REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 5105-5107 OF 2009 NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION Appellant Versus COMMISSIONER OF INCOME TAX, DELHI-V Respondent JUDGMENT SANJAY KISHAN KAUL, J. 1. Which pocket of Government should be enriched has taken forty-four (44) years to decide classic case of what ought not to be! Signature Not Verified factual matrix: Digitally signed by ASHA SUNDRIYAL Date: 2020.09.11 19:52:29 IST Reason: 2. appellant-Corporation, National Co-operative Development Corporation, was established under National Cooperative 1 Development Corporation Act, 1962 (hereinafter referred to as NCDC Act ). Preamble of NCDC Act reads as under: Act to provide for incorporation and regulation of Corporation for purpose of planning and promoting programmes for 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. 3. functions of appellant-Corporation are set out in Section 9 of 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 national level cooperative societies, as also to State level cooperative societies, latter on guarantee of State Governments. funding process for appellant-Corporation is set out in Section 12 of NCDC Act, by way of grants and loans received from Central Government. appellant-Corporation is required to maintain fund called National Cooperative Development Fund (for short Fund ) which is, inter alia, credited with all monies received by it by way of grants and loans from Central Government, as well as sums of money as may from time to time be realised out of repayment of loans made from Fund or from interest on loans or dividends or other 2 realisations on investments made from Fund. Section 13 mandates maintenance of Fund and same reads as under: 13. Corporation to maintain fund. (1) Corporation shall maintain fund called National Cooperative Development Fund (hereinafter referred to as 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) grants and other sums of money by way of loans paid to Corporation by 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 Central Government may make to Corporation for 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 Fund or from interest on loans or dividends or other realisations on investments made from Fund. (2) moneys in Fund shall be applied for (a) advancing loans and granting subsidies to State Governments on such terms and conditions as Corporation may deem fit for purpose of enabling State Governments to subscribe to share capital of co-operative societies or for otherwise financing co-operative societies; (b) meeting pay and allowances of managing director, officers and other employees of Corporation and other 3 administrative expenses of Corporation; and (c) carrying out purposes of this Act. (emphasis supplied) In furtherance of this, as and when surplus funds accumulated, appellant-Corporation invested 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 State Governments/Apex Cooperative Institutions are credited to this account. 4. Even though appellant-Corporation is intermediary or pass through entity, it is distinct juridical entity. Its taxation status is as follows: i. Insofar as funds are received from 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 interest component, it is treated as taxable income and is logically taxed as business income. issue which has arisen for consideration is whether component of interest income earned on funds received under Section 13(1), and disbursed by way of grants to national or state level co-operative 4 societies, is eligible for deduction for determining taxable income of appellant-Corporation. This was, as stated herein, contrary to earlier accounting practice and arose for first time for assessment year 1976-77. Accordingly, factual matrix pertaining to this aforementioned assessment year has been taken on record. 5. aforesaid endeavour of appellant-Corporation did not succeed before Assessing Officer (for short AO ). AO opined that non-refundable grants were in nature of capital expense and not revenue expense and, thus, disallowed same as deduction. What weighed with AO was also fact that grants received from Central Government were in nature of capital receipt exempt from tax. AO noted that no deduction as sought for has been claimed in previous assessment years. Of course, subsequently, stand of appellant-Corporation, as assessee, was that same was mistake and they could not be bound by same for subsequent years. This round went to Revenue Department. 6. appeal was preferred before Commissioner of Income Tax (Appeals), New Delhi (for short CIT(A) ), which in terms of order 5 dated 22.8.1980 opined that grants made by appellant-Corporation 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 acquisition of capital assets, but not by appellant-Corporation itself. Thus, conclusion was reached that, in terms of Section 37 of Income Tax Act, 1961 (hereinafter referred to as IT Act ) as it stood for relevant assessment year, any expenditure (except of prohibited type) laid out or expended wholly and exclusively for purpose of business was allowable as deduction while computing business income. CIT(A), thus, found that approach adopted by AO was fallacious as functions and activities of appellant-Corporation included giving loans and grants which, in fact, was very purpose for which it had been set up. appellant-Corporation was, thus, held entitled to deduction of Rs. 19,35,950/-. net deduction, however, allowed was limited to Rs. 13,66,187/- on account of refund of grants to extent of Rs. 5,69,763/-, which had remained unutilised. second round, thus, went 6 to appellant-Corporation. 7. It was now turn of Revenue Department to prefer appeal before Income Tax Appellate Tribunal (for short ITAT ), Delhi Bench, which, however, accepted view taken by AO and did not agree with approach of CIT(A), setting aside order of CIT(A). rationale for doing so was slightly different. It held that grants, additional grants and other sums received by appellant- Corporation from Central Government went to single fund and were not treated as its income and, thus, disbursements made from same could not be treated as revenue expenses. disbursement of monies to State Governments and cooperative societies were held to be pure and simple application of Fund under Section 13(2) of NCDC Act and could not be expenditure in nature of revenue. Round three, thus, went to Revenue Department. 