2015 (10) TMI 928 - AT - Income Tax

Deduction u/sec. 36 (l)(viia) denied - CIT(A) not accepting the fact that the Branch at Naigaon-Juhchandra which is a rural place has a population of only 4,679 - assessee has made a claim for deduction under section 36(1)(viia) treating the Naigaon Branch as a rural branch in the past for assessment year 2007-08 as also in subsequent assessment year; and in the assessment for assessment year 2007-08 such a claim has been allowed - assessee is a co-operative bank and in the banking business Held that - An identical question fell for consideration of Hon ble Kerala High Court in the case of CIT vs. Lord Krishna Bank Ltd. (2010 (10) TMI 860 - Kerala High Court) wherein held that meaning of rural area contained in the census report wherein the revenue village is treated as a unit of rural area, can be, rightly adopted . It has been further observed that the place referred to in the definition clause for the purpose of identifying the branch of a bank is rural branch with reference to its location as the revenue village and accordingly the Hon ble High Court has rejected the finding of the Tribunal that place referred to in the definition is the Ward or local authority like panchayat or municipality. Thus it is clear from the above decision of the Kerala High Court that a rural branch has to be always in the rural area and the place referred can easily be taken as village. In view of the above decision the scope of definition of a place where the branch of the bank is situated cannot be extended beyond the rural unit being village as recognized in the census report. It is not the case of the AO that though the branch in question is situated in a rural village however, the entire or majority part of the advances are given to the customers belonging to the neighboring urban area so as to defeat the very purpose and object of the incentive in the shape of deduction under section 36(1)(viia) granted under the Act. In view of the above discussion we hold that Juchandra Naigaon, branch situated at village Juhchandra Naigaon is a rural branch in terms of section 36(1)(viia) of the Income tax Act and accordingly entitled for deduction under the said section. - Decided in favour of assessee.

Summary

Issues:
1. Denial of deduction under section 36(1)(viia) for a rural branch.

Analysis:

The appeal in question challenged the order of the Commissioner of Income-tax (Appeals) for the assessment year 2008-09 regarding the denial of deduction under section 36(1)(viia) for a branch located in a rural area. The primary contention was whether the branch at Naigaon-Juchandra qualified as a rural branch for the purpose of the deduction. The Assessing Officer (AO) rejected the claim based on the population criteria, considering the population of three panchayats in the area instead of the specific village where the branch was located. The appellant argued that the population of the village itself was below the threshold of ten thousand, making it eligible for the rural classification. Reference was made to various documents, including census reports and property tax receipts, to support this claim.

The core issue revolved around the interpretation of the term "rural branch" as defined in section 36(1)(viia) of the Income tax Act. The appellant contended that the classification should be based on the population of the specific village where the branch is situated, rather than considering the broader area served by the branch. This argument was supported by a decision of the Hon'ble High Court of Kerala in a similar case. On the contrary, the Departmental Representative (DR) emphasized the wide area covered by the branch in providing services and loans, suggesting that the population of the entire service area should determine the branch's classification.

The Tribunal analyzed the relevant provisions and the Kerala High Court's decision, which emphasized that the term "place" in the definition of a rural branch should refer to the specific location of the branch, such as a revenue village. The Court clarified that the classification should be based on the population of the village itself, rather than the broader area served by the branch. As the population of the village where the branch was located met the criteria for a rural branch, the Tribunal concluded that the branch at Juchandra Naigaon qualified as a rural branch under section 36(1)(viia) and was entitled to the deduction. The decision aligned with the interpretation provided by the Kerala High Court and upheld the appellant's claim for the deduction.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the appellant and holding that the branch at Juchandra Naigaon was indeed a rural branch as per the provisions of section 36(1)(viia) of the Income tax Act. The decision was based on the specific population criteria of the village where the branch was situated, in line with the interpretation provided by the Hon'ble Kerala High Court in a similar case.