The Bhavana Rishi Co-operative Urban Bank Ltd., Hyd, Hyderabad V. DCIT, Cir-2(3), Hyd, Hyderabad

ITA 418/HYD/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6279 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 28-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K J RAO
• Assessee Lawyers: TABREZULLA KHAN
• Keywords: Business expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER ITA NO. 418/HYD/2016 ASSESSMENT YEAR : 2009-10 THE BHAVANA RISHI CO- OPERATIVE URBAN BANK LIMITED, HYDERABAD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(3), HYDERABAD. PAN: AABAT 4532 C APPELLANT RESPONDENT FOR ASSESSEE: SHRI TABREZULLA KHAN (AR) FOR REVENUE: SHRI K.J. RAO (D.R.) DATE OF HEARING: 25/07/2016 DATE OF PRONOUNCEMENT: 27/07/2016 O R D E R PER LALIET KUMAR, J.M. : THIS IS THE APPEAL FILED BY THE ASSESSEE ARI SES AGAINST THE ORDER DATED 31/12/2015 PASSED BY THE LD. CIT(A)-9, H YDERABAD FOR THE A.Y. 2009-10. THE GROUNDS TAKEN BY THE ASSESS EE IN APPEAL ARE AS UNDER:- 1. THE ORDER OF THE LD. CIT(A)-9, HYDERABAD IS DEV OID OF LAW AND FACTS OF THE CASE. 2. OUR EXPLANATIONS IN JUSTIFICATION OF OUR CLAIMS HAVE NOT BEEN CONSIDERED FOR DECIDING THE CASE. I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 2 -: 3. THE DECISIONS OF : (A) HONBLE ITAT, B- BENCH, VISHAKHAPATNAM IN THE CASE OF VISHAKHAPATNAM COOPERATIVE BANK LTD. IN ITA NO. 19/VIZAG/2011 DATED 29/08/2011 AND (B) HONBLE ITAT, A-BENCH, HYDERABAD IN THE CASE O F NAV BHARAT COOPERATIVE URBAN BANK LTD., HYDERABAD IN ITA NO. 822/HYD/2015 DATED 09/10/2015 ARE NOT CONSIDERED WHEREIN ISSUES IDENTICAL TO THOSE OF THE ASSESSEE ARE INVOLVED. 4. THE FACT THAT THE APPELLANT FOLLOWS MERCANTILE S YSTEM OF ACCOUNTING IS NOT TAKEN ON RECORD WHILE DECIDING TH E CASE. IN MERCANTILE SYSTEM OF ACCOUNTING, THE BUSIN ESS EXPENDITURE OF A YEAR HAS TO BE ADOPTED IN THAT YEA R 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 AFTE R CONCLUSION OF THE FINANCIAL YEAR, SUBJECT TO LIMITA TIONS IN CERTAIN CASES. IN THE INSTANT CASE THE APPELLANT HA S PAID THE INTEREST ON SHARE CAPITAL TO ITS MEMBERS ON 12/7/2009 AGAINST THE PROVISION MADE IN THE FINANCI AL YEAR 2008-09. 5. THE DISALLOWANCE OF RS. 23,97,359/- BEING THE PR OVISION 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 RELI EF, OTHERWISE HE SHALL BE PUT TO HUGE LOSS. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A CO- OPERATIVE SOCIETY AND IS ENGAGED IN THE BUSINESS OF BANKING. THE ASSESSEE FILES ITS RETURN FOR THE YEAR UNDER CONSIDERA TION ON 30/09/2009 DECLARING TOTAL INCOME OF RS. 14,47,977/- . THE CASE I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 3 -: WAS SELECTED FOR SCRUTINY ASSESSMENT. THE ORDER PASS ED DETERMINING THE TOTAL INCOME OF RS. 16,99,136/-. IN TH E SCRUTINY ASSESSMENT, THE AMOUNT OF RS. 23,97,959/- DEBITED IN TH E P&L ACCOUNT TOWARDS THE PROVISIONS FOR INTEREST ON SHARE CA PITAL WAS DISALLOWED AND WAS BROUGHT TO TAX. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. A.O., THE A SSESSEE CARRIED THE MATTER BEFORE THE LD CIT(A), WHO HAS UPHEL D 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 T HE CASE RECORDS. ALL THE GROUNDS OF APPEAL RELATE TO THE IS SUE OF ADDITION OF RS. 23,97,359/- TOWARDS PROVISION FOR I NTEREST ON SHARE CAPITAL. THE ASSESSING OFFICER WAS OF THE OPI NION THAT THERE IS NO PROVISION UNDER IT ACT. TO ALLOW DEDUCT ION FOR PROVISION FOR PAYMENTS ON INTEREST ON SHARE CAPITAL . THE ASSESSING OFFICER HELD THAT A PAYMENT CAN BE ALLOWE D AS EXPENDITURE ONLY IF IT IS A CHARGE ON, PROFIT OR IT WAS INCURRED TO EARN THE INCOME. DURING THE APPELLATE PROCEEDING S 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 SOCIETIE S ACT AS A COOPERATIVE SOCIETY FOR THE PURPOSE OF DOI NG 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 I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 4 -: 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 CERTAI N PERCENTAGE OF INTEREST. THUS THE SUBSCRIPTION TO TH E SHARE CAPITAL OF THE ASSESSEE BANK IS IN THE NATURE OF BORROWED CAPITAL. CONTRARY TO THIS IN THE CASE O F A COMPANY, THE PUBLIC SUBSCRIBES TO THE SHARE CAPITAL VOLUNTARILY AS AN INVESTMENT EXPECTING APPRECIATION . 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 S UPPORT OF ITS CONTENTIONS: '1. ACIT CIRCE, 1(1) VIZAG VS. VISAKHAPATNAM CO. BA NK LTD. IN ITA NO. 5/VIZAG/2011 FOR A Y. 2007-08. 2. CIT VS. TTD CO-OPERATIVE STORES LTD. (1998) 2321 TR 109 (AP). 3. DCIT, CIRCLE 15(1), HYDERABAD VS. NAVBHARAT CO-O PERATIVE URBAN BANK LTD. FOR THE AY. 2011-12 IN ITA NO. 822/HYD/2015.' 4.2 THE SUBMISSIONS OF THE ASSESSEE ARE CAREFULLY E XAMINED VIS- A-VIS THE ASSESSMENT ORDER. THE ADDITIONS IN THE AS SESSMENT ORDER RELATE TO THE 'PROVISION' FOR INTEREST ON SHA RE CAPITAL. AS PER THE IT ACT, DEDUCTION CANNOT BE ALLOWED ON ANY PROVISION I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 5 -: FOR PAYMENT OF INTEREST ON SHARE CAPITAL. EXPENDITU RE WHICH IS DEBITED TO P&L ACCOUNT IS ALLOWABLE ONLY IF IT I S INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUS INESS. AS SUCH THIS PROVISION IS ONLY APPROPRIATION OF PROFIT S WHICH CANNOT BE ALLOWED. I HAVE ALSO PERUSED THE CASE LAW S AS RELIED UPON BY THE ASSESSEE AND IT IS SEEN THAT THE FACTS OF THESE CASES ARE DIFFERENT FROM THE FACTS OF THE INS TANT CASE. IN THE CASES OF, CIRCLE 15(1), HYDERABAD VS. NAVBH ARAT CO- OPERATIVE URBAN BANK LTD AND CIT VS. TTD CO-OPERATI VE STORES LTD. (1998) 232 ITR 109 (AP) AS CITED BY THE ASSESSEE, THE ISSUE IS WITH REGARD TO THE PAYMENT OF INTEREST ON SHARE CAPITAL AND NOT A PROVISION. BUT IN THE INSTANT CAS E THE MATTER IS WITH REGARD TO 'PROVISION ON INTEREST ON SHARE CAPITAL'. AS PROVISION IS NOT AN ALLOWABLE DEDUCTIO N UNDER THE IT ACT AND ONLY A PAYMENT WILL BE ALLOWED AS AN EXPENDITURE WHICH IS CHARGED TO P&L ACCOUNT WHICH I S INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS THE ASSESSEE'S CONTENTIONS ARE NOT ACCEPTABLE. THER EFORE, I FIND NO INFIRMITY IN THE ORDER PASSED BY THE ASSESS ING 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 HONBLE TRIBUNAL IN THE CASE OF DCIT, CIRCLE 15(1), HYDERABAD VS. NAVBHARAT CO-OPER ATIVE 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 JUD GMENT DO NOT DEALS I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 6 -: WITH THE ACTUAL PAYMENT MADE ON THE SHARE CAPITAL A ND DO NOT DEAL WITH THE ISSUE OF PROVISION FOR INTEREST ON SHARE C APITAL. 6. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. WE AR E OF THE OPINION THAT THE ORDER PASSED BY THE AUTHORITIES BELOW ARE REQUI RED TO BE SET ASIDE AND THE APPEAL OF THE ASSESSEE IS REQUIRED TO BE AL LOWED. IN OUR VIEW, IN CASE OF COOPERATIVE SOCIETY, THERE IS A LIABILITY T O REPAY THE SHARE CAPITAL TO THE MEMBERS CONCERNED. ONCE HE CEASES TO BE A ME MBER, THEREFORE, THE SHARE CAPITAL IN THE HANDS OF COOPERATIVE SOCIE TY CANNOT BE TREATED WITH THE SHARE CAPITAL OF THE COMPANY, IT COULD BE TREATED AS A BORROWED CAPITAL. FURTHER THE ASSESSEE WAS FOLLOWING THE MER CANTILE SYSTEM OF ACCOUNTING AND ANY BUSINESS EXPENDITURE RELATING TO A FINANCIAL YEAR WHICH IS NOT PAID DURING THE FINANCIAL YEAR IS REQU IRED TO BE PROVIDED IN THE P&L ACCOUNT AND THE SAID PROVISION WILL BE SET UP WITH ACTUAL PAYMENT PAID IN THE SUBSEQUENT YEAR. ON THE SAME AN ALOGY, THE ASSESSEE MADE THE PROVISION FOR RS. 23,97,359/- TOW ARDS THE INTEREST ON SHARE CAPITAL IN THE P&L ACCOUNT FOR THE FINANCI AL 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 CAS E 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 SHAR E CAPITAL I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 7 -: GOES TO REDUCE THE INTEREST COLLECTED BY THE SOCIETY FR OM ITS MEMBERS AND IT DID NOT FORM PART OF THE PROFIT. IN OUR V IEW, THE MAKING PROVISION FOR THE PAYMENT OF INTEREST ON THE SHA RE CAPITAL AND PAYING THE INTEREST ON THE SHARE CAPITAL WILL NOT M AKE ANY CHANGE IN THE APPLICATION OF LAW. THE REASONING GIVE N 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 GOVERN ED BY 'A.P. MUTUALLY AIDED COOPERATIVE SOCIETIES ACT, 1995. IT CARRIES ON THE BUSINESS OF BANKING, WHICH INVOLVES MAINLY ACCE PTING DEPOSITS AND OTHER SOURCES OF FUNDS AND DEPLOYS THE M IN ADVANCING LOANS AND ADVANCES. THE ASSESSEE, BEING A CO- OPERATIVE SOCIETY, IS ENTITLED TO LEND OR ADVANCE M ONEY ONLY TO ITS MEMBERS, I.E., ANY PERSON WHO INTENDS TO BORROW MONEY FROM THE ASSESSEE HAS TO NECESSARILY BECOME A MEMBE R OF THE ASSESSEE SOCIETY. CLAUSE 42 OF BYE LAWS OF THE ASSE SSEE 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 OVERDRAFT S, LOAN AGAINST ONE OR TWO PERSONAL SURETIES AND PURCHASE/D ISCOUNT OF CLEAN BILLS AND CHEQUES. I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 8 -: B) A BORROWER AGAINST TANGIBLE SECURITIES SHOULD H OLD SHARE OF THE BANK TO THE EXTENT OF 2.50PERCENT OF H IS BORROWINGS FROM THE BANK EXCEPT GOLD LOAN BORROWERS . C) IN THE CASE OF LOANS FOR SMALL SCALE INDUSTRIAL UNITS THE LINKING OF SHARE CAPITAL MIGHT BE FIXED INITIAL LY AT ONE PERCENT OF THE BORROWINGS, TO BE RAISED IN THE COUR SE OF NEXT TWO YEARS TO 2.5 PERCENT. D) THE SHARE LINKING PRESCRIBED IN THE CLAUSE SHAL L 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 ANDH RA PRADESH CO-OPERATIVE SOCIETIES ACT, 1964'. SUBSEQUE NTLY, THE ANDHRA PRADESH STATE GOVERNMENT BROUGHT IN A NEW AC T NAMED 'THE ANDHRA PRADESH MUTUALLY AIDED