2022 (9) TMI 710 - AT - Income Tax

Deductibility of deduction u/s 36(1)(viia) w.r.t. deduction on account of 10% of aggregate average advances made by rural branches - disallowance of deduction under second limb of Section 36(1)(viia)(a) with respect to 10 % of the aggregate average advances made by rural branches - HELD THAT - The assessee is a Co-operative society engaged in banking business. It is observed that the aforesaid effective issue in these two appeals is covered by decision of Zila Sahkari Bank Limited 2021 (11) TMI 522 - ITAT ALLAHABAD which shall be applicable to the effective issue of disallowance of deduction under second limb of Section 36(1)(viia)(a) of the 1961 Act concerning disallowance of 10% of the aggregate average advances made by rural branches , arising in these two appeals filed by the assesssee for ay 2009-10 and 2010-11, and we hold that the assessee shall be eligible for deduction u/s 36(1)(viia)(a) @ 10 % of the aggregate average advances made by rural branches subject to following issues to be verified by AO before granting deduction under second limb of Section 36(1)(viia)(a) - AO shall verify that the assessee holds banking license granted by RBI during the relevant year(s) under consideration , as is mandated u/s 22 of the 1949 Act - AO shall verify that the assessee satisfies the conditions of being a primary co-operative bank as are stipulated u/s 5(ccv) of the 1949 Act, as incorporated by virtue of Section 56 of the 1949 Act - The assessee will file computation for claiming deduction under second limb of Section 36(1)(viia)(a) , which computation shall be verified by AO before granting aforesaid deduction. The assessee is directed to appear before AO and file relevant evidences in support of its claim , so that the AO can verify the above facts concerning (a) to (c) above, before granting deduction.We order accordingly.

Summary

Issues Involved: Validity of reassessment proceedings under Section 147, disallowance of deduction under Section 36(1)(viia) of the Income Tax Act, 1961, and the applicability of Section 154 for rectification of mistakes.

Issue 1: Validity of Reassessment Proceedings Under Section 147

The assessee challenged the reassessment proceedings initiated under Section 147, arguing that it was based on a change of opinion since the issue had already been considered during the original assessment under Section 143(3). The Tribunal did not explicitly address this issue in detail but proceeded to analyze the substantive issue of disallowance under Section 36(1)(viia).

Issue 2: Disallowance of Deduction Under Section 36(1)(viia)

The core issue was whether the assessee, a cooperative bank, was entitled to a deduction of 10% of aggregate average advances made by its rural branches under Section 36(1)(viia). The assessee argued that the provision allowed such a deduction for cooperative banks, while the AO and CIT(A) contended that the deduction was restricted to scheduled banks as per Rule 6ABA of the Income Tax Rules, 1962.

The Tribunal referred to the decision in the case of Zila Sahkari Bank Limited, where it was held that cooperative banks are entitled to the deduction under the second limb of Section 36(1)(viia). The Tribunal emphasized that the legislative intent, as clarified in the Finance Act, 2007, was to extend the same deductions available to scheduled and non-scheduled banks to cooperative banks. The Tribunal noted that although there was no corresponding amendment in Rule 6ABA, the substantive provision of the Act would prevail over the Rule.

The Tribunal directed the AO to verify whether the assessee held a banking license during the relevant years and to ensure that the assessee met the conditions of being a primary cooperative bank as stipulated under the Banking Regulation Act, 1949. The assessee was also directed to provide the necessary computation for the deduction, which the AO would verify before granting the deduction.

Issue 3: Applicability of Section 154 for Rectification

For the assessment year 2010-11, the AO had disallowed the deduction under Section 36(1)(viia) by invoking Section 154, arguing that it was a prima facie mistake. The Tribunal kept this legal issue open, as the appeal was otherwise decided in favor of the assessee based on the substantive analysis of Section 36(1)(viia).

Conclusion:

The Tribunal allowed the appeals for both assessment years, directing the AO to verify specific conditions before granting the deduction under Section 36(1)(viia). The Tribunal's decision was based on the interpretation that cooperative banks are entitled to the deduction, aligning with the legislative intent and previous judicial decisions. The issue of invoking Section 154 was left open for further consideration.