2016 (1) TMI 667 - AT - Income Tax

Deduction u/s 36(1) (viia) - whether assessee is eligible for deduction of 10 % of the amount of aggregate average rural advances of the bank and a further deduction of 7.5 % of the Income? - Held that - Circular no 464 dated 18/7/1986 explaining the provision of The Income Tax (Amendment) Act 1986 has answered this issue as under - Income-tax (Amendment) Act, 1986 Modification in respect of deduction on provisions for bad and doubtful debts made by the banks 5. Under the existing provisions of clause (viia) of sub-section (1) of section 36 of the Income-tax Act inserted by the Finance Act, 1979, provision for bad and doubtful debts made by scheduled or a non-scheduled Indian bank is allowed as deduction within the prescribed limits. The limit prescribed is 10 per cent of the total income or 2 per cent of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent, they were being discriminated against. Further, it was felt that the existing ceiling in this regard, i.e., 10 per cent of the total income or 2 per cent of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under clause (viia) of sub-section (1) of section 36 of the Income-tax Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2 per cent of the aggregate average advances made to by rural branches of the banks concerned. It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provisions secure that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks, not just the banks incorporated in India, limited to 5 per cent of the total income (computed before making any deduction under this clause and Chapter VIA). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction up to 2 per cent of the aggregate average advances made by such branches and a further deduction up to 5 per cent of their total income in respect of provision for bad and doubtful debts. There is no change in law except the percentages subsequent to this circular. Therefore it is apparent that section 36(1) (viia) clearly provides for deduction of 7.5 % of the total income and a further deduction of 10 % of the aggregate of average rural advances of the specified banks. Thus assessee is entitled to further deduction of 7.5 % of total income of the assessee over and above 10 % of aggregate of average rural advances of the bank. - Decided in favour of assessee

Summary

Issues:
- Late filing of appeal by the assessee
- Non-allowance of full deduction under section 36(1)(viia) of the Income Tax Act

Analysis:

Late filing of appeal by the assessee:
The appeal was filed late by 9 days, and the assessee submitted an application for condonation of delay citing a change in counsel as the reason for the delay. The delay was condoned by the ITAT as the reasons explained by the assessee were deemed reasonable, and the delay was admitted without objection from the Departmental Representative (DR).

Non-allowance of full deduction under section 36(1)(viia) of the Income Tax Act:
The dispute revolved around the interpretation of section 36(1)(viia) concerning the deduction available to a cooperative bank. The assessing officer disallowed a deduction of &8377; 41,12,596/- being 7.5% of the total income, citing that only 7.5% of total income or 10% of average rural advances, whichever is higher, is allowable. The CIT (A) upheld this decision. However, the appellant argued that the bank should be allowed a deduction of 7.5% of the total income and an additional deduction of 10% of the aggregate average rural advances of the bank. The appellant relied on the amended provisions of the Income Tax Act, a CBDT circular, and a decision of the ITAT Jaipur bench to support their claim.

The ITAT analyzed the provisions of section 36(1)(viia) and the CBDT circular, which clarified that a cooperative bank is entitled to a deduction of 7.5% of the total income and a further deduction of 10% of the aggregate average rural advances. The ITAT also considered the decision of the Jaipur bench of ITAT in a similar case. Based on the provisions of the Act and the circular, the ITAT concluded that the assessee was entitled to the additional deduction of 7.5% of the total income over and above 10% of the aggregate average rural advances. Consequently, the order disallowing the deduction was reversed, and the appeal of the assessee was allowed.

In conclusion, the ITAT ruled in favor of the assessee, allowing the appeal and reversing the decision of the CIT (A) regarding the deduction under section 36(1)(viia) of the Income Tax Act.