CO-OPERATI VE SOCIETIES ACT, 1995 TO BRING ALL THE MUTUALLY AIDED CO- OPERATIVE SOCIETIES UNDER THE NEW ACT. THE STATEMEN T 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 OWNE D, MANAGED AND CONTROLLED BY MEMBERS FOR THEIR ECONOMI C AND SOCIAL BETTERMENT AND FOR THE MATTER CONNECTED THEREWITH OR INCIDENTAL THERETO. .....OVER THE YEAR S, HOWEVER, INCREASED STATE PARTICIPATION IN THE FINAN CING AND MANAGEMENT OF CO-OPERATIVES HAS LED TO AN I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 9 -: UNFORTUNATE SITUATION WHERE CO-OPERATIVES THEMSELVE S, BY AND LARGE, HAVE STARTED TO PERCEIVE THEMSELVES N OT 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 COOPERATIVE BUSINESS, ACCOUNTABILITY, RESPONSIBILITY AND SELF-R ELIANCE 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 FOR MS FOR THEIR SURVIVAL. THESE CO-OPERATIVES NEED TO BE GIVEN GREATER AUTONOMY AND ENCOURAGED TO PURSUE TO LEGITIMATE INTERESTS OF THEIR MEMBERS IN AN EFFECTI VE, SELF-RELIANT, RESPONSIBLE, ACCOUNTABLE AND DEMOCRAT IC MANNER. THE GOVERNMENT ALSO RECOGNIZES THAT ENABLIN G LEGISLATION IS REQUIRED IF ORDINARY PEOPLE WHO EXPE CT TO BENEFIT FROM THE CO-OPERATIVE FORM OF BUSINESS, WIT HOUT BEING DEPENDENT ON GOVERNMENT RESOURCES, ARE TO VOLUNTARILY PROMOTE AND EFFECTIVELY DEVELOP SERVICE S FOR THEMSELVES THROUGH THEIR OWN CO- OPERATIVE SOCIETIE S.' 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 INS TITUTION WITH THE AIM OF ACHIEVING ECONOMIC AND SOCIAL BETTE RMENT OF ITS MEMBERS. 13. THE ANDHRA PRADESH GOVERNMENT HAS ISSUED GUIDE LINES FOR FRAMING BYE-LAWS OF A CO-OPERATIVE SOCIETY. IN CLAUSE 30 OF THE SAID GUIDE LINE, UNDER THE HEAD 'I NTEREST ON SHARE CAPITAL', THE GOVERNMENT HAS BROUGHT OUT THE I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 10 -: DISTINGUISHING FEATURES OF 'SHARE CAPITAL' BELONGIN G TO A LIMITED COMPANY AND A CO-OPERATIVE SOCIETY IN THE F OLLOWING LINES: 30. INTEREST ON SHARE CAPITAL 'IN OTHER FORMS OF BUSINESS, PEOPLE INVEST WITH THE HOPE THAT THEIR INVESTMENT WILL EARN THEM THE MAXIM UM POSSIBLE RETURNS. HOWEVER, IN A COOPERATIVE, MEMBER S INVEST IN ORDER THAT THEY CAN SET UP SERVICES WHICH THEY ARE IN NEED OF, FROM THE PROVISION OF WHICH, THEY C AN 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, FR OM 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. SEC TION 16 OF THE ACT ITSELF DOES NOT PERMIT US TO GIVE MORE I NTEREST THAN THE BANKS AND, THEREFORE, WE MAY WANT TO INCLU DE IN OUR BYE-LAWS THAT EACH YEAR OUR GENERAL BODY WIL L DECIDE HOW MUCH INTEREST TO GIVE ON SHARE CAPITAL, SUCH, HOWEVER, THAT IT DOES NOT EXCEED THE MAXIMUM INTERE ST PAYABLE BY SCHEDULED BANKS, ON FIXED DEPOSITS'. THUS IT IS BROUGHT OUT CLEARLY THAT THE OBJECTIVE O F 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 TH E NEW ACT DOES NOT PERMIT THE CO-OPERATIVE SOCIETIES TO R AISE SHARE CAPITAL FROM GOVERNMENT OR OTHER NON-MEMBERS. I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 11 -: 14. ANOTHER DISTINGUISHING FEATURE IN THE CASE OF CO- OPERATIVE SOCIETIES IS THAT THE SHARE CAPITAL COLLE CTED BY A CO- OPERATIVE SOCIETY FROM