TaxTMI 
TaxTMI 
2016 (8) TMI 64
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....9/10/2015 are not considered wherein issues identical to those of the assessee are involved. 4. The fact that the appellant follows mercantile system of accounting is not taken on record while deciding the case. In mercantile system of accounting, the business expenditure of a year has to be adopted in that year only irrespective of the fact that the same is paid in the same year or paid subsequently. The Income Tax Act, 1961 does not disallow the expenditure of a year, where a provision is made and the same is paid 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 Rs. 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. The brief facts of the case are that the assessee is a Cooperative Society and is engaged in the business of banking. The assessee files its return for....
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....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 Stores Ltd. (1998) 2321TR 109 (AP). 3. DCIT, Circle 15(1), Hyderabad Vs. Navbharat Co-operative urban Bank Ltd. for the AY. 2011-12 in ITA No. 822/Hyd/2015." 4.2 The submissions of the assessee are carefully examined visa- vis the assessment order. The additions in the assessment order relate to the 'provision' for interest on share capital. As per the IT Act, deduction cannot be allowed on any provision for payment of interest on share capital. Expenditure which is debited to P&L 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....
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.... financial year 2008-09 and the same was paid in the subsequent year. Further, we are bound by the order passed by the Coordinate Bench in the case of DCIT Vs. Navbharat Co-operative urban Bank Ltd. (supra) and also the judgment in the case of Vishakhapatnam Cooperative Bank Ltd Vs Addl.CIT in ITA No. 19/Vizag/2011 dated 29/08/2011. Wherein, in both the 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-operative society governed by "A.P. Mutually Aided Cooperative Societies Act, 1995. It carries on the business of banking, which involves mainly accepting deposits and other sources of funds and deploys them in advancing loans and advances. The assessee, being a cooperative society, is entitled to lend or advance money only to its me....
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....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 assistance in other forms for their survival. These co-operatives need to be given greater autonomy and encouraged to pursue to legitimate interests of their members in an effective, self-reliant, responsible, accountable and democratic manner. The Government also recognizes that enabling legislation is required if ordinary people who expect to benefit from the co-operative form of business, without being dependent on 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. 1....
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....rmitted 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 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 by the members only inter se. 16. In this back ground, if we look at the impugned issue, i.e. the interest paid on share capital, the ratio laid down by Hon'ble jurisdictional A.P. High Court in the case of CIT Vs. T.T.D. Co-operative Stores Ltd, (Supra), by following the Supreme Court's decisions referred (Supra), squarely apply to the facts of the instant issue. In the case of T.T.D. Co- operative Stores Ltd., (Supra), the members were sold go....
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....hall 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 receive a net amount of Rs. 95,000/- only from the assessee society. Similarly, the net amount which go out of the coffers of the assessee society is also Rs. 95,000/- only. However, the assessee society would charge interest at applicable rate on the loan amount of Rs. 1,00,000/-, even though the net amount received by Mr.X is only Rs. 95,000/-, i.e., that the assessee society is collecting interest, not only on Rs. 95,000/-,being net cash out flow from its coffers, but also on the amount of Rs. 5,000/- given by Mr. X as Share capital. At the end of the year, the assessee society may determine the amount of interest payable on the share capital out of the surplus. In the above said example, the assessee society would pay interest on the amount of Rs. 5,000/- giv....