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TMI Blog2011 (11) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... following questions which are common to all the three years: (1) What is the true meaning and real effect in law of the provisions of Sec.36(1)(viii) of the Income Tax Act, 1961 as it existed for the relevant assessment year and what items of income can be considered as profits derived from business of providing long term finance which would in law be eligible for deduction u/s 36(1)(viii). (2) What are the principles to be applied for determining whether a particular item of income is derived from the business of providing long term finance for being eligible for deduction under Section 36(1)(viii) 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 pragmatic business consideration rather than purely legalistic arguments. (3) Whether in the facts and circumstances of the case, the Tribunal was correct in law in relying and applying the ratio of decisions which do not deal or pertain to the provisions contained in Sec.36(1)(viii) of the Income Tax act, 1961. (4) Whether in the facts and circumstances of the case, the Tribunal was correct in law in holding that income earned by way of dividend fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of pragmatic business consideration rather than purely legalistic arguments. (4) Whether in the facts and circumstances of the case, the Tribunal was correct in law in relying and applying the ratio of decisions which do not deal or pertain to the provisions contained in Sec.36(1)(viii) of the Income Tax Act, 1961." 2. 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. The revenue contests this position. 3. The assessee is a company set up under the National Cooperative Development Corporation Act, 1962 with the object of promoting the cooperative movement in the country. 4. We can take up ITA No.513/2011 as the lead case. In the return filed for this year, 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 b) Interest on short-term deposits with banks: Rs.3,76,31,144 c) Service charges on SDF loans: Rs. 85,09,703 The deductions were claimed on the footing that the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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. 7. Section 85 of the Companies 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 made for the purpose of redemption. In Globe United Engineering and Foundry Co. Ltd v Industrial Finance Corporation of India Ltd. (1974) 44 Comp. Cas. 347, this Court observed: "The preference shares are really part of the company's share capital; they are not loans". In the light of the clear statement of this court, redeemable preference shares cannot be treated as loans. 8. In the case of Lalchand Surana & others v Hyderabad Vanaspathi Ltd. (1990) 68 Comp.Cas. 415, the Andhra Pradesh High Court he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) wherein it was observed that "from the financial point of view, redeemable preference shares are a hybrid form of shares and debentures, incorporating features of both, and being closer to the latter than other preference shares, but from the legal point of view they are shares and are treated as such". The Court further noted the view of the learned author in Pennington's Company Law, 4th Edition, page 195 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 the Gujarat High Court this view of the author clearly indicated that the holder of preference shares is not in the same position as that 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 the preference shares by the date fixed for redemption, the holder thereof cannot compel it to do so by suing in debt for the return of his capital or by filing for a mandatory injunction. This view of the author, according to the Gujarat High Court also nega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding of the Tribunal that the service charges on SDF loans do not qualify for the deduction because the loans are not provided by the assessee but are given by the Government 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 carrying on the business of providing long-term finance. 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 from 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. 15. We now turn 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 any substantial questions of law. We decline to admit them. 16. The questions raised by the assessee in ITA NO.512/2011 are identical. For the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has raised eight questions, stated to be substantial questions of law. Question Nos. 2 to 8 are identical with Question Nos. 1 to 7 raised by the assessee in ITA Nos.810 & 811/2011 (asst. years: 2007-08 and 2001-02). For the reasons given by us in those appeals, we decline to admit question Nos. 2 to 8 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.147/148 of the Act. The decision of the Tribunal is in paragraph 5 of its order. The findings on the basis of which the reassessment proceedings were held to be in order are: a) There is no discussion in the original assessment order about the various claims made by the 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 shows that it is just a general letter and did not contain any working for the purpose of the section. c) The assessment was reopened within 4 years from 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 pro ..... 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