TMI Blog2006 (11) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... s have advanced common arguments and we are disposing them off by this common order. 2. The Assessee is a Statutory Corporation incorporated by The National Cooperative Development Corporation Act, 1962 (for short 'the NCDC Act) for the purpose of planning and promoting programmes for the production, processing, marketing, storage, export and import of agricultural produce, foodstuffs, industrial goods, livestock, certain other commodities and services on cooperative principles. 3. For carrying on its activities, the Assessee, receives grants and loans from, inter alia, the Government of India. The Assessee then advances grants, loans and subsidies to cooperative societies through State Governments/Apex Cooperative Banks. The surplus fund held by the Assessee are, from time to time, invested by it in fixed deposits on which it derives interest income. The Assessee also derives income by way of interest on debentures and loans advanced to State Governments/Apex Cooperative institutions etc. The Assessee pays tax on its interest income. The grants and loans it receives are treated as capital receipts and are not taxable. 4. In the Assessment year 1976-77, for the first t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other sums of moneys received by the assessee from the Central Govt. has not been treated as income of the assessee, the disbursement made to State Governments viz. grant of subsidies is application of that fund under Section 13(2) of Central Act No.26 of 1962 and it cannot be treated as an expenditure in the nature of Revenue one. Simply because the moneys disbursed have come out of earning of interest by the assessee on fixed deposits it cannot be said to be an expenditure of the Revenue nature since under Section 13(3) of the Act all moneys in the fund shall have to be deposited by the assessee in the Reserve Bank/State Bank/Nationalized Bank and according to learned counsel for the assessee, Shri Ganeshan, the expenditure is relatable to money and not the nature of the payment disbursement. Since under section 13 of the Central Act No.26 of 1962, the assessee is required to maintain a fund called The National Cooperative Development Fund and since the grants, additional grants and money received by the assessee in that fund from Central Government has not been treated by the assessee as income, the disbursement of moneys to State Governments as subsidies under various sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the grants/loans may have been utilized by the recipients for acquisition of assets. The Assessee submitted that these advances were expenditure incurred by it for the purpose of its business or profession and were therefore revenue expenditures deductible under Section 37 of the Act. The Assessee also placed reliance upon the judgment of Commissioner of Income Tax, Bombay City v. Associated Cement Companies Ltd, [1988] 172 ITR 257 (SC) which holds: " what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the Assessee's trading operations or enabling the management and conduct of the Assessee's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future." 13. The Revenue on the other hand contended that the interest income on fixed deposits in Banks, etc. is not the business income of the Assessee. It was cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t loses its character of business income. Learned counsel relied on para 13 of the order of the Tribunal in ITA No. 4025 (Del)/1980 where the Tribunal held as follows:- " we are of the view that on the facts and in the circumstances, since the grants, additional grants and other sums of moneys received by the Assessee from the Central Govt. has not been treated as income of the Assessee, the disbursement made to State Governments viz. grant of subsidies is application of that fund under Section 13(2) of Central Act No.26 of 1962 and it cannot be treated as an expenditure in the nature of Revenue one. Simply because the moneys disbursed have come out of earning of interest by the Assessee on fixed deposits it cannot be said to be an expenditure of the Revenue deposited by the Assessee in the Reserve Bank/State Bank/Nationalised Bank." 15. The Assessee, National Cooperative Development Corporation, as aforesaid is a statutory Corporation constituted by the NCDC Act. The functions of the Corporation are contained in Section 9 of the NCDC Act. The primary functions of the Corporation are to plan, promote and finance programmes through co-operative societies for the production, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures, while it also earns interest on the loans it advances in discharge of its statutory obligations. Consequently in our view it cannot be said that the interest income derived by the Assessee would fall under the head " income from other sources" under Section 56 of the Act. We may refer to the decision reported in CIT vs. R. M. Meenakshisunderam [1995] 212 ITR 220 (Madras). It is also to be noted that it is not the case of the Revenue that the interest income derived by the Assessee is "income from other sources." Reference is made to the order passed by the Assessing Officer for the assessment year 1976-77 wherein in paragraph 9, the various components of interest income have been enlisted and they have not been classified by the Assessing Officer as "income from other sources. 18. Coming to the issue whether the advances/disbursements made by the Assessee from out of its interest income amount to capital expenditure or revenue expenditure, we are of the view that the so called expenditure cannot be claimed as revenue expenditure by the Assessee. 19. The words " capital expenditure " have not been defined in the Act. However the words have been interpreted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of the expenditure, the source from which the money was spent, whether the payment was made once and for all or is a recurring expenditure and whether the asset acquired is going to be a source of permanent income or it exhausts itself either during the course of the year when it was acquired or within a short period thereafter. The main test is its permanency, i.e., whether the value of the capital of the company or its asset or its goodwill is permanently increased by reason of such expenditure. It is impossible to lay down any test which would meet all cases. For example, a firm carrying on the business of plying motor vehicles for hire might decide to increase its business and lay down a new road connecting two places. This would be in the nature of a capital expenditure. If, on the other hand, it spends money every year for the running repairs to the road, that might be in the nature of a Revenue expenditure. Similarly, a firm dealing in machinery might buy machinery for sale which would be Revenue expenditure, while an industrial concern might buy machinery to replace worn out machinery and that would be in the nature of capital expenditure. Even in the case of an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduring benefit, whether the expenditure constitutes conceivable nucleus to form the foundation for posterior profit earning, whether the expenditure could be viewed as an integral part of the conduct of the business and to avoid inroads and incursions into its concrete present and potential future, are all some of the main incidents which have a bearing on the decision whether, in a given case, the expenditure is capital or chargeable to Revenue. On the whole, an objective application of a judicial mind to the facts of each case is necessary." 21. In the illuminating judgment of Bhagwati J. in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, [1955] 27 I.T.R.34, CSC; [1955] 1 S. C. R. 972., some broad principles of distinction were deduced by his Lordship as follows (page 44): " 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment . . . . . . . . 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on loans or dividends or other realisations on investments made from the Fund. The monies which are advanced from the Fund cannot be identified as forming part of the interest income, or the grants received from the Central Government or other agencies, or loans that the Assessee Corporation may receive for the purpose of its business. Moreover the monies advanced by the Assessee Corporation in discharge of its statutory obligations even when they are advanced as interest bearing loans can at best be classified as capital expenditure. 24. We find force in the submission made by the learned counsel for the Revenue, that to be able to claim a deduction as revenue expenditure, the Assessee has to first establish that there is in fact an "expenditure" which the Assessee has incurred. Then alone the question of it being classified as "revenue expenditure" can arise. When the Assessee advances loans to State Governments and other cooperative societies, in our view, the same cannot be claimed to be "expenditure", since it cannot be said that the monies advanced as loans go out of the hands of the Assessee irretrievably. It is inherent in a loan transaction that the loan amo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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