Deduction for bad debts under section 36(1)(viia) requires an actual provision and treats co-operative bank branches as rural branches.

Section 36(1)(viia) allows deduction only where the assessee has actually created a provision for bad and doubtful debts; a claimed deduction without such a provision does not satisfy the statutory condition. For the rural branch definition under the same provision, a co-operative bank is treated as a non-scheduled bank within the relevant banking law framework, and branches located in a revenue village are taken as rural branches by reference to the applicable population test. On these points, the tax treatment discussed in the article favours the Revenue position and supports disallowance where the statutory requirements are not met.

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Issues: (i) Whether a co-operative bank falls within the expression "non-scheduled bank" for the purposes of the definition of "rural branch" under section 36(1)(viia) of the Income-tax Act, 1961, and whether branches located in a revenue village are to be treated as rural branches; (ii) Whether deduction claimed under section 36(1)(viia) is allowable without creation of an actual provision for bad and doubtful debts.

Issue (i): Whether a co-operative bank falls within the expression "non-scheduled bank" for the purposes of the definition of "rural branch" under section 36(1)(viia) of the Income-tax Act, 1961, and whether branches located in a revenue village are to be treated as rural branches.

Analysis: The Explanation to section 36(1)(viia) defines "rural branch" with reference to a branch of a scheduled bank or a non-scheduled bank situated in a place having a population not exceeding ten thousand. The definition of "non-scheduled bank" is linked to section 5(c) and Part V of the Banking Regulation Act, 1949, under which a co-operative bank is brought within the scope of banking company concepts for the purpose of the Act. On that basis, a co-operative bank is treated as a non-scheduled bank for section 36(1)(viia). The relevant meaning of "place" for identifying a rural branch is the revenue village, and the Tribunal applied the jurisdictional High Court view on that point.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether deduction claimed under section 36(1)(viia) is allowable without creation of an actual provision for bad and doubtful debts.

Analysis: The deduction under section 36(1)(viia) is available only in respect of any provision for bad and doubtful debts actually made by the assessee. Since the assessee claimed the deduction without creating such a provision in its books, the statutory condition for allowance was not satisfied.

Conclusion: The claim was rightly disallowed and the issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The appeal failed on both substantive grounds, and the disallowance made by the tax authorities was sustained.

Ratio Decidendi: A deduction under section 36(1)(viia) is allowable only where the assessee has actually created a provision for bad and doubtful debts, and for that provision the expression "non-scheduled bank" encompasses a co-operative bank for the statutory scheme applied here.

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