Zila Sehkari Bank Ltd., Meerut vs Assessee

Date of Hearing : 17.06.2015 Date of Pronouncement :25 .06.2015

ORDER

PER N.K. SAINI, A.M.

This is an appeal by the Assessee against the order dated 19/03/2013 of the Ld. CIT(A)- Meerut.

2. Following grounds have been raised in this appeal read as under :-

1 . On the facts and in the circumstances of the case, the ld. Commissioner of Income Tax (Appeals) has erred in sustaining the disallowance made by the Assessing Officer u/s 36(1) (viia) of the Income Tax Act, 1961. Observations 2 ITA No.3994/Del/2013

made, inferences drawn and findings recorded in this regard are arbitrary and illegal.

2. That the ld. Assessing Officer had himself conceded in the body of the order that the bad debts claimed by the assessee need to be allowed which is also reflected in the fact that out of the total provision for bad debts at Rs. 10.56 crores, Rs. 8.91 crores only were disallowed. The ld. Commissioner of Income Tax (Appeals) has erred in holding that the assessee was not eligible for deduction under the first proviso to section 36(1)(viia) of the Income Tax Act, 1961."

3. Facts of the case in brief are that the assessee filed the return of income on 14.9.2009 declaring an income of Rs. 11,49,91,029/- which was processed u/s 143(1) of the IT Act, 1961(hereinafter referred to as the Act). Later on the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had made provision for bad debt reserve to the tune of Rs. 10,56,02,052/- and the same was debited in the P & L Account, the assessee claimed the deduction u/s 36(1) (viia) of the Act. The AO allowed the claim of Rs. 1,59,16,341/- and disallowed the remaining amount of Rs. 8,91,73,611/-.

4. Being aggrieved the assessee carried the matter to the ld. CIT(A) who sustained the disallowance made by the AO and relevant findings has been given in para 2.7 and 2.10 of the impugned order which read as under :-

3 ITA No.3994/Del/2013 "2.7 The arguments advanced by the assessee bank have been considered. It is noted that sec. 36(1)(viia) provides for two types of deduction namely, 7.5% of the gross total income and 10% of the aggregate average advances made by rural branches of a bank. The banks which are eligible for these deductions are scheduled bank, non scheduled band and co-operative bank. Rule 6 ABA, which prescribes the manner in which aggregate average advance is to be computed, is applicable only in respect of scheduled bank. Keeping in view above, it is apparent that the deduction in so far as 7.5% of the total income is concerned is admissible to all the three entities namely scheduled bank, non scheduled bank and co-operative bank. However, in so far as the deduction being 10% of the aggregate average advances made by rural branches concerned, the same is admissible only to scheduled bank and not to non scheduled bank. In so far as co-operative banks are concerned, as mentioned above, specified co-operative banks are included in the Second Schedule of RBI Act, 1934. Such banks would, besides being a co-operative bank would also be covered in the meaning of scheduled bank under Clause (ii) of Explanation as to Section 36(1)(viia).

It is pertinent to note that co-operative bank were brought within the ambit of sec. 36(1)(viia) vide Finance Act 2007 w.e.f. 01.04.2007. Prior to that, Clause (ii) of Explanation to sec. 36(1)(viia) specifically excluded co-operative bank from the definition of scheduled bank. This exclusion has been omitted simultaneously with the inclusion of co-operative bank in sec. 36(1)(viia) of the Act. This implies that the deduction of 10% of the average advances made by rural branches is admissible only to those co-operative banks which figure in the second scheduled of the RBI Act, 1934. Thus co- operative bank which do not figure in the second scheduled of the RBI Act, 1934 and non scheduled banks would only be eligible for deduction of 7.5% of the total income computed before deduction u/s 36(1)(viia) and Chapter VIA of the I.T.Act, 1961. ----------------------- 2.10 In so far as the contention that in case the provisions of Section 36(1)(viia) is not applicable to the assessee, it would be eligible for deduction under the Proviso to Section 36(1)(viia), it is noted that the said proviso applies to a scheduled bank or a non scheduled bank only and not to a co-operative bank.

