2014 (8) TMI 635 - HC - Income Tax

Advances made to rural branched u/s 36(1)(viia) - co-operative society - scheduled bank - Deduction of 10 per cent of the aggregate average advances - Applicability of definition of rural branch in Explanation (ia) to section 36(1)(viia) to co-operative banks Held that - Rural branch is a branch which falls under Explanation (ia) to section 36(1)(viia) - The Explanation to section 5(c) clearly indicates which are the transactions which would not come within the meaning of banking business - Non-schedule bank means a banking company as defined under section 5(c) which is not a scheduled bank - co-operative bank cannot be considered as a scheduled bank as the Second Schedule to the Reserve Bank of India Act does not include any of the co-operative banks - though any company which transacts business of banking in India would come within the meaning of non-scheduled bank, by virtue of Explanation (1) under this, clause scheduled bank is excluded - So far as sub-clause (a) of clause (viia) of section 36(1), two types of deductions are provided to non-scheduled bank, a scheduled bank and a co-operative bank other than a primary agricultural credit society, etc. It is to be noted that the assessees are not primary agricultural credit co-operative society or other kind of bank so as to go out of the definition of cooperative bank under sub-clause (a) to clause (viia) of section 36(1) - No doubt, Explanation (ia) to section 36(1)(viia) defines what is a rural branch - It is with reference to a place and certain number of population - It refers to branch of a scheduled bank or a non-scheduled bank - co-operative bank also falls under the category of non-scheduled bank for the purpose of this section - reading of the entire section 36(1)(viia)(a) along with the Explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision - the authorities below were justified in opining that the benefit of deduction of 10 per cent of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts - Such rural branch means a branch as explained under Explanation (ia), as opined in the decision of Lord Krishna Bank s case 2010 (10) TMI 860 - Kerala High Court - Decided against Assessee.

Summary

Issues Involved:
1. Entitlement of appellants-assessees to deduction of 10% of aggregate average advances made by rural branches under section 36(1)(viia) of the Income-tax Act, 1961.
2. Applicability of the definition of rural branch in Explanation (ia) to section 36(1)(viia) to co-operative banks.
3. Coverage of co-operative banks under the definition of 'banking company' in section 5(c) of the Banking Regulation Act.

Detailed Analysis:

Issue 1: Entitlement to Deduction of 10% of Aggregate Average Advances
The appellants-assessees, being co-operative banks, claimed deductions under section 36(1)(viia) of the Income-tax Act, 1961. This section provides for two types of deductions: one not exceeding 7.5% of the total income and another not exceeding 10% of the aggregate average advances made by rural branches. The Assessing Officer and the appellate authorities restricted the appellants-assessees to a deduction of 7.5% of the total income, as they had created provisions for bad and doubtful debts in the books of account. The appellants did not seriously contest this restriction. The controversy centered on whether the rural branch definition under the Explanation to section 36(1)(viia) includes rural branches of co-operative banks, thereby entitling them to the 10% deduction.

Issue 2: Applicability of the Definition of Rural Branch to Co-operative Banks
The appellants argued that the absence of a specific mention of co-operative banks in the Explanation to section 36(1)(viia) meant that rural branches of co-operative banks should be understood in their general sense, not as defined in the Explanation. They contended that as long as these branches had licenses issued by the Reserve Bank of India and were situated in areas fitting the general meaning of rural, they should qualify for the 10% deduction. The Revenue, however, argued that the definition of rural branch under the Explanation, which refers to branches in places with populations not exceeding 10,000, should be applied. The court noted that the definition of rural branch in the Explanation to section 36(1)(viia) explicitly refers to branches of scheduled and non-scheduled banks, not co-operative banks. However, it was reasoned that co-operative banks, being non-scheduled banks, should also fall under this definition for the purpose of the section.

Issue 3: Coverage of Co-operative Banks under 'Banking Company' Definition
The court examined various definitions under the Income-tax Act, the Banking Regulation Act, and the Reserve Bank of India Act to understand the terms 'banking company,' 'scheduled bank,' 'non-scheduled bank,' and 'co-operative bank.' It was noted that the Banking Regulation Act defines a banking company as any company transacting banking business in India, and a non-scheduled bank is a banking company not included in the Second Schedule to the Reserve Bank of India Act. Co-operative banks, being non-scheduled banks, thus fall under this category. The court concluded that the inclusion of co-operative banks in the main section 36(1)(viia)(a) of the Income-tax Act, even without specific mention in the Explanation, means they are entitled to the benefits provided they meet the conditions set out in the provision.

Conclusion:
The court held that the authorities were justified in restricting the deduction to 7.5% of the total income for bad and doubtful debts. It further concluded that co-operative banks are entitled to the 10% deduction of aggregate average advances made by rural branches, provided these branches meet the definition of rural branch under the Explanation to section 36(1)(viia). The appeals were dismissed, and the substantial questions of law were answered in favor of the Revenue.