In giving the recommendation, a bench of Justices Sanjay Okay Kaul and Hrishikesh Roy quoted 18th century economist Adam Smith, who in his ‘Wealth of Nations’ had mentioned, “The tax which every particular person is certain to pay ought to make certain and never arbitrary. The time of cost, the style of cost, the amount to be paid ought all to be clear and plain to the contributor and to each different individual”.
“Simply as the federal government doesn’t want for avoidance of tax equally, it’s the accountability of the regime to design a tax system for which a topic can finances and plan. If correct stability is achieved between these, pointless litigation might be prevented with out compromising on era of income,” Justice Roy mentioned, writing the judgement for the bench.
Justice Roy mentioned, “It must be noticed right here that within the taxation regime, there isn’t any room for presumption and nothing might be taken to be implied. The tax a person or a company is required to pay, is a matter of planning for a taxpayer and the Authorities ought to endeavour to maintain it handy and easy to attain maximization of compliance.”
The assessee banks had raised the next query earlier than the SC — “Whether or not proportionate disallowance of curiosity paid by the banks is known as for underneath Part 14A of Earnings Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and curiosity to assessee Banks when assessee had enough curiosity free personal funds which have been greater than the investments made.”
The assessees are scheduled banks and in course of their banking enterprise, in addition they interact within the enterprise of investments in bonds, securities and shares which earn them, pursuits from such securities and bonds as additionally dividend earnings on investments in shares of corporations and from items of UTI and many others. that are tax free.
Part 14 of the Earnings Tax Act classifies varied incomes underneath Salaries, Earnings from home property, Revenue & Positive factors of enterprise or career, Capital Positive factors & Earnings from different sources. Part 14A pertains to expenditure incurred in relation to earnings which aren’t includable in Complete Earnings and that are exempted from tax. No taxes are subsequently levied on such exempted earnings. Part 14A had been integrated within the Act to make sure that expenditure incurred in producing such tax exempted earnings will not be allowed as a deduction whereas calculating whole earnings for the involved assessee.
The banks clarified that none of them keep separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free earnings is earned in order that disallowances may very well be restricted to the precise expenditure incurred by the assessee. In different phrases, the expenditure incurred in the direction of curiosity paid on funds borrowed equivalent to deposits utilized for investments in securities, bonds and shares which yielded the tax-free earnings, can’t conveniently be associated to a separate account, maintained for the aim.
Ruling in favour of the banks, the bench mentioned, “Shares and securities held by a financial institution are inventory in commerce, and all earnings acquired on such shares and securities have to be thought of to be enterprise earnings. That’s the reason Part 14A wouldn’t be drawn to such earnings.”
“The income has didn’t discuss with any statutory provision which obligates the assessee to keep up separate accounts which could justify proportionate disallowance. The difficulty framed in these appeals is answered towards the Income and in favour of the assessee. The appeals by the assessees are accordingly allowed,” the bench mentioned.