\ :K IN TI{E HIGH COURT OF DELHI AT NEW DELHI + ITA NOs . 51^gl20l1, 810/20l1,8lll201,l, ll39/20Ll,1140120L1, & 1r4ll20ll Reserved on : 19th November.2011. % Date of Decision : 28'n November. 201 1 ' 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: IION'BLE MR. JUSTICE SANJIV KIIANNA IION'BLE MR. JUSTICE R.V. EASWAR 1. Whether Reporters of local papers may be allowed to t.. 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.5l2/20tt. l- r 4l *'-, ' (R.V.EASWAR) JT]DGE ,l -l , t( (-. (sANJrv KHANNA) JT]DGE NOYEMBER 28,2OIL 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 'f IN T'XIE HNGTI COIJ]RT OF DEI,TII AT.NEW DELEII + ITA NOs.512/20L1, 51312011, 810/2011' 81112011, 1139 l20ll, 1140120LL, & 11.411201\ Reserved on ' 16tl'November;2011. Date of Decision : 28tr'November. 2011. NATIONAL COOPERATIVE DEVELOPMENT CORPORATION ... APPellant Ttnough: Mr. RajatNavet, Adv. VERSUS ASSISTANT COMMISSIONER OF INCOME TAX, ruchi d;,,1,:l:l1T* COR.AM: trION'BLE MR. JUSTICtr SANJIV KTIANNA HON'BLE MR. JUSTNCtr R.V. EASWAR 1. Whether Reporlels of local papers may be allowed to see the judgment? - 2. To be refen'ed to the Reporter or not ? 1l-t 3. Whether the judgment should be reported in the Digest? "f'e , i R.V. EASWAR. J.: These are seven appeals filed by the assessee under Sec.260A of ' the Income Tax Ait, 1961 ("the Act" for short) against the orders of the ITA Nos.5 I2/201I, 513/2011, 870/2011, 811/2011,1139/2011,1140/2OIl & lI4l/2011 Page I of 17 ) % 6 Income Tax Appetrlate Tribunal ("Tribunal" for short) passed on different dates and for different assessment years as shown in the table below: ITA No. Assessr4ent year Date of Tribunal's orrler No.of questions raised sr2l20ll 1999-2000 513l20Ir 2004-0s 810/2011 2007-08 8Iy20LI' 2001-02 rr39l20t1 2000-01 rr40l20rr 2002-03 tl4rlz0lr 2003-04 20-Lr-2009 20-Lr-2009 3r-l-20r1 11-3-2011 29-4-20t1 2t-4-201r 13-4-20rt 6 In respect of the assessment years 1999-00, 2004-05 and 2000-01 the assessee has raised the following questions which are comlnon 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 assesslnent year and what items of income can be considered as profits derived fi'om business of providing long term 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 particular item of income is derived frorn the 'business of providing long term finance for being eligible " for deduction under Section 36(1)(viii) and whether the ITA Nos.5 I 2l20ll, 57312011 , 8 10/201 1 , 811/201 I,ll39/20r1, 114012011 & ll4tl20l1 P-age2 of 17 e) l 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 arguments? (3)Whether in the facts and circumstances of the case, the Tribunal was gonect 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 Incotne Tax act, l96L? (a)whether in the facts and circumstances of the case, the Tribunal was coffect in law in holding that income earned by way of dividend from redeemable sh4res 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 colrect in law in holding that interest earned. on short term deposits made during the interregnum period between disbursement of funds was not profit derived fiom 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, thb Tribunal was coffect in law in holding that service charges earned by the Appellant for monitoring and irnplementation of ' SDF Loans was not eligible for deduction under Section 36(1)(viii) of the Act? In respect of the assesstnent years 2007-08 and 200I-02 the assessee has, in addition to the above six questions, raised olle rlore question which is as under: "Whether in the facts and circutnstances of the case, the Tribunal was conect in law in holding that interest on ' advances/deposits and misc. receipts were not eligible for deductiori under Section 36(1)(viii) of the Act?" ITANos.512l20ll, 51312011, 810/201i, 8I|12011, 1139l20l1, 1140/2011l & |l4l/2011. Page3 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, t96l?" In respect of the assessment year 2OO3-04, the assessee has raised the following four questions: (l)Whether in the facts'and circumstances of the case, the Tribunal was correct in law in upholding initiation of proceedings under section 263 as well 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) of the Income Tax Act, 196l as it existed for the relevant assessment year and what items of income can be considered as profits ierived from business of providing log term finance which would in law be eligible for deduction u/s 36(1)(viii)? (3)What are the principles to be applied for determining whether a particular itemof income is derived from the business of pfoviding Iong term finance for being eligible for deduction under section 36(lXviiD and whether the itt,rtas to what is profits derived fiom such business of providing long term finance is to be decided on the basis of pragmutic brrsiness consideration rather than purely l"galistic arguments? (a)Whether in the facts and circumstances of the case, the Tribunal was correct in law in relying and applying the ratio of decisions ITANos.51212017, 5t312011, 810/2011' 8 1 1/20i l, 113912011, ll40l20l1 & ll41 12011 Page 4 of 17 I which do not deal or pertain to the provisions contained in Sec.36(1)(viii) of the Income Tax Act, 196I?" 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, L962 with the object of promoting the cooperative movement in lhe countty. 