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2020 (9) TMI 496
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...., livestock, certain other commodities and services on cooperative principles and for matters connected therewith or incidental thereto." 3. The functions of the appellant-Corporation are set out in Section 9 of the NCDC Act, which is, inter alia, to advance loans or grant subsidies to State Governments for financing cooperative societies; provide loans and grants directly to the national level cooperative societies, as also to the State level cooperative societies, the latter on the guarantee of State Governments. The funding process for the appellant-Corporation is set out in Section 12 of the NCDC Act, by way of grants and loans received from the Central Government. The appellant-Corporation is required to maintain a fund called the National Cooperative Development Fund (for short 'the Fund') which is, inter alia, credited with all monies received by it by way of grants and loans from the Central Government, as well as sums of money as may from time to time be realised out of repayment of loans made from the Fund or from interest on loans or dividends or other realisations on investments made from the Fund. Section 13 mandates maintenance of a Fund and the same reads as under....
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....ation is whether the component of interest income earned on the funds received under Section 13(1), and disbursed by way of "grants" to national or state level co-operative societies, is eligible for deduction for determining the "taxable income" of the appellant-Corporation. This was, as stated herein, contrary to the earlier accounting practice and arose for the first time for the assessment year 1976-77. Accordingly, the factual matrix pertaining to this aforementioned assessment year has been taken on record. 5. The aforesaid endeavour of the appellant-Corporation did not succeed before the Assessing Officer (for short 'AO'). The AO opined that the non-refundable grants were in the nature of capital expense and not a revenue expense and, thus, disallowed the same as a deduction. What weighed with the AO was also the fact that the grants received from the Central Government were in the nature of a capital receipt exempt from tax. The AO noted that no deduction as sought for has been claimed in the previous assessment years. Of course, subsequently, the stand of the appellant-Corporation, as the assessee, was that the same was a mistake and they could not be bound by the same ....
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....e nature of revenue. Round three, thus, went to the Revenue Department. 8. The fourth round was before the Delhi High Court where on a reference made under Section 256(1) of the IT Act, the High Court accepted the question of law to be answered as under: "Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified on facts and in law in holding that amount of Rs. 19,35,950/- being grants disbursed by the assessee-applicant to various State Governments during the financial year 1975-76 relevant to asstt. year 1976-77 was not in the nature of Revenue expenditure, hence not allowable in computing the total income of the assessee for the asstt. year under reference." 9. It appears that the aforesaid practice of claiming allowable deductions was sought to be followed in the subsequent assessment years and the High Court by the common impugned judgment dated 24.11.2006 answered the reference qua the assessment years 1976-77 and 1981-82. 10. Now turning to the High Court order, this fourth round again went in favour of the Revenue Department answering the reference accordingly. In terms of the reasoning of the High Court, it....
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....tion Sought Arising out of 5105/2009 1976-77 1981-82 Rs. 19,35,950 Rs. 1,96,17,920 Common order dated 24.11.2006 5106/2009 1982-83 Rs. 1,26,90,860 Order dated 12.7.2007 decided in terms of order dated 24.11.2006 5107/2009 1983-84 Rs. 1,39,38,943 Order dated 12.7.2007 decided in terms of order dated 24.11.2006 13. It is, thus, left to this Court as usual to give the final knock-out punch, being the fifth round of adjudicatory process on this issue itself! 14. We may also notice a fact that originally the Special Leave Petition was dismissed leaving it to the appellant-Corporation to get its petition revived in case permission was granted by the High Powered Committee. This was in view of the fact that the Committee existed then to settle inter-governmental disputes, but was subsequently disbanded. The record shows that a meeting of the Committee was held on 14.8.2007 and it was felt that the question regarding the nature of grants disbursed by the appellant-Corporation needed adjudication by the Court, though the Committee did not itself settle the issue. The representative of the appellant-Corporation before the Committee faulted t....
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....er, and becomes a capital receipt. iv. The High Court erred in holding that it cannot be identified as to which component of the funds has been advanced by way of "grants". It is not ascertainable as to whether it is from the income earned, or capital receipts. The appellant-Corporation submitted that merely because a common Fund is maintained by it in terms of Section 13 of the NCDC Act, the interest income earned/received by the appellant-Corporation cannot lose its character of "business income" and gets transformed into a capital receipt. If this contention is accepted, then even the interest income will not be liable to tax under profits and gains of business, and must be treated as a capital receipt. v. Since the accounts of the appellant-Corporation are duly audited, it would be able to demonstrate the nexus of the income receipts to the amounts disbursed by way of grants. The claim of deduction is restricted to the outright grants made from the revenue receipts, which are subjected to tax in the normal course of business. The CIT(A) has rightly allowed only those grants, which were in fact disbursed out of the taxable interest income of the appellant as ex....
