NEW DELHI: The Supreme Court has offered a significant tax aid to banks’ earnings from investments in bonds, securities and shares and suggested the federal government to maintain its tax regime easy to stop avoidance of tax liabilities.
In giving the recommendation, a bench of Justices Sanjay K Kaul and Hrishikesh Roy quoted 18th century economist Adam Smith, who in his ‘Wealth of Nations’ had stated, “The tax which every particular person is certain to pay ought to make sure 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 duty of the regime to design a tax system for which a topic can price range and plan. If correct stability is achieved between these, pointless litigation could be prevented with out compromising on technology of income,” Justice Roy stated, writing the judgement for the bench.
Justice Roy stated, “It must be noticed right here that within the taxation regime, there isn’t any room for presumption and nothing could 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 named for below Part 14A of Revenue Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and curiosity to assessee Banks when assessee had adequate curiosity free personal funds which had been greater than the investments made.”
The assessees are scheduled banks and in course of their banking enterprise, in addition they have interaction 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 models of UTI and many others. that are tax free.
Part 14 of the Revenue Tax Act classifies varied incomes below Salaries, Revenue from home property, Revenue & Positive aspects of enterprise or career, Capital Positive aspects & Revenue from different sources. Part 14A pertains to expenditure incurred in relation to earnings which aren’t includable in Complete Revenue 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 isn’t allowed as a deduction whereas calculating complete earnings for the involved assessee.
The banks clarified that none of them preserve 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 direction of curiosity paid on funds borrowed similar to deposits utilized for investments in securities, bonds and shares which yielded the tax-free earnings, can not conveniently be associated to a separate account, maintained for the aim.
Ruling in favour of the banks, the bench stated, “Shares and securities held by a financial institution are inventory in commerce, and all earnings obtained on such shares and securities have to be thought of to be enterprise earnings. That’s the reason Part 14A wouldn’t be interested in such earnings.”
“The income has didn’t seek advice from any statutory provision which obligates the assessee to keep up separate accounts which could justify proportionate disallowance. The problem 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 stated.

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