TMI Blog2011 (8) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the provisions of the Income-tax Act. Accordingly it was held that the rebate given to the members is not a part of profit at all. In the instant case also, it has to be held that the amount paid by the assessee as "interest on share capital", in the instant year, goes to reduce the gross interest collected by it from its members and it would not form part of profit at all - the appeal of the assessee is allowed. - 5 & 19 (VIZAG.) OF 2011 - - - Dated:- 29-8-2011 - SUNIL KUMAR YADAV, B.R. BASKARAN, JJ. TH. Lucas Peter for the Appellant. G.V.N. Hari for the Respondent. ORDER B.R. Baskaran, Accountant Member. The cross appeals are directed against the order dated 4-11-2010 passed by the learned CIT (A) Visakhapatnam and they relate to the assessment year 2007-08. 2. The revenue is challenging the decision of the learned CIT(A) in deleting the disallowance made under section 40(a)(ia) of the Act. The assessee is assailing the decision of the learned CIT(A) in confirming the disallowance of claim made under the head interest on share capital . 3. The facts relating to the issues are stated in brief. The assessee is a co-operative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extract below the relevant observations made by the learned CIT(A) on this issue: 5.1 The learned Authorised Representative submitted that inter alia, that the Assessing Officer while disallowing the appellant's claim that it being a cooperative society and hence, it is exempt from the obligations to deduct tax at source in respect of interest payment under section 194A of the Act, erroneously observed that although the appellant is an entity registered under the Cooperative Societies Act, yet it is not entitled to the benefit of a cooperative society under the Act for having been engaged in banking activities like any other bank, and thus, it could not partake of the benefit of the exemption provided under section 194A(3)(v) of the Act. He further submitted that the Assessing Officer clearly failed to appreciate that no matter whatever its business activities are, the appellant's legal status is that of a cooperative society and as such it is entitled to all the benefits contemplated and provided under the Act. The fact as appearing in the appellant society's case accord very well with the requirements stipulated under the CBDT circular No. 9/2002 dated 11-9-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the obligation to deduct tax at source in terms of section 194A(3)(v) of the Act. Consequently, the assessee cannot be made liable for any disallowance under section 40(a)(ia) of the Act, assuming that certain interest payments exceeding the prescribed monetary limit have been made to various parties/members. Hence, there is no need for considering the factual details to ascertain the number of cases where the interest payments exceeding the threshold limit have been made during the year. Even otherwise, there is no scope for effecting any ad hoc and estimated disallowance under section 40(a)(ia) of the Act; any disallowance has to be made only on actual basis pursuant to ascertainment of defaults in each case of interest payment. Accordingly, the assessee gets relief and the addition of ₹ 1,80,05,129 is hereby deleted . 4.1 We have carefully considered the arguments of the assessee and also the decision rendered by Learned CIT(A). Section 194A(3) of the Act prescribes the monetary limits and also a list of payments which are exempt from the requirement of complying with the provisions of TDS prescribed under sub-section (1) of that section. Clause (v) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia has exempted Urban Co-operative Banks fulfilling certain criteria, from the mandatory requirement of linking share capital to the borrowing norms. (b) Thus the public subscribe to the share capital of the co-operative societies as a condition for obtaining loan, where as in the case of limited companies, the public subscribe to the equity share capital as an investment with the expectation of appreciation of share values. Further, in the case of co-operative society, a member can withdraw the share capital on ceasing to be a member and such kind of refund of share capital is not permissible in the case of limited companies. Hence there is wide variation in the purpose and characteristics of the share capital in the hands of co-operative societies and limited companies. In the instant case, clause 42 of the Bye-Laws of the assessee-society prescribes the rules for linking share capital to the borrowals. (c) Since the borrowers are compelled to subscribe to the share capital, the nature of their contribution is akin to making of margin money deposits and hence the interest paid on the share capital should be treated as expenditure. (d) Section 16(1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence both section 36(1)(iii) and section 40(b)(iv) of the Act go together. (h) The term Capital borrowed signifies that there is a liability to repay the capital so borrowed. In the case of Pepsu Road Transport Corporation v. CIT [1981] 130 ITR 18/6 Taxman 148 (Punj. Har.), the share capital provided by the Central and State Government was not treated as borrowed capital only for the reason that there was no obligation to refund the capital so provided. However, in the case of co-operative societies, there is a liability to repay the share capital when the concerned member ceases to be a member. Hence Share capital in the hands of co-operative societies should be treated as Borrowed Capital . (i) In the case of Jamshedpur Motor Accessories Stores v. CIT [1974] 95 ITR 664, the Hon'ble Patna High Court has held that the payment of share of profit to the financiers in lieu of interest is not uncommon and hence, if such a payment was made on the ground of commercial expediency, the same is allowable as deduction. (j) In the case of CIT v. T.T.D. Co-operative Stores Ltd. [1998] 232 ITR 109/101 Taxman 273 (A.P), the rebate to be given to its members w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alone cannot be taken support to categorise the impugned payment as Interest on borrowed capital . Except in the hands of Limited Companies, the capital can be repaid in other forms of business organizations like Individuals, Partnership firms, Association of persons etc. Even in the case of Limited companies, they are permitted to purchase their own shares. (i) The books of account maintained by the assessee either as per Co-operative Act or as per the guidelines of Reserve Bank of India does not decide the nature of payment. A payment can be allowed as expenditure only if it is a charge on profit or it was incurred to earn the income. (j) The decision of Hon'ble Supreme Court in the case of Munjal Sales Corporation is concerned with the scope of provisions of section 40(b)(iv) of the Act. The decision of Hon'ble P H High court in the case of Pepsu Road Transport Corporation, the assessee therein was not a Co-operative society. 