Keep tax regime simple to check dodging, Supreme Court tells govt

There was a large tax relief for bank earnings from bonds, securities, and shares and the Supreme Court encouraged the government to maintain its tax scheme simple to prevent dodging of tax burden.

Sanjay K Kaul and Hrishikesh Roy referenced Adam Smith, an economist from the 18th century who wrote in ‘Wealth of Nations’ that “the tax which each individual is compelled to pay should be certain and not arbitrary. Everyone should know when and how to make a payment, as well as how much to pay.

“Just as the government does not want everyone to avoid paying taxes, it is the regime’s obligation to develop a tax system that allows people to budget and prepare. Unnecessary litigation can be avoided without sacrificing revenue generation if a proper balance is established between these,” Justice Roy wrote for the court in his decision.

“It needs to be noted here that there is no room for presumption under the taxation structure, and nothing may be deemed to be implied,” Justice Roy said. The tax that an individual or a corporation is expected to pay is a matter of planning for the taxpayer, and the government should strive to make it as convenient and uncomplicated as possible in order to maximise compliance.

The assessee banks had asked the Supreme Court, “Whether proportionate disallowance of interest paid by banks is required under Section 14A of the Income Tax Act for investments made in tax-free bonds/ securities yielding tax-free dividend and interest to assessee Banks when assessee had sufficient interest-free own funds that were greater than the investments made?”

The assessees are scheduled banks that invest in bonds, securities, and shares in the course of their banking operations, earning interest on such securities and bonds as well as tax-free dividend income on investments in company shares and UTI units.

Salaries, Income from House Property, Profit & Gains of Business or Profession, Capital Gains, and Income from Other Sources are all categorized under Section 14 of the Income Tax Act. Section 14A refers to tax-exempt expenditures incurred in connection with income that are not included in Total Income. As a result, no taxes are imposed on such exempted income. Section 14A of the Act was added to ensure that expenses incurred in obtaining such tax-free income are not recognised as a deduction for evaluating total income for the concerned assessee.

All of the banks confirmed that they do not hold separate accounts for bonds, securities, and shares from which tax-free income is generated, so that disallowances could be restricted to the actual interest paid on borrowed funds, such as deposits used for investments in securities, bonds and shares that produced tax-free income, cannot be conveniently linked to a separate account maintained for the purpose.

The bench ruled in favour of the banks, saying, “A bank’s shares and securities are stock in trade, and all income earned on such shares and securities must be taken into account business income. As a result, Section 14A would be uninterested in such income.”

“The revenue has failed to specify any statutory provision requiring the assessee to keep separate accounts and so justifying proportionate disallowance. The issue raised in these appeals is resolved in favour of the assessee and against the Revenue. As a result, the assessees’ appeals are permitted “The bench stated.