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I-T - Mandatory interest on share capital payable to members of co-operative bank can be allowed as an expenditure incurred for carrying on business: ITAT

By TIOL News Service

VISAKHAPATNAM, OCT 20, 2018: THE ISSUE IS - Whether mandatory interest on share capital payable to the members of co-operative bank can be allowed as an expenditure incurred for carrying on the business and is not appropriation of profits. YES IS THE VERDICT.

Facts of the case

The assessee had filed return for relevant AY. During assessment, the AO found that the assessee had debited Rs.4,55,61,020/- for the assessment year 2012-13 towards the interest paid and out of which the amount of Rs. 23,64,321/- was paid towards interest on share capital for the year 2010-11. The AO issued the show cause notice calling the assessee's explanation as to why the interest on share capital should not be disallowed. The assessee filed the explanation stating that the interest on share capital was required to be paid to the members as compulsory obligation without any choice as per A.P. Mutually Aided Cooperative Societies Act, 1995. The Cooperative Law envisages membership fee as share capital and equity deposit and thereby provide for payment of mandatory interest on the amount so contributed by the members. Therefore requested the AO to allow the expenditure debited to the P&L account. The AO not being convinced with the explanation of the assessee disallowed the interest and added back to the income of assessee. The CIT(A) allowed the appeal of the assessee on this ground. Aggrieved Revenue filed appeal before the Tribunal.

Tribunal held that,

++ CIT(A) followed the order of Tribunal in ITA Nos. 444 & 445, 449, 450/VIZ/2012, which is in favour of the assessee. Since the facts of the case are identical, respectfully following the view taken by the Coordinate Bench, it was decided to uphold the order of the CIT(A). However, it was observed from the order of the AO that the interest on share capital was related to the year 2010-11 which is relevant for the assessment year 2011-12, but not the impugned year. Neither the CIT(A) nor the AO has given a clear finding with regard to the correct assessment year in which the interest was accrued. Therefore, it was decided to remit the matter back to the file of the AO to examine the issue with regard to the accrual of liability as per the system of accounting followed by the assessee and decide the issue afresh on facts and merits. The appeal of the revenue on this issue is allowed for statistical purpose.

(See 2018-TIOL-1872-ITAT-VIZAG)


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