National Cooperative Development Corporation v. CIT

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The Tax Publishers2020 TaxPub(DT) 3686 (SC) : (2020) 427 ITR 0288 : (2020) 316 CTR 0593 : (2020) 274 TAXMAN 0187

INCOME TAX ACT, 1961

Section 37(1)

Where assessee-corporation was established under the National Cooperative Development Act, 1962 and its function was to propel loans or grant subsidies to State Governments, as disbursements of grants was held to be core business of assessee, expenditure incurred in course of business and for purpose of business would naturally be an allowable deduction under section 37(1). Further, merely because grants benefit a third party, it would not render disbursement as application of income and not expenditure and thus, every application of income towards business objective of assessee was a business expenditure and nothing else.

Business expenditure - Allowability - Assessee function was to propel loans or grant subsidies to State Governments - Expenditure incurred in course of business whether allowable when grants benefitted third parties

Assessee corporation was established under the National Cooperative Development Act, 1962. It functioned under section 9 to propel loans or grant subsidies to the State Governments which was helpful in financing cooperative societies. Even though assessee was an intermediary or passes through entity, it was a distinct juridical entity. Issue arose as to whether the component of interest income earned on the funds received under section 13(1) of National Cooperative Development Act, 1962 and disbursed by way of grants to national or state level co-operative societies, was eligible for a deduction for determining the taxable income of assessee. AO alleged that non-refundable grants were not a revenue expense but they were a capital expense, and thus, the equivalent was not allowed for deduction. Held: Generation of interest income from surplus or idle funds and its utilization for grant of loan or grants was a part of assessee's finance business activity and was to be taxed as business income. Mere circumstance that assessee did not carry on business activity for profit motive was not material as profit making was not an essential ingredient. Disbursement of funds having been held to be core business of assessee-corporation, expenditure incurred in course of business and for purpose of business would naturally be an allowable deduction under section 37(1). Source of funds from which expenditure was made was not relevant and it was also not relevant as to whether expenditure was incurred out of corpus funds or from interest income earned by assessee-corporation. Merely because grants benefitted a third party, it would not render disbursement as application of income and not expenditure. Thus, every application of income towards business objective of assessee-corporation was a business expenditure and nothing else.