TMI Blog2014 (8) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 7.5 per cent., of the total income. They further opined that the appellants-assessees are entitled to such benefit for the current year as they have created provisions for bad and doubtful debts in the books of account. So far as this issue, there is not much to ponder over the issue. Even otherwise, the appellants-assessees have no serious contest on this aspect of the matter. The entire controversy is whether rural branch defined under the Explanation would include rural branch of a co-operative bank or not. The appellants-assessees claimed deductions under section 36(1)(viia) of the Act from its total income. It has two types of deductions, i.e., deduction of an amount not exceeding 7.5 per cent. of the total income and also the deduction of an amount not exceeding 10 per cent. of the aggregate average advances made by their rural branches. So far as the first deduction of 7.5 per cent., it was restricted with reference to the provision made in the books of account for the current year. So far as 10 per cent. of the aggregate average advances, it was rejected. Aggrieved by the same, appeals came to be filed before the Commissioner of Income-tax (Appeals). Those appeals we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch provision, therefore, one cannot place reliance on generic terms. According to him, by virtue of the inclusion of co-operative bank in the main section, even if the name of co-operative bank under the Explanation to clause (viia) of section 36(1) is absent, it would not assist the appellants-assessees in any manner as co-operative bank not being a scheduled bank would come under the purview of non-scheduled bank, therefore, under the Explanation with reference to rural branch of a non-scheduled bank would automatically bring into its fold co-operative bank also. The appellants-assessees further contended that having selected to open their rural branches mostly in rustic areas inhabited by rural artisans engaged in their traditional avocation, factually also, they would get the benefit even if the court holds that the appellants-banks being co-operative banks would fall under the category of nonscheduled bank. They substantiate this contention by bringing on record certain facts. According to them, for obtaining licences from the Reserve Bank of India, at the time of submitting the application itself each bank would indicate the areas in which it proposes to open new branches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rural branch' 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. 'co-operative bank', 'primary agricultural credit society' and 'primary co-operative agricultural and rural development bank' shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P. 'scheduled bank' means a bank for the time being included in the Second Schedule to the Reserve Bank of India Act. In order to understand what is a banking company, one has to refer to the Banking Regulation Act and to understand whether a particular bank is a scheduled bank, one has to see whether such bank finds a place in the Second Schedule to the Reserve Bank of India Act. Co-operative bank means a bank as explained under sub-section (4) of section 80P of the Act. Section 5(c) of the Banking Regulation Act, defines banking company as under : 'banking company' means any company which transacts the business of ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operative 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 co-operative bank would be lost. Sub-clause (a) consists of two types of deductions. One refers to the deduction of an amount not exceeding 7.5 per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A). The second one refers to the deduction of an amount not exceeding 10 per cent. of the aggregate average advances made by rural branches of such bank while computing in the prescribed manner. So far as the benefit of 7.5 per cent. 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-clause (a) of clause (viia) are entitled to seek deduction of an amount not exceeding 7.5 per cent. of the total income. Only condition is, there should be a provision for bad and doubtful debts. Till April 1, 2007, there was no need to make any provision for bad and doubtful debts under this clause so far as co-operative bank and they were claiming benefits applicable to them under section 80P. During ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rural branch means a branch of a scheduled bank or a nonscheduled 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.' What is clear from the above is that the classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. While the assessee's case that found acceptance with the Tribunal is that 'place' referred to in the above definition clause is the ward of a panchayat or municipality, the Assessing Officer took the view that 'place' contained in the definition clause should mean a revenue village. No doubt, 'place' as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of 'place' referred to in the section. Standing counsel for the Department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of 'place' as referred to in the Census Report produced coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch which falls under Explanation (ia) to section 36(1)(viia). The Tribunal had to reverse the judgment of the Commissioner of Income-tax (Appeals) in the light of the decision in Lord Krishna Bank's case (supra). Then coming to the controversy whether co-operative bank could claim deduction of 10 per cent. of the aggregate average advances while computing the income irrespective of falling under rural branch as per the Explanation, in order to consider a company as a banking company it must transact business of banking in India as defined under section 5(c) of the Banking Regulation Act. 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. As already stated above, 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. Reading of section 5(c) along with the Explanation, clearly indicates though any company which transacts business of banking in India would come within the meaning of n ..... 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