So far as the dis allowance of administrative expenditure is concerned, we feel considering the fact that there is no precise formula for proportionate dis allowance, no dis allowance is called for, for proportionate administrative cost attributable to earning of tax free income until Rule 8D came into force. We, therefore, dispose of the appeals by setting aside the orders of the Tribunal and that of the first appellate authority on this issue and remand all the assessments back to the Assessing Officer for reworking dis allowance under Section 14A in the case of each assessee for each assessment year.
The proportionate dis allowance under Section 14A should be limited to only interest liability and not overheads or administrative expenditure; which should be considered for dis allowance under Rule 8D from 2007-2008 on wards.
The Commissioner Of Income Tax (CIT), Trichur Vs The Catholic Syrian Bank Ltd., Trichur
I.T. Appeal Nos. 467, 720, 730, 843, 479, 1324 & 1045 of 2009 & 40 of 2010
JUDGMENT
The question raised in the 8 connected appeals, 7 filed by the Revenue and one by one of the Banks is one and the same i.e. whether proportionate dis allowance of interest paid by the Bank is called for under Section 14A of the Income Tax Act (hereinafter called “the Act”) for the investments made in U.T.I. shares, tax free bonds/securities etc. which yielded tax free dividend and interest. We have heard Senior counsel Sri.P.K.R.Menon appearing for the Revenue and Senior counsel Sri.Sarangan appearing along with Adv. Sri. P. Balakrishnan for the assessee¬Banks.
2. The assessees are all Scheduled Banks engaged in the banking business and in the course 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 dis allowance 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 neutralized 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 assessment year up to the assessment year 2000-2001 that were finalized when the proviso was introduced without making any dis allowance under Section 14A, were allowed to achieve finality. Dis allowance under Section 14A was intended to be made only for pending assessments and for assessments for the assessment years commencing from 2001-2002 on wards. In all these cases dis allowance made under Section 14A are either in pending assessments or for assessments for the assessment years commencing from 2001-2002 on wards. No dispute is raised by the assessees against application of Section 14A by virtue of operation of the proviso to the said Section introduced by Finance Act, 2002.
Admittedly none of the assessee- Banks have separate accounts for the investments made in bonds, securities and shares where from tax free income is earned so that dis allowance could be limited to the actual expenditure incurred. In other words, the assessee- Banks do not have separate accounts for the expenditure incurred towards interest paid on funds borrowed such as deposits utilized for investments in securities, bonds and shares which yielded tax free income. The position is same so far as the overhead and administrative expenditure of the assessee is concerned. In the absence of separate accounts for investments which earn tax free income, the Assessing Officer worked out a formula which is the average cost of deposit in the year under consideration and applying the same he made proportionate disallowance of interest attributable to the funds invested to earn tax free income. As a specimen case we extract hereunder actual figures available in the assessment of Catholic Syrian Bank Ltd. for the assessment year 200 1- 2002 (I.T.A. No. 467/2009).
