National Co-operative Development Corporation (Appellant) vs. Commissioner of Income Tax, (Respondent)
CIVIL APPEAL NOS. 5105-5107 OF 2009
The Supreme Court- September 29, 2020
FACT OF THE CASE
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 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.
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 money 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 realized 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.
THE MONEY 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 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, 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.
THE DECISION OF ASSESSING OFFICER
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 for the subsequent years.
APPEAL BEFORE COMMISSIONER (APPEAL)
An appeal was preferred before the Commissioner which opined that the grants made by the Appellant undisputedly fall within its authorised activities, which were 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 itself.
The Commissioner 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 net deduction, however, allowed was limited on account of refund of the grants to the extent of amount which had remained unutilised.
APPEAL BEFORE TRIBUNAL
The Revenue Department to prefer an appeal before the Income Tax Appellate Tribunal which, however, accepted the view taken by the AO and did not agree with the approach of the Commissioner, setting aside the order of the Commissioner.
APPEAL BEFORE HIGH COURT
Thereafter, an appeal as preferred before the High Court. 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 of profits and gains of business or profession being a part of its normal business activity.
The High Court 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 had 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 did not leave the hands of the Appellant-Corporation irretrievably.
ORDER/ JUDGEMENT OF SUPREME COURT
The functions of the Appellant-Corporation was to advance loans or grant subsidies to State Governments for financing cooperative societies, etc. There was no other function which the Appellant-Corporation carries out nor did 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 were advanced. It was 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 was the business activity, that was what had persuaded to opine that the income generated in the form of interest on the unutilised capital was in the nature of business income.
The objectives were 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 was the reason they have been treated as capital receipts.
However, 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 was the only business activity. Once it was business activity, the interest generated on the unutilised capital had been held to be the business income.
The contention of the Revenue Department that merely because the interest income received had merged with the monies in the common Fund it loses its revenue character and becomes a capital receipt is not correct. This line of argument was inconsistent with the position where interest money was received, it was 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 could not acquire the character of a capital receipt. The interest having been treated as revenue receipt on which taxes were paid, it must continue to retain the character of revenue receipt. If the nature of receipt was treated as capital receipt then consistent with the aforesaid approach, no taxes would have been payable on the amount.
The corollary was that all expenses incurred in connection with the business were deductible.
This court also find 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 could not be distinctly identified. This was a question of fact.
The plea of the Respondents was based on a pure conjecture. It was the case of the Appellant-Corporation throughout that it could easily demonstrate the direct and proximate nexus of interest earned through grants made, as its accounts were duly audited. In fact, Commissioner allowed the business expenditure only to a certain amount on the basis of the facts and figures as emerged from the balance sheet. This was a burden which was to be discharged by the Appellant-Corporation and the Commissioner had been satisfied with the nexus of interest income with the disbursement of grants made, as having been established.
This court unable to agree with the findings arrived at by the AO, Appellate Tribunal and the High Court albeit for different reasons and concur with the view taken by the Commissioner.
Section 13 of the Income Tax Act, 1961 specifies the circumstances where exemptions under Section 11 and 12 would not be available for a Trust.
Section 11 of the Income Tax Act deals with the exemption of income derived from property held in trust or other legal obligations, relating to religious or charitable purposes.
Section 12 deals with the exemption of income derived by such a trust from voluntary contributions not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution.
CONCLUSION
From above decision of the Apex Court ,it is clear that when grants received by the corporation from government was considered as capital receipt and same grant has been distributed as non-refundable ,the nature remain the same as capital expenses and it does not become as revenue expenses and same cannot be allowed as deduction. The AO had also noted that in earlier years the assessee had not claimed non-refundable grants as expenditure and hence ,during assessment year under consideration same is not considered as revenue expenditure.
DISCLAIMER: The case law produced above is only for information of readers. In case of necessity do consult with tax professionals for more understanding and clarity on the subject matter.
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