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TMI Blog2020 (9) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... osits so that the amount does not lie idle. That the income generated was again applied to the disbursement of grants and loans. The income generated from interest is necessarily inter- linked to the business of the appellant-Corporation and would, thus, fall under the head of profits and gains of business or profession . There would, therefore, be no requirement of taking recourse to Section 56 of the IT Act for taxing the interest income under this residuary clause as income from other sources. To decide the question as to whether a particular source of income is business income, one would have to look to the notions of what is the business activity. The activity from which the income is derived must have a set purpose. The business activity of the appellant-Corporation is really that of an intermediary to lend money or give grants. Thus, the generation of interest income in support of this only business (not even primary) for a period of time when the funds are lying idle, and utilised for the same purpose would ultimately be taxable as business income. The fact that the appellant- Corporation does not carry on business activity for profit motive is not material as profit making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermine the real income , permissible expenses are required to be set off. As prior to insertion of this sub-clause, such expenses would be permissible under the general Section 37(1) of the IT Act, which provides for deduction of permissible expenses on principles of commercial accountancy. Post amendment, such expenses get allowed under the specific section, viz. Section 36(1)(xii) after the amendment by the Finance Act, 2003. We would, thus, like to conclude that we are unable to agree with the findings arrived at by the AO, ITAT and the High Court albeit for different reasons and concur with the view taken by the CIT(A) for the reasons set out hereinbefore. It is, thus, left to this Court as stated above to strike the final blow and allow the appeals, leaving the parties to bear their own costs, while noticing with regret the inordinately long passage of time and the wastage of judicial time on deciding, who is principally right when in either eventuality it benefits the Central Government. - Sanjay Kishan Kaul And Indu Malhotra , JJ. For the Appellant : Mr. Pradeep Kumar Bakshi, AOR For the Respondent : Mrs. Anil Katiyar, AOR JUDGMENT SANJAY KISHAN KAUL, J. 1. Which pocket of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ants, if any, as the Central Government may make to the Corporation for the purposes of this Act; and (d) such 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. (2) The moneys in the Fund shall be applied for- (a) advancing loans and granting subsidies to State Governments on such terms and conditions as the Corporation may deem fit for the purpose of enabling State Governments to subscribe to the share capital of co-operative societies or for otherwise financing co-operative societies; (b) meeting the pay and allowances of the managing director, the officers and other employees of the Corporation and other administrative expenses of the Corporation; and (c) carrying out the purposes of this Act. (emphasis supplied) In furtherance of this, as and when surplus funds accumulated, the appellant-Corporation invested the idle funds in fixed deposits from time to time, which generated income. It may also be noted that income by way of interest on debentures and loans advanced to the State Governments/Apex Cooperative Institutions are credited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of Section 37 of the Income Tax Act, 1961 (hereinafter referred to as the IT Act ) as it stood for the relevant assessment year, any expenditure (except of the prohibited type) laid out or expended wholly and exclusively for the purpose of the business was allowable as a deduction while computing business income. The CIT(A), thus, found that the approach adopted by the AO was fallacious as the functions and activities of the appellant-Corporation included giving loans and grants which, in fact, was the very purpose for which it had been set up. The appellant-Corporation was, thus, held entitled to the deduction of ₹ 19,35,950/-. The net deduction, however, allowed was limited to ₹ 13,66,187/- on account of refund of the grants to the extent of ₹ 5,69,763/-, which had remained unutilised. The second round, thus, went to the appellant-Corporation. 7. It was now the turn of the Revenue Department to prefer an appeal before the Income Tax Appellate Tribunal (for short ITAT ), Delhi Bench, which, however, accepted the view taken by the AO and did not agree with the approach of the CIT(A), setting aside the order of the CIT(A). The rationale for doing so was slight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant-Corporation and lost its character as business income. 