TMI Blog2022 (9) TMI 710X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No. 134 & 135/Alld./2019 - - - Dated:- 13-9-2022 - Shri Vijay Pal Rao, Judicial Member And Shri Ramit Kochar, Accountant Member For the Appellant : CA S.K. Jaiswal For the Respondent : Sri. Ramendra Kumar Vishwakarma ,CIT- DR ORDER PER SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER: These two appeals, first appeal is filed by assessee, being ITA No. 134/Alld./2019 for assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion which prescribed only the computation mechanism cannot override the substantive provision of section 36(1)(viia) of the Income Tax Act, 1961. 6. Because the order appealed against is contrary to the facts, law and principle of natural justice. 3. The assessee has raised following grounds of appeal in memo of appeal filed with tribunal, in ITA no. 135/Alld./2019 , for ay: 2010-11, which reads as under:- 1. Because the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in holding that there was prima facie mistake in the order dated 26.03.2013 passed under Section 143(3) on account of allowance of deduction of Rs. 10,42,18,168/- on account of provision for bad and doubtful debts as per the provision of section 36(1)(viia) of the Income Tax Act, 1961. 2. Because the learned assessing officer has allowed the claim for bad and doubtful debts as per the categorical provision of section 36(1)(viia) after making detailed enquiry and there was no prima facie mistake in the order apparent from record which is rectifiable and comes under the purview of provision of section 154 of the income Tax Act, 1961. 3. Because the learned commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim deduction in respect of bad and doubtful debts. The assessee furnished computation of disallowance as under: Advances as per Revised Balance Sheet Rs. 1,85,37,69,719/- Maximum Provision allowed u/s 36(1)(viia) 10% of Advance Rs. 18,53,76,971/- Total Provision as per revised Balance Sheet Rs. 22,29,87,769/- Disallowed excess provision Rs. 3,76,10,798/- 4b)The assessee alternatively explained that the assessee could claim deduction of more amount u/s 36(1)(viia) of the 1961 Act as about 50% of branches of the assessee bank are rural branches and represent advances given to the members amounting to Rs. 61,52,41,000/- . 4c) The AO assessed income of the assessee at Rs. 4,70,77,050/- ( which was the income declared by assessee in its revised return of income filed with revenue on 11.12.2010), vide assessment order dated 30.12.2011 passed by AO u/s 143(3) of the 1961 Act. 5. Later the case of the assessee was reopened by Revenue by invoking provisions of Section 147 of the 1961 Act, and notice u/s 148 dated 01.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not eligible to the benefit of additional deduction of 10% of aggregate average advances made by Rural Branches, as per second limb of Section 36(viia) of the 1961 Act. The AO also held that the Co-operative Banks are not a non-scheduled banks . The AO relied upon decision of Lucknow-tribunal in the case of Mansarovar Urban Co-operative Bank Ltd. v. DCIT and also the decision of Lucknow-tribunal in the case of ACIT v. Hardoi District Co-operative Bank Ltd. in ITA No. 463/Luck/2006) , dated 28.09.2006 to hold that the assessee is not eligible for deduction @10% of aggregate average advances made by Rural Branches , as the assessee is neither a scheduled bank nor a non scheduled bank . The AO further observed that even under Rule 6ABA of the Income-tax Rules, 1962 , the deduction u/s 36(1)(viia) of the 1961 Act shall be restricted to rural branches of a scheduled bank including scheduled co-operative banks. The AO observed that the deduction/exemption provisions are to be strictly construed . The AO , however, granted the benefit of deduction of seven and half percent of the total income under first limb, computed before making any deduction under Section 36(1)(viia) of the Act , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in rule 6 ABA of I.T. Rules, 1962, wherein the deduction of 10% of the aggregate average advances made by the rural branches has been restricted to rural branches of a scheduled bank only and since there is no reference of non scheduled bank, or Co-operative Bank in Rule 6 ABA, AO did not allow the extra 10% deduction, though allowing the 7.5% deduction to the appellant. Appellant's only submission in this regard is that though the Rule 6ABA has not been correspondingly amended but the provisions of Act will prevail over the Rule. I agree with the contention of AO in this regard. The deduction u/s 36(1)(viia) is an extraordinary deduction and has to be construed strictly under the law and the Rules framed therein. The impugned subsection Itself mentions that the 10% deduction has to be computed in the prescribed manner, for which Rule 6 ABA has been enacted, which allows for extra deduction of 10% only to rural branches of a 'scheduled bank only' and since there is no reference of 'non-scheduled bank' or 'Co-operative banks' in Rule 6ABA, AO correctly did not allow the extra 10% deduction. If intention of legislature was to use the term ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hapter VIA) and ii) ..an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner . By virtue of the contents of the aforesaid clause defining the amount of deduction to be allowed it is specifically stated that the deduction of an amount not exceeding 