The ACIT, Circle-1(1), Visakhapatnam V. M/s Visakhapatnam Co-operative Bank Ltd., Visakhapatnam

ITA 5/VIZ/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56816 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 20-04-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 17-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TH LUCAS PETER
• Keywords: Business expenditure; Commercial expediency

Judgement Text

ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 1 OF 20 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO.5/VIZAG/2011 ASSESSMENT YEAR: 2007-08 ACIT, CIRCLE-1(1) VISAKHAPATNAM VS. VISAKHAPATNAM COOPERATIVE BANK LTD., VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO: AAAAT 0844 L ITA NO.19/VIZAG/2011 ASSESSMENT YEAR: 2007-08 VISAKHAPATNAM COOPERATIVE BANK LTD., VISAKHAPATNAM VS. ADDL. CIT RANGE-1 VISAKHAPATNAM (APPELLANT) PAN NO: AAAAT 0844 L (RESPONDENT) ASSESSEE BY: SHRI G.V.N. HARI, CA DEPARTMENT BY: SHRI TH. LUCAS PETER, CIT (DR) DATE OF HEARING: 07/07/2011 DATE OF PRONOUNCEMENT: 29/08/2011 ORDER PER SHRI B. R. BASKARAN, ACCOUNTANT MEMBER: THE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DA TED 4.11.2010 PASSED BY THE LEARNED CIT (A) VISAKHAPATNAM AND THE Y RELATE TO THE ASSESSMENT YEAR 2007-08. 2. THE REVENUE IS CHALLENGING THE DECISION OF THE L EARNED CIT (A) IN DELETING THE DISALLOWANCE MADE UNDER SECTION 40(A)( IA) OF THE ACT. THE ASSESSEE IS ASSAILING THE DECISION OF THE LEARNED C IT (A) IN CONFIRMING THE DISALLOWANCE OF CLAIM MADE UNDER THE HEAD INTEREST ON SHARE CAPITAL. 3. THE FACTS RELATING TO THE ISSUES ARE STATED IN B RIEF. THE ASSESSEE IS A COOPERATIVE SOCIETY REGISTERED UNDER ANDHRA PRADESH MUTUALLY AIDED COOPERATIVE SOCIETIES ACT 1995. IT IS CARRYING ON B ANKING BUSINESS. IN THE ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 2 OF 20 RETURN OF INCOME FILED FOR THE YEAR UNDER CONSIDERA TION, THE ASSESSEE CLAIMED A SUM OF ` 1,37,29,103/- AS EXPENDITURE UNDER THE HEAD INTERES T PAID ON SHARE CAPITAL. THE ASSESSING OFFICER TOOK THE VIEW THAT THE INTEREST PAID ON SHARE CAPITAL IS ONLY AN APPROPRIATION OF P ROFITS AND ACCORDINGLY DISALLOWED CLAIM SO MADE. THE ASSESSING OFFICER AL SO NOTICED THAT THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE U/S 194A OF T HE ACT ON THE INTEREST PAID TO THE DEPOSITORS. THE ASSESSEE HAD CLAIMED IN TEREST PAYMENT ON DEPOSITS TO THE TUNE OF ` 18,00,51,294/-. SINCE THE ASSESSEE DID NOT FURNISH THE BREAK-UP DETAILS OF SAID PAYMENT, THE ASSESSING OFFICER MADE ESTIMATED DISALLOWANCE OF ` 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 AN D DELETED THE ADDITION MADE UNDER SECTION 40(A)(IA) OF THE ACT. HENCE BOT H 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) O F THE ACT FOR THE REASON THAT THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURC E U/S 194A OF THE ACT ON THE INTEREST PAID ON DEPOSITS. THE ASSESSEE CLAIMED THAT THE SAID INTEREST WERE PAID ONLY TO ITS MEMBERS AND IT, BEING A COOPE RATIVE SOCIETY, IS NOT REQUIRED TO DEDUCT TAX AT SOURCE UNDER SECTION 194A OF THE ACT AS PER THE PROVISIONS OF SEC.194A (3) (V) OF THE ACT. HOWEVER , THE ASSESSING OFFICER TOOK THE VIEW THAT THE ASSESSEE, EVEN THOUGH A COOP ERATIVE SOCIETY, IS REQUIRED TO DEDUCT TAX AT SOURCE UNDER SECTION 194A OF THE ACT SINCE IT IS CARRYING ON BANKING BUSINESS AND FURTHER IT IS NOT A CO-OPERATIVE SOCIETY AS STATED IN SECTION 80P OF THE ACT. ACCORDINGLY, HE ESTIMATED THE AMOUNT OF INTEREST PAYMENTS ON WHICH THERE WAS DEFAULT IN DED UCTION OF TDS AT ` 1,80,05,129/- AND DISALLOWED THE SAME UNDER SECTION 40(A)(IA) OF THE ACT. IN THE APPEAL PREFERRED BEFORE THE LEARNED CIT (A), THE FIRST APPELLATE AUTHORITY ACCEPTED THE CONTENTIONS MADE BY THE ASSE SSEE THAT IT IS ELIGIBLE FOR EXEMPTION FROM DEDUCTION OF TAX AT SOURCE UNDER SECTION 194A(3)(V) OF THE ACT AND ACCORDINGLY DELETED THE SAID ADDITION. FOR THE SAKE OF ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 3 OF 20 CONVENIENCE, WE EXTRACT BELOW THE RELEVANT OBSERVAT IONS MADE BY THE LEARNED CIT (A) ON THIS ISSUE: 5.1 THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTE D THAT INTER ALIA, THAT THE ASSESSING OFFICER WHILE DISALL OWING THE APPELLANTS CLAIM THAT IT BEING A COOPERATIVE SOCIE TY AND HENCE, IT IS EXEMPT FROM THE OBLIGATIONS TO DEDUCT TAX AT SOURCE IN RESPECT OF INTEREST PAYMENT UNDER SECTION 194A OF THE ACT, ERRONEOUSLY OBSERVED THAT ALTHOUGH THE APP ELLANT IS AN ENTITY REGISTERED UNDER THE COOPERATIVE SOCIETIE S ACT, YET IT IS NOT ENTITLED TO THE BENEFIT OF A COOPERATIVE SOC IETY UNDER THE ACT FOR HAVING BEEN ENGAGED IN BANKING ACTIVITI ES LIKE ANY OTHER BANK, AND THUS, IT COULD NOT PARTAKE OF THE B ENEFIT OF THE EXEMPTION PROVIDED UNDER SECTION 194A(3)(V) OF THE ACT. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER CLE ARLY FAILED TO APPRECIATE THAT NO MATTER WHATEVER ITS BUSINESS ACTIVITIES ARE, THE APPELLANTS LEGAL STATUS IS THAT OF A COOP ERATIVE SOCIETY AND AS SUCH IT IS ENTITLED TO ALL THE BENEF ITS CONTEMPLATED AND PROVIDED UNDER THE ACT. THE FACT A S APPEARING IN THE APPELLANT SOCIETYS CASE ACCORD VE RY WELL WITH THE REQUIREMENTS STIPULATED UNDER THE CBDT CIRCULAR NO.9/2002 DT. 11.09.2002 WHEREIN IT HAS BEEN STATED THAT THE EXEMPTION IS AVAILABLE IN RESPECT OF INTEREST PAYME NTS TO, INTER ALIA, ONLY THOSE MEMBERS WHO HAVE JOINED IN A PPLICATION FOR THE REGISTRATION OF THE COOPERATIVE SOCIETY AND THOSE WHO ARE ADMITTED TO MEMBERSHIP AFTER REGISTRATION IN AC CORDANCE WITH THE BYE-LAWS AND RULES OF THE SOCIETY. IN THE APPELLANTS CASE ALL THE MEMBERS ARE REGULAR MEMBERS AND NOT AN Y ASSOCIATE OR SYMPATHIZER MEMBER. EVEN OTHERWISE, TH E HON'BLE MUMBAI HIGH COURT IN THE CASE OF JALGAON DI STRICT CENTRAL COOPERATIVE BANK LTD & ANR VS. UNION OF IND IA & OTHERS (2003) 265 ITR 423 (BOM) HAS HELD THAT NO DI STINCTION SHOULD BE MADE BETWEEN ANY NOMINAL MEMBER, ASSOCIAT E 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 P ROVISION 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 REQ UISITIONED BY THE ASSESSING OFFICER DURING THE ASSESSMENT PROC EEDINGS SINCE SUCH INFORMATION WAS VOLUMINOUS IN NATURE, YE T THE FACT REMAINS IS THAT IN MAJORITY OF CASES EACH INTEREST PAYMENT REMAINED BELOW THE THRESHOLD LIMIT OF ` 20,000/-. THEREFORE, THERE WAS NO WARRANT ON THE PART OF THE ASSESSING O FFICER TO HAVE EFFECTED A DISALLOWANCE UNDER SECTION 40(A)(IA ) OF THE ACT ON AN ADHOC AND ESTIMATED BASIS. ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 4 OF 20 5.3 AFTER HEARING THE LEARNED AUTHORISED REPRESENTA TIVE AND ON A CAREFUL CONSIDERATION OF THE FACTS RELATING TO THE ISSUE IT MAY BE STATED THAT IRRESPECTIVE OF THE NATURE OF BU SINESS ACTIVITIES CARRIED BY IT, THE ASSESSEE IS A COOPERA TIVE SOCIETY REGISTERED UNDER THE RELEVANT STATUTE, AND, HENCE, IT IS ENTITLED TO THE BENEFITS PROVIDED IN THE AT WITH RE FERENCE TO ITS ACTIVITIES AS PRESCRIBED UNDER THE ACT. WHETHER OR NOT ITS BUSINESS ACTIVITIES ARE REGULATED BY ANY OTHER STAT UTE IS NOT MATERIAL FOR DETERMINING WHETHER IT IS ENTITLED TO THE BENEFITS UNDER THE ACT. THE ASSESSEE BEING A COOPERATIVE SOC IETY AND ENGAGED IN BANKING ACTIVITIES AS PER THE BANKING RE GULATION AT, 1949, IT CERTAINLY IS ENTITLED TO THE BENEFIT P ROVIDED UNDER THE AT SUBJECT TO ITS FULFILLMENT OF THE CONDITIONS OF ELIGIBILITY FOR ANY SPECIFIC BENEFIT. HENCE, ON THIS COUNT ITSE LF, THE ASSESSEE GETS THE BENEFIT OF THE EXEMPTION FROM THE OBLIGATION TO DEDUCT TAX AT SOURCE IN TERMS OF SECT ION 194A(3)(V) OF THE ACT. CONSEQUENTLY, THE ASSESSEE C ANNOT BE MADE LIABLE FOR ANY DISALLOWANCE UNDER SECTION 40(A )(IA) OF THE AT, ASSUMING THAT CERTAIN INTEREST PAYMENTS EXC EEDING THE PRESCRIBED MONETARY LIMIT HAVE BEEN MADE TO VARIOUS PARTIES/ MEMBERS. HENCE, THERE IS NO NEED FOR CONSIDERING TH E FACTUAL DETAILS TO ASCERTAIN THE NUMBER OF CASES WHERE THE INTEREST PAYMENTS EXCEEDING THE THRESHOLD LIMIT HAVE BEEN MA DE DURING THE YEAR. EVEN OTHERWISE, THERE IS NO SCOPE FOR EFFECTING ANY ADHOC AND ESTIMATED DISALLOWANCE UNDE R SECTION 40(A)(IA) OF THE ACT; ANY DISALLOWANCE HAS TO BE MA DE ONLY ON ACTUAL BASIS PURSUANT TO ASCERTAINMENT OF DEFAULTS IN EACH CASE OF INTEREST PAYMENT. ACCORDINGLY, THE ASSESSEE GETS RELIEF AND THE ADDITION OF RS.1,80,05,129/- IS HEREBY DELE TED. 4.1 WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF THE ASSESSEE AND ALSO THE DECISION RENDERED BY LEARNED CIT(A). SECTION 1 94A(3) OF THE ACT PRESCRIBES THE MONETARY LIMITS AND ALSO A LIST OF P AYMENTS WHICH ARE EXEMPT FROM THE REQUIREMENT OF COMPLYING WITH THE PROVISIO NS OF TDS PRESCRIBED UNDER SUB SECTION (1) OF THAT SECTION. CLAUSE (V) OF SECTION 194A(3), ON WHICH RELIANCE WAS PLACED BY THE ASSESSEE, READS AS UNDER: 194(3) THE PROVISIONS OF SUB SECTION (1) SHALL NOT APPLY . (V) TO SUCH INCOME CREDITED OR PAID BY A CO-OPERATI VE SOCIETY TO A MEMBER THEREOF OR TO ANY OTHER COOPERATIVE SOC IETY. ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 5 OF 20 ON A PLAIN READING OF THE SECTION 194A(3)(V), WE NO TICE THAT THE SAID SECTION PROVIDES BLANKET EXEMPTION TO THE INTEREST PAID BY ANY CO-OPERATIVE SOCIETY TO ITS MEMBERS. THE TERM CO-OPERATIVE SOCIETY HA S 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 TI ME BEING IN FORCE IN ANY STATE FOR THE REGISTRATION OF CO- OPERATIVE SOCIETIES. IT CAN BE SEEN THAT NEITHER SEC. 2(19) NOR SEC. 194A (3) MAKES ANY DISCRIMINATION BETWEEN THE CO-OPERATIVE SOCIETIES C ARRYING ON BANKING BUSINESS AND OTHER CO-OPERATIVE SOCIETIES. HOWEVER , AS PER SEC. 194A(3), THE SAID EXEMPTION IS AVAILABLE ONLY TO THE INTERES T PAYMENTS MADE TO ITS MEMBERS OR TO ANY OTHER CO-OPERATIVE SOCIETY. IN T HE INSTANT CASE, IT IS THE CLAIM OF THE ASSESSEE THAT ALL THE INTEREST PAYMENT S HAVE BEEN MADE ONLY TO ITS MEMBERS. IN THAT CASE, THE ASSESSEE IS SQUAREL Y 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. NOW, WE SHALL TAKE UP THE APPEAL OF THE ASSE SSEE. THE SOLITARY ISSUE URGED IN THIS APPEAL RELATES TO THE ELIGIBILITY OF DEDUCTION OF CLAIM MADE UNDER THE HEAD INTEREST ON SHARE CAPITAL. THE LE ARNED CIT(A) HAS UPHELD THE VIEW OF THE ASSESSING OFFICER THAT THE SAID PAY MENT IS ONLY AN APPROPRIATION OF PROFITS AND NOT A CHARGE ON PROFIT . 6. HOWEVER, ACCORDING TO THE ASSESSEE, THE SAID PAYMENT IS NOT AN APPROPRIATION OF PROFIT, BUT EXPENDITURE INCURRED B Y IT IN THE ORDINARY COURSE OF BUSINESS. THE CONTENTIONS OF LEARNED A.R IN THI S CONNECTION ARE SUMMARIZED BELOW: (A) THE ASSESSEE IS A CO-OPERATIVE SOCIETY CARRYIN G ON BANKING BUSINESS. IT CAN LEND OR ADVANCE MONEY ONLY TO ITS MEMBERS. ACCORDINGLY THE INTENDED BORROWERS ARE REQUIRED TO SUBSCRIBE TO THE SHARE CAPITAL AT A CERTAIN PERCENTAGE OF THE LOAN A MOUNT. ONLY RECENTLY, VIDE CIRCULAR NO. UBD.BPD.(PCB).CIR.NO.22 /09.18.201/2010- 11 DATED 15-11-2010, THE RESERVE BANK OF INDIA HAS EXEMPTED URBAN CO-OPERATIVE BANKS FULFILLING CERTAIN CRITERI A, FROM THE ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 6 OF 20 MANDATORY REQUIREMENT OF LINKING SHARE CAPITAL TO T HE BORROWING NORMS. (B) THUS THE PUBLIC SUBSCRIBE TO THE SHARE CAPITAL OF THE CO-OPERATIVE SOCIETIES AS A CONDITION FOR OBTAINING LOAN, WHERE AS IN THE CASE OF LIMITED COMPANIES, THE PUBLIC SUBSCRIBE TO THE EQUI TY SHARE CAPITAL AS AN INVESTMENT WITH THE EXPECTATION OF APPRECIATION OF SHARE VALUES. FURTHER, IN THE CASE OF CO-OPERATIVE SOCIETY, A MEM BER CAN WITHDRAW THE SHARE CAPITAL ON CEASING TO BE A MEMBER AND SUC H KIND OF REFUND OF SHARE CAPITAL IS NOT PERMISSIBLE IN THE CASE OF LIMITED COMPANIES. HENCE THERE IS WIDE VARIATION IN THE PURPOSE AND CH ARACTERISTICS OF THE SHARE CAPITAL IN THE HANDS OF CO-OPERATIVE SO CIETIES AND LIMITED COMPANIES. IN THE INSTANT CASE, CLAUSE 42 OF THE BY E-LAWS OF THE ASSESSEE SOCIETY PRESCRIBES THE RULES FOR LINKING S HARE CAPITAL TO THE BORROWALS. (C) SINCE THE BORROWERS ARE COMPELLED TO SUBSCRIBE TO THE SHARE CAPITAL, THE NATURE OF THEIR CONTRIBUTION IS AKIN T O MAKING OF MARGIN MONEY DEPOSITS AND HENCE THE INTEREST PAID ON THE S HARE CAPITAL SHOULD BE TREATED AS EXPENDITURE. (D) SECTION 16(1) OF THE A.P. MUTUALLY AIDED CO-OP ERATIVE SOCIETIES ACT, 1995 PROVIDES FOR THE DISPOSAL OF SURPLUS. TH IS SECTION MANDATES FOR THE PAYMENT OF INTEREST ON SHARE CAPITAL NOT EX CEEDING THE RATE OF INTEREST PAID BY SCHEDULED BANKS. HENCE THERE IS M ANDATORY REQUIREMENT FOR PAYMENT OF INTEREST ON SHARE CAPITA L. CLAUSE 46 OF THE BYE-LAWS OF THE ASSESSEE ALSO PROVIDES FOR MAKI NG THE SAID PAYMENT. (E) THE GOVERNMENT OF ANDHRA PRADESH HAS ISSUED GU IDELINES FOR FRAMING BYE-LAWS OF A CO-OPERATIVE SOCIETY, IN WHIC H THE OBJECT BEHIND PAYMENT OF INTEREST ON SHARE CAPITAL IS EXPL AINED 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 MAX IMUM 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 CAP ITAL IS ONLY TO KEEP THE MONETARY VALUE OF THE SHARE CAPITAL IN TAC T FOR THE SHARE HOLDERS, WHICH IS SIMILAR TO THE OBJECTIVE OF KEEPI NG MONEY IN DEPOSITS WITH THE BANK. HENCE SUCH A PAYMENT IS EX PENDITURE IN THE HANDS OF THE CO-OPERATIVE SOCIETY. (F) THE INCOME TAX ACT PERMITS DEDUCTION OF INTERES T PAID TO THE PARTNERS IN THE CASE OF PARTNERSHIP FIRMS, HOWEVER, SUBJECT TO THE CONDITIONS PRESCRIBED UNDER SECTION 40(B) OF THE AC T. THE PARTNERS ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 7 OF 20 ARE AKIN TO THE MEMBERS IN THE CASE OF CO-OPERATIV E SOCIETIES. FURTHER U/S 40(BA) OF THE ACT, THE INTEREST PAID TO THE MEMBERS OF AN ASSOCIATION OF PERSON IS NOT ALLOWED AS DEDUCTION . HOWEVER THE CO-OPERATIVE SOCIETIES ARE SPECIFICALLY EXEMPTED FROM THE DEFINITION OF ASSOCIATION OF PERSONS IN SECTION 40(BA), MEAN ING THEREBY THE INCOME TAX ACT DOES NOT DEBAR DEDUCTION OF PAYMENT O F INTEREST TO THE MEMBERS OF A CO-OPERATIVE SOCIETY. (G) THE INTEREST EXPENDITURE IS ALLOWED UNDER SECT ION 36(1)(III) OF THE ACT . THE SAID SECTION