8. fourth round was before Delhi High Court where on reference made under Section 256(1) of IT Act, High Court accepted question of law to be answered as under: Whether on facts and in circumstances of case, 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 assessee-applicant to various State Governments during financial year 1975-76 relevant to asstt. year 1976-77 was not in nature of Revenue expenditure, hence not allowable in computing total income of assessee for asstt. year under reference. 9. It appears that aforesaid practice of claiming allowable deductions was sought to be followed in subsequent assessment years and High Court by common impugned judgment dated 24.11.2006 answered reference qua assessment years 1976-77 and 1981-82. 10. Now turning to High Court order, this fourth round again went in favour of Revenue Department answering reference accordingly. In terms of reasoning of High Court, it was mixed bag for two sides. argument of Revenue Department that such interest income of appellant-Corporation would fall within category of income from other sources under Section 56 of IT Act, for which allowable deductions are enumerated under Section 57 of IT Act was, however, repelled. Revenue Department further sought to argue that advances were in form of application of income rather than expenditure of income. It also argued that loans disbursed were 8 liable to be refunded in terms of agreement under which they were advanced, making them ineligible to be treated as expenditure. Moreover, once interest income was received, it merged into Section 13 Fund of appellant-Corporation and lost its character as business income. 11. High Court opined that since business of appellant- Corporation was to receive funds and to then advance them as loans or grants, interest income earned which was so applied would also fall under head D of Section 14 of Chapter IV of IT Act under head of profits and gains of business or profession being part of its normal business activity. High Court delved into scheme of NCDC Act and in view of Section 13, which provided for creation of fund, being common pool where all accretions get amalgamated, including from interest on loans and dividends and interest earned on FDRs. It was held that monies which were advanced from Fund cannot be distinctly identified as forming part of interest income. other aspect High Court opined on was that in order to claim deduction as revenue expenditure, appellant-Corporation has to first establish that it incurred expenditure. advancement of loans to 9 State Governments and cooperative societies could not be claimed as expenditure as same does not leave hands of appellant- Corporation irretrievably. It is not necessary for us to delve further into this issue as that was not question framed to be answered. 12. We are now faced with Civil Appeals in relation to different assessment years, which arise from common judgment dated 24.11.2006 and common order dated 12.7.2007, which had in turn relied on 24.11.2006 judgment. particulars are in tabulated form as under: Civil Appeal Assessment Deduction Arising out of Number Year(s) Sought 5105/2009 1976-77 Rs. 19,35,950 Common order 1981-82 Rs. 1,96,17,920 dated 24.11.2006 5106/2009 1982-83 Rs. 1,26,90,860 Order dated 12.7.2007 decided in terms of order dated 24.11.2006 5107/2009 1983-84 Rs. 1,39,38,943 Order dated 12.7.2007 decided in terms of order dated 24.11.2006 13. It is, thus, left to this Court as usual to give final knock-out punch, being fifth round of adjudicatory process on this issue itself! 10 14. We may also notice fact that originally Special Leave Petition was dismissed leaving it to appellant-Corporation to get its petition revived in case permission was granted by High Powered Committee. This was in view of fact that Committee existed then to settle inter-governmental disputes, but was subsequently disbanded. record shows that meeting of Committee was held on 14.8.2007 and it was felt that question regarding nature of grants disbursed by appellant-Corporation needed adjudication by Court, though Committee did not itself settle issue. representative of appellant-Corporation before Committee faulted view taken by High Court inter alia on ground that expenditure as monies advanced as loans do not go out of hands of Corporation irretrievably was finding, which was not based on facts of case as issue pertained only to grants and not to loans. grants were disbursed in accordance with provisions of Section 9 of NCDC Act and, thus, monies advanced as grants never came back to appellant and were in nature of expenditure of appellant- Corporation. Committee was of view that grants disbursed by appellant-Corporation were not in nature of loans and were 11 exclusively for business of Corporation and should have been treated as revenue expenditure. Contentions of parties: 15. On behalf of appellant-Corporation, Mr. Rajat Navet contended that High Court has fallen into error in discussing issue as if it was one of loans as opposed to grants, which was subject matter of reference. Thus, what was contended was that there was some confusion in impugned order vis- -vis this aspect of loans and grants. It was, thus, submitted on behalf of appellant-Corporation as under: i. Any grants disbursed (to National or State Governments, for further disbursal to co-operative societies) out of Interest Income , which is admittedly taxed as business income by Revenue Department, is allowable as revenue expenditure under Section 37(1) of IT Act, 1961. ii. error and anomaly in judgment of High Court, is that in para 22, it has treated grants and loans at par, or as identical in nature. There is distinction between grants and loans , since monies advanced as loans come back into coffers of appellant-Corporation; however, with respect to 12 grants or subsidies , there is irretrievable outgo from coffers of appellant-Corporation. This distinction has not been examined by High Court. claim of appellant-Corporation is restricted only with respect to grants, and not loans. iii. High Court erred in holding that as taxable interest/income or revenue stream of income gets amalgamated in common pool of Fund under Section 13(1) of NCDC Act, along with funds received from Central Government, it loses its revenue character, and becomes capital receipt. iv. High Court erred in holding that it cannot be identified as to which component of funds has been advanced by way of grants . It is not ascertainable as to whether