2024 (9) TMI 1443 - AT - Income Tax

Addition u/s 36(1)(viia) - provision for bad and doubtful debts disallowed - whether the presence of both rural advances and non-rural advances by a bank, is a must in order to be eligible to claim deduction towards provision for bad and doubtful debts u/s 36(1) (viia) ? - HELD THAT - On identical facts, the Co-ordinate Bench of ITAT Bangalore, in the case of ING Vysya Bank Ltd. 2014 (9) TMI 44 - ITAT BANGALORE held that in order to allow assessee's claim under section 36(1)(viia) of the Act, what has to be seen by Assessing Officer, is as to whether provision for bad and doubtful debts (PBDD) is created, irrespective of whether it is in respect of rural or non-rural advances by debiting profit and loss account and, to extent of provision for bad and doubtful debts (PBDD) is so created, assessee is entitled to deduction subject to upper limit of deduction laid down in said section. Our view is fortified by the order of Bhagini Nivedita Sahakari Bank Ltd. 2018 (12) TMI 322 - ITAT PUNE wherein it was held that a co-operative bank is entitled to claim deduction of bad debts provided in first part of section 36(1)(viia)(a) being 7.5 per cent of total income even in absence of rural branches. Actual provision made in the books by the Assessee on account of provision for bad and doubtful debts (PBDD) (irrespective of whether it is rural or non-rural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred in section 36(1)(viia) (a), the deduction has to be allowed to the Assessee. For availing the benefit of 7.5% (present limit 8.5%) of total income, there is no condition that it should be in respect of any rural branches. All types of banks described under sub-clause (a) of clause (viia) are entitled to seek deduction of an amount not exceeding 7.5% (present limit 8.5%) of total income and only condition is that there should be provision for bad and doubtful debts in the books of account. Based on these facts and circumstances, we delete the addition made by the assessing officer and allow the appeal of the assessee.

Summary

Issues Involved:
1. Disallowance of deduction under Section 36(1)(viia) of the Income Tax Act, 1961.
2. Applicability of Section 36(1)(viia) to rural advances only.
3. Eligibility of the assessee, a cooperative bank, for deduction under Section 36(1)(viia) in the absence of rural branches.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 36(1)(viia):
The primary issue involves the disallowance of Rs. 20,38,284/- claimed by the assessee under Section 36(1)(viia) of the Income Tax Act, 1961. The assessee, a cooperative bank, argued that the deduction under Section 36(1)(viia) allows any cooperative bank, other than a primary cooperative agricultural and rural development bank, a deduction of 7.5% of the total income before any other deductions. The Assessing Officer (AO) disallowed this claim, asserting that the deduction under Section 36(1)(viia) is applicable only to rural advances, and since the assessee did not have rural branches, the deduction was not permissible.

2. Applicability of Section 36(1)(viia) to Rural Advances Only:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] both held that the deduction under Section 36(1)(viia) applies exclusively to rural advances. This interpretation was supported by the Supreme Court decision in Catholic Syrian Bank Ltd. vs. CIT, where it was held that the legislative intent behind Section 36(1)(viia) was to encourage rural advances. The CIT(A) emphasized that the deduction was meant to promote rural banking by allowing banks to make provisions for bad and doubtful debts related to rural advances.

3. Eligibility of the Assessee for Deduction under Section 36(1)(viia) in the Absence of Rural Branches:
The Tribunal examined whether the presence of rural branches is a prerequisite for claiming the deduction under Section 36(1)(viia). The assessee argued that even in the absence of rural branches, the deduction of 7.5% of the total income should be allowed. The Tribunal referred to various judgments, including the Supreme Court's decision in Catholic Syrian Bank Ltd., which clarified that the deduction under Section 36(1)(viia) is distinct and independent from Section 36(1)(vii) and should not be conflated. The Tribunal also considered the judgments of various High Courts and ITAT benches, which supported the view that the deduction of 7.5% of the total income does not necessitate rural branches.

Tribunal's Findings and Conclusion:
The Tribunal concluded that the deduction under Section 36(1)(viia) cannot be denied solely on the grounds of the absence of rural branches. The Tribunal emphasized that the provision allows a deduction of 7.5% of the total income, irrespective of whether the bank has rural branches or not. The Tribunal cited several judgments, including those from the ITAT Bangalore, ITAT Pune, and the Kerala High Court, which supported the view that the deduction is available to all types of banks described under Section 36(1)(viia), provided there is a provision for bad and doubtful debts in the books of account.

The Tribunal allowed the appeal filed by the assessee, thereby permitting the deduction under Section 36(1)(viia) of the Income Tax Act, 1961, for the assessment year 2014-15.

Order:
The appeal filed by the assessee is allowed. The Tribunal directed the AO to allow the deduction of Rs. 20,38,284/- under Section 36(1)(viia) of the Income Tax Act, 1961. The order was pronounced in the open court on 30-08-2024.