TaxTMI 
TaxTMI 
2010 (10) TMI 1068
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....ourse of banking business they are also engaged in the business of investment in bonds, securities and in shares which earn the assessees interest from such securities and bonds and also dividend on investments in shares of companies and from units of U.T.I. etc., which are tax free. Section 14A was introduced to the Income-tax Act by Finance Act, 2001 with retrospective effect from 1-4-1962. This provision provide for disallowance of expenditure incurred by the assessee in relation to income which does not form part of the total income. In other words, if the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns income that is free from tax, assessee is not entitled to deduction of such interest or other expenditure. Even though the provision was brought to the statute with retrospective effect from 1.4.1962, the retrospectivity is neutralised by a proviso later introduced by Finance Act, 2002 with effect from 11.5.2001 where under reassessment, rectification of assessment etc. were prohibited for any assessment year beginning on or before 1st April, 2001. In other words, assessments for any....
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.... the Assessing Officer found out the average cost of deposit of the relevant year. Since the assessee's investment on tax free bonds and shares during the relevant year was Rs. 13.06 crores, the Assessing Officer worked out 8.72% of this as the interest expenditure incurred by the assessee for earning tax free income. The disallowance was accordingly worked out at Rs. 1,13,88,320/-. In other words, for earning a total tax free income under two heads of Rs. 2,48,25,538/-, the Assessing Officer found that the assessee would have suffered an interest liability of Rs. 1,13,88,320/- and, therefore, this amount was disallowed under section 14A of the Act. Even though in the case of some of the assessees the Assessing Officer has even determined proportionate administrative cost and disallowed the same, in the case of this assessee for this assessment year we do not find any such disallowance. In other words, disallowance under section 14A is limited to interest alone. Since the issue raised has to be decided with reference to the scope of section 14A, we extract hereunder the said section with sub-clauses (2) and (3) and the proviso: "Section 14A. (1) For the purposes of computing....
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....ble. Another decision cited by the Revenue in support of their contention is the recent decision of the Supreme Court in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 192 Taxman 211 / 326 ITR 1 . Both counsel appearing for assessee-Banks relied on decision of the Supreme Court in CIT v. Indian Bank Ltd. [1965] 56 ITR 77 and contended that where separate accounts are not available with the Bank with regard to expenditure incurred on earning tax free income, there is no scope for disallowance under section 14A at all. According to both counsel for the assessees proportionate disallowance is called for only under sub-section (2) read with Rule 8D of the Income-tax Rules which came into force from 2007-08 onwards and the same cannot be applied for any earlier assessment year. We do not think much reliance can be placed on the decision of the Supreme Court in the case of Indian Bank Ltd. (supra) , because the said decision was rendered much prior to the introduction of section 14A and the purpose of section 14A itself is to get over judgments of the Supreme Court and High Courts declaring assessee's eligibility for deduction of business expenditure incurred for earning the i....
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....aintained separate accounts or not. Considering the significant amount of tax free income earned by the assessee-Banks for all the years involved, we are of the view that the investments for earning tax free income is substantial and if assessment is made without making disallowance under section 14A, the same will render a distorted figure of taxable income which is not permissible under the Act. If the assessee does not maintain separate accounts, it is for the Assessing Officer to estimate the same by adopting a rational basis. In principle, we, therefore, uphold the disallowance made by the Assessing Officer under section 14A. We, therefore, uphold the order of the Tribunal impugned in I.T.A. No.40/2010 wherein they have followed a Special Bench decision of the Bombay Bench of the Tribunal in I.T.O v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 [2008] 26 SOT 603 and reverse the orders of the Tribunal and that of the first appellate authority in all other seven appeals. 4. The next question to be considered is whether the method adopted by the Assessing Officer in estimating average cost of deposit and making the disallowance by working out average interest cost on t....