it is from income earned, or capital receipts. appellant-Corporation submitted that merely because common Fund is maintained by it in terms of Section 13 of NCDC Act, interest income earned/received by appellant-Corporation cannot lose its character of business income and gets transformed into capital receipt. If this contention is accepted, then even interest income will not be 13 liable to tax under profits and gains of business, and must be treated as capital receipt. v. Since accounts of appellant-Corporation are duly audited, it would be able to demonstrate nexus of income receipts to amounts disbursed by way of grants. claim of deduction is restricted to outright grants made from revenue receipts, which are subjected to tax in normal course of business. CIT(A) has rightly allowed only those grants, which were in fact disbursed out of taxable interest income of appellant as expenditure. vi. Since grants are given in normal course of appellant-Corporation s business, those grants which are from interest income, and assessed as business income, should be allowed as deductions from taxable income of appellant- Corporation. requisite conditions for being allowed as deduction under Section 37(1) of IT Act stand fulfilled since: a. expenditure has been incurred wholly and exclusively for purpose of business being carried out by assessee; b. it has been expended during accounting year in 14 question. c. it is not on any personal account of assessee; d. it is not in nature of capital expenditure. vii. expenditure incurred by appellant-Corporation cannot be capital expenditure as neither any enduring advantage or benefit has accrued to it, nor had any asset come into existence which belonged to or was owned by appellant-Corporation. 16. reference was made to judgment of this Court in Commissioner of Income Tax, Bombay v. Associated Cements Companies Ltd.,1 which in turn cited with approval dictum of Viscount Cave. L.C. in Atherton v. British Insulated and Helsby Cables Ltd.2 as under: But when expenditure is made, not only once and for all, but with view to bringing into existence asset or advantage for enduring benefit of trade. I think that there is very good reason (in absence of special circumstances leading to opposite conclusion) for treating such 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 advantage of enduring benefit, may, nonetheless, be on 11988 (Supp) SCC 378 2(1924) 10 Tax Cases 155, 192-83: (1926) AC 205 (HL) 15 revenue account and test of enduring benefit may break down, but what is material to consider is nature of advantage in commercial sense and it is only where advantage is in capital field, that expenditure would be disallowable on application of this test. If advantage consists merely in facilitating assessee s trading operations or enabling management and conduct of assessee s business to be carried on more effectively or more profitably while leaving fixed capital untouched, expenditure would be on revenue account, even though advantage may endure for indefinite future. 17. reference was also made to judgment in M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax 3 to contend that what may be capital receipt in hands of payee, may be revenue expenditure in relation to payer. Para 5 of said judgment read as under: 5. In first place it is not universally true proposition that what may be capital receipt in hands of payee must necessarily be capital expenditure in relation to payer. fact that certain payment constitutes income or capital receipt in hands of recipient is not material in determining whether payment is revenue or capital disbursement qua payer. It was felicitously pointed out by Macnaghten, J. in Race Course Betting 3(1980) 4 SCC 25 16 Control Board v. Wild that payment may be revenue payment from point of view of payer and capital payment from point of view of receiver and vice versa. Therefore, decision in Maheshwari Devi Jute Mills case cannot be regarded as authority for proposition that payment made by assessee for purchase of loom hours would be capital expenditure. Whether it is capital expenditure would have to be determined having regard to nature of transaction and other relevant factors. 18. On other hand, Mr. Arijit Prasad, learned senior counsel, on behalf of Revenue Department, submitted as under: i. Since interest income received has merged with monies in common Fund, it loses its revenue character, and becomes capital receipt. ii. grants given to State Governments and national co- operatives are not in course of trade business of appellant- Corporation, but are mere application of income.4 iii. giving of grants was application of income hence it was not expenditure. Even if it was to be considered as case of expenditure, it would, at best, be in nature of capital expenditure. iv. direct nexus of monies given as outright grants from 4Commissioner of Income Tax, Bombay v. Shri Sitaldas Tirathdas, (1961) 2 SCR 634 17 taxable interest income, cannot be distinctly identified in common Fund. 19. Revenue Department sought to revive debate on issue repelled by High Court, i.e., that income should be treated as income from other sources under Section 56 of IT Act and not under Section 28 of IT Act. exemption, if any, thus, would be under Section 57 and not under Section 37 of IT Act. Conclusion: 20. We have given considerable thought to rival contentions of learned counsels for parties even though dispute is really in narrow compass. 21. first aspect which we would advert to is whether interest on loans or dividends would fall under head of Income from other sources under Section 56 of IT Act or would it amount to income from Profits and gains of business or profession under head D of Section 14 of IT Act. In terms of Section 28 of IT Act such profits and gains of any business or profession under head D of Section 14 of IT Act would be chargeable to income tax if income is relatable to profits and gains of business or profession carried out by assessee 18 at any time during previous year [Clause (i) of Section 28 of IT Act]. Section 56 of IT Act is in nature of residuary clause, i.e., if income of every kind which is not to be excluded from total income under IT Act would be chargeable under this head if it is not chargeable under Section 14 heads to E . 