2012 (3) TMI 691 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of amount claimed under "Provision for bad and doubtful debts" u/s 36(1)(viia).
2. Interpretation of the term "Place" for identifying "rural branch" of the bank.
3. Netting of provision for bad and doubtful debts created during the year with the provision created in earlier years and written back during the year.

Summary of Judgment:

Issue 1: Deduction of amount claimed under "Provision for bad and doubtful debts" u/s 36(1)(viia)
The assessee, a co-operative bank, claimed a deduction of Rs. 35.27 crores for "Provision for bad and doubtful debts" u/s 36(1)(viia). The AO restricted the deduction to 7.5% of the total income, arguing that the branches did not qualify as "rural branches" as defined in the Act.

Issue 2: Interpretation of the term "Place" for identifying "rural branch" of the bank
The AO interpreted "Place" as all "panchayat wards" under the branch's service area, while the assessee interpreted it as the "panchayat ward" where the branch is located. The Ld CIT(A) agreed with the assessee's interpretation, but the Hon'ble Kerala High Court reversed this, stating that "Place" should be understood as a "revenue village" with a population of less than 10,000. The Tribunal followed the High Court's decision, setting aside the Ld CIT(A)'s order and restoring the AO's assessment.

Issue 3: Netting of provision for bad and doubtful debts created during the year with the provision created in earlier years and written back during the year
The AO and Ld CIT(A) held that only the net provision of Rs. 7.35 crores (new provision of Rs. 35.27 crores minus Rs. 27.92 crores written back) should be considered for deduction u/s 36(1)(viia). The Tribunal agreed with the assessee that the provision for bad and doubtful debts created during the year should not be netted against the amount written back, except in cases where the provision for a particular debt needs enhancement. The Tribunal directed the AO to verify the quantum of new provision made by the assessee.

Additional Plea by Assessee:
The assessee argued that the definition of "rural branch" in sec. 36(1)(viia) does not apply to co-operative banks. The Tribunal rejected this plea, stating that a co-operative bank is classified as a "non-scheduled bank" under the Banking Regulation Act, 1949, and thus the High Court's decision applies.

Conclusion:
The appeal of the revenue was allowed, and the appeal of the assessee was partly allowed. The Tribunal directed the AO to verify the quantum of new provision made by the assessee and dismissed the assessee's request to set aside the matter for taxing the provision written back.