STATES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED AS DEDUCTION WHILE COMP UTING THE INCOME FROM BUSINESS. THE HON'BLE SUPREME COURT IN THE CA SE OF MUNJAL SALES CORPORATION VS. CIT (2008)(298 ITR 298) HAS O BSERVED THAT SECTION 40(B)(IV), WHICH ALLOWS PAYMENT OF INTEREST TO PARTNERS, HAVE TO BE READ ALONG WITH SECTION 36(1)(III) OF THE ACT . HENCE BOTH SECTION 36(1)(III) AND SECTION 40(B)(IV) OF THE ACT GO TOGETHER. (H) THE TERM CAPITAL BORROWED SIGNIFIES THAT THE RE IS A LIABILITY TO REPAY THE CAPITAL SO BORROWED. IN THE CASE OF PEPS U ROAD TRANSPORT CORPORATION VS. CIT (1981)(130 ITR 18)(P&H), THE SH ARE CAPITAL PROVIDED BY THE CENTRAL AND STATE GOVERNMENT WAS NO T TREATED AS BORROWED CAPITAL ONLY FOR THE REASON THAT THERE W AS NO OBLIGATION TO REFUND THE CAPITAL SO PROVIDED. HOWEVER, IN THE CA SE OF CO-OPERATIVE SOCIETIES, THERE IS A LIABILITY TO REPAY THE SHARE CAPITAL WHEN THE CONCERNED MEMBER CEASES TO BE A MEMBER. HENCE SHA RE CAPITAL IN THE HANDS OF CO-OPERATIVE SOCIETIES SHOULD BE TREAT ED AS BORROWED CAPITAL. (I) IN THE CASE OF JAMSHEDPUR MOTOR ACCESSORIES ST ORES VS. CIT (1974)(95 ITR 664), THE HON'BLE PATNA HIGH COURT HA S HELD THAT THE PAYMENT OF SHARE OF PROFIT TO THE FINANCIERS IN LIE U OF INTEREST IS NOT UNCOMMON AND HENCE, IF SUCH A PAYMENT WAS MADE ON T HE GROUND OF COMMERCIAL EXPEDIENCY, THE SAME IS ALLOWABLE AS DEDUCTION. (J) IN THE CASE OF CIT VS. T.T.D CO-OPERATIVE STO RES LTD., (1998)(232 ITR 109)(A.P), THE REBATE TO BE GIVEN TO ITS MEMBERS WAS ASCERTAINED ONLY AT THE END OF THE YEAR AT THE TIME OF MAKING UP OF ACCOUNTS. THE REVENUE TREATED THE SAID PAYMENT A S APPROPRIATION OF PROFIT. HOWEVER, THE HON'BLE ANDHRA PRADESH HIG H COURT HAS HELD THAT THE REBATE SO GIVEN IS NOT PART OF PROFIT AT A LL BUT IT GOES TO REDUCE THE PRICE OF THE GOODS SOLD BY THE CO-OPERAT IVE SOCIETY. ACCORDINGLY THE REBATE SO GIVEN WAS ALLOWED AS A DE DUCTION. THE SAME PRINCIPLES APPLY IN THE INSTANT CASE ALSO. (K) THE ASSESSEE HAS CLAIMED THE INTEREST ON SHAR E CAPITAL AS EXPENDITURE IN ITS PROFIT AND LOSS ACCOUNT, I.E. IT IS NOT SHOWN AS APPROPRIATION OF PROFIT. ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 8 OF 20 (L) THE INTEREST SO PAID TO THE SHARE HOLDERS IS T AXABLE IN THEIR RESPECTIVE HANDS. IF THE SAID PAYMENT IS DISALLOWE D 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 TOW ARDS TRADING LIABILITIES AND WHICH ARE CHARGE ON PROFITS ARE O NLY ALLOWED AS DEDUCTION. (B) IN THE INSTANT CASE, THE INTEREST IS PAID ON S HARE CAPITAL. THE SAID PAYMENT PARTAKE THE CHARACTER OF DIVIDEND, W HICH IS AN APPROPRIATION OF PROFIT. (C) THE PARTNERSHIP FIRMS AND ASSOCIATION OF PERSO NS ARE NOT LEGAL ENTITIES. UNDER THE ACT, THE PAYMENT OF INTEREST O N CAPITAL IS NOT ALLOWED AS A DEDUCTION EXCEPT FOR THE PARTNERSHIP F IRMS. (D) FOR THE PURPOSE OF COMPUTING INCOME UNDER THE INCOME TAX ACT, THE PROVISIONS OF THE INCOME TAX ACT ALONE SHOULD B E CONSIDERED, I.E. THE PROVISIONS OF ANY OTHER LAW ARE NOT REQUIRED TO BE CONSIDERED. (E) THE PAYMENT OF INTEREST ON CAPITAL IS PRESCRIB ED U/S 16(1) OF THE A.P. MUTUALLY AIDED CO-OPERATIVE SOCIETIES ACT, 199 5 UNDER THE HEAD DISPOSAL OF SURPLUS, I.E. THE SAID PAYMENT IS ONL Y AN APPROPRIATION OF PROFIT AND NOT A CHARGE ON PROFIT. (F) THE DOUBLE TAXATION IS NOT NEW TO THE INCOME TA X ACT. UNDER THE OLD SCHEME OF TAXATION OF PARTNERSHIP FIRMS, THE IN COME OF THE FIRM WAS SUBJECTED TO TAX BOTH IN THE HANDS OF THE FIRM AS WELL AS IN THE HANDS OF THE PARTNERS. (G) THERE IS NO PROVISION UNDER THE INCOME TAX ACT TO ALLOW DEDUCTION OF PAYMENT OF INTEREST ON SHARE CAPITAL. EVEN UNDER THE CO-OPERATIVE ACT REFERRED (SUPRA), SUCH PAYMENT IS PERMITTED WHILE DECIDING THE MANNER OF DISPOSAL OF SURPLUS ONLY. (H) THE CRITERIA OF REPAYMENT OF SHARE CAPITAL A LONE CANNOT BE TAKEN SUPPORT TO CATEGORISE THE IMPUGNED PAYMENT AS INTEREST ON BORROWED CAPITAL. EXCEPT IN THE HANDS OF LIMITED COMPANIES, THE CAPITAL CAN BE REPAID IN OTHER FORMS OF BUSINESS OR GANIZATIONS LIKE INDIVIDUALS, PARTNERSHIP FIRMS, ASSOCIATION OF PERSO NS ETC. EVEN IN THE CASE OF LIMITED COMPANIES, THEY ARE PERMITTED TO PU RCHASE THEIR OWN SHARES. (I) THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSE E EITHER AS PER CO-OPERATIVE ACT OR AS PER THE GUIDELINES OF RESERV E BANK OF INDIA ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 9 OF 20 DOES NOT DECIDE THE NATURE OF PAYMENT. A PAYMENT C AN BE ALLOWED AS EXPENDITURE ONLY IF IT IS A CHARGE ON PROFIT OR IT WAS INCURRED TO EARN THE INCOME. (J) THE DECISION OF HON'BLE SUPREME COURT IN THE C ASE OF MUNJAL SALES CORPORATION IS CONCERNED WITH THE SCOPE OF PR OVISIONS OF SEC.40(B)(IV) OF THE ACT. THE DECISION OF HON'BLE P & H HIGH COURT IN THE CASE OF PEPSU ROAD TRANSPORT CORPORATION, THE A SSESSEE THERE IN WAS NOT A CO-OPERATIVE SOCIETY. 8. IN THE REJOINDER, THE LEARNED A.R SUBMITTED THE DISALLOWANCE PROVIDED U/S 40(BA) OF THE ACT FOR INTEREST PAID TO THE MEMB ERS OF ASSOCIATION OF PERSONS DOES NOT APPLY TO A CO-OPERATIVE SOCIETY. HE FURTHER SUBMITTED THE TERM CAPITAL BORROWED USED IN SEC. 36(1)(III) OF THE ACT SHOULD BE GIVEN WIDE MEANING. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. THE DISPUTE BETWEEN THE PARTIES REVOLVES AROUND A N ARROW COMPASS. THE CLAIM OF THE ASSESSEE IS THAT THE AMOUNT PAID TOWAR DS 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 D EPARTMENT IS THAT THE IT IS MERELY AN APPROPRIATION OF PROFIT, SINCE THE SAI D 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 DECIDE D ONLY AFTER THE END OF THE FINANCIAL YEAR, THAT TOO AFTER DECIDING THE NET PRO FIT OF THE YEAR. IT IS INTERESTING TO NOTE THAT BOTH THE PARTIES HAVE TAKE N SUPPORT OF SECTION 16(1) OF THE A.P. MUTUALLY AIDED CO-OPERATIVE SOCIETIES A CT, 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 PROPORTIO N TO THEIR USE OF THE CO-OPERATIVE SOCIETIES SERVICES AN D PAYMENT ON SHARE CAPITAL OF INTEREST NOT EXCEEDING THE RATE OF INTEREST PAID BY SCHEDULED BANKS, SUCH PERCENTAGE O F THE SURPLUS ARISING FROM ITS BUSINESS TRANSACTIONS IN T HE PREVIOUS YEAR, AS MAY BE APPROVED BY THE GENERAL BODY. ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 10 OF 20 THE CASE OF THE ASSESSEE IS THAT IT IS MANDATORY TO PAY INTEREST ON SHARE CAPITAL AS THE WORD SHALL IS USED IN THE ABOVE SA ID SECTION AND HENCE THE IMPUGNED PAYMENT IS A CHARGE ON PROFIT. ON THE CON TRARY, THE VIEW OF THE DEPARTMENT IS THAT THE TERM SURPLUS IS DEFINED TO MEAN THE NET EXCESS OF INCOME OVER EXPENDITURE AND HENCE THE DISPOSAL OF S URPLUS SIGNIFIES ONLY APPROPRIATION OF PROFIT. 10. HOWEVER, IN OUR VIEW, THE IMPUGNED ISSUE NE EDS TO BE ANALYSED IN A DIFFERENT ANGLE. IN THIS CONNECTION, WE FEEL IT PER TINENT TO DISCUSS ABOUT THE DECISION OF HONBLE JURISDICTIONAL ANDHRA PRADESH H IGH COURT IN THE CASE OF CIT VS. T.T.D CO-OPERATIVE STORES LTD, REFERRED SUP RA. THE FACTS OF THE SAID CASE AND THE DECISION RENDERED BY THE HONBLE COURT ARE, IN OUR VIEW, RELEVANT FOR RESOLVING THE ISSUE BEFORE US. THE ASS ESSEE IN THE ABOVE SAID CASE IS ALSO A CO-OPERATIVE SOCIETY ENGAGED IN THE BUSINESS OF PURCHASING PROVISIONS AND OTHER GOODS WHICH ARE SOLD MOSTLY TO THE MEMBERS OF SOCIETY. AT THE END OF THE YEAR, AFTER ASCERTAINING THE PROFITS, THE SOCIETY DECLARED REBATE TO ITS MEMBERS. THE ASSESSEE CLAIM ED THE AMOUNT OF REBATE SO DISTRIBUTED AS A DEDUCTION IN COMPUTING T HE INCOME, BUT THE SAID CLAIM WAS DISALLOWED BY THE REVENUE BY HOLDING THAT THE REBATE IS NOTHING BUT AN APPROPRIATION OF ITS PROFIT. THE TRIBUNAL, HOWEVER, HELD THAT THE REBATE WAS TO BE RELATED TO THE SALE PRICE OF GOODS , WHICH SHOULD BE CONSIDERED AS A PROVISIONAL PRICE AND THE REBATE IS RELATED TO THE SAID PROVISIONAL PRICE. ACCORDINGLY IT WAS THAT THE AMO UNT OF REBATE SHOULD BE ALLOWED AS A DEDUCTION IN APPROPRIATING TRADING PRO FITS AND NOT AS EXPENDITURE INCURRED. THIS WAS SO HELD FOR ASSESSM ENT YEARS 1980-81 AND 1981-82. HOWEVER, FOR THE ASSESSMENT YEAR 1982-83, THE ITO ALLOWED THE DEDUCTION OF REBATE ONLY TO THE EXTENT OF PROFITS O F BUSINESS. THIS WAS CONFIRMED BY THE TRIBUNAL. ON THESE FACTS, THE HIG H COURT PROCEEDED TO ANSWER THE FOLLOWING TWO QUESTIONS:- (A) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE PAYMENT OF REBATE TO ITS MEMBERS WAS AN EXPENDITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF ITS BUSINES S? ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 11 OF 20 (B) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE APPROPRIAT ION OF PROFITS TO MEMBERS UNDER SEC. 45 OF THE CO-OPERATIV E SOCIETIES ACT IN THE NAME OF REBATE WAS NOT DISTRIB UTION OF PROFITS TO THE MEMBERS? 10.1 THE HONBLE COURT APPROVED THE OBSERVATION S 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 A ND 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 AC COUNT WHERE THE FIGURE FOR SALES WILL BE REDUCED BY THE AMOUNT OF REBATE G IVEN. IT IS NOT A CASE WHERE THIS DEDUCTION ON BUSINESS EXPENDITURE IS MAD E AFTER ASCERTAINING THE GROSS PROFIT. 10.2 WITH REGARD TO THE QUESTION WHETHER THE SA ID 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 SOC IETY 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 REL ATED BACK TO THE DATE OF SALES AND THE SALES FIGURE IS REDUCE D IN TRADING ACCOUNT. THIS IS THE VIEW TAKEN IN ARMOOR CO-OPERA TIVE MARKETING SOCIETY VS. CIT (1987)(167 ITR 565)(AP). 10.3 THE HIGH COURT ALSO TOOK NOTE OF THE FOLLOWIN G DECISIONS OF HONBLE SUPREME COURT, WHICH WERE REFERRED TO BY THE TRIBUN AL AND ALSO THE COUNSEL FOR THE ASSESSEE. (A) POONA ELECTRICITY SUPPLY CO. LTD VS. CIT (1965 )(57 ITR 521) (B) ASSOCIATED POWER CO. LTD VS. CIT (1996) (218 I TR 195) ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 12 OF 20 WE EXTRACT BELOW THE OBSERVATIONS MADE BY THE HONB LE SUPREME COURT IN THIS REGARD: THE TRIBUNAL ALSO REFERRED TO THE DECISION OF THE SUPREME COURT IN POONA ELECTRIC SUPPLY CO. LTD.S CASE (SUP RA) IN SUPPORT OF THEIR VIEW. IN THAT CASE, THE ELECTRICIT Y ACT PROVIDED FOR CREATING A RESERVE FOR THE CUSTOMERS, IN CASE THE PROFIT IS MORE THAN THE REASONABLE RATE ADMISSI BLE FOR PAYING CHARGES TO THE CUSTOMERS. THE SUPREME COURT POINTED OUT THAT IF THE REBATE IS GIVEN, IT GOES TO REDUCE THE PRICE AND, THEREFORE, IT IS A CASE OF THE ASSESSEE RECEIVING LESS AMOUNT AS A PROFIT. 10.4 HOWEVER, IN THE CASE OF T.T.D. CO-OPERATIV E STORES LTD., SUPRA, THE COUNSEL FOR THE REVENUE SOUGHT TO DISTINGUISH THE C ASE OF POONA ELECTRIC SUPPLY CO. LTD, (SUPRA), BY STATING THAT THERE IS N O SUCH STATUTORY DIRECTION TO GRANT REBATE IN THE CASE OF T.T.D. CO-OPERATIVE STORES LTD. HOWEVER, THE HIGH COURT REJECTED THE SAID CONTENTION OF THE REVE NUE BY OBSERVING AS UNDER: ..BUT WE ARE OF THE OPINION THAT THERE IS A CLEAR DECISION TO GIVE REBATE TO THOSE MEMBERS OF THE SOCIETY WHO HAV E DONE LARGE BUSINESS AS AN INCENTIVE FOR THE PURPOSE OF ENCOURAGING THE CO-OPERATIVE MOVEMENT AND THAT THE REBATE IS NOT TO BE GIVEN IF THERE IS A LOSS. EVEN IN THE RECENT DECISION IN ASSOCIATED POWER CO. LTD. VS. CI T (SUPRA), THE SUPREME COURT HAS REITERATED THE VIEW AFTER QUO TING THE FOLLOWING PASSAGE FROM POONA ELECTRIC SUPPLY CO. LT DS CASE (SUPRA); UNDER S. 10(1) OF THE IT ACT, TAX SHALL BE PAYABLE BY AN ASSESSEE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS IN RESPECT OF PROFITS AND GAINS OF ANY BUSINESS CARRIED ON BY HIM. THE SAID PROFITS AND ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 13 OF 20 GAINS ARE NOT PROFITS REGULATED BY ANY STATUTE, BUT PROFITS IN A BUSINESS COMPUTED ON BUSINESS PRINCIPLES. THEY ARE BUSINESS PROFITS AND NOT STATUTORY PROFITS. THEY ARE REAL PROFITS AND NOT NOTIONAL PROFITS. THE REAL PROFIT OF A BUSINESSMAN UNDER S. 10(1) OF THE IT ACT CANNOT OBVIOUSLY INCLU DE THE AMOUNTS RETURNED BY HIM BY WAY OF REBATE TO THE CONSUMERS UNDER STATUTORY COMPULSION. IT IS AS IF H E RECEIVED ONLY FROM THE CONSUMERS THE ORIGINAL AMOUN T 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 T HEM AND ANOTHER BUSINESSMAN COLLECTING RS. X ALONE. TH E 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 WA S LED TO OBSERVE THAT THE INCOME TAX WAS A TAX ON THE REAL I NCOME, I.E. THE PROFIT ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJ ECT TO THE PROVISIONS OF THE IT ACT. THE REAL PROFIT COULD BE ASCERTAINED ONLY BY MAKING THE PERMISSIBLE DEDUCTIONS. THERE W AS A CLEAR CUT DISTINCTION BETWEEN DEDUCTIONS MADE FOR ASCERTA INING THE PROFITS AND DISTRIBUTION MADE OUT OF PROFITS. IN A GIVEN CASE, WHETHER THE OUTGOING FELL IN ONE OR THE OTHER OF TH E HEADS WAS A QUESTION OF FACT TO BE FOUND ON THE RELEVANT CIRCUM STANCES, HAVING REGARD TO THE BUSINESS PRINCIPLES. ANOTHER DISTINCTION THAT HAD TO BE BORNE IN MIND WAS THAT BETWEEN THE R EAL PROFITS AND THE STATUTORY PROFITS, THAT IS, BETWEEN THE COM MERCIAL PROFITS AND THE STATUTORY PROFITS, THE LATTER WERE STATUTORILY FIXED FOR A SPECIFIED PURPOSE. THE SUPREME COURT EMPHASI ZED THE FACT THAT THE AMOUNT RETURNED IS NOT A PART OF PROF IT AT ALL. WE, ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 14 OF 20 THEREFORE, ANSWER THE QUESTIONS IN THE AFFIRMATIVE AND AGAINST THE REVENUE. 11. NOW WE SHALL TURN TO THE FACTS PREVAILING I N THE INSTANT CASE. THE ASSESSEE IS A CO-OPERATIVE SOCIETY GOVERNED BY A.P . MUTUALLY AIDED CO- OPERATIVE SOCIETIES ACT, 1995. IT CARRIES ON THE BU SINESS OF BANKING, WHICH INVOLVES MAINLY ACCEPTING DEPOSITS AND OTHER SOURCE S OF FUNDS AND DEPLOYS THEM IN ADVANCING LOANS AND ADVANCES. THE ASSESSEE , BEING A CO-OPERATIVE SOCIETY, IS ENTITLED TO LEND OR ADVANCE MONEY ONLY TO ITS MEMBERS, I.E., ANY PERSON WHO INTENDS TO BORROW MONEY FROM THE ASSESSE E HAS TO NECESSARILY BECOME A MEMBER OF THE ASSESSEE SOCIETY. CLAUSE 42 OF BYE LAWS OF THE ASSESSEE SOCIETY PRESCRIBES THE CONDITION FOR LINK ING 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/DISCOUNT OF CLEAN BILLS AND CHEQUES. B) A