Vipin Sanghi, J.
1. These are two References under Section 256(1) of the Income Tax Act, 1961 ( for short `the Act') arising out of ITA No. 4025(Del)/1970 and ITA No. 5766/Del/1984 for Assessment Years 1976-77 and 1981-82 respectively. Since the factual matrix is similar, the counsels have advanced common arguments and we are disposing them off by this common order.
2. The assessed is a Statutory Corporation incorporated by The National Cooperative Development Corporation Act, 1962 (for short 'the NCDC Act') for the purpose of planning and promoting programmes for the production, processing, marketing, storage, export and import of agricultural produce, foodstuffs, industrial goods, livestock, certain other commodities and services on cooperative principles.
3. For carrying on its activities, the assessed, receives grants and loans from, inter alia, the Government of India. The assessed then advances grants, loans and subsidies to cooperative societies through State Governments/Apex Cooperative Banks. The surplus fund held by the assessed are, from time to time, invested by it in fixed deposits on which it derives interest income. The assessed also derives income by way of interest on debentures and loans advanced to State Governments/Apex Cooperative institutions etc. The assessed pays tax on its interest income. The grants and loans it receives are treated as capital receipts and are not taxable.
4. In the Assessment year 1976-77, for the first time, the assessed claimed that the disbursements made by it, from out of its interest income, is revenue expenditure and is allowable as a deduction in the computation of its income under the heading 'profits and gains of business or profession'.
5. By its orders passed in ITA Nos. 4025(Del)/1970 and 5766/Del/1984 the Tribunal did not agree with this contention of the assessed and held that the disbursements were a capital expenditure.It is in this background that at the instance of the assessed the following questions of law have been referred to us in the two References:
ITR 555/1983
Whether on the facts and in the circumstances of the case, the income-tax Appellate Tribunal was justified on facts and in law in holding that amount of Rs. 19,35,950/- being grants disbursed by the assessed-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 assessed for the asstt. year under reference.
ITR 41/1989Whether on the facts and in the circumstances of the case, the Tribunal was right in following its earlier order for assessment year 1979-80 and 1980-81 and holding that the sum of Rs. 1,96,17,920/- paid by the assessed to various State Governments/Cooperative Societies was not of the nature of revenue expenditure and hence was not allowable as a deduction in computing the total income of the assessed.
6. The specific facts in relation to assessment year 1976-77 and pertaining to ITR 555/83 are as follows:
For the assessment year 1976-77, the assessed Corporation, had for the first time, claimed revenue expenditure under the head 'Grants' made by it to various State Governments amounting to Rs. 19,35,950/- as allowable deduction incurred for the purpose of the business from out of its interest income. The Corporation claimed that the expenses were for promotional purposes in accordance with the provision of Section 9A of the NCDC Act.
7. The said claim for deduction was disallowed by the Assessing Officer and on appeal allowed by the Commissioner of Income Tax (Appeals) to the extent of Rs. 13,66,187/-. On further Appeal the Income Tax Appellate Tribunal (for short `the Tribunal')reversed the decision of the CIT (Appeals) holding that:.since the grants, additional grants and other sums of moneys received by the assessed from the Central Govt. has not been treated as income of the assessed, the disbursement made to State Governments viz. grant of subsidies is application of that fund under Section 13(2) of Central Act No.26 of 1962 and it cannot be treated as an expenditure in the nature of Revenue one. Simply because the moneys disbursed have come out of earning of interest by the assessed on fixed deposits it cannot be said to be an expenditure of the Revenue nature since under Section 13(3) of the Act all moneys in the fund shall have to be deposited by the assessed in the Reserve Bank/State Bank/Nationalized Bank and according to learned Counsel for the assessed, Shri Ganeshan, the expenditure is relatable to money and not the nature of the payment disbursement. Since under Section 13 of the Central Act No.26 of 1962, the assessed is required to maintain a fund called The National Cooperative Development Fund and since the grants, additional grants and money received by the assessed in that fund from Central Government has not been treated by the assessed as income, the disbursement of moneys to State Governments as subsidies under various schemes as provided in that Act is a pure and simple disbursement out of that fund as provided under Section 13(2) of the said Act, hence it is not an expenditure in the nature of Revenue one....
