2015 (11) TMI 1446 - AT - Income Tax

Claim of interest on share capital - whether allowable to assessee or not? - Held that - As rightly considered by the 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 Member. Therefore, the share capital in the hands of the Co-operative Society 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-ordinate Bench in the case of Visakhapatnam Co-operative Bank Ltd., Vs. Addl. CIT 2011 (8) TMI 319 - ITAT VISAKHAPATNAM wherein it was held that interest paid on share capital goes to reduce the interest collected by the Society from its Members and it would not form part of profit. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the claim of interest on share capital of Rs. 25,28,526/- can be allowed to the assessee or not.

Issue-wise Detailed Analysis:

1. Claim of Interest on Share Capital:
The core issue in this appeal is the allowability of the claim of interest on share capital amounting to Rs. 25,28,526/- by the assessee, a co-operative society engaged in banking.

Assessment and Disallowance by AO:
The Assessing Officer (AO) disallowed the interest claimed on the share capital, treating it as an appropriation of profits rather than an allowable deduction under the Income Tax Act. The AO equated the share capital of the co-operative society with that of an ordinary company, where no interest is allowable on the share capital invested, and only dividends are paid from profits earned.

Contentions by Assessee:
The assessee argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that as a co-operative society, it was mandatory for members to subscribe to the share capital to avail loans. The interest paid on this share capital should be considered an allowable expenditure and not part of the profit. The assessee supported its claim by referring to Rule 36(5)(d) of the A.P. Co-operative Societies Act, 1964, and by-law No. 44 of the Society Rules, which mandated paying interest at a specified percentage.

CIT(A)'s Findings:
The CIT(A) concurred with the assessee's contentions, distinguishing the share capital of a co-operative society from that of a company. The CIT(A) noted that the share capital in a co-operative society is compulsory for members and cannot be withdrawn except upon ceasing membership. The interest paid on this share capital is intended to keep its monetary value intact, similar to interest on bank deposits.

CIT(A) referred to the case of Pepsu Road Transport Corporation Vs CIT (130 ITR 18) (P & H), where share capital provided by the Central Government was not treated as borrowed capital due to no obligation to refund. However, in co-operative societies, there is a liability to repay the share capital when the member ceases to be a member, thus treating it as borrowed capital. Consequently, provisions of section 36(1)(iii) and section 40(ba) of the Income Tax Act apply, making the interest on borrowed capital an allowable expenditure.

ITAT's Decision:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s order, agreeing that the share capital in the hands of the co-operative society should be treated as borrowed capital. The ITAT referred to the decision in Visakhapatnam Co-operative Bank Ltd. Vs. Addl. CIT in ITA No. 19/Vizag/2011, where it was held that interest paid on share capital reduces the interest collected by the society from its members and does not form part of the profit.

The ITAT elaborated on the unique nature of co-operative societies, emphasizing that they exist for the mutual benefit of their members, and the share capital collected is refundable upon cessation of membership, unlike in companies. The interest paid on share capital is seen as a reduction in the gross interest collected, aligning with the concept of "real income" as per commercial principles.

Conclusion:
The ITAT dismissed the Revenue's appeal, affirming that the interest on share capital in a co-operative society is an allowable deduction, as it reduces the gross interest collected from members and does not constitute profit. The appeal was decided in favor of the assessee, and the interest on share capital was allowed as a deduction.

Order Pronounced:
The appeal was dismissed, and the order was pronounced in the open court on 09th October, 2015.