In Brief
The Supreme Court considered whether banks making investments in tax-free securities without maintaining separate accounts must suffer proportionate disallowance of interest paid on borrowed funds under Section 14A of the Income Tax Act. The Court held that where a bank has available interest-free funds exceeding its investments in tax-free securities, a presumption arises that the investment was made from such interest-free funds, not borrowed funds. Consequently, no disallowance under Section 14A applies. There is no statutory obligation to maintain separate accounts, and the Revenue cannot impose disallowance based merely on their absence. The Court emphasized that causal nexus must exist between the disallowed expenditure and earning of exempt income. The appeals by the assessee banks were allowed.
The lawyer headnote and full judgment text are available to registered users.