In CIT v. Indian Bank Ltd.  56 ITR 77 (SC), the assessee had income from interest on securities, both taxable and non-taxable. The Assessing Officer apportioned the interest paid by the bank between taxable and non-taxable income, but the Supreme Court found that as long as the borrowings on which interest was paid related to business, such apportionment was not justified and that the entire interest was allowable as deduction.
The benefit of this judgment was denied in the case of CIT v. Tata Chemicals Ltd. (256ITR395) on the pretext that the said case has application to the case of an investment company only. The Bombay High Court has been the first court to refute such an assumption and in this regard followed the Supreme Court laid down principles in the case of Rajasthan State Warehousing Corporation (2000) 242ITR450. The Apex Court had laid down earlier that if both the exempted incomes and the taxable incomes are derived from one indivisible business, then the apportionment of the expenditure is impossible.
In fact now after the insertion of section 14A in the Income tax Act, 1961 the allowability of expenses while computing the net taxable income would depend on the question of exemption and not on the basis whether the business activity is one and indivisible hence unsettling the well settled law of the apex court.