SOUTH INDIAN BANK LTD. versus COMMISSIONER OF INCOME TAX

Citation: [2021] 6 S.C.R. 154 · Decided: 09-09-2021 · Supreme Court of India · Bench: SANJAY KISHAN KAUL · Disposal: Appeal(s) allowed

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Judgment (excerpt)

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SUPREME COURT REPORTS
[2021] 6 S.C.R.
SOUTH INDIAN BANK LTD.
v.
COMMISSIONER OF INCOME TAX
(Civil Appeal No. 9606 of 2011)
SEPTEMBER 09, 2021
[SANJAY KISHAN KAUL AND HRISHIKESH ROY, JJ.]
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
   [2021] 6 S.C.R. 154
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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-interest-
bearing 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]
SOUTH INDIAN BANK LTD. v. COMMISSIONER
OF INCOME TAX
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SUPREME COURT REPORTS
[2021] 6 S.C.R.
5. The proportionate disallowance of interest is not
warranted, under Section 14A of Income Tax Act for investments
made in 

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