# NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION v. COMMISSIONER OF INCOME TAX, DELHI-V

- **Citation:** [2020] 13 S.C.R. 517
- **Court:** Supreme Court of India
- **Decided:** 2020-09-11
- **Case number:** Civil Appeal Nos. 5105-5107 of 2009
- **Bench:** Sanjay Kishan Kaul, Indu Malhotra
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/national-co-operative-development-corporation-v-commissioner-of-income-tax-34365
- **Pages:** 37

## Headnote

Income Tax Act, 1961 - s.37(1)- Taxable income of appellantCorporation- Interest earned on funds received u/s.13(1), 1962
Act and disbursed by way of grants to national/state level cooperative societies - If eligible for deduction - Not allowed by
Assessing Officer (AO) - CIT(Appeals) held the Corporation entitled
to deduction - Order set aside by ITAT - High Court decided in
favour of revenue - On appeal, held: If an assessee carries on
business, all that is required to be seen is whether any outlay
constitutes an expenditure 'for the purpose of business' as used in
s.37(1) - Disbursement of grants is 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 u/s.37(1)
- Source of funds from which the expenditure is made is not relevant
- It is also not relevant as to whether the expenditure is incurred
out of the corpus funds or from the interest income earned by the
appellant - Findings arrived at by the AO, ITAT and the High Court
not agreed with -View taken by the CIT(A)concurred with - National
Cooperative Development Corporation Act, 1962 - ss.9, 12,
13(1),(2)- Finance Act, 2003 - s.36(1)(xii)- Finance Act, 2001 -
Finance Act, 2002.
Income Tax Act, 1961 - ss.14, 28, 56, 57 - Held: s.56 is in
the nature of a residuary clause, i.e., if the income of every kind
which is not to be excluded from total income under the IT Act would
be chargeable under this head if it is not chargeable u/s.14 heads
'A' to 'E'.
Doctrines/Principles - Principle of diversion by overriding
title - When not applicable - Discussed -Income Tax Act, 1961 -
National Cooperative Development Corporation Act, 1962.
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SUPREME COURT REPORTS
[2020] 13 S.C.R.
Income Tax Act, 1961 - Determination of income - Held:
Scheme of the IT Act requires the determination of 'real income' on
the basis of ordinary commercial principles of accountancy - To
determine the 'real income', permissible expenses are required to
be set off - Income tax is a tax on real income.
Government Litigation:
Increase in, inter se government and its bodies - Impediments
and resolution - Discussed.
Taxation matters -Pertaining to Central Public Sector
Enterprises (CPSE) and government authorities -Advance tax ruling
system -Indian scenarios vis-à-vis international scenario -
Discussed.
Disposing of the appeals, the Court
HELD: 1.1 The appellant-Corporation, National Cooperative Development Corporation, was established under the
National Cooperative Development Corporation Act, 1962
(NCDC Act). 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 appellantCorporation 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. 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. Income by way of
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interest on debentures and loans advanced to the State
Governments/Apex Cooperative Institutions are credited to this
account. Even though the appellan

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 [2020] 13 S.C.R. 517
NATIONAL CO-OPERATIVE
DEVELOPMENT CORPORATION
v.
COMMISSIONER OF INCOME TAX, DELHI-V
(Civil Appeal Nos. 5105-5107 of 2009)
SEPTEMBER 11, 2020
[SANJAY KISHAN KAUL AND INDU MALHOTRA, JJ.]
Income Tax Act, 1961 - s.37(1)- Taxable income of appellantCorporation- Interest earned on funds received u/s.13(1), 1962
Act and disbursed by way of grants to national/state level cooperative societies - If eligible for deduction - Not allowed by
Assessing Officer (AO) - CIT(Appeals) held the Corporation entitled
to deduction - Order set aside by ITAT - High Court decided in
favour of revenue - On appeal, held: If an assessee carries on
business, all that is required to be seen is whether any outlay
constitutes an expenditure 'for the purpose of business' as used in
s.37(1) - Disbursement of grants is 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 u/s.37(1)
- Source of funds from which the expenditure is made is not relevant
- It is also not relevant as to whether the expenditure is incurred
out of the corpus funds or from the interest income earned by the
appellant - Findings arrived at by the AO, ITAT and the High Court
not agreed with -View taken by the CIT(A)concurred with - National
Cooperative Development Corporation Act, 1962 - ss.9, 12,
13(1),(2)- Finance Act, 2003 - s.36(1)(xii)- Finance Act, 2001 -
Finance Act, 2002.
