ZILA SAHKARI BANK LTD.,MIRZAPUR vs. ASSTT. COMMISIONER OF INCOME TAX, MIRZAPUR

PER SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER:

These two appeals, filed by assessee, being ITA No.135/Alld./2015 and 136/Alld/2015 for assessment year(s): 2010-11 and 2011-12 respectively , are directed against two separate appellate order(s) dated 16.12.2014 and 17.12.2014in Appeal No(s).110/ACIT/R-III/MZP/13-14and 124/JCIT/R- III/MZP/13-14 passed by learnedCommissioner of Income Tax (Appeals), Allahabad (hereinafter called "theCIT(A)"),for assessment years(ay):2010-11 and

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 2011-12respectively, the appellate proceedingshad arisen before learned CIT(A)from two separate assessment order(s) dated 23.03.2013and 06.0.2014 respectively passed by learned Assessing Officer (hereinafter called "the AO") under Section 143 (3) of the Income-tax Act,1961(hereinafter called “ the Act”) . Since, both the appeals involve common issues , these two appeals were heard together and are disposed of by this common order. We have heard both the parties through Video Conferencing mode through Virtual Court. 2. The grounds of appeals raised by assessee in ITA Nos. 135/Alld./2015 for ay: 2010-11in memo of appeal filed with Income-Tax Appellate Tribunal, Allahabad Bench , Allahabad(hereinafter called “ the tribunal”) , reads as under: “1. BECAUSE assessment order dated 23.03.2013, whereby income was determined at Rs. 2,79,13,220/- as against the ‘returned income’ of Rs 1,07,16,847/- , was liable to be declared as void ab-initio for the reason that selection of case for “scrutiny assessment” and notice under section 143(2) issued (in pursuance of such selection) were not in accordance with the ‘scheme’ of the Act. 2. BECAUSE the “CIT(A)”, in exercise of his coterminous power, while deciding the issue of ‘variation’ between the ‘returned income’ and ‘assessed income’ as represented by (a)Disallowance out of provision for ‘bad debts’ : Rs, 1,70,81,955 Under section 36(1)(viia) (b) disallowance out of depreciation : : Rs. 1,14,416 was, inter-alia obliged under the law to look into the validity of the assessment order dated 23.03.2013 itself, as the same had a vital bearing on the decision in the appeal. WITHOUT PREJUDICE TO THE AFORESAID 3 BECAUSE the authorities below have erred in law and on facts in disallowing/upholding the disallowance of a part of the provision for bad debts, as had been claimed under section 36(1)(viia) of the Act, to the extent of Rs. 1,70,81,955. 4 BECAUSE the “appellant” had been carrying on ‘banking business’ since its very inception as a ‘Cooperative Bank and even if its name did not appear in the list of scheduled banks 2

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 appended to the RBI Act 1934, the claim of the “appellant” was liable to be allowed in its entirely, looking to the insertion of terms “non-scheduled bank”/“cooperative bank” in section 36(1)(viia) by the Finance Act 2007 w.e.f. 1.4.2007.

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 3.BECAUSE the authorities below have erred in law and on facts in disallowing/ upholding the disallowance of a part of the provision for bad debts, as had been claimed under section 36(1)(viia) of the Act, to the extent of Rs. 1,65,02,332. 4. BECAUSE the “appellant” had been carrying on ‘banking business’ since its very inception as a ‘Cooperative Bank and even if its name did not appear in the list of scheduled banks appended to the RBI Act 1934, the claim of the “appellant” was liable to be allowed in its entirely, looking to the insertion of terms “non-scheduled bank”/ “cooperative bank” in section 36(1)(viia) by the Finance Act 2007 w.e.f. 1.4.2007. 5. BECAUSE as per express provision contained in the statute, entire claim was liable to be allowed and view to the contrary as has been taken by the “CIT(A) is wholly erroneous, as being in-consistent with the express provisions of law and, on an application of rule of harmonious construction. 6. BECAUSE the order appealed against is contrary to facts, law and principles of natural justice.” 3. First, we will take up appeal of the assessee in ITA no. 135/Alld/2015 for ay: 2010-11. The brief facts of the case are that the assesseehas deducted Rs. 1,78,85,718/- from Profit and Loss Account as ‘Provision for Bad and Doubtful Debts’. The assessee has also claimed said amount as deduction from income, under the provisions of Income-tax Act, 1961, while filing return of income with department. The case of the assessee was selected by Revenue for framing scrutiny assessment u/s 143(3) of the 1961 Act and Statuary Notices u/s 143(2) and 142(1) were admittedly issued and served to the assessee by AO. During the course of assessment proceedings conducted by AO u/s 143(3) read with Section 143(2) of the 1961 Act for ay:2010-11, the assessee was asked by AO to explain about the aforesaid claim of deduction. The assessee submitted before the AO that the said claim has been made as per RBI/NABARD instructions for provisioning on advances and other assets. It was submitted by the assessee before the AO that the banks are required to follow these instructions otherwise the accounts would be

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 qualified by statutory auditors. Thus, it was submitted that the guidelines are statutory and hence the assessee is bound to follow the same . The AO rejected claim of the assessee by invoking provisions of Section 36(1)(viia) of the 1961 Act, while the AO allowed deduction to the tune of seven and half percentage of the total income shown by the assessee under the provisions of Section 36(1)(viia) of the 1961 Act, and consequently deduction allowed by the AO stood at Rs. 8,03,763/-. The second issue which arises from this appeal for ay: 2010-11 is with respect to disallowance of depreciation under Section 32 of the 1961 Act, wherein disallowance was made to the tune of Rs. 1,14,416/-, wherein it was observed by AO that the assessee has claimed additions in fixed assets under the Block of Assets-‘Plant and Machinery’ of Rs. 13,50,973/- and claimed depreciation @15%. The AO asked assessee to submit evidence. The assessee filed copies of bills totaling an amount of Rs. 1,53,793/- and these bills were for office furniture , which were purchased after September, 2009 . The AO allowed depreciation 5% (50% of the normal depreciation on Furniture @10% allowable under the provisions of 1961 Act) on these bill and the excess depreciation claimed of Rs. 85,943/- was disallowed by the AO. It was further observed by the AO that the assessee has claimed depreciation on Computers purchased of Rs. 99,18,777/- , while the assessee could produce bills of Rs. 98,71,322/- , which led AOto disallow depreciation @ 60% ( rate of depreciation allowable under the 1961 Act) on the differential amount, leading to disallowance of Rs. 28,473/-, and thus the total additions to the tune of Rs. 1,14,416/- stoodadded to the income of the assesseeby the AO, vide assessment order dated 23.03.2013 passed by the AO u/s 143(3) of the 1961 Act. 4. Aggrieved by an assessment order dated 23.03.2013 framed by AO u/s 143(3) of the 1961 Act, the assessee filed first appeal with ld. CIT (A). The assessee claimed before ld. CIT (A) that theassessee is entitled for deduction under Section

