2020 (9) TMI 496 - SC - Income Tax

Supreme Court Rules Interest Income as Business Income; Grants Qualify as Deductible Revenue Expenditure for Tax Purposes.

NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION Versus COMMISSIONER OF INCOME TAX, DELHI-V

NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION Versus COMMISSIONER OF INCOME TAX, DELHI-V - [2020] 427 ITR 288 (SC) Issues Involved:1. Taxability of interest income earned on funds received under Section 13(1) of the NCDC Act.2. Eligibility of grants disbursed by the appellant-Corporation as revenue expenditure under Section 37(1) of the Income Tax Act, 1961.Detailed Analysis:1. Taxability of Interest Income:The core issue was whether the interest income earned on funds received under Section 13(1) of the NCDC Act and disbursed as grants is taxable as 'business income' or 'income from other sources.' The Court concluded that the interest income should be taxed as 'profits and gains of business or profession' under Section 28 of the IT Act. The rationale was that the appellant-Corporation's primary business is to receive funds and advance them as loans or grants, and the interest income generated from these funds is interlinked with this business activity. The Court stated, 'The interest income arose on account of the fund so received and it may not have been utilised for a certain period of time, being put in fixed deposits so that the amount does not lie idle.' Therefore, the interest income is part of the appellant-Corporation's normal business activities and should be taxed accordingly.2. Eligibility of Grants as Revenue Expenditure:The next issue was whether the grants disbursed by the appellant-Corporation could be considered revenue expenditure eligible for deduction under Section 37(1) of the IT Act. The Court examined the nature of these grants and concluded that they should be treated as revenue expenditure. The Court emphasized that the disbursement of grants is an integral part of the appellant-Corporation's business activities, stating, 'The disbursement of grants has already been held to be the core business of the appellant-Corporation.' The Court rejected the Revenue Department's argument that the grants were merely an application of income and not an expenditure, noting that the grants were non-refundable and incurred wholly and exclusively for the purpose of the appellant-Corporation's business. The Court also highlighted that the grants did not create any enduring advantage or asset for the appellant-Corporation, thereby qualifying them as revenue expenditure.Conclusion:The Supreme Court allowed the appeals, agreeing with the view taken by the CIT(A) and rejecting the findings of the AO, ITAT, and the High Court. The Court ruled that the interest income earned by the appellant-Corporation is taxable as business income and that the grants disbursed qualify as revenue expenditure deductible under Section 37(1) of the IT Act. The Court noted that the appellant-Corporation's role as an intermediary to lend money or give grants is its only business activity, and the interest income generated from unutilized funds should be considered business income. The Court also emphasized that the grants disbursed are for the purpose of the appellant-Corporation's business and should be allowed as deductions.Postscript:The Court expressed concern over the high volume of litigation involving government entities and suggested the need for a more efficient dispute resolution mechanism. The Court recommended considering the efficacy of the advance tax ruling system to reduce litigation and emphasized the importance of making the government an efficient and responsible litigant. The Court also highlighted the need for a comprehensive legislation to institutionalize mediation, particularly for disputes involving government authorities.