DCIT, Circle-15(1), Hyd, Hyderabad V. Navabharat Co-operative Urban Bank Ltd., Hyd, Hyderabad

ITA 822/HYD/2015

• Counselvise Citation: 82222514 RSA 2015
• Duration Of Justice: 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 17-06-2015
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 822/HYD/2015 ASSESSMENT YEAR: 2011-12 DY. COMMISSIONER OF INCOME TAX, CIRCLE-15(1), HYDERABAD VS NAVABHARATH CO - OP. URBAN BANK LTD., HYDERABAD [PAN: AAAAN5312R] (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI S. K. GUPTA , D R FOR ASSESSEE : NONE DATE OF HEARING : 2 4 - 0 9 - 201 5 DATE OF PRONOUNCEMENT : 09 - 1 0 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS APPEAL WAS FILED BY REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-VII, HYDERABAD DATED 17-04-2015. THE ISSUE IN THIS APPEAL IS WHETHER TH E CLAIM OF INTEREST ON SHARE CAPITAL OF RS. 25,28,526/- CAN BE ALLOWED TO ASSESSEE OR NOT? WHEN THE CASE WAS TAKEN UP FOR HEARING, NONE APPEAR ED ON BEHALF OF ASSESSEE EVEN THOUGH NOTICE WAS SERVED. CONSEQUENT LY, THE CASE WAS DECIDED EX-PARTE RESPONDENT, AFTER HEARING THE LD. DR. 2. ASSESSEE IS ENGAGED IN THE BUSINESS OF BANKING A ND FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 22,54,370/- . ASSESSING OFFICER I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 2 -: (AO) IN THE COURSE OF SCRUTINY ASSESSMENT NOTICED T HAT ASSESSEE PAID AN INTEREST OF RS. 25,28,526/-ON THE SHARE CAPITAL AND CLAIMED AS DEDUCTION. OBSERVING THAT INTEREST PAID ON SHARE CA PITAL IS NOT ALLOWABLE DEDUCTION AS PER INCOME TAX ACT, AS IT AMOUNTS TO D ISTRIBUTION OF PROFITS, AO DISALLOWED THE ABOVE AMOUNT. 3. BEFORE THE LD. CIT(A), ASSESSEE SUBMITTED THAT A S A CO-OPERATIVE SOCIETY IT WAS ENGAGED IN THE BUSINESS OF BANKING, INVOLVING ACCEPTING THE DEPOSITS AND DEPLOYING THEM AS ADVANCES/LOANS T O ITS MEMBERS. IT WAS SUBMITTED THAT ANY PERSON INTENDING TO BORROW M ONEY FROM THE BANK HAS TO BECOME A MEMBER BY SUBSCRIBING TO THEIR SHARE CAPITAL AT PRESCRIBED PERCENTAGE OR QUANTUM OF SHARES CORRESPO NDING TO THE INTENDED BORROWAL. BRINGING OUT THE DIFFERENCES BE TWEEN 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 CASE OF VISAKHAPATNAM CO-OPERATIVE BAN K LTD., VS. ADDL. CIT IN ITA NO. 19/VIZAG/2011 DT. 29-08-2011. 4. LD. CIT(A) AFTER CONSIDERING THE DETAILED SUBMIS SIONS OF ASSESSEE AND CASE LAW HAS CONCURRED WITH THE CONTENTIONS OF ASSESSEE BY STATING AS UNDER: 5.2 THE ASSESSMENT ORDER, WRITTEN SUBMISSIONS OF TH E APPELLANT AND THE CASE LAW WERE GONE THROUGH. THE ISSUE TO BE DECIDED IS WHETHER INTEREST ON SHARE CAPITAL IS APP ROPRIATION OF PROFIT OR IT IS CHARGE ON PROFIT WHICH GOES TO REDU CE THE GROSS INTEREST COLLECTED BY THE SOCIETY FROM ITS MEMBERS AND WOULD NOT FORM PART OF PROFIT AT ALL. 5.2.1 FROM THE ASSESSMENT ORDER, IT IS SEEN THAT TH E ASSESSING OFFICER EQUATED THE SHARE CAPITAL OF A CO -OPERATIVE SOCIETY I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 3 -: WITH THE SHARE CAPITAL OF AN ORDINARY COMPANY, WHER E NO INTEREST IS ALLOWABLE ON THE SHARE CAPITAL INVESTED BUT DIVIDEN DS WERE PAID FROM PROFITS EARNED. IN THE CASE ON HAND, THE