,f IN THE HIGH COT]RT OF DELHI AT NEW DELHI + ITA NOs. 5l3l20ll,8l0l20ll,8lll20ll, 113912011,11401201L, & tt4U20rt Reserved on : 16th November. 201 1. Date of Decision : 28th November. 2011. NATIONAL COOPERATIVE DEVELOPMENT CORPORATION .... Appellant Through: Mr. Rajat Navet, Adv. \rERSUS ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 13(1) .....ResPondent Through : Ms. Suruchi Aggarwal, Adv. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V. EASWAR 1. Whether Reporters of local papers may be allowed to see the judgment? 2.To be referred to the Reporter or not ? Yes. 3. Whether the judgment should be reported in the Digest? YeS. - R.V. EASWAR, J.: For detailed order, see ITA No.5I2|20II. I . ftdt\ l.^-t " (R.V.EASWAR) JTIDGE 4-.,1 | -) rl (sANJrv KHANNA) Jt]DGE % NOVEMBER 28,20L1 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified 'T IN TIIE IINGII COT]RT OF DEI,TII AT NEW DEX-HI + ITA NOs .51212011, . 5\312011., 810/20tr"1, 8tr 1/201"X.' ' 113912011,1L40120l1, & LX'41'120r1' Reserved on : 16tl'November' 2011. Date of Decision : 28tl'November. 2011. J NATIONAL COOPERATIVE DEVELOPMENT CORPORATION "" APPellant Through: 1\4r. RajatNavet, Adv' VEI{SUS t-t" ASS{STANT COMMISSIONER OF INCOME TAX, CIRCLE13(1).....Respondent Through : Ms. Suruchi Aggarwal, Adv. CORAM: I{ON'BLE MR. JUSTXC]D SANJIV KI{ANNA HON'BLE MTd. JUST]ICE R.V. EASWATT 1. Whetirer Repofters of local papers may be allowed to see the judgment? ' 2.Tobe referred to the Reporter or not ? J*.,, \- 3. Whether the judgrnent should be reported in the Digest? "f*-1 f,T.V. EASWAR, J.: TheseareseVenappea1sfiledbyt1reassesSeeunderSec.260Aof the Income Tax Ait, 1961 ("the Acf'for shor-t) against the orders of the ITANos.5l2l20lI, 51312011, Bl0l201I, ulnotr, tr3g/2011,lr4o/2olr & ll4ll201l Page 1 of 17 % n Income Tax Appellate Tribunal ("Tribunal" for short) passed on different dates and for different assessment years as shown in the tabl.e below: ITA No. Assessment Year Date of Tribunal's orrler No'of questions iaised 5r2l20ll 1999-2000 sr3l20rr 2004-05 810/2011 2007-08 8ry20rl 200r-02 t13912011 2000-01 ll40l20ll 2002-03 rr4tl20ll 2003-04 In respect of the assessment years 1999-00, 2004-05 and 2000-01 the assessee has raised the following questions which are common to all' the three years: (l)Whatisthetruemeaningandrealeffectinlawofthe provisions of Sec.36(1)(viii) of the Income Tax Abt, 1961 as it existed for the relevant assessment year and what items of income can be considered as profits derived fiom businessofprovidinglongtermfinancewhichwouldin law be eligible for deduction u/s 36(1)(viii)? (2)What are"th" principles to be applied for cletermining whether a partilula' ltem of income is derived from the business of providing long ter-m finance for being eligible for,deductionunderSection36(1)(viii)andwhetherthe 20-Ir-2009 20-lr-2009 3t-l-20tr Ll-3-20rr 29-4-Z0rr 2I-4-2011 13-4-201r ITANos.5 l2l20ll, 513/2011, 810/2011' 811/201 r, ll39lz0ll,1l40l20ll & l14rl20rr Pdge2 oflT -)- 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 argurnents? 1:;WnAtfrer in the facts and circumstances of the case, tfue 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, 196l? (a)whether in the facts and circumstances of the case, the Tribunal Was correct in law in holding that income earned ' by way of dividend from redeemable shares was not "iigiUl" for deduction under Section 36(1)(viii) of the Act? (5)Whether in the facts and circumstances of the case, the Tribunal was correct in law in holding that interest earned on short telm deposits made during the intenegnum period between disbursement of funds was not profit derived from the business of long term finance and thus not eligible for ' deduction under Section 36(1)(viii) of the Act? (6)Whether in the facts and circumstances of the case, the Tribunal was coll'ect in law in holding that service charges earned by the Appellant for monitoring and irnplernentation of SDF Loans was not eligible for deduction under Section 36(1)(viii) of the Act? In respect of the assessulent years 2007-08 and 200I-02 the assessee has, in addition to the above six questions, raised one more question which is as under: "Whethbr in the facts and circumstances of the case, the Tribunal was correct in law in holding that interest on