22. aforesaid aspect did not form part of rationale of view taken by AO, but CIT(A) opined that grants made by appellant-Corporation undisputedly fall within its authorised business activities and, thus, even advancing of grants from interest income would be revenue expense as it had not resulted in acquisition of capital assets by appellant-Corporation and, thus, would be adjustable under Section 37(1) of IT Act. ITAT, while reversing order of CIT(A), does not deal with this aspect but impugned judgment of High Court, once again, adverted to this aspect and came to conclusion that interest income would fall under head D of Section 14 of IT Act and would not fall under head of income from other sources under Section 56 of IT Act. 23. We are in agreement with this view taken by High Court, as only business of appellant-Corporation is to receive funds and then to 19 advance them as loans or grants. interest income arose on account of fund so received and it may not have been utilised for certain period of time, being put in fixed deposits so that amount does not lie idle. That income generated was again applied to disbursement of grants and loans. income generated from interest is necessarily inter- linked to business of appellant-Corporation and would, thus, fall under head of profits and gains of business or profession . There would, therefore, be no requirement of taking recourse to Section 56 of IT Act for taxing interest income under this residuary clause as income from other sources. In our view, to decide question as to whether particular source of income is business income, one would have to look to notions of what is business activity. activity from which income is derived must have set purpose. business activity of appellant-Corporation is really that of intermediary to lend money or give grants. Thus, generation of interest income in support of this only business (not even primary) for period of time when funds are lying idle, and utilised for same purpose would ultimately be taxable as business income. fact that appellant- Corporation does not carry on business activity for profit motive is not 20 material as profit making is not essential ingredient on account of self- imposed and innate restriction arising from very statute which creates appellant-Corporation and very purpose for which appellant- Corporation has been set up. Our view finds support from judgment in Sole Trustee, Lok Shikshana Trust v. Commissioner of Income Tax, Mysore.5 24. In view of aforesaid finding crucial issue would be whether amounts advanced as grants from this income generated could be adjusted against income to reduce impact of taxation as revenue expense. If it is revenue expense amount can be deducted but if it is capital expense then answer would be in negative. 25. facts before us clearly set out that undoubtedly amount received to be advanced as loans and grants by appellant-Corporation from Central Government are treated as capital receipts. In fact, if it was otherwise, they would have become taxable in hands of appellant-Corporation. Over this, there is no dispute. line of argument on behalf of appellant-Corporation was, however, predicated on plea that assuming it to be so, grants (and not loans) 5 (1976) 1 SCC 254 21 cannot be treated as capital expenditure as neither any enduring advantage or benefit has accrued to appellant-Corporation nor has any asset come into existence which belongs to or was owned by appellant-Corporation. Thus, what may be capital receipt in hands of appellant-Corporation may still be revenue expenditure and it is in that context that observations in Atherton v. British Insulated and Helsby Cables Ltd.6 referred to in Commissioner of Income Tax, Bombay v. Associated Cement Companies Ltd., Bombay 7 were relied upon. context was slightly different in those cases because if expenditure was to bring into existence asset or advantage for enduring benefit of trade, it was opined that case could be made out attributed not to revenue but to capital. In this case, of course, this proposition is really reverse and advantage was sought to be taken of aforesaid principle. 26. We are not in disagreement with aforesaid proposition to extent that there can be amount treated as capital receipt while same amount expended may be revenue expenditure. question is whether this is so in present case. 6(supra) 7(supra) 22 27. No doubt interest income is not directly received as capital amount. It is actually generated by utilising capital receipts when fund is lying idle though income so generated is then applied for very objective for which appellant-Corporation was set up, i.e., disbursement of grants and advancement of loans. impugned judgment of High Court appears to us to have dealt with both loans and grants, but question of references framed, and which is position accepted before us, is that dispute related to only grants. It was not appellant-Corporation s case that amounts advanced as loans, same being payable with interest, could be adjusted as expenses against business income generated by investing amounts and consequently earning interest on same. argument was predicated on reasoning that since interest generated is treated as business income, grants made, which would never come back, should be adjustable as expenses against same. In fact, to extent grants were returned back, CIT(A) did not allow entire deduction as claimed for but only did so qua amount which was disbursed as grant and never received back. 28. To decide aforesaid question, it would be appropriate to advert 23 to very purpose for which statutory appellant-Corporation has been set up. It is in this context that we have set out functions of 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 appellant-Corporation carries out nor does it generate any funds of its own from any other business. In sense role is confined to receiving funds from Central Government and appropriately advancing same as loans, grants or subsidies. In larger canvas appellant-Corporation plans, promotes and makes financial programmes for benefit of these societies and other entities to which such loans, grants and subsidies are advanced. We may say it is really in nature of intermediary with expertise in financial sector to carry forward intent of Central Government to assist State Governments, Cooperative Societies, etc. Since this is business activity, that is what has persuaded us to opine that income generated in form of interest on unutilised capital is in nature of business income. objectives are wholly socio-economic and amounts received including grants come with prior stipulation for funds received to be passed on to downstream entities. This is 24 reason they have been treated as capital receipts. However, we are unable to opine that since this is pass-through entity on basis of statutory obligation, advancement of loans and grants is not business activity, when really it is only business activity. Once it is business activity, interest generated on unutilised capital has been held by us to be business income. 29. We are unable to accept contention of Revenue Department that merely because interest income received has merged with monies in common Fund it loses its revenue character and becomes capital receipt. This line of argument is inconsistent with position where interest money is received, it is held to be of revenue character, and chargeable to tax under head Profits and Gains of Business or Profession . This amount while lying in same fund cannot acquire character of capital receipt. interest having been treated as revenue receipt on which taxes are paid, it must continue to retain character of revenue receipt. If nature of receipt is treated as capital receipt then consistent with aforesaid approach, no taxes would have been payable on amount. corollary is that all expenses incurred in connection with business are deductible. 25 30. legal position, which emerges is that if assessee carries on business, all that is required to be seen is whether any outlay constitutes expenditure for purpose of business as used in Section 37(1) of IT Act. provision reads as under: 37. General. (1) Any expenditure (not being expenditure of nature described in sections 30 to 36 and not being in nature of capital expenditure or personal expenses of assessee), laid out or expended wholly and exclusively for purposes of business or profession shall be allowed in computing income chargeable under head "Profits and gains of business or profession". disbursement of grants has already been held to be core business of appellant-Corporation. Once that requirement is satisfied, expenditure incurred in course of business and for purpose of business , would naturally be allowable deduction under Section 37(1) of IT Act. source of funds from which expenditure is made is not relevant. It is also not really relevant as to whether expenditure is incurred out of corpus funds or from interest income earned by appellant-Corporation. 31. We are also unable to accept contention of respondent that payouts constitute mere application of income, which does not 26 tantamount to expenditure. disbursement of non-refundable grants is integral part of business of appellant-Corporation as contemplated under Section 13(1) of NCDC Act and, thus, is for purpose of its business. purpose is direct; merely because grants benefit third party, it would not render disbursement as application of income and not expenditure. 32. In support of aforesaid view, we may rely on judgment of this Court in CIT Kerala, Ernakulam v. Travancore Sugar & Chemicals Ltd.,8 which gave occasion to examine issue whether discharge of obligation paid to Government was application of income or diversion of profits. This Court came to conclusion that from any point of view, whether as revenue expenditure or as overriding charge of profit-making apparatus or laid out and expended wholly and exclusively for purposes of trade, this was allowable revenue expenditure. 33. logical conclusion is that every application of income towards business objective of appellant-Corporation is business expenditure and nothing else. endeavour of Revenue Department to rely on 8 (1973) 3 SCC 274 (more specifically para 23) 27 judgment in Sitaldas Tirathdas case9 is not appreciable since that was case dealing with obligation of individual who was compelled to apply portion of his income for maintenance of persons whom he was under personal and legal obligation to maintain. IT Act does not permit any deduction from total income in such circumstances. 34. We also find really no force in submission of Revenue Department that direct nexus of monies given as outright grants from taxable interest income cannot be distinctly identified. This is question of fact. plea of respondents is based on pure conjecture. It is case of appellant-Corporation throughout that it can easily demonstrate direct and proximate nexus of interest earned through grants made, as its accounts were duly audited. In fact, CIT(A) allowed business expenditure only to certain amount on basis of facts and figures as emerged from balance sheet. This is burden which was to be discharged by appellant-Corporation and CIT(A) had been satisfied with nexus of interest income with disbursement of grants made, as having been established. 9 (supra) 28 35. We may also note another principle to test proposition, i.e., of diversion by overriding title. This principle was originally set out in Sitaldas Tirathdas case10 and principle has been since followed. If portion of income arising out of corpus held by assessee consumed for purposes of meeting some recurring expenditure arising out of obligation imposed on assessee by contract or by statute or by own volition or by law of land and if income before it reaches hands of assessee is already diverted away by superior title portion passed or liable to be passed on is not income of assessee. test, thus, is what amounts to application of income and what is diversion by overriding title. principle, in sense would apply, if Act or Rules framed thereunder or other binding directions bind institution to spend interest income on disbursal of grants. 36. appellant-Corporation has devised procedure of sanction/disbursal of its system for institutional development of cooperatives. appellant-Corporation actually supplements efforts of State Governments. Thus, State Governments recommend proposals of individual societies/projects to appellant-Corporation in 10 (supra) 29 prescribed systematic format and that society may also avail direct funding of projects under various schemes of assistance on fulfillment of stipulated conditions. formal sanction is thereafter conveyed to State Government or Society as case may be and release of funds depends on progress of implementation and is on non- reimbursement basis. Part of funds are advanced as loans ranging from 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 stand of appellant-Corporation as contained in para 5 of assessment order. 