Supreme Court decides 44 years Old dispute between National Co-Operative Development Corp. & Commissioner of Income Tax [Read Judgment]

On 11^th Sep 2020, The Supreme Court in the case of National Co-Operative Development Corporation v. Commissioner of Income Tax comprising of two-Judge Bench Justice Sanjay Kishan Kaul and Justice Indu Malhotra decided 44 years Old dispute between National Co-Operative Development Corporation & Commissioner of Income Tax and ruled that the the “Tax transparency has been a hallmark trait of the Swedish legal system. Swedish law requires public disclosure of ex-ante tax administration such as advance rulings.

Factual Matrix

The functions of the appellant-Corporation are set out in Section 9 of the National Co-operative Development Corporation Act, which is, inter alia, to advance loans or grant subsidies to State Governments for financing cooperative societies. 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. Section 13 mandates the maintenance of a 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. 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:

1. 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.
2. With respect to the interest component, it is treated as taxable income and is logically taxed as “business income.”  

Issue

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, are eligible for the deduction for determining the “taxable income” of the appellant-Corporation.

Assessing Officer (A.O)

The aforesaid endeavor of the appellant-Corporation did not succeed before the AO. The AO opined that the non-refundable grants were in the nature of the capital expense and not a revenue expense and, thus, disallowed the same as a deduction.

Appeal- Commissioner of Income Tax (CIT)

An appeal was preferred before the Commissioner of Income Tax (Appeals), New Delhi (for short ‘CIT(A)’), which in terms of the order opined that the grants made by the appellant-Corporation undisputedly fall within its authorized activities, which are interlinked and interconnected with its main business of advancing loans on interest to State Governments and cooperative societies. Appeal- Income Tax Appellate Tribunal (ITAT)

Tribunal held that the grants, additional grants, and other sums received by the Appellant Corporation 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.

Appeal- Delhi High Court

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 7 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.”

APPEAL- SUPREME COURT

Contentions by the Appellants

The Appellant contended before the Supreme Court 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

Contentions by the Revenue Officer

The Revenue Department, submitted before the Court as under:

1. Since the interest income received has merged with the monies in the common Fund, it loses its revenue character, and becomes a capital receipt.
2. The grants given to State Governments and national cooperatives are not in the course of trade business of the appellant Corporation, but are a mere application of income.
3.  The giving of grants was an application of income hence it was not an expenditure. Even if it was to be considered as a case of expenditure, it would, at best, be in the nature of capital expenditure.

Court Findings & Judgment

The Supreme Court in its findings state that the 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’.

Further, the Court stated that “Tax transparency has been a hallmark trait of the Swedish legal system. Swedish law requires public disclosure of ex ante tax administration such as advance rulings. Both the taxpayer as well as the Swedish Tax Agency can request an advance tax ruling, these rulings are published without information identifying the taxpayer that requested them. The Skatterättsnämnden, or the Council for Advance Tax Rulings is the Swedish Government agency which is vested with this power. The advance ruling system has played a crucial role in Sweden’s position as a country with one of the highest tax compliance rates in the world. 19. The aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in the litigation process.”

The Supreme Court in its Judgment stated that 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.

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