National Cooperative Development Corporation v. Assitant Commissioner of Income Tax

?K IN THE HIGH COI]RT OF DELHI AT NEW DELHI + ITA NOs . sl3lzlirl,8l}l20ll,8lll20l1, ll3gl20ll,114012011, & rr4u20tl Reserved on : 16th November. 2011. % Date of Decision : 28th November. 2011. NATIONAL COOPERATIVE DEVELOPMENT CORPORATION ... Appellant Through: Mr. Rajat Navet, Adv. VERSUS ASSISTANT COMMISSIONER OF INCOME TAX, ,S CIRCLE 13(1) .....Respondent Through : Ms. Suruchi Aggarwal, Adv. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V. EASWAR

¶1Whether Reporters of local papers may be allowed to see the judgment?

2.To be referred to the Reporter or not ? Yes.

¶3Whether the judgment should be reported in the Digest? Yes. R.V. EASWAR. J.: For detailed order. see ITA No.5I2|20II. lr' M -"-t " e' (R.V. EASWAR) JUDGE <- ,lr /' It -. (SANJIV KIIANNA) JUDGE f NOVEMBER 28,2011 Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. t{ :K IN TIIE HXGII COU]RT OF DEI-I{I AT NEW DELIil + ITA NOs.5121201.1, 5l3l20ll, 810/20Ltr', 811/2011' L139 120L1,, 11.40120L1, & L1.,41,1201.1 R.eserved on : 16tl'November, 201 1. Date of Decision : 28tl'November. 2011. NATIONAL COOPERATIVE DEVELOPMENT CORPORATION "" APPellant Thtough: Mr. Rajat Navet, Adv. ,, VERSUS \\./ ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 13(1) " "'ResPondent Through : Ms. Suruchi Aggarwal, Adv. CORAM: IXON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MfT. JUST'ICtr R.V. EASWAR

¶1Whether Reporters of local papers may be allowed to see the judgmenl?

¶2To be referred to the Reporter or not ? 1-

¶3Whether the judgffrent should be reporled in the Digest? "l*-1 t/' R'.V. EASWAR' J.: t-These ar.e seven appeals filed by the assessee under Sec.260A of the Income Tax Ait, t961 ("the Acf'for short) against the orders of the ITA Nos.5 l2l20IL, 51312011, 810/201 l, 8l1l2}1l,1139/2011,ll40l20ll &' ll41l201l Income Tax Appellate Tribunal ("Tribunal" for short) passed on different clates and for different assessment years as shown in the table below: ITA No. Assessment Year Date of Tribunal's orrler No'of questions raised i.r/ sr2l20ll 1999-2000 st3l20rr 2004-05 810/2011 2007-08 8l1l20II 2001-02 113912011 2000-01 rr40l20rl 2002-03 rl4ll20ll 2003-04 20-rl-2009 20-lr-2009 31-1-2011 l-3-20rr 29-4-70rr 2l-4-201r t3-4-201r In respect of the assessment yeals 1999-00, 2004-05 and 2000-01 the assessee has raised the following questions which are comillon to all the three years:

(l)What is the-true rneaning and real effect in law of the provisionsofSec.36(1)(viii)oftheIrrcotneTaxAct,196l' as it existed for the relevant assesslnent year and what items of income can be considered as profits derived from businessofprovidinglongtermfinancewhichwouldin law be eligible for deduction u/s 36(1)(viii)?

(2)What "r""th" principles to be applied for cletermining whether a particular itern of income is derived fiom the business of providing long tefm finance for being eligible for deduction under Section 36(1)(viii) and whether the ITA Nos.5 I 2l20Il, 51312017, 8 10/201 1 ' 811 lz}L 1, Il3g l20rl, 1 140 l20r | &' | 141 120 r 1 Page2 of 17 issue as to what is profits derived from such business of providing long term finance is to be decided on the basis of pragrnatic business consideration rather than purely legalistic arguments?

