Creation of provision for bad-debt with different nomenclature won't disallow sec. 36(1)(viia) relief

IT : Creation of provision for bad debt under different nomenclature would not disentitle co-operative bank from claiming deduction under section 36(1)(viia)
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[2013] 37 taxmann.com 247 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'A'
Vellore Dist. Central Co-operative Bank Ltd.
v.
Commissioner of Income-tax, Chennai-VIII*
DR. O.K. NARAYANAN, VICE-PRESIDENT
AND VIKAS AWASTHY, JUDICIAL MEMBER
IT APPEAL NO. 914 (MDS.) OF 2013
[ASSESSMENT YEAR 2008-09]
JULY 17, 2013
Section 36(1)(viia) of the Income-tax Act, 1961 - Bad debts [Co-operative bank] - Assessment year 2008-09 - Whether, co-operative bank is a non-scheduled bank and, thus, entitled to claim benefit of provisions of section 36(1)(viia)(a) - Held, yes - Whether where assessee, a co-operative bank, had created provision for bad and doubtful debts though under different nomenclature, viz., 'Reserve for NPA' in accordance with RBI directions, this would not disentitle assessee for claiming deduction under section 36(1)(viia)(a) - Held, yes [Paras 7 & 8] [In favour of assessee]
FACTS

Facts
■ The assessee was a co-operative bank. Its assessment was completed on certain loss.
■ Thereafter, the Commissioner passed order under section 263 on the ground that the assessee being a co-operative bank, was not entitled to deduction under section 36(1)(viia) and even otherwise assessee had not created provision for bad and doubtful debt and, hence, not eligible for deduction under section 36(1)(viia).
■ On appeal:
Assessee's arguments
■ The co-operative banks are also entitled, at par with scheduled banks and non-scheduled banks, for availing deduction under section 36(1)(viia)(a).
■ The reserve had been created for bad and doubtful debts under different nomenclature, i.e., reserve for NPA and, therefore, the assessee was entitled to claim deduction under section 36(1)(viia).
Issues invalued
■ Whether co-operative bank is entitled to deduction under section 36(1)(viia).
■ Whether creation of reserve for NPA can be considered as reserve for bad and doubtful debt?
HELD

■ A perusal of the provisions of section 36(1)(viia), clearly shows that the benefit of deduction under sub-clause (a) is available to scheduled banks, non-scheduled banks and co-operative banks.[Para 6]
■ The Commissioner has held that the benefit of section 36(1)(viia)(a) is available only to scheduled and non-scheduled banks, and co-operative banks are not entitled for the same. It is an admitted fact that the assessee is carrying on banking activities. Thus, the assessee falls within the definition of the section 5 (c) of the Banking Regulation Act. The scheduled banks in India are those banks, which are included in the second schedule of the RBI Act. The RBI includes only those banks in Second schedule which satisfy the criteria laid down in section 42(6)(a) of the Act. Thus, all other companies, which are carrying on banking business and fall within the ambit of section 5(c) of the Banking Regulation Act but are not included in the Second schedule of RBI Act, are non-scheduled banks. In view of the above, the assessee is a non-scheduled bank and is, thus, entitled to claim benefit of the provisions of section 36(1)(viia)(a) [Para 7].
■ The terminology 'Reserve for NPA' has been used by the assessee in accordance with the RBI directions. As is evident from the assessment order, the assessee has indeed created 'Reserve for NPA'. For claiming benefit under the provisions of section 36(1)(viia)(a) the condition to be satisfied is that provision for bad and doubtful debts should have been made by the bank eligible to claim such deduction. Co-operative banks do not strictly follow the provisions of the Banking Regulation Act for the purpose of maintaining their books of account. The assessee has created provision for bad and doubtful debts, may be under different nomenclature. This will not disentitle the assessee for claiming deduction under the provisions of section 36(1)(viia)(a). The purpose for creation of reserve for NPA is same, i.e., creating provision towards bad and doubtful debts. [Para 8]
■ In view of the above, the assessment order is neither erroneous nor prejudicial to the interest of the revenue. Therefore, the impugned order of Commissioner passed under section 263 is set aside and the appeal of the assessee is allowed. [Para 8]
CASE REVIEW

Asstt. CIT v. Jaipur Central Co-operative Bank Ltd. [IT Appeal No. 817 (JP) OF 2011, Dated 7-3-2012] (para 7) distinguished.
CASES REFERRED TO