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 36(1)(viia) of the 1961 Act, being deduction @ 7 ½ % of the total income and also further deduction of 10% of the aggregate average advances made by the Rural Branches of the bank . The assessee submitted before ld. CIT(A) that the AO allowed deduction u/s 36(1)(viia) of the 1961 Act @7 ½ % of the total income of the assessee, while further deduction @ 10% of the aggregate average advances made by the Rural Branches of the bank was not allowed by the AO. The ld. CIT(A) was pleased to reject the contentions of the assessee sofar as allowability of deduction @ 10% of the aggregate average advances made by the Rural Branches are concerned, by holding as under: “3.4 Decision I have gone through the order of the AO and the submission of the appellant. I have also gone through relevant case laws. Briefly, the facts of the case that the A.O. allowed the deduction @7.5% of the total income (computed before making any deduction under this clause and Chapter VIA) in respect of provision for bad and doubtful debts. However, the AO has denied the deduction @ 10% of the aggregate average advances allowable in the case of rural branches of such bank. In the original assessment order and later on through a rejoinder the AO has submitted that the deduction of 10% is not allowable in the case of the assessee in view of the definition provided in the said section and rule 6ABA of I.T. Rules, 1962 coupled with intent of legislature while bringing the amendment in Section 36(1)(viia) w.e.f 01.04.2007. The A.O. contended that the deduction upto 10% of the aggregate average advances is applicable only in the case the advances are made by the rural branches of such bank. Rural branches are defined in the act, vide explanation (ia) of Section 36(1)(viia). As per this explanation, the rural branch means a branch of a scheduled bank or non-scheduled bank situated in a place which has a population of not more than 10,000. Therefore, for the purposes of

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 section 36(1)(viia), rural branch does not mean branch of a co-operative bank. I agree with the contention of the A.O. that any branch of a co-operative bank much less a scheduled bank or non-scheduled bank, cannot be called a rural branch, unless a branch satisfied the condition given therein. The appellant has not produced any such details either before the A.O. or before me to work out aggregate average advances relating to the rural branches. The issue as to whether a co-operative bank falls in the category of a scheduled bank or a non-scheduled bank will be discussed later. Presuming, a co-operative banks falls under the category of scheduled bank or non-scheduled bank, it has to satisfy that the deduction is claimed in respect of advances made by the rural branches. As stated above, no such details of rural branches and advances made by them have been furnished, one of the conditions to claim the deduction is not met by the appellant. In this respect it is worthwhile to mention instruction no. 10 of 2008, dated 31st July, 2008 issued by the CBDT to deal with Section 36(1)(viia). In para 3 of the said instruction it has been clearly stated the Board has been made aware of irregularities through C&AG that the deduction u/s 36(1)(viia) is being allowed by the AO’s without verification as to whether the concerned branches come within a definition of ‘rural branch’.In several cases, this has resulted in large under assessment of income. The A.Os. have, therefore, been directed to ensure that the claims of deduction towards advances given by rural branches of banks are allowed only after verifying (at least by way of test check) as to whether such branches are eligible to be treated as a rural branch according to the definition given in explanation (ia) to Section 36(1)(viia) of the I.T.Act. Since, the onus to claim the deduction was on the assessee. It has to satisfy the AO that the deduction has been claimed in respect of advances by the rural

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 branches, the condition has not been fulfilled. Accordingly, the deduction is not allowable. As regard the status of appellant society as scheduled bank, there is no dispute because even the appellant has admitted that it does not fall in second schedule to the Reserve Bank of India Act, 1934. On the contention of the appellant to treat the appellant in the category of non-scheduled bank, the AO has argued that the issue is covered by the decision of the Hon’ble ITAT Lucknow ‘B’ Bench in the case of Mansarovar Urban Cooperative Bank Ltd. vs. DCIT. The AO has quoted relevant part of the decision as under- “Had Co-operative Bank been a part of non-scheduled bank then it was not necessary for the legislature to separately provide such benefit u/s 36(1)(viia) to a co-operative bank by making necessary amendment in that section”. The Hon’ble Tribunal was of the view that the addition of term “co-operative bank” only distinguishes it from non-scheduled bank. As such the co-operative bank cannot be called non-scheduled bank. Had the intent of legislature been so to include all the banking companies, it would have been convenient to use the term ‘banking concern’ rather than separately defining ‘non-scheduled bank’ and ‘scheduled bank’. Since, the definition of non-scheduled bank as given in explanation (i) to section 36(1)(viia) is exhaustive, it cannot be extended to any other entity other than what is mentioned therein. No additional entity either by analogy or by harmonious construction or otherwise can be brought in to the definition of ‘non scheduled bank’ or ‘scheduled bank’ to provide benefit of Section 36(1)(viia). The Hon’ble Tribunal has also taken note of exclusion of co-operative bank from the definition of scheduled bank which, as per their interpretation, the benefit is given for deduction u/s36(1)(viia) by adding the ‘co-operative bank’. As per 8

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 the second schedule to the RBI Act, various co-operative banks are included in the definition of scheduled bank. By excluding the words ‘it does not include a co-operative bank’ in the definition of scheduled bank, the concept of scheduled bank has been enlarged under I.T. Act. The A.O. has also referred to portion of the memorandum to the Finance Bill, 2007 to clarify the concept of deduction wherein it is mentioned that ‘the definition of scheduled bank in clause (ii) of explanation to said clause (viia) is also proposed to be amended to include scheduled co-operative banks within the definition. The AO wants to assert that after the amendment, the definition of scheduled bank will include scheduled co-operative banks. In the written argument the A.R. for the appellant has objected to the legality of the assessment order alleging that the transfer of the case from the ACIT, Range-, Mirzapur to the JCIT, Range-3, Mirzapur was not as per the provisions of the Act. It is argued that such transfer was made on the back of the Appellant without giving any opportunity. There was no reasonfor the transfer of the case and at least no such reason has been given to the appellant. I do not find this objection of the appellant sustainable in the eyes of law because the CIT has the powers over the cases under his jurisdiction to assign it to any office within his charge. There is no legal or administrative bar for such transfer. There was no need to give the assessee any opportunity before the transfer. Hence, this ground is dismissed. The appellant has given legislative history of the amendments in section 36(1)(viia). Those are not reported here for the sake of brevity. However, the references will be used wherever it is required. The appellant has extracted Circular no.3 dated 12.03.2008 reported in (2008) 299 ITR (St)8- “Deduction in respect of any provision for bad and doubtful debts to be allowed in the case of co-operative banks u/s 36(1)(viia)

