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2011 (8) TMI 319 - AT - Income TaxAddition - interest on share capital - Failure to deduct tax at source under section 194A - The assessee is a co-operative society registered under Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995 - It is carrying on banking business - the interest paid on share capital, the ratio laid down by Hon ble jurisdictional A.P. High Court in the case of CIT v. T.T.D. Co-operative Stores Ltd. 1998 (3) TMI 114 - ANDHRA PRADESH High Court , squarely apply to the facts of the instant issue - In the case of T.T.D. Co-operative Stores Ltd. , the members were sold 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 societies business - The claim 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 - 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 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 assessee as interest on share capital , in the instant year, goes to reduce the gross interest collected by it from its members and it would not form part of profit at all - the appeal of the assessee is allowed.
Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act. 2. Disallowance of claim under the head "Interest on Share Capital." Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(ia) of the Income Tax Act: The revenue challenged the decision of the CIT(A) in deleting the disallowance made under Section 40(a)(ia) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the interest payment of Rs. 1,80,05,129 under Section 40(a)(ia) due to the assessee's failure to deduct tax at source under Section 194A on interest paid to depositors. The assessee contended that the interest was paid only to its members and, being a cooperative society, it was exempt from TDS under Section 194A(3)(v). The CIT(A) accepted the assessee's contention, referencing CBDT Circular No. 9/2002 and the Mumbai High Court's decision in Jalgaon District Central Cooperative Bank Ltd. v. Union of India, which held that interest payments to all categories of members are exempt under Section 194A(3)(v). The Tribunal upheld the CIT(A)'s decision, noting that Section 194A(3)(v) provides a blanket exemption to interest paid by cooperative societies to their members, as defined under Section 2(19) of the Act. 2. Disallowance of Claim Under the Head "Interest on Share Capital": The assessee contested the CIT(A)'s decision to uphold the AO's view that "interest on share capital" is an appropriation of profits and not a charge on profit. The assessee argued that the interest paid on share capital is an ordinary business expenditure, not an appropriation of profit, citing several points: - The share capital is linked to borrowings, akin to margin money deposits. - Section 16(1) of the A.P. Mutually Aided Cooperative Societies Act, 1995 mandates the payment of interest on share capital. - The Government of Andhra Pradesh guidelines suggest that interest on share capital is meant to protect members' investments from inflation, similar to bank deposits. - The Income Tax Act allows interest on capital for partnership firms under Section 40(b), and cooperative societies are specifically exempted from the definition of "Association of Persons" under Section 40(ba). The Tribunal analyzed the issue, referencing the Andhra Pradesh High Court's decision in T.T.D. Co-operative Stores Ltd., which held that rebates given to members are not appropriations of profit but reductions in sales price. Applying this rationale, the Tribunal concluded that interest on share capital reduces the gross interest collected from members and is not part of the profit. Therefore, it should be allowed as a deduction. Conclusion: The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, concluding that the disallowance under Section 40(a)(ia) was incorrect and that the interest on share capital should be treated as a deductible business expenditure.
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