Co-operative bank deduction under section 36(1)(viia) needs licence and rural-branch verification; depreciation claims face 180-day limits.

Section 36(1)(viia) was discussed as extended to co-operative banks after the 2007 amendment, with eligibility and quantum depending on the banking licence position, the applicable banking-law framework, and proof of aggregate average advances of rural branches under the relevant computation rules. The matter required factual verification by the Assessing Officer, so the deduction claim was remanded for fresh examination on facts and law. On depreciation under section 32, the claim failed because the assessee did not satisfactorily prove purchase, existence, and use of the assets, and depreciation had been claimed at the full rate despite use for less than 180 days; the statutory restriction to fifty per cent was applied and the disallowance sustained.

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Issues: (i) Whether the assessee-bank was entitled to deduction under section 36(1)(viia) of the Income-tax Act, 1961, on the amount attributable to provision for bad and doubtful debts computed with reference to aggregate average advances made by rural branches. (ii) Whether the disallowance of depreciation under section 32 of the Income-tax Act, 1961, was sustainable.

Issue (i): Whether the assessee-bank was entitled to deduction under section 36(1)(viia) of the Income-tax Act, 1961, on the amount attributable to provision for bad and doubtful debts computed with reference to aggregate average advances made by rural branches.

Analysis: The statutory scheme of section 36(1)(viia), as amended with effect from 01.04.2007, extended the deduction for provision for bad and doubtful debts to co-operative banks other than primary agricultural credit societies and primary co-operative agricultural and rural development banks. The provision also contemplated a further deduction linked to aggregate average advances made by rural branches of such bank. The definition of rural branch in the Explanation, the computation rule in Rule 6ABA, and the effect of section 56 of the Banking Regulation Act, 1949, were considered together. The matter required verification of whether the RBI licence covered the relevant period and whether the assessee could be treated as carrying on banking business for the years under appeal. The record was also insufficient on the quantification of rural-branch advances.

Conclusion: The issue was remanded to the Assessing Officer for fresh adjudication, and the assessee was held entitled to have the claim examined afresh on facts and law.

Issue (ii): Whether the disallowance of depreciation under section 32 of the Income-tax Act, 1961, was sustainable.

Analysis: The assessee did not satisfactorily establish the purchase invoices or the existence and use of the relevant fixed assets, and full depreciation had been claimed even where assets were put to use for less than 180 days. The statutory restriction in the proviso to section 32 required depreciation to be limited to fifty per cent in such cases.

Conclusion: The disallowance of depreciation was upheld and the issue was decided against the assessee.

Final Conclusion: The appeals were allowed only to the extent of remand on the deduction under section 36(1)(viia), while the depreciation disallowance was sustained.

Ratio Decidendi: A co-operative bank may claim the benefit of section 36(1)(viia) after the 2007 amendment, but entitlement and quantum must be verified on the basis of the banking licence position, the applicable banking-law framework, and proof of rural-branch advances; depreciation is restricted by the statutory proviso where assets are used for less than 180 days.

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