\ % ?I IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA NOs. 51312011,, 810/20ll,8lll20ll, ll39l20ll,114012011, & lt4u20tl Reserved on : 16fr November. 2OtL. Date of Decision : 28th November.20II. NATIONAL COOPERATIVE DEVELOPMENT CORPORATION Appellant Through: Mr. Rajat Navet, Adv. VERSUS ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 13(1) .....Respondent Through : Ms. Suruchi Aggarwal, Adv. CORAM: HON'BLE MR. JUSTICE SANJIV KIIANNA 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. 4n l^U,-'',-* " (R.V. EASWAR) JT]DGE (SANJIV KIIANNA) JT]DGE NOVEMBER 28,2OLI 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 5-* )K IN THE H]IGII COURT OF DEI.III AT NEW DELHI + ITA NOs . 5\212011, 5l3l20ll, 8tr 0/201'L' 81112011,, ll39 /2011, 1140/20LL, & 114112011, % NATIONAL COOPERATIVE DEVELOPMENT .... Appellant coRPoRATIoN rhrough: Mr. Rajat Navet, Adv' VERSUS ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 13(1) '...ResPondent Through : Ms. Suruchi Aggarwal, Adv. CORAM: HON'BLE MR. JUSTNCE SANJIV KHANNA HON'BLE MR.. JUSTICE R.V. EASWAR 1. Whether Repofters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not ? '1- 3. Whether the judgrnent sLould be reporled in the Digest? "l*a ', R.v. EASWAR, J.: . These are seven appeals filed by the assessee under Sec.260A of the Income Tax ait, t961 ("the Act" for short) against the orders of the ITANos.5i2/201I, 513/2011, 810/2011, 81112011,113912011,1140/2011 & lI4ll201l Page 1 of 17 Reserved on : 16tr'November, 2011. Date of Decision : 28tl'November. 2011. Income Tax Appellate Tribunal ("Tribunal" for short) passed on differe't dates and for different assessment years as shown in the table below: ITA No. Assessment vear Date of Tribunal's order No'of questions raised 3 / 5r2l20rl 1999-2000 5r3l20rI 2004-05 810/2011 2007-08 8rv20rl 200r-02 rI39l20r1 2000-01 tI:40120t1 2002-03 Il4Ll20I1, 2003-04 20-rt-2009 20-Ll-2009 3r-l-20rr II-3-201r 29-4-201r 2l-4-2011 13-4-20tr 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)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 fiotn business of providing long telm 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 partiiular item of incorne is derived fi'orn the ' busines, of ptouiding long tenn finance for being eligible for deduction under Section 36(1)(viii) and whether the ITANos.5 l2l20ll, 57312071, 810/2011, 8rll20lr, tr39lz}n, 11401201| &' 1l4rl20rr Page? of 17 7 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 iegalistic arguments? (3)Whether in'the facts and circumstances of the case, the Tribunal was coffect in law in relying and applying the ratio of decisions which do not deal or pertain to the provisions contained iir sec.36(1)(viii) of the Income Tax act, 196I? (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 eligible for deduction under Section 36(1)(viii) of the Act? (5)Whether in the facts and circumstances of the case, the Tribunal was coffect in law in holding that interest eatned on short term deposits made during the interregnum period ' between disbursernent of funds was not profit derived from the business of long term finance and thus not eligible fbr deduction under Section 36(1)(viii) of the Act? (6)Whether in the facts and circumstances of the case, the Tribunal was colrect in law in holding that service charges earned by the Appellant for monitoring and implementation of SDF Loans was not eligible for deduction under Section 36(1)(viii) of the Act? In respect of the assessment years 2007-08 and 200I-02 the assqssee has, in addition to the above six questions, raised 'one lnore question which is as under: "Whether in the facts and circumstances of the case, the Tribunal was corect in law in holding that interest on advances/deposits and rnisc. receipts were not eligible for deduction under Section 36(1)(viii) of the Act?" \ ITANos.512l20ll, 51312011, 810/2011, 811 l2ol1, I 139 l20ll, r | 40 120 ll &. 1 l4l /201 | Page 3 of 17 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 Tribunal was correct in law in upholding initiation of proceedings by the Assessing Officer under Section 148 of the Income Tax Act, 196l?" In respect of the assessrnent yeat 2003-04, the assessee has raised the following four questions: ,(l)Whether in the facts and circurnstances of the "ur", the lribunal was coffect in law in upholding initiation of proceedings under Section 263 as well as the order passed by the CIT under Section 263 of the'Act? (2)What is the true rneaning ancl real effect in law of the provisions of Sec.36(1)(viii) of the Income Tax Act, 196I as it existed for'the relevant assessment year and what items of income can be considered as profits.deriyed from business of providing log term fit*";" which would in law be eligible for deduction u/s 36(1)(viii)? (3)What are the principles to be applied for_ deterrnining whether a particular item^of income is derived frorn the business of providing iorrg term finance for being eligible for deduction under Section f Oqf ;1viii) and whether the issue'as to what is profits derived fiom such business of providing long term finance is to be decided on the basis of prugmuti" business consideration rather than purely legalistic arguments? (a)Whether in the facts and circumstances of the case, the Tribunal was colrect in law in relying and applying the ratio of decisions ITANos.5l2l2}ll, 51312011, 810/2011, 8 1 1/201 l, 11391201r, 114012011 & ll4ll20lr Page 4 of 17 which do not deal or peltain to the provisions contained in ' Sec.36(1)(viii) of the Income Tax Act, L96l?" ' Z. 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 counfiy' . 