(3)Whether in the facts and circumstarices of the case, the Tribunal was colect in law in relying and applying the ratio of decisions which do not deal or pertain to the provisions contailed in Sec.36(1)(viii) of the Income Tax act, 196I?

(a)whether in the facts and circumstances of the case, the Tribunal was coffect in law in holding that income earned by way of dividend from redeemable shares was not eligible for deduction under Section 36(1)(viii) of the Act?

(s)Whether in the facts and circumstances of the case, the Tribunal was correct in law in holding that interest eatled on short term deposits made during the interregnuln period between disbursement of funds rvas not profit derived fioin the business of long term finance and thus not eligible for deduction under Section 36(1)(viii) of the Act?

(6)Whether in the facts and circumstances of the case, the Tribunal was cotrect in law in holding that service charges earned by the Appellant for monitoring and irnplementation of sDF Loans was not eligible for deduction under Section 36(1)(viii) of the Act? In respect of the assesstnent years 2007-08 and 2001-02 the assessee has, in addition to the above six questions, raised olle lnore .. I r . r question which is as under: "Whether in the facts and circumstances of the case, the Tribunal was correct in law in holding that interest on advances/deposits and misc. receipts were not eligible for deduction under Section 36(1)(viii) of the Act?" ITANos.512l20ll, 51312011, 8i0/2011, 8ll/20r1, ll39l20ll, 1740/2011 & ll4r/201 | In respect of the assessment year 2002-03, in addition to the above seven questions the assessee has raised the following question as question No.1: ,,Whether in the facts and circumstances of the case' the Tribunal was correct in law in upholding initiation of proceedings by the Assessing officer under section 148 of the Income Tax Act, 196I?" In respect of the assessment year 2003-04, the assessee has raised the following four questions:

(l)Whether in the facts and circumstances of the case, the 'Iribunal was correct in law in upholding initiation of proceedings-under Section 263 as well as the order passed by the CIT under Section 263 of the Act?

(2)What is the true meaning and real effect in law of the provisions of Sec.36(lXviii) of the Income Tax Act, 196l'as it existed for the relevant assessment year and what iterns of income can be considered as profits derived fi'om business of providing log tenn finance which would in law be eligible for deduction u/s 36(1)(viii)?

(3)What are the principles to be applied for detennining whether a particular item of income is derived from the business of providing long term finance for being eligible for deduction under Section gOdxviii) and whether the issue as to what is profits-derived from such business of providing long term finance is to be decided on the basis of prug*uti, brrtin.ts consideratiori rather than purely legalistic arguments? ( )Whether in the facts and circutnstances of the case, the Tribunal was corect in law in relying and applying the ratio of decisiols ITANos.5l2l2}ll, 51312011, Bl0/2011, 8 I 1/201 l, 1139 l}0ll, lI40l201l & ll4rl201r which do not deal or pertain to the provisions contained in Sec.36(1)(viii) of the Income Tax Act, 196I?" Z. It is contended by the assessee that all the questions for all the years in appeal are substantial questions of law and therefore the appeals should be admitted. 'Ihe revenue contests this position.

¶3The assessee is a company set up under the National cooperative Development Corporation Act, Lg62 with the object of promoting the cooperative movemetlt in the country.

¶4We can take up ITA No.51312011 as the lead case. In the return filed for this yeffi, the assessee claimed that it was entitled to the deduction under Sec.36(1)(viii) of the Act in respect of the following items of income: a) Dividend received in respect of redeemable preference shares in companies: Rs. 46,94,800 a) Interest on short-term deposits with banks: Rs.3,76 ,3I,I44 c) Service charges on SDF loans: Rs. 85,09,703 The deductions were claimed on the footing that the assessee was engaged in the business of providing long-term finance and the aforesaid items of income were derived from the said business as provided in Sec.36(1)(viii). The Assessing Officer did not accept the claim since according to him ITANos.5l2l20l1, 5l3l20ll, 810/2011, 8lrl2oll, rl391201l, rl40/201r & |14|120|| these were not items of income "derived frotn" the business of providing long-ter-m finance within the rneaning of the section.

¶5On appeal, the CIT (A) endorsed the view taken by the Assessing Officer. On further. appeal by the assessee to the Tribunal, the Tribunal held that though the aforesaid items of incorne can. be said to be ,,attributable" to the business of providing long-term finatLce, that was not sufficient to attract the provisions of Section 36(1)(viii) and that the condition in the Section that the incorne should be'"derived from" the business of providing long-term finance was not satisfied. In this view of the matter, it proceeded to examine every item of income in respect of which the deduction was claimed and recorded.the following findilgs in paragraph 13 of its order: a) That the dividend from redeemable preference shares represents return/dividend on investment and it cannot be said to represent profit from providing long-tenn finance and that there was nothing to show that the investment in the shares was rnade-with a view to providing long-term finance: b) That the interest from bank was received on deposits/FDs which were for short periods and even if they wele for long periods they cannot be considered as profit derived from the provision of long-term finance to banks as essentially they are the assessee's investrnents; lTANos.5121201l, 5l3l2}l1, 810/2011, 811/2011, l!39l20ll,ll40l207l & 1141/2011 c) The service charges received by the assessee in respect of SDF loans did not represent any interest, that they were only service charges received by the assessee on loans given by the goverunent but routed through the assessee and therefore the service charges cannot be said to be income or profit derived from the business of providing long-telm finance.

¶6We may first take up question No.4. In our view, it is a substantial question of law. The point to be considered is whether the clividend income received in respect of the investment in redeernable preference shares can be treated as profits derived fiom the business of providing long-term finairce. "Long telm finance" is defined in clause (h) of the Explanation to S.36(1)(viii) to mean "any loan or advance where the terms under which moneys ale loaned or advanced provide for repayment .along with interest thereof during a period of'not less than five years"' This takes us to the question whether a preference share can be held to be a loan or advance.

¶7Section 85 of the cornpanies Act, 1956 provides for two kinds of share capital of a company: preference share capital and equity share capital. Section 80 makes detailed provisions for the issue by a company of redeemable preference shares. Clause (a) of the proviso to sub-section

(1) thereof says that no such share shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of share capital rnade for the purpose of ITA Nos.5 l2/2OIl, 513/2011, Bl0/2011, 8rl l2orl, 1739 /20n, l 140/201 1 & l l41 /201 1 PageT oflT redemption. In Globe llnited Engineering and Foundry co' lLtd v Industrial Finance Corponation of India Ltd' (1974) 44 Comp' Cas' 347, this Court observed: "The preference shares are really part of the company's share caprtal; they are not loans". In' the ligfut of the clear statement of this court, redeemable preference shares cannot be treated as loans. g. In the case of I alchand Sursna & others v Xlyderabnd Vanaspathi Ltd. (1gg0) 6s conry.cas. 415,the Andhra Pradesh High court held that since redeemable preference shares can be redeemed by a company only out of its profits (which would otherwise be available for dividend) or out of proceeds of an issue made for the purpose of redemption, the holder theieof is not a creditor as such limitations irnposed by the Proviso (a) to Section 80(1) of the Cornpanies Act do not apply to an ordinary creditor' ' We must however add that the Andhra Pradesh High Court was concetned with the position of a redeemable preference shareholder after the failure of the comllany to redeem the share. In the case before, us, we are concerned with the position of a redeemable preference share holder prioi to the due date for redemption. If anything, such a case is on stronger q. footing and arsuch shareholders can never be held to be a creditor of the company.

¶9The issue had also the Supreme'Court in Investment CorPoratio n arisen under the Interest Tax AcL 1974 before CIT, Kanpur vs Sshars Inditt Savings and Ltd. (2010) 321 ITR 371' The question before ITANos.512l20l1, 51312017, 810/2011' 81 1/201 l, lr3gl20rr, ll40l20r1 & ll4r/20rr Page B of 17 a the court was whether interest eatned on bonds and debentures was chargeable to tax under the aforesaid Act having regard to the definition of the word "interest" in sec.2(7) of the said Act. Under this definition, interest lneans interest on loans and advances made in India; it included and excluded certain interest which is not relevant for our purpose. The question was whether bonds and debentures can be treated aS loans and advances. It was observed by the Court that the interest on loans and advances will not cover interest on bonds and debentures bought by the assessee by way of "investment", within the meaning of Section 2(7)' In this view it was held that such interest was not chargeable under the Interest Tax Act.

¶10We may also refer to a judgment of the Gujarat High Court in Anarkali ssrabhai v. cIT Guiarat [1952] 138 ITR 437. That case'arose under the Income Tax Act and the question was whether the assessee was liable to pay capital gains tax on receipt of an arnount equal to the face value of the preference shares when the company redeern.S1"., tn" y assessee received fi'orn the company an amount which aeeeded' the ' amount which(had paid for these shares. In deciding this question the Gujarat High Court had to examine the nature of redeemable prefbrence shares issued by u company. The Court referred to Palmer's Company Law (page 356, par4graph l,22"d Edition) wherein it was observed that "fi.orn the financial point of view, redeemable preference Shares are a l.""rb,rid : y ft{1slA form of shares and debentures, incorporating features of both, ITA Nos.5 12/2011, 5l3l}0ll, 810/2011, 8r1 l20l r, l l39 l20I l, l l40 /20 1r & 1 1 41 /201 1 rl o' o and being closer to the latter than other preference shares, but fiorn the legal point of view they are shares and are treated as such"' The Coutt further noted the view of the leamed author in Pennington's Company Law,4th Edition, page lg5 that if redemption of the petitioner's shares would make a company insolvent, it may not be allowed to redeem those shares because repayment of preference capital would be a fraud upon the company's creditors. According to ihe Gujarat High Court this view of the author clearly indicated that the holder of preference shares is not in the same position as tlrat of a creditor. The learned author had also expressed the view in the aforesaid treatise, as noticed by the Gujarat High Court, that if a company defaults in redeeming ihe preference shares by the date fixed for redemption, the holder thereof cannot cornpel it to do so by suing in debt for the return of his capital or by fili1g for a mandatory injunction. This vierv of the author, according to the Gujarat High Court also negatives the contention that once the company decides to redeem its preference shares, the holder thereof would be in the position of a creditor. 1 1. Having regard to the legal position adumbrated in the above judgrnents, we are' of the view that investment in redeemable preference shares cannot be considered as a loan or advance made by the assessee to the company for interest. The basic characteristic of a loan is that the person advancing the loan has the. right to sue on the debt, whereas the preference share holtlers cannot sue for the money due on the shares ITA Nos.5 1 2l20ll, 51312011 , 810/201 1 , 81112011 , rl3gl2olr, ll40l20l1 & 1141/2011 Page 10 of17 I underlaken to be redeemed and as of right claim a return of the share money except in a winding up and that to after the redemption date. Similarly, a preference share holder stands on a different footing from a person who has advanced monies to another. An "advance" has been defined in the Black's Law Dictionary as "to pay money or render other value before. it is due; to furnish something before an equivalent is received or to fuinish money for a specific pu{pose understood between the parties, the money or some equivalent to be returned'1 etc. 'Ihus an advance is also quite different frorn I preference shares in nature and character.

¶12Having regard to the aforesaid discussion, we are of the view that there is no merit in the assessee's claim that the dividend received in interest of the redeemable preference shares amounts to profits derived from providing long term finance within the meaning of Section 36(1)

(viii) of the Act read with clause (h) of the Explanation to the Section. We, accordingly, answer the substantial question of law in the affirmative and in.favour of the Revenue.

¶13Question No.5 is directed against the finding of the Tribunal that interest earned on short-term deposits made during the interregnum period between disbursernent of funds was not profit derived from the business of providing long-term finance. As held by the Tribunal, this is also an ITA Nos.5 1 2/2011, 513/2011, B 10/201 1, 8tt l20ll, ll39/201 l, 1 140/201 | &. | | 41 l20l I @ investment of the funds of the assessee for making use of the idle funds remaining with it during the intenegnum period. The interest cannot be considered as profit derived frorn the business of providing long-terrn finance within the meaning of the Section. No question of law arises orit of the factual finding of the Tribunal, which is not challenged as perverse. The question cannot be adrnitted.

¶14' euestion No.6 is directed against the finding of the Tribunal that the service charges on SDF loans do not qualiff for the deduction because the loans are not provided by the assessee but ale given by the Govemment through the assessee for which service charges are paid. This factual finding is not challenged by the assessee. The funds of the assessee are not involved. The Government's funds are routed through the assessee. The assessee cannot therefore be considered to be cartying on the business of providing long-term fi.nance. It is in receipt of only service charges and not interest, obviously because its funds are not involved. It is also not the case that the assessee borrows monies fi'om the Government for interest and advances loans for higher interest. In'view of the factual position, no substantial question of law arises. We decline to admit the question.

¶15We now tum to the first three questions which are general in nature. Having regard to the findings recorded by the Tribunal, which are not disputed, these questions are of academic nature. They do not raise a1y substantial questions of law. We decline to admit thern. ITA Nos.5 l2/20II, 5I3l20Il, 810/201 i, 8tv20rl, 1r3912011, ll401201l & 1 141 /2011 r

¶16The questions raised by the assessee in ITA NO.5I2|20IL are identical. For the above reasons we decline to adrnit them. t7. euestion Nos.l to 5 raised in ITA No.1 13912011 are identical to the first five questions raised in the appeals in ITA Nos.513 &' 5l2l20l1. For the same reasons given above, we decline to admit them. Question No.6 is directed against the finding of the Tribunal that interest on advances/deposits or loans to'employees amounting to Rs.9,95,152 does not qualiff for the deduction because it does not.represent profit derived from the business of providing long-terrn finance. In substance and qualitatively, there is no difference between the other items of incorne claimed to be eligibte for deduction under Sec.3.6(l)(viii) and the interest received on advances/deposits or loans to employees. The Tribunal has therefore applied the same reasoning to this interest also' We do not see aly substantial question of law arising fi'om the finding.of the Tribunal' Our reasoning in respect of the other questions applies to this question also. We therefore decline to admit the question No.6 in this appeal'

¶18We now take up ITA Nos. 810 & 8IIl20t1 relating to the assessment years 2007-08 and 200L-02 respectively. The first six questions raised by the assessee are identical with the six questions raised by it in ITA Nos. 5I2 & 51312011. For .the same reasons given by us in those appeals, we decline to admit these questions. Question No.7 in these two appeals (i.e., ITA Nos.BlO & 8IIl2OIl) are identical to Question No.6 raised in ITA No.l I3gl20L1, i.e., against the finding of the Tribunal ITA Nos.5 1 212017 , 513/2011, 8 10/201 I , 81 1/201 1, ll39l20rr, lr40l20ll & 1r4ll20lr Page 13. of 1.7 @ that interest on advances or loans to employees does not qualiry for the deduction. Following our reasoning given in the precedilg paragraph, we decline to admit this question for this year. The question also refers to "miscellaneous receipts". The Tribunal has not dealt with this item of receipt separately and has applied the earlier orders passed by it for the assessment years Lggg-2000 and 2004-05 to the miscellaneous receipts and held that they do not also qualiff for the deduction. In our view, the salne reasoning given by us in respect of the other items of income would apply to miscellaneous income also, the details of which have not been fu'rished to us. We accordingly decline to admit the questions raised by the assessee in ITANos. 810 & 8lLl20lI. Lg. we now take up ITA No.1L4OI2OI1 (asst. year. 2002-03) for consideration. In this year the assessee has raised eight questions, stated to be substantial questions of law. Question Nos. 2 to 8 are identical with Question Nos. I to 7 raised by the assessee in ITA Nos.810,& 8lll20ll (asst. years: 2007-08 and 2001-02). For the reasons given by us in those appeals, we decline to admit question Nos. 2 to B for this year' In question No.1, the assessee has challenged the decision of the Tribunal holding that the reassessment proceedings were validly initiated under Sec.I47ll48 of the Act. Thb decision of the Tribunal is in paragraph 5 of its order' The findings on the basis of which the reassessrnent proceedings we1e held to be in order are: ITANos.512l2}l7, 51312011, 810/2011, 8l1 lzol1, Ll39 lz0lr, 17401201 1 & rl41 /20r r Page L4 ot 17 a) There is no discussion in the original assessment order about the various claims made by tire assessee under Sec.36(1)(viii), except a bare reference to the assessee's letter dated 3-12-2004. b) A perusal of the letter dated 3-12-2004 general letter and did not contain any working section. c) The assessment was reopened within 4 yearsfrotn the end of the assessment year and therefore the benefit of the proviso to Sec.147 is not available to the assessee. d) The reassessment proceedings were not prompted by a change of opinion If that is so, it is obvious that the conclusion of the Tribunal that the reassessment proceedings were validly initiated .cannot give rise to pny question of law, much less a substantial question of law. We therefore decline to admit Question No.1 also for this year.

¶20In ITA No.1 L4Il20l1, the assessee has raised four questions, stated to be substantial questions of law. Question Nos. 2 to 4 are identical with Question Nos.l to 3 raised in ITA Nos. 5I2 8.51312011 and'for the reasons given by us in respect tf thor" questions in those appeals, we decline to admit Question Nos.2 to 4 for this year. As regards the first question, it is directed against the finding of the Tribunal that the CIT'had validly initiated revision proceedings under sec.263 of the Act and set ITANos,5l2/2071, 513/2011, 810/2011' 8lr/2olr, rr39/20r l, 1140/2011 & | 141 /2011 shows that it is just a for the pulpose of the aside the assessment order for de novo consideration and passing of fresh assessment order in respect of the various claims made by the assessee under Sec.36(1)(viii). These claims are the salne as have been rnade in respect of the other years, viz., dividend on redeemable preference shares, interest on bank deposits/FDs, service charges on SDF 'loans, miscellaneous receipts, inteiest on loans/advances to ernployees etc' The Tribunal has taken the view in paragraph 5 of its order that the assessment order was enoneous in as much as it failed to take into account the amendment in Section 36(1)(viii) made by the Finance Act, 198i. It has also been held that the AO has failed to examine the claims tnade by the' assessee for deduction under Sec.36(1)(viii). It is seen from the order of ' the CIT that in taking proceedings under Sec.263 he has referted to and relied upon the judgment of this Court in Gee Vee Enterprises (1975) 99 ITR 375 wherein it was held that failure to make relevant enquiries would invite action under the Section on the ground that the assesslnent order is erroneous and prejudicial to the interest of the revenue. In oui' opinion, this judgment was rightly invoked by the CIT in the present case and his action was rightly upheld by the Tribunal. No substantial question of law arises in respect of this issue. We, therefore, decline io admit Question No.1 also for this year. Zl. In the result, question No.4 raised in ITA No.5I3l20I1 is answered i1 affir-mative and against the assessee. The identical question raised in other appeals is also answered against the assesse€. All other queStions ITANos.5l2/2011, 51312011, 810/2011, 8I1l20II, lI39l2}ll, ll40l20rl & tr4ll20rr raised in all the appeals are not admitted as they, are not substantial questions pf law. The appeals are disposed of accordingly' No costs' 0t t\\V!)r*,g,,.-t' (R.V.EASWAR) JUDGE NOVEMBER z8,zol1, vld/rnm ITA Nos.512l20II, 51312071, 810/2011, 8Irl2}1l, ll39/2011, 1140/2011 & l14l/2011 (SANJIV IGIANNA) JUDGE