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....xpenditure would be on the revenue account, even though the advantage may endure for an indefinite future. 17. A reference was also made to the judgment in M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax (1980) 4 SCC 25 to contend that what may be a capital receipt in the hands of the payee, may be a revenue expenditure in relation to the payer. Para 5 of the said judgment read as under: "5. In the first place it is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. It was felicitously pointed out by Macnaghten, J. in Race Course Betting Control Board v. Wild that a "payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa. Therefore, the decision in Maheshwari Devi Jute Mills case cannot be regarded as an authority for the proposition that payment made by an asse....
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....not to be excluded from total income under the IT Act would be chargeable under this head if it is not chargeable under Section 14 heads 'A' to 'E'. 22. The aforesaid aspect did not form a part of the rationale of the view taken by the AO, but the CIT(A) opined that the grants made by the appellant-Corporation undisputedly fall within its authorised business activities and, thus, even the advancing of grants from the interest income would be a revenue expense as it had not resulted in acquisition of capital assets by the appellant-Corporation and, thus, would be adjustable under Section 37(1) of the IT Act. The ITAT, while reversing the order of the CIT(A), does not deal with this aspect but the impugned judgment of the High Court, once again, adverted to this aspect and came to the conclusion that the interest income would fall under head 'D' of Section 14 of the IT Act and would not fall under the head of 'income from other sources' under Section 56 of the IT Act. 23. We are in agreement with this view taken by the High Court, as the only business of the appellant-Corporation is to receive funds and then to advance them as loans or grants. The interest income arose on accou....
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....rgument on behalf of the appellant-Corporation was, however, predicated on a plea that assuming it to be so, the grants (and not loans) cannot be treated as a capital expenditure as neither any enduring advantage or benefit has accrued to the appellant-Corporation nor has any asset come into existence which belongs to or was owned by the appellant-Corporation. Thus, what may be a capital receipt in the hands of the appellant-Corporation may still be a revenue expenditure and it is in that context that the observations in Atherton v. British Insulated and Helsby Cables Ltd. (supra) referred to in Commissioner of Income Tax, Bombay v. Associated Cement Companies Ltd., Bombay (supra) were relied upon. The context was slightly different in those cases because if an expenditure was to bring into existence an asset or advantage for enduring benefit of the trade, it was opined that a case could be made out attributed not to revenue but to capital. In this case, of course, this proposition is really the reverse and advantage was sought to be taken of the aforesaid principle. 26. We are not in disagreement with the aforesaid proposition to the extent that there can be an amount treated a....
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.... Cooperative Societies, etc. Since this is the business activity, that is what has persuaded us to opine that the income generated in the form of interest on the unutilised capital is in the nature of business income. The objectives are wholly socio-economic and the amounts received including grants come with a prior stipulation for the funds received to be passed on to the downstream entities. This is the reason they have been treated as capital receipts. However, we are unable to opine that since this is a pass-through entity on the basis of a statutory obligation, the advancement of loans and grants is not a business activity, when really it is the only business activity. Once it is business activity, the interest generated on the unutilised capital has been held by us to be the business income. 29. We are unable to accept the contention of the Revenue Department that merely because the interest income received has merged with the monies in the common Fund it loses its revenue character and becomes a capital receipt. This line of argument is inconsistent with the position where interest money is received, it is held to be of revenue character, and chargeable to tax under the ....
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....emicals Ltd., (1973) 3 SCC 274 (more specifically para 23) which gave an occasion to examine the issue whether the discharge of an obligation paid to the Government was application of income or diversion of profits. This Court came to the conclusion that from any point of view, whether as revenue expenditure or as an overriding charge of the profit-making apparatus or laid out and expended wholly and exclusively for the purposes of trade, this was an allowable revenue expenditure. 33. The logical conclusion is that every application of income towards business objective of the appellant-Corporation is a business expenditure and nothing else. The endeavour of the Revenue Department to rely on the judgment in the Sitaldas Tirathdas case (supra) is not appreciable since that was a case dealing with the obligation of an individual who was compelled to apply a portion of his income for the maintenance of persons whom he was under a personal and legal obligation to maintain. The IT Act does not permit any deduction from the total income in such circumstances. 34. We also find really no force in the submission of the Revenue Department that the direct nexus of monie....
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....funds are advanced as loans ranging from a period 3 to 8 years with rate of interest varying from time to time, while another part is applied to grants, which are not received back naturally. This modus-operandi has also been set out as a stand of the appellant-Corporation as contained in para 5 of the assessment order. 37. The NCDC Act does not specify as to who should be the grantee; what should be amount to be granted. All that is prescribed is that the business of the appellant-Corporation is to provide loans or grants for the avowed object for which it has been set up. The decision with regard to who should get the grant is taken by the appellant-Corporation directly in the course of, and for the purpose of its business. Thus, the amount agreed to be given should be given as a loan or grant, or both is entirely at the business discretion of the appellant-Corporation. No grantee has a superior title to the funds. Hence, this is not a case of diversion of income by overriding title. 38. We may record here that income has to be determined on the principles of commercial accountancy. There is, thus, a distinction between 'real profits' ascertained on principles of comm....