4. We can take up ITA No.5 1312011 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 it-ems of income: a) Dividend received in respect of redeemable preference shares in companies: Rs. 46,94,800 a) Interest on short-te1m deposits with banks: Rs.3,76,3I,I44 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-term 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 according to'him ITANos.512l20ll,' 51312011, 810/2011, 811/201 I,ll3gl20;ll, rl40l201l & 1141/2011 Page 5 0f n? lo these were not items of income "derived fi'orn" the business of providing long-term,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 ftnance, that was not sufficient to attact the provisions of Section 36(1)(viii) and that the condition in the Section'that the income should be "derived from" 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 retum/dividend on investment and it cannot be said to represent profit fiorn providing long-tenn finance. and that there was nothing to show that the investment in the shares was made with a view to providing long-term finance; b) That the interest frorn 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.512l20I1, 51312011, 810/2011, 81 1/201 1, 113912011, 114012011 & l141lz0lr Page 6 of 17 il 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 gover'runent but routed through the assessee and therefore the service charges cannot be said to be income or profit derived from the business of providing long-tenn 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 clividend income received in respect of the investment in redeemable preference shares can be treated as profits derived from the business of providilg long-term finance. "Long tenn 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 ilterest thereof during a period of not less than ftve years". Thib 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 rnade for the purpose of ITA Nos.5 l2/2}ll, 5I3l20ll, 8i0/201 1, 8lr/2olr, rr39l20rr, Ir40l20rl & ll41/2011 PageT oflT redemption. In Globe United Engineening and Foundny Co" Ltd v rndustrial 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. g. In the case of I alchand Sursna & others v Hyderabctd Vanaspathi Ltd. (1gg0) 6s conry.cas. 415,the Andhra Pradesh High court held 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 pu{pose of redemption, the holder thereof is not a creditor as such limitations 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 Coutt was concerned 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 concerned with the position of a redeemable preference share holder prior to the due date for redemption. If anything, such a case is on stronger r). footing and assuch 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 India Savings and Investment Corporatiott Ltd. (2010) 321 ITR 371- The question before ITANos.512l20Il, s1i/201 1, ll39l20rl, 5t3120r1, 810/2011, tl40l20l1 & rl4rl201r Paee B of 17 the court was whether interest earned on bonds and debentures was chargeable to tax under the aforesaid Act having regard to the definition of the word "interest" in sec.2(7) of the said Act. Under this definition, interest means interest on loans and advances made in India; it included and excluded certain interest which is not relevant for our purpose. The question was whether bonds and debentures can be treated as loans and advances. It was observed 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 surnbhai v. cIT Guiarat [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 amount equal to the face value of the preference shares when the company rede"-.$H:, tnt y assessee received frorn the company an amount which aeeecieel the I 'h,L ' amount whichi had paid for these shares. h^ In deciding this question the Gujarat High Court had to exarnine the nature of redeemable preference shares issued by a company. The Court referred to Palmer's Cotnpany Law (page 356, paragraph I,22nd Edition) wherein it was observed that ..fiom the financial point of view, redeemable preference shares are a ,&^1,1 : y 'ffii# fonn of shares and debentures, incorporating features of both, ITANos.512/2017, 51312011, 810/2017, 8lrl20rl, 1139l20r1, |r40120ll & 114r/201| Page 9 of 17 t1 and being closer to the latter than other preference shares, but frorn the legal point of view they are shares and are treated as such"' The Court fuither 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 bg 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 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 , bv the date fixed for redemption, the holder thereof cannot compel it to do I so by suing in debt for the. retutn of his capital or by filing for a rnandatory 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' . I 1. Having regard to the legal position adurnbrated in the above judgments, we are of the view that investment in redeemable preference shares cannot be considered as a loan or advance made by the assessee to the company for interest. The basic characteristic of 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 ITANos.512l20ll, 5'13/2011, 810/2011, 8I I l}}n, II39 l20l l, | | 40 l20l 1 & | r4l /2011 Page 10 of 17 ty undeftaken to be redeemed and as of right claim a retutn of the share money except in a winding up and that to after the redemption date. Similarly, a preference share holder stands on a different footing from a person who has advanced monies to another. An "advance" has been defined in the Black's Law Dictionary as "to pay money or render other value before it is due; to furnish something before an equivalent is received or tb furnish money for a specific purpose understood between the parties, the money or some equivalent to be retumed" etc. Thus an advance is also quite different frorn fi preference shares in nature and character lZ. Having regard to the aforesaid discussion, we are of the view that there is no merit in the assessee's clairn that the dividend received in interest of the redeemable preference shares atnounts to profits derived fi'om 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 affinnative and in favour of the Revenue. 