The Funds received by the National Co-operative Development Corporation under Section 13(1) of NCDC Act, 1962 will be treated as Taxable Income: SC
The National Co-operative Development Corporation (Appellant) was established under the National Cooperative Development Corporation Act, 1962. (NCDC Act) and it functions under Section 9 of the NCDC Act to propel loans or grant subsidies to the State Governments which is helpful in financing cooperative societies. It likewise provides loans and grants legitimately to both National level cooperative societies and State level cooperative societies, the latter on the guarantee of State Governments. The funding to the National Co-operative Development Corporation comes by way of grants and loans received from the Central Government which is enshrined in Section 12 of the NCDC Act and for this, the Corporation is mandatorily required to maintain a fund which is called the National Cooperative Development Fund under Section 13 of the Act, where all the awards and advances received from the Central Government is credited. Though this Corporation is an intermediary or passes through entity, it is a distinct juridical entity.
The issue which had arisen in this case of National Co-operative Development Corporation v. Commissioner of Income Tax, Delhi-V, was that “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 a deduction for determining the taxable income of the Corporation?” It was opined by the Assessing Officer (AO) that the non-refundable grants are not a revenue expense but they are a capital expense, and thus, the equivalent is not allowed for deduction.
An appeal was made by the Appellant-Corporation before the Commissioner of Income Tax (CIT) regarding grants made by them undisputedly fall within its authorized activities and are linked with its main activities which are described under Section 9 of the NCDC Act, 1962. However, this appeal was rejected by CIT, referring Section 37 of the Income Tax Act, 1961 (IT Act), as it laid down that “any expenditure which is expended wholly and exclusively for the business was allowable as a deduction while computing business income”.Thus, it was found by CIT that the approach adopted by the Assessing Officer was erroneous and hence, the appellant-Corporation is entitled to the deduction of Rs. 19,35,950/-.
This made an aggrieved party prefer an appeal before the Income Tax Appellate Tribunal (ITAT) where the previous view of the Assessing Officer was accepted and the approach of the CIT was condemned, therefore the order of CIT was set aside. It was held by the ITAT that all the grants, additional and other sum received by the Appellant-Corporation from the Central Government under Section 12 of NCDC Act, 1962 went to the single fund and the same cannot be treated as its income, therefore, the disbursements made from such fund could not be treated as a revenue expense.
A contradictory statement had been opined by the Delhi High Court that the main business of the Appellant-Corporation was to receive funds from the Central Government and then advance them as loans or grants to cooperative societies, therefore the interest earned from the loan would fall under the “head D of Section 14 of Chapter IV of the Income Tax Act, 1961 under the head of profits and gains of business or profession being a part of its normal business activity”. It was also advanced by the High Court that to claim a deduction as an item of revenue expenditure, the Appellant-Corporation has to first establish that it is incurred as an expenditure because the advancement of loans to the State Government and Cooperative Societies could not be claimed as an expenditure as the same does not lave the hands of the Corporation irrevocably. At last, it was left to the Apex Court to decide the matter and solve the issue raised.
Observations and Conclusions of the Court:
The Court is of the view that the grants made by the Appellant-Corporation will undisputedly fall within its authorized business activities and the advancing of grants from the source of interest will be a revenue expense because it had not resulted in the acquisition of capital assets by any Corporation, therefore, the same will be adjustable under Section 37(1) of the IT Act, 1961.
Similarly, the interest income would fall under the head D of Section 14 of the IT Act under the head of profits and gains of business or profession being a part of its normal business activity and would not fall under the head of income from other sources under Section 56 of the IT Act under the head of a residuary clause as income from other sources. The reason behind this is that the only business of the Appellant-Corporation here is to receive funds from the Central Government and then advance the same as loans and grants to the State Government and Cooperative Societies. Thought, the interest income arises on account of the funds received may not be utilized for a certain period but instead of lying idle, it is put in the fixed deposits, and the income generated from it again applied to the disbursement of grants and loans.
The issue of dispute raised by the Appellant-Corporation is related to the grants only and not to the loans because grants made on the interest generated would never come back and hence the same is adjustable against the business expenses. Additionally, the purpose for which this Corporation has been established is to provide financial support to the State Government and Cooperative Societies by way of providing them loans or grants. This very nature of act comes under the business activity and the income generated in the form of interest on the unutilized capital is the nature of business income.
Therefore, the appeal of the National Co-operative Development Corporation is dismissed and is entitled to the payment of Rs. 19,35,950/- as a deduction from the income tax.