IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN TUESDAY, THE 20TH SEPTEMBER 2011 / 29TH BHADRA 1933 ITA.No. 174 of 2010() --------------------- AGAINST THE ORDER DATED 10/09/2009 IN ITA.790/2007 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: ---------------------------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT ------------------------ STATE BANK OF TRAVANCORE, POOJAPPURA,THIRUVANANTHAPURAM. ADV. SRI.P.BALAKRISHNAN (E) FOR R1 SRI.V.SREEKUMAR FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20/09/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N. RAMACHANDRAN NAIR & P.S. GOPINATHAN, JJ. ........................................... I.T.A.NO.174 OF 2010 ............................................. Dated this the 20th day of September, 2011. JUDGMENT C.N. Ramachandran Nair, J. The question raised in the Revenue's appeal is whether the Tribunal was justified in cancelling dis-allowance of expenditure incurred by the assessee by way of interest paid on funds borrowed for making investments where from tax free income is received. 2. On going through the Tribunal's order impugned in the appeal, what we notice is that the Tribunal has discussed only the applicability of Section 14 A of I.T. Act for the free bonds purchased to meet Statutory Liquidity Ratio (SLR) by the respondent Bank. However, the total disallowance pertains to investments not only in tax free bonds, but for funds raised for purchase of shares of companies, the income where from is exempt from tax under Section 10 (23G) of the I.T.Act. The issue is squarely covered by our judgment reported in Commissioner of Income Tax v. Catholic Syrian Bank Ltd (237 CTR 167). However counsel for the respondent/assessee submits that the issue raised I.T.A.NO.174 OF 2010 : 2 : herein is not covered in the above judgment because in the assessee's case investment in tax free bonds is to meet the requirement of maintenance of SLR. However, we are unable to accept this contention because investment considered and decided by us in the above decision was in tax free bonds which is the investment made by the respondent/assessee herein also. Normally tax free bonds are purchased by banks only to meet part of SLR requirements. Even though it is not so stated in the above decided case, investments made by those banks also would have been to meet the SLR requirements. In any case, we do not think that the object or purpose of the investment affects operation of Section 14 A of the I.T. Act in as much as any expenditure incurred for earning tax free income is not an allowable deduction by virtue of operation of the said section. So much so, we hold that even though purchase of tax free bonds is for meeting the SLR requirements, interest and other expenditures incurred on the borrowals for investment in tax free bonds is to be disallowed. We therefore allow the appeal filed by the Revenue I.T.A.NO.174 OF 2010 : 3 : by reversing the order of the Tribunal and that of the First Appellate Authority and by restoring disallowance under Section 14 A of expenditure incurred on borrowals for investments in tax free bonds and other investments where from the income earned is not taxable. C.N. RAMACHANDRAN NAIR, JUDGE. P.S. GOPINATHAN, JUDGE. cl