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2016 (8) TMI 64 - ITAT HYDERABAD

2016 (8) TMI 64 - ITAT HYDERABAD - TMI - Accrual of income and expenditure - Real income - co-operative society - Provision on interest on share capital by assessee society - addition to profit of assessee trust - Held that:- 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. .....

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r. On the same analogy, the assessee made the provision for ₹ 23,97,359/- towards the interest on share 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 chan .....

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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 the case of Vishakhapatnam Cooperative Bank Ltd. In ITA No. 19/Vizag/2011 dated 29/08/2011 and (b) Hon ble ITAT, A-Bench, Hyderabad in the case of Nav Bharat Cooperative Urban Bank Ltd., Hyderabad in ITA No. 822/Hyd/2015 dated 09/10/2015 are not con .....

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after conclusion of the financial year, subject to limitations in certain cases. In the instant case the appellant has paid the interest on share capital to its members on 12/7/2009 against the provision made in the Financial Year 2008-09. 5. The disallowance of ₹ 23,97,359/- being the provision for interest on share capital and consequential tax and interest put to the assessee to huge loss. 6. The assessee begs to pray for redressal and relief, otherwise he shall be put to huge loss. 2. .....

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pital was disallowed and was brought to tax. 3. Being aggrieved by the order of the ld. A.O., the assessee carried the matter before the ld CIT(A), who has upheld the order passed by the ld. A.O. with the following reasons:- 4.1 I have carefully perused the facts of the case, the assessment order, submissions of the assessee and the case records. All the grounds of appeal relate to the issue of addition of ₹ 23,97,359/- towards provision for interest on share capital. The Assessing Officer .....

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tered 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 Sh .....

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eciation. The shareholder of a company cannot surrender his shares for refund at Par. Investments into the shares of a company are at the discretion of the investor. The shareholder of a company can sell his shares to others. But this is not the case with Cooperative Societies." The assessee relied on the following case laws in support of its contentions: "1. ACIT Circe, 1(1) Vizag Vs. Visakhapatnam Co. Bank Ltd. In ITA No. 5/Vizag/2011 for A Y. 2007-08. 2. CIT Vs. TTD Co-operative Sto .....

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account is allowable only if it is incurred wholly and exclusively for the purposes of the business. As such this provision is only appropriation of profits which cannot be allowed. I have also perused the case laws as relied upon by the assessee and it is seen that the facts of these cases are different from the facts of the instant case. In the cases of, Circle 15(1), Hyderabad Vs. Navbharat Cooperative urban Bank Ltd and CIT Vs. TTD Co-operative Stores Ltd. (1998) 232 ITR 109 (AP) as cited by .....

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infirmity in the order passed by the Assessing Officer and hence, the order is hereby upheld. 4. Now the assessee is in appeal before us. The ld AR of the assessee relied upon the order passed by this Hon ble Tribunal 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 actua .....

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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 and the said provision will be set up with actual payment paid in the subsequent year. .....

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e orders it was held that 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. In our view, 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. The reasoning given by the Coordinate Bench is as under:- 11. Now we shall turn to the facts prevailing in the instant case. The assessee is a co .....

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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/discount of clean bills and cheques. b) A borrower against tangible securities should hold share of the Bank t .....

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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 .....

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ve started to perceive themselves not as member-controlled, member-sensitive business, guided by the universally accepted principles of cooperation, 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 some Government funds but are not dependent upon such funds or on Government ass .....

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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 guide lines for framing Bye-laws of a Co-operative society. In clause 30 o .....

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e 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 endeavour 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 .....

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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 h .....

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ervices 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 out of the business should be shared .....

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f 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 ascertaining the profit made d .....

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ce 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 .....

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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 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 h .....

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