Supreme Court: Which pocket of the Government should be enriched has taken forty-four (44) years to decide – a classic case of what ought not to be

The SC on September 11, 2020 {NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION vs COMMISSIONER OF INCOME TAX, DELHI-V} held that which pocket of the Government should be enriched has taken forty-four (44) years to decide – a classic case of what ought not to be!

The issue which had arisen for consideration before the SC was whether the component of interest income earned on the funds received under Section 13(1), and disbursed by way of “grants” to national or state level co-operative societies, is eligible for deduction for determining the “taxable income” of the appellant-Corporation.

It was held by the Bench, comprising of Justice Sanjay Kishan Kaul & Justice Indu Malhotra, that it is in agreement with the view taken by the High Court, as the only business of the appellant-Corporation is to receive funds and then to advance them as loans or grants. It was held that the interest income arose on account of the fund so received and it may not have been utilised for a certain period of time, being put in fixed deposits so that the amount does not lie idle. That the income generated was again applied to the disbursement of grants and loans. It was held that the income generated from interest is necessarily interlinked to the business of the appellant-Corporation and would, thus, fall under the head of ‘profits and gains of business or profession’. It was held that there would, therefore, be no requirement of taking recourse to Section 56 of the IT Act for taxing the interest income under this residuary clause as income from other sources.

The SC held that to decide the question as to whether a particular source of income is business income, one would have to look to the notions of what is the business activity. It was held that the activity from which the income is derived must have a set purpose. It was held that the business activity of the appellant-Corporation is really that of an intermediary to lend money or give grants. Thus, it was held that the generation of interest income in support of this only business (not even primary) for a period of time when the funds are lying idle, and utilised for the same purpose would ultimately be taxable as business income. It was held that the fact that the appellantCorporation does not carry on business activity for profit motive is not material as profit making is not an essential ingredient on account of self-imposed and innate restriction arising from the very statute which creates the appellant-Corporation and the very purpose for which the appellantCorporation has been set up.

It was held that the logical conclusion is that every application of income towards business objective of the appellant-Corporation is a business expenditure and nothing else.

Finally, the question before the SC, that was, whether on the facts and in the circumstances of the case, the HC & ITAT were justified on facts and in law in holding that amount of Rs.19,35,950/- being grants disbursed by the assessee-applicant to various State Governments during the financial year 1975-76 relevant to asstt. year 1976-77 was not in the nature of Revenue expenditure, hence not allowable in computing the total income of the assessee for the asstt. year under reference, was answered in negative in favour of assessee by the SC.

It was held that it is unable to agree with the findings arrived at by the AO, ITAT and the High Court albeit for different reasons and concur with the view taken by the CIT(A) and it is, thus, left to the Court to strike the final blow and allow the appeals, leaving the parties to bear their own costs, while noticing with regret the inordinately long passage of time and the wastage of judicial time on deciding, who is principally right when in either eventuality it benefits the Central Government.

It was also observed that the Indian legal system is reeling under a docket explosion. It was held that the Government and public authorities are active contributories to this deluge. To top it, a number of litigations arise inter se the Government and its bodies and, thus, the only question is which pocket of the Government will be benefitted?

The SC held that it is of the opinion that one of the main impediments to inter-se government dispute resolution, plainly speaking, is that the bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement. It was held that in order to make the system function effectively, it may be appropriate to have a Committee of legal experts presided by a retired Judge to give their imprimatur to the settlement so that such apprehensions do not come in the way of arriving at a settlement. It was held that it is its pious hope that a serious thought would be given to the aspect of dispute resolution amicably, more so in the post-COVID period.

It was further held that a vibrant system of Advance Ruling can go a long way in reducing taxation litigation. It was held that this is not only true of these kinds of disputes but even disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity. It was held that instead of first filing a return and then facing consequences from the Department because of a different perception which the Department may have, an Advance Ruling System can facilitate not only such a resolution, but also avoid the tiers of litigation which such cases go through as in the present case.

It was held by the SC that it is appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

In the end before parting it was held by the SC that it may refer to the legal legend Mr. Nani A. Palkhivala, who while addressing a letter of congratulations to Mr. Soli J. Sorabjee on attaining his appointment as the Attorney General on 11.12.1989 referred to the greatest glory of Attorney General as not to win cases for the Government but to ensure that justice is done to the people. In this behalf, he refers to the motto of the Department of Justice in the United States carved out into the Rotunda of the Attorney General Office:

“The United States wins its case whenever justice is done to one of its citizens in the courts.”

It was held by the SC that the Indian citizenry is entitled to a hope that the aforesaid is what must be the objective of Government litigation, which should prevail even within the Indian legal system. It was concluded in the words of Martin Luther King, Jr., “We must accept finite disappointment, but never lose infinite hope.”