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Government Should Keep Taxation System Convenient & Simple, Says Supreme Court

LIVELAW NEWS NETWORK
9 Sep 2021 4:03 PM GMT
Government Should Keep Taxation System Convenient & Simple, Says Supreme Court
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The Supreme Court observed that it is the responsibility of the Government should endeavour to keep taxation regime convenient and simple.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 bench of Justices Sanjay Kishan Kaul and Hrishikesh Roy observed.The court said that...

The Supreme Court observed that it is the responsibility of the Government should endeavour to keep taxation regime convenient and simple.

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 bench of Justices Sanjay Kishan Kaul and Hrishikesh Roy observed.

The court said that if proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.

The 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.

Section 14A deals with expenditure incurred in relation to income not includible in total income. It provides for disallowance of expenditure incurred by the assessee in relation to income, which does not form part of their total income. If the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assessee is disentitled to deduction of such interest or other expenditure.

In this case, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income. The ITAT, allowing assessee's appeal, held that disallowance under Section 14A is not warranted, in absence of clear identity of funds. This was reversed by the Commissioner of Income Tax (Appeals) and later by the High Court and thus the assessee banks approached the Apex Court.

The appellant banks contended that 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.

Referring to earlier judgments, the 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 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 court said:

Echoing what was said by the 18th century economist, 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 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:
Case: South Indian Bank Ltd. Vs. Commissioner of Income Tax ; CA 9606 OF 2011
Citation: LL 2021 SC 435
Coram: Justices Sanjay Kishan Kaul and Hrishikesh Roy
Counsel: Senior Advocates S. Ganesh, S.K. Bagaria, Jehangir Mistri and Joseph Markose, for appellants, ASG Vikramjit Banerjee, Sr. Adv Arijit Prasad for respondents

Click here to Read/Download Judgment



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