Income Tax Act, 1961 - ss.14, 28, 56, 57 - Held: s.56 is in
the nature of a residuary clause, i.e., if the income of every kind
which is not to be excluded from total income under the IT Act would
be chargeable under this head if it is not chargeable u/s.14 heads
'A' to 'E'.
Doctrines/Principles - Principle of diversion by overriding
title - When not applicable - Discussed -Income Tax Act, 1961 -
National Cooperative Development Corporation Act, 1962.
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SUPREME COURT REPORTS
[2020] 13 S.C.R.
Income Tax Act, 1961 - Determination of income - Held:
Scheme of the IT Act requires the determination of 'real income' on
the basis of ordinary commercial principles of accountancy - To
determine the 'real income', permissible expenses are required to
be set off - Income tax is a tax on real income.
Government Litigation:
Increase in, inter se government and its bodies - Impediments
and resolution - Discussed.
Taxation matters -Pertaining to Central Public Sector
Enterprises (CPSE) and government authorities -Advance tax ruling
system -Indian scenarios vis-à-vis international scenario -
Discussed.
Disposing of the appeals, the Court
HELD: 1.1 The appellant-Corporation, National Cooperative Development Corporation, was established under the
National Cooperative Development Corporation Act, 1962
(NCDC Act). 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 appellantCorporation 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. 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. Income by way of
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interest on debentures and loans advanced to the State
Governments/Apex Cooperative Institutions are credited to this
account. Even though the appellant-Corporation is an
intermediary or "pass through" entity, it is a distinct juridical
entity. Its taxation status is as follows:
i. Insofar as funds are received from the Central
Government, these are treated as capital receipts, and hence
are not chargeable to tax. There is no dispute about this.
ii. With respect to the interest component, it is treated as
taxable income and is logically taxed as "business income."
The issue which has arisen for consideration 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 contrary to the earlier accounting practice and arose
for the first time for the assessment year 1976-77. [Paras 2-4][528F-G; 529-A-C; 530-C-G]
1.2 The first aspect to be adverted 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 previous year [Clause (i) of Section 28 of the IT Act].
Section 56 of the IT Act is in the nature of a residuary clause, i.e.,
if the income of every kind which is 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'. 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
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the interest income would be a revenue expense as it had not
resulted in acquisition of capital assets by the appellantCorporation 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. This
Court is 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 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. That the income
generated was again applied to the disbursement of grants and
loans. The income generated from interest is necessarily interlinked 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 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. [Paras 21-23][538-D-H;
539-A-F]
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The Sole Trustee, Lok Shikshana Trust v. The
Commissioner of Income Tax, Mysore (1976) 1 SCC
254 : [1976] 1 SCR 461- relied on.
1.3 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. The facts 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 fact, if it was otherwise, they
would have become taxable in the hands of the appellantCorporation. Over this, there is no dispute.There can be an
amount treated as a capital receipt while the same amount
expended may be a revenue expenditure. The question is whether
this is so in the present case. [Paras 24-26][539-F-H; 540-A,
D-E]
1.4 No doubt the interest income is not directly received
as a capital amount. It is actually generated by utilising the capital
receipts when the fund is lying idle though the income so
generated is then applied for the very objective for which the
appellant-Corporation was set up, i.e., disbursement of grants
and advancement of loans. The impugned judgment of the High
Court appears to have dealt with both loans and grants, but the
question of references framed, and which is a position accepted
before this Court, is that the dispute related to only grants. It
was not the appellant-Corporation's case that the amounts
advanced as loans, the same being payable with interest, could
be adjusted as expenses against the business income generated
by investing the amounts and consequently earning interest on
the same. The argument was predicated on a reasoning that since
the interest generated is treated as a business 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
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as grant and never received back. 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 the functions of the appellant-Corporation
have been set out, 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. It is really in the nature of an
intermediary with expertise in the financial sector to carry forward
the intent of the Central Government to assist State Governments,
Cooperative Societies, etc. Since this is the business activity,
that is what has persuaded this Court 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 socioeconomic 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, this Court is 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 to be the business income. This Court is 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 head
'Profits and Gains of Business or Profession'. This amount while
lying in the same fund cannot acquire the character of a capital
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receipt. The interest having been treated as revenue receipt on
which taxes are paid, it must continue to retain the character of
revenue receipt. If the nature of receipt is treated as capital
receipt then consistent with the aforesaid approach, no taxes
would have been payable on the amount. The corollary is that all
expenses incurred in connection with the business are deductible.
[Paras 27-29][540-E-H; 541-A-H; 542-A-B]
1.5 The legal position, which emerges is that if an assessee
carries on business, all that is required to be seen is whether any
outlay constitutes an expenditure 'for the purpose of business'
as used in Section 37(1) of the IT Act. The disbursement of grants
has already been held to be the core business of the appellantCorporation. 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.
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. The logical
conclusion is that every application of income towards business
objective of the appellant-Corporation is a business expenditure
and nothing else. There is also really no force in the submission
of the Revenue Department that the direct nexus of monies given
as outright grants from the taxable interest income cannot be
distinctly identified. This is a question of fact. The plea of the
respondents is based on a pure conjecture. It is the case of the
appellant-Corporation throughout that it can easily demonstrate
the direct and proximate nexus of interest earned through grants
made, as its accounts were duly audited. In fact, CIT(A) allowed
the business expenditure only to a certain amount on the basis of
the facts and figures as emerged from the balance sheet. This is
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a burden which was to be discharged by the appellant-Corporation
and the CIT(A) had been satisfied with the nexus of interest
income with the disbursement of grants made, as having been
established. [Paras 30, 31, 33 and 34][542-B-C; D-G; 543-B-F]
1.6 Another principle may also be noted to test the
proposition, i.e., of diversion by overriding title. This principle
was originally set out in the Sitaldas Tirathdas case and the
principle has been since followed. If a portion of income arising
out of a corpus held by the assessee consumed for the purposes
of meeting some recurring expenditure arising out of an
obligation imposed on the 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.The appellantCorporation 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 appellantCorporation 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 of implementation and is on a non-reimbursement basis.
Part of the 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. The NCDC Act does not specify as to who
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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. Income has to be
determined on the principles of commercial accountancy. There
is, thus, a distinction between 'real profits' ascertained on
principles of commercial accountancy. In the case of a business,
the profits must be arrived at on ordinary commercial principles.
The scheme of the IT Act requires the determination of 'real
income' on the basis of ordinary commercial principles of
accountancy. To determine the 'real income', permissible
expenses are required to be set off. There is, thus, a clear
distinction between deductions made for ascertaining real profits
and thereafter distributions made out of profits. The distribution
would be application of income. There is also a distinction between
real profits ascertained on commercial principles and profits fixed
by a statute for a specific purpose. Income tax is a tax on real
income. [Paras 35-38][543-F-H; 544-A-H; 545-C]
Commissioner of Income Tax, Bombay v. Shri Sitaldas
Tirathdas [1961] 2 SCR 634 - distinguished.
Poona Electric Supply Co. Ltd. v. CIT Bombay City,
[1965] 3 SCR 818 - relied on.
1.7 Even though in the own view of the appellantCorporation 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. There is another statutory
development. The Finance Act of 2003 added a provision in
Section 36 of the IT Act as sub-clause. The amendment has to be
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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'. [Paras 3941][545-D-E; 546-B-D]
1.8 The Finance Act, 2003, thus, inserted a new clause
mentioned aforesaid so as to provide that an expenditure not
being capital expenditure incurred by a corporation or body
corporate, by whatever name called, constituted or established
by a Central, State or Provincial Act for the objects and purposes
authorised by such Act under which such corporation or body
corporate was constituted or established, shall be allowed as a
deduction in computing the income under the head 'profits and
gains of business or profession'.The amendment had been
introduced into the Act with effect from 1.4.2002. The question,
thus, arises whether prior to this amendment such expenses were
not allowable under the prevailing tax regime for such entitles
which were not exempt from tax. In the years prior to the
amendment, as this Court is dealing with AY 1976-77 onwards,
the tax jurisprudence has evolved on the basis of ordinary
principles of commercial accountancy for determining the taxable
income. Thus, 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. This
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Court is 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. [Paras 42-44][546-D-H; 547-A-C]
CIT Kerala, Ernakulam v. The Travancore Sugar &
Chemicals Ltd. (1973) 3 SCC 274 : [1973] 2 SCR 738;
CIT, Gujarat v. S.C. Kothari (1972) 4 SCC 402 : [1972]
1 SCR 950 - relied on.
Commissioner of Income Tax, Bombay v. Associated
Cements Companies Ltd., 1988 (Supp) SCC 378 : [1988]
 SCR 917; M/s. Empire Jute Co. Ltd. v. Commissioner
of Income Tax (1980) 4 SCC 25 : [1980] 3 SCR 1370
- referred to.
Oil and Natural Gas Commission & Anr. v. Collector of
Central Excise 1995 Supp (4) SCC 541; Electronics
Corporation of India v. Union of India (2011) 332 ITR
58 (SC); Union of India & Ors. v. Pirthwi Singh & Ors.
(2018) 16 SCC 363 : [2018] 3 SCR 935; Columbia
Sportswear Company v. Director of Income Tax
Bangalore (2012) 11 SCC 224: [2012] 7 SCR 187 -
referred to.
Chaturvedi & Pithisaria's Income Tax Law, Volume 3,
Sixth Edition (2014), Pg. 3310, published by
LexisNexis - referred to.
Atherton v. British Insulated and Helsby Cables Ltd.
(1924) 10 Tax Cases 155, 192-83: (1926) AC 205 (HL)
- referred to.
Case Law Reference
[1988] 3 SCR 917
referred to
Para 16
[1980] 3 SCR 1370
referred to
Para 17
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(1961) 2 SCR 634
distinguished
Para 18
[1976] 1 SCR 461
relied on
Para 23
[1973] 2 SCR 738
relied on
Para 32
(1965) 3 SCR 818
relied on
Para 38
[1972] 1 SCR 950
relied on
Para 38
1995 Supp (4) SCC 541
referred to
Para 2
(2011) 332 ITR 58 (SC)
referred to
Para 3
[2018] 3 SCR 935
referred to
Para 4
[2012] 7 SCR 187
referred to
Para 12
CIVIL APPELLATE JURISDICTION : Civil appeal nos. 51055107 of 2009.
From the Judgment and Order dated 24.11.2006 of Division Bench
of the High Court of Delhi at New Delhi in ITR Nos. 555 of 1983 and 41
of 1989.
Arijit Prasad, Sr. Adv., Rajat Navet, Pradeep Kumar Bakshi,
Ms. Praveena Gautam, Mrs. Anil Katiyar, Advs. for the appearing parties.
The judgment of the Court was delivered by
SANJAY KISHAN KAUL, J.
1. Which pocket of the Government should be enriched has taken
forty-four (44) years to decide - a classic case of what ought not to be!
The factual matrix:
2. The appellant-Corporation, National Co-operative Development
Corporation, was established under the National Cooperative
Development Corporation Act, 1962 (hereinafter referred to as the
'NCDC Act'). The Preamble of the NCDC Act reads as under:
"An Act to provide for the incorporation and regulation of a
Corporation for the purpose of planning and promoting programmes
for the production, processing, marketing, storage, export and
import of agricultural produce, foodstuffs, industrial goods,
livestock, certain other commodities and services on cooperative
principles and for matters connected therewith or incidental
thereto."
