2022 (9) TMI 577 - AT - Income Tax

Disallowance u/s 36(1)(vii)(a) - provision for bad and doubtful debt - provision made against the standard loan (contingent liability) - Eligibility of deduction to Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank - AO restricted the allowance u/s 36(1)(vii)(a) of the Act to 7.5% (Income Provision) and disallowed excess provision - HELD THAT - Bare perusal of provisions of section 36(1)(viia) will reveal that Cooperative Banks other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank shall be eligible and entitled for claiming deduction u/s 36(1)(viia)(a) so far as first limb is concerned to the tune of seven and half percentile of total income. Deduction claimed @ 10% of aggregate average advanced made by the rural branch assessee, is too disallowed - So far as second limb of section 36(1)(viia) (a) is concerned, the deduction allowed is 10% of aggregate average advances made by the Rural Branches of such bank computed in the prescribed manner, as is stipulated in section 36(1)(viia)(a) of the 1961 Act. While including 'Co-operative Bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank' in section 36(1)(viia)(a) effective from 1-4-2007, law makers have brought eligible Co-operative Banks to be entitled for deduction under first limb, and while referring to 'such bank' in the second limb, in our considered view by literal reading and interpretation, eligible Co-operative Banks shall also be entitled to claim deduction under second limb. As the use of the term 'such bank' in the second limb of section 36(1)(viia)(a), will relate back to the banks as specified in the first limb which, inter-alia, will include eligible Co-operative Banks. In Explanation to section 36(1)(viia), it is provided that rural branches means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year. The inclusion of Co-operative Bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank were brought within the ambit of section 36(1)(viia) by way of inserting in sub-clause (a) to clause (viia) to sub-section (1) to section 36 by Finance Act, 2007 w.e.f. 1-4-2007, but there was no corresponding amendment in Explanation to section 36(1)(viia), and Co-operative Banks are not included here for ascertaining the manner to identify Rural Branches of Co-operative Bank. Section 36(1)(viia)(a) stipulates that the deduction under second limb towards aggregate average advances made by Rural Branches of such bank shall be computed in prescribed manner. Thus, the matter is remitted back to the file of the AO for fresh adjudication, as is directed by us in this order. The evidences/explanations submitted by assessee in its defence shall be admitted by AO, and adjudicated by AO on merits in accordance with law. We order accordingly.

Summary

Issues Involved:
1. Disallowance under Section 40a(ia) of the Income Tax Act.
2. Disallowance of provision for bad and doubtful debts under Section 36(1)(viia) of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 40a(ia):
The assessee initially raised an issue regarding the disallowance of Rs. 1,03,14,374/- under Section 40a(ia) of the Income Tax Act. However, during the proceedings, the counsel for the assessee informed that this ground was not being pressed. Consequently, this issue was not adjudicated.

2. Disallowance of Provision for Bad and Doubtful Debts:
The primary issue under consideration was the disallowance of Rs. 64,29,240/- related to the provision for bad and doubtful debts. The assessee, a District Cooperative Bank, had made a provision of Rs. 80 lakhs against standard loans, which was considered a contingent liability. The Assessing Officer (AO) restricted the allowance under Section 36(1)(viia) to 7.5% of the total income plus provision, resulting in an allowable amount of Rs. 15,70,760/-. Consequently, the excess provision of Rs. 64,29,240/- was disallowed.

The AO's decision was based on the order of the ITAT Amritsar Bench in the assessee's own case for A.Y. 2007-08. The CIT(A) upheld this disallowance. The assessee argued that the provision was made for advances by rural branches and should be allowed in full.

The Tribunal examined the provisions of Section 36(1)(viia) and noted that it allows a deduction of up to 7.5% of the total income and an additional 10% of the aggregate average advances made by rural branches. The Tribunal observed that the authorities did not adequately discuss and analyze the applicability of Section 36(1)(viia) in the context of the assessee's case.

The Tribunal highlighted the relevant legal provisions, including the definitions of "rural branch" and "scheduled bank," and the computation method for aggregate average advances as per Rule 6ABA of the Income Tax Rules. It also referred to the amendments made by the Finance Act, 2007, which extended the benefits of Section 36(1)(viia) to cooperative banks.

The Tribunal concluded that the matter required further verification and analysis by the AO. It directed the AO to re-examine the issue, provide the assessee with an opportunity to present evidence, and adjudicate the matter afresh in accordance with the law.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remitting the matter back to the AO for fresh adjudication regarding the disallowance of Rs. 64,29,240/- under Section 36(1)(viia). The AO was instructed to provide a proper opportunity for the assessee to present its case and to re-evaluate the provision for bad and doubtful debts in light of the relevant legal provisions. The ground regarding Section 40a(ia) was not pressed and thus not adjudicated.