11. The High Court opined that since the business of the appellant- Corporation was to receive funds and to then advance them as loans or grants, the interest income earned which was so applied would also fall under the head D of Section 14 of Chapter IV of the IT Act under the head of profits and gains of business or profession being a part of its normal business activity. The High Court delved into the scheme of the NCDC Act and in view of Section 13, which provided for the creation of a fund, being the common pool where all accretions get amalgamated, including from interest on loans and dividends and interest earned on FDRs. It was held that the monies which were advanced from the Fund cannot be distinctly identified as forming part of the interest income. The other aspect the High Court opined on was that in order to claim deduction as a revenue expenditure, the appellant-Corporation has to first establish that it incurred an expenditure. The advancement of loans to the State Governments and cooperative societies could not be claimed as expenditure as the same does not leave the hands of the appellant- Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant-Corporation, Mr. Rajat Navet contended that the High Court has fallen into an error in discussing the issue as if it was one of loans as opposed to grants, which was the subject matter of the reference. Thus, what was contended was that there was some confusion in the impugned order vis- -vis this aspect of loans and grants. It was, thus, submitted on behalf of the appellant-Corporation as under: i. Any grants disbursed (to National or State Governments, for further disbursal to co-operative societies) out of the Interest Income , which is admittedly taxed as business income by the Revenue Department, is allowable as a revenue expenditure under Section 37(1) of the IT Act, 1961. ii. The error and anomaly in the judgment of the High Court, is that in para 22, it has treated grants and loans at par, or as identical in nature. There is a distinction between grants and loans , since the monies advanced as loans come back into the coffers of the appellant-Corporation; however, with respect to grants or subsidies , there is an irretrievable outgo from the coffers of the appellant-Corporation. This distinction has not been examined by the High Court. The claim of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce which belonged to or was owned by the appellant-Corporation. 16. A reference was made to the judgment of this Court in Commissioner of Income Tax, Bombay v. Associated Cements Companies Ltd., 1988 (Supp) SCC 378 which in turn cited with approval the dictum of Viscount Cave. L.C. in Atherton v. British Insulated and Helsby Cables Ltd. (1924) 10 Tax Cases 155, 192-83: (1926) AC 205 (HL) as under: But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. It was opined that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on the revenue account and the test of enduring benefit may break down, but what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field, that the expenditure would be disallowable on an application of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es given as outright grants from the taxable interest income, cannot be distinctly identified in the common Fund. 19. The Revenue Department sought to revive the debate on the issue repelled by the High Court, i.e., that the income should be treated as income from other sources under Section 56 of the IT Act and not under Section 28 of the IT Act. The exemption, if any, thus, would be under Section 57 and not under Section 37 of the IT Act. Conclusion: 20. We have given considerable thought to the rival contentions of learned counsels for the parties even though the dispute is really in a narrow compass. 21. The first aspect which we would advert to is whether interest on loans or dividends would fall under the head of Income from other sources under Section 56 of the IT Act or would it amount to income from Profits and gains of business or profession under head D of Section 14 of the IT Act. In terms of Section 28 of the IT Act such profits and gains of any business or profession under the head D of Section 14 of the IT Act would be chargeable to income tax if the income is relatable to profits and gains of business or profession carried out by the assessee at any time during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even primary) for a period of time when the funds are lying idle, and utilised for the same purpose would ultimately be taxable as business income. The fact that the appellant- Corporation does not carry on business activity for profit motive is not material as profit making is not an essential ingredient on account of self- imposed and innate restriction arising from the very statute which creates the appellant-Corporation and the very purpose for which the appellant- Corporation has been set up. Our view finds support from the judgment in The Sole Trustee, Lok Shikshana Trust v. The Commissioner of Income Tax, Mysore. (1976) 1 SCC 254. 24. In view of the aforesaid finding the crucial issue would be whether the amounts advanced as grants from this income generated could be adjusted against the income to reduce the impact of taxation as a revenue expense. If it is revenue expense the amount can be deducted but if it is capital expense then the answer would be in the negative. 25. The facts before us clearly set out that undoubtedly the amount received to be advanced as loans and grants by the appellant-Corporation from the Central Government are treated as capital receipts. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, the grants made, which would never come back, should be adjustable as expenses against the same. In fact, to the extent grants were returned back, the CIT(A) did not allow the entire deduction as claimed for but only did so qua the amount which was disbursed as grant and never received back. 28. To decide the aforesaid question, it would be appropriate to advert to the very purpose for which the statutory appellant-Corporation has been set up. It is in this context that we have set out the functions of the appellant-Corporation in para 3 hereinabove, i.e., to advance loans or grant subsidies to State Governments for financing cooperative societies, etc. There is no other function which the appellant-Corporation carries out nor does it generate any funds of its own from any other business. In a sense the role is confined to receiving funds from the Central Government and appropriately advancing the same as loans, grants or subsidies. In a larger canvas the appellant-Corporation plans, promotes and makes financial programmes for the benefit of these societies and other entities to which such loans, grants and subsidies are advanced. We may say it is really in the nature of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be allowed in computing the income chargeable under the head Profits and gains of business or profession . The disbursement of grants has already been held to be the core business of the appellant-Corporation. Once that requirement is satisfied, the expenditure incurred in the course of business and for the purpose of business , would naturally be an allowable deduction under Section 37(1) of the IT Act. The source of funds from which the expenditure is made is not relevant. It is also not really relevant as to whether the expenditure is incurred out of the corpus funds or from the interest income earned by the appellant-Corporation. 31. We are also unable to accept the contention of the respondent that the payouts constitute a mere application of income, which does not tantamount to expenditure. The disbursement of non-refundable grants is an integral part of business of the appellant-Corporation as contemplated under Section 13(1) of the NCDC Act and, thus, is for the purpose of its business. The purpose is direct; merely because the grants benefit a third party, it would not render the disbursement as application of income and not expenditure. 32. In support of the aforesaid v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by a contract or by statute or by own volition or by the law of the land and if the income before it reaches the hands of the assessee is already diverted away by a superior title the portion passed or liable to be passed on is not the income of the assessee. The test, thus, is what amounts to application of income and what is the diversion by overriding title. The principle, in a sense would apply, if the Act or the Rules framed thereunder or other binding directions bind the institution to spend the interest income on disbursal of grants. 36. The appellant-Corporation has devised a procedure of sanction/disbursal of its system for institutional development of cooperatives. The appellant-Corporation actually supplements the efforts of the State Governments. Thus, State Governments recommend proposals of individual societies/projects to the appellant-Corporation in a prescribed systematic format and that society may also avail direct funding of projects under various schemes of assistance on fulfillment of stipulated conditions. The formal sanction is thereafter conveyed to the State Government or the Society as the case may be and the release of funds depends on progress ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a statute for a specific purpose. Income tax is a tax on real income. 39. We may also note that even though in the own view of the appellant-Corporation for preceding years in question, it never claimed any such adjustments, but that of course does not preclude the right of the appellant-Corporation as they sought to make out a case of mistake at a subsequent date. 40. We may also note another statutory development. The Finance Act of 2003 added a provision in Section 36 of the IT Act as sub-clause (1) (xii) in the following terms: 36. Other deductions. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 (i) to (xi) xxxx (xii) any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, if, - (a) It is constituted or established by a Central, State or Provincial Act; (b) Such corporation or body corporate, having regard to the objects and purposes of the Act referred to in sub-clause (a), is notified by the Central Government in the Official Gazette for the purposes of this clause; and (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the specific section, viz. Section 36(1)(xii) after the amendment by the Finance Act, 2003. 