2018 (6) TMI 1710 - HC - Income Tax

Advances made to rural branches u/s 36(1)(viia) - Deduction of provision for bad debts in terms of Section 36(1)(viia) - definition of Rural branch for the purpose of arriving at deduction u/s. 36(1)(viia ) - HELD THAT - The definition of non-scheduled bank as noticed from the Banking Regulation Act was any bank which is not included in the second schedule to the Act . Though there was a separate definition of co-operative banks in the Banking Regulation Act, the Division Bench held that the co-operative banks for the purpose of section 36(1)(viia) would be treated as included and entitled to such benefit. A reading of clause (a) under section 36 (1)(viia) would dispel any doubts regarding such inclusion. The deduction in respect of any provision for bad and doubtful debts to the extent of 7 % of the total income is applicable to scheduled banks not being one incorporated outside India, a non scheduled bank or a co-operative bank other than those specified. Under the second limb the deduction is to the extent of 10% of the aggregate average advances by the rural branches of such bank. The rural branches of the category of banks referred to in the first limb would be entitled under the second limb. We agree with the decision and there is no reason for us to take a different view in the present case especially in an appeal instituted by another assessee. The question raised is also as to the sustainability of the dictum in Kannur District Co-operative Bank 2014 (8) TMI 635 - KERALA HIGH COURT that while identifying the 'rural branches', the co-operative banks are also to be brought under the rigour of the definition of a Rural Branch . The Division Bench found that the view was covered by the earlier judgment in Lord Krishna Bank Ltd. 2010 (10) TMI 860 - KERALA HIGH COURT . - Also see MALAPPURAM DISTRICT CO-OP. BANK LTD VERSUS INCOME TAX OFFICER, WARD-2, TIRUR. 2014 (10) TMI 1023 - KERALA HIGH COURT - Decided against assessee.

Summary

Issues:
Entitlement of petitioner bank to benefit under the second limb of clause (viia) of Section 36(1) of the Income Tax Act without reference to the definition of rural branch.

Analysis:
The judgment addresses the issue of whether a Co-operative Bank is entitled to the benefit under the second limb of clause (viia) of Section 36(1) of the Income Tax Act without reference to the definition of rural branch. The history of deductions available to Co-operative Banks is highlighted, noting that all Co-operative Banks were initially granted deductions under Section 80P, excluding them from deductions under Section 36. However, on 1.4.2007, changes were made confining the deduction under Section 80P to specific Co-operative Banks, leading to the inclusion of Co-operative Banks under Section 36 to grant them benefits similar to scheduled and non-scheduled banks.

The judgment refers to a previous decision by a Division Bench in Commissioner of Income Tax v. Lord Krishna Bank Ltd., which discussed the extension of benefits to banks with rural branches based on population criteria. The definition of 'Rural Branch' was examined, emphasizing the use of population data from the last census report to determine rural areas. The judgment concluded that the rural area should be identified based on the census report's definition of a revenue village with specific boundaries, without importing artificial definitions of wards within Panchayats or Municipalities.

Another issue raised was whether a Co-operative Bank could claim benefits under the second limb of Section 36(1)(viia). The judgment noted that while the definition of 'rural branch' did not explicitly include Co-operative Banks, a Division Bench previously ruled that Co-operative Banks falling under the category of non-scheduled banks could avail benefits under the second limb of Section 36(1)(viia). This interpretation was supported by the definition of 'non-scheduled bank' in the Banking Regulation Act.

The judgment emphasized the provisions of Section 36(1)(viia) and clarified that the deductions for bad and doubtful debts applied to scheduled banks, non-scheduled banks, and Co-operative Banks meeting specific criteria. The judgment upheld the decision of the Division Bench in Kannur District Co-operative Bank, affirming that Co-operative Banks could be considered entitled to benefits under the second limb of Section 36(1)(viia) based on their classification as non-scheduled banks.

In conclusion, the judgment found that the issue had been previously addressed in various judgments, including Lord Krishna Bank and Kannur District Co-operative Bank. The Court upheld the earlier decisions, ruling against the assessee and in favor of the revenue, rejecting the appeal based on the established legal interpretations and precedents.