S. Sundaram Pillai v. V.R. Patabiraman AIR 1985 SC 582 (para 4), Asstt. CIT v. Jaipur Central Co-operative Bank Ltd. [IT Appeal No. 817 (JP) OF 2011, Dated 7-3-2012] (para 4) and CIT v. Eastern Medikit Ltd., [2011] 337 ITR 56/202 Taxman 572/12 taxmann.com 427 (Delhi) (para 5).
C. Srinivasan for the Appellant. Shaji P. Jacob for the Respondent.
ORDER

Vikas Awasthy, Judicial Member - The appeal has been filed by the assessee against the order passed u/s. 263 of the Income Tax Act, 1961 (herein after referred to as 'the Act') by the Commissioner of Income Tax, Chennai-VIII on 13-02-2013.
2. The brief facts of the case are that the assessee is a Co-operative bank. Assessee filed its return of income for the Assessment Year (AY) 2008-09 on 20-10-2008 declaring loss Rs. 28,52,33,360/-. The case of the assessee was selected for scrutiny and notice u/s. 143(2) was issued to the assessee on 19-08-2009. The assessment order u/s. 143(3) was passed on 09-09-2010 determining loss at Rs. 15,48,29,520/- as against the loss returned at Rs. 28,52,33,360/-.
3. Revision proceedings u/s. 263 of the Act were initiated against the assessee and show cause notice dated 29-01-2013 was issued to the assessee. The CIT passed order u/s. 263 with the following observations:
"After careful consideration of the facts of the case, submissions of the assessee, it is to be pointed out that the assessee had not created reverse/provision towards bad and doubtful debts before making any deduction u/s. 36(1)(viia) of the Income-tax Act, 1961. However, the nomenclature given to such a reserve/provision was different and the same is shown as Reserve for NPA amounting to Rs. 18,31,04,368/-. This aspect has not been considered by the Assessing Officer while finalizing the order u/s. 143(3) of the Act dt. 09-09-2010. Who was duty-bound to do so. In sofaras the issue of assessee not eligible for deduction u/s. 36(1)(viia) of the Income-tax Act, 1961 for the reason that cooperative banks are not eligible for deduction under the said section, this aspect also had escaped the notice of the Assessing Officer while finalizing the scrutiny assessment proceedings"
The CIT held that in view of the observations made in the order, the assessment order passed u/s. 143 (3) is erroneous and prejudicial to the interest of the Revenue. The CIT set aside the assessment order and directed the Assessing Officer to pass the order afresh keeping in mind the observations made by him in his order.
Aggrieved against the order of the CIT u/s. 263, the assessee preferred an appeal before the Tribunal.
4. Shri C. Srinivasan, appearing on behalf of the assessee submitted that the CIT has erred in coming to the conclusion that assessee being co-operative bank is not entitled to claim deduction u/s. 36(1)(viia). The CIT erred in holding that the definition of 'Rural Banks' given in explanation (ia) to section 36(1)(viia) includes only scheduled and non-scheduled banks and not the co-operative banks. The AR further submitted that the CIT has erred in holding that the assessee has not created any reserve/provision for bad and doubtful debts and hence the deduction claimed u/s. 36(1)(viia) is not allowable. The AR pointed out that vide amendment brought by Finance Act 2007 w.e.f. 01-04-2007, co-operative banks other than Primary Agricultural Credit Society or Primary Co-operative Agricultural and Rural Development Banks have been included in sub-clause(a) of Section 36(1)(viia). Thus, the co-operative banks are also entitled at par with scheduled banks and
non-scheduled banks for availing deduction u/s. 36(1)(viia)(a). The ld. AR further submitted that the co-operative banks are non-scheduled banks as defined in section 5(c) of the Banking Regulation Act, 1949. The ld. AR referred to the judgment of the Hon'ble Supreme Court of India in case of S. Sundaram Pillai v. V.R. Patabiraman AIR 1985 SC 582 wherein it has been held that an explanation cannot over ride the section. The objection of the CIT that in Explanation (ia) to Section 36(1)(viia), Rural Branch means a branch of a scheduled bank or a non-scheduled bank only and co-operative banks are not included, therefore, assessee is not entitled to claim deduction under the provisions of the Section is unfounded.
As regards the other observation of the CIT that assessee has not created any reserve or provision for bad and doubtful debts, the AR submitted that the assessee has created reserve for NPA. In fact, the reserve has been created for bad and doubtful debts under different nomenclature, therefore, the assessee is entitled to claim deduction u/s. 36(1)(viia). In support of his contentions, the ld. AR relied on the decision of the Jaipur Bench of the Tribunal in ITA No. 817/JP/2011 in the case of Asstt. CIT v. Jaipur Central Co-operative Bank Ltd., decided on March 7, 2012; wherein the Tribunal has held that the Central Co-operative Banks are eligible for deduction u/s. 36(1)(viia) in respect of 7.5% for total income and 10% average rural advances.
5. On the other hand, Shri Shaji P. Jacob, appearing on behalf of the Revenue has strongly supported the order of the CIT and submitted that the assessee has not created any provision for bad and doubtful debts. Unless provision is created for bad and doubtful debts, benefit u/s. 36(1)(viia) cannot be granted to the assessee. In order to support his contentions, the ld. DR relied on the judgment of the Hon'ble Delhi High Court in the case of CIT v.Eastern Medikit Ltd., [2011] 337 ITR 56/202 Taxman 572/12 taxmann.com 427.
6. We have heard the submissions made by the representatives of both the sides. We have also perused the impugned order as well as the decisions relied upon by the representatives of both the sides. From the submissions made by both the sides and impugned order, two questions have emerged for adjudication :
i. Whether the assessee is entitled to claim deduction u/s. 36(1)(viia)(a)?
ii. If the answer to the above said question is in affirmative; Whether the assessee has created any reserve/provision for bad and doubtful debts?
To answer these questions, we have to first examine the provisions of the Act. The relevant extract of the provisions of section 36(1)(viia)(a) are reproduced herein below:
"Section. 36 (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—
(i)** ** **
(viia) [in respect of any provision for bad and doubtful debts made by-
(a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:

