TMI Blog2008 (12) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. the form prescribed for specified categories of resident applicants under section 245N(b)(iii) of the Act and has sought advance ruling in respect of the following two questions: - "(i) Whether the swapping premium amounting to Rs.170,58,24,000/- is profit derived from the business of providing long-term finance (computed under the head 'Profits Gains of Business or Profession' before making any deduction under this clause) in terms of section 36(1)(viii) of the Income Tax Act, 1961 (ii) Whether specified percentage thereof is eligible for deduction u/s 36(1)(viii) of the Income Tax Act in view of the fulfillment of condition for carrying this sum to the special reserve." 2. Briefly stated, the applicant, M/s. Rural Electrification Corporation Limited, a public sector undertaking, is reportedly registered as a Non-Banking Financial Company by Reserve Bank of India. The main objective of the applicant company is to provide long-term finance primarily to State Electricity Boards for the purpose of transmission, distribution and generation of electricity so that the society at large is benefited on road to industrial, agricultural and infrastructural development. As sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate nexus with the applicant's business operations of providing long-term finance and as such qualified for the deduction under section 36(1)(viii) of the Act. 4. The AO considered the applicant's contentions in course of the assessment proceedings and allowed the restricted deduction under the aforesaid section. The AO observed that the phraseology 'profits derived from' such business of providing long-term finance has got a narrow and restricted connotation as laid down in certain judicial pronouncements and in the absence of direct and immediate nexus between the source and the premium earned, the AO concluded that the applicant forfeits the claim of allowance of deduction under the section 36(1)(viii) in respect of the 'swapping premium' received. To comprehend fully the stand of the Revenue, it may not be out of place to give the following extract from the assessment order:- "The explanation of the assessee is considered carefully and is found not acceptable. The immediate source of swapping premium is the scheme for converting the long-term finance given at a higher percentage of interest rate to a lower percentage of interest rate. The swapping premium is a one time r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Crs. claimed by the assessee. However, as the assessee has made a Special Reserve of Rs.245.65 Crores only as per the requirement of the provisions of section 36(1)(viii) in the Balance Sheet as on 31.03.04, the deduction u/s 36(1)(viii) is restricted to Rs.245.65 crores only." 5. The applicant's appeal against the AO's Order before the Commissioner of Income-tax (Appeals) did not succeed and the appeal before the Income Tax Appellate Tribunal has been sought to be withdrawn. Meanwhile, the applicant has obtained the requisite permission from the Committee on Disputes, a body under the Cabinet Secretariat, Government of India, to pursue the matter before this Authority. 6. In the written submissions filed before us, the Revenue has reiterated the arguments given by the AO in the assessment proceeding as given above. The Revenue submits that the clients of the applicant, as a result of the lower interest rate scenario, would have entered into agreements with any other financier in the market at lower interest rate but for the risk of compensation payable to the applicant on account of breach of contract. The 'swapping premium' thus tantamounts, as stated, to 'compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect nature of income or expenditure. As regards Revenue's reliance on the section 10(23G) to deny the eligibility status to the applicant, it has been contended that the reference to section 10(23G) in the section 36(1)(viii) of the Act has been made only for the limited purpose of defining 'Infrastructure facilities' so as to enlarge the scope of the impugned section i.e. section 36(1)(viii) of the Act and the initial requirement of providing long-term finance for the 'industrial and agricultural development', as contained in the section, remained unchanged. The applicant has been, as initially required, approved by the Central Government as being eligible for deduction under section 36(1)(viii) of the Act because it has been giving loans for the industrial development in the country by advancing loans for Power Projects. The Revenue has never doubted the eligibility criteria for the deduction and as such, to take refuge in section 10(23G) seems to be far-fetched, the learned counsel submitted. Also, the setting or rescheduling of the fixed rate of interest does not, by any stretch of imagination, tantamount either to compensation charged by the applicant for 'breach of contract' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idends, other than dividends referred to in section 115-O, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company or a co-operative bank from investments made on or after the 1st day of June,1998 by way of shares or long-term finance in any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of section 80-1A(a) or a housing project referred to in sub-section (10) of section 80-1B and which has been approved by the Central Government on an application made by it in accordance with the rules made in this behalf and which satisfies the prescribed conditions. xxx xxx xxx Section 80-IA(4) This section applies to - (i) any enterprise carrying on the business [of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining] any infrastructure facility which fulfils all the following conditions,(a) namely :- (a) it is owned by a company registered in India or by a consortium of such companies; (b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing or (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 31st day of March 2003; (b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2003; K" xxx xxx xxx However, Clause (c) was omitted by Finance Act,2001 w.e.f. 1.4.2002. 10. In the backdrop of the above extract we may also recall the legislative history of the section 36(1)(viii) of the Act which has undergone various changes/amendments with the passage of time. It is seen that this provision i.e. section 36(1)(viii) of the Act corresponded to section 10(2)(xiva) of the 1922 Act which, as on 31st March, 1962, was in the following terms:- "(xiva) in respect of any special reserve created by a financial corporation which is engaged in providing long term finance for industrial development in India(a), an amount not exceeding ten per cent of the total income carried to such reserve account: Provided that the corporation is for the time being approved by the Central Government for the purposes of this clause: Provided further that where the aggregate of the amounts carried to such reserve account from time to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and registered in India with the main object of carrying on the business of providing long-term finance for the construction or purchase of residential houses in India, in the following terms:- "agricultural development in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes(a), an amount not exceeding forty per cent of the total income (computed before making any deduction under Chapter VIA) carried to such reserve account:" In addition to the deduction being available, for 'industrial or agricultural development', the Finance Act, 1995 w.e.f. 1.4.1996 also added 'or development of infrastructure facility in India'(a) and it was stated therein that the term 'infrastructure facility' shall have the meaning assigned to it as in section 80-1A of the Act. Later on by the Finance Act, 1997, it was amended to the effect that 'infrastructure facility' shall have the meaning assigned to it as in section 10(23G) of the Act (since omitted by the Finance Act, 2007 w.e.f. 1.4.2007). In line with the policy of simplification, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a special reserve which is not only created but maintained too. (vi) The approval of the Central Government for an eligible entity was necessary upto 31st March, 2000. 12. Based on the preceding discussion, we have first to examine whether the applicant is an eligible entity for the deduction under section 36(1)(viii) of the Act. The 'eligible entity' has been stated to be a 'financial corporation' which includes, as per the definition in the Section, a 'public company' and a 'Government Company'. As per the Explanation appended to Section 36(1)(viii) of the Act, 'Public Company' will have the meaning assigned to it in section 3 of the Companies Act, 1956 and section 3 of the Companies Act stands in the following terms:- U 5 [(iv) "public company" means a company which - (a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company;] Further, as per Explanation (c) to section 36(1)(viii) of the Act, Government Company shall have the meaning assigned to it in section 617 of the Companies Act, 1956 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the availability of electricity contributes significantly to the overall development of the country including that of the development of industry, agriculture and infrastructure. The provision of electricity is essential for modernization and growth of agriculture and also caters to the requirements of industry including small and medium industries, agro-industries, Khadi and village industries etc. The applicant has been providing finance for the industrial and agricultural development in India and keeping these very goals in view the Government of India granted approval to the applicant for the deduction under section 36(1)(viii) of the Act vide order bearing No.147(4)/71-TPL dated 23rd March, 1971 which is reproduced as under:- "F.NO.147(4)/71-TPL GOVERNMENT OF INDIA MINISTRY OF FINANCE (Department of Revenue and Insurance) New Delhi , 23rd March, 1971. ORDER Subject: Income-tax Act, 1961 - Section 36(1)(viii) - approval by Govt. of a financial Corporation for the purpose of - In exercise of the powers conferred by clause (viii) of sub-section (1) of section 36 of the Income-tax Act, 1961 (43 of l1961), the Central Government hereby appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange, so the period of five years will be counted from the date of advancing the initial loan and not from the date of rescheduling the interest rates. The contention of the Revenue, on this score, does not sound convincing. 18. Engaged in the business of generation, distribution or transmission of power, the applicant accordingly satisfies the requirements of being an 'eligible entity' as laid down in Section 36(1)(viii) of the Act and the Revenue's reliance on the Section 10(23G) of the Act, as referred to above, is far-fetched and misplaced. 19. Before we take up the Revenue's contention that 'swapping premium' is not directly 'derived' from the business of long-term finance, the following extracts from at least two important judicial decisions as relied upon by the Revenue, will be quite relevant:- (i) CIT vs. Sterling Foods(supra) "The word 'derive' is usually followed by the word 'from', and it means: 'get, to trace from a source; arise from, originate in; show the origin or formation of'. The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Tamil Nadu State Electricity Board and also from other State Governments. Pursuant to these requests, the applicant agreed to re-scheduling the earlier interest rate on the loans already given. In other words, the swapping premium is simply a compensation received for agreeing to a lesser amount of interest as against higher fixed rate of interest initially fixed. We find that the business of providing long-term finance is immediate and effective source of the swapping premium received. As against the facts of the present case, it emerges that the facts in the case laws relied upon by the Revenue were quite different. In the Sterling's case and Hindustan Lever's case (supra) the receipts of income were from the sale of import entitlements and did not have any direct nexus with the main business operations of the Industrial undertakings, whereas in the case of the applicant the swapping premium receipt is, as discussed above, directly derived from the main business operations. Even in the case of Raja Bahadur Kamakhya Narain Singh (supra) interest income received from the arrears of rent did not have any immediate nexus with the agricultural land. As such, this decision is als ..... X X X X Extracts X X X X X X X X Extracts X X X X
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