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.... of this clause; and (c) The expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or established; xxx" 41. The amendment has to be appreciated in the context of the Departmental Circular No.7/2003 dated 5.9.2003, which provides for deduction for expenditure incurred by entities established under any Central, State or Provincial Act. Entities that are created under an Act of Parliament have the basic object and function of carrying on developmental activities in the areas as specified in the said Acts. By the Finance Act, 2001 and the Finance Act, 2002, tax exemption of certain bodies set up through an Act of Parliament was withdrawn. Subsequent to the removal of the tax shield, a doubt has arisen that some of the activities having no profit motive being carried on by such entities cannot be said to be business and therefore, expenditure incurred on such developmental activities may not be allowed as a deduction when computing the income under the head 'profits and gains of business or profession'. 42. The Finance Act, 2003, thus, inserted a new clause mentioned aforesaid so as to provide that an expenditure....
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....il and Natural Gas Commission & Anr. v. Collector of Central Excise 1995 Supp (4) SCC 541 requiring that such cases must be referred to a Committee to be appointed by the Government to facilitate a resolution of such disputes and that no case should be filed without the approval of this Committee. This system was a failure as is apparent from the facts of the present case, where the SLP filed by the appellant-Corporation was initially dismissed with liberty to revive the same in case the High Powered Committee granted such a permission which was so granted in a meeting held on 14.08.2009. The said Committee discussed the legal ramifications, and in some way opined in favour of the appellant-Corporation, as is apparent from the discussion aforesaid. But the ball was again lobbed back into the Court to adjudicate the said issue rather than a resolution being reached. The result was only the revival of the appeal, and the consequent decision which has seen the light of the day only now. 3. The aforesaid failure of the system resulted in the Supreme Court recalling its orders in the ONGC cases vide Electronics Corporation of India v. Union of India. (2011) 332 ITR 58 (SC). 4. The....
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....change of India -SLP (C) Diary No. 35567 of 2019 by a bench of which one of us (Sanjay Kishan Kaul, J.) was a part. 6. Insofar as non-taxation matters are concerned, the Administrative Mechanism for Resolution of CPSEs Disputes was conceptualised to replace the Permanent Machinery of Arbitration and to promote equity through collective efforts to resolve disputes. It has a two-tiered structure. 7. At the first level, commercial disputes will be referred to the Committee comprising Secretaries of the Administrative Ministries/Departments to which the disputing parties belong and the Secretary, Department of Legal Affairs. In case the two disputing parties belong to the same Ministry/Department, the Committee will comprise Secretary of Administrative Ministry/Department concerned; the Secretary, Department of Legal Affairs and the Secretary, Department of Public Enterprises. If a dispute is between a CPSE and a State Government Department/Organisation, the Committee will comprise of the Secretary of the Ministry Department of the Union to which the CPSE belongs, the Secretary, Department of Legal Affairs and the Chief Secretary of the State concerned. Such disputes are ideally ....
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....nt because of a different perception which the Department may have, an Advance Ruling System can facilitate not only such a resolution, but also avoid the tiers of litigation which such cases go through as in the present case. In fact, before further discussing this Advance Ruling System, we can unhesitatingly say that, at least, for CPSEs and Government authorities, there would be no question of taking this matter further once an Advance Ruling is delivered, and even in case of private persons, the scope of any further challenge is completely narrowed down. 12. It is as far back as in 1971 that a report was submitted by the Direct Taxes Enquiry Committee under the Chairmanship of Dr. K.N. Wanchoo, recognising the need for providing Advance Ruling System, particularly in cases involving foreign collaboration. The aim was to give advance rulings to taxpayers or prospective taxpayers, which would then considerably reduce the Revenue's workload and decrease the number of disputes. This finally resulted in a scheme of Advance Ruling being brought into effect in 1993, with the introduction of a new Chapter in the Income Tax Act, 1961 (hereinafter referred to as the 'IT Act'). A quasi....
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....gh that it cannot provide any solace to any individual, and we do believe that it is time to reconsider and reduce the ceiling limit, more so in terms of the recent announcement stated to be in furtherance of a tax friendly face-less regime! 16. We may refer to the international scenario where there has been an incremental shift towards mature tax regimes adopting advance ruling mechanisms. The increase in global trade puts the rulings system at the centre-stage of a robust international tax cooperation regime. The Organisation for Economic Cooperation and Development (for short 'OECD') lists advance rulings as one of the indicators to assess trade facilitation policies, making it an aspirational international best practice standard. For example, Australia and New Zealand have a robust system of advance rulings wherein the decisions (which are public rulings affecting a large number of taxpayers) are given teeth by being made binding on the revenue authorities. New Zealand has gone a step further and innovated "status rulings" under which a taxpayer can apply to the Commissioner for a ruling on how a change in the law impacts an existing ruling. 17. In the United States, ther....