SC on 44 year old case & need for Vibrant system of Advance Ruling

Supreme Court (SC) on Forty-Four year old case and need for Vibrant system of Advance Ruling

Recently, Supreme Court delivered its verdict in a Forty-Four (44) year old pending case in case of National Co-operative Development Corporation.

While the interesting part of the judgment is the Two Postscripts penned down by Justice Kaul but let’s not directly jump to it. First let us briefly understand the issue involved and then understand the Postscripts.

The opening line of the decision – “Which pocket of the Government should be enriched has taken forty-four (44) years to decide – a case of what ought not to be!”

To appreciate the reason behind this line, let us understand the facts of the case:

• The taxpayer, National Co-operative Development Corporation (‘NCDC’) was established under the National Cooperative Development Corporation Act, 1962.
• The function of NCDC was to advance loans or grant subsidies to State Governments for financing cooperative societies and provide loans and grants directly to the national level and State level cooperative societies, on the guarantee of State Governments.
• For this purpose, NCDC was receiving the funding from the Central Government (‘CG’).
• So basically, NCDC was acting as an intermediary between the Central Government and State Government for the purpose of financing cooperative societies.

By this time, you must have understood the introductory line of SC – Which pocket of the government should be enriched has taken 44 years to decide!!

• NCDC invested idle funds in fixed deposits which generated interest income. It also earned interest income on loan advanced to cooperative societies.
• The tax liability for NCDC was as under:
  • Funds received from CG were treated as capital receipt and therefore not chargeable to tax.
  • Interest income on loan and FD was chargeable to tax.

Issues before SC:

• Whether interest income should be taxable under the head of ‘profits and gains of business or profession’ (‘PGBP’) or ‘income from other sources’ (‘IFOS’)?
• Whether non-refundable grants made from interest income should be allowed as revenue expenditure against the interest income and only net interest income should be chargeable to tax?

Supreme Court discussed both the issues at length and concluded as under:

• On the first issue, SC concurred with the view of HC that the only business of the NCDS is to receive funds and then to advance them as loans or grants. The income generated from interest is necessarily inter- linked to the business of the NCDC and would, thus, fall under the head of PGBP.
• On the second issue, SC has discussed various concepts such as ‘application of income’, ‘diversion of income by overriding title’ and subsequent amendment by the Finance Act 2003 in relation to addition of clause (xii) under section 36 of the Income-tax Act, 1961 (‘the IT Act’) wherein expenditure (not in nature of capital expenditure) incurred by such corporation, for the objects and purposes authorised by the Act under which it is constituted or established, are allowable as expenditure. SC held that the disbursement of grants is the core business of the NCDC and therefore, the expenditure incurred in the course of business and for the ‘purpose of business’, should be an allowable deduction under Section 37(1) of the IT Act.
  

Responding both the issues in favour of assessee, SC concluded that it 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.

Wait!! This is just the conclusion for the issues involved. Now comes the most interesting part of the decision – The “2 Postscripts”

Postscript 1 dealt with the issue of litigation arising inter se the Government and its bodies for non-tax matters

SC noticed the fact that the Indian legal system is reeling under a docket explosion. SC highlighted about the ‘Administrative Mechanism for Resolution of Central Public Sector Enterprises (‘CPSEs’) Disputes’ for settling matters in case of non-taxation matter. It observed that one of the main impediments to such a resolution is that the bureaucrats are reluctant to accept responsibility, apprehending that their decision may be called into question in future and they may face consequences.

SC suggested 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 and hoped that a serious thought would be given to the aspect of dispute resolution, more so in the post-COVID period.

SC also advocated that mediation has proved to be an efficacious remedy and suggested that a serious thought is required to bring forth a comprehensive legislation to institutionalise mediation.

Postscript 2 dealt with issue of litigation pertaining to taxation matters

SC noticed that the petition rate of the tax department before the Supreme Court is around 87% and taxation is one of the largest areas of litigation for the Government.

SC highlighted some of the well-established advance ruling system of other countries and suggested that:

• A vibrant system of Advance Ruling can go a long way in reducing taxation litigation not only in case of matters pertaining in case of CPSE and government authorities 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. In case of CPSEs and Government authorities, SC suggested that matter should not be taken up further once an Advance Ruling is delivered.
• SC noticed that threshold[2] for applicability of advance ruling in case of resident is so high that it cannot provide any solace to any individual, and therefore proposed to reconsider and reduce the ceiling limit.
• Recommended to the CG 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.
• Also advocated that a council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

My Views – Tax certainty and litigation are something which every business looks upon and are considered to be an integral part while considering ‘ease of doing business’. The above suggestions, especially, in respect of advance ruling, if implemented, may be a very welcome move for taxpayers. One can only wish that the above suggestions of SC reaches to the ears of CG and one can hope to see some new developments soon.

[2] transactions of value of Rs.100 crore or more [Notification No. 73, dated 28-11-2014]