10% of the aggregate average advances made only by the rural branches of the bank are to be allowed. Now, rural branches has been defined in the Act vide Explanation (ia) of section 36(1)(viia) which is as follows: (ia) 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 10,000/- according to the last preceding census of which the relevant figures have been published before the first day of the previous year. In Rule 6ABA. For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely:- (a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the above emphasized portion w.e.f. 01.04.2007, the benefit of claim u/s 36(i)(viia), as far as the allowability of ten percent of aggregate average advance made by rural branches of such bank., is concerned, was extended to cooperative banks but only those Co-operative banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934. Appellant is admittedly not included in the said Second Schedule. In the light of the above facts and respectfully following the ruling of apex court in the case of M/S BINANI CEMENT LTD. (Supra) it is held that appellant is not entitled to extra 10% deduction u/s 36(1)(viia) as correctly held by AO. This addition is upheld. These grounds are dismissed. Thus, the first appeal was dismissed by Learned CIT(A) vide appellate order dated 14.08.2019 passed by learned CIT(A). 7. Aggrieved by the aforesaid appellate order passed by ld. CIT(A) dismissing appeal of the assessee, the assessee has come in appeal before the tribunal. The Learned counsel for the assessee at the outset submitted that the issue of deductibility of deduction u/s 36(1)(viia) of the 1961 Act w.r.t. deduction on account of 10% of aggregate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered/referred /verified to by the AO as well as by ld. CIT(A) , as both the authorities decided the issue against the assessee , and hence there was no question of verifying the computational details for ay: 2009-10 and 2010-11 . So far as invocation of Section 154 of the 1961 Act is concerned, the ld. CIT DR submitted that this is an error of law , whether the deduction can be validly claimed by the assessee u/s 36(1)(viia) and hence AO could always invoke its powers under Section 154. The reliance was placed by ld. CIT DR on the decision of Hon ble Madras High Court in the case of Cuddalore District Central Co-operative Bank Ltd. v. DCIT , (2021) 130 taxmann.com 239 (Madras HC). 8. We have considered rival contentions and perused the material on record. We have observed that the only effective issue in these two appeals is with respect to disallowance of deduction under second limb of Section 36(1)(viia)(a) of the 1961 Act with respect to 10 % of the aggregate average advances made by rural branches. 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 Allahabadtribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra s of this order. Further, ld. CIT(A) also observed that the assessee has not even submitted details of aggregate average advances made by Rural Branches before AO as well before ld. CIT(A) and hence even if the deduction is to be allowed, quantification cannot be done in the absence of details furnished by the assessee of the aggregate average advances made by Rural Branches. With this background , we proceed further to adjudicate this appeal. Before proceeding further, it will be profitable at this stage to reproduce provisions of Section 36(1)(viia) of the 1961 Act as it stood at relevant time , which is reproduced as hereunder: Other deductions. 36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- **** **** (viia) in respect of any provision for bad and doubtful debts made by- (a) a scheduled bank [not being [* * *] a bank incorporated by or under the laws of a country outside India] or a non- scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.] Explanation.-For the purposes of this clause,- [(i) non-scheduled bank means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank;] [(ia)] 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 publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ural development activities. It will also be appropriate at this stage to reproduce Rule 6ABA of Income-tax Rules, 1962 as it stood at relevant time, which is reproduced hereunder: [Computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of section 36. 6ABA. For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely :- (a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year shall be aggregated separately; (b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a); (c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank. Explanation.-In this rule, rural branch and scheduled bank shall have the meanings assigned to them in the Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is a co-operative bank and holds a licence issued in that behalf by the Reserve Bank, subject to such conditions, if any, as the Reserve Bank may deem fit to impose: PROVIDED that nothing in this sub-section shall apply to a co-operative society, not being a primary credit society or a co-operative bank carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), for a period of one year from such commencement: [PROVIDED FURTHER that nothing in this subsection shall apply to a primary credit society carrying on banking business on or before the commencement of the Banking Laws (Amendment) Act, 2012, for a period of one year or for such further period not exceeding three