A PERSON SHALL BE REFUNDED T O 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 INVESTM ENT. ONLY RECENTLY, THE LIMITED COMPANIES ARE PERMITTED TO PU RCHASE THEIR OWN SHARES AND SUCH PURCHASE CANNOT BE EQUATE D TO REFUND OF SHARE CAPITAL. IN OUR VIEW, THE CO-OPERAT IVE SOCIETIES ARE PERMITTED TO REFUND THE SHARE CAPITAL IN TUNE W ITH 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 CLE AR THAT THE MUTUALLY AIDED CO-OPERATIVE SOCIETIES EXIS T SOLELY FOR THE MUTUAL BENEFIT OF ITS MEMBERS. IN THE INSTANT C ASE, THE ASSESSEE HEREIN IS REQUIRED TO LEND OR ADVANCE MONE Y ONLY TO ITS MEMBERS, THE OBJECT OF WHICH IS THAT THE BENEFI TS ARISING OUT OF THE BUSINESS SHOULD BE SHARED BY THE MEMBERS ONLY INTER SE. 16. IN THIS BACK GROUND, IF WE LOOK AT THE IMPUGNE D ISSUE, I.E. THE INTEREST PAID ON SHARE CAPITAL, THE RATIO LAID DOWN BY HON'BLE JURISDICTIONAL A.P. HIGH COURT IN T HE CASE OF CIT VS. T.T.D. CO-OPERATIVE STORES LTD, (SUPRA), BY FOLLOWING THE SUPREME COURT'S DECISIONS REFERRED (SUPRA), SQU ARELY I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 12 -: APPLY TO THE FACTS OF THE INSTANT ISSUE. IN THE CAS E OF T.T.D. CO- OPERATIVE STORES LTD., (SUPRA), THE MEMBERS WER E SOLD GOODS AT A PARTICULAR RATE AND AT THE TIME OF FINAL IZING THE ACCOUNTS, A REBATE WAS GIVEN TO THE MEMBERS AS A SP ECIAL INCENTIVE FOR INCREASING SOCIETIES BUSINESS. THE CL AIM 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 T HE 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 AF TER ASCERTAINING THE PROFIT MADE DURING THE YEAR IS TAK EN AS THE OCCASION TO FIND OUT WHETHER THE SOCIETY HAS A SURP LUS OUT OF WHICH A REBATE COULD BE GIVEN TO THE LOYAL CUSTOMER S. (C) THE SAID PAYMENT IS BACKED BY A CLEAR DECISION TO GIVE REBATE. (D) THE ACTUAL REBATE RELATE BACK TO THE DATE OF S ALES AND THE SALES FIGURE IS REDUCED IN THE TRADING ACCO UNT, EVEN IF THE ASCERTAINMENT OF REBATE IS AT THE TIME OF MAKIN G UP OF THE ACCOUNTS. (E) THE NET PROFIT IS ASCERTAINED ONLY AFTER ALLOW ING THE REBATE, WHICH GOES TO REDUCE THE PRICE AT WHICH MEM BERS PURCHASED THE GOODS FROM THE SOCIETY, I.E. IT IS NO T A CASE WHERE THIS DEDUCTION ON BUSINESS EXPENDITURE IS MAD E AFTER ASCERTAINING THE GROSS PROFIT. I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 13 -: (F) THERE IS DISTINCTION BETWEEN THE 'REAL PROFITS ' AND THE 'STATUTORY PROFITS', THAT IS BETWEEN THE COMMER CIAL PROFITS AND THE STATUTORY PROFITS, THE LATTER WERE STATUTOR ILY FIXED FOR A SPECIFIED PURPOSE. THE INCOME TAX WAS A TAX ON THE REAL INCOME, I.E. THE PROFIT ARRIVED AT ON COMMERCIAL PR INCIPLES SUBJECT TO THE PROVISIONS OF THE IT ACT. 17. IN THE INSTANT CASE, THE BUSINESS OF THE ASSES SEE SOCIETY IS BANKING BUSINESS, WHEREIN THE 'CASH' FOR MS THE WORKING COMMODITY. THE BUSINESS OF BANKING, INTER A LIA, CONSISTS OF TAKING DEPOSITS AND ADVANCING LOAN. IN THE INSTANT CASE THERE IS NO DISPUTE WITH REGARD TO THE FACT TH AT THE LOANS ARE ADVANCED ONLY TO THE MEMBERS AND THE BORROWER H AS TO NECESSARILY SUBSCRIBE TO THE SHARE CAPITAL OF THE A SSESSEE 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 