** ** **"
A perusal of the provisions of Section 36(1)(viia), clearly show that the benefit of deduction under sub-clause(a) is available to scheduled banks, non-scheduled banks and co-operative banks. The Explanation (ia) to clause (viia) defines 'Rural Branch'. The relevant extract of the same is as under:
"Explanation—for the purposes of this clause,—
(i)** ** **
(ia) "rural branch" means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;"
7. The ld. CIT has held that the benefit of Section 36(1)(viia)(a) is available only to Scheduled and Non-Scheduled Banks, co-operative banks are not entitled for the same. Here it becomes important to understand the concept of Scheduled and Non-Scheduled Banks. The Banking Regulation Act, 1949 defines 'banking company' in Section 5(c) as:
"'Banking company' means any company which transacts the business of banking in India."
In the instant case, it is an admitted fact that the assessee is carrying on banking activities. Thus, the assessee falls within the definition of Section 5(c) of Banking Regulation Act. The Reserve Bank of India (RBI) Act, 1934 defines 'Scheduled Bank' in Section 2(e) as:
"'Scheduled Bank' means a bank included in the second schedule."
Hence, the Scheduled Banks in India are those banks, which are included in the second schedule of RBI Act. The RBI includes only those banks in second schedule which satisfy the criteria laid down in section 42(6)(a) of the Act. Thus, all other companies which are carrying on banking business and fall within the ambit of Section 5(c) of the Banking Regulation Act but are not included in the second schedule of RBI Act are non-Scheduled Banks.
In view of the above, we are of the considered opinion that the assessee is a Non-Scheduled Bank and is thus entitled to claim benefit of provisions of Section 36(1)(viia)(a) of the Act. Our view is further fortified by the decision of 'Jaipur Bench' of the Tribunal in the case of Jaipur Central Co-operative Bank Ltd. (supra).
8. Now, the second question which arises for determination before us is whether the assessee has created any reserve/provision for bad and doubtful debts?
The AR has contended that the assessee has created provisions for bad and doubtful debts under the nomenclature 'Reserve for NPA'. The terminology 'Reserve for NPA' has been used by the assessee in accordance with the RBI directions. As is evident from the assessment order, the assessee has indeed created 'Reserve for NPA'. For claiming benefit under the provisions of Section 36(1)(viia)(a) the conditions to be satisfied is: that provision for bad and doubtful debts should have been made by the bank eligible to claim such deduction. Co-operative Banks do not strictly follow the provisions of Banking Regulation Act for the purpose of maintaining their Books of Account. In our considered opinion, the assessee has created provision for bad and doubtful debts may be under different nomenclature. This will not dis-entitle the assessee for claiming deduction under the provisions of Section 36(1)(viia)(a). The purpose for creation of reserve for NPA is same
i.e., creating provision towards bad and doubtful debts.
In view of the above, we find that the assessment order dated 09-09-2010 is neither erroneous nor prejudicial to the interest of the Revenue. The impugned order of CIT passed u/s. 263 is set aside and the appeal of the assessee is allowed.VARSHA