13. Question No.5 is directed against the finding of the Tribunal that interest earnbd on short-term deposits made during the interregnum period between disbursernent of funds was not profit derived from the business of providing long-term finance. As held by the Tribunal, this is also an ITANos.5i2l20ll, 513/2011, Bl0/2071, 8ll/20r1, 1139/2011, 7140/2011 & 17411201 r Page Ll, of17 tb investment of the funds of the assessee for making use of the idle funds remaining with it during the intenegmrm period. The interest cannot be considered as profit derived from the business of providing long-terrn finance within the meaning of the Section. No question of law arises out of the factual finding of the Tribunal, which is not challenged as perverse. The question cannot be adrnitted. 14. 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 ate given by the Government 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 Goverrunent's funds are routed through the assessee. The assessee cannot therefore be considered to be canying on th" brrrirress 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 tnonies from the Governtnent for ilterest 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 genel'al in nature. Having regard to the findings recorded by the Tribunal, which are not disputed, these questions are of acad.bmic nature. They do not raise any substantial questions of law. We decline to admit them. 5r3l20rl, 810/2011, 1140/2011 & 1141/2011 ITA Nos.512/20II, 811l20rl,1139/2011, Page 12 of 17 l1 16. The questions raised by the assessee in ITA No'5lzl20ll are identical. For the above reasons we decline to admit them' 17. euestion Nos.1 to 5 raised in ITA No.1 13912011 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 admit them. Question No'6 is directed against the finding of the Tribunal that interest on advances/deposits or loans to employees alnounting to Rs'9,95,152 does not qualiff for the deduction because it does not.represent profit derived from the business of providing long-term finance' In substance and qualitatively, there is no difference between the other items of iricome clairned to be eligible 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 liibunal' Our reasoning in respect of the other questions applies to this question also. We therefore decline to adrnit the question No.6 in this appeal' 18. We now take up ITA Nos. 810 & 8IIl20l1 relating to the assessment years 2007-08 and 200I-02 respectively. The first six questions raised by the assessee are identical with the six questions raisbd by it in ITA Nos. 5I2 & 51312011. For the same reasons given by us in those appeals, we decline to admit these questions. Question No'7. in these two appeals (i.e., ITA Nos.BlO & 8Lll2OI1) are identical to Question No.6 raised in ITA No.l |3gl20l1, i.e., against the finding of the Tribunal ITANos.5l2l2}ll, 51312011, 810/2011, 81 i/201 1, lr39l20ll, l140l20ll &' 1r4ll20r1 Page 13 of17 ty u 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 lggg-2000 and 2004-05 to the miscellaneous receipts and held that they do not also qualiff for the deduction. In our view, the same reasoning given by us in respect of the other items of income would appty to miscellaneous incorne also, the details of which have not been fuinished to us. We accordingly decline to admit the questions raised by the assessee in ITA Nos' 810 & 8IL|20II' D. We now take up ITA No.1!40l20l1 (asst. yea.I]. 2002-03) for consideratiol. In thiS year the assessee has raised eight questions, stated to ' be substantial questions of law. Question Nos. 2 to B are identical with Question Nos. I to 7 raised by the assessee in ITA Nos'810 & 81Il20Il (asst. years: 2007-08 and 2001-02). 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 reassessment proceedings were validly initiated under sec-I47ll48 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: lTANos.512l20ll, 51312011, 810/2011, 8r1 lz0l1, 1139 l?0r1, ll40l20l1 &' rl4rl20l I Page 14 of 11 \ a) There is no discussion in the original assessment order about the various clairns 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 general letter and did not 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 prompted by a change of opinion. If that is so, it is obvious that the conclusion of the Tribunal that the reassessment prdceedings were validly initiated cannot give rise to arry 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.l I4I]20I1, the assessee has raised four questioirs, stated to be substantial questions of law. Question Nos. 2 to 4 are identical with Question Nos.l to 3 raised in ITA Nos. 512 & 5I3120IL and for the reasons given by us in respect tf thor. 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 ITANos.512l2O7I, 5l3n}lI, 810/2011, 81 1/201 1, ll39l20lr, lr40l201l & ll41/2011 Page 15 of17 letter dated 3-12-2004 shows that it is just a contain any working for the pulpose of the aside the assessment order for de novo consideration and passing of fi'esh assesslnelt order in respect of the various claims rnade by the assessee under Sec.36(1)(viii). These claims