years, as the Reserve Bank may, after recording the reasons in writing for so doing, extend.] [(2) Every co-operative society carrying on business as a cooperative bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965) shall before the expiry of three months from the commencement, every co-operative bank which comes into existence as a result of the division of any other co-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk and non-scheduled bank to a co-operative bank not being a primary agricultural credit society or a primary cooperative agricultural and rural development bank. This amendment will take effect retrospectively from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-2008 and subsequent years. It is also relevant at this point to refer to Memorandum to Finance Bill, 2007, the relevant portion is reproduced hereunder: Deduction in respect of any provision for bad and doubtful debts to be allowed in the case of co-operative banks under section 36(1)(viia) Under the existing provisions of clause (viia) of sub-section (1) of section 36, deduction of an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under the said clause and Chapter VIA) and an amount not exceeding ten per cent 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 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 sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable to scheduled co-operative banks. These amendments will take effect, retrospectively, from 1st April, 2007 and will, accordingly apply in relation to the assessment year 2007-08 and subsequent years. [Clauses 6 and 12] The perusal of Notes to Clauses and Memorandum to Finance Act, 2007, clearly stipulate that the benefit of deduction u/s 36(1)(viia) which was available to a Scheduled and a Nonscheduled bank is sought to be extended to Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank , with effect from 01.04.2007, as the deduction erstwhile available to such eligible co-operative banks u/s 80P stood withdrawn by Finance Act, 2006 w.e.f. 01.04.2007. Thus, there was an amendment by Finance Act, 2007 to Section 36(1)(viia), applicable w.e.f. 01.04.2007, wherein the Co-operative Banks other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank, were brought under the provisions of Section 36(1)(viia) for claiming deductions in respect of provisions made for bad and doubtful debts . Prior to this amendment, Cooperative Banks wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duled 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. 01.04.2007, but there was no corresponding amendment in Explanation to Section 36(1)(viia), and Cooperative Banks are not included here for ascertaining the manner to identify Rural Branches of Co-operative Bank. Further, 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. The manner of computing deduction is prescribed in Rule 6ABA of the 1962 Rules which refers only to scheduled bank, and there is no mention of Non-Scheduled Bank or Co-operative Bank in Rule 6ABA of the 1962 Rules. This is a beneficial p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of RBI Act, 1934 being a scheduled bank. By virtue of Section 56 of the 1949 Act , in section 5 of the 1949 Act, after clause (cc) , the clause (cci) was inserted in Section 5 , which stipulates that Cooperative Bank means a state co-operative bank, a central co-operative bank and a primary co-operative bank. Admittedly , the assessee is not a scheduled co-operative bank as the assessee is not included in Second Schedule to the Reserve Bank of India Act, 1934 , and hence by virtue of Section 56 of the 1949 Act read with Section 5(c) and 5(cci) , the assessee is to be classified as Non-scheduled Bank with the Rider in the instant case provided it is held that the assessee was holding banking license issued by RBI for the relevant period under consideration because the banking license was granted by RBI only on 10.01.2012, as is mandated under Section 22 of the 1949 Act , for which we have given our observations elsewhere in this order. Our above view is fortified by decision of Hon ble Kerala high Court in the case of Kannur District Co-operative Bank Limited(supra) and we are in agreement with the above view of Hon ble Kerala High Court, although we note that tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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. The 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 assessee was granted banking license by RBI which covers relevant previous year 2009-10, then in our view the assessee will be eligible for deduction u/s 36(1)(viia) under both the limbs. Proceeding further that if at all assessee is found to be eligible for deduction u/s. 36(1)(viia), it is also ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Needless to say that the AO shall provide proper and adequate opportunity of being heard to the assessee in set aside proceedings. The evidences/explanations submitted by assessee in its defense shall be admitted by AO , and adjudicated by AO on merits in accordance with law. We order accordingly. 8b. We are agreeable with the ratio of aforesaid decision of Allahabad-tribunal in the case of Zila Sahkari Bank Limited(supra), 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) of the 1961 Act @ 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) of the 1961 Act:- a) The 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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