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 Under the existing provision of clause (viia) of sub section (1) of section 36, deduction of an amount not exceeding seven and one- half percent of the total income (computed before making any deduction under the said clause and chapter VI-A) and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of a scheduled bank or a non-scheduled bank computed in the prescribed manner is allowed as a deduction in the computation of income of such banks. “Scheduled bank,” as defined in the explanation to clause (viia) of sub section (1) of the section 36, does include a co-operative bank. The deduction earlier allowable under Section 80P in the case of cooperative society engaged in carrying on the business of banking (cooperative banks) has been withdrawn from A.Y. 2007-08 barring in the case of a primary agriculture credit society or a primary co-operative agriculture and rural development bank. Since profits of cooperative banks are now taxable after withdrawal of deduction available to a cooperative society engaged in a carrying on the business of banking u/s 80P, such co-operative society banks should be allowed deduction in respect of any provision for bad debts as its profits have become taxable. The amendment proposes to allow this deduction to co-operative banks notbeing a primary agriculture credit society or a primary co-operative agriculture and rural development bank. The definition of scheduled bank in clause (ii) of Explanation to said clause (viia) is also proposed to be amended to include scheduled cooperative banks within the definition. Under the existing provisions contained in the Explanation to item (fa) of sub-clause (iv) of clause (15) of section 10, the expression “scheduled bank” has been defined to have the meaning assigned to it in clause (ii) of the Explanation (viia) of sub-section (1) of section 36 which does not include co-operative banks. However, the definition of “Scheduled bank” after the proposed amendment will include Scheduled cooperative banks. The referral definition of “Scheduled bank” presently occurring in the explanation to the aforesaid item (fa) to ensure that the scope of the exemption allowed under the aforesaid item (fa) is not changed. The proposed amendment to the definition of “Scheduled bank” as it appears in sec 36 will also have the effects of making the provision of sec43 D applicable to Scheduled co-operative banks.”

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 By citing the above circular the appellant has argued that the intent of the legislature is to bring the taxability of co-operative banks at par with the other commercial bank. The legislation has restricted the benefit of exemption or deduction to the scheduled bank wherever it intended to do so. For this purpose, the ld A.R. has referred to the provision u/s 10(15)(fa) and Section 43D of the Act. The Ld. AR wants to state that the co-operative banks have not been excluded from the benefit under reference as no such provision is brought on statute in the context of Section 36(1)(viia). The A.R. has vehemently argued that the co-operative banks falls in the category of non-scheduled bank. In accordance with the A.R. a banking company takes into its fold any company which transacts the business of banking in India. According to the A.R. any company transacting the business of banking in India will qualify to be a banking company as per clause (c) of Section 5 of the Banking Company Regulation Act, 1949. The Ld. AR has tried to explain that the cooperative societies transacting the banking works are banking company. In this context, the A.R. has relied on the following decision.- I. Judgment dated 03.04.2014 of Hon’ble Kerala High Court reported in (2014) 365 ITR 343 [also reported in (2014) 50 taxman. Com 189 (Kerala)] II. Order dated 07.03.2012 in ITA No. 817/JP/2011 passed by the Hon’ble Jaipur Bench of ITAT in the case of ACIT, Circle 3, Jaipur vs. Jaipur Central Cooperative Bank, Jaipur. III. Order dated 08.05.2013 passed by the Hon’ble Cochin Bench of ITAT in the case of Trichur District Co-operative Bank Ltd. Vs. Assistant commissioner of Income Tax reported in (2013)60 SOT 145

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 IV. Order dated 17.07.2013 passed by the Hon’ble Chennai Bench of ITAT in the case of Vellore Dist. Central Cooperative Bank ltd. Vs Commissioner of Income Tax reported in (2013)145 ITD 129 V. Order dated 07.03.2012 in in ITA No. 472/Jodh/2013 passed by Hon’ble Jodhpur Bench of ITAT in the case of ACIT, Circle 1, Udaipur vs. Dungarpur Central Cooperative Bank, Dungarpur. I have gone through the decisions cited by the ld. AR to claim that a cooperative bank falls in the category of non-scheduled bank. But in this connection, the decision of ITAT Lucknow Bench and its observations are worth consideration that if the intention of the legislature was to use the term non-scheduled bank as referring to cooperative bank for the purpose of 36(1)(viia), it would have been convenient for the legislation to use the word ‘banking concern only’. There must be some meaning to add the term cooperative bank along with scheduled and non-scheduled bank. If all the cooperative banks are in the fold of a non-scheduled bank, there is no meaning to add the term‘cooperative bank’. The A.R. has argued that the judgments of the ITAT Lucknow relate to AYs earlier to the A.Y. 2007-08 and Section 36(1)(viia) has undergone amendment. As a matter of fact, the rational to distinguish non-scheduled bank and co-operative bank rendered in the case of Mansarovar Urban Co-operative Bank Ltd. vs. DCIT by the ITAT Lucknow Bench is very much relevant as it raises the question of significance to include the term ‘cooperative bank’ where term ‘non-scheduled bank’ already exists. The intent of legislature is amply clear by the perusal of Rule 6ABA of I.T. Rules to provide the method of computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of Section 36. The rule is as under-

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 “for the purposes of clause (viia) of sub section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following namely;- (a).--- (b)— (c)-- Explanation: in this rule, “rural branch” and “scheduled bank” shall have the meaning assigned to them in the Explanation to clause (viia) of sub section (1) of section 36.” In the light of above rules, which do not include non-scheduled bank nothing say of a co-operative bank, the benefit of deduction upto 10% in the case of rural branches cannot be extended to the appellant. I do not agree with the argument of the appellant that the rule is not in harmony with the I.T.Act, so the same may be over looked. I understand that the intent of the legislature is not to extend the benefit to cooperative banks. Another noticeable facts in the case of the appellant is that it was granted the license of banking business by RBI only w.e.f 10.01.2012. The license has not been granted with retrospective effect even in the cooperative society was engaged in the banking business. In view of the above facts and in the circumstances, the decisions of the A.O. is confirmed and the ground taken by the appellant are dismissed.”

Thus, as could be seen that ld.CIT(A) upheld the decision of AO and rejected the contention of the assessee, vide appellate order dated 16.12.2014 passed by ld. CIT(A). Further, the ld. CIT(A) observed that the banking license was granted by RBI to assesseew.e.f. 10.01.2012 which was not granted with retrospective effect. Further, the ld. CIT(A) also observed that the assessee has not given any details to

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 quantify the deduction computed @10% of aggregate average advances made by Rural Branches , as no such details as to aggregate average advances made by Rural Branches are placed on record by assessee. 4.2. So far as second issue regarding disallowance of depreciation is concerned, the ld. CIT(A) observed that the assessee has not opposed the disallowance of the depreciation that were made by the AO , and hence the decision of the AO was confirmed by ld. CIT(A), vide appellate order dated 16.12.2014 passed by ld. CIT(A). 5. Aggrieved by appellate order dated 16.12.2014 passed by ld. CIT(A), the assessee has come in appeal before tribunal. The Ld. Counsel for assessee opened arguments before the Division Bench of the tribunal. The ld. Counsel for the assessee submitted that the assessee was granted banking license by RBI on 10th January, 2012 vide License No. RPCD.LK-14(DCCB)/2012 , wherein RBI allowed the assessee bank to continue and carrying on banking business. The said license issued by RBI is placed in paper book at page 60. The Ld. Counsel for the assessee submitted that AO had not allowed deduction under Section 36(1)(viia) of the 1961 Act towards 10% of aggregate average advances made by Rural Branches of the bank. It is submitted by Ld. Counsel for the assessee that the assessee is a Co- operative Bank and the word Co-operative Bank under Section 36(1)(viia) was added by Finance Act, 2007 , wherein Rural Branches of the Co-operative Banks were also covered for grant of further deduction @ 10% of the aggregate average advances by Rural Branches of Co-operative Bank. The ld. Counsel for the assessee drew our attention to Explanationto Section 36(1)(viia) of the 1961 Act, and submitted thatthe assessee is entitled for deduction computed @10% of aggregate average advances made by Rural branches. The ld. Counsel for the assessee drew our attention to the appellate order passed by ld. CIT(A) and submitted that the assessee is carrying on banking business since inception. Our attention was drawn 14