44. We would, thus, like to conclude that we are unable to agree with the findings arrived at by the AO, ITAT and the High Court albeit for different reasons and concur with the view taken by the CIT(A) for the reasons set out hereinbefore. It is, thus, left to this Court as stated above to strike the final blow and allow the appeals, leaving the parties to bear their own costs, while noticing with regret the inordinately long passage of time and the wastage of judicial time on deciding, who is principally right when in either eventuality it benefits the Central Government. Postscript 1: 1. The Indian legal system is reeling under a docket explosion. The Government and public authorities are active contributories to this deluge. To top it, a number of litigations arise inter se the Government and its bodies and, thus, the only question, as stated in the beginning, is which pocket of the Government will be benefitted? 2. The aforesaid position resulted in a judicial innovation with the Supreme Court passing orders in Oil and Natural Gas Commission Anr. v. Collector of Central Excise 1995 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time of the Courts as well as the public exchequer. This was as far back as in 1988. It was only in the year 2010 that the National Litigation Policy (for short NLP ) was formulated with the aim of reducing litigation and making the Government an efficient and responsible litigant. Five (5) years later it reportedly saw a revision to increase its efficacy, but it has hardly made an impact. In the year 2018, the Central Government gave its approval towards strengthening the resolution of commercial disputes of Central Public Sector Enterprises (for short CPSEs )/ Port Trusts inter se, as well as between CPSEs and other Government Departments/Organisations. The aim was and is to put in place a mechanism within the Government for promoting a speedy resolution of disputes of this kind, however it excluded disputes relating to Railways, Income Tax, Customs and Excise Departments. It has now been made applicable to all disputes other than those related to taxation matters. This was pursuant an order passed in The Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India - SLP (C) Diary No. 35567 of 2019 by a bench of which one of us (Sanjay Kishan Kaul, J.) was a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to institutionalise mediation, in furtherance of this function to which India has committed itself. Postscript 2: 10. We now turn to the issue of matters pertaining to CPSEs and Government authorities insofar as taxation matters are concerned, because they are consistently sought to be carved out as a separate category of cases. One of the largest areas of litigation for the Government is taxation matters. The petition rate of the tax department before the Supreme Court is at 87%. - See Economic Survey 2017-19 Volume 1 by the Department of Economic Affairs, Ministry of Finance, Government of India So, the question is can something be done about it? 11. In our opinion, a vibrant system of Advance Ruling can go a long way in reducing taxation litigation. This is not only true of these kinds of disputes but even disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity. Instead of first filing a return and then facing consequences from the Department because of a different perception which the Department may have, an Advance Ruling System can facilitate not only such a resolution, but also avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 245R(6) of the IT Act), the average time taken is stated to be reaching around four (4) years!- See Deloitte Report on Advance Rulings in India: Delivering Greater Tax Certainty (Deloitte Tax Policy Paper 5, 2019) There is obviously lack of adequate numbers of presiding officers to deal with the volume of cases. Interestingly, the primary reason for this is the large number of vacancies and delayed appointments of Members to the AAR. ibid In view of the time taken, the very purpose of AAR is defeated, resulting in the mechanism being used infrequently as is evident from the ever- increasing tax related litigation. 14. We may notice a significant development in Section 245N of the IT Act. It was through Notification No.11456 dated 3.8.2000 that public sector companies were added to the definition of applicant , and in 2014, it was made applicable to a resident who had undertaken one or more transactions of the value of ₹ 100 crore or more. 15. Insofar as a resident is concerned, the limit is so high 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward. 21. We have been persuaded to write two postscripts on account of the backbreaking dockets which are ever increasing and as a move towards a trust between the Tax Department and the assessee, and we hope that both the aspects meet consideration at an appropriate level. 22. In the end before parting we may refer to the legal legend Mr. Nani A. Palkhivala, who while addressing a letter of congratulations to Mr. Soli J. Sorabjee on attaining his appointment as the Attorney General on 11.12.1989 referred to the greatest glory of Attorney General as not to win cases for the Government but to ensure that justice is done to the people. In this behalf, he refers to the motto of the Department of Justice in the United States carved out into the Rotunda of the Attorney General Office: The United States wins its case w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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