Co-operative bank deduction for bad debts upheld where restrictive reading of the explanation could not defeat the main provision.

A co-operative bank was entitled to deduction for bad and doubtful debts under section 36(1)(viia) because the main provision extends the benefit to scheduled banks, non-scheduled banks and co-operative banks, linked to income and rural branch advances. The Tribunal held that the explanation defining "rural branch" could not be read so restrictively as to defeat the substantive deduction granted by the main clause. Treating the bank as within the statutory banking framework and relying on legislative materials showing intended coverage of co-operative banks, it found no sustainable basis to deny the claim. The Assessing Officer's disallowance was therefore deleted.

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Issues: Whether a co-operative bank was entitled to deduction under section 36(1)(viia) of the Income-tax Act, 1961 in respect of 10% of the aggregate average advances made by its rural branches.

Analysis: The provision allows deduction in respect of bad and doubtful debts to a scheduled bank, non-scheduled bank, and co-operative bank, and the allowance is linked both to a percentage of total income and to the aggregate average advances made by rural branches. The explanation defining "rural branch" cannot be read to defeat the substantive grant of deduction in the main clause. The bank was treated as falling within the statutory banking framework under the Banking Regulation Act, 1949, and the legislative materials relied upon showed that co-operative banks were intended to receive the benefit of section 36(1)(viia). The Tribunal found that the Assessing Officer had not given a sustainable basis for denying the deduction and that the Commissioner (Appeals) had correctly applied the provision.

Conclusion: The assessee was entitled to the deduction under section 36(1)(viia), and the disallowance made by the Assessing Officer was rightly deleted.

Ratio Decidendi: A statutory explanation cannot be construed so as to nullify the substantive entitlement created by the main provision, and where the main clause grants a deduction to a co-operative bank, the benefit cannot be denied by a restrictive reading of the explanation.

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