8. The specific facts in relation to ITR No.41/89 are as follows:
For the assessment year, 1981-82 the assessed had claimed deduction of Rs. 2,43,18,921/- as revenue expenditure being disbursement of grants to various State Govts. and National Level Cooperative Institutions for assisting development of cooperative programme. As against this 'expenditure', the assessed corporation had received an amount of Rs. 1407/- lacs from the Central Government and another amount of Rs. 1001/- from other cooperative societies. After adjusting these two receipts from the grants made, the assessed claimed as allowable deduction, revenue expenditure of Rs. 1,96,17,920/- from its profits. The claim of deduction was not allowed by the assessing officer following his earlier order. The CIT (Appeals) also rejected the claim of the assessed. On further appeal, the Tribunal affirmed the decision of the CIT (Appeals) following its own orders for the previous assessment years including for the assessment year 1976-77.
9. According to the assessed, the expenditure in question was incurred by the assessed from its own income, and not from the grants received by the Corporation from the Central Government. The assessed claims that the grants/loans advanced by it were in the nature of Revenue expenditure from the point of view of the assessed and it was wrong to treat the same as capital expenditure merely because these disbursements may be in the nature of capital receipts from the point of view of the recipient. To buttress this argument he relied upon Empire Jute Co. Ltd v. Commissioner of Income Tax : [1980]124ITR1(SC) , wherein the Supreme Court has held that:
In the first place, it is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.
10. It was stressed that no assets were acquired in the process of disbursement of these grants/loans by the assessed though the grants/loans may have been utilized by the recipients for acquisition of assets. The assessed submitted that these advances were expenditure incurred by it for the purpose of its business or profession and were thereforee revenue expenditures deductible under Section 37 of the Act. The assessed also placed reliance upon the judgment of Commissioner of Income Tax, Bombay City v. Associated Cement Companies Ltd. : [1988]172ITR257(SC) which holds:.what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessed's trading operations or enabling the management and conduct of the assessed's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.
11. The Revenue on the other hand contended that the interest income on fixed deposits in Banks, etc. is not the business income of the assessed. It was claimed that the same is in fact income from other sources' under Section 56 of the Act. Disbursement of the said income is a mere application of income and thereforee it cannot be treated as revenue expenditure. It was contended that the only deduction that can be claimed in respect of 'income from other sources' are those provided for in Section 57 of the Act and that none of the advances made by the assesse are covered by the deduction provided under Section 57 of the Act. Reliance has also been placed on Commissioner of Income-Tax v. Sitaldas Tirathdas : [1961]41ITR367(SC) to claim that this was merely a case of application of income which the assessed had received as its own. In the cited case, the assessed claimed as revenue expenditure the maintenance amount he was required to pay in pursuance of an order passed under Section 125 Cr. P.C. Disallowing the claim, the Supreme Court held that the expenditure was not incurred in discharge of an overriding charge, where the assessed was merely a collector of another's income. It was a case as aforesaid, of mere application of ones income. Learned Counsel for the Revenue raised an even more fundamental argument by claiming that the disbursements made by the assessed as loans could not even be considered as 'expenditure'. He relied on Commissioner of Income Tax v. N.C. John and Sons Ltd. : [1994]208ITR57(Ker) to contend that an expenditure has to be incurred before it can be claimed as a deduction. In this case the Court observed:
For claiming deduction as expenditure the amount should have been spent by the assessed as an amount paid out or paid away. To be a payment which is made irrevocably, there should not be any possibility of the money forming once again a part of the funds of the assessed. If this condition is not fulfilled and there is a possibility of there being a resulting trust in favor of the assessed, the money cannot be considered to have been spent by the assessed. The assessed cannot claim that he had spent out or away the amount which he seeks to get deduction of.