37. NCDC Act does not specify as to who should be grantee; what should be amount to be granted. All that is prescribed is that business of appellant-Corporation is to provide loans or grants for avowed object for which it has been set up. decision with regard to who should get grant is taken by appellant-Corporation directly in course of, and for purpose of its business. Thus, amount agreed to be given should be given as loan or grant, or both is entirely at business discretion of appellant-Corporation. No grantee has superior title to funds. Hence, this is not case of diversion of 30 income by overriding title. 38. We may record here that income has to be determined on principles of commercial accountancy. There is, thus, distinction between real profits ascertained on principles of commercial accountancy. In case of Poona Electric Supply Co. Ltd. v. CIT Bombay City11 this Court has held that income tax is on real income. In case of business, profits must be arrived at on ordinary commercial principles. scheme of IT Act requires determination of real income on basis of ordinary commercial principles of accountancy. To determine real income , permissible expenses are required to be set off. In this behalf, we may also usefully refer to judgment in CIT, Gujarat v. S.C. Kothari12 where following principle was laid down: 6. tax collector cannot be heard to say that he will bring gross receipts to tax. He can only tax profits of trade or business. That cannot be done without deducting losses and legitimate expenses of business... There is, thus, clear distinction between deductions made for ascertaining real profits and thereafter distributions made out of profits. 11 (1965) 3 SCR 818 12 (1972) 4 SCC 402 31 distribution would be application of income. There is also distinction between real profits ascertained on commercial principles and profits fixed by statute for specific purpose. Income tax is tax on real income. 39. We may also note that even though in own view of appellant-Corporation for preceding years in question, it never claimed any such adjustments, but that of course does not preclude right of appellant-Corporation as they sought to make out case of mistake at subsequent date. 40. We may also note another statutory development. Finance Act of 2003 added provision in Section 36 of IT Act as sub-clause (1) (xii) in following terms: 36. Other deductions. (1) deductions provided for in following clauses shall be allowed in respect of matters dealt with therein, in computing income referred to in section 28 (i) to (xi) xxxx (xii) any expenditure (not being in nature of capital expenditure) incurred by corporation or body corporate, by whatever name called, if, - 32 (a) It is constituted or established by Central, State or Provincial Act; (b) Such corporation or body corporate, having regard to objects and purposes of Act referred to in sub-clause (a), is notified by Central Government in Official Gazette for purposes of this clause; and (c) expenditure is incurred for objects and purposes authorised by Act under which it is constituted or established; xxx 41. amendment has to be appreciated in context of 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 Act of Parliament have basic object and function of carrying on developmental activities in areas as specified in said Acts. By Finance Act, 2001 and Finance Act, 2002, tax exemption of certain bodies set up through Act of Parliament was withdrawn. Subsequent to removal of tax shield, doubt has arisen that some of 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 deduction when 33 computing income under head profits and gains of business or profession . 42. Finance Act, 2003, thus, inserted new clause mentioned aforesaid so as to provide that expenditure not being capital expenditure incurred by corporation or body corporate, by whatever name called, constituted or established by Central, State or Provincial Act for objects and purposes authorised by such Act under which such corporation or body corporate was constituted or established, shall be allowed as deduction in computing income under head profits and gains of business or profession . amendment had been introduced into Act with effect from 1.4.2002.13 43. question, thus, arises whether prior to this amendment such expenses were not allowable under prevailing tax regime for such entitles which were not exempt from tax. In years prior to amendment, as we are dealing with AY 1976-77 onwards, tax jurisprudence has evolved on basis of ordinary principles of commercial accountancy for determining taxable income. Thus, prior 13 Chaturvedi & Pithisaria s Income Tax Law, Volume 3, Sixth Edition (2014), Pg. 3310, published by LexisNexis 34 to insertion of this sub-clause, such expenses would be permissible under general Section 37(1) of IT Act, which provides for deduction of permissible expenses on principles of commercial accountancy. Post amendment, such expenses get allowed under specific section, viz. Section 36(1)(xii) after amendment by Finance Act, 2003. 44. We would, thus, like to conclude that we are unable to agree with findings arrived at by AO, ITAT and High Court albeit for different reasons and concur with view taken by CIT(A) for reasons set out hereinbefore. It is, thus, left to this Court as stated above to strike final blow and allow appeals, leaving parties to bear their own costs, while noticing with regret inordinately long passage of time and wastage of judicial time on deciding, who is principally right when in either eventuality it benefits Central Government. Postscript 1: 1. Indian legal system is reeling under docket explosion. Government and public authorities are active contributories to this deluge. To top it, number of litigations arise inter se 35 Government and its bodies and, thus, only question, as stated in beginning, is which pocket of Government will be benefitted? 