The Supreme Court recently advised the central government to keep the taxation system convenient and simple. A two-judge bench of Justices Sanjay Kishan Kaul and Hrishikesh Roy observed that just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan.
If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue, the bench said.
The Apex court was considering the appeals filed by various banks in which the issue raised was whether Section 14A of the Income Tax Act enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income.
In this case, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income. Earlier, the Tribunal allowed the appeals holding that disallowance under Section 14A is not warranted, in absence of clear identity of funds. This was laterreversed by the High Court and thus the assessee banks approached the Apex Court.
Before the Court, the banks argued that the investments made in bonds and shares should be considered to have been made out of interest free funds which were substantially more than the investment made and therefore the interest paid by the assessee on its deposits and other borrowings, should not be considered to be expenditure incurred in relation to tax free income on bonds and shares and as a corollary, there should be no disallowance under Section 14A of the Act.
The bench referred its earlier judgments and opined that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.
While concluding the bench quoted Adam Smith (from his seminal work Wealth of Nations): “The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.”
“The tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue,” the bench said.
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