2021 (11) TMI 522 - AT - Income Tax

Disallowance of bad debts as claimed u/s 36(1)(viia) - allowability of deduction u/s 36(1)(viia) of the 1961 Act under the second limb wherein the deduction claimed @10% of aggregate average advances made by Rural Branches of the assessee, stood disallowed - HELD THAT - There are certain relaxation periods granted to class of certain cooperative societies who are already carrying on banking business and are brought within the ambit of the 1949 Act from time to time, to seek license from RBI within the prescribed cut-off period and the RBI is empowered to grant such banking license from retrospective effect whence the statutory amendment bringing a class of co-operative society within the ambit of the 1949 Act. The assessee has claimed that RBI granted banking license to it to continue and carry on banking business , vide license dated 10.01.2012 , and although we are seized of ay 2010- 11 , the assessee has claimed that it will be entitled and eligible for deduction u/s 36(1)(viia) as the said license was granted with retrospective effect to continue and carrying on the banking business. It is the claim of the assessee that it is carrying on banking business since its inception. These aspect has not been exhaustively looked into by the authorities below as the ld. CIT(A) has merely concluded that the assessee is not entitled for deduction u/s 36(1)(viia) also on the grounds that it did not held banking license during the relevant period under consideration. Thus, the matter is to be remanded back to the AO to look into the provisions of Section 56 of the 1949 Act and its applicability to the assessee, as also the application filed by assessee with RBI for seeking banking license and whether on the strength of same , the said license was granted by RBI with retrospective effect so as to entail assessee to seek deduction u/s 36(1)(viia) for the year under consideration , as complete facts are not on record before us. AO is directed to make relevant enquires and verifications , including , inter-alia, making enquiries from RBI to seek relevant information to arrive at decision whether the assessee will be eligible for deduction u/s 36(1)(viia). Thus , if it is found by AO after due verifications and enquiries that the assessee was granted banking license by RBI which covers relevant previous year 2009-10, then in our view the assessee will be eligible for deduction u/s 36(1)(viia) under both the limbs. so far as manner in which Rural Branches are to be determined, we clarify that it will be in the same manner as is specified in Explanation (ia) to Section 36(1)(viia), although the said explanation does not refer to Co-operative Bank specifically , but the said issue is adjudicated by Hon ble Kerala High Court in the case of Kannur District Co-operative Bank Limited 2014 (8) TMI 635 - KERALA HIGH COURT wherein Hon ble High Court held that Rural Branch defined under aforesaid explanation would also include rural branch of a co-operative bank and same terms and conditions as stipulated in explanation (ia) to Section 36(1)(viia) shall apply while determining Rural Branches of Co-operative Bank. Thus,the place referred for identifying the branch of the bank as a rural branch with reference to is location is the revenue village as that the Rural Branch has to be always in rural area and the place referred can be taken as village , and that it cannot be extended beyond the rural unit being village as recognized in the census report and then reference is to the population criteria as specified in Explanation (ia) to Section 36(1)(viia). Thus, the matter is remitted back to the file of the AO for fresh adjudication, as is directed by us in this order. Needless to say that the AO shall provide proper and adequate opportunity of being heard to the assessee in set aside proceedings. The evidences/explanations submitted by assessee in its defense shall be admitted by AO , and adjudicated by AO on merits in accordance with law. We order accordingly. Disallowance of depreciation u/s 32 - assessee could not produce the invoices for purchases purportedly made of the fixed assets during the year under consideration, and secondly the assessee claimed depreciation at full rates on the purchases made of fixed assets although the said fixed assets were purchased after 30th September of the previous year - HELD THAT - The assessee did not press this issue concerning disallowance of depreciation before ld. CIT(A) as well before us. Since the assessee is not able to produce purchase invoices for fixed assets purported to have been purchased even before us, nor does it has any evidence as to the existence of the said fixed assets and its usage for business of the assessee, we donot find any merit in the claim of the assessee and hence this issue is decided against the assessee and the appellate order passed by ld. CIT(A) stood confirmed. We order accordingly. Further, Reference is drawn to provisions of Section 32 read with proviso , wherein if the asset as specified in the said proviso is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this subsection in respect of such asset shall be restricted to fifty percent of the amount calculated at the percentage prescribed for an asset specified in the said proviso. Thus, clearly the assessee has erroneously claimed depreciation at full rate even though the said asset was put to use for business purposes for less than 180 days, the assessee will be entitled for depreciation @50% of the amount calculated at the percentage prescribed for an asset specified in the said proviso. This issue is also decided against the assessee

Summary

Issues Involved:
1. Validity of the assessment orders.
2. Disallowance of provision for bad debts under Section 36(1)(viia).
3. Disallowance of depreciation under Section 32.
4. Status and eligibility of the appellant as a Cooperative Bank for deductions under the Income-tax Act.

Detailed Analysis:

1. Validity of the Assessment Orders:
The appellant contended that the assessment orders dated 23.03.2013 and 06.02.2014, determining income significantly higher than the returned income, were void ab-initio due to non-compliance with the "scheme" of the Act for scrutiny assessment and issuance of notice under Section 143(2). The tribunal did not find merit in this argument, dismissing the objection regarding the legality of the assessment orders.

2. Disallowance of Provision for Bad Debts under Section 36(1)(viia):
The appellant claimed deductions for provisions for bad and doubtful debts under Section 36(1)(viia). The AO allowed a deduction of 7.5% of the total income but disallowed the additional 10% of aggregate average advances made by rural branches, citing the appellant's failure to provide necessary details and the legislative intent excluding cooperative banks from this provision. The CIT(A) upheld this view, noting the appellant did not hold a banking license during the relevant period and failed to provide details of rural branches and advances.

The tribunal, however, observed that the Finance Act, 2007 extended the benefits of Section 36(1)(viia) to cooperative banks, allowing deductions for provisions made for bad and doubtful debts. The tribunal noted that the appellant's eligibility for such deductions depended on whether it held a banking license during the relevant period. The tribunal remanded the matter back to the AO to verify if the banking license granted on 10.01.2012 covered the relevant assessment years and to compute the deduction based on aggregate average advances made by rural branches if the appellant was eligible.

3. Disallowance of Depreciation under Section 32:
The AO disallowed part of the depreciation claimed by the appellant due to insufficient evidence of fixed asset purchases and incorrect depreciation rates. The CIT(A) upheld this disallowance, and the appellant did not contest this issue before the tribunal. The tribunal confirmed the disallowance, noting the appellant's failure to provide purchase invoices and evidence of asset usage.

4. Status and Eligibility of the Appellant as a Cooperative Bank:
The tribunal examined whether the appellant, as a cooperative bank, was entitled to deductions under Section 36(1)(viia). The tribunal referred to the Finance Act, 2007, which included cooperative banks within the ambit of Section 36(1)(viia), allowing them to claim deductions for provisions for bad and doubtful debts. The tribunal also considered relevant case laws and legislative amendments, concluding that cooperative banks could be classified as non-scheduled banks for the purposes of Section 36(1)(viia), provided they held the necessary banking license.

The tribunal directed the AO to verify the appellant's banking license status during the relevant period and to compute the allowable deductions accordingly. The tribunal emphasized the need for the appellant to provide complete details of aggregate average advances made by rural branches to substantiate their claim.

Conclusion:
The tribunal partly allowed the appeals for statistical purposes, remanding the matter back to the AO for fresh adjudication on the eligibility and computation of deductions under Section 36(1)(viia), while confirming the disallowance of depreciation under Section 32.