C.i.t, Chandigarh v. Punjab State Warehousing Corporation, Chandigarh

In the High Court of Punjab and Haryana, Chandigarh. ITA No.18 of 2001 Date of Decision: 15.01.2009 C.I.T, Chandigarh. ....appellant. Versus Punjab State Warehousing Corporation, Chandigarh. ....Respondent. Coram:- Hon'ble Mr.Justice J.S. Khehar Hon'ble Mr. Justice Nawab Singh Present: Ms. Urvashi Dhugga, Advocate for the appellant. Mr. Navdeep Sukna and for the respondents. Mr. Sudershan Thakur, Advocates ... J.S. Khehar, J. (Oral). The respondent – assessee is primarily engaged in the activityof letting of godowns or warehouses for storage. In so far as, theassessment year 1990-91 is concerned, income in respect of the aforesaidactivity was exempt under Section 10(29) of the Income Tax Act, 1961(hereinafter referred to as the 1961 Act). Section 10(29) of the 1961 Act, isbeing extracted hereunder:- “10(29) In the case of an authority constituted under any lawfor the time being in force for the marketing of commodities,any income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing ofcommodities”. The issue which has come up for adjudication before us is inrespect of income from another allied activity being carried out by therespondent – assessee. The respondent – assessee has adopted a policy ofextending loans to its employees. These loans are extended to enable theemployees to purchase houses and motor vehicles. The respondent –assessee charges interest on the aforesaid loans extended to the employees.The income from the allied activity referred to above, is the interest incomeaforesaid. The sole issue which has arisen for consideration before thisCourt is, whether the interest income derived by the respondent – assesseecan be set off as against the interest paid by the respondent – assessee fortaking a loan from the NABARD. Before we embark on the proposition noticed in the foregoingparagraph, it is essential to record a finding on a related aspect of the matter,namely, whether the instant income derived out of interest by the respondent – assessee falls within the purview of Section 57 of the 1961 Act (i.e.income from other sources). The Commissioner of Income Tax (Appeals),adjudicated upon the controversy by an order dated 25.9.1991, wherein itwas held that the instant income of the respondent – assessee derived byway of interest, was income from other sources. This determination at thehands of the Commissioner of Income Tax (Appeals), was upheld by theIncome Tax Appellate Tribunal, vide its order dated 17.5.2000. The orderspassed by the Commissioner of Income Tax (Appeals) dated 25.9.1991, aswell as, the order passed by Income Tax Appellate Tribunal dated17.5.2000, are not subject matter of challenge at the hands of the respondent – assessee. In the aforesaid view of the matter, we have no hesitation inconcluding, that the respondent – assessee had accepted, that the incomederived by the respondent – assessee as interest by extending loans to itsemployees, is income from other sources falling under Section 57 of the1961 Act. Having arrived at the aforesaid conclusion, the next question tobe settled is, whether the component of income earned by the respondent –Corporation can be subjected to tax. If so, whether in computing theliability of the respondent – Corporation, the interest income earned by itcan be set off against the interest being paid by the respondent – assessee tothe NABARD. The relevant provision which has been invoked by therespondent – assessee to escape from the said liability of tax, is Section 57(iii) of the 1961 Act. The aforesaid provision is being extracted hereunder:-- Having arrived at the aforesaid conclusion, the next question tobe settled is, whether the component of income earned by the respondent –Corporation can be subjected to tax. If so, whether in computing theliability of the respondent – Corporation, the interest income earned by itcan be set off against the interest being paid by the respondent – assessee tothe NABARD. The relevant provision which has been invoked by therespondent – assessee to escape from the said liability of tax, is Section 57(iii) of the 1961 Act. The aforesaid provision is being extracted hereunder:-- “57(iii) Any other expenditure (not being in the nature ofcapital expenditure) laid out or expended wholly andexclusively for the purpose of making or earning such income.”In our considered view, the term “purpose” referred to in clause(iii) of Section 57 of the 1961 Act, for the present controversy, is relatableto the activity of the respondent –assessee in earning income by extendingloans to its employees. In so far as, the deduction conceived of under clause(iii) of Section 57 of the 1961 Act is concerned, the same is relatable only toexpenditure incurred for the said “purpose”. It is not the case of therespondent – assessee, and in fact cannot be its claim, that the interest beingpaid by the respondent – assessee to the NABARD is an expenditure incurred by it for the “purpose” under reference. Thus viewed, we aresatisfied that the respondent – assessee cannot be allowed to set off theinterest income being derived by it for the welfare of the employeesengaged by it as against the interest being paid by the respondent – assesseeto the NABARD. In view of the above, we are satisfied that the set off allowed bythe Income Tax Appellate Tribunal, dated 17.5.2000 was wholly unjustified,being beyond the scope of Section 57 of the 1961 Act. The instant appeal,accordingly, stands allowed in the aforesaid terms. The following substantial question of law arose foradjudication in the present appeal: “Whether on the facts and in the circumstances of the caseHon’ble I.T.A.T. is right in law in allowing interest paid by theCorporation is eligible for deduction u/s 57(iii) against theinterest on advances received when no direct nexus can beestablished between the amounts for interest payment andinterest received?” The aforesaid question of law is answered in favour of the Revenue. ( J.S. Khehar )Judge 15.01.2009 sk. ( Nawab Singh ) Judge.