid discussion and the cited judgments advise thisCourt to conclude that the proportionate disallowance of interest is notwarranted, under Section 14A of Income Tax Act for investments madein tax free bonds/ securities which yield tax free dividend and interestto Assessee Banks in those situations where, interest free own fundsavailable with the Assessee, exceeded their investments. With this 12 [(2007) 15 SCC 611] / [(2007) 160 TAXMAN 48 (SC)]

13 2017 (393) ITR 476 (P&H)

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Aconclusion, we unhesitatingly agree with the view taken by the learnedITAT favouring the assessees.

28. The above conclusion is reached because nexus has not beenestablished between expenditure disallowed and earning of exemptincome. The respondents as earlier noted, have failed to substantiateBtheir argument that assessee was required to maintain separateaccounts. Their reliance on Honda Siel (Supra) to project such anobligation on the assessee, is already negated. The learned counsel forthe revenue has failed to refer to any statutory provision which obligatethe assessee to maintain separate accounts which might justifyproportionate disallowance.C

29. In the above context, the following saying of Adam Smith inhis seminal work – The Wealth of Nations may aptly be quoted:

“The tax which each individual is bound to pay ought to becertain and not arbitrary. The time of payment, the mannerDof payment, the quantity to be paid ought all to be clear andplain to the contributor and to every other person.”

Echoing what was said by the 18[th] century economist, it needsto be observed here that in taxation regime, there is no room forpresumption and nothing can be taken to be implied. The tax anEindividual or a corporate is required to pay, is a matter of planning fora tax payer and the Government should endeavour to keep it convenientand simple to achieve maximization of compliance. Just as theGovernment does not wish for avoidance of tax equally it is theresponsibility of the regime to design a tax system for which a subjectcan budget and plan. If proper balance is achieved between these,Funnecessary litigation can be avoided without compromising ongeneration of revenue.