2019 (12) TMI 1202 - AT - Income Tax

Co-op Bank wins deduction appeal under IT Act citing bad debts provision

The ITAT allowed the appeal of a Co-operative Bank, holding that it is entitled to claim a deduction under section 36(1)(viia) of the Income Tax Act, ... Denial of claim of deduction u/s 36(1)(viia) - HELD THAT:- We find that identical issue arose in assessee’s own case for A.Y. 2013-14 and the Coordinate Bench of the Tribunal by following the decision of the Tribunal in the case of Bhagini Nivedita Sahakari Bank Ltd [2018 (12) TMI 322 - ITAT PUNE] had decided the issue in assessee’s favour. Issues Involved:1. Disallowance of Rs. 35,22,475/- under section 36(1)(viia) of the Income Tax Act, 1961.2. Applicability of section 36(1)(viia) only if advances are made by rural branches of a bank.Issue-Wise Detailed Analysis:1. Disallowance of Rs. 35,22,475/- under section 36(1)(viia) of the Income Tax Act, 1961:The assessee, a Co-operative Bank, claimed a deduction of Rs. 35,22,475/- under section 36(1)(viia) of the Income Tax Act, 1961, which was disallowed by the Assessing Officer (AO) on the grounds that the assessee did not have any rural advances. The AO relied on the decision of the Hon’ble Apex Court in the case of Catholic Syrian Bank Ltd. vs. CIT, which held that the deduction under section 36(1)(viia) is not allowable in the absence of rural advances. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, leading the assessee to appeal before the ITAT.2. Applicability of section 36(1)(viia) only if advances are made by rural branches of a bank:The core issue was whether the deduction under section 36(1)(viia) is applicable only if the bank has rural branches. The assessee argued that the issue was already decided in its favor by the ITAT in the assessee’s own case for the assessment year 2013-14, where the ITAT had allowed the deduction despite the absence of rural branches. The Revenue, however, contended that the AO was justified in denying the deduction based on the CBDT Circular No.464 and the Supreme Court decision in Catholic Syrian Bank Ltd.Tribunal's Analysis and Decision:The ITAT reviewed the facts and submissions and noted that the issue had been previously decided in favor of the assessee in a similar case for the assessment year 2013-14. The Tribunal found that the deduction under section 36(1)(viia) consists of two components: one not exceeding 7.5% of the total income and another not exceeding 10% of the aggregate average advances made by rural branches. The Tribunal referred to the decision in Bhagini Nivedita Sahakari Bank Ltd. vs. DCIT, which clarified that the 7.5% deduction is not contingent upon having rural branches, while the 10% deduction specifically pertains to rural advances.The Tribunal also considered the decision of the Hon’ble Kerala High Court in The Kodungallur Town Co-Op. Bank Ltd. vs. ACIT, which supported the view that the 7.5% deduction is available to all banks, including co-operative banks, irrespective of whether they have rural branches. The Tribunal emphasized that the provision for bad and doubtful debts must be made in the books of account to claim the deduction.Given that the Revenue did not present any new material or distinguishing features from the previous case, the ITAT followed its earlier decision and held that the assessee is entitled to the deduction under section 36(1)(viia) to the extent of 7.5% of the total income. The appeal of the assessee was thus allowed.Conclusion:The ITAT concluded that the assessee, a Co-operative Bank without rural branches, is entitled to claim the deduction under section 36(1)(viia) of the Income Tax Act, 1961, up to 7.5% of the total income, provided a provision for bad and doubtful debts is made in the books of account. The Tribunal’s decision was based on precedents and the interpretation of the relevant legal provisions and circulars. The appeal of the assessee was allowed, and the order was pronounced on 20th December 2019.