Tax which individual or corporate is required to pay,is matter of planning & Govt. should endeavour to keep it convenient & simple:SC

feature-top

Read Judgement: SOUTH INDIAN BANK LTD vs. COMMISSIONER OF INCOME TAX

Pankaj Bajpai

New Delhi, September 10, 2021: The Supreme Court has ruled that proportionate disallowance of interest is not warranted u/s 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.

The Division Bench of Justice Sanjay Kishan Kaul and Justice Hrishikesh Roy observed that no nexus had been established between expenditure disallowed and earning of exempt income, and the Revenue had failed to refer to any statutory provision which obligated the assessee to maintain separate accounts which might justify proportionate disallowance.

The facts of the case was that the Assessees, scheduled banks, in the course of their banking business, invested in bonds, securities and shares which resulted in tax-free income. They did not maintain separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income was earned, nor did they maintain separate accounts for the overheads and administrative expenditure.

The Revenue made proportionate disallowance of interest attributable to the funds invested to earn tax free income by referring to the average cost of deposit for the relevant year which was confirmed by CIT(A).

The ITAT noticed that the Assessees had surplus funds and reserves from which investments could be made and thus, accepted Assessees’ argument that investments were not made out of interest or cost bearing funds alone and deleted the disallowance u/s 14A noting the absence of clear identity of funds which was reversed by the HC primarily on the basis that the Assessees did not maintain separate accounts.

The Top Court referred to Adam Smith’s seminal work Wealth of Nations, to reiterate rule against presumption in tax law and expounded that “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 Division Bench noted that the question is whether Section 14A enables the Revenue 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 respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure”, observed the Court.

The Apex Court therefore allowed the appeals of South Indian Bank and other banks, holding that the Assessees are not legally obligated to maintain separate investment funds for earning different kinds of investment incomes and where non-interest bearing funds available are larger than the funds deployed in tax-free investments, disallowance u/s 14A cannot be made.

Add a Comment