TaxTMI 
TaxTMI 
2015 (11) TMI 1446
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....re capital is not allowable deduction as per Income Tax Act, as it amounts to distribution of profits, AO disallowed the above amount. 3. Before the Ld. CIT(A), assessee submitted that as 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 contended that interest on the share capital is an allowable expenditure and it should not form part of profit. In support of its claim, assessee referred to Rule 36(5)(d) of the A.P. Co-operative Societies Act, 1964 which mandates that interest should be paid at not less than specified percentage as part of disposal of surplus. Further, relying on the by-law No. 44 of the Society Rules, it was submitted that interest was being provided at 15%. Assessee relied on the decision of ITAT, Visakhapatnam Bench in the ca....
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.... the member concerned ceases to be a member. Therefore, share capital in the hands of co-operative societies should be treated as borrowed capital. 5.2.4 Once the share capital in the hands of co-operative society is treated as borrowed capital, the provisions of section 36(1)(iii) and section 40(ba) come into play and such interest on borrowed capital is allowable as expenditure in the hands of cooperative society. Therefore, interest on share capital in the hands of co-operative society was a charge on profit and hence, allowable as deduction as this goes to reduce the gross interest collected 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 facts of the case on hand and accordingly, the Assessing Officer is directed allow the interest on share....
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....ed 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 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 un....
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....rest, 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 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 share holder of a limited company has to transfer or sell the shares to any other person in order to realize his investment....
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....e 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 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. Suppo....