Un-necessary litigation initiated by the revenue forcing assessee to protest and contest and delayed justice in the case of NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION {NCDC}.

[DEV KUMAR KOTHARI]

History of cases:

1. Assessment years involved are AY  1976-77 and 1981-82. Therefore, for the AY 1976-77 (accounting year 1975-76) it took 44 years to finally settle the dispute.
2.  2020 (9) TMI 496 - SUPREME COURT  NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION VERSUS COMMISSIONER OF INCOME TAX, DELHI-V  CIVIL APPEAL NOS. 5105-5107 OF 2009  Dated: - 11 September 2020
    {Filed in 2009 and finally decided in 2020}
3.  2006 (11) TMI 183 - DELHI HIGH COURT NATIONAL CO-OPERATIVE DEVELOPMENT COUNCIL VERSUS COMMISSIONER OF INCOME-TAX
   555 of 1983 and 41 of 1989  Dated: - 24 November 2006
   ({filed in 1989 and decided in last of 2006}
    
4. Date of order of Tribunals – could not be found  however reference numbers are found in judgment of honorable High Court as follows:
    
                     These are two References under Section 256(1) of the Income Tax Act, 1961 ( for short 'the Act') arising out of ITA No. 4025(Del)/1970 and ITA No. 5766/Del/1984 for Assessment Years 1976-77 and 1981-82 respectively.
   Thus we find that time gap in two assessment years is of five years, whereas time gap in filing of appeals is about fourteen years.
    
   Income Tax References under section 256.1 were numbered as
   ITR 555/1983          For AY 1976-77
    
   ITR 41/1989            For AY 1981-82
    
   Therefore, there seems some  typing mistake in judgment of Honorable High Court,  because for AY 1976-77 appeal before ITAT cannot be filed in 1970 as is reflected by the  ITA No. 4025(Del)/1970 .
    
   The honourable Supreme Court has also discussed issue of delay. However, the same is not considered in this article.
    
   Decision in this case is analysed below::

The assessee was incorporated vide the  The National Cooperative Development Corporation Act, 1962 ( in short  NCDC Act). The  objects are  planning and promoting programs for the production, processing, marketing, storage, export and import of agricultural produce, foodstuffs, industrial goods, livestock, certain other commodities and services on cooperative principles. Assessee received grants from the Central Government and others for advancing loans or grants to achieve its purposes.

Question arose about taxability of interest earned on deployment of surplus funds. Interest earned was also to be applied for the purposes of the Corporation.  One question was whether such interest was to be assessed  as business income and other was whether  grants given out of interest so earned can be allowed against such interest earned. The honorable Supreme Court held in favor of assessee by holding that the interest earned was business income, and to the extent it was applied in granting grants, which are not refundable and which were never returned  was not taxable or the amount of such grants was to be allowed as business expenditure against interest income treated as business income.

It has also again been held that income has to be determined on the principles of commercial accountancy and there is  a distinction between ‘real profits’ ascertained on principles of commercial accountancy.

Reference was made to judgment in  the case of POONA ELECTRIC SUPPLY COMPANY LIMITED VERSUS COMMISSIONER OF INCOME-TAX, BOMBAY CITY I - 1965 (4) TMI 20 - SUPREME COURT  wherein it was  held  “that income tax is on the real income. In the case of a business, the profits must be arrived at on ordinary commercial principles. The scheme of the IT Act requires the determination of ‘real income’ on the basis of ordinary commercial principles of accountancy.

Court further held that to determine the ‘real income’, permissible expenses are required to be set off and referred  to the judgment in COMMISSIONER OF INCOME-TAX, GUJARAT VERSUS SC KOTHARI - 1971 (10) TMI 3 - SUPREME COURT where the following principle was laid down:

 “6. …The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business...”

There is, thus, a clear distinction between deductions made for ascertaining real profits and thereafter distributions made out of profits.

The distribution would be application of income. There is also a distinction between real profits ascertained on commercial principles and profits fixed by a statute for a specific purpose. Income tax is a tax on real income.

The interest having been treated as revenue receipt on which taxes are paid, it must continue to retain the character of revenue receipt. If the nature of receipt is treated as capital receipt then  no taxes would have been payable on the amount. The corollary is that all expenses incurred in connection with the business are deductible.

Un-necessary litigation initiated by the Ld. AO:

In view of above  discussions, it can be said that the revenue un-necessarily forced the assessee to indulge into litigation. As per facts of the case, there should not have been objection by the Ld. AO at  original and initial stage and he should have allowed the deduction of amount spent out as grants out of interest earned.

While making any additions or disallowance, objective decision is required to be made to compute real income ( subject to specific adjustments). There should not be  any additions or disallowance merely to make assessed income more than returned income.