C.A. No. 004069 - 004071 / 2015

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Under Section 14A of the Income Tax Act, proportionate disallowance of interest paid by scheduled banks on borrowed funds cannot be made in respect of investments in tax-free bonds and securities where the assessee's interest-free own funds exceed the quantum of such investments, as no nexus is established between the disallowed expenditure and the earning of exempt income. As analysed on casestatus.in, there is no statutory obligation compelling an assessee to maintain separate accounts for different categories of funds, and in the absence of such a requirement, the Revenue cannot invoke proportionate disallowance merely because funds are held in a common account.