2. aforesaid position resulted in judicial innovation with Supreme Court passing orders in Oil and Natural Gas Commission & Anr. v. Collector of Central Excise14 requiring that such cases must be referred to Committee to be appointed by Government to facilitate resolution of such disputes and that no case should be filed without approval of this Committee. This system was failure as is apparent from facts of present case, where SLP filed by appellant-Corporation was initially dismissed with liberty to revive same in case High Powered Committee granted such permission which was so granted in meeting held on 14.08.2009. said Committee discussed legal ramifications, and in some way opined in favour of appellant-Corporation, as is apparent from discussion aforesaid. But ball was again lobbed back into Court to adjudicate said issue rather than resolution being reached. result was only revival of appeal, and consequent decision which has seen light of day only now. 14 1995 Supp (4) SCC 541 36 3. aforesaid failure of system resulted in Supreme Court recalling its orders in ONGC cases vide Electronics Corporation of India v. Union of India.15 4. Central Government and State authorities have been repeatedly emphasising that they have evolved litigation policy. Our experience is that it is observed more in breach. approach is one of bringing everything to highest level before this Court, so that there is no responsibility in decision-making process unfortunate situation which creates unnecessary burden on judicial system. This aspect has also been commented upon in judgment of this Court in Union of India & Ors. v. Pirthwi Singh & Ors.,16 albeit between Government and private parties, where question of law had been settled and yet appeal was filed only to invite dismissal. object appears to be that certificate for dismissal is obtained from highest court so that quietus could be put to matter in Government Departments. Undoubtedly, this is 15 (2011) 332 ITR 58 (SC) 16 (2018) 16 SCC 363 37 complete wastage of judicial time and in various orders of this Court it has been categorized as certificate cases , i.e., purpose of which is only to obtain this certificate of dismissal. 5. 126th Law Commission of India Report titled Government and Public Sector Undertaking Litigation Policy and Strategies debated Government versus Government matters which weighed heavily on time of Courts as well as public exchequer. This was as far back as in 1988. It was only in year 2010 that National Litigation Policy (for short NLP ) was formulated with aim of reducing litigation and making Government efficient and responsible litigant. Five (5) years later it reportedly saw revision to increase its efficacy, but it has hardly made impact. In year 2018, Central Government gave its approval towards strengthening 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. aim was and is to put in place mechanism within Government for promoting speedy resolution of disputes of this 38 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 order passed in Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India 17 by bench of which one of us (Sanjay Kishan Kaul, J.) was part. 6. Insofar as non-taxation matters are concerned, Administrative Mechanism for Resolution of CPSEs Disputes was conceptualised to replace Permanent Machinery of Arbitration and to promote equity through collective efforts to resolve disputes. It has two-tiered structure. 7. At first level, commercial disputes will be referred to Committee comprising Secretaries of Administrative Ministries/Departments to which disputing parties belong and Secretary, Department of Legal Affairs. In case two disputing parties belong to same Ministry/Department, Committee will comprise Secretary of Administrative Ministry/Department 17 SLP (C) Diary No. 35567 of 2019 39 concerned; Secretary, Department of Legal Affairs and Secretary, Department of Public Enterprises. If dispute is between CPSE and State Government Department/Organisation, Committee will comprise of Secretary of Ministry Department of Union to which CPSE belongs, Secretary, Department of Legal Affairs and Chief Secretary of State concerned. Such disputes are ideally to be resolved at first level itself within time schedule of three (3) months, and in eventuality of them remaining unresolved, same may be referred to Cabinet Secretary at second level, whose decision will be final and binding on all concerned. 8. We are of opinion that one of main impediments to such resolution, plainly speaking, is that bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement. In order to make system function effectively, it may be appropriate to have Committee of legal experts presided by retired Judge to give their imprimatur to 40 settlement so that such apprehensions do not come in way of arriving at settlement. It is our pious hope that serious thought would be given to aspect of dispute resolution amicably, more so in post-COVID period. 9. In most countries, mediation has proved to be efficacious remedy and here we are talking about mediation inter se Government authorities or Government departments. India is now signatory to Singapore Convention on Mediation and we understand that serious thought is being given to bring forth comprehensive legislation to institutionalise mediation, in furtherance of this function to which India has committed itself. Postscript 2: 10. We now turn to issue of matters pertaining to CPSEs and Government authorities insofar as taxation matters are concerned, 41 because they are consistently sought to be carved out as separate category of cases. One of largest areas of litigation for Government is taxation matters. petition rate of tax department before Supreme Court is at 87%. 18 So, question is can something be done about it? 11. In our opinion, vibrant system of Advance Ruling can go long way in reducing taxation litigation. This is not only true of these kinds of disputes but even disputes between taxation department and private persons, who are more than willing to comply with law of land but find some ambiguity. Instead of first filing return and then facing consequences from Department because of different perception which Department may have, Advance Ruling System can facilitate not only such resolution, but also avoid tiers of litigation which such cases go through as in present case. In fact, before further discussing this Advance Ruling System, we can unhesitatingly say that, at least, for CPSEs and Government authorities, there would be no question of taking this matter further once Advance Ruling is delivered, and even in case of private 18See Economic Survey 2017-19 Volume 1 by Department of Economic Affairs, Ministry of Finance, Government of India 42 persons, scope of any further challenge is completely narrowed down. 12. It is as far back as in 1971 that report was submitted by Direct Taxes Enquiry Committee under Chairmanship of Dr. K.N. Wanchoo, recognising need for providing Advance Ruling System, particularly in cases involving foreign collaboration. aim was to give advance