APPEL LANT IS A CO- OPERATIVE SOCIETY AND INVESTMENT TOWARDS SHARE CAPI TAL BY THE MEMBERS OF THE SOCIETY IS COMPULSORY IN NATURE TO G ET ANY LOAN. THIS SHARE CAPITAL CANNOT BE WITHDRAWN IN ORDINARY COURS E EXCEPT ON CEASING TO BE A MEMBER OF THE SOCIETY. THE PURPOSE BEHIND THIS SHARE CAPITAL AND PAYING INTEREST IS ENUMERATED IN THE GUIDELINES FOR FRAMING BYE-LAWS OF A CO-OPERATIVE SOCIETY BY T HE GOVERNMENT OF ANDHRA PRADESH AS UNDER: 'NONETHELESS, IT SHOULD BE OUR ENDEAVOUR TO PROTECT OUR MEMBERS' SHARE CAPITAL FROM INFLATION, AND IF POSSI BLE TO PAY AN INTEREST ON IT EQUAL TO THE MAXIMUM RATE THAT COMME RCIAL BANKS PAY ON FIXED DEPOSITS' 5.2.2 THUS, THE OBJECT OF PAYMENT OF INTEREST ON SH ARE CAPITAL IS ONLY TO KEEP THE MONETARY VALUE OF THE SHARE CAP ITAL INTACT FOR THE SHARE HOLDERS, WHICH IS SIMILAR TO THE OBJECTIVE OF KEEPING MONEY IN DEPOSITS WITH THE BANK AND THIS NOT THE CASE WITH S HARE CAPITAL OF THE COMPANIES WHERE DIVIDENDS ON PROFITS EARNED WER E DECLARED AND THE INVESTOR IS FREE TO SELL OR TRANSFER HIS SH ARES / PART OF THE SHARES AT WILL. 5.2.3 NOW COMING TO THE INCOME TAX ACT AND ALLOWABI LITY OF INTEREST ON SHARE CAPITAL, IN THE CASE OF PEPSU ROA D TRANSPORT CORPORATION VS CIT (130 ITR 18) (P & H), IT WAS HEL D THAT THE SHARE CAPITAL PROVIDED BY THE CENTRAL GOVERNMENT WAS NOT TREATED AS BORROWED CAPITAL FOR THE REASONS THAT THERE WAS NO OBLIGATION TO REFUND THE CAPITAL SO PROVIDED. HOWEVER, IN THE CAS E OF A CO- OPERATIVE SOCIETY THERE IS A LIABILITY TO REPAY THE SHARE CAPITAL WHEN THE MEMBER CONCERNED CEASES TO BE A MEMBER. THEREFO RE, SHARE CAPITAL IN THE HANDS OF CO-OPERATIVE SOCIETIES SHOU LD BE TREATED AS BORROWED CAPITAL. 5.2.4 ONCE THE SHARE CAPITAL IN THE HANDS OF CO-OPE RATIVE SOCIETY IS TREATED AS BORROWED CAPITAL, THE PROVISI ONS OF SECTION 36(1)(III) AND SECTION 40(BA) COME INTO PLAY AND SU CH INTEREST ON BORROWED CAPITAL IS ALLOWABLE AS EXPENDITURE IN THE HANDS OF CO- OPERATIVE SOCIETY. THEREFORE, INTEREST ON SHARE CAP ITAL IN THE HANDS OF CO-OPERATIVE SOCIETY WAS A CHARGE ON PROFIT AND HENCE, ALLOWABLE AS DEDUCTION AS THIS GOES TO REDUCE THE GROSS INTER EST COLLECTED BY IT FROM ITS MEMBERS AND IT WOULD NOT FORM PART OF PROF IT AT ALL. 5.2.5 THE ISSUE OF ALLOWABILITY OF INTEREST ON SHAR E CAPITAL IS DECIDED BY THE HON'BLE ITAT, 'B' BENCH, VISAKHAPATN AM 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 SHA RE CAPITAL GOES I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 4 -: TO REDUCE THE INTEREST COLLECTED BY THE SOCIETY FRO M ITS MEMBERS AND IT WOULD NOT FORM PART OF PROFIT. THE FACTS AND DEC ISION IN THIS CASE SQUARELY APPLIES TO THE FACTS OF THE CASE ON HAND A ND ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED ALLOW THE INTERES T ON SHARE CAPITAL CLAIMED BY THE APPELLANT. 