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TMI Blog2021 (11) TMI 522X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence 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 - ITA No.135/Alld./2015 And ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2013 itself, as the same had a vital bearing on the decision in the appeal. WITHOUT PREJUDICE TO THE AFORESAID 3 BECAUSE the authorities below have erred in law and on facts in disallowing/upholding the disallowance of a part of the provision for bad debts, as had been claimed under section 36(1)(viia) of the Act, to the extent of ₹ 1,70,81,955. 4 BECAUSE the appellant had been carrying on banking business since its very inception as a Cooperative Bank and even if its name did not appear in the list of scheduled banks appended to the RBI Act 1934, the claim of the appellant was liable to be allowed in its entirely, looking to the insertion of terms non-scheduled bank / cooperative bank in section 36(1)(viia) by the Finance Act 2007 w.e.f. 1.4.2007. 5. BECAUSE as per express provision contained in the statute, entire claim was liable to be allowed and view to the contrary as has been taken by the CIT(A) is wholly erroneous, as being in-consistent withthe express provisions of law and, on an application of rule of harmonious construction. 6. BECAUSE investment in fixed assets stood fully supported by the entries in the books of accent as ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. BECAUSE the order appealed against is contrary to facts, law and principles of natural justice. 3. First, we will take up appeal of the assessee in ITA no. 135/Alld/2015 for ay: 2010-11. The brief facts of the case are that the assesseehas deducted ₹ 1,78,85,718/- from Profit and Loss Account as Provision for Bad and Doubtful Debts . The assessee has also claimed said amount as deduction from income, under the provisions of Income-tax Act, 1961, while filing return of income with department. The case of the assessee was selected by Revenue for framing scrutiny assessment u/s 143(3) of the 1961 Act and Statuary Notices u/s 143(2) and 142(1) were admittedly issued and served to the assessee by AO. During the course of assessment proceedings conducted by AO u/s 143(3) read with Section 143(2) of the 1961 Act for ay:2010-11, the assessee was asked by AO to explain about the aforesaid claim of deduction. The assessee submitted before the AO that the said claim has been made as per RBI/NABARD instructions for provisioning on advances and other assets. It was submitted by the assessee before the AO that the banks are required to follow these instructions otherwise the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) of the 1961 Act @7 % of the total income of the assessee, while further deduction @ 10% of the aggregate average advances made by the Rural Branches of the bank was not allowed by the AO. The ld. CIT(A) was pleased to reject the contentions of the assessee sofar as allowability of deduction @ 10% of the aggregate average advances made by the Rural Branches are concerned, by holding as under: 3.4 Decision I have gone through the order of the AO and the submission of the appellant. I have also gone through relevant case laws. Briefly, the facts of the case that the A.O. allowed the deduction @7.5% of the total income (computed before making any deduction under this clause and Chapter VIA) in respect of provision for bad and doubtful debts. However, the AO has denied the deduction @ 10% of the aggregate average advances allowable in the case of rural branches of such bank. In the original assessment order and later on through a rejoinder the AO has submitted that the deduction of 10% is not allowable in the case of the assessee in view of the definition provided in the said section and rule 6ABA of I.T. Rules, 1962 coupled with intent of legislature while bringing the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfy the AO that the deduction has been claimed in respect of advances by the rural branches, the condition has not been fulfilled. Accordingly, the deduction is not allowable. As regard the status of appellant society as scheduled bank, there is no dispute because even the appellant has admitted that it does not fall in second schedule to the Reserve Bank of India Act, 1934. On the contention of the appellant to treat the appellant in the category of non-scheduled bank, the AO has argued that the issue is covered by the decision of the Hon ble ITAT Lucknow B Bench in the case of Mansarovar Urban Cooperative Bank Ltd. vs. DCIT. The AO has quoted relevant part of the decision as under- Had Co-operative Bank been a part of non-scheduled bank then it was not necessary for the legislature to separately provide such benefit u/s 36(1)(viia) to a co-operative bank by making necessary amendment in that section . The Hon ble Tribunal was of the view that the addition of term co-operative bank only distinguishes it from non-scheduled bank. As such the co-operative bank cannot be called non-scheduled bank. Had the intent of legislature been so to include all the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the amendments in section 36(1)(viia). Those are not reported here for the sake of