Tax free investment made from mixed funds shall not attract disallowance u/s 14A
Facts of the case:
The assessee is a scheduled bank, and its major business activities involves investing in bonds, securities and shares from which it earns income by way of interest and dividend.
The assessee has not maintained any separate account for source of investments wherefrom tax-free income is earned.
The Assessing Officer made the proportionate disallowance of Interest attributable to funds invested to earn tax free income.
Provisions as applicable as per section 14A of the Income Tax Act, 1961
According to the provisions of section 14A of the Income Tax Act, 1961, where an Assessee has earned any income which does not get included in the total income, expenditure incurred in relation to such income shall not be allowed as deduction for the purpose of computing total income.
Decision of the Supreme Court:
In this decision, the Hon’ble Apex Court held that, disallowance for expenditure incurred in relation to exempt income shall not apply where tax free investments are made from mixed funds but the interest free funds are higher than the amount of tax-free investments made. While rendering its decision in this case, the Hon’ble Apex Court also referred to its earlier ruling in case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT, where it had held that were the investments are made from the interest free funds, it is necessary for the tax authorities to establish that expenditure has been incurred to earn such tax-free income.
Comments
This case settles the controversy around Section 14A disallowance in case where investments are made from mixed funds. So far as, the proportionate of interest free funds in the pool of mixed funds is more than the investments made, no disallowance shall get attracted under Section 14A of the Act. Further, the absence of requirement to make separate books of accounts puts the onus back on the income tax department to prove that funds used in making tax-free investments carry interest cost which should be disallowed accordingly.