BORROWER AGAINST TANGIBLE SECURITIES SHOULD HO LD 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 U NITS THE LINKING OF SHARE CAPITAL MIGHT BE FIXED INITIALLY A T ONE PERCENT OF THE BORROWINGS, TO BE RAISED IN THE COUR SE OF NEXT TWO YEARS TO 2.5PERCENT. D) THE SHARE LINKING PRESCRIBED IN THE CLAUSE SHALL 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 ANDHRA PRADESH CO-OPERAT IVE SOCIETIES ACT, 1964. SUBSEQUENTLY, THE ANDHRA PRADESH STATE GOVERNMENT B ROUGHT IN A NEW ACT ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 15 OF 20 NAMED THE ANDHRA PRADESH MUTUALLY AIDED CO-OPERATI VE SOCIETIES ACT, 1995 TO BRING ALL THE MUTUALLY AIDED CO-OPERATIVE S OCIETIES 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 C O-OPERATIVE SOCIETIES RELIANT BUSINESS ENTERPRISES, BASED ON TH RIFT, 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 INCIDENTA L THERETO. .. OVER THE YEARS, HOWEVER, INCREASED STATE PARTICIPA TION IN THE FINANCING AND MANAGEMENT OF CO-OPERATIVES HA S LED TO AN UNFORTUNATE SITUATION WHERE CO-OPERATIVES THEMSE LVES, BY AND LARGE, HAVE STARTED TO PERCEIVE THEMSELVES NOT AS MEMBER-CONTROLLED, MEMBER-SENSITIVE BUSINESS, GUIDE D BY THE UNIVERSALLY ACCEPTED PRINCIPLES OF CO-OPERATION , BUT AS CHANNELS FOR GOVERNMENT SUBSIDIES AND LARGESSE. SO UND 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 FU NDS OR ON GOVERNMENT ASSISTANCE IN OTHER FORMS FOR THEIR S URVIVAL. THESE CO-OPERATIVES NEED TO BE GIVEN GREATER AUTONO MY AND ENCOURAGED TO PURSUE TO LEGITIMATE INTERESTS OF THE IR MEMBERS IN AN EFFECTIVE, SELF-RELIANT, RESPONSIBLE, ACCOUNT ABLE 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 EFFECTIVE LY ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 16 OF 20 DEVELOP SERVICES FOR THEMSELVES THROUGH THEIR OWN C O- OPERATIVE SOCIETIES. THUS IT CAN BE SEEN THAT THE OBJECT AND REASONS FOR BRINGING IN A NEW LEGISLATION CLEARLY RECOGNIZES AND FURTHER GIVES ST RESS TO THE NECESSITY OF DEVELOPING CO-OPERATIVE SOCIETIES AS A MEMBER-CONTR OLLED, MEMBER- SENSITIVE BUSINESS INSTITUTION WITH THE AIM OF ACHI EVING ECONOMIC AND SOCIAL BETTERMENT OF ITS MEMBERS. 13. THE ANDHRA PRADESH GOVERNMENT HAS ISSUED GU IDE LINES FOR FRAMING BYE-LAWS OF A CO-OPERATIVE SOCIETY. IN CLAUSE 30 O F THE SAID GUIDE LINE, UNDER THE HEAD INTEREST ON SHARE CAPITAL, THE GOVE RNMENT HAS BROUGHT OUT THE DISTINGUISHING FEATURES OF SHARE CAPITAL BELONGING TO A LIMITED COMPANY AND A CO-OPERATIVE SOCIETY IN THE FOLLOWING LINES: 30. INTEREST ON SHARE CAPITAL IN OTHER FORMS OF BUSINESS, PEOPLE INVEST WITH THE HOPE THAT THEIR INVESTMENT WILL EARN THEM THE MAXIMUM POSSIBL E RETURNS. HOWEVER, IN A COOPERATIVE, MEMBERS INVEST IN ORDER THAT THEY CAN SET UP SERVICES WHICH THEY ARE IN NEE D OF, FROM THE PROVISION OF WHICH, THEY CAN GET SIGNIFICANT FI NANCIAL 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 ENDAVOUR TO PROTECT O UR MEMBERS SHARE CAPITAL, FROM INFLATION, AND, IF POS SIBLE, TO PAY AN INTEREST ON IT EQUAL TO THE MAXIMUM RATE THA T COMMERCIAL BANKS PAY ON FIXED DEPOSITS. IN EARLY YEA RS, HOWEVER, WE MAY BE ABLE TO PAY ONLY A NOMINAL RATE OF INTEREST, 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 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 ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 17 OF 20 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-ME MBERS. 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. ONLY RECENTLY, TH E LIMITED COMPANIES ARE PERMITTED TO PURCHASE THEIR OWN SHARES AND SUCH PUR CHASE CANNOT BE EQUATED TO REFUND OF SHARE CAPITAL. IN OUR VIEW, T HE CO-OPERATIVE SOCIETIES ARE PERMITTED TO REFUND THE SHARE CAPITAL IN TUNE W ITH ITS OBJECTIVE OF PROVIDING SERVICES TO ITS MEMBERS ONLY. IN CASE OF CO-OPERATIVE SOCIETIES CARRYING ON BANKING BUSINESS, THIS PROVISION ENABLE S IT TO LEND OR ADVANCE MONEY ONLY TO ITS MEMBERS. 15. FROM THE FOREGOING DISCUSSIONS, IT BECOMES C LEAR THAT THE MUTUALLY AIDED CO-OPERATIVE SOCIETIES EXIST SOLELY FOR THE M UTUAL BENEFIT OF ITS MEMBERS. IN THE INSTANT CASE, THE ASSESSEE HEREIN I S REQUIRED TO LEND OR ADVANCE MONEY ONLY TO ITS MEMBERS, THE OBJECT OF WH ICH 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 IMPUG NED 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-OP ERATIVE STORES LTD, (SUPRA), BY FOLLOWING THE SUPREME COURTS 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 SO LD GOODS AT A PARTICULAR RATE AND AT THE TIME OF FINALIZING THE ACCOUNTS, A REBATE WAS GIVEN TO THE MEMBERS AS A SPECIAL INCENTIVE FOR INCREASING SOCIE TIES BUSINESS. THE CLAIM ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 