TaxTMI 
TaxTMI 
2011 (8) TMI 319
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....med a sum of Rs. 1,37,29,103 as expenditure under the head "Interest paid on Share Capital". The Assessing Officer took the view that the interest paid on share capital is only an appropriation of profits and accordingly disallowed claim so made. The Assessing Officer also noticed that the assessee did not deduct tax at source under section 194A of the Act on the interest paid to the depositors. The assessee had claimed interest payment on deposits to the tune of Rs. 18,00,51,294. Since the assessee did not furnish the break-up details of said payment, the Assessing Officer made estimated disallowance of Rs. 1,80,05,129 under section 40(a)(ia) of the Act. In the appeal preferred by the assessee, the learned CIT(A) confirmed the addition pertaining to interest on share capital and deleted the addition made under section 40(a)(ia) of the Act. Hence both the parties are in appeal before us. 4. We shall take up the appeal of the revenue first. The Assessing Officer made disallowance under section 40(a)(ia) of the Act for the reason that the assessee has failed to deduct tax at source under section 194A of the Act on the interest paid on deposits. The assessee claimed that the said i....
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....dmitted to membership after registration in accordance with the bye-laws and rules of the society. In the appellant's case all the members are regular members and not any associate or sympathizer member. Even otherwise, the Hon'ble Mumbai High Court in the case of Jalgaon District Central Cooperative Bank Ltd v. Union of India [2003] 265 ITR 423 (Bom.) has held that no distinction should be made between any nominal member, associate member or sympathiser member, as stated in the CBDT Circular and that interest payment to member of all category could be treated as exempt under section 194A(3)(v) of the Act so as to provide a blanket exemption from TDS provision in respect of interest payments to any member of a cooperative society. Although, the appellant could not furnish the detailed particulars of interest payment as requisitioned by the Assessing Officer during the assessment proceedings since such information was voluminous in nature, yet the fact remains is that in majority of cases each interest payment remained below the threshold limit of Rs. 20,000. Therefore, there was no warrant on the part of the Assessing Officer to have effected a disallowance under section 40....
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....r to any other co-operative society. On a plain reading of the section 194A(3)(v), we notice that the said section provides blanket exemption to the interest paid by any co-operative society to its members. The term "Co-operative society" has been defined under section 2(19) of the Act as under: "2(19) "Co-operative Society" means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any state for the registration of co-operative societies." It can be seen that neither section 2(19) nor section 194A(3) makes any discrimination between the co-operative societies carrying on banking business and other co-operative societies. However, as per section 194A(3), the said exemption is available only to the interest payments made to its members or to any other co-operative society. In the instant case, it is the claim of the assessee that all the interest payments have been made only to its members. In that case, the assessee is squarely covered by the exemption provided under section 194A(3)(v) of the Act. Accordingly we find no reason with the decision of Learned CIT(A) on this issue. 5. ....
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....re is mandatory requirement for payment of interest on share capital. Clause 46 of the Bye-Laws of the assessee also provides for making the said payment. (e) The Government of Andhra Pradesh has issued Guidelines for framing Bye-Laws of a Co-operative society, in which the object behind payment of interest on share capital is explained 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 commercial banks pay on fixed deposits. In early years, however, we may be able to pay only a nominal rate of interest, if any" Thus the object of payment of interest on share capital is only to keep the monetary value of the share capital in tact for the shareholders, which is similar to the objective of keeping money in deposits with the bank. Hence such a payment is expenditure in the hands of the co-operative society. (f) The Income-tax Act permits deduction of interest paid to the partners in the case of partnership firms, however, subject to the conditions prescribed under section 40(b) of the Act. The partners are akin to the members ....
