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TMI Blog2022 (11) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... r the scheme - i.e. the assessee herein should take 0.50% as its income. and the excess amount of surplus over and above 0.50% referred above shall be transferred to TDF/WDF. The AO has taken the view that, since the assessee did not keep the funds pertaining to TDF/WDF in separate bank accounts and used it for its own business purposes, the amount so transferred to these funds would constitute income of the assessee. The assessee has acted as nodal or implementing agency for the schemes framed by GOI. Hence the amounts transferred to TDF/WDF are diverted at source itself and hence, the same does not belong to the assessee. Accordingly, the amounts so diverted to TDF/WDF cannot be brought to tax in the hands of the assessee. Disallowance of expenditure incurred on promotional activities - capital expenditure - 36(1)(xii) - Since the notification was not available for the year under consideration, the Ld CIT(A) confirmed the disallowance on the ground that the assessee is not a notified u/s 36(1)(xii) of the Act during the year. - HELD THAT:- When the notifying authority itself has mentioned that the assessee is being notified from AY 2013-14 onwards, we are of the view that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industries, rural infrastructure, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promote integrated rural development. The assessee filed its return of income for the year under consideration declaring a total income of Rs.1817.68 crores. The assessing officer completed the assessment determining total income of the assessee at Rs.2534.50 crores by making certain additions. The appeal filed by the assessee before Ld CIT(A) was partly allowed. Aggrieved by the order passed by Ld CIT(A), both the parties have filed these appeals on the issues decided against each of them. 3. We shall first take up the appeal filed by the revenue. The grounds of appeal urged by the assessee give rise to the following two issues:- (a) Relief granted in respect of interest receipts of Rs.628.55 crores transferred to Tribal development fund (TDF). (b) Relief granted in respect of interest receipt of Rs.4.88 crores transferred to Short term co-operative rural credit Fund (STCRC)/Watershed Development Fund (WDF). 4. The facts relating to both the issues are identical in nature and are being discussed in brief. The assessee claimed a sum of Rs.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also called as "Relative margin". It was submitted that the assessee has been directed to credit this surplus amount/relative margin to a separate fund called "Tribal Development Fund" (TDF). It was submitted that the above said amount of Rs.682.55 crores represents the surplus amount of relative margin. It is the contention of the assessee that it does not have right over the above said surplus amount or relative margin, as the RIDF amount itself is administered by it as per the directions given by GOI/RBI. Accordingly, the assessee has transferred the surplus amount/relative margin to TDF account by debiting "interest expenses" account. In support this submission, the assessee placed its reliance on various circulars issued by RBI from time to time, which has been tabulated by AO as under in the assessment order:- Sr. No. Particulars Purposes 1 RPCD. No. Plan. 898/04.09.01/2000-01 dated 30 April 2001 The rate of interest payable to the commercial hanks were linked with their shortfall in priority sector lending. For excess/surplus funds remaining with NABARD directions were issued for crediting the same to Watershed Development Fund. 2 RPCD. C.O. Plan. 290/04.09.41/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bal Development Fund are excluded. b. The RBI has at times issued directions to pay back the commercial banks the interest rate differentials on RIDF deposits (i.e., interest payable to commercial banks at flat rate of 6% and not linked with the shortfall in the priority sector lending). In view of the foregoing, it is submitted and it will be appreciated that- - We are merely acting as a Banker/agent of RBI/GOI for mobilization and disbursement of RIDF deposits; - We are entitled to a margin of only 0.5% as fixed/regulated by the RBI/GOI. - The interest rate differential/excess or surplus funds remaining with us is not NABARD's own money and is the money of RBI spent/required to be spent as per the directions of RBI in this regard and - Hence, the excess/surplus funds lying with us credited to Tribal Development Fund (as per the directions of the RBI/GOI) represents funds belonging to the RBI/GOI and the same is not/cannot be treated as forming part of our income." With regard to the amount credited to Watershed Development Fund (WDF), it was submitted that the facts are identical in nature except that this fund is generated out of another scheme, viz., Short t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribal Development Fund' document, the ownership of Tribal Development Fund' is vested only with NABARD and not with RBI or GOL (i) The assessee has failed to file any clarification from RBI despite of the repeated opportunities given to them. The assessee could not file any supporting