18 OF 20 OF THE REVENUE THAT THE SAID REBATE IS ONLY APPROPR IATION OF PROFIT WAS REJECTED BY THE HON'BLE HIGH COURT. THE AMOUNT OF R EBATE WAS TREATED AS A REDUCTION IN THE SALES FIGURE ON THE REASONING THAT (A) THE INITIAL SALES AMOUNT IS CONSIDERED AS PROVISION AL PRICE FOR THE GOODS SOLD. (B) THE REBATE DETERMINED AT THE END OF THE YEAR AFTER ASCERTAINING THE PROFIT MADE DURING THE YEAR IS TAKEN AS THE OCC ASION TO FIND OUT WHETHER THE SOCIETY HAS A SURPLUS OUT OF WHICH A REBATE COULD BE GIVEN TO THE LOYAL CUSTOMERS. (C) THE SAID PAYMENT IS BACKED BY A CLEAR DECISION TO GIVE REBATE. (D) THE ACTUAL REBATE RELATE BACK TO THE DATE OF SALES AND THE SALES FIGURE IS REDUCED IN THE TRADING ACCOUNT, EVEN IF T HE ASCERTAINMENT OF REBATE IS AT THE TIME OF MAKING UP OF THE ACCOUN TS. (E) THE NET PROFIT IS ASCERTAINED ONLY AFTER ALLOWING THE REBATE, WHICH GOES TO REDUCE THE PRICE 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 AN D THE STATUTORY PROFITS, THAT IS BETWEEN THE COMMERCIAL PROFITS AN D THE STATUTORY PROFITS, THE LATTER WERE STATUTORILY FIXED FOR A SP ECIFIED PURPOSE. THE INCOME TAX WAS A TAX ON THE REAL INCOME, I.E. T HE PROFIT ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE IT ACT. 17. IN THE INSTANT CASE, THE BUSINESS OF THE AS SESSEE SOCIETY IS BANKING BUSINESS, WHEREIN THE CASH FORMS THE WORKING COMM ODITY. 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 H AS TO NECESSARILY SUBSCRIBE TO THE SHARE CAPITAL OF THE ASSESSEE SOCI ETY IN ORDER TO AVAIL THE LOAN FACILITY. 18. THE HON'BLE SUPREME COURT HAS EXPLAINED THE CONCEPT OF REDUCTION OF SALES PRICE VIS--VIS THE REBATE BY GIVING AN E XAMPLE AND THE SAME WAS ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 19 OF 20 EXTRACTED BY US IN PARAGRAPH 10.4 (SUPRA). WE ARE OF THE VIEW THAT THE CONCEPT SO EXPLAINED BY HON'BLE SUPREME COURT EQUAL LY APPLIES IN THE INSTANT CASE ALSO. WE SHALL EXPLAIN THE SAME BY GI VING AN EXAMPLE. SUPPOSE, A PERSON, SAY MR. X, APPROACHES THE ASSESS EE SOCIETY FOR AVAILING A LOAN OF SAY, ` 1,00,000/-. LET US ASSUME THAT HE IS REQUIRED TO P URCHASE SHARES WORTH ` 5,000/- FROM THE SHARE CAPITAL OF THE ASSESSEE SOCI ETY. IN THAT CASE, MR. X WILL PAY ` 5,000/- TO THE ASSESSEE SOCIETY AND THE ASSESSEE SOCIETY WILL GIVEN A LOAN OF ` 1,00,000/- TO MR. X. IN EFFECT, MR.X WOULD RECEIVE A NET AMOUNT OF ` 95,000/- ONLY FROM THE ASSESSEE SOCIETY. SIMILARLY, THE NET AMOUNT WHICH GO OUT OF THE COFFERS OF THE A SSESSEE SOCIETY IS ALSO ` 95,000/- ONLY. HOWEVER, THE ASSESSEE SOCIETY WOULD CHARGE INTEREST AT APPLICABLE RATE ON THE LOAN AMOUNT OF ` 1,00,000/-, EVEN THOUGH THE NET AMOUNT RECEIVED BY MR.X IS ONLY ` 95,000/-, I.E., THAT THE ASSESSEE SOCIETY IS COLLECTING INTEREST, NOT ONLY ON ` 95,000/-,BEING NET CASH OUT FLOW FROM ITS COFFERS, BUT ALSO ON THE AMOUNT OF ` 5,000/- GIVEN BY MR. X AS SHARE CAPITAL. AT THE END OF THE YEAR, THE ASSESSEE SOCIETY MAY DE TERMINE THE AMOUNT OF INTEREST PAYABLE ON THE SHARE CAPITAL OUT OF THE SU RPLUS. IN THE ABOVE SAID EXAMPLE, THE ASSESSEE SOCIETY WOULD PAY INTEREST ON THE AMOUNT OF ` 5,000/- GIVEN AS SHARE CAPITAL. IN THAT CASE, AS PE R THE RATIO OF THE HON'BLE SUPREME COURT AND THE ANDHRA PRADESH HIGH COURT IN THE CASES CITED IN PARA 10 AND PARA 10.3 (SUPRA), THE INTEREST SO PAID ON THE SHARE CAPITAL ACTUALLY GOES TO REDUCE THE AMOUNT OF INTEREST THAT WAS COLLECTED INITIALLY BY THE ASSESSEE SOCIETY FROM MR. X. 19. AS STATED EARLIER, IT WAS HELD IN THOSE CAS ES THAT THE INCOME TAX IS TO BE LEVIED ON THE REAL INCOME, I.E. THE PROFIT ARR IVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE INCOME TAX ACT. ACCORDINGLY IT WAS HELD THAT THE REBATE GIVEN TO THE MEMBERS IS NO T A PART OF PROFIT AT ALL. IN THE INSTANT CASE ALSO, IT HAS TO BE HELD THAT THE AMOUNT PAID BY THE ASSESSEE AS INTEREST ON SHARE CAPITAL, IN THE INS TANT YEAR, GOES TO REDUCE THE GROSS INTEREST COLLECTED BY IT FROM ITS MEMBERS AND IT WOULD NOT FORM PART OF PROFIT AT ALL. WE ORDER ACCORDINGLY. ITA NOS 5 AND 19 OF 2011 VIZAG COOP BANK LTD VISAKH APATNAM PAGE 20 OF 20 20. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED AND THE APPEAL OF THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 29 TH AUGUST, 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE:29-08-2011 COPY TO 1 THE ACIT, CIRCLE-1(1) VISAKHAPATNAM 2 THE VISAKHAPATNAM COOPERATIVE BANK LTD., NEAR KOT HA ROAD, VISAKHAPATNAM 530 001 3 THE ADDL. CIT, RANGE-1 VISAKHAPATNAM 4 5 THE CIT 1, VISAKHAPATNAM THE CIT (A) VISAKHAPATNAM 6 THE DR, ITAT, VISAKHAPATNAM. 7 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM