Co-operative bank is entitled to claim deduction of bad debts provided in first part of section 36 (1) (viia) (a) @  7.50% of total Income and same cannot be denied linking it to rural advances




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Co-operative bank is entitled to claim deduction of bad debts provided in first part of section 36 (1) (viia) (a) @  7.50% of total Income and same cannot be denied linking it to rural advances

ITAT COCHIN BENCH

IT APPEAL NO.408/COCH/2015
[ASSESSMENT YEAR 2010-11]

Kodungallur Town Co-op Bank Ltd…………………………………………………Appellant.
v/s
Assistant Commissioner of Income-tax,Circle 2(1), Trissur………………..Respondent

B.P. JAIN, ACCOUNTANT MEMBER
AND GEORGE GEORGE. K., JUDICIAL MEMBER
Date :JULY  18, 2016 
Appearances
Mohan Pulikkal for the Appellant.
Shantom Bose, CIT-DR for the Respondent.
ORDER

George George K, Judicial Member – This appeal, at the instance of the assessee is directed against the CIT’s order dated 24.3.2015 passed u/s. 263 of the I T Act. The relevant assessment year is 2010-11.

2. Briefly stated the facts of the case are as follows:

The assessee is a cooperative bank. For the relevant assessment year, the assessment u/s. 143(3) of the Act was completed vide order dated 5.3.2013 fixing the total income at Rs. 4,37,29,894/-. The assessee had claimed deduction in respect of ‘provision for bad and doubtful debts’ amounting to Rs. 6,88,42,638/- u/s. 36(1)(viia)(a) of the Act. When the assessment u/s. 143(3) was completed, deduction amounting to Rs. 35,45,667/- was allowed u/s. 36(1)(viia)(a) of the Act being 7.5% of the total income and the balance claim being 10% of aggregate average advances made by the assessee’s rural branches was disallowed by the AO on the ground that the rural branches as declared by the bank were not actually rural branches as defined under Explanation (ia) to section 36(1)(viia) of the I T Act.

3. Subsequent to the completion of the assessment, the CIT issued notice u/s. 263 of the Act (notice dated 12.3.2015) proposing to revise the assessment order passed u/s. 143(3) of the Act. The CIT, in the proposed revision, was of the view that allowing deduction by the AO amounting to Rs. 35,45,667/- being 7.5% of the total income, is erroneous and prejudicial to the interest of the revenue in view of the judgment of the Hon’ble Apex Court in the case of Catholic Syrian Bank Ltd. v. CIT [2012] 343 ITR 270/206 Taxman 182/18 taxmann.com 282. According to the Commissioner, the Hon’ble Apex Court had held that section 36(1)(viia)(a) applies only to rural advances and since the assessee’s bank was not having any rural branch, deduction allowed u/s. 36(1)(viia)(a) amounting to Rs. 35,45,667/- was not in order. To the proposed revision, the assessee had filed elaborate objections, which are reproduced at para 3 of the impugned order.

4. The objection raised by the assessee was rejected by the CIT and he set aside the assessment order passed u/s. 143(3) of the Act. The CIT directed the AO to examine the issue of deduction u/s. 36(a)(viia)(a) afresh. The relevant finding of the CIT reads as follows:

“4. I have considered the facts of the case and submission made by the assessee. The Hon’ble Supreme Court vide order of 17.2.2012 in the case of Catholic Syrian Bank td vs CIT has held ‘indisputably, clause (viia)(a) of section 36(1) applies only to rural advances’> The position of law is very clear. In this context, it is seen that the AO has not examined any such details to ascertain and confirm the rural advances.

5. Since the eligibility of the deduction u/s. 36(1)(viia)(a) had not been examined as discussed above during the scrutiny, I am convinced that the assessment order u/s. 143(3) dated 5.3.2013 made by the Asst Commissioner of Income Tax, Circle 2 Thrissur is erroneous and prejudicial to the interest of the revenue within the meaning of section 263 of the I T act, 1961. Therefore, the aforesaid order dated 5.3.2013 is set aside with direction to examine the issue of deduction u/s. 36(1)(viia)(a) in respect of provision for bad and doubtful debts afresh in accordance with law after providing reasonable opportunity to the assessee.”

 

5. The assessee being aggrieved is in appeal before us. The ld counsel for the assessee reiterated the submissions made before the CIT. Further, the ld counsel argued that the issue is squarely covered by the judgment of the Hon’be jurisdictional High Court in assessee’s own case in ITA No. 37 of 2013 (judgment dated 24.8.2012), which is identical to the facts for the current assessment year.

6. The ld DR present was duly heard.

7. We have heard the rival submissions and perused the material on record. The judgment of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) relied by the CIT while invoking his revisionary jurisdiction does not apply to the facts of the present case. The Hon’ble Supreme Court had essentially considered the issue whether the deduction available to scheduled banks under clause (vii) of sub-sec.( 1) of Sec.36 of the Act, in respect of bad debts written off shall be limited to the extent the said debts exceed the credit balance in the provision for bad and doubtful debts account made under clause (viia). The assessments related to the assessment year 2002-03 and prior years and the Hon’ble Apex Court had considered the law with reference to the fact situation and social commitments of the scheduled banks at that time. The assessee herein is a co-operative bank. The cooperative banks was included in the category of beneficiaries under clause (viia) by Finance Act, 2007 with effect from 01.04.2007. Therefore the Hon’ble Apex Court, in Catholic Syrian Bank Ltd.’s case (supra), did not have the opportunity to consider the fact situation that would have persuaded the legislature to include co-operative banks also in the category of beneficiaries under clause (viia) of sub-sec.(1) of Sec.36 of the Act. The deduction provided in the first part of clause (viia)(a) of 7.5% of the total income, hitherto enjoyed by the assessee since the inclusion of co-operative banks within the ambit of clause (viia)(a) by Finance Act, 2007, is unconcerned with advances made by the rural branches of the banks. A reading of paragraph 27 of the judgment of the Hon’ble Apex Court would show that while making the observation “indisputably, clause (viia)(a) applies only to rural advances”, the Hon’ble Apex Court was examining the issue if there would be double deduction of actual bad debts written off under clause (vii) and deduction in respect of rural advances provided under the second part of clause (viia). The Hon’ble Apex Court has not held that the first part of clause (viia) providing for deduction of 7.5% of the total income applies only to rural advances. The CBDT in Clause 5 of its Circular No. 464 dated July 18, 1986 referred to by the Hon’ble Apex Court in Catholic Syrian Bank Ltd.’s case (supra) makes it very clear that the two deductions provided in clause (viia)(a), viz. 7.5% of the total income (computed before making any deduction under this clause and Chapter VIA) and 10% of the aggregate average advances made by the rural branches are distinct and independent. The intention of the legislature was to give the benefit of deduction of 7.5% of the total income to the scheduled, non-scheduled and co-operative banks under clause (viia) while a similar benefit of deduction of a specified percentage of the total income was extended to the foreign banks and public financial institutions under clauses (viia) (b) and (viia)(c) respectively, apart from the benefit available to them under clause (vii). The proposal to deny the benefit of the first part of clause (viia)(a) to the assessee linking it to rural advances would therefore subvert the legislative intent.

8. Further, the Hon’ble jurisdictional High Court in assessee’s own case, cited supra, has considered an identical issue. The relevant finding of the Hon’ble jurisdictional High Court reads as under:

“9. Admittedly, appellants/assessees are cooperative banks. With introduction of Finance Act of 2007, coming into effect from04.2007, one has to understand what was the position was prior to 1.4.2007 and after 1.4.2007. During the relevant assessment year, admittedly the appellants/assessees were not entitled for any deduction provided under section 80P of the Act. Prior to 1.4.2007, they were enjoying the benefits provided under section 80P. With the introduction of Finance Act 2007 with effect from 1.4.2007, they could claim deductions as provided under section 367(1) of the Act. We are concerned with sub-clause (a) of clause (viia) to section36(1). Prior to Finance Act of 2007, cooperative bank was not included in sub-clause (a) so far as provisions for bad and doubtful debts. With effect from 1.4.2007, cooperative bank was included under sub clause (a) of clause (viia) of section 36(1). It is further clarified that only such cooperative bank other than a primary agriculture credit society, etc., is included in sub clause (a) of clause (viia). The provision is a beneficial one. No doubt, plain reading of main section 36(1) (viia)(a) and Explanation under said section present certain difficulties, but situation is not without possibilities. The object and intention of the legislature is to be understood by harmonious construction of the provisions. The policy was to include cooperative banks as well, as they could not take shelter under section 80P of the Income Tax Act any more. By restricting the scope of the provisions, the very purpose of inclusion of cooperative bank would be lost. Sub clause (a) consists of two types of deduction. One refers to deduction of an amount not exceeding 7.5% of the total income (computed before making any deduction under this clause and chapter VIA). Section one (sic) refers to deduction of an amount not exceeding10% of the aggregate average advances made by rule branches of such bank while computing in the prescribed manner. So far as benefit of 7.5% of the total income, there is no condition that it should be in respect of any rural branch. All types of banks described under sub claque (a) of clause (viia) are entitled to seek deduction of an amount of exceeding 7.5% of the total income. Only condition is there should be a provision for bad and doubtful debts. . . . . . . . . . . . . . . . . . . . . . . . . “

9. In view of the aforesaid reasoning and the judgment of the Hon’ble jurisdictional High Court in the case in assessee’s own case cited supra, we are of the view that the CIT is not justified in invoking his revisionary jurisdiction u/s. 263 of the Act and therefore, we set aside the same. It is ordered accordingly.

10. In the result, the appeal filed by the assessee is allowed

 

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