8. In the rejoinder, the Learned A.R. submitted the disallowance provided under section 40(ba) of the Act for interest paid to the members of Association of Persons does not apply to a co-operative society. He furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f society. At the end of the year, after ascertaining the profits, the society declared rebate to its members. The assessee claimed the amount of rebate so distributed as a deduction in computing the income, but the said claim was disallowed by the revenue by holding that the rebate is nothing but an appropriation of its profit. The Tribunal, however, held that the rebate was to be related to the sale price of goods, which should be considered as a provisional price and the rebate is related to the said provisional price. Accordingly it was that the amount of rebate should be allowed as a deduction in appropriating trading profits and not as expenditure incurred. This was so held for assessment years 1980-81 and 1981-82. However, for the assessment year 1982-83, the ITO allowed the deduction of rebate only to the extent of profits of business. This was confirmed by the Tribunal. On these facts, the High court proceeded to answer the following two questions:- (a) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the payment of rebate to its members was an expenditure wholly and exclusively incurred for the purpose of its busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educe the price and, therefore, it is a case of the assessee receiving less amount as a profit. 10.4 However, in the case of T.T.D. Co-operative Stores Ltd. (supra), the counsel for the revenue sought to distinguish the case of Poona Electric Supply Co. Ltd. (supra), by stating that there is no such statutory direction to grant rebate in the case of T.T.D. Co-operative Stores Ltd. (supra). However, the High Court rejected the said contention of the revenue by observing as under: but we are of the opinion that there is a clear decision to give rebate to those members of the society who have done large business as an incentive for the purpose of encouraging the co-operative movement and that the rebate is not to be given if there is a loss. Even in the recent decision in Associated Power Co. Ltd. v. CIT (supra), the Supreme Court has reiterated the view after quoting the following passage from Poona Electric Supply Co. Ltd.'s case (supra); Under section 10(1) of the IT Act, tax shall be payable by an assessee under the head Profits and gains of business in respect of profits and gains of any business carried on by him. The said profits and gains are not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42 of Bye Laws of the assessee-society prescribes the condition for Linking Shareholding with Loan/Limits and the said clause reads as under : 42. Linking Shareholding with Loan/Limits: (a) A borrower should hold share capital at least 5 per cent of his borrowings, if such borrowing is on an unsecured basic i.e. in the form of clean overdrafts, loan against one or two personal sureties and purchase/discount of clean bills and cheques. (b) A borrower against tangible securities should hold share of the Bank to the extent of 2.50 per cent of his borrowings from the Bank except Gold loan borrowers. (c) In the case of loans for small scale industrial units the linking of share capital might be fixed initially at one per cent of the borrowings, to be raised in the course of next two years to 2.5 per cent. (d) The share linking prescribed in the clause shall not however, apply to the loans granted to nominal member against pledge of gold jewels and silverware. (e) Loans may however, be granted to non-members on the security of their deposits with the Bank . 12. The Co-operative societies in the province of Andhra Pradesh were in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Interest on Share Capital , the Government has brought out the distinguishing features of Share Capital belonging to a limited company and a co-operative society in the following lines: 30. Interest on Share Capital In other forms of business, people invest with the hope that their investment will earn them the maximum possible returns. However, in a cooperative, members invest in order that they can set up services which they are in need of, from the provision of which, they can get significant financial benefit. That is, they expect to benefit, not from direct return on the investment, but from the services provided by the cooperative, as a result of the investment. Nonetheless, it should be our endavour to protect our members share capital, from inflation, and, if possible, to pay an interest on it equal to the maximum rate that commercial banks pay on fixed deposits. In early years, however, we may be able to pay only a nominal rate of interest, if any. Section 16 of the Act itself does not permit us to give more interest than the banks and, therefore, we may want to include in our bye-laws that each year our general body will deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the revenue that the said rebate is only appropriation of profit was rejected by the Hon'ble High Court. The amount of rebate was treated as a reduction in the sales figure on the reasoning that (a) the initial sales amount is considered as provisional price for the goods sold. (b) the rebate determined at the end of the year after ascertaining the profit made during the year is taken as the occasion to find out whether the society has a surplus out of which a rebate could be given to the loyal customers. (c) the said payment is backed by a clear decision to give rebate. (d) the actual rebate relate back to the date of sales and the sales figure is reduced in the trading account, even if the ascertainment of rebate is at the time of making up of the accounts. (e) the net profit is ascertained only after allowing the rebate, which goes to reduce the price at which members purchased the goods from the society, i.e., it is not a case where this deduction on business expenditure is made after ascertaining the gross profit. (f) there is distinction between the real profits and the statutory profits , that is between the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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