2014 (2) TMI 137 - AT - Income Tax

Disallowance u/s 36(1)(viia) of the Act Claim of provision for bad and doubtful debts - 10% of the aggregate advances made by the rural branches Held that - The term banking Company also includes a Co-operative Bank - Thus a co-operative bank falls under the definition of banking company - Further as per the definition given in Explanation under sec. 36(1)(viia) of the Income tax Act, a banking company as defined in sec. 5(c) of the Banking Regulation Act, which is not a scheduled bank, is classified as a non-scheduled bank thus, a Co-operative bank would be classified as a non-scheduled bank for the purpose of sec. 36(1)(viia) of the Act Decided against Assessee.

Summary

Issues:
1. Disallowance of provision for bad and doubtful debts under section 36(1)(viia) of the Income Tax Act.
2. Interpretation of the term "rural branch" in the context of Co-operative banks.

Issue 1: Disallowance of provision for bad and doubtful debts:
The appeal pertains to the disallowance of the claim of provision for bad and doubtful debts made under section 36(1)(viia) of the Income Tax Act. The assessee claimed deductions for bad and doubtful advances, which were disallowed by the Assessing Officer on the grounds that the bank did not have any rural branches. The dispute centered around the definition and classification of "rural branch" as per the Act.

Analysis:
The assessee contended that the definition of "rural branch" in the Act did not apply to Co-operative banks, arguing that Co-operative banks should not be equated with non-scheduled banks. However, the Departmental Representative cited a previous Tribunal decision that classified Co-operative banks as non-scheduled banks for the purposes of section 36(1)(viia). The Tribunal referred to the decision of the Kerala High Court in the case of Lord Krishna Bank, which clarified the interpretation of "rural branch" as branches located in rural areas with a population of less than 10,000.

Issue 2: Interpretation of the term "rural branch" for Co-operative banks:
The alternative plea raised by the assessee was whether the definition of "rural branch" applied to Co-operative banks. The argument was based on the contention that the definition in the Act did not explicitly include Co-operative banks under the term "rural branch," and therefore, the ordinary meaning should be considered. The Tribunal addressed this new plea despite procedural objections due to its implications on statutory interpretation.

Analysis:
The Tribunal analyzed the definitions of "non-scheduled bank" and "Co-operative bank" under the Banking Regulation Act, 1949, concluding that a Co-operative bank falls under the definition of a banking company, thereby classified as a non-scheduled bank for the purpose of section 36(1)(viia). Consequently, the Tribunal rejected the alternative plea raised by the assessee, upholding the decision that the provisions of the Act applied to Co-operative banks in the context of rural branches.

In conclusion, the Tribunal dismissed the appeal of the assessee, affirming the decision of the Assessing Officer and the CIT(A) regarding the disallowance of the provision for bad and doubtful debts. The judgment was pronounced on 24-08-2012 by the Tribunal.