The apex court, which allowed a batch of appeals filed by banks against an order Kerala High Court, held that proportionate disallowance of interest is not warranted under section 14A income tax act For investments made in tax free bonds/securities which pay tax free dividend and interest to assessee banks, in cases where the interest free own funds available with them exceed their investments. Section 14A of the Income-tax Act deals with expenditure incurred in respect of income not included in total income.
A bench of Justices Sanjay Kishan Kaul and Hrishikesh Roy said, “With this finding, we without hesitation agree with our view. on it In favor of the assessees.”
Referring to the work of 18th century economist Adam Smith in ‘The Wealth of Nations’, the bench observed that it needs to be noted here that “in the tax system, there is no room for conjecture and nothing to be implied”. cannot be taken”.
The bench observed, “The tax which an individual or corporate has to pay is a matter of planning for the taxpayer and the Government should endeavor to keep it convenient and simple to maximize compliance. The way the Government does not want Equally tax avoidance, it is the responsibility of the government to create a tax system for which a subject can budget and plan”.
The top court said that unnecessary litigation can be avoided without compromising on revenue generation if proper balance is achieved.
“In view of the foregoing discussion, the issue decided in these appeals is answered against the revenue and in favor of the assessee. The appeal by the assessee is accordingly allowed, no order on cost is passed”, it said.
The bench said that this conclusion has been reached as the relationship between disallowed expenditure and exempted income has not been established.
“The Respondent (Department of Revenue), has failed to prove his contention that the assessee was required to maintain separate accounts… The counsel for the Revenue (Department) has failed to mention any statutory provision which would enable the assessee to maintain separate accounts. – obliges to maintain separate accounts. may justify proportionate disallowance”, it said.
The bench said the Central Board of Direct Taxes (CBDT) had issued a circular dated November 2, 2015, explaining all the shares, and securities held by the bank which were not purchased to maintain the Statutory Liquidity Ratio (SLR). It’s stock. -In-trade and not investment and the income from them is on account of the business of banking.
“Therefore the income earned by way of such investment shall come under the head of profits and gains of business. The Punjab and Haryana High Court in the matter… adverting the CBDT circular, correctly concluded that the holdings held by the Bank Shares and securities are stocks in business, and all income received on such shares and securities should be treated as business income. Therefore section 14A will not attract such income,” the apex court said.
It said that in the present case, the Kerala High Court had upheld the proportionate disallowance to the extent of investment made in tax-exempt bonds/securities by the Assessing Officer under section 14A of the Income Tax Act, mainly because of the maintenance of a separate account. had not been. by banks.
The bench said that when it inquired on this aspect about the law which mandates banks to maintain separate accounts, the revenue department could not give a satisfactory reply and instead relied on the earlier judgment and argued that It is solely the responsibility of the banks to disclose all material facts.
“An assessee certainly has an obligation to provide full material disclosure while filing income tax return, but there is no similar legal obligation on the assessee to maintain separate accounts for different types of funds held by him” , it said.
The bench said that in the absence of any statutory provision that compels banks to maintain separate accounts for different types of funds, the decision cited by the revenue department would have no application.
The top court was interpreting whether Section 14A enables the department to make a disclaimer on expenses incurred for earning tax-free income in cases where certain banks which are before the court, cannot claim tax-free earnings. Do not keep separate accounts for investments made and other expenditures. Income.
In the absence of separate accounts for investments earning tax free income, the Assessing Officer had made proportionate disallowance of interest on account of funds invested to earn tax free income.
Since the figures of actual expenditure for disallowance under section 14A are not available, the Assessing Officer computed the proportionate disallowance by referring to the average cost of the deposit for the year concerned.
The Commissioner of Income Tax (A) concurred with the view of the Assessing Officer.
However, the Income Tax Appellate Tribunal (ITAT) accepted the case of the banks and held that the disallowance under section 14A is not necessary in the absence of clear identification of the money.
The decision of ITAT was reversed by the Kerala High Court accepting the argument of the Revenue Department and thereafter the banks approached the apex court.