5. AFTER HEARING THE LD. DR, WHO RELIED ON THE ORDE RS OF AO AND PERUSING THE FACTS OF THE CASE, WE ARE OF THE OPINI ON THAT THE ORDER OF CIT(A) IS TO BE UPHELD. AS RIGHTLY CONSIDERED BY T HE LD. CIT(A), IN THE CASE OF CO-OPERATIVE SOCIETY, THERE IS A LIABILITY TO REPAY THE SHARE CAPITAL TO THE MEMBER CONCERNED ONCE HE CEASES TO BE A MEMB ER. THEREFORE, THE SHARE CAPITAL IN THE HANDS OF THE CO-OPERATIVE SOCI ETY CANNOT BE EQUATED WITH THE SHARE CAPITAL OF THE COMPANY AND IT CAN BE TREATED AS BORROWED CAPITAL. SAME ISSUE WAS CONSIDERED BY THE CO-ORDI NATE BENCH IN THE CASE OF VISAKHAPATNAM CO-OPERATIVE BANK LTD., VS. A DDL. CIT IN ITA NO. 19/VIZAG/2011 DT. 29-08-2011 (SUPRA), WHEREIN IT WA S HELD THAT INTEREST PAID ON SHARE CAPITAL GOES TO REDUCE THE INTEREST C OLLECTED BY THE SOCIETY FROM ITS MEMBERS AND IT WOULD NOT FORM PART OF PROF IT. RELEVANT PORTION OF THE SAID DECISION OF ITAT IS AS UNDER: 11. NOW WE SHALL TURN TO THE FACTS PREVAILING IN T HE 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, BEIN G A CO-OPERATIVE SOCIETY, IS ENTITLED TO LEND OR ADVANCE MONEY ONLY TO ITS MEMBE RS, I.E., ANY PERSON WHO INTENDS TO BORROW MONEY FROM THE ASSESSEE HAS TO NE CESSARILY BECOME A MEMBER OF THE ASSESSEE SOCIETY. CLAUSE 42 OF BYE LAWS OF T HE ASSESSEE 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 BA SIC I.E. IN THE FORM OF CLEAN OVERDRAFTS, LOAN AGAINST ONE OR TWO PERSONAL SURETI ES 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 HIS BORROWINGS FROM TH E BANK EXCEPT GOLD LOAN BORROWERS. I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 5 -: C) IN THE CASE OF LOANS FOR SMALL SCALE INDUSTRIAL UNITS THE LINKING OF SHARE CAPITAL MIGHT BE FIXED INITIALLY AT ONE PERCENT OF THE BORROWINGS, TO BE RAISED IN THE COURSE 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 A NDHRA 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 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 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 FO R THEIR ECONOMIC AND SOCIAL BETTERMENT AND FOR THE MATTER CONNECTED THER EWITH OR INCIDENTAL THERETO. .....OVER THE YEARS, HOWEVER, INCREASED ST ATE PARTICIPATION IN THE FINANCING AND MANAGEMENT OF CO-OPERATIVES HAS LED T O AN UNFORTUNATE SITUATION WHERE CO-OPERATIVES THEMSELVES, BY AND LA RGE, HAVE STARTED TO PERCEIVE THEMSELVES NOT AS MEMBER-CONTROLLED, MEMBE R-SENSITIVE BUSINESS, GUIDED BY THE UNIVERSALLY ACCEPTED PRINCIPLES OF CO -OPERATION, BUT AS CHANNELS FOR GOVERNMENT SUBSIDIES AND LARGESSE. SOU ND AND SUSTAINABLE CO- OPERATIVE BUSINESS, ACCOUNTABILITY, RESPONSIBILITY AND SELF-RELIANCE HAVE TAKEN A BACK SEAT. .... ON THE OTHER HAND, THE GOVERNMENT RECOGNIZES THAT T HERE ARE SOME CO-OPERATIVES WHICH MAY HAVE SOME GOVERNMENT FUNDS BUT ARE NOT DEPENDENT UPON SUCH FUNDS OR ON GOVERNMENT ASSISTAN CE IN OTHER FORMS FOR THEIR SURVIVAL. THESE CO-OPERATIVES NEED TO BE GIVE N GREATER AUTONOMY AND ENCOURAGED TO PURSUE TO LEGITIMATE INTERESTS OF THE IR MEMBERS IN AN EFFECTIVE, SELF-RELIANT, RESPONSIBLE, ACCOUNTABLE AND DEMOCRAT IC MANNER. THE GOVERNMENT ALSO RECOGNIZES THAT ENABLING LEGISLATIO N IS REQUIRED IF ORDINARY PEOPLE WHO EXPECT TO BENEFIT FROM THE CO-OPERATIVE FORM OF BUSINESS, WITHOUT BEING DEPENDENT ON GOVERNMENT RESOURCES, ARE TO VOL UNTARILY 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 ST RESS TO THE NECESSITY OF DEVELOPING CO-OPERATIVE SOCIETIES AS A MEMBER-CONTR OLLED, MEMBER- SENSITIVE BUSINESS INSTITUTION WITH