Government Should Keep Tax System Convenient and Simple, Says Supreme Court

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The Supreme Court observed that it is the government’s responsibility to strive to maintain a practical and simple tax system. can budget and plan, the bench of Judges Sanjay Kishan Kaul and Hrishikesh Roy observed. The court said that …

The Supreme Court observed that it is the government’s responsibility to strive to maintain a practical and simple tax system.

Just as the government does not want tax evasion as well, it is the regime’s responsibility to design a tax system for which a subject can budget and plan., observed the bench of Justices Sanjay Kishan Kaul and Hrishikesh Roy.

The court said that if an appropriate balance is struck between these, unnecessary litigation can be avoided without compromising income generation.

The court was considering appeals filed by various banks in which the question raised was whether section 14A of the Income Tax Act allows the department to disallow expenses incurred to earn tax-free income in the cases where appraisers do not keep separate accounts for investments and other expenses incurred to earn tax-free income.

Section 14A deals with expenses incurred in relation to income not included in total income. It provides for the exclusion of expenses incurred by the appraised against income, which is not part of their total income. If the appraisee incurs expenses to earn tax-free income, such as interest paid on borrowed funds, to invest in a business that earns tax-free income, the appraiser is not entitled to deduct such interest or other expenses.

In this case, the valuation agent made a proportional denial of interest attributable to funds invested to earn tax-free income. ITAT, allowing the appraise’s appeal, found that the rejection under section 14A is not justified, in the absence of a clear identity of the funds. This was overturned by the Income Tax (Appeals) Commissioner and later by the High Court and the assessed banks therefore approached the Apex Court.

The appellant banks argued that the investments made in bonds and stocks should be considered to have been made from interest-free funds which were significantly higher than the investment made and that, therefore, the interest paid by the valued on its deposits and other borrowings should not be as expenses incurred in connection with the non-taxable income on bonds and stocks and as a corollary, there should be no disallowance under section 14A of the law.

Referring to previous judgments, the court ruled that the proportional denial of interest is not justified, under Article 14A of the Income Tax Law for investments made in bonds / securities not which yield dividends and non-taxable interest to assessed banks in situations where the free equity interest available from the Assesee has exceeded their investments.

In concluding, the bench quoted Adam Smith (from his seminal book Wealth of Nations): “The tax that each individual is required to pay must be certain and not arbitrary. The time of payment, the method of payment, the amount to be paid must all be clear and clear to the contributor and to anyone else. “

The court said:

Echoing what the economist of the eighteenth century said, it is clear here that in a tax system, there is no room for presumption and nothing can be taken for implication. The tax that an individual or business is required to pay is a matter of planning for a taxpayer and the government should strive to keep it convenient and simple to maximize compliance. Just as the government does not want tax evasion either, it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If the right balance is struck between these, unnecessary litigation can be avoided without compromising income generation:

Case: South Indian Bank Ltd. versus. Income Tax Commissioner; CA 9606 FROM 2011
Reference: LL 2021 SC 435
Coram: Judges Sanjay Kishan Kaul and Hrishikesh Roy
Counsel: Senior Counsel S. Ganesh, SK Bagaria, Jehangir Mistri and Joseph Markose, for the appellants, ASG Vikramjit Banerjee, Sr. Adv Arijit Prasad for the respondents

Click here to read / download the judgment

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