Commissioner of Income Tax, Thiruvananthapuram vs State Bank of Travancore

C.N. Ramachandran Nair, J.—The question raised in the Revenue''s appeal is whether the Tribunal was justified in cancelling disallowance of expenditure incurred by the assessee by way of interest paid on funds borrowed for making investments where from tax free income is received.

On going through the Tribunal''s order impugned in the appeal what we notice is that the Tribunal has discussed only the applicability of Section 14A of IT Act for the free bonds purchased to meet Statutory Liquidity Ratio (SLR) by the respondent Bank. However, the total disallowance pertains to investments not only in tax free bonds, but for funds raised for purchase of shares of companies, the income wherefrom is exempt from tax u/s 10(23G) of the I.T. Act. The issue is squarely covered by our judgment reported in Commissioner of Income Tax Vs. Catholic Syrian Bank Ltd., . However counsel for the respondent/assessee submits that the issue raised herein is not covered in the above Judgment because in the assessee''s case investment in tax free bonds is to meet the requirement of maintenance of SLR. However, we are unable to accept this contention because investment considered and decided by us in the above decision was in tax free bonds which is the investment made by the respondent/assessee herein also. Normally tax free bonds are purchased by banks only to meet part of SLR requirements. Even though it is not so stated in the above decided case, investments made by those banks also would have been to meet the SLR requirements. In any case, we do not think that the object or purpose of the investment affects operation of section 14A of the I.T. Act inasmuch as any expenditure incurred for earning tax free income is not an allowable deduction by virtue of operation of the said section. So much so, we hold that even though purchase of tax free bonds is for meeting the SLR requirements, interest and other expenditures incurred on the borrowals for investment in tax free bonds is to be disallowed.

We therefore allow the appeal filed by the Revenue by reversing the order of the Tribunal and that of the First Appellate Authority and by restoring disallowance u/s 14A of expenditure incurred on borrowals for investments in tax free bonds and other investments wherefrom the income earned is not taxable.