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TMI Blog2022 (2) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, disallowance under Section 14A cannot be made. Also 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. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessee. Thus we remand the matter to the Assessing Officer to decide the issues raised herein afresh, taking note of the observations made in the Supreme Court decision as referred to above and pass appropriate orders, within a period of three months from the date of receipt of a copy of this judgment - T.C.A.Nos.509 to 511 of 2010 - - - Dated:- 8-2-2022 - Hon'ble Mr. Justice R. Mahadevan And Hon'ble Mr. Justice J. Sathya Narayana Prasad For the Appellant in all T.C.As : Mr.Subbaraya Aiyar For the Respondent in all T.C.As : Mr.M.Swaminathan, SSC and Mrs.V.Pushpa, JSC COMMON JUDGMENT R.MAHADEVAN, J. These tax case appeals have been filed by the appellant / Revenue, challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14A is applicable and hence, the decision of the Special Bench cited supra is to be followed by the Assessing Officer. Since the CIT (Appeals) himself has restored the matter to the Assessing Officer, we direct the Assessing Officer to consider the decision of Madras High Court in the assessee's own case reported in 273 ITR 510 and the decision of Special Bench in the case cited supra and then decide the issue according to law, of course, after giving effective opportunity of being heard to the assessee. The assessee in also directed to produce necessary details that may be required by the Assessing Officer for deciding the issue. Thus, it is apparent from the above extract that the Tribunal remanded the matter to the Assessing officer for fresh consideration of the issues raised herein, in the light of the decisions of this court as well as the Special Bench cited supra. 4.At this juncture, the learned counsel appearing for both sides jointly submitted that the issues involved herein deserve to be answered in favour of the assessee, as per the decision of the Supreme Court in South Indian Bank Ltd. v. Commissioner of Income-tax [(2021) 130 taxmann.com 178(SC)] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies then, there is a presumption that investment which has been made in tax free securities, has come out of interest free funds available with assessee. In such situation Section 14A of the Act would not be applicable. Similar views have been expressed by other High Courts in CIT v. Suzlon Energy Ltd. [(2013) 33 taxmann.com 157/ 215 Taxman 272/ 354 ITR 630 (Guj)], CIT v. Microlabs Ltd. [(2017) 79 taxmann.com 365 / (2016) 383 ITR 490 (Kar)] and CIT v. Max India Ltd. [(2016) 75 taxmann.com 268 / 388 ITR 81 (Punj Har.)]. Mr. S Ganesh the learned Senior Counsel while citing these cases from the High Courts have further pointed out that those judgments have attained finality. On reading of these judgments, we are of the considered opinion that the High Courts have correctly interpreted the scope of Section 14A of the Act in their decisions favouring the assessees. 20. Applying the same logic, 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 Act. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income .. The following was written explaining the scope of Section 14-A(1): 41. In the first instance, it needs to be recognised that as per Section 14-A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act . Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. Adverting to the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which merits consideration is Godrej and Boyce Manufacturing Company Ltd. V. DCIT [(2017) 1 SCC 421]. Here the assessee had access to adequate interest free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of total income of the Assessee. Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench observed that for disallowance of expenditure incurred in earning an income, it is a condition precedent that such income should not be includible in total income of assessee. This Court accordingly concluded that for attracting provisions of Section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi s judgment reads as follow: 36. what cannot be denied is that the requirement for attracting the provisions of Section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income . 25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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