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TMI Blog2015 (11) TMI 1446X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the claim of interest on share capital of ₹ 25,28,526/- can be allowed to assessee or not? When the case was taken up for hearing, none appeared on behalf of assessee even though notice was served. Consequently, the case was decided ex-parte respondent, after hearing the Ld. DR. 2. Assessee is engaged in the business of banking and filed its return of income declaring total income of ₹ 22,54,370/-. Assessing Officer (AO) in the course of scrutiny assessment noticed that assessee paid an interest of ₹ 25,28,526/-on the share capital and claimed as deduction. Observing that interest paid on share capital is not allowable deduction as per Income Tax Act, as it amounts to distribution of profits, AO disallowed the above amount. 3. Before the Ld. CIT(A), assessee submitted that as a co-operative society it was engaged in the business of banking, involving accepting the deposits and deploying them as advances/loans to its Members. It was submitted that any person intending to borrow money from the ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only to keep the monetary value of the share capital 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 share capital of the companies where dividends on profits earned were declared and the investor is free to sell or transfer his shares / part of the shares at will. 5.2.3 Now coming to the Income Tax Act and allowability of interest on share capital, in the case of Pepsu Road Transport Corporation Vs CIT (130 ITR 18) (P H), it was held 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 case of a cooperative society there is a liability to repay the share capital when the member concerned ceases to be a member. Therefore, share capital in the hands of co-operative societies should be treated as borrowed capital. 5.2.4 Once the share capital in the hands of co-operative society is treated as borrowed capital, the provisions of section 36(1)(iii) and section 40(ba) come into play and such interest on borrowed capital is allowable as expenditure in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 overdrafts, loan against one or two personal sureties and purchase/discount of clean bills and cheques. b) A borrower against tangible securities should hold share of the Bank to the extent of 2.50percent of his 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 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 Andhra Pradesh were initially governed by The Andhra Pradesh Co-operative Societies act, 1964 . Subsequently, the Andhra Pradesh State G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 possible returns. 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 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 endavour to protect our members share capital, from 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. 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 interest payable by scheduled banks, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bate was treated as a reduction in the sales figure on the 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 after ascertaining the profit made during the year is taken as the occasion 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 the ascertainment of rebate is at the time of making up of the accounts. (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 and the statutory profits , that is between the commercial profits and the statutory profits, the latter were statutorily fixed for a specified purpose. The income tax was a tax on the real income, i.e. t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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