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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:
"13. Corporation to maintain fund.- (1) The Corporation shall
maintain a fund called the National Cooperative Development Fund
(hereinafter referred to as the Fund) to which shall be credited-
(a) all moneys and other securities transferred to it under clause
(a) of sub-section (2) of section 24;
(b) the grants and other sums of money by way of loans paid to
the Corporation by the Central Government under section 12;
(bb) all moneys received under section 12B;
(bbb) all moneys received for services rendered;
(ba) all moneys borrowed under section 12A;
(c) such additional grants, 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
NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION
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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 this account.
4. Even though the appellant-Corporation is an intermediary or
"pass through" entity, it is a distinct juridical entity. Its taxation status is
as follows:
i.
Insofar as funds are received from the Central Government,
these are treated as capital receipts, and hence are not
chargeable to tax. There is no dispute about this.
ii.
With respect to the interest component, it is treated as
taxable income and is logically taxed as "business income."
The issue which has arisen for consideration 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 cooperative 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
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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 for the
subsequent years. This round went to the Revenue Department.
6. An appeal was preferred before the Commissioner of Income
Tax (Appeals), New Delhi (for short 'CIT(A)'), which in terms of the
order dated 22.8.1980 opined that the grants made by the appellantCorporation undisputedly fall within its authorised activities, which are
interlinked and interconnected with its main business of advancing loans
on interest to State Governments and cooperative societies. These grants
were intended to be utilised for various projects which were admittedly
of capital nature and resulted in the acquisition of capital assets, but not
by the appellant-Corporation itself. Thus, a conclusion was reached that,
in terms 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 Rs.
19,35,950/-. The net deduction, however, allowed was limited to Rs.
13,66,187/- on account of refund of the grants to the extent of Rs.
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 slightly different. It held that
the grants, additional grants and other sums received by the appellantCorporation from the Central Government went to a single fund and
were not treated as its income and, thus, the disbursements made from
the same could not be treated as revenue expenses. The disbursement
of monies to State Governments and cooperative societies were held to
NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION
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be a pure and simple application of the Fund under Section 13(2) of the
NCDC Act and could not be an expenditure in the 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 was a mixed
bag for the two sides. The argument of the Revenue Department that
such interest income of the appellant-Corporation would fall within the
category of income from other sources under Section 56 of the IT Act,
for which allowable deductions are enumerated under Section 57 of the
IT Act was, however, repelled. The Revenue Department further sought
to argue that the advances were in the form of application of income
rather than expenditure of income. It also argued that the loans disbursed
were liable to be refunded in terms of the agreement under which they
were advanced, making them ineligible to be treated as expenditure.
Moreover, once the interest income was received, it merged into Section
13 Fund of the appellant-Corporation and lost its character as business
income.
11. The High Court opined that since the business of the appellantCorporation was to receive funds and to then advance them as loans or
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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 appellantCorporation irretrievably. It is not necessary for us to delve further into
this issue as that was not the question framed to be answered.
12. We are now faced with Civil Appeals in relation to different
assessment years, which arise from the common judgment dated
24.11.2006 and the common order dated 12.7.2007, which had in turn
relied on the 24.11.2006 judgment. The particulars are in a tabulated
form as under:
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
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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
the view taken by the High Court inter alia on the ground that expenditure
as monies advanced as loans do not go out of the hands of the Corporation
irretrievably was a finding, which was not based on the facts of the case
as the issue pertained only to the grants and not to the loans. The grants
were disbursed in accordance with the provisions of Section 9 of the
NCDC Act and, thus, monies advanced as grants never came back to
the appellant and were in the nature of expenditure of the appellantCorporation. The Committee was of the view that the grants disbursed
by the appellant-Corporation were not in the nature of loans and were
exclusively for business of the Corporation and should have been treated
as revenue expenditure.
Contentions of the parties:
15. On behalf 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-à-vis this aspect of
loans and grants. It was, thus, submitted on behalf of the appellantCorporation 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.