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 to Page No. 60 of the paper book wherein, the banking license No. RPCD.LK-14 (DCCB)/2012 Dt. January 10th, 2012 issued by RBI, Regional Office, Lucknow is placed, which is reproduced hereinunder:

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 Our attention was also drawn by ld. Counsel for the assesseeto Page No. 123 of paper book , wherein, RBI letter dated 13th Feb, 2013 is placed wherein with reference to Kanpur ZilaSehkari Bank Limited, the RBI clarified that the said bank is not a scheduled bank but is having a non-scheduled bank status. Our attention was drawn to Section 56 of the Banking Regulation Act, 1949 . It was submitted that Income-Tax Appellate Tribunal, Lucknow Bench’s decision in case of Mansarovar Urban Co-operative Bank Ltd v. DCIT, reported in (2010) 126 ITD 72(Lucknow) was a decision which was for ay prior to amendment made to Section 36(1)(viia) by Finance Act, 2007 w.e.f. 01.04.2007 , as assessment year before tribunal in the case of ‘Mansarovar Urban Co-operative Bank Limited’ was ay: 2003-04 , when ‘Co-operative Bank’ was not included in the Section 36(1)(viia) of the 1961 Act . It was submitted that the present cases relates to ay’s:2010-11 and 2011-12 and hence decision of tribunal in the case of ‘Mansarovar Urban Co- operative Bank Ltd.’(supra) is not applicable. Our attention was also drawn by ld. Counsel for the assesseeto the decision of Hon’ble Kerala High Court in the case of Kannur District Cooperative Bank Limited v. CIT (2014) 50 taxmann.com 189(Kerala). It was submitted by ld. Counsel for the assesseethat ld. CIT(A) in the case of assessee itself has allowed the deduction u/s 36(1)(viia) towards 10% of the aggregate average advances made by Rural Branches in ay: 2007-08(Appeal No. 9/DCIT/R-III/MZP/15-16) , order dated 22.06.2016 , and also in ay:2012- 13(Appeal No. 5/DCIT/R-III/MZP/15-16) , order dated 22.06.2016. The copies of appellate orders passed by ld. CIT(A) in the case of assessee for ay’s: 2007-08 and 2012-13 are placed in file . It was submitted by ld. Counsel for the assesseethat Department has not filed any further appeal with tribunal against aforesaid appellate orders passed by ld. CIT(A). Our attention was drawn to page No. 108 of the paper book wherein instruction No. 10 of 2008 Dt. 31st July, 2008 is placed , and the said instruction is reproduced herein under:

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 INSTRUCTION NO. 10 OF 2008, DT. 31ST JULY, 2008 31/07/2008 Subject: Assessment of banks- Allowance of deduction to rural branches -Regarding BUSINESS EXPENDITURE DEDUCTION 36(1)(viia) Kindly refer to above, 2. While computing the income under the head ‘Profit and gains of business and profession’ a scheduled bank (not being a bank incorporated by or under the laws of a foreign country) or a non-scheduled bank or a co-operate bank other than a primary agricultural credit society or a primary cooperative agricultural and rural bank is entitled to claim deduction or provision for bad debt of 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. The term ‘rural bench’ has been defined in Explanation (ia) to section 36(a)(viia) to be a branch of a scheduled or a non-scheduled bank situated in a place which has 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. 3. It has, however, come to the notice of the Board through the report of the C&AG’s office that, in many instances, claims made by banks for deduction under Section 36(1)(viia)of the Income-tax Act, 1961 are being allowed without verification as to whether the concerned branches come with the definition of ‘rural branch’. In several cases, this has resulted in large under- assessment of income. 4. The Assessing Officer should, therefore, ensure that the claims of deduction towards advances given by rural branches of banks are allowed only after 18

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 verifying (at least by way of test check) as to whether such branches are eligible to be treated as a ‘rural branch’ according to the definition given in Explanation (ia) to Section 36 (1)(viia) of the Income Tax, Act, 1961. 5. A review of completed assessments may also be carried out and appropriate remedial action may be taken as may be necessary. This may be brought to the notice of all concerned for strict compliance.” Our attention was drawn by ld. Counsel for the assessee to Explanation No. (vi) to Section 36(1)(viia), and it was also submitted by ld. Counsel for the assesseethat earlier Section 80P(4) of the 1961 Act was applicable to Co-operative Banks, which have been withdrawn by Finance Act, 2007 w.e.f. 01.04.2007. It was submitted that as per Explanation (a) to Section 80P(4), the co-operative bank shall have meaning as assigned to them in Para V of the Banking Regulation Act, 1949. The ld. Counsel for the assessee submitted that the AO itself allowed deduction to the assessee @7.5% of the total income , while only further deduction computed @10% of the aggregate average advances made by Rural Branches was denied by AO to the assessee. It was clarified by ld. Counsel for the assessee that the banking license was granted by RBi in January 2012,but the same was from retrospective effect, although the assessee did not held license during the ay: 2010-11 and 2011- 12. 5.2. On the other hand, the Ld. DR submitted before the Bench that the assessee has claimed deduction under Section 36(1)(viia) and quantum of deduction is under dispute. It was submitted by ld. DR that AO has already allowed deduction @7.5% of the total income , while the assesseeis not entitled for further deduction @ 10% of the aggregate average advances made by ‘Rural Branches’. Our attention was drawn to Explanation (ia) to Section 36(1)(viia), and it was submitted that sofar as further deduction @ 10% of aggregate average advances made by Rural Branches are concerned , the Co-operative Banks are not entitled 19

