Legalcops – Legal Blog – Business Registrations & Tax Compliances

Hi there,

The tax, an individual or a corporate is required to pay, is a matter of planning for a taxpayer and the Government should endeavor to keep it convenient and simple to achieve maximization of compliance.

Question of Law:

Whether Section 14A, enables the Income tax Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income.


  1. Appellants are scheduled banks engage in banking business and also engage in the business of investments in bonds, securities and shares, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI etc. which are tax free.
  2. The ITAT found that the investments made in tax free bonds and in shares would therefore be in nature of stock in trade. It held in favour of Appellant.
  3. Department went to High Court and High court held in favour of department. Hence, this appeal.


  1. As can be seen, the contention on behalf of the assessee was rejected by the CIT(A) as also by the High Court primarily on the ground that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account.
  2. Department failed to substantiate their argument that appellant need to maintain separate bank accounts.


Appeals are answered against the Revenue and in favour of the appellant. Appeal Allowed with no order on costs.

Link to the Judgment

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