BY- Krishna Sridhar
On Friday, the Supreme Court stated that there is no room for guesswork in the tax system and that the government has a responsibility to develop a convenient and simple tax system for individuals or companies to budget and plan. The Supreme Court allowed banks to lodge a number of appeals and ruled that under Article 14A of the Income Tax Act it is inappropriate to invest in tax-exempt bonds/securities, the tax-exempt dividends and interest in the assessee bank. In these cases, their available interest-free capital exceeded their investment. Section 14A talks about Expenditure incurred in relation to income not includible in total income and states that “For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act”.
The bench comprising of judges Sanjay Kishan Kaul and Hrishikesh Ray stated that “With this conclusion, we unhesitatingly agree with the view taken by the ITAT favouring the assessees.” They also stated that “in taxation regime, there is no room for presumption and nothing can be taken to be implied” referring to a work of the notable economist Adam Smith. Moreover, the bench opined that “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 the maximization of compliance. Just as the Government does not wish for the 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 court was of the opinion that an ideal balance was to be achieved in order to make sure trivial litigations are avoided without the revenue taking hits. It stated that “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”
The judge said the conclusion came because there was no correlation between the disallowed expenses and receipt of tax-free income. The court stated that “The respondents (revenue department), have failed to substantiate their argument that assessee was required to maintain separate accounts…The counsel for the revenue has failed to refer to any statutory provision which obligates the assessee to maintain separate accounts which might justify proportionate disallowance” The bank said that when asked for this aspect of the law mandates the banks to maintain a separate consistent account, the income department could not provide a satisfactory response and, thus relying on a previous verdict, it argued that it is the responsibility of the banks to reveal fully all relevant information. It opined that “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”. The judge said that in the absence of legal provisions forcing banks to keep segregated accounts for different types of funds, the ruling cited by the tax authority was not applicable. However, ITAT accepted the bank’s case and considered that a refusal under the provisions of Article 14A without a clear fund identity was not necessary. ITAT’s decision was overturned by the High Court and the Tax Department’s reasoning was accepted and the bank has since appealed to the Supreme Court.