4. We can take up ITA No.5I3l20l1 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 items of income: ") Dividend received in respect of redeemable preference shares in companies: Rs. 46,94,800 a) Interest on short-term deposits with banks: Rs.3,76,3I,L44 c) Service charges on SDF loans: Rs. 85,09,703 The deductions were clairned on the footing that the assessee was engaged in the business of providing long-term finance and the aforesaid iterns 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 ITA Nos.5 1212011, 51312011, 810/201 1, 8I l lz0l l, 1739 1201 1, 1 r 40 l20 l l & l 1 4l /20r 1 Page 5 of L7 ',O these were not items of income "derived from" the business of providing long-term finance within the meaning of the section. 5. on appeal, the cIT (A) endorsed the view taken by thq 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 income.should be "derived frorn" the business of providing long-term finance was not satisfied' In this view of the matter, it pioceeded 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 ftom 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-term 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 aF essentially they are the assessee,s investments; ITA Nos.5 1212011, 51312011, 8i0/2011, 81 l/201 I,1l3gl20lr,114012011 &' rr41l20r1 Page 6 of L7 l) c) The seruice charges received by the assessee in respect of SDir loans did not represent any interest, that they were only service charges. received by'the assessee on loans given by the goveffIment but routed through the assessee and therefore the service charges camot be said to be income or profit derived frorn the business of providing long-tertn 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 providing 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 alorig 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 share capital of a company: preference share capital and equity share capital. Section B0 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 nr'ade for the purpose of ITANos.512l207I, 513/2011, 810/2011, 811 l20lr, 1139 l20TI, 114012011 & lr41 1201 1 PageT oflT L2-- redemption. In Globe United Engineening and Foundry Co' X-,td v Industrial Finance corporation of India I'td. (1974) 44 Cornp' cas' 347, this Court observed: "The preference shares are really parl 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 Surana & others v Xfyderabad Vansspathi Ltd. (1gg0) 6s conry.cos. 415,the Andhra Pradesh High cotttt held that since redeemable preference shares can be redeemed by a company only out of its profits (which would otherwisb be available for dividend) or out of proceeds of an issue tnade for the purpose 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 Andll'a Pradesh High Court was concerned with the position of a redeemable preference shareholder after the failurd of the company to redeem the share. In the case before us, we are concemed with the position of a redeemable preference share holder prior to the due date for redemption. If anything, such a case is on stronger rI. footing and as-such shareholders can never be held to be a creditor of the company. 9. The issue had also arisen under the Interest Tax Act, 1974 before the suprerne court in,crT, Kanpur vs' sahara India savings snd Investment corporation Ltd. (2010) 321 ITR 37L' The question before ITANos.512l2OI1, 5l3l2}l7, 810/2011, 81 1/201 l, ll3glz}rl, rl40l20r1 &, l14rl20rr Page 8 of 17 ) 1r) 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 obseryed by the Court 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)' ln this view it was held that such interest was not chargeable under the Interest Tax Act. 10. We rnay also refer to a judgment of the Gujarat High Court in ,A,narkali Sarabhai v. CIT Guiarat t19S2l 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 amQunt equal to the face value of the preference shares when the company redeem them. The .^,."2.1e.1 y assessee received from the company an amount which aeeeded the !. amount *tri"fffrud paid for these shares. In deciding this question the Gpjarat High Court had to examine the nature of redeemable preference shares issued by a corrrpany. The Court referred to Palmer's Company Law (pag e 356, paragraph l, 22"d Edition) wherein it was observed that "frorn the finalcial point of view, redeemable preference shares are a [""+n;a : y '-W#gd form of shares and debentures, incorporating features of both, ITANos.512l201l, 51312017, 81012011, 81 1 lZOr l, 1 739 1201r, L l40 l20rr & 1 l4r l20 1 r Page 9 of L7 ('l\ and being closer to the latter than other preference shares, but fiom 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, 4th Edition, page 195 that if redemption of the petitioner's shares .would malce a company insolvent, it may not be.allowed to redeem those shares because repayment of preference capital woirld be a fraud upon the company's creditors. According to ihe Gujarat High Court this view of the author clearly inilicated 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 by the date fixed for redemption, the holder thereof cannot cornpel it to do .so by suing in debt for the return of his capital or by filing for a mandatory injunction. This view of the auth6r, according to the Gujarat High Court also negatives the contention that once the cornpany decides to redeem its preference shares, the holder thereof would be in the positicin of a creditor. 