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Dy. Commissioner of Income Tax, Circle-15 (1) , Hyderabad Versus Navabharath Co-Op. Urban Bank Ltd.

2015 (11) TMI 1446 - ITAT HYDERABAD

Claim of interest on share capital - whether allowable to assessee or not? - Held that:- As rightly considered by the Ld. CIT(A), in the case of Co-operative Society, there is a liability to repay the share capital to the Member concerned once he ceases to be a Member. Therefore, the share capital in the hands of the Co-operative Society cannot be equated with the share capital of the company and it can be treated as ‘borrowed capital’.

Same issue was considered by the Co-ordinate Be .....

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RDER PER B. RAMAKOTAIAH, A.M. : This appeal was filed by Revenue against the order of the Commissioner of Income Tax (Appeals)-VII, Hyderabad dated 17-04-2015. The issue in this appeal is whether the claim of interest on share capital of ₹ 25,28,526/- can be allowed to assessee or not? When the case was taken up for hearing, none appeared on behalf of assessee even though notice was served. Consequently, the case was decided ex-parte respondent, after hearing the Ld. DR. 2. Assessee is eng .....

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a co-operative society it was engaged in the business of banking, involving accepting the deposits and deploying them as advances/loans to its Members. It was submitted that any person intending to borrow money from the bank has to become a Member by subscribing to their share capital at prescribed percentage or quantum of shares corresponding to the intended borrowal. Bringing out the differences between the share capital of a co-operative society and share capital of a company, it was contend .....

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ch in the case of Visakhapatnam Co-operative Bank Ltd., Vs. Addl. CIT in ITA No. 19/Vizag/2011 dt. 29-08-2011. 4. Ld. CIT(A) after considering the detailed submissions of assessee and case law has concurred with the contentions of assessee by stating as under: 5.2 The assessment order, written submissions of the appellant and the case law were gone through. The issue to be decided is whether interest on share capital is appropriation of profit or it is charge on profit which goes to reduce the g .....

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is compulsory in nature to get any loan. This share capital cannot be withdrawn in ordinary course except on ceasing to be a member of the society. The purpose behind this share capital and paying interest is enumerated in the guidelines for framing bye-laws of a co-operative society by the Government of Andhra Pradesh as under: Nonetheless, it should be our endeavour to protect our members share capital from inflation, and if possible to pay an interest on it equal to the maximum rate that com .....

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owability of interest on share capital, in the case of Pepsu Road Transport Corporation Vs CIT (130 ITR 18) (P & H), it was held that the share capital provided by the Central Government was not treated as borrowed capital for the reasons that there was no obligation to refund the capital so provided. However, in the case of a cooperative society there is a liability to repay the share capital when the member concerned ceases to be a member. Therefore, share capital in the hands of co-operat .....

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llected by it from its members and it would not form part of profit at all. 5.2.5 The issue of allowability of interest on share capital is decided by the Hon ble ITAT, B Bench, Visakhapatnam in the case of Visakhapatnam Co-operative Bank Ltd in ITA No.19/Vizag/2011 dated 29.08.2011 held that the interest paid on share capital goes to reduce the interest collected by the society from its members and it would not form part of profit. The facts and decision in this case squarely applies to the fac .....

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apital in the hands of the Co-operative Society cannot be equated with the share capital of the company and it can be treated as borrowed capital . Same issue was considered by the Co-ordinate Bench in the case of Visakhapatnam Co-operative Bank Ltd., Vs. Addl. CIT in ITA No. 19/Vizag/2011 dt. 29-08-2011 (supra), wherein it was held that interest paid on share capital goes to reduce the interest collected by the Society from its Members and it would not form part of profit. Relevant portion of t .....

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borrow money from the assessee has to necessarily become a member of the assessee society. Clause 42 of Bye Laws of the assessee society prescribes the condition for Linking Share holding 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 percent 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/di .....

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nal 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 initially governed by The Andhra Pradesh Co-operative Societies act, 1964 . Subsequently, the Andhra Pradesh State Government brought in a new Act named The Andhra Pradesh Mutually Aided Co-operative Societies Act, 1995 to bring all the mutually aided co-operative societies .....

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led to an unfortunate situation where co-operatives themselves, by and large, have started to perceive themselves not as member-controlled, member-sensitive business, guided by the universally accepted principles of co-operation, but as channels for Government subsidies and largesse. Sound and sustainable cooperative business, accountability, responsibility and self-reliance have taken a back seat. .... On the other hand, the Government recognizes that there are some Co-operatives which may have .....

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Government resources, are to voluntarily promote and effectively develop services for themselves through their own Co- operative societies. Thus it can be seen that the Object and reasons for bringing in a new legislation clearly recognizes and further gives stress to the necessity of developing co-operative societies as a member-controlled, member- sensitive business institution with the aim of achieving economic and social betterment of its members. 13. The Andhra Pradesh Government has issued .....

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er 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 .....

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apital of a co-operative society is only to avail its services which the members themselves set up at the time when they are in need of so that they can get significant financial benefit. It is also stated in the guide line that section 14 of the new Act does not permit the Co-operative societies to raise share capital from Government or other non-members. 14. Another distinguishing feature in the case of co-operative societies is that the share capital collected by a co-operative society from a .....

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une with its objective of providing services to its members only. In case of cooperative societies carrying on banking business, this provision enables it to lend or advance money only to its members. 15. From the foregoing discussions, it becomes clear that the mutually aided Co-operative Societies exist solely for the mutual benefit of its members. In the instant case, the assessee herein is required to lend or advance money only to its members, the object of which is that the benefits arising .....

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icular rate and at the time of finalizing the accounts, a rebate was given to the members as a special incentive for increasing societies business. The 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 ascer .....

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ch 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 commercial profits and the statutory profits, the latter were statutorily fixed for a specified purpose. The income tax was a tax on the real income, i.e. the profit arrived at on commercial principles subje .....

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n ble Supreme Court has explained the concept of reduction of sales price vis-A-vis the rebate by giving an example and the same was extracted by us in paragraph 10.4 (Supra). We are of the view that the concept so explained by Hon ble Supreme Court equally applies in the instant case also. We shall explain the same by giving an example. Suppose, a person, say Mr. X, approaches the assessee society for availing a loan of say, ₹ 1,00,000/-. Let us assume that he is required to purchase shar .....

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