brevity. However, the references will be used wherever it is required. The appellant has extracted Circular no.3 dated 12.03.2008 reported in (2008) 299 ITR (St)8- Deduction in respect of any provision for bad and doubtful debts to be allowed in the case of co-operative banks u/s 36(1)(viia) Under the existing provision of clause (viia) of sub section (1) of section 36, deduction of an amount not exceeding seven and onehalf percent of the total income (computed before making any deduction under the said clause and chapter VI-A) and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of a scheduled bank or a non-scheduled bank computed in the prescribed manner is allowed as a deduction in the computation of income of such banks. Scheduled bank, as defined in the explanation to clause (viia) of sub section (1) of the section 36, does include a co-operative bank. The deduction earlier allowable under Section 80P in the case of cooperative society engaged in carrying on the business of banking (cooperative banks) has been withdrawn from A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company takes into its fold any company which transacts the business of banking in India. According to the A.R. any company transacting the business of banking in India will qualify to be a banking company as per clause (c) of Section 5 of the Banking Company Regulation Act, 1949. The Ld. AR has tried to explain that the cooperative societies transacting the banking works are banking company. In this context, the A.R. has relied on the following decision.- I. Judgment dated 03.04.2014 of Hon ble Kerala High Court reported in (2014) 365 ITR 343 [also reported in (2014) 50 taxman. Com 189 (Kerala)] II. Order dated 07.03.2012 in ITA No. 817/JP/2011 passed by the Hon ble Jaipur Bench of ITAT in the case of ACIT, Circle 3, Jaipur vs. Jaipur Central Cooperative Bank, Jaipur. III. Order dated 08.05.2013 passed by the Hon ble Cochin Bench of ITAT in the case of Trichur District Co-operative Bank Ltd. Vs. Assistant commissioner of Income Tax reported in (2013)60 SOT 145 IV. Order dated 17.07.2013 passed by the Hon ble Chennai Bench of ITAT in the case of Vellore Dist. Central Cooperative Bank ltd. Vs Commissioner of Income Tax reported in (2013)145 ITD 129 V. Ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legislature is not to extend the benefit to cooperative banks. Another noticeable facts in the case of the appellant is that it was granted the license of banking business by RBI only w.e.f 10.01.2012. The license has not been granted with retrospective effect even in the cooperative society was engaged in the banking business. In view of the above facts and in the circumstances, the decisions of the A.O. is confirmed and the ground taken by the appellant are dismissed. Thus, as could be seen that ld.CIT(A) upheld the decision of AO and rejected the contention of the assessee, vide appellate order dated 16.12.2014 passed by ld. CIT(A). Further, the ld. CIT(A) observed that the banking license was granted by RBI to assesseew.e.f. 10.01.2012 which was not granted with retrospective effect. Further, the ld. CIT(A) also observed that the assessee has not given any details to quantify the deduction computed @10% of aggregate average advances made by Rural Branches , as no such details as to aggregate average advances made by Rural Branches are placed on record by assessee. 4.2. So far as second issue regarding disallowance of depreciation is concerned, the ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in case of Mansarovar Urban Co-operative Bank Ltd v. DCIT, reported in (2010) 126 ITD 72(Lucknow) was a decision which was for ay prior to amendment made to Section 36(1)(viia) by Finance Act, 2007 w.e.f. 01.04.2007 , as assessment year before tribunal in the case of Mansarovar Urban Co-operative Bank Limited was ay: 2003-04 , when Co-operative Bank was not included in the Section 36(1)(viia) of the 1961 Act . It was submitted that the present cases relates to ay s:2010-11 and 2011-12 and hence decision of tribunal in the case of Mansarovar Urban Co-operative Bank Ltd. (supra) is not applicable. Our attention was also drawn by ld. Counsel for the assesseeto the decision of Hon ble Kerala High Court in the case of Kannur District Cooperative Bank Limited v. CIT (2014) 50 taxmann.com 189(Kerala). It was submitted by ld. Counsel for the assesseethat ld. CIT(A) in the case of assessee itself has allowed the deduction u/s 36(1)(viia) towards 10% of the aggregate average advances made by Rural Branches in ay: 2007-08(Appeal No. 9/DCIT/R-III/MZP/15-16) , order dated 22.06.2016 , and also in ay:2012- 13(Appeal No. 5/DCIT/R-III/MZP/15-16) , order dated 22.06.2016. The copies of app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be carried out and appropriate remedial action may be taken as may be necessary. This may be brought to the notice of all concerned for strict compliance. Our attention was drawn by ld. Counsel for the assessee to Explanation No. (vi) to Section 36(1)(viia), and it was also submitted by ld. Counsel for the assesseethat earlier Section 80P(4) of the 1961 Act was applicable to Co-operative Banks, which have been withdrawn by Finance Act, 2007 w.e.f. 01.04.2007. It was submitted that as per Explanation (a) to Section 80P(4), the co-operative bank shall have meaning as assigned to them in Para V of the Banking Regulation Act, 1949. The ld. Counsel for the assessee submitted that the AO itself allowed deduction to the assessee @7.5% of the total income , while only further deduction computed @10% of the aggregate average advances made by Rural Branches was denied by AO to the assessee. It was clarified by ld. Counsel for the assessee that the banking license was granted by RBi in January 2012,but the same was from retrospective effect, although the assessee did not held license during the ay: 2010-11 and 2011- 12. 