rulings to taxpayers or prospective taxpayers, which would then considerably reduce Revenue s workload and decrease number of disputes. This finally resulted in scheme of Advance Ruling being brought into effect in 1993, with introduction of new Chapter in Income Tax Act, 1961 (hereinafter referred to as IT Act ). quasi-judicial tribunal was established as Authority for Advance Rulings (for short AAR ) to provide certainty and avoid litigation related to taxation of transactions involving non- residents. scope of transactions on which advance ruling can be sought from AAR has gradually increased to now include both residents and non-residents, who can seek same for issues having substantial tax impact. Chapter XIX-B of IT Act deals with advance rulings and it has been defined in Section 245N(a) of 43 IT Act. These rulings are binding both on Income Tax Department and applicant, and while there is no statutory right to appeal, Supreme Court has held in Columbia Sportswear Company v. Director of Income Tax Bangalore19 that challenge advance ruling first lies before High Court, and subsequently before Supreme Court. advance ruling may be reversed in event substantial question of general public importance arises or similar question is already pending before Supreme Court for adjudication. 13. ground level situation is that this methodology has proved to be illusionary because there is increasing number of applications pending before AAR due to its low disposal rate and contrary to expectation that ruling would be given in six (6) months (as per Section 245R(6) of IT Act), average time taken is stated to be reaching around four (4) years!20 There is obviously lack of adequate numbers of presiding officers to deal with volume of cases. Interestingly, primary reason for this is large number of 19 (2012) 11 SCC 224 20See Deloitte Report on Advance Rulings in India: Delivering Greater Tax Certainty (Deloitte Tax Policy Paper 5, 2019) 44 vacancies and delayed appointments of Members to AAR. 21 In view of time taken, very purpose of AAR is defeated, resulting in mechanism being used infrequently as is evident from ever- increasing tax related litigation. 14. We may notice significant development in Section 245N of IT Act. It was through Notification No.11456 dated 3.8.2000 that public sector companies were added to definition of applicant , and in 2014, it was made applicable to resident who had undertaken one or more transactions of value of Rs. 100 crore or more. 15. Insofar as resident is concerned, 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 ceiling limit, more so in terms of recent announcement stated to be in furtherance of tax friendly face-less regime! 16. We may refer to international scenario where there has been incremental shift towards mature tax regimes adopting advance 21ibid. 45 ruling mechanisms. increase in global trade puts rulings system at centre-stage of robust international tax cooperation regime. Organisation for Economic Cooperation and Development (for short OECD ) lists advance rulings as one of indicators to assess trade facilitation policies, making it aspirational international best practice standard. For example, Australia and New Zealand have robust system of advance rulings wherein decisions (which are public rulings affecting large number of taxpayers) are given teeth by being made binding on revenue authorities. New Zealand has gone step further and innovated status rulings under which taxpayer can apply to Commissioner for ruling on how change in law impacts existing ruling. 17. In United States, there is mechanism for Treasury to authorise guidance in form of revenue rulings, procedures and notices. mechanism again, has been bolstered by subsequent practice and interpretations of United States courts, where rulings have indicated that taxpayers may be penalised if they act 46 inconsistently with legal interpretations set out in revenue rulings, procedures or notices. 18. Tax transparency has been hallmark trait of Swedish legal system. Swedish law requires public disclosure of ex ante tax administration such as advance rulings. Both taxpayer as well as Swedish Tax Agency can request advance tax ruling, these rulings are published without information identifying taxpayer that requested them. Skatter ttsn mnden, or Council for Advance Tax Rulings is Swedish Government agency which is vested with this power. advance ruling system has played crucial role in Sweden s position as country with one of highest tax compliance rates in world. 19. aim of any properly framed advance ruling system ought to be dialogue between taxpayers and revenue authorities to fulfil mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in litigation process. 47 20. We, thus, consider it appropriate to recommend to Central Government to consider efficacy of advance tax ruling system and make it more comprehensive as tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. council for Advance Tax Ruling based on Swedish model and New Zealand system may be possible way forward. 21. We have been persuaded to write two postscripts on account of backbreaking dockets which are ever increasing and as move towards trust between Tax Department and assessee, and we hope that both aspects meet consideration at appropriate level. 22. In end before parting we may refer to legal legend Mr. Nani A. Palkhivala, who while addressing letter of congratulations to Mr. Soli J. Sorabjee on attaining his appointment as Attorney General on 11.12.1989 referred to greatest glory of Attorney General as not to win cases for Government but to ensure that 48 justice is done to people. In this behalf, he refers to motto of Department of Justice in United States carved out into Rotunda of Attorney General Office: United States wins its case whenever justice is done to one of its citizens in courts. Indian citizenry is entitled to hope that aforesaid is what must be objective of Government litigation, which should prevail even within Indian legal system. In words of Martin Luther King, Jr., We must accept finite disappointment, but never lose infinite hope. 49 23. copy of this order be sent to Department of Revenue, Department of Expenditure and Department of Economic Affairs, Ministry of Finance and to Ministry of Law & Justice. ... J. [Sanjay Kishan Kaul] .. J. [Indu Malhotra] New Delhi. September 11, 2020. 50 National Co-Operative Development Corporation v. Commissioner of Income-tax, Delhi-V