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 for same as the said deduction is available only to Scheduled and Non-Scheduled Banks. The assessee is a Co-operative Bank and is neither Scheduled bank nor Non-Scheduled bank. Our attention was drawn to decision of ITAT , Lucknow Bench in the case of Mansarovar Urban Co-operative Bank Ltd. v. DCIT,reported in (2010) 126 ITD 72(Luck.), wherein the AO denied the deduction under the aforesaid second limb concerning deduction computed @10% of aggregate average advances made by Rural Branches . It was submitted by ld. DR that deduction computed on the basis of 10% of aggregate average advances made by Rural Branches cannot be allowed to the assessee as per provisions of Section 36(1)(viia) read with Explanations to said Section. The Ld. DR relied on the orders of the authorities below. It was submitted by ld. DR that the assessee has not even filed workings to quantify computing deduction claimed under Section 36(1)(viia) of the 1961 Act under the second limb, as no details of the aggregate average advances made by Rural Branches were furnished . Thus, it was submitted by ld. DR that if at all this claim is to be allowed by tribunal , then working of the quantification of the deduction allowable is to be seen by the AO and matter can be restored to the file of the AO for quantification of deduction and the assessee be directed to place complete records before the AO as to aggregate average advances made by Rural Branches. The Ld. DR further submitted that there is a difference between Provision for NPA and Provision for Doubtful Debts. The ld. DR relied upon decision of Hyderabad-tribunal in the case of ACIT v. Andhra Pradesh GrameenVikas Bank (2015)60 taxmann.com 328(Hyd. Trib.) and it is was submitted that there is a difference between NPA and Provision for Doubtful Debts. It was submitted that matter can be restored back to the file of AO/CIT(A) for fresh adjudication . The ld. DR also relied upon the decision of Vishakhapatnam tribunal in the case of ACIT v. Chaitanya Godavari Grameena Bank reported in (2018) 93 taxmann.com 400(Visakhapatnam-trib.)

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 5.3 The Ld. AR in rejoinder submitted that the provision has been made in the Profit and Loss Account of Rs 1,78,85,718/- , towards Provision for Bad and Doubtful Debts(NPA Provision). Our attention was drawn to Page Nos. 30 and 31 of the paper book, wherein audited accounts of the assessee are placed. It was submitted that the AO allowed deduction of Rs. 8,03,763/-, while disallowance was made by AO to the tune of Rs. 1,70,81,955/-. It was submitted that there is no question of disallowing any deduction with respect to Section 36(1)(viia). The ld. Counsel for the assessee relied upon decision of Hon’ble ITAT Mumbai in the case CitizenCredit Co-operative Bank Limited reported in (2014) 49 taxmann.com 11(Mum-trib) in which one of us being Hon’ble Judicial Member was part of the Division Bench who pronounced the said judicial order on July 25, 2014. Sofar as second issue is concerned regarding disallowance of depreciation , the Ld. Counsel for the assessee submitted that there were some purchases made after 30thSeptember on which full deduction was claimed and the AO rightly restricted deduction claim of depreciation to 50% of the relevant rate of depreciation allowed. The ld. Counsel for the assessee submitted that invoices for some purchases of fixed assets were not available . The ld. Counsel for the assessee left the matter to the discretion of the Bench. 6. We have considered rival contentions and perused the material on record including orders of authorities below and case laws cited before us. This appeal was heard by Division Bench through Video Conferencing Mode through Virtual Court. We have observed that there are two effective issues in this appeal. The first issue concerns itself with the allowability of deduction u/s 36(1)(viia) of the 1961 Act under the second limb wherein the deduction claimed @10% of aggregate average advances made by Rural Branches of the assessee, stood disallowed. The second effective issue concerns itself with disallowance of depreciation under the provisions of Section 32 of the 1961 Act, mainly on the grounds that the assessee

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 could not produce the invoices for purchases purportedly made of the fixed assets during the year under consideration, and secondly the assessee claimed depreciation at full rates on the purchases made of fixed assets although the said fixed assets were purchased after 30th September of the previous year. The assessee did not press this issue concerning disallowance of depreciation before ld. CIT(A) as well before us. Since the assessee is not able to produce purchase invoices for fixed assets purported to have been purchased even before us, nor does it has any evidence as to the existence of the said fixed assets and its usage for business of the assessee, we donot find any merit in the claim of the assessee and hence this issue is decided against the assessee and the appellate order passed by ld. CIT(A) stood confirmed. We order accordingly. Further, Reference is drawn to provisions of Section 32 read with proviso , wherein if the asset as specified in the said proviso is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub- section in respect of such asset shall be restricted to fifty percent of the amount calculated at the percentage prescribed for an asset specified in the said proviso. Thus, clearly the assessee has erroneously claimed depreciation at full rate even though the said asset was put to use for business purposes for less than 180 days, the assessee will be entitled for depreciation @50% of the amount calculated at the percentage prescribed for an asset specified in the said proviso. This issue is also decided against the assesse and in favour of Revenue. We order accordingly. Now, coming back to the first effective issue concerning grant of deduction u/s 36(1)(viia) of the 1961 Act. The assessee has claimed deduction to the tune of Rs. 1,78,85,718/- u/s 36(1)(viia) of the 1961 Act , while filing return of income with the Revenue. The said amount is reflected by assessee as deduction while computing Profits of the assessee, in the audited Profit and Loss Account of the

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 assessee. The audited financial statements of the assessee are placed in paper book filed by the assessee. The AO has allowed deduction of Rs. 8,03,763/- computed at the rate of seven and half percent of the total income under the first limb of Section 36(1)(viia), while the AO did not allow deduction to the tune of Rs. 1,70,81,955/- which stood disallowed by AO. The ld. CIT(A) upheld disallowance of the deduction to the tune of Rs. 1,70,81,955/-. While confirming the disallowance as was made by the AO, the ld. CIT(A) observed that the assessee is not eligible for deduction under the second limb of Section 36(1)(viia)(a) of the 1961 Act which concerns itself with deduction computed @10% of aggregate average advances made by Rural Branches of assessee, keeping in view amended provisions of Section 36(1)(viia) as amended by Finance Act, 2007 , w.e.f. 01.04.2007. The ld. CIT(A) further observed that Regional Office of Reserve Bank of India, Lucknow has granted banking license to the assessee on 10.01.2012 , and during the year under consideration, the assessee was not even holding banking license and hence there is no question of grant of deduction u/s 36(1)(viia) of the 1961 Act. The said banking license issued by RBI is reproduced in the preceding para’s of this order. Further, ld. CIT(A) also observed that the assessee has not even submitted details of aggregate average advances made by Rural Branches before AO as well before ld. CIT(A) and hence even if the deduction is to be allowed, quantification cannot be done in the absence of details furnished by the assessee of the aggregate average advances made by Rural Branches. With this background , we proceed further to adjudicate this appeal. Before proceeding further, it will be profitable at this stage to reproduce provisions of Section 36(1)(viia) of the 1961 Act as it stood at relevant time , which is reproduced as hereunder: “Other deductions. 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- 23

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 **** **** (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:] [Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten per cent" had been substituted :] [Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession." ] [Explanation.—For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;] (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA);] [(c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) :]

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 [Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.] Explanation.—For the purposes of this clause,— [(i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank;] [(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; [(ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) [***];] [(iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (iv) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (v) "State industrial investment corporation" means a Government companywithin the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and [eligible for deduction under clause (viii) of this sub-section];] [(vi) "co-operative bank", "primary agricultural credit society" and "primary co- operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;]”

It will also be appropriate at this stage to reproduce Explanation to sub-section (4) of Section 80P as it stood at relevant time, which is reproduced hereunder:

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 “(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation.—For the purposes of this sub-section,— (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.”