5.2. On the other hand, the Ld. DR submitted before the Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e restored back to the file of AO/CIT(A) for fresh adjudication . The ld. DR also relied upon the decision of Vishakhapatnam tribunal in the case of ACIT v. Chaitanya Godavari Grameena Bank reported in (2018) 93 taxmann.com 400(Visakhapatnam-trib.) 5.3 The Ld. AR in rejoinder submitted that the provision has been made in the Profit and Loss Account of ₹ 1,78,85,718/- , towards Provision for Bad and Doubtful Debts(NPA Provision). Our attention was drawn to Page Nos. 30 and 31 of the paper book, wherein audited accounts of the assessee are placed. It was submitted that the AO allowed deduction of ₹ 8,03,763/-, while disallowance was made by AO to the tune of ₹ 1,70,81,955/-. It was submitted that there is no question of disallowing any deduction with respect to Section 36(1)(viia). The ld. Counsel for the assessee relied upon decision of Hon ble ITAT Mumbai in the case CitizenCredit Co-operative Bank Limited reported in (2014) 49 taxmann.com 11(Mum-trib) in which one of us being Hon ble Judicial Member was part of the Division Bench who pronounced the said judicial order on July 25, 2014. Sofar as second issue is concerned regarding disallowance of depreciation , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assesse and in favour of Revenue. We order accordingly. Now, coming back to the first effective issue concerning grant of deduction u/s 36(1)(viia) of the 1961 Act. The assessee has claimed deduction to the tune of ₹ 1,78,85,718/- u/s 36(1)(viia) of the 1961 Act , while filing return of income with the Revenue. The said amount is reflected by assessee as deduction while computing Profits of the assessee, in the audited Profit and Loss Account of the assessee. The audited financial statements of the assessee are placed in paper book filed by the assessee. The AO has allowed deduction of ₹ 8,03,763/- computed at the rate of seven and half percent of the total income under the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er VIA) and an amount not exceeding [ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner : [Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:] [Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words five per cent , the words ten per cent had been substituted :] [Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) [***];] [(iii) public financial institution shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (iv) State financial corporation means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (v) State industrial investment corporation means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and [eligible for deduction under clause (viii) of this sub-section];] [(vi) co-operative bank , primary agricultural cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced hereunder: 5. Interpretation.- [In this Act], unless there is anything repugnant in the subject or context,- **** **** (c) banking company means any company which transacts the business of banking [in India]. Explanation.-Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause; It is equally relevant to reproduce the definition of Co-operative Bank as is contained in Part V of Banking Regulation Act,1949 , which is reproduced hereunder: PART V APPLICATION OF THE ACT TO CO-OPERATIVE BANKS 56. Act to apply to co-operative societies subject to modifications.- The provisions of this Act, as in force for the time being, shall apply to, or in relation to, cooperative societies as they apply to, or in relation to banking companies subject to the following modifications, namely:-- (a) throughout this Act, unless the context otherwise requires,-- (i) references to a banking compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree months from its so coming into existence, [every primary credit society which had become a primary co-operative bank on or before the commencement of the Banking Laws (Amendment) Act, 2012, shall before the expiry of three months from the date on which it had become a primary cooperative bank] and every co-operative society [***] shall before commencing banking business in India, apply in writing to the Reserve Bank for a licence under this section: PROVIDED that nothing in clause (b) of sub-section (1) shall be deemed to prohibit- (i) a co-operative society carrying on business as a cooperative bank at the commencement of the Banking Law (Application to Co-operative Societies) Act, 1965 (23 of 1965); or (ii) a co-operative bank which has come into existence as a