12. The Revenue contended that the loans disbursed by the assessed obviously were liable to be refunded in terms of the agreement under which they were advanced. The Revenue has also contended that after interest is received by the assessed, it merges into the fund of the assessed and in any case, it loses its character of business income. Learned Counsel relied on para 13 of the order of the Tribunal in ITA No. 4025 (Del)/1980 where the Tribunal held as follows:.we are of the view that on the facts and in the circumstances, since the grants, additional grants and other sums of moneys received by the assessed from the Central Govt. has not been treated as income of the assessed, the disbursement made to State Governments viz. grant of subsidies is application of that fund under Section 13(2) of Central Act No.26 of 1962 and it cannot be treated as an expenditure in the nature of Revenue one. Simply because the moneys disbursed have come out of earning of interest by the assessed on fixed deposits it cannot be said to be an expenditure of the Revenue deposited by the assessed in the Reserve Bank/State Bank/Nationalised Bank.
13. The assessed, National Cooperative Development Corporation, as aforesaid is a statutory Corporation constituted by the NCDC Act. The functions of the Corporation are contained in Section 9 of the NCDC Act. The primary functions of the Corporation are to plan, promote and finance programmes through co-operative societies for the production, processing, marketing, storage and export of minor forest produce and to undertake development of certain notified services for the purpose of discharging its functions. It is also obliged under Section 9(2)(a) and 9(2)(b) of the NCDC Act to advance loans or grant subsidies to State Government for financing co-operative societies to achieve its objectives. Section 12 of the NCDC Act states that the Central Government, after due appropriation by Parliament by law, may pay to the assessed Corporation by way of grant, additional grant or by way of loan such sums of money as it may determine or as may be required by the Corporation for its activities. The assessed Corporation is competent to borrow funds on loan or to receive gifts, grants, donations and benefactions from the Government or other agencies. Under Section 13 of the NCDC Act, the Corporation is obliged to maintain a fund called the National Co-operative Development Fund. All streams of funding and receipts eventually flow into this fund which is a common pool. Section 13(1)(d), of the NCDC Act being particularly relevant is reproduced below:
13(1) The Corporation shall maintain a fund called the National Cooperative Development Fund (hereinafter referred to as the Fund) to which shall be credited:
(a) xx xx
xx xx
(d)such sums of money as may, from time to time, be realised out of repayment of loans made from the Fund or from interest on loans or dividends or other realisation on investments made from the Fund.
14. Section 13(2)(a) of the NCDC Act obliges the assessed Corporation to advance loans and grant subsidies to State Governments from out of the monies in the fund.
15. Since it is the business of the assessed Corporation to receive funds, inter alia, as loans and also to advance monies, inter alia, as loans, we consider that the interest income earned by the assessed would squarely fall under heading 'D' of Section 14 of the Act that is 'profits and gains of business or profession'. It is the statutory function and obligation of the Corporation to provide funding to the State Governments either by way of grants or by way of loans, and for carrying out its statutory functions and obligations, it receives grants and loans from the Government and other entities. As a part of its normal business activity the assessed derives interest income by investing its surplus funds in fixed deposits and debentures, while it also earns interest on the loans it advances in discharge of its statutory obligations. Consequently in our view it cannot be said that the interest income derived by the assessed would fall under the head ' income from other sources' under Section 56 of the Act. We may refer to the decision reported in CIT v. R.M. Meenakshi Sunderam : [1995]212ITR220(Mad) . It is also to be noted that it is not the case of the Revenue that the interest income derived by the assessed is 'income from other sources.'Referenceis made to the order passed by the Assessing Officer for the assessment year 1976-77 wherein in paragraph 9, the various components of interest income have been enlisted and they have not been classified by the Assessing Officer as 'income from other sources.
16. Coming to the issue whether the advances/disbursements made by the assessed from out profits interest income amount to capital expenditure or revenue expenditure, we are of the view that the so called expenditure cannot be claimed as revenue expenditure by the assessed.
17. The words 'capital expenditure' have not been defined in the Act. However the words have been interpreted and various tests have been laid down to determine the nature of expenditure in a catena of judicial decisions. The Privy Council in Jagat Bus Service v. Commissioner of Income-tax : [1950]18ITR13(All) dealt with the scope of the expression `capital expenditure' as follows:
The question, what is capital expenditure, has been the subject-matter of debate and consideration in a very large number of cases. In the case of British Insulated and Helsby Cables, Ltd. v. Atherton [1926] A. C. 205 : 10 Tax Cas. 155. various tests were recapitulated from decisions in previous cases, such as that ' capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year ' from the decision of Lord Dunedin in Vallambrosa Rubber Co. v. Farmer [1910] SC 519, at P. 525 and, again, that income expenditure is ' a proper debit item to be charged against incomings of the trade when computing the profits of it ' : per Lord Sumner in Usher's case, [1915] A.C.433; 6 Tax Case 399. The Lord Chancellor said that : when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to Revenue but to capital.' Lord Atkinson also relied on the observations of Lord Dunedin quoted above with the amendment proposed by Rowlatt, J., in Ounsworth v. Vickers, Ltd. [1915] 3 K.B.267 at P. 273 : 6 Tax Case 671 to the following effect:
I take it, and indeed both sides agree, that no stress is there laid upon the words ' every year ' : the real rest is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all. ' There is a further test given in the judgment of Lord Atkinson, whether the expenditure could be regarded as forming part of the cost by which the profits and gains for that year have been acquired in which case it would be Revenue expenditure.
The decision in each case, of the question, whether an item of expenditure is Revenue expenditure or capital expenditure, depends upon a variety of circumstances, e.g., the nature of the expenditure, the source from which the money was spent, whether the payment was made once and for all or is a recurring expenditure and whether the asset acquired is going to be a source of permanent income or it exhausts itself either during the course of the year when it was acquired or within a short period thereafter. The main test is its permanency, i.e., whether the value of the capital of the company or its asset or its goodwill is permanently increased by reason of such expenditure. It is impossible to lay down any test which would meet all cases. For example, a firm carrying on the business of plying motor vehicles for hire might decide to increase its business and lay down a new road connecting two places. This would be in the nature of a capital expenditure. If, on the other hand, it spends money every year for the running repairs to the road, that might be in the nature of a Revenue expenditure. Similarly, a firm dealing in machinery might buy machinery for sale which would be Revenue expenditure, while an industrial concern might buy machinery to replace worn out machinery and that would be in the nature of capital expenditure. Even in the case of an industrial concern minor repairs which have to be frequently made and which are known as running repairs are Revenue expenditure, while replacement of costly machinery is capital expenditure. It is, thereforee, difficult to lay down any test which could be applied to every case. To my mind, ' capital ' means an asset which has an element of permanency about it and which is capable of being a source of income and ' capital expenditure ' must, thereforee, generally mean an acquisition of an asset and the asset must be intended to be of lasting value ; while income or Revenue expenses are generally running expenses incurred in earning profit or expenses incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return or a very limited number of returns.
18. In Commissioner of Income-tax v. Ashok Leyland Ltd. : [1969]72ITR137(Mad) the Madras High Court drew a distinction between revenue and capital expenditure. It was observed:
A clear-cut dichotomy cannot be laid down in the absence of a statutory definition of ' capital and Revenue expenditure '. Invariably it has to be considered from the point of view of the payer. In the ultimate analysis, the conclusion of the admissibility of an allowance claimed is one of law, if not a mixed question of law and fact. The word ' capital ' connotes permanency and capital expenditure is, thereforee, closely akin to the concept of securing something tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise.
This distinction, though candid and well accepted, yet is susceptible to modification under peculiar and distinct circumstances. Thus, the facts of each case, the attendant circumstances revolving round the expenditure, the aim, object and purpose of the same, their impact on the assessed, particularly in matters relating to the future of the assessed's trade and business, whether it could be sustained on ordinary can one of commercial expediency simpliciter, whether it is a step-in-aid of future expansion or prolongation of life of an existing business, whether it is to secure an enduring benefit, whether the expenditure constitutes conceivable nucleus to form the foundation for posterior profit earning, whether the expenditure could be viewed as an integral part of the conduct of the business and to avoid inroads and incursions into its concrete present and potential future, are all some of the main incidents which have a bearing on the decision whether, in a given case, the expenditure is capital or chargeable to Revenue. On the whole, an objective application of a judicial mind to the facts of each case is necessary.
19. In the illuminating judgment of Bhagwati J. in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax : [1955]27ITR34(SC) , some broad principles of distinction were deduced by his Lordship as follows:
1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment....
2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade....
3. Whether, for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.
20. In Hall Storms Property Ltd v. Stedval, Commissioner of Taxation [1946] 72 C. L. R. 634, 647, Starke J., while emphasising that none of the so-called definitions or tests or any other definitions or tests suggested by the cases are decisive, pointed out that an asset or advantage need not have a tangible existence and expressed the view that expenditure to acquire the goodwill of a business or to acquire restrictive covenants against competition in business may be of a capital nature. In Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) and Regent Oil Co. Ltd. v. Inland Revenue Commissioners [1969] 73 ITR 301, the House of Lords approved the aforesaid decision in the following words:
I consider that no different result is reached according as to whether an asset or advantage is of a tangible or of an intangible nature.
21. The assessed Corporation is entrusted with funds by the Central Government and other agencies for the purpose of disbursement thereof in fulfillment of its statutory obligations.It is for this reason that the funds that it receives as grants from the Central Government are not treated as revenue receipts and are not subjected to tax.The assessed Corporation is obliged to manage its funds in a prudent manner in accordance with the provisions of the NCDC Act and all its accretions, by whatever source, get amalgamated in a common pool called the National Cooperative Development Fund created under Section 13 of the NCDC Act.This also includes monies as may, from time to time,be realised out of repayment of loans made from the Fund or from interest on loans or dividends or other realisations on investments made from the Fund.The monies which are advanced from the Fund cannot be identified as forming part of the interest income, or the grants received from the Central Government or other agencies, or loans that the assessed Corporation may receive for the purpose of its business.Moreover the monies advanced by the assessed Corporation in discharge of its statutory obligations even when they are advanced as interest bearing loans can at best be classified as capital expenditure.
22. We find force in the submission made by the learned Counsel for the Revenue, that to be able to claim a deduction as revenue expenditure, the assessed has to first establish that there is in fact an 'expenditure' which the assessed has incurred. Then alone the question of it being classified as 'revenue expenditure' can arise.When the assessed advances loans to State Governments and other cooperative societies, in our view, the same cannot be claimed to be 'expenditure', since it cannot be said that the monies advanced as loans go out of the hands of the assessed irretrievably. It is inherent in a loan transaction that the loan amount has to be returned to the lender with or without interest, as the parties may agree. It cannot be said in respect of the monies lent by the assessed, that there is no possibility of those amounts once again forming a part of the Fund of the assessed. In this regard we agree with the analysis of the Kerala High Court in the case of CIT v N.C John(supra). Since the amounts disbursed as loans cannot be claimed to be 'expenditure', the question of treating them as 'revenue expenditure' does not arise.
23. So far as the assessed is concerned, its business is to deal in money. When it advances interest bearing loans, it is investing its capital for the purpose of earning revenue in the shape of interest. When monies are disbursed as loans, it is with a view to bringing into existence an advantage, in the shape of interest income for the enduring business of the assessed. The capital employed in its business by the assessed is capable of being a source of income.It is not necessary that in every case for capital expenditure, an asset should come into being.By advancing a loan, the assessed secures an incorporeal right to recover the same with interest as per the terms of the loan.We also agree with the submission of the Revenue that it is merely a case of application of income of the assessed and the assessed was applying the same in discharge of its statutory obligations.
24. We thereforee answer the questions raised in these references in the affirmative and in favor of the Revenue and against the assessed.