Co-operative bank deduction and securities loss rules: proviso relief denied, but Available for Sale trading loss allowed.

A co-operative urban bank is outside the scope of the first proviso to section 36(1)(viia), which refers only to scheduled and non-scheduled banks; deduction for provision for bad and doubtful debts or standard assets was therefore not allowable and the disallowance was sustained. Loss on sale of government securities held in the Available for Sale category was allowable as a trading loss because banking norms recognise that category and CBDT Instruction No. 17/2008 supported deduction of the net loss arising in the course of banking business; the appellate relief on that issue was upheld.

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Issues: (i) Whether a co-operative urban bank was entitled to deduction under the first proviso to section 36(1)(viia) of the Income-tax Act, 1961 in respect of provision for bad and doubtful debts or standard assets. (ii) Whether loss on sale of government securities classified under the Available for Sale category was allowable as a trading loss.

Issue (i): Whether a co-operative urban bank was entitled to deduction under the first proviso to section 36(1)(viia) of the Income-tax Act, 1961 in respect of provision for bad and doubtful debts or standard assets.

Analysis: The provision under sub-clause (a) of section 36(1)(viia) covers scheduled banks, non-scheduled banks and certain other specified banks, while the first proviso refers only to a scheduled bank or a non-scheduled bank. The term co-operative bank is not brought within the scope of that proviso. The claim for deduction under the proviso was also raised only before the appellate authority. In that statutory setting, the assessee could not extend the proviso to a co-operative urban bank.

Conclusion: The deduction under the first proviso to section 36(1)(viia) was not allowable to the assessee and the disallowance was sustained.

Issue (ii): Whether loss on sale of government securities classified under the Available For Sale category was allowable as a trading loss.

Analysis: RBI norms recognise investment categories including Held To Maturity, Available For Sale and Held For Trading. Securities in the Available For Sale category are subject to valuation and related treatment consistent with banking instructions, and CBDT Instruction No. 17/2008 dated 26/11/2008 supports the allowability of the net loss arising from such securities. On the facts, the securities were in the Available For Sale category and the loss arose in the course of the banking business.

Conclusion: The loss on sale of government securities was allowable as trading loss and the relief granted by the appellate authority was upheld.

Final Conclusion: The assessee succeeded on the claim relating to loss on sale of government securities, but failed on the deduction claimed for provision for bad and doubtful debts under the first proviso to section 36(1)(viia). The matter was therefore disposed of with partial relief to both sides.

Ratio Decidendi: A co-operative bank is outside the scope of the first proviso to section 36(1)(viia), whereas a loss arising from sale of government securities held in the Available For Sale category is allowable as a business trading loss when supported by the applicable banking and CBDT norms.

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