Deduction for provisions for advances allowed where Rule 6ABA/CBDT methodology is followed; entrance fee characterisation remitted.

Deduction for provisions relating to advances is allowable where the aggregate average advances of rural branches are computed in accordance with Rule 6ABA and the CBDT Instruction No.17/2008 methodology; applying that method the Tribunal set aside the confirmation of disallowance and allowed the assessee on the provision of Rs.33,90,000. The characterisation of nominal/entrance fee receipts as capital or revenue requires examination of the assessee's bye laws and relevant RBI master circulars, so that issue is remitted to the Assessing Officer for fresh adjudication with liberty to file evidence.

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Issues: (i) Whether provision made towards standard assets by the bank is allowable as deduction under section 36(1)(viia) of the Income-tax Act, 1961; (ii) Whether receipt on account of nominal/entrance fee is a capital receipt or revenue receipt and whether it should be brought to tax.

Issue (i): Whether the provision of Rs.33,90,000/- made towards standard assets qualifies for deduction under section 36(1)(viia) of the Income-tax Act, 1961 when computed in accordance with Rule 6ABA of the Income Tax Rules, 1962 and CBDT Instruction No. 17/2008 dated 26-11-2008.

Analysis: The Tribunal examined the computation method for aggregate average advances under Rule 6ABA and the clarifications in CBDT Instruction No.17/2008 which require aggregate average outstanding advances at the end of each month for rural branches to determine the limit under section 36(1)(viia). The Tribunal considered prior decisions of the Tribunal on similar facts, including the assessee's earlier proceedings and the Nizamabad District Cooperative Central Bank Ltd. decision, and observed that where the aggregate average advances are computed in accordance with Rule 6ABA and the CBDT instruction, provision towards standard assets has been accepted for deduction under section 36(1)(viia).

Conclusion: In favour of assessee. The order of the Commissioner (Appeals) confirming disallowance is set aside and the assessee's ground challenging that confirmation is allowed.

Issue (ii): Whether the nominal/entrance fee receipts are capital receipts or revenue receipts and liable to tax.

Analysis: The Tribunal found that neither the Assessing Officer nor the Commissioner (Appeals) had discussed or determined the nature of the nominal/entrance fee receipts. The Tribunal noted that the question requires examination of the assessee's bye-laws and relevant RBI master circulars on capital adequacy to determine whether such receipts are capital or revenue in nature and that the assessee should be permitted to place supporting evidence before the AO.

Conclusion: Allowed for statistical purpose. The matter is remanded to the Assessing Officer for fresh consideration of the nature of the nominal/entrance fee receipts in light of the bye-laws and RBI master circulars, with liberty to the assessee to file evidence.

Final Conclusion: The appeal is partly allowed: the tribunal allowed the assessee's challenge to confirmation of disallowance under section 36(1)(viia) and remitted the question of characterisation of nominal/entrance fee receipts to the Assessing Officer for fresh adjudication.

Ratio Decidendi: Deduction under section 36(1)(viia) of the Income-tax Act, 1961 for provisions relating to advances is allowable where the aggregate average advances by rural branches are computed in accordance with Rule 6ABA of the Income Tax Rules, 1962 and the limits and methodology in CBDT Instruction No. 17/2008 dated 26-11-2008 are followed.

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