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.... is not part of profit at all but it goes to reduce the price of the goods sold by the co-operative society. Accordingly the rebate so given was allowed as a deduction. The same principles apply in the instant case also (k) The assessee has claimed the "interest on share capital" as expenditure in its profit and loss account, i.e. it is not shown as appropriation of profit. (l) The interest so paid to the shareholders is taxable in their respective hands. If the said payment is disallowed in the hands of the assessee, it would lead to double taxation. 7. The contentions of Learned D.R. are summarized below: "(a) Under the Income-tax Act, the payments made towards trading liabilities and which are "Charge on Profits" are only allowed as deduction. (b) In the instant case, the interest is paid on "share capital". The said payment partake the character of "Dividend", which is an appropriation of profit. (c) The Partnership firms and Association of Persons are not legal entities. Under the Act, the payment of interest on capital is not allowed as a deduction except for the partnership firms. (d) For the purpose of computing incom....
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....round a narrow compass. The claim of the assessee is that the amount paid towards interest on capital is a charge on profit and hence allowable as deduction while computing the income of the assessee. However, the view of the department is that it is merely an appropriation of profit, since the said payment itself is decided only at the time when the decision on the manner of disposal of "surplus" of the year is taken, i.e., the said payment is decided only after the end of the financial year, that too after deciding the net profit of the year. It is interesting to note that both the parties have taken support of section 16(1) of the A.P. Mutually Aided Co-operative Societies Act, 1995, which reads as under: "16. Disposal of surplus.-(1) In any year a Co-operative Society shall allocate towards a deficit cover funds, deferred payment to members as patronage rebate in proportion to their use of the Co-operative Societies services and payment on share capital of interest not exceeding the rate of interest paid by scheduled banks, such percentage of the surplus arising from its business transactions in the previous year, as may be approved by the general body." The case of the a....
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....distribution of profits to the members? 10.1 The Hon'ble Court approved the observations of the Tribunal that the scheme of rebate is that the price at which the goods were sold to the members was taken as a provisional price. When the rebate is given at the end of the year, the provisional price is reduced and the amount received by the society (sales amount) is itself taken at a reduced figure. The Court explained that the deduction goes to the trading account where the figure for sales will be reduced by the amount of rebate given. It is not a case where this deduction on business expenditure is made after ascertaining the gross profit. 10.2 With regard to the question whether the said payment of rebate is appropriation of profit, the High Court observed as under: "The only objection is that this rebate is given at the end of the year after ascertaining the profit made during the year. That can be an occasion to find out whether the society has a surplus out of which a rebate could be given to the loyal customers. But even if the ascertainment is at the time of making up of the accounts, the actual rebate is related back to the date of sales and the sales figure is ....
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.... section 10(1) of the IT Act cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received only from the consumers the original amount minus the amount he returned to them. In substance, there cannot be any difference between a business man collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them and another businessman collecting Rs. X alone. The amount returned is not a part of the profits at all." At the end the High Court observed as under: "After considering various judgments, this Court was led to observe that 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. The real profit could be ascertained only by making the permissible deductions. There was a clear cut distinction between deductions made for ascertaining the profits and distribution made out of profits. In a given case, whether the outgoing fell in one or the other of the heads was a question of fact to be found on the relevant circumstances, having regard to the business principles. Another distincti....
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....995 to bring all the mutually aided co-operative 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 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 co-operative 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 assistance in other forms for their survival. These....
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.... 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 guideline 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 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 Companies Act. A shareholder of a limited company has to transfer or sell the shares to any other person in order to realize his investment. Only recently, the Limited companies are permitted to purchase their own shares and such purchase cannot be equated to refund of share capital. In our view, the Co-operative Societies are permitted to refund the share capital in tune with its objective of providing services to its members only. In case of co-operative societies carrying on banking business, this provision enables it to lend or advance money only to its members. ....
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.... 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-à-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, Rs. 1,00,000. Let us assume that he is required to purchase shares worth Rs. 5,000 from the share capital of the assessee-society. In that case, Mr. X will pay Rs. 5,000 to the assessee-society and the assessee-society will given a loan of Rs. 1,00,000 to Mr. X. In effect, Mr. X would r....