TMI Blog2016 (8) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... are capital in the P&L account for the financial year 2008-09 and the same was paid in the subsequent year. The interest paid on the share capital goes to reduce the interest collected by the society from its members and it did not form part of the profit. The making provision for the payment of interest on the share capital and paying the interest on the share capital will not make any change in the application of law. - Decided in favour of assessee. - ITA No. 418/HYD/2016 - - - Dated:- 27-7-2016 - Shri B. Ramakotaiah, Accountant Member And Shri Laliet Kumar, Judicial Member For the Assessee: Shri Tabrezulla Khan (AR) For the Revenue: Shri K.J. Rao (D.R.) ORDER Per Laliet Kumar, J. M. This is the appeal filed by the assessee arises against the order dated 31/12/2015 passed by the ld. CIT(A)-9, Hyderabad for the A.Y. 2009-10. The grounds taken by the assessee in appeal are as under:- 1. The order of the ld. CIT(A)-9, Hyderabad is devoid of law and facts of the case. 2. Our explanations in justification of our claims have not been considered for deciding the case. 3. The decisions of : (a) Hon ble ITAT, B- Bench, Vishakhapatnam in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n share capital. The Assessing Officer held that a payment can be allowed as expenditure only if it is a charge on, profit or it was incurred to earn the income. During the appellate proceedings the assessee submitted as follows: The nature of Share Capital in the case of a Cooperative Society is different from that of the share capital of a company. The assessee is registered under the AP. State Cooperative Societies Act as a Cooperative society for the purpose of doing banking business. Loans and Advances are given by the assessee only to its members. Any individual wants to avail a loan from the assessee is under compulsion to become a member of the society by subscribing to the shares of the assessee bank. The borrower should remain as a member as long as the loan account is outstanding. After closure of the loan account the borrower can get refund of his Share Capital at par. Thus a member in the assessee bank subscribes to the Share Capital not as a voluntary investment but to avail the services of the assessee. For the amount of share capital subscribed by the borrower he is entitled to certain percentage of interest. Thus the SUbscription to the Share Capital of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the case of DCIT, Circle 15(1), Hyderabad Vs. Navbharat Co-operative urban Bank Ltd. for the AY. 2011-12 in ITA No. 822/Hyd/2015. 5. On the other hand, the ld DR has submitted that the judgment relied by the assessee is not applicable as the judgment do not deals with the actual payment made on the share capital and do not deal with the issue of provision for interest on share capital. 6. We have heard the rival contentions of both the parties and perused the material available on the record. We are of the opinion that the order passed by the authorities below are required to be set aside and the appeal of the assessee is required to be allowed. In our view, in case of Cooperative Society, there is a liability to repay the share capital to the members concerned. Once he ceases to be a member, therefore, the share capital in the hands of Cooperative Society cannot be treated with the share capital of the company, it could be treated as a borrowed capital. Further the assessee was following the mercantile system of accounting and any business expenditure relating to a financial year which is not paid during the financial year is required to be provided in the P L account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 cooperative societies under the new Act. The Statement of objects and reasons given for the new Act reads as under: An Act to provide for the voluntary formation of Co-operative Societies reliant business enterprises, based on thrift, self- help and mutual aid and owned, managed and controlled by members for their economic and social betterment and for the matter connected therewith or incidental thereto. .....Over the years, however, increased State participation in the financing and management of co-operatives has led to an unfortunate situation where co-operatives themselves, by and large, have st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 decide how much interest to give on share capital, such, however, that it does not exceed the maximum interest payable by scheduled banks, on fixed deposits . Thus it is brought out clearly that the objective of subscribing to the share capital 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 cooperative societies is that the share capital collected by a cooperative society from a person shall be refunded to him on his ceasing to be a member. This kind of refund of share capital is not permitted under the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 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 subject to the provisions of the IT Act. 17. In the instant case, the business of the assessee society is banking business, wherein the cash forms the working commodity. The business of banking, inter alia, consists of taking deposits and advancing loan. In the instant case there is no dispute with regard to the fact that the loans are advanced only to the members and the borrower has to necessarily subscribe to the share capital of the assessee society in order to avail the loan facility. 18. The Hon'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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