1 1. Having regard to the legal position adumbrated 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.512l20I1, 5l3l20ll, 810/20i1' 8ll l20lr, r13g 12017, 114012011 &' ll4rl2011 Page 10 of 17 l,U undeftaken to be redeemed and as of right claim a return 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 to furnish money for a specific purpose understood between the parties, the money or some equivalent to be returned" etc. Thus an advance is also quite different from fl preference shares in nature and character. IZ. Having regard to the aforesaid discussion, we are of the view that there is no merit in the assessee's claim that the dividend received in interest of thq redeemable preference shares atnounts to profits derived fi'om providing long term finance within the tneaning 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 affirrnative and in favour of the Revenue. 13. Question No.5 is directed against the finding of the Tribunal that ( t--.^-^^n+ o^*-ol ^- ohnrf-forrn r{e^ncifc rncr{e r{rrrino the ir J ' lnterest earned on short-term deposits made during the intenegnum periot between disbursement of funds was not profit derived fi'om the business of providing long-term finance. As held by the Tribunal, this is also an ITANos.512l20II, 51312011, 810/2011, 8rl l2o11, 1139 12011, lr40/201 1 & lr4l 1201 r Page 11 of 17 r6 investment of the funds of the assessee for making use of the idle funds remaining with it during the interregnum 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 admitted. 14. Question No.6 is directed against the finding of the Tribunal that the service charges. on SDF loans do not qualify for the deduction because tlre loans are not provided by the 'assessee but are given by the Government through the assessee for which service charges are paid, This factual finding is not challenged by the assessee. The funds. of the assessee are not involved. The Government's funds are routed through the assessee. The assessee caru1ot therefore be considered to be canying on the business 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 monies from the Government 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 threq 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. ITA Nos.5 1 2l20II, 5I3l20Il , 8 I 0/201 l, 8lI l20II, 1 139 l20l l, 11 40 120 | 1 & 1 | 4 1 l20ll Page 12 of 17 rl 16, The questions raised by the assessee in ITA No'5l2l20l1 are identical. For the above reasons we decline to adrnit thern. 17 . euestion Nos.l to 5 raised in ITA No.1 13912011 are identical to the first.five questions raised in the appeals in ITA Nos.5 t3 BL 5l2l20l1. 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 ernployees amounting to Rs'9,95,152 does not qualifl, 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 income claimed 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 riot 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 declile to admit the question No.6 in this appeal' 18. We now take up ITA Nos. 810 &' 8II120I1 relating to the assessment years 2007-08 and 2o0I-02 respectively. The first six questions raised by the assessee are identical with the six questions raised by it in ITA Nos. 5L2 & 51312011. For the same reasons given by us in those appeals, we decline to admit these qrr"riionr. Questioh No'7 in these two appeals (i.e., ITA Nos.810 & 8LI12OI1) are identical to Question No.6 raised in ITA No.l I3gl20I1, i.e., against the finding of the Tribunal ITA Nos.512l2OIl, 5l3l20ll, 810/2011, 81 1/201 1, 1139 1201L, ll40l20l1 & ll4rl20ll Page 13 of 17 1( that interest on advances or loans to employees does not quali$ 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 assessmenr years Lggg-2000 and 2004-05 to the miscellaneous receipts and held that they do not also qualify fof the deduction. In our view, the same reasoning given by us in respect of the other items of income would apply to miscellaneous income also, the details of which have not been frulished to us. We accordingly decline to admit the questions raised by the assessee inITANos. 810 & 811/2011. D. We now take up ITA No.l L4O120I1 (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 & 8IL/20II (asst. years: 2OO7-08 and 2001-02). For the reasons given by us in those appeals, we decline to admit question N?t. 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.1471148 of the Act. The decision of the Tribunal is i., putugraph 5 of its order' The findings on the basis of which the reassessment proceedings were held to be in order are: ITANos.512l20ll, 51312071, Bi0/2011, 8r1lz0n, n39l20rl, 1140/2011 & l14r/201 r Page 14 of 17 a L1 i u) 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 datetl 3-12-2004 shows that it is just a general letter and did not contain any working for the pulpose of the section. c) The assessment was reopened within 4 yearc from the end of the assesslnenr 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 proceedings were validly initiated cannot give rise to any question of law, much less a substantial question of law. We therefore decline to admit Question No.1 also for this year. 20. In ITA No.1 I4LI20L1, the assessee has raised four questions, stated to be substantial questions of law. Question Nos. 2 to 4 are identical with Question Nos.l to 3 raised in ITA Nos. 5I2 & 5L3120LL 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