Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of Where assessee-corporation used to finance programmes through co-operative societies, monies advanced by assessee in discharge of its statutory functions could not be said to be an 'expenditure' and, therefore, assessee's claim that disbursements made out of its interest income were allowable as revenue expenditure, was untenable The assessee was a statutory corporation incorporated by the National Cooperative Development Corporation Act, 1962 ('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 co-operative principles. For carrying on its activities, the assessee received grants and loans from, inter alia, the Government of India. The assessee then advanced grants, loans and subsidies to co-operative societies through State Governments/apex co-operative banks. As a part of its normal business activity the assessee derived interest income by investing its surplus funds in fixed deposits and debentures, while it also earned interest on the loans it advanced in discharge of its statutory obligations. In the assessment year 1976-77, for the first time, the assessee claimed that the disbursements made by it, from out of its interest income, were in the nature of revenue expenditure and hence allowable as a deduction in the computation of its income under the head "profits and gains of business or profession". The Tribunal held that the disbursements were capital expenditure. Held that while the interest income derived by the assessee was its business income, the advances/disbursements made by the assessee from out of its interest income amounted to capital expenditure. To be able to claim a deduction as revenue expenditure, the assessee has to first establish that there is in fact an 'expenditure' which the assessee has incurred. Then alone the question of it being classified as 'revenue expenditure' can arise. When the assessee advanced loans to State Governments and other co-operative societies,…

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