result of the division of any other co-operative society carrying on business as a cooperative bank, or the amalgamation of two or more co-operative societies carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965) or at any time 2[thereafter]; [***] from carrying on banking business until it is granted a licence in pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anking (co-operative banks) has been withdrawn from assessment year 2007-08 barring in the case of a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Since profits of co-operative banks are now taxable after withdrawal of deduction available to a co-operative society engaged in carrying on the business of banking under section 80P, such co-operative society banks should be allowed deduction in respect of any provision for bad and doubtful debts as its profits have become taxable. The amendment proposes to allow this deduction to co-operative banks not being a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The definition of scheduled bank in clause (ii) of Explanation to said clause (viia) is also proposed to be amended to include scheduled co-operative banks within the definition. Under the existing provisions contained in the Explanation to item (fa) of sub-clause (iv) of clause (15) of section 10, the expression scheduled bank has been defined to have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of subsection (1) of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80P. Thus, by virtue of insertion of Section 80P(4) , by Finance Act, 2006 effective from 01.04.2007, Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank were not entitled to claim deduction of profits and gains of business attributable to business of banking , while computing total income chargeable to tax under the provisions of Section 80P by virtue of insertion of Section 80P(4), but Co-operative Banks 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 Finance Act, 2007 w.e.f. 01.04.2007 , for claiming deductions in respect of provisions made for bad and doubtful debts. Bare perusal of provisions of Section 36(1)(viia) will reveal that Co-operative Banks other than a primary agricultural credit society or a primary co-operative 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. So far as second limb of Section 36(1)(viia) (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termine the eligibility of tax-payer to get the prescribed deduction , But once the tax-payer is found to be eligible to get deduction, then the provision is to be liberally construed to give full effect to the beneficial provision to enable the achievement of the purposes for which it was intended. It is equally true that taxation provisions are to be strictly construed and there is no equity in taxing statute, but at the same time provision are to be read in a harmonious manner to make it workable and any reading of the provision which makes it otiose so far it is possible is to be avoided. The Revenue has heavily relied on the decision of Lucknow Bench of tribunal in the case of Mansarover Urban Co-operative (supra) to contend that the Co-operative Banks shall not be entitled for deduction under second limb of Section 36(1)(viia)(a) with respect to deduction computed based on aggregate average advances made by Rural Branches . We have carefully gone through the aforesaid decision of tribunal and it is observed that the relevant ay under consideration before tribunal was ay:2003-04 and the tribunal decided that the benefit u/s 36(1)(viia) shall not be available to Co-operative Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct do not agree with the above view of tribunal.The assessee is admittedly not a scheduled cooperative bank. However, going by the definition of non-scheduled bank in Explanation (i) to Section 36(1)(viia), it means a banking company as defined in clause (c) of Section 5 of the 1949 Act. By virtue of Section 56 of the 1949 Act, the provisions of the 1949 Act as are applicable to banking companies were made applicable to Co-operative Banks and reference to a banking company or the company or such company shall be construed as references to a co-operative bank and as defined in Part V of the 1949 Act, the Co-operative bank means a state co-operative bank, a central co-operative bank and a primary co-operative bank, as Section 5 of the 1949 Act stood amended by virtue of Section 56 wherein clause (cci) stood inserted in Section 5 of the 1949 Act, after clause (c). Similarly Section 22 of the 1949 Act stood amended by substitution by virtue of Section 56 of the 1949 Act , and no co-operative society shall carry on banking business in India unless it is a co-operative bank and holds a license issued in that behalf by the RBI. There are certain relaxation periods granted to class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no details as to aggregate average advances made by Rural Branches were submitted. The assessee is directed to submit complete details with respect thereto. Further, 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 v. CIT reported in (2014) 50 taxmann.com 189(Kerala HC), 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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