APPLI ES IN THE INSTANT CASE ALSO. WE SHALL EXPLAIN THE SAME BY GIV ING AN EXAMPLE. SUPPOSE, A PERSON, SAY MR. X, APPROACHES T HE ASSESSEE SOCIETY FOR AVAILING A LOAN OF SAY, RS.1,0 0,000/-. LET US ASSUME THAT HE IS REQUIRED TO PURCHASE SHARES WO RTH RS.5,000/- FROM THE SHARE CAPITAL OF THE ASSESSEE S OCIETY. IN THAT CASE, MR. X WILL PAY RS.5,000/- TO THE ASSESSE E SOCIETY AND THE ASSESSEE SOCIETY WILL GIVEN A LOAN OF RS. 1 ,00,000/- I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 14 -: TO MR. X. IN EFFECT, MR.X WOULD RECEIVE A NET AMOUN T OF RS.95,000/- ONLY FROM THE ASSESSEE SOCIETY. SIMILARLY, THE NET AMOUNT WHICH GO OUT OF THE COFFE RS OF THE ASSESSEE SOCIETY IS ALSO RS.95,000/- ONLY. HOWE VER, THE ASSESSEE SOCIETY WOULD CHARGE INTEREST AT APPLICABL E RATE ON THE LOAN AMOUNT OF RS.1,00,000/-, EVEN THOUGH THE N ET AMOUNT RECEIVED BY MR.X IS ONLY RS.95,000/-, I.E., THAT THE ASSESSEE SOCIETY IS COLLECTING INTEREST, NOT ONLY O N 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 C APITAL. AT THE END OF THE YEAR, THE ASSESSEE SOCIETY MAY DETER MINE THE AMOUNT OF INTEREST PAYABLE ON THE SHARE CAPITAL OUT OF THE SURPLUS. IN THE ABOVE SAID EXAMPLE, THE ASSESSEE SO CIETY WOULD PAY INTEREST ON THE AMOUNT OF RS.5,000/- GIVE N AS SHARE CAPITAL. IN THAT CASE, AS PER THE RATIO OF TH E HON'BLE SUPREME COURT AND THE ANDHRA PRADESH HIGH COURT IN THE CASES CITED IN PARA 10 AND PARA 10.3 (SUPRA), THE I NTEREST SO PAID ON THE SHARE CAPITAL ACTUALLY GOES TO REDUCE T HE AMOUNT OF INTEREST THAT WAS COLLECTED INITIALLY BY THE ASS ESSEE SOCIETY FROM MR. X. 19. AS STATED EARLIER, IT WAS HELD IN THOSE CASES THAT THE INCOME TAX IS TO BE LEVIED ON THE 'REAL INCOME' , I.E. THE PROFIT ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE INCOME TAX ACT. ACCORDINGLY IT WA S HELD THAT THE REBATE GIVEN TO THE MEMBERS IS NOT A PART OF PR OFIT AT ALL. IN THE INSTANT CASE ALSO, IT HAS TO BE HELD THAT THE A MOUNT PAID BY THE ASSESSEE AS 'INTEREST ON SHARE CAPITAL', IN THE INSTANT I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 15 -: YEAR, GOES TO REDUCE THE GROSS INTEREST COLLECTED B Y IT FROM ITS MEMBERS AND IT WOULD NOT FORM PART OF PROFIT AT ALL . WE ORDER ACCORDINGLY. BY RESPECTFULLY FOLLOWING THE ORDER OF THE COORDINATE BENCH IN THE CASE OF DCIT VS NAVABHARATH CO-OPERATIVE URBAN BANK L TD. AND SINCE THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE A BOVE CASE, WE, THEREFORE, ALLOW THE APPEAL OF THE ASSESSEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON SD/- SD/- ( B. RAMAKOTAIAH ) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 27 TH JULY, 2016 *RANJAN COPY FORWARDED TO: 1. THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD., C/O- THE CHIEF EXECUTIVE OFFICER, THE BHAVANA RISHI CO-OP ERATIVE URBAN BANK LTD., H.NO. 7-47, MADHURAPURI COLONY, GADDIANNARAM, DILSUKHNAGAR, HYDERABAD-500060. 2. THE DCIT, CIRCLE 2(3), IT TOWERS, HYDERABAD 3. CIT(APPEALS)-9, HYDERABAD. 4. PR. CIT-2, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE. I.T.A. NO. 418/HYD/2016 THE BHAVANA RISHI CO-OPERATIVE URBAN BANK LTD. VS. DCIT :- 16 -: