New
Delhi:
The Supreme Court on Thursday said that in a taxation regime there is no room
for presumption and it is the responsibility of the government to design a tax
system which is convenient and simple so that an individual or a corporate can
budget and plan.
The
top court, which allowed a batch of appeals filed by banks against an order of
the Kerala High Court, held 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 them,
exceeded their investments. Section 14A of Income Tax Act deals with
expenditure incurred in relation to income not includible in total income.
A
bench of Justices Sanjay Kishan Kaul and Hrishikesh Roy said “With this
conclusion, we unhesitatingly agree with the view taken by the ITAT favouring
the assessees.”
Referring
to the work of 18th century economist Adam Smith in 'The Wealth of Nations'',
the bench said it needs to be observed here that “in taxation regime, there is
no room for presumption and nothing can be taken to be implied”.
The
bench said, “The tax an individual or a corporate is required to pay, is a
matter of planning for a taxpayer 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”.
The
top court said that if proper balance is achieved, unnecessary litigation can
be avoided without compromising on generation of revenue.
“In
view of the foregoing discussion, the issue framed in these appeals is answered
against the Revenue and in favour of the assessee. The appeals by the Assessees
are accordingly allowed with no order on costs”, it said.
The
bench said that its conclusion is reached because nexus has not been
established between expenditure disallowed and earning of exempt income.
“The
respondents (Revenue department), have failed to substantiate their argument
that assessee was required to maintain separate accounts...The counsel for the
Revenue(department) has failed to refer to any statutory provision which
obligate the assessee to maintain separate accounts which might justify
proportionate disallowance”, it said.
The
bench said that the Central Board of Direct Taxes (CBDT) had issued the
Circular on November 2, 2015, which had explained all shares, and securities
held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR)
are its stock-in-trade and not investments and income arising out of those is
attributable, to business of banking.
“Hence
the income earned through such investments would fall under the head Profits
and Gains of business. The Punjab and Haryana High Court, in the case...while
adverting to the CBDT Circular, concluded correctly that shares and securities
held by a bank are stock in trade, and all income received on such shares and
securities must be considered to be business income. That is why Section 14A
would not be attracted to such income,” the top court said.
It
said that in the present case the Kerala High Court had endorsed the
proportionate disallowance made by the Assessing Officer under Section 14A of
the Income Tax Act to the extent of investments made in tax-free
bonds/securities primarily because, separate account was not maintained by the
banks.
The
bench said that when it enquired on this aspect about the law which obligates
the banks to maintain separate accounts, the Revenue department could not
provide a satisfactory answer and instead relied upon an earlier verdict to
argue that it is the responsibility of the banks to fully disclose all material
facts.
“An
assessee definitely has the obligation to provide full material disclosures at
the time of filing of Income Tax Return but there is no corresponding legal
obligation upon the assessee to maintain separate accounts for different types
of funds held by it”, it said.
The
bench said that in absence of any statutory provision which compels the banks
to maintain separate accounts for different types of funds, the judgement cited
by the Revenue department will have no application.
The
top court was interpreting whether Section 14A enables the Department to make
disallowance on expenditure incurred for earning tax free income in cases where
some banks who are before the court do not maintain separate accounts for the
investments and other expenditures incurred for earning the tax-free income.
In
absence of separate accounts for investment which earned tax free income, the
assessing officer had made proportionate disallowance of interest attributable
to the funds invested to earn tax free income.
Since
actual expenditure figures are not available for making disallowance under
Section 14A, the Assessing Officer worked out proportionate disallowance by
referring to the average cost of deposit for the relevant year.
The
Commissioner of Income Tax (A) had concurred with the view taken by the
Assessing Officer.
The
Income Tax Appellate Tribunal(ITAT), however, accepted the banks'' case and
held that disallowance under Section 14A is not warranted in absence of clear
identity of funds.
The
decision of the ITAT was reversed by the Kerala High Court by accepting the
contention of the revenue department and thereafter banks have approached the
top court.
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