2014 (6) TMI 930 - AT - Income Tax

Non entitlement to deduction of 10% of the aggregate average advances made by its rural branches u/s. 36(1)(viia) - Held that - An identical issue was considered by the Hon ble Jurisdictional High Court in the assessee s own case 2014 (8) TMI 635 - KERALA HIGH COURT wherein noted that the assessees are not primary agricultural credit co-operative society or other kind of bank so as to go out of the definition of cooperative bank under sub-clause (a) to clause (viia) of section 36(1) - No doubt, Explanation (ia) to section 36(1)(viia) defines what is a rural branch - It is with reference to a place and certain number of population - It refers to branch of a scheduled bank or a non-scheduled bank - co-operative bank also falls under the category of non-scheduled bank for the purpose of this section - reading of the entire section 36(1)(viia)(a) along with the Explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision - the authorities below were justified in opining that the benefit of deduction of 10 per cent of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts - - Decided against Assessee.

Summary

Issues Involved:
1. Entitlement to deduction of 10% of the aggregate average advances made by rural branches under Section 36(1)(viia) of the Income Tax Act.

Detailed Analysis:

1. Entitlement to Deduction of 10% of Aggregate Average Advances:
The primary issue raised by the assessee in both appeals was the entitlement to a deduction of 10% of the aggregate average advances made by its rural branches under Section 36(1)(viia) of the Income Tax Act. The Hon'ble Jurisdictional High Court had previously addressed this issue in the assessee's own case, as cited in I.T.A. Nos. 179/2012 and others, with a judgment dated 3rd April 2014.

2. Legal Provisions and Definitions:
Section 36 of the Income Tax Act deals with various deductions allowable in computing the income referred to in Section 28. Specifically, Section 36(1)(viia) pertains to deductions for bad and doubtful debts. The clause allows banks, including co-operative banks, to claim deductions for such debts, subject to certain conditions. The relevant part of the clause reads as follows:
"A scheduled bank not being a bank approved by Central Government for the purposes of clause (viiia) or a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half percent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner."

3. Definitions for Clarity:
The explanation to Section 36 provides definitions for terms used in sub-clause (a) of clause (viia), such as "non-scheduled bank," "rural branch," "co-operative bank," and "scheduled bank." For instance, a "non-scheduled bank" is defined as a banking company not included in the Second Schedule to the Reserve Bank of India Act. A "rural branch" is defined as a branch of a scheduled or non-scheduled bank situated in a place with a population of not more than ten thousand according to the last preceding census.

4. Historical Context and Legislative Intent:
Before the Finance Act of 2007, co-operative banks were not included in sub-clause (a) of clause (viia) concerning provisions for bad and doubtful debts. Post-01.04.2007, co-operative banks were included, provided they were not primary agricultural credit societies. The legislative intent was to extend the benefits of Section 36(1)(viia) to co-operative banks, which could no longer claim benefits under Section 80P. The provision aims to allow deductions for bad and doubtful debts, with conditions for creating provisions in the books of accounts.

5. Interpretation of "Rural Branch":
The High Court clarified that the term "rural branch" should be understood as defined in the explanation to Section 36(1)(viia), which refers to branches located in places with populations not exceeding ten thousand. The Court emphasized that the definition does not exclude the literal meaning of "rural branch," which excludes urban areas. The classification of branches as rural or urban is based on the population of the place where the branch is located, as per the Census Report.

6. Applicability to Co-operative Banks:
The High Court concluded that co-operative banks could claim the deduction of 10% of the aggregate average advances, provided their rural branches meet the criteria defined in the explanation to Section 36(1)(viia). The Court reasoned that co-operative banks fall under the category of non-scheduled banks for the purpose of this section, and thus are entitled to the deductions if they satisfy the specified conditions.

Conclusion:
In light of the High Court's judgment, the Tribunal decided against the assessee, dismissing the ground raised in both appeals. Consequently, the appeals filed by the assessee were dismissed, affirming the Revenue's stance on the matter.

Result:
The appeals filed by the assessee in I.T.A. Nos. 182 & 183/Coch/2014 were dismissed, with the decision pronounced on 27-06-2014.