It will also be appropriate at this stage to reproduce Rule 6ABA of Income-tax Rules, 1962 as it stood at relevant time, which is reproduced hereunder: “[Computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of section 36. 6ABA. For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely :— (a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year shall be aggregated separately; (b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a); (c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank. Explanation.—In this rule, "rural branch" and "scheduled bank" shall have the meanings assigned to them in the Explanation to clause (viia) of sub-section (1) of section 36.]”

It is equally relevant to reproduce clause(c) of Section 5 of the Banking Regulation Act, 1949 , which is reproduced hereunder: “5. Interpretation.— [In this Act], unless there is anything repugnant in the subject or context,—

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 **** **** (c) “banking company” means any company which transacts the business of banking [in India]. Explanation.—Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;” It is equally relevant to reproduce the definition of Co-operative Bank as is contained in Part V of Banking Regulation Act,1949 , which is reproduced hereunder: “PART V APPLICATION OF THE ACT TO CO-OPERATIVE BANKS 56. Act to apply to co-operative societies subject to modifications.— The provisions of this Act, as in force for the time being, shall apply to, or in relation to, co- operative societies as they apply to, or in relation to banking companies subject to the following modifications, namely:-- (a) throughout this Act, unless the context otherwise requires,-- (i) references to a "banking company" or "the company" or "such company" shall be construed as references to a co-operative bank; (ii) references to "commencement of this Act" shall be construed as references to commencement of the Banking Laws (Application to Co- operative Societies) Act, 1965 (23 of 1965); (b) in section 2, the words and figures "the Companies Act, 1956 (1 of 1956) and" shall be omitted; (c) in section 5,-- (i) after clause (cc), the following clauses shall be inserted, namely:-- (cci) "Co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank;” It is equally relevant to reproduce substituted section 22 of the 1949 Act by virtue of Section 56 of the 1949 Act as is applicable to co-operative Banks:

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 “(o) in section 22,-- (i) for sub-sections (1) and (2) the following sub-sections shall be substituted, namely:-- "(1) Save as hereinafter PROVIDED, no co-operative society shall carry on banking business in India unless— (a) [***] (b) it is a co-operative bank and holds a licence issued in that behalf by the Reserve Bank, subject to such conditions, if any, as the Reserve Bank may deem fit to impose: PROVIDED that nothing in this sub-section shall apply to a co-operative society, not being a primary credit society or a co-operative bank carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), for a period of one year from such commencement: [PROVIDED FURTHER that nothing in this subsection shall apply to a primary credit society carrying on banking business on or before the commencement of the Banking Laws (Amendment) Act, 2012, for a period of one year or for such further period not exceeding three years, as the Reserve Bank may, after recording the reasons in writing for so doing, extend.] [(2) Every co-operative society carrying on business as a cooperative bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965) shall before the expiry of three months from the commencement, every co-operative bank which comes into existence as a result of the division of any other co-operative society carrying on business as a co- operative bank, or the amalgamation of two or more co-operative societies carrying on banking business shall, before the expiry of three months from its so coming into existence, [every primary credit society which had become a primary co-operative bank on or before the commencement of the Banking Laws (Amendment) Act, 2012, shall before the expiry of three months from the date on which it had become a primary cooperative bank] and every co-operative society [***] shall before commencing banking business in India, apply in writing to the Reserve Bank for a licence under this section: PROVIDED that nothing in clause (b) of sub-section (1) shall be deemed to prohibit— (i) a co-operative society carrying on business as a cooperative bank at the commencement of the Banking Law (Application to Co-operative Societies) Act, 1965 (23 of 1965); or (ii) a co-operative bank which has come into existence as a result of the division of any other co-operative society carrying on business as a co- operative bank, or the amalgamation of two or more co-operative societies carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965) or at any time 2[thereafter]; 28

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 [***] from carrying on banking business until it is granted a licence in pursuance of this section or is, by a notice in writing notified by the Reserve Bank that the licence cannot be granted to it.]; (ii) sub-section (3A) shall be omitted; (iii) in sub-section (4) in clause (iii) the words, brackets, figures and letter "and sub-section (3A)" shall be omitted;] At this stage , it will be relevant to refer to Notes on Clauses to Finance Bill, 2007 , wherein introducing the amendment, notes on clauses stipulates as under: “Sub-clause (a) of clause (viia) of sub-section (1) of the said section provides for deduction of an amount not exceeding seven and one-half per cent. of the total income (computed before making any deduction under the said clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of a scheduled bank as specified or a non-scheduled bank in the computation of income of such banks. The proposed amendment seeks to extend the same deductions which are available to a scheduled bank and non-scheduled bank to a co-operative bank not being a primary agricultural credit society or a primary co-operative agricultural and rural development bank. This amendment will take effect retrospectively from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-2008 and subsequent years.”

It is also relevant at this point to refer to Memorandum to Finance Bill, 2007, the relevant portion is reproduced hereunder: “Deduction in respect of any provision for bad and doubtful debts to be allowed in the case of co-operative banks under section 36(1)(viia)

Under the existing provisions of clause (viia) of sub-section (1) of section 36, deduction of an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under the said clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of a scheduled bank or a non-scheduled bank computed in the prescribed manner is allowed as deduction in the computation of income of such banks. "Scheduled bank", as defined in the Explanation to clause (viia) of sub-section (1) of the section 36, does not include a co-operative bank.

The deduction earlier allowable under section 80P in the case of a co-operative society engaged in carrying on the business of banking (co-operative banks) has been 29

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 withdrawn from assessment year 2007-08 barring in the case of a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Since profits of co-operative banks are now taxable after withdrawal of deduction available to a co-operative society engaged in carrying on the business of banking under section 80P, such co-operative society banks should be allowed deduction in respect of any provision for bad and doubtful debts as its profits have become taxable. The amendment proposes to allow this deduction to co-operative banks not being a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

The definition of scheduled bank in clause (ii) of Explanation to said clause (viia) is also proposed to be amended to include scheduled co-operative banks within the definition.

Under the existing provisions contained in the Explanation to item (fa) of sub-clause (iv) of clause (15) of section 10, the expression "scheduled bank" has been defined to have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub- section (1) of section 36 which does not include co-operative banks. However, the definition of "scheduled bank" after the proposed amendment will include scheduled co-operative banks. The referral definition of "scheduled bank" presently occurring in the Explanation to the aforesaid item (fa) does not allow exemption of interest payable to a non-resident or a not ordinarily resident by a co-operative bank. In order to continue with this position, the definition of "scheduled bank" in its pre-amended form in clause (ii) of Explanation to clause (viia) of sub-section (1) of section 36 is being substituted for the existing Explanation in the aforesaid item (fa) to ensure that the scope of the exemption allowed under the aforesaid item (fa) is not changed. The proposed substitution of the definition of "scheduled bank" in the said item (fa) meets with this objective.