THE AIM OF ACHIEVING ECON OMIC AND SOCIAL BETTERMENT OF ITS MEMBERS. I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 6 -: 13. THE ANDHRA PRADESH GOVERNMENT HAS ISSUED GUIDE 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 GOVERNMENT HA S BROUGHT OUT THE DISTINGUISHING FEATURES OF 'SHARE CAPITAL' BELONGIN G 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 POSSIBLE RETU RNS. HOWEVER, IN A COOPERATIVE, MEMBERS INVEST IN ORDER THAT THEY CAN SET UP SERVICES WHICH THEY ARE IN NEED OF, FROM THE PROVISION OF WHICH, THEY CAN G ET SIGNIFICANT FINANCIAL BENEFIT. THAT IS, THEY EXPECT TO BENEFIT, NOT FROM DIRECT RE TURN ON THE INVESTMENT, BUT FROM THE SERVICES PROVIDED BY THE COOPERATIVE, AS A RESU LT OF THE INVESTMENT. NONETHELESS, IT SHOULD BE OUR ENDAVOUR TO PROTECT O UR MEMBERS' SHARE CAPITAL, FROM INFLATION, AND, IF POSSIBLE, TO PAY AN INTERES T ON IT EQUAL TO THE MAXIMUM RATE THAT COMMERCIAL BANKS PAY ON FIXED DEPOSITS. IN EAR LY YEARS, 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, T HAT IT DOES NOT EXCEED THE MAXIMUM INTEREST PAYABLE BY SCHEDULED BANKS, ON FIX ED 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 THE NEW ACT DOES NOT PERMIT THE CO-OPERATIVE SOCIET IES TO RAISE SHARE CAPITAL FROM GOVERNMENT OR OTHER NON-MEMBERS. 14. ANOTHER DISTINGUISHING FEATURE IN THE CASE OF C O-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 O THER PERSON IN ORDER TO REALIZE HIS INVESTMENT. ONLY RECENTLY, THE LIMITED COMPANIE S ARE PERMITTED TO PURCHASE THEIR OWN SHARES AND SUCH PURCHASE CANNOT BE EQUATE D TO REFUND OF SHARE CAPITAL. IN OUR VIEW, THE CO-OPERATIVE SOCIETIES ARE PERMITT ED 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, T HIS PROVISION ENABLES IT TO LEND OR ADVANCE MONEY ONLY TO ITS MEMBERS. 15. FROM THE FOREGOING DISCUSSIONS, IT BECOMES CLEA R THAT THE MUTUALLY AIDED CO-OPERATIVE SOCIETIES EXIST SOLELY FOR THE M UTUAL BENEFIT OF ITS MEMBERS. IN THE INSTANT CASE, THE ASSESSEE HEREIN IS REQUIRED T O LEND OR ADVANCE MONEY 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 IMPUGNED ISSUE, I.E. THE INTEREST PAID ON SHARE CAPITAL, THE RATIO LAID DOWN BY HON'B LE JURISDICTIONAL A.P. HIGH I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 7 -: COURT IN THE CASE OF CIT VS. T.T.D. CO-OPERATIVE ST ORES LTD, (SUPRA), BY FOLLOWING THE SUPREME COURT'S DECISIONS REFERRED (S UPRA), SQUARELY APPLY TO THE FACTS OF THE INSTANT ISSUE. IN THE CASE OF T.T.D. C O- OPERATIVE STORES LTD., (SUPRA), THE MEMBERS WERE SOLD GOODS AT A PARTICULAR RATE AN D AT THE TIME OF FINALIZING THE ACCOUNTS, A REBATE WAS GIVEN TO THE MEMBERS AS A SP ECIAL INCENTIVE FOR INCREASING SOCIETIES BUSINESS. THE CLAIM OF THE REVENUE THAT T HE 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 FIGU RE ON THE REASONING THAT (A) THE INITIAL SALES AMOUNT IS CONSIDERED AS PROVI SIONAL 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 TAKEN AS THE OCCASION TO FIND OU T 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 SA LES AND THE SALES FIGURE IS REDUCED IN THE TRADING ACCOUNT, EVEN IF THE ASCERTA INMENT OF REBATE IS AT THE TIME OF MAKING UP OF THE