SC Upholds Beneficial Allocation Theory Where Tax-Free Investments Are Made From Mixed Fund: EY Insight

The Legal Library section collates quality and in-depth reports on regulatory developments, court rulings and policy changes authored by India’s top law firms and consultants. These reports offer BloombergQuint’s subscribers an opportunity to expand their understanding of law and policy.

This Tax Alert summarises a recent Supreme Court ruling in a batch of cases involving different banks, one of them being South India Bank Ltd. (Taxpayer), on the issue of disallowance of proportionate interest expenditure where tax-free investments are made out of mixed funds (made up partly of interest-free funds and partly of interest-bearing funds).

The Supreme Court held that disallowance for expenditure incurred in relation to exempt income is not attracted where the tax-free investments are made from mixed funds and the interest-free funds/owned funds of the taxpayer are higher than the amount of tax free investment.

In such a case, it is incorrect for the tax authority to make disallowance of proportionate interest expenditure on the ground of absence of separate accounts maintained for making tax-free investments – more particularly, where there is no legal or statutory obligation to maintain separate books of accounts for tax-free and taxable investments.

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EY – Supreme Court Upholds Beneficial Allocation Theory.pdf


This alert does not constitute legal advice and is for information purpose only. This report is authored by an external party. BloombergQuint does not vouch for the accuracy of its contents nor is responsible for them in any way. The views expressed in the report are that of the author entity and do not represent the views of BloombergQuint.

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