The proposed amendment to the definition of "scheduled banks" as it appears in section 36 will also have the effect of making the provisions of section 43D applicable to scheduled co-operative banks.

These amendments will take effect, retrospectively, from 1st April, 2007 and will, accordingly apply in relation to the assessment year 2007-08 and subsequent years.

[Clauses 6 and 12]” The perusal of Notes to Clauses and Memorandum to Finance Act, 2007, clearly stipulate that the benefit of deduction u/s 36(1)(viia) which was available to a Scheduled and a Non-scheduled bank is sought to be extended to Co-operative 30

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank , with effect from 01.04.2007, as the deduction erstwhile available to such eligible co-operative banks u/s 80P stood withdrawn by Finance Act, 2006 w.e.f. 01.04.2007. Thus, there was an amendment by Finance Act, 2007 to Section 36(1)(viia), applicable w.e.f. 01.04.2007, wherein the Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, were brought under the provisions of Section 36(1)(viia) for claiming deductions in respect of provisions made for bad and doubtful debts . Prior to this amendment, Co- operative Banks were entitled to claim deduction of Profits and Gains of business attributable to business of banking , while computing total income chargeable to tax by virtue of provisions of Section 80P. Thus, by virtue of insertion of Section 80P(4) , by Finance Act, 2006 effective from 01.04.2007, Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank were not entitled to claim deduction of profits and gains of business attributable to business of banking , while computing total income chargeable to tax under the provisions of Section 80P by virtue of insertion of Section 80P(4), but Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank were brought within the ambit of Section 36(1)(viia) by Finance Act, 2007 w.e.f. 01.04.2007 , for claiming deductions in respect of provisions made for bad and doubtful debts. Bare perusal of provisions of Section 36(1)(viia) will reveal that Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank shall be eligible and entitled for claiming deduction u/s 36(1)(viia)(a) so far as first limb is concerned to the tune of seven and half percentile of total income. So far as second limb of Section 36(1)(viia) (a) is concerned, the deduction allowed is 10% of aggregate average advances made by the Rural Branches of such bank computed in the prescribed 31

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 manner, as is stipulated in Section 36(1)(viia)(a) of the 1961 Act. While including ‘Co-operative Bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank’ in Section 36(1)(viia)(a) effective from 01.04.2007 , law makers have brought eligible Co-operative Banks to be entitled for deduction under first limb, and while referring to ‘such bank’ in the second limb, in our considered view by literal reading and interpretation, eligible Co-operative Banks shall also be entitled to claim deduction under second limb. As the use of the term ‘such bank’ in the second limb of Section 36(1)(viia)(a), will relate back to the banks as specified in the first limb which, inter-alia, will include eligible Co-operative Banks. In Explanation to Section 36(1)(viia) , it is provided that rural branches 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. The inclusion of Co-operative Bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank were brought within the ambit of Section 36(1)(viia) by way of inserting in sub-clause (a) to clause (viia) to sub-section (1) to Section 36 by Finance Act, 2007 w.e.f. 01.04.2007, but there was no corresponding amendment in Explanation to Section 36(1)(viia), and Co- operative Banks are not included here for ascertaining the manner to identify Rural Branches of Co-operative Bank. Further, Section 36(1)(viia)(a) stipulates that the deduction under second limb towards aggregate average advances made by Rural Branches of such bank shall be computed in prescribed manner. The manner of computing deduction is prescribed in Rule 6ABA of the 1962 Rules which refers only to scheduled bank, and there is no mention of Non-Scheduled Bank or Co-operative Bank in Rule 6ABA of the 1962 Rules. This is a beneficial provision , which enable grant of deduction towards provisions made for bad and doubtful debts. No doubt , it is true that beneficial provisions are to be strictly 32

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 construed to determine the eligibility of tax-payer to get the prescribed deduction , But once the tax-payer is found to be eligible to get deduction, then the provision is to be liberally construed to give full effect to the beneficial provision to enable the achievement of the purposes for which it was intended. It is equally true that taxation provisions are to be strictly construed and there is no equity in taxing statute, but at the same time provision are to be read in a harmonious manner to make it workable and any reading of the provision which makes it otiose so far it is possible is to be avoided. The Revenue has heavily relied on the decision of Lucknow Bench of tribunal in the case of Mansarover Urban Co-operative (supra) to contend that the Co-operative Banks shall not be entitled for deduction under second limb of Section 36(1)(viia)(a) with respect to deduction computed based on aggregate average advances made by Rural Branches . We have carefully gone through the aforesaid decision of tribunal and it is observed that the relevant ay under consideration before tribunal was ay:2003-04 and the tribunal decided that the benefit u/s 36(1)(viia) shall not be available to Co-operative Bank prior to 01.04.2007, as the Co-operative Banks are brought under the purview of Section 36(1)(viia) with effect from 01.04.2007. By virtue of Section 56 of the Banking Regulation Act, 1949, the 1949 Act was made applicable to co-operative societies subject to modification as stipulated therein . It is stipulated that the provisions of the 1949 Act, shall apply to , or in relation to banking companies subject to modification stipulated. It is , inter-alia, stipulated that unless the context otherwise requires references to a “banking company” or “the company” or “such company” shall be construed as reference to a Co-operative Bank . Thus, once Co- operative Banks stood covered by Section 36(1)(viia) by Finance Act, 2007 w.e.f. 01.04.2007 , then it shall be a non-scheduled bank as defined in explanation (i) to Section 36(1)(viia) , which explanation provides that a “non-scheduled bank” means a banking company as defined in clause (c ) of section 5 of the Banking Regulation Act, 1949, unless it is in the second schedule of RBI Act, 1934 being a 33

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 scheduled bank. By virtue of Section 56 of the 1949 Act , in section 5 of the 1949 Act, after clause (cc) , the clause (cci) was inserted in Section 5 , which stipulates that “ Co-operative Bank” means a state co-operative bank, a central co-operative bank and a primary co-operative bank. Admittedly , the assessee is not a scheduled co-operative bank as the assessee is not included in Second Schedule to the Reserve Bank of India Act, 1934 , and hence by virtue of Section 56 of the 1949 Act read with Section 5(c) and 5(cci) , the assessee is to be classified as Non-scheduled Bank with the Rider in the instant case provided it is held that the assessee was holding banking license issued by RBI for the relevant period under consideration because the banking license was granted by RBI only on 10.01.2012, as is mandated under Section 22 of the 1949 Act , for which we have given our observations elsewhere in this order. Our above view is fortified by decision of Hon’ble Kerala high Court in the case of Kannur District Co-operative Bank Limited(supra) and we are in agreement with the above view of Hon’ble Kerala High Court, although we note that tribunal in the case of Mansarover Urban Co- operative (supra) has taken a different view that Co-operative Bank cannot be classified as non-scheduled bank, with which we with due respect do not agree with the above view of tribunal.The assessee is admittedly not a scheduled co- operative bank. However, going by the definition of non-scheduled bank in Explanation (i) to Section 36(1)(viia), it means a banking company as defined in clause (c) of Section 5 of the 1949 Act. By virtue of Section 56 of the 1949 Act, the provisions of the 1949 Act as are applicable to banking companies were made applicable to Co-operative Banks and reference to a “banking company” or “the company” or “such company” shall be construed as references to a co-operative bank and as defined in Part V of the 1949 Act, the “Co-operative bank” means a state co-operative bank, a central co-operative bank and a primary co-operative bank, as Section 5 of the 1949 Act stood amended by virtue of Section 56 wherein clause (cci) stood inserted in Section 5 of the 1949 Act, after clause (c). Similarly 34

