In Brief
Scheduled banks invested in tax-free bonds and securities while holding both interest-free and interest-bearing funds. The Revenue sought disallowance of interest paid, claiming proportionate amounts were incurred for earning tax-exempt income. The Supreme Court held that where an assessee has sufficient interest-free funds exceeding investments, disallowance under Section 14A is not permissible. The assessee has the right to appropriate that investments came from interest-free funds. No statutory obligation exists to maintain separate accounts. Clear causal nexus between expenditure and exempt income is mandatory; proportionate estimation by Revenue without such nexus is impermissible. Appeals allowed.
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