documents which can substantiate assessee's contention that the funds transferred to Tribal Development Fund are actually the RBI's income/RBI's Funds and not the income of NABARD. Further, there has been no clarification from RBI or any supporting evidence from the RBI/assessee to prove that the Tribal Development Fund' is RBI's money which is being held by NABARD on behalf of the RBI. j) In the absence of any clarification/confirmation from RBI, despite of the repetitive opportunities provided to the assessee; assessee's stand that this is not a real income of NABARD and NABARD is playing a mere a role of Trustee is considered as incorrect. The amount transferred to Tribal Development Fund' was the real income of NABARD, application of which has taken place as per the instructions of RBI. (k) Tribal Development Fund' remained under effective control of N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is placing reliance on the directions given by RBI with regard to transfer of surplus funds to TDF/WDF. However, the said RBI directions only suggest the manner of utilization of surplus/relative margin and hence it cannot be considered as diversion of income by overriding title. Hence these directions will not determine or bar the taxability of the surplus or relative margin under the Income tax Act. The Ld D.R submitted that the assessee has not kept the funds transferred to TDF account in separate bank account, i.e., it has put the funds in common hotchpots and was freely using them in its regular business activities. Accordingly, the Ld D.R submitted that the assessee is the owner of the funds and is in actual control of it. Further, section 45 of NABARD Act permits the assessee to create Reserve Funds or any other fund by transferring funds from out of annual profits and also out of any other receipts like gifts, grants, donations or benefaction, which the assessee may receive. Accordingly, the Ld D.R submitted that the TDF & WDF belong to such kinds of reserve funds created by the assessee in terms of sec. 45 of NABARD Act. He submitted that the law is clear that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese submissions, the Ld A.R invited our attention to the Budget Speech given by the Finance Minister on 15th March, 1995, wherein the Hon'ble Finance Minister has announced establishment of "Rural Infrastructure Development Fund" within NABARD (the assessee herein). He also invited our attention to the guideline issued by RBI with regard to establishment of TDF/WDF. He further submitted that the Department of Financial Services under Ministry of Finance, vide its letter dated 20th February, 2013 has clarified that the assessee is only a trustee of these funds and interest under these funds do not count as income of the assessee. The Ld A.R accordingly submitted that it is a clear case of diversion of income by overriding title. The Ld A.R placed his reliance on the following case laws:- (a) CIT vs. New Horizon Sugar Mills (P) Ltd (2000)(244 ITR 738)(Mad), wherein the amount set apart for construction of molasses storage tank as required by Molasses Control Order, which is required to be spent as per the directions of Government was held to be excluded as there is diversion of income at source. (b) DCIT vs. M/s National Commodity & Derivatives Exchange Ltd (ITA No.1423/Mum/2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sector target for agricultural lending, subject to a maximum of 1.5 per cent of the bank's net credit. This is expected to create a corpus of about Rs.2,000 crore for completion of rural infrastructure projects." We notice that the Government of India has devised a scheme for increasing investment in Agricultural and rural infrastructure projects and accordingly, proposed to establish a new "Rural Infrastructural Development Fund" within NABARD, the assessee herein. It is also stated that the commercial banks shall contribute funds as per the directions given by RBI. 12. The Ld A.R submitted that the RBI has issued circulars in this regard from time to time. In this regard, he invited our attention to Circular No. RPCD. CO. Plan 3113/04.09.49/2009-10 dated September 18, 2009. This circular lists out the rate of interest payable to banks on the deposits contributed by them and also prescribes the rate of interest payable by the State Governments/NRRDA on the loans taken by them out of this fund. Following portions of the circular are relevant here:- "7. Further, the relative margin available to NABARD in excess of 0.5 per cent in respect of deposits placed by banks in RIDF XV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The excess amount of surplus over and above 0.50% referred above shall be transferred to TDF/WDF. (c) The funds credited to TDF/WDF should also be used for specified purposes only. We noticed earlier that WDF was established with the assessee and the initial corpus has been contributed by the MOA, GOI and the assessee. The objective of the schemes is promotion of investment in agriculture and rural development. 15. The AO has taken the view that, since the assessee did not keep the funds pertaining to TDF/WDF in separate bank accounts and used it for its own business purposes, the amount so transferred to these funds would constitute income of the assessee. We notice that the manner of keeping funds is not the criteria for determining whether there is diversion of funds by overriding title. The criteria stated by Hon'ble Supreme Court in the case of CIT vs. Sitaldas Tirathdas (supra) is extracted below:- "……. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t utilize the amount in the said fund for any other purpose. The fund had to be utilized for the purpose of constructing a storage tank in accordance with the specifications given by the Central Government. If the assessee failed to collect such amount as directed by the Molasses Control (Amendment) Order, the Central Government would construct a molasses storage tank and recoup the construction charges from the assessee. Therefore, there was diversion of title at the source of the income collected under the directions given under the Molasses Control (Amendment) Order. The sum in question was not includible in the assessee's total income. 12. In the face of the decision in the case of Salem Cooperative Sugar Mills Ltd (supra), it goes without saying that the Tribunal was right in holding that the amount set apart towards molasses storage reserve fund should be excluded from its total income as revenue expenditure. This question is, therefore, answered against the Revenue and in favour of the assessee." It was brought to our notice that the revenue challenged above said decision rendered by Hon'ble Madras High Court by filing appeal before Hon'ble Supreme Court. However, the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the funds so credited. From the foregoing discussions, we are of the view that the assessee has acted as nodal or implementing agency for the schemes framed by GOI. Hence the amounts transferred to TDF/WDF are diverted at source itself and hence, the same does not belong to the assessee. Accordingly, the amounts so diverted to TDF/WDF cannot be brought to tax in the hands of the assessee. Accordingly, we affirm the order passed by Ld CIT(A) in respect of amount of Rs.628.55 crores transferred to TDF/WDF. For identical reasons, we uphold the order passed by Ld CIT(A) in respect of amount of Rs.4.88 crores transferred to WDF/STCRC fund. 21. We shall now take up the appeal filed by the assessee. Following issues arise out of the grounds urged by the assessee:- (a) Disallowance of expenditure incurred on promotional activities. (b) Treating the Service charges not accrued as income of the assessee. (c) Claim for deduction of Education Cess. 22. The first issue relates to the disallowance of expenditure incurred on promotional activities. The AO noticed that the assessee has incurred expenses for promotional activities out of various funds created by it in the past for di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. In support of this contention, the Ld A.R placed his reliance on the following decisions:- (a) Maruti Suzuki India Ltd vs. Union of India (2017)(84 taxmann.com 45(Delhi) (b) Banco Products (India) Ltd vs. DCIT (2018)(95 taxmann.com 132)(Guj). The Ld A.R submitted that both these decisions have been rendered in the context of sec.35(2AB) of the Act. However, the ratio of the said decisions would equally apply for this issue also. 26. The Ld D.R submitted that the CBDT has issued notification recognizing the assessee from AY 2013-14 onwards only. Hence the assessee cannot be considered to be a recognized entity during the year under consideration. 27. We heard rival contentions and perused the record. We have also gone through the decision rendered in the above said two cases, which have been in the context of sec.35(2AB) of the Act. Under the provisions of sec.35(2AB), the expenditure incurred in an "in house research and development facility" as approved by the prescribed authority is granted weighted deduction. Under sec.36(1)(xii), the corporation itself should be notified for the purposes of sec.36(1)(xii) of the Act. Hence, while interpreting the provisions of sec.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding title. We have also held that the assessee is not the owner of funds so transferred WDF. If the above said amount of Rs.44.70 crores have been spent out of the funds so transferred to WDF as per the directions issued by GOI/RBI, the assessee could not claim such expenditure incurred out of WDF, held as not belonging to assessee, as deduction. 31. The next issue relates to the assessment of service charges on accrual basis. The assessee has been following accounting policy of accounting "Service charges on loans out of Micro Finance Development and Equity Fund, Watershed Development Fund" on receipt basis. The AO called for the details of "Service charges accrued but not received", which amounted to Rs.4,92,922/-. The AO assessed the same as income of the assessee. The Ld CIT(A) confirmed the same, but directed the AO to exclude the service charges, which have been offered to tax on "receipt basis" in order to avoid double taxation of same income. 32. We heard the parties on this issue. The ld A.R submitted that the total income declared by the assessee for this year was Rs.1817.68 crores. Further, the assessee has been following the accounting policy of offering service cha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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