THE TIRUCHIRAPALLI DISTRICT CENTRAL COOP BANK LTD.,TRICHY vs. ACIT, CIRCLE-1(1), TRCHY

आदेश / O R D E R

PER PADMAVATHY.S, A.M: This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short "CIT(A)") passed u/s. 250 of the Income Tax Act, 1961 (in short "the Act") dated 05.12.2025 for Assessment Year (AY) 2014-15.

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 2 -: The case was selected for scrutiny and the statutory notices were duly served on the assessee. The A.O made a disallowance u/s. 36(1)(viia) of the Act by holding that: “b. Claim u/s 36 (1)(viia) of the Act In the computation of income, the assessee bank claimed Rs.14,55,89,991/- as deduction u/s 36(1)(viia). The assessee was requested to produce the complete details of this claim. The assessee is claiming 10% of the aggregate average advances made by the rural branches of the bank as deduction u/s 36 (1) (viia) of the Act.

The section 36(1) (viia) reads as under;

"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 VI-A) 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:"

In the explanation to the section it is explained that "Explanation.-For the purposes of this clause,-

(1) "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;"

From the explanation, it is understood that aggregate average advances by the rural branches can be claimed only by the scheduled bank or non scheduled bank and not by Co-operative bank. The AR was requested to explain how the assessee is eligible to claim 10% of the average aggregate advance by the rural branches.

The AR submitted that the explanation to the section 36(1)(viia) explains only the term rural branch. In the section itself, it is

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 3 -: mentioned as 'the aggregate average advances made by the rural branches of such bank', and the assessee is eligible to claim the amount. The contention of the AR is not acceptable. It is true that the explanation is only to explain the term 'rural branch'. In the explanation, if it is explained as 'rural branch means branch of a such bank', then the contention of the AR is acceptable. Whereas, in the explanation, it is clearly mentioned that "rural branch" means a branch of a scheduled bank or a non-scheduled bank. It does not include co-operative bank. Therefore, the contention of the AR is not acceptable. However, 7.5% of the total income is allowed as deduction u/s 36(1)(viia) while computing the total income of the assessee.”

Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) upheld the disallowance made by the A.O u/s. 36(1)(viia) of the Act. The assessee is in appeal before the Tribunal against the order of the CIT(A).

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 4 -: 4. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 5 -: branches. Rural branch is defined under Explanation (ia) to section 36(1)(viia) as follows :

"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.'

What is clear from the above is that the classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. While the assessee's case that found acceptance with the Tribunal is that 'place' referred to in the above definition clause is the ward of a panchayat or municipality, the Assessing Officer took the view that 'place' contained in the definition clause should mean a revenue village. No doubt, 'place' as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of 'place' referred to in the section. Standing counsel for the Department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of 'place' as referred to in the Census Report produced could be adopted for the purpose of this case. What is written in the Census Report 2001 is as follows :

'The basic unit for rural areas is the revenue village with definite surveyed boundaries. The rural area is, however, taken as the residual portion excluding the urban area and for that no strict definition is followed.'

In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee's case accepted by the Tribunal that population in a ward has to be reckoned for deciding as to whether the location of a panchayat is in a rural area or not is accepted, then probably even in municipal areas there may be wards with less than 10000 population thereby answering the branch located in such municipal area also as a rural branch. Going by the ordinary meaning of rural branch, we feel only branches of the bank located in rural areas are covered. When the Legislature adopts population as the basis for classification of rural branches, that too, with reference to the last Census Report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel the above meaning of rural area contained in the Census Report wherein revenue village is treated as a unit of rural area, can be rightly adopted. So much so, 'place' referred to in the above definition clause for the purpose of identifying the branch of a bank as a

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 6 -: rural branch with reference to its location is the revenue village. Therefore, in our view, the finding of the Tribunal that 'place' referred to in the definition is the ward of a local authority like panchayat or municipality is incorrect and, in our view, a rural branch has to be always in rural areas and the place referred can easily be taken as a village. Several wards may come within a village, whether it be in corporation, municipality or panchayats. There can be no village in a municipal or corporation area where the population is less than 10000. So much so, rural branches are such of the branches located in a village where the population in the village as a unit is less than 10000.'

It is clear from the above judgment that this court had already an occasion to consider the meaning of place with reference to the above section. Therefore, rural branch is a branch which falls under Explanation (ia) to section 36(1)(viia). The Tribunal had to reverse the judgment of the Commissioner of Income-tax (Appeals) in the light of the decision in Lord Krishna Bank's case (supra). 12. Then coming to the controversy whether co-operative bank could claim deduction of 10 per cent. of the aggregate average advances while computing the income irrespective of falling under rural branch as per the Explanation, in order to consider a company as a banking company it must transact business of banking in India as defined under section 5(c) of the Banking Regulation Act. The Explanation to section 5(c) clearly indicates which are the transactions which would not come within the meaning of banking business. Non-schedule bank means a banking company as defined under section 5(c) which is not a scheduled bank. As already stated above, co-operative bank cannot be considered as a scheduled bank as the Second Schedule to the Reserve Bank of India Act does not include any of the co-operative banks. Reading of section 5(c) along with the Explanation, clearly indicates though any company which transacts business of banking in India would come within the meaning of non-scheduled bank, by virtue of Explanation (1) under this, clause scheduled bank is excluded. So far as sub-clause (a) of clause (viia) of section 36(1), two types of deductions are provided to non-scheduled bank, a scheduled bank and a co-operative bank other than a primary agricultural credit society, etc. It is to be noted that the appellants- assessees are not primary agricultural credit co-operative society or other kind of bank so as to go out of the definition of co-operative bank under sub-clause (a) to clause (viia) of section 36(1). No doubt, Explanation (ia) to section 36(1)(viia) defines what is a rural branch. It is with reference to a place and certain number of population. It refers to branch of a scheduled bank or a non-scheduled bank. Apparently, we do not find the term "co-operative bank". Section 5(cci) of the Banking Regulation Act though has brought in the definition of co-operative bank, virtually every bank which is not scheduled bank would fall under the definition of non- scheduled bank. Reading of the definition of non-scheduled bank along

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 7 -: with the meaning of rural branch under the Explanation to section 36(1) of the Act, clearly indicate that co-operative bank also falls under the category of non-scheduled bank for the purpose of this section. Therefore, reading of the entire section 36(1)(viia)(a) along with the Explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision. 13. Therefore, we are of the opinion, the authorities below were justified in opining that the benefit of deduction of 10 per cent. of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts. Such rural branch means a branch as explained under Explanation (ia), as opined in the decision of Lord Krishna Bank's case (supra).”

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 8 -: credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and onehalf 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:]

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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 cooperative 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) xxxxxxxxxxxxxxx

[(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;”

“ ‘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:

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 9 -:

“ ‘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 (supra).”

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) लेखा सद�य सद�य सद�य /Accountant Member सद�य लेखा लेखा लेखा �याियक �याियक सद�य �याियक �याियक सद�य सद�य / Judicial Member सद�य चे�नई/Chennai, �दनांक/Dated: 17th July, 2026. EDN, Sr. P.S EJTADA Digitally signed by EJTADA DURGA DURGA NARESH Date: 2026.07.21 NARESH 17:40:08 +05'30'

ITA No.1108/Chny/2026 Thiruchirappalli District Central Co-op. Bank Ltd. :- 10 -: आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF