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TMI Blog2006 (11) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... odities 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 time, the Assessee claimed that the disbursements made by it, from out of its interest income, is revenue expenditure and is allowable as a deduction in the computation of its income under the heading "profits and gains of business or profession". 5. By its orders passed in ITA Nos. 4025(Del)/1970 and 5766/Del/1984 the Tribunal did not agree with this contention of the Assessee and held that the disbursements were a capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 schemes as provided in that Act is a pure and simple disbursement out of that fund as provided under section 13(2) of the said Act, hence it is not an expenditure in the nature of Revenue one..….." 9. The specific facts in relation to ITR No.41/89 are as follows:- 10. For the assessment year, 1981-82 the Assessee had claimed deduction of Rs.2,43,18,921/-as revenue expenditure being disbursement of grants to various State Govts. and National Level Cooperative I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 claimed that the same is in fact "income from other sources" under Section 56 of the Act. Disbursement of the said income is a mere application of income and therefore it cannot be treated as revenue expenditure. It was contended that the only deduction that can be claimed in respect of "income from other sources" are those provided for in Section 57 of the Act and that none of the advances made by the assesse are covered by the deduction provided under Section 57 of the Act. Rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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, processing, marketing, storage and export of minor forest produce and to undertake development of certain notified services for the purpose of discharging its functions. It is also obliged under Section 9(2)(a) and 9(2)(b) of the NCDC Act to advance loans or grant subsidies to State Government for financing co-operative societies to achieve its objectives. Section 12 of the NCDC Act states that the Central Government, after due appropriation by Parliament by law, may pay to the Assessee Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 and various tests have been laid down to determine the nature of expenditure in a catena of judicial decisions. The Privy Council in Jagat Bus Service Vs. Commissioner of Income-tax, [1950]18 ITR 13, 18, 22 dealt with the scope of the expression 'capital expenditure' as follows:- " The question, what is capital expenditure, has been the subject-matter of debate and consideration in a very large number of cases. In the case of British Insulated and Helsby Cables, Ltd. v. Atherton [1926] AC. 205 ; [1925 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 industrial concern minor repairs which have to be frequently made and which are known as running repairs are Revenue expenditure, while replacement of costly machinery is capital expenditure. It is, therefore, difficult to lay down any test which could be applied to every case. To my mind, " capital " means an asset which has an element of permanency about it and which is capable of being a source of income and " capital expenditure " must, therefore, generally mean an acquisition of an asset and the asset must be intended to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 trade . . . . . . . 3. Whether, for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital 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 amount has to be returned to the lender with or without interest, as the parties may agree. It cannot be said in respect of the monies lent by the Assessee, that there is no possibility of those amounts once again forming a part of the Fund of the Assessee. In this regard we agree with the analysis of the Kerala High Court in the case of CIT v N.C John [1994] 208 ITR 57 Since the amounts disbursed as loans cannot be claimed to be "expenditure", the question of treating them as "revenue expenditure" does not arise. 25. So far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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