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 Section 22 of the 1949 Act stood amended by substitution by virtue of Section 56 of the 1949 Act , and no co-operative society shall carry on banking business in India unless it is a co-operative bank and holds a license issued in that behalf by the RBI. There are certain relaxation periods granted to class of certain co- operative societies who are already carrying on banking business and are brought within the ambit of the 1949 Act from time to time, to seek license from RBI within the prescribed cut-off period and the RBI is empowered to grant such banking license from retrospective effect whence the statutory amendment bringing a class of co-operative society within the ambit of the 1949 Act. The assessee has claimed that RBI granted banking license to it to continue and carry on banking business , vide license dated 10.01.2012 , and although we are seized of ay: 2010- 11 , the assessee has claimed that it will be entitled and eligible for deduction u/s 36(1)(viia) as the said license was granted with retrospective effect to continue and carrying on the banking business. It is the claim of the assessee that it is carrying on banking business since its inception . These aspect has not been exhaustively looked into by the authorities below as the ld. CIT(A) has merely concluded that the assessee is not entitled for deduction u/s 36(1)(viia) also on the grounds that it did not held banking license during the relevant period under consideration. Thus, the matter is to be remanded back to the AO to look into the provisions of Section 56 of the 1949 Act and its applicability to the assessee, as also the application filed by assessee with RBI for seeking banking license and whether on the strength of same , the said license was granted by RBI with retrospective effect so as to entail assessee to seek deduction u/s 36(1)(viia) for the year under consideration , as complete facts are not on record before us. The AO is directed to make relevant enquires and verifications , including , inter-alia, making enquiries from RBI to seek relevant information to arrive at decision whether the assessee will be eligible for deduction u/s 36(1)(viia). Thus , if it is found by AO after due verifications and enquiries that the assessee was granted 35

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 banking license by RBI which covers relevant previous year 2009-10, then in our view the assessee will be eligible for deduction u/s 36(1)(viia) under both the limbs. Proceeding further that if at all assessee is found to be eligible for deduction u/s. 36(1)(viia), it is also observed that the assessee has not submitted any computation quantifying the deduction allowable under the second limb of Section 36(1)(viia)(a) of the 1961 Act , as no details as to aggregate average advances made by Rural Branches were submitted. The assessee is directed to submit complete details with respect thereto. Further, so far as manner in which Rural Branches are to be determined, we clarify that it will be in the same manner as is specified in Explanation (ia) to Section 36(1)(viia), although the said explanation does not refer to Co-operative Bank specifically , but the said issue is adjudicated by Hon’ble Kerala High Court in the case of Kannur District Co-operative Bank Limited v. CIT reported in (2014) 50 taxmann.com 189(Kerala HC), wherein Hon’ble High Court held that Rural Branch defined under aforesaid explanation would also include rural branch of a co-operative bank and same terms and conditions as stipulated in explanation (ia) to Section 36(1)(viia) shall apply while determining Rural Branches of Co-operative Bank. Thus,the place referred for identifying the branch of the bank as a rural branch with reference to is location is the revenue village as that the Rural Branch has to be always in rural area and the place referred can be taken as village , and that it cannot be extended beyond the rural unit being village as recognized in the census report and then reference is to the population criteria as specified in Explanation (ia) to Section 36(1)(viia). Reference is drawn to judgment of Hon’ble Kerala High Court in the case of CIT v. Lord Krishna Bank Limited (2011) 339 ITR 606(Ker. HC ) and judgment of Hon’ble Kerala High Court in the case of Ernakulam District Co-operative Bank Limited v. CIT reported in (2018) 98 taxmann.com 488(Ker. HC). We are in agreement with the afore-stated judgments of Hon’ble Kerala High Court. It is also observed that similar view was taken by Mumbai-tribunal in the case of Citizen Credit Co- 36

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12 operative Bank Limited v. ACIT, Mumbai reported in (2014) 49 taxmann.com 11(Mum-trib.), in which one of us namely Hon’ble Judicial Member was part of the Division Bench who pronounced the said judgment. No contrary judgment of Hon’ble Superior Courts including Jurisdictional High Court are cited by Revenue. Thus, the matter is remitted back to the file of the AO for fresh adjudication, as is directed by us in this order. Needless to say that the AO shall provide proper and adequate opportunity of being heard to the assessee in set aside proceedings. The evidences/explanations submitted by assessee in its defense shall be admitted by AO , and adjudicated by AO on merits in accordance with law. We order accordingly. 7.In the result, appeal filed by the assessee in ITA no. 135/Alld/2015 for ay: 2010- 11 is partly allowed for statistical purposes. 8.Our decision in ITA No. 135/Alld/2015 for ay: 2010-11 shall apply mutatis mutandis to appeal filed by assessee in ITA no. 136/Alld/2015 for ay: 2011-12. 9.In the result, appeal filed by the assessee in ITA no. 136/Alld/2015 for ay: 2011- 12 is partly allowed for statistical purposes. 10.In the result, both the appeals filed by the assessee in ITA no. 135- 136/Alld/2015 for ay’s: 2010-11 and 2011-12 are partly allowed for statistical purposes. Order pronounced on 30/09/2021 at Allahabad

Sd/-/- SdSd/-/- [VIJAY PAL RAO] [RAMIT KOCHAR] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30/09/2021 kd Copy forwarded to: 37

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12

By order Assistant Registrar Date Initials Original dictation pad is enclosed at the end of file 1. Draft dictated on: 16 .09.2021 Sr. PS/PS 2. Draft placed before author: 16.09.2021 Sr. PS/PS 3. Draft proposed & placed before the 29.09.2021 JM/AM second member: 4. Draft discussed/approved by Second JM/AM Member: 5. Approved Draft comes to the Sr. PS/PS: .09.2021 Sr. PS/PS 6. Order pronounced on: .09.2021 Sr. PS/PS 7. File sent to the Bench Clerk: .09.2021 8. Date on which file goes to the Head .09.2021 Sr. PS/PS Clerk: 9. Date on which file goes to AR 10. Date of dispatch of Order:

ITA No.135/ALLD/2015 And ITA No. 136/ALLD/2015 ZilaSahkari Bank Limited Assessment Year: 2010-11 and 2011-12