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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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