ACCOUNTS. (E) THE NET PROFIT IS ASCERTAINED ONLY AFTER ALLOWI NG THE REBATE, WHICH GOES TO REDUCE THE PRICE AT WHICH MEMBERS PURCHASED THE GOO DS FROM THE SOCIETY, I.E. IT IS NOT A CASE WHERE THIS DEDUCTION ON BUSINESS EXPENDI TURE IS MADE 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 INCO ME 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 ASSESS EE SOCIETY IS BANKING BUSINESS, WHEREIN THE 'CASH' FORMS THE WORKING COMM ODITY. THE BUSINESS OF BANKING, INTER ALIA, CONSISTS OF TAKING DEPOSITS AN D 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 HAS TO NECESSARILY SUBSCRIBE TO THE SHARE CAPITAL OF THE ASSESSEE SOCIETY IN ORDER TO AVAIL T HE LOAN FACILITY. 18. THE HON'BLE SUPREME COURT HAS EXPLAINED THE CON CEPT OF 'REDUCTION OF SALES PRICE' VIS-A-VIS THE REBATE BY GIVING AN E XAMPLE AND THE SAME WAS EXTRACTED BY US IN PARAGRAPH 10.4 (SUPRA). WE ARE O F 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. SUPPOS E, 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 GIVE N A LOAN OF RS. 1,00,000/- TO MR. X. IN EFFECT, MR.X WOULD RECEIVE A NET AMOUNT O F RS.95,000/- ONLY FROM THE ASSESSEE SOCIETY. I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 8 -: SIMILARLY, THE NET AMOUNT WHICH GO OUT OF THE COFFE RS OF THE ASSESSEE SOCIETY IS ALSO RS.95,000/- ONLY. HOWEVER, THE ASSE SSEE SOCIETY WOULD CHARGE INTEREST AT APPLICABLE RATE ON THE LOAN AMOUNT OF R S.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/- GIVE N BY MR. X AS SHARE CAPITAL. 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 SOCIETY WOULD PAY INTEREST ON THE AMOUNT O F RS.5,000/- GIVEN AS SHARE CAPITAL. IN THAT CASE, AS PER THE RATIO OF THE HON' BLE SUPREME COURT AND THE ANDHRA PRADESH HIGH COURT IN THE CASES CITED IN PAR A 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 ASSESS EE SOCIETY FROM MR. X. 19. AS STATED EARLIER, IT WAS HELD IN THOSE CASES T HAT THE INCOME TAX IS TO BE LEVIED ON THE 'REAL INCOME', I.E. THE PROFIT ARRIVE D AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE INCOME TAX ACT. AC CORDINGLY IT WAS HELD THAT THE REBATE GIVEN TO THE MEMBERS IS NOT A PART OF PROFIT AT ALL. IN THE INSTANT CASE ALSO, IT HAS TO BE HELD THAT THE AMOUNT PAID BY THE ASSES SEE AS 'INTEREST ON SHARE CAPITAL', IN THE INSTANT YEAR, GOES TO REDUCE THE G ROSS INTEREST COLLECTED BY IT FROM ITS MEMBERS AND IT WOULD NOT FORM PART OF PROFIT AT ALL. WE ORDER ACCORDINGLY. 6. RESPECTFULLY FOLLOWING THE ABOVE, SINCE THE FACT S ARE SIMILAR, WE DO NOT FIND ANY MERIT IN REVENUES APPEAL, ACCORDINGLY , THE SAME IS DISMISSED. 7. IN THE RESULT, APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09 TH OCTOBER, 2015 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 09 TH OCTOBER, 2015 TNMM I.T.A. NO. 822/HYD/2015 NAVABHARATH CO-OP URBAN BANK LTD :- 9 -: COPY TO : 1. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-15(1), 1 ST FLOOR, B-BLOCK, IT TOWERS, A.C. GUARDS, HYDERABAD. 2. NAVABHARATH CO-OP. URBAN BANK LTD., PLOT NO. 12, BRINDAVAN COLONY, DR. A.S. RAO NAGAR, HYDERABAD. 3. CIT (APPEALS)-VII, HYDERABAD. 4. CIT-VII, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.