advances/deposits and misc. receipts were not eligible for deduction under Section 36(1)(viii) of the Act?" ITA Nos.5 1 2l2OIl, 513/2011 , 8 10/201 I ' 8rr /20rr, l l39 /201 1, 1 1 40/201 1 & 1 l4l /201 1 Page 3 of 17 g In respect of the assessment year 2002-03, in addition to the above seven questions the assessee has raised the following question as question No.1 : ,.'whether in the facts and circumstances'of the case, the Tribunalwascorrectinlawinupholdinginitiationof ;;;;."ii"gr by the Assessing Officer under Section 148 of the Income Tax Act, 196I?" . In lesfect of the assessment year 2003-04, the assessee has raised the following four questions: (l)Whether in the facts and circurnstances of the case' the Tribunal was correct in law in upholding initiation of proceedings under Section 263 aswell as the ordeipassed by the CIT under Section 263 of the Act? . (2)what is the true meaning and real effect in law of the provisions of Sec.36(1)(viii)ofthelncomeTaxAct,lg6lasitexistedforthe relevantassessmentyealandwhatitemsofincomecanbe considereJ-u, p-fits ierived from business of providing log term finance which would in law be eligible for deduction u/s . 36(lXviiD? (3)what are the principles to be applied for determining whether a particular itern-of income is derived from the business of providing Iong term finance for being eligible for deduction undel Section :O(f Xviii) *J *ft"ttter the ltt.t" ut to what is profits derived fiom such b.rrin.r, of providing long term finance is to be decided on the basis of prugmuti" u.rrlrr"r, consideration rather than purely legatistic arguments? (a)Whether in the facts and circumstances of the case, the Tribunal was corect in law in relying and applying the ratio of decisions ITANos.512l20I1, 51312011, 810/2011' 811/201 l,ll3gl20ll, rr40l20lr & ll4rl20rr Page 4 of 17 o which do not deal or pertain to the provisions contained in Sec.36(1)(viii) of the Income Tax Act, 196I?" 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 Dev6lopment Corporation Act, 1962 with the object of promoting the cooperative movement in the countty' 4. we can take up ITA No.5I312011 as the lead case. In the return filed for this yeaf, 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 : a) 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 was engaged in the business of providing long-tenn finance and the aforesaid items of income were derived from the said business as provided in Sec'36(1)(viii)' The Assessing Officer did not accept the claim since 4ccording to him ITANos.512l2OlI, 5l3l20ll, 810/2011' 811 l20l 1, l13g 1201 l, rl40 l20r | & | | 41 1201 | Page 5 of Jl7 , these were not items of income "derived from" the business of providilg . long-tenn finance within the meaning of the Section. 5. on appeal, the cIT (A) endorsed the view taken by the Assessing Officer. On further appeal by the assessee to the Tribunal, the Tribunal held that though the aforesaid items of income can be said to be "attributable" to the business of providing long-term finance, that was not sufficient to attract the provisions of section 36(1)(viii) and that the condition in the Section that the iiicome should be "derived fron" the business of providing long-term finance was not satisfied. In this view of the matter, it proceeded to examine every item of income in respect of which the deduction was claimed and recorded.the following findings in paragraph 13 of its order: a) That the dividend from redeemable preference shares represents return/dividend on investment and it cannot be said to represent profit from providing long-term finance and that there was nothing to show that the investment in the shares was made with a view to providing long-terrn finance; b) That the interest from bank was received on deposits/FDs which were for short periods and even if they were for long periods they cannot be considered as profit derived from the provision of long-term finance to. banks as essentially they are the assessee's investments; ITANos.5l2l2}1l, 51312011, 810/2011' 81i/201 r,1r3glz0n, iioiioi'&' 114112011 Page 6 or 17 c) The service charges received by the assessee in respect of SDF loans did not represent any interest, that they were only service charges received by the assessee on loans given by the gov"rnnent but routed through th'e assessee and therefore ihe service charges cannot be said to be income or profit derived from the business of providing long-term finance. 6. We may first take up question No.4. In our view, it is a substantial question of law. The point to be considered is whether the dividend income received in respect of the investment in redeernable preference shares can be treated'as profits derived fiom the business of providing long-term finance. "Long term finance" is defined in clause (h) of the Explanation to S.36(1)(viii) to mean "any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than ftve 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 shar-e 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 shales. 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 ITA Nos.5 1 2l20II, 5l3l20tl, 8 1 0/201 1, 811 l20Il, lI39 l20lI, 114012011 &, 1l4r /201 1 PageT oflT redemption. In Globe united Engineening and Foundry co" Ltd v Industrial Finance corporation of India Ltd. (1974) 44 Conip' 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 1oans. g. In the case of I alchand Sursna & others v llyderabsd Vansspatlai Ltd. (1gg0) 6s contp.cas. 475,the Andhra Pradesh Fligh court, h6td that since redeemable preference shares can be redeemed by a company only out of its profits (which would otherwise be available for dividend) or out of proceeds of an issue made for the purpose of redemption, the holder thereof is not a creditor as such lirnitations imposed by the Proviso (a) to section 80(1) of the companies Act do not apply to an ordinary creditor' We must however add that the Andhra Pradesh High Court was coucerned with the position of a redeemable preference shareholder after the failure of the company to redeem the share. In the case before us, we are cencemed with the position of a redeemable preference s.hare holder prior to the due date for redemption. If anything, such a case. is on stronger U . r r- -1r r^ 1^^ ^ ^-^Ai+. footing And AxslJch shareholders can never be held to be a creditor of the company. g. The issue had also arisen under the Interest Tax Act, 1974 before the supreme court in cIT, Kanpur vs sahara Inclia'savings and Investment corporution Ltd. (2010) 321 ITR 371. The question before ITANos.5l2l2}ll, 51312011, 810/2011' 81 1/201 I, Il39lZ0I1, ll40l20l1 & r14ll20rr Page B of 17 l u the court was whether interest earned on bonds and debentures was chargeable to tax under the aforesaid Act having iegard to the definition of tlre wgrd "interest" in sec.2(7) of the said Act. Und,er this definition, interest tpeans interest on loans eind advances made in India; it included and excluded certain interest which is not relevant for our purpose. The question was whether bonds and debenturel can be treated as loans and advances. It was obserued by the Couft that the interest on loans and advances will not cover interest on bonds and debentures bought by the assessee by way of "investment", within the meaning of Section 2(7)' In this view it was held that such interest was not chargeable under the Interest Tax Act. 10. We may also refer to a judgment of the Gujarat High Court in Anarkali Sarabhai v. CIT Gujarat [1952] 138 ITR 437. That case arose under the Income Tax Act and the question was whether the assessee was liable to pay capital gains tax on receipt of an atnount equal to the face value of the preference shares when the company redeem them' The .^rnz.le.l y dssessee received from the company an amount which aeceded the 'Ar amount which/had paid for these shares. In deciding this question the h Gujarat High Court had to examine the nature of redeernable preference shares issued by a company. The Court referred to Pafuner's Company Law (page 356, paragraph I,22"d Edition) wherein it was observed that .,flom the financial point of view, redeemable preference shares are a Ivrtr',;a : ' Wd form of shares and debentures, incorporating features of both, ITA Nos.5 1212011, 5l3l20ll, 810/2011, 8ll l20ll, I 139 1207 l, IL40/20 ll & lr 41 1201 1 Page 9 of17 and being closer to the latter than other preference shares, but fi'orn the legal point of view they are shares and are treated as such"' The Coutt fuither noted the view of the leamed author in Pennington's Company Law, 4'h 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 ihe Gujarat High Court this view of the author clearly indic'ated that the holder of preference shares is not in the same position as that of a creditor. The learned author hadl 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 redamption, the holder thereof cannot compel it t6 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 negatives the contention that once the company decides to redeem its preference shares, the holder thereof would be in the position of a creditor. 1 1. Having regard to the legal position adumbrated in the above judgrnents, we are of the view that investment in redeemable pref-erence shares cannot be considered as a loan or advance made by the assessee to the company for interest. The basic characteristic bf a loan is that the person advancing the loan has the right to sue on the debt, whereas the preference share holders cannot sue for the money due on the shares ITA Nos.5 I 2lZOl1, 51312011 , 8 10/201 1 ' 81 1/201 1, ll39l2oll, 114012011 &, ll4l/20rr Page 10 of 17 undertaken to be redeemed and as of right claim.a retum of the share money except in a winding up and that to after the redernption date. Similarly, a preference share holder stands on a different footing fi'om a person who has advanced monies to another. An "advance" has been defined in thd Black's Law Dictionary as "to pay money Or render other value before it is due; to fuinish something before an equivalent is received or to furnish money for a specific purpose understood between the parties, the money or some advance is also quite different character. equivalent to be retutned" from fr preference shares etc. Thus an in natule and D. there Having regard to the aforesaid discussioll, we are of the view that is no merit in the assessee's claim that the dividend received in interest of the redeemable preference shares atnounts to profits derived from providing long term finance within the meaning of Section 36(1) (viii) of the Act read with clause (h) of the Explanation to the Section. We, accordingly, answer the substantial question of law in the affirmative and in favour of the Revenue. 13. Question No.5 is directed against the finding of the Tribunal that interest earned on short-term deposits made dgring the interregnum period between disbursement of funds was not profit derived fiom the business of providing long-tenn finance. As held by the Tribunal, this is also an ITA Nos.5i2l20II, 51312011, 810/2011, 8Il 1201 1, rl39 l20l 1, 1 1 401201 | & ll 41 1201 1 Pale 11 of17 n investment of the funds of the assessee for makin, ,rr" of the idle fund Y remaining with it during the interregnum period. The interest cannot be considered as profit derived from the business of providing long-term finance within the meaning of the Section. No question of law arises out of the faptual finding of the Tribunal, which is not challenged as perverse. The question cannot be admitted. t4. Question No.6 is directed against the finding of the Tribunal that the service charges on SDF loans do not qualiff for the deduction because the loans are not provided by the assessee but are. given by the Gover-nment through the assessee for which service charges are paicl. This factual finding is not challenged by the assessee. The funds of the assessee are not involved. The Government's funds are routed throigh the assessee. The assessee cannot therefore be considered to be canying on th6 business of providing long-term finance. It is in receipt of only set'vice charges and not interest, obviously because its funds are not involved. It is also not the case that the assessee borrows monies fiom the Goverrunent 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 acadbmic nature. They do not raise any substantial questions of law. We decline to admit them. ITANos.5I2l2OIl, 51312011, 8l0l20ll, 8ly20rl, 1139 l2oll, 11401201 1 & 1 1 41 12011 Page 12 of L7 0 a: 16. The questions raised by the assessee in ITA NO.5I2l20Il ate identical. For the above reasons we decline to admit them. t7. Question Nos.1 to 5 raised in ITA No.1 I3gl2O11 are identical to the first five questions raised in the appeals in ITA Nos.513 & 51212011. For the same reasons given above, we decline to adrnit them. Question No.6 is directed against the finding of the Tribunal that interest on advances/deposits or loans to employees amounting to Rs'9,95,152 does not qualify for the deduction because it does not.represent profit derived . from the business of providing long-terrn finance. In substance and qualitatively, there is no difference between the other items of income plaimed to be etigibte for deduction under Sec.36(1)(viii) and the interest received on advances/deposits or loans to employees' The Tribunal has therefore applied the same reasoning to this interest also. We do not see any substantial question of law arising from the finding of the Tribunal. our reasoning in respect of the other questions applies to this question also. We therefore decline to admit the question No.6 in this appeal' 18. We now take up ITA Nos.810 & 8Ill20I1 relating to the assessment years 2007-08 and 2001-02 respectively. The first six questions raised by the assessee are identical with the six questions raised by it in ITA Nos. 5I2 & 51312011. For the same reasons given by us in those appeals, we decline to admit these questions. QuestioU No'7 in these two appeals (i.e., ITA Nos.810 & 8Ill20I1) are identical to Question No.6 raised in ITA No.l I3gl20I1, i.e., against the finding of the Tribunal ITANos.51212077, 5I3l20Il, 810/201i, 8ll l20Ir, ll39 l20rl, 11401201 | &' 1 l4rl20l1 Page 13 of 17 r that interest on advances or loans to employees does not qualify for the deduction. Following our reasoning given in the preceding paragraph' we decline to admit this question for this year. The question also refers to ,'miscellaneous receipts". The Tribunal has not dealt with this item of receipt separately and has applied the earlier orders passed by it for the assessment years 1999-2000 and 2004-05 to the miscellaneous receipts and held that they do not also qualify for the deduction' In our view' the same reasoning given by us in respect of the other items of incotne would apply to miscellaneous income also, th.e details of which have not been furnished to us. we accordingly decline to adrnit the questions raised by the assessee in ITA Nos. 810 & 81 1/201 1 ' 19. we now take up ITA No. II40l20l1 (asst. year: 2002-03) for consideration. In this year the assessee has raised eight questions, stated to be substantial questions of law. Question Nos. 2 to 8 are identical with Question Nos. I to 7 raised by the assessee in ITA Nos'810 & 811/2011 (asst. years: 2007-08 and 200l-02). For the reasons given by us in those appeals, we decline to admit question Nos. 2 to B for this year' In question No.1, the assessee has challenged the decision of the Tribunal holding that the reasseisment proceedings were validly initiated under Sec.147l148 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: ITA Nos.51212011, 51312011, 810/201 1, 811 1201 l, 1r3g l20ll, rr40 1201 r & 11 41 120 1 | Page 14 of l7 a) There is no discussion in the original assessment order about the various claims made by tire 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 wor{<ing for the pulpose of the section. c) The assesslnent was reopened within 4 years fi'om 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 proqeedings were not prornpted by a. change of opinion. If that is so, it is obvious that the conclusion of the Tribunal that the reassessment proceedings were validty initiated cannot give rise to any question of law, much less a substantial question of law. We therefore decline to admit Question No.l also for this year' 20. In ITA No.1 !4tl20l1, the assessee has raised four questions, stated to be substantial questions of law. Question Nos. 2to 4 are identical with Question Nos.l to 3 raised in ITA Nos. 512 & 51312011 and for the' reasons giyen by us in respect ff tnose questions in those appeals, we decline to admit Question Nos.2 to 4 for this year. As regards the first question, it is directed against the finding of the Tribunal that the CIT had validly initiated revision proceedings under Sec.263 of the Act and set ITA Nos.512l20ll, 513/2011, 810/2011, 811/201 r,lr39l20ll, Lr40l201l & ll41l20rr Paee 15 of17 ,v-) (/2/ t-/ 'aside the assessment order for de novo consideration and passing of fresh assessment order in respect of the various claims made by the assessee under Sec.36(1)(viii). These claims are