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South Indian Bank Ltd. v. Commissioner of Income Tax

Civil Appeal · 2021 INSC 462Decided 9 Sept 2021
Civil Appeal No. 9606 of 2011
Justice Sanjay Kishan Kaul · Justice Hrishikesh Roy

Background

Several banks earned tax-free income (interest on tax-free bonds and dividends) alongside their regular taxable banking business, without keeping separate bank accounts for the funds used to make these tax-free investments. The tax department disallowed a proportionate share of the banks' interest expenditure under Section 14A of the Income Tax Act, reasoning that some borrowed/interest-bearing funds must have financed the tax-free investments. The Income Tax Appellate Tribunal ruled for the banks, but the High Court reversed in favour of the Revenue.

Decision Breakdown

The Supreme Court held that where an assessee has "mixed funds" (partly interest-free, partly interest-bearing) and its own interest-free funds are larger than the tax-free investments made, the law presumes the investments came from the interest-free funds, so no proportionate disallowance under Section 14A is warranted. The Court found no statutory obligation on an assessee to maintain separate accounts for different types of funds, rejecting the Revenue's argument that the absence of such accounts justified disallowance. Relying on its own and various High Courts' precedents (including Maxopp Investment and Godrej & Boyce), the Court ruled in favour of the banks and allowed their appeals.

Lesson Learnt

A taxpayer with sufficient interest-free funds of its own does not need to segregate its bank accounts to protect tax-free investment income from disallowance: the law presumes such investments were made from the interest-free funds when they are adequate to cover them.

Official source (sci.gov.in)View Judgment (PDF)

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