The assessee bank is a co-operative bank and as evident from the wordings of Section 36(1)(viia), the provision contemplates three different categories of bank, namely scheduled bank, non scheduled bank and co-operative bank.

4 ITA No.3994/Del/2013 Therefore, the assessee bank cannot be treated as a non scheduled bank. A contention was raised at this point that if the version of Revenue is accepted, the category co-operative bank referred to in Section 36(1)(viia) would only cover scheduled co-operative bank. Therefore a contention was raised that co-operative banks other than scheduled Co-operative banks were in the nature of non scheduled bank. This contention cannot be accepted. In the case of Mansarovar Urban Co-operative Bank Ltd. (26 ITD 72), the ITAT, Lucknow Bench held that non scheduled bank as per Explanation (i) to Section 36(1)(viia) means a "Banking Company" as defined in Section 5(c) of the Banking Regulation Act, 1949. Banking Company u/s 5(c) of the 1949 Act means in "Company"which transacts business of banking in India. Company has been defined in Section 5(d) of the 1949 Act to mean any company as defined in Section 3 of the 1956 Act does not include co-operative bank in definition of a company. Therefore, a co- operative bank is not a company and is not non scheduled bank. Hence, it is not eligible for deduction under the first Proviso of Section 36(1)(viia) of the I.T. Act, 1961."

5. Being aggrieved the assessee is in appeal, the Ld. Counsel for the assessee at the very outset stated that the issue is covered in favour of the assessee vide order dated 14.08.2013 in ITA No. 5155/Del/2011 in assessee's own case for assessment year 2008-09 and that the department has not preferred any appeal before the Hon'ble High Court. In his rival submissions, the ld. DR supported the orders of the authorities below.

6. We have considered the submissions of both the parties and carefully gone through the material available on the record, it is noticed that an identical issue having similar facts has been adjudicated by this bench of the Tribunal in assessee's own case for 5 ITA No.3994/Del/2013

the assessment year 2008-09 in ITA no. 5155/Del./2011 wherein vide para 5 to 5.2 of the order dated 14 August, 2013, it has been held as under :-

"5. We have heard rival submissions and perused the entire material available on record.

5.1. The fact that the assessee claimed provision for bad debt reserve in terms of section 36(1) (viia) qua rural branches only has not been disputed. While disallowing the claim of the assessee, the assessing officer and CIT(A) have not relied on specific provisions of section 36(1)(viia), rather referred to SLR and CRR which do nto find any reference in the language of section 36(1)(viia). In our considered view with these undisputed facts on record, the Hon'ble Supreme Court judgment in the case of Catholic Syrian Bank Ltd. (supra) is squarely applicable to the facts of the case, allowing rural branches advances without inference of SLR & CRR.

5.2. In these circumstances and legal position, the assessee is eligible for the claim of bad debt reserve u/s 36(1)(viia) which needs to be allowed. In view thereof, the assessee's appeal is allowed."

7. Since the fact for the year under consideration are similar to the facts involved in the aforesaid referred to case decided vide order dated 14 August, 2013 in ITA No. 5155/Del./2011 for the assessment year 2008-09 in assessee's own case. So respectfully following the said order, the impugned disallowance sustained by the ld. CIT(A) is deleted.

In the result, appeal of the Assessee is allowed.

6 ITA No.3994/Del/2013 (Order Pronounced in the Court on 25/06/2015).

Sd/- Sd/- (H.S.Sidhu) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 25 / 06/2015 *B.Rukhaiyar* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR 7 ITA No.3994/Del/2013

Date Initial 1. Draft dictated on 23.06.2015 2. Draft place 24.06.2015 d before author 3. Draft proposed & placed before the second member 4. Draft discussed/approved by Second Member. 5. Approved Draft comes to the Sr.PS/PS 6. Kept for pronouncement on 7. File sent to the Bench Clerk 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.