DEPUTY COMMISSIONER OF INCOME TAX , TIRUCHIRAPALLI vs. THE KARUR VYSYA BANK LIMITED, KARUR

1 At the outset, we find that there is a delay of 31 days in filing the appeal by the Revenue. The department has filed the reasons for filing the appeal belatedly and after considering the same the delay is condoned and taken up for adjudication. ITA No. 1502/CHNY/2025: 2. The grounds raised by the assessee for A.Y. 2018-19 are as follows: 1. The order of the learned CIT(A) is against the law and facts of the case.

The learned CIT(A) erred in confirming that certain branches as non-rural branches and disallowing a sum of Rs.19,96,89,544/- claimed by the appellant bank u/s.36(1)(viia).

1. The learned CIT(A) erred in holding that some of the branches are not rural branches as per the definition of Section 36(1)(viia).

2. The learned CIT(A) failed to appreciate the fact that term “rural branch” is to be determined based only on the population and not on any other basis.

3. The learned CIT(A) failed to appreciate that branches have been classified as rural branches as per Reserve Bank of India classification, based on the population data, and on that basis, licenses have been granted.

4. The learned CIT(A) failed to appreciate that the provisions of the Income Tax Act and the Rules, thereunder, do not stipulate an alternate method to determine the status of rural branches.

5. The learned CIT(A) erred in not directing the Assessing Officer to revise the eligible deduction u/s.36(1)(viia) after considering the additions made to the returned income by the Ld. Assessing Officer.

6. The learned CIT(A) erred in considering certain branches as non-rural branches based on surmises and conjectures.

The lower authorities erred in disallowing Rs.42,75,76,143/- u/s.36(1)(vii) being the bad debts written off by the non-rural branches of the Appellant bank.

1. The lower authorities failed to appreciate the fact that the non-rural debts are not controlled by the proviso to Section 36(1)(vii).

2. The lower authorities erred in not following the decisions of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd vs CIT [2012] 343 ITR 270 (SC).

3. The lower authorities failed to appreciate the fact that introduction of Explanation 2 to Section 36(1)(vii) by Finance Act, 2013 has not changed the proposition of law as it existed before introduction of such explanation.

4. The lower authorities failed to appreciate the fact that this issue is covered by the orders of the Hon’ble ITAT in the appellant bank’s own case.

Brief facts of the case are that the assessee is a Banking Company carrying on the business of banking in India. The assessee filed its return of income electronically on 06.10.2018 admitting a total income of Rs.509,79,62,270/- computed under the regular provisions of the Income Tax Act, 1961 (in short “the Act”) and Book Profit of Rs.660,04,77,151/- under the provisions of section 115JB of the Act. The case was selected for scrutiny through CASS under E-assessment Scheme, 2019 and notice dated 22/09/2019 u/s.143(2) of the Act, was issued. Subsequently, notices u/s.142(1) of the Act were issued on various dates calling for information. In response to the e-notices, the assessee submitted certain details before the National Faceless Assessment Centre. The Assessing Officer ignoring the submissions made by the assessee, passed an order u/s.143(3) of the Act dated 31.05.2021, assessing the Total Income of the assessee bank at Rs.697,05,64,35/- under normal provisions after making following additions and disallowance of claims made / deduction claimed by the assessee: Sl. No Nature of additions/disallowances Amount in Rs. 1 Disallowance of depreciation on investments 91,05,14,883 2 Disallowance of Provision for Bad and Doubtful Debts u/s.36(1)(viia) 19,96,89,544 3 Disallowance of Excess claim of Bad debts u/s 36(1)(vii) 42,75,76,143 4 Disallowance on account of stale drafts account 41,46,170 5 Disallowance of ex-gratia payment 33,06,75,325 TOTAL 1,87,26,02,065

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A), NFAC, Delhi.

The Ld.CIT(A), vide the impugned order dated 31.03.2025 partly allowed the appeal of the assessee. He allowed the grounds of the assessee as tabulated below: Sl. No Particulars Amount (Rs.) 1 Disallowance of depreciation on investments 91,05,14,883 2 Disallowance on account of stale drafts account 41,46,170 3 Disallowance of ex-gratia payment 33,06,75,325 TOTAL 1,24,53,36,378

The Ld. CIT(A) however, did not allow the grounds of the assessee on the following issues: Sl. No Particulars Amount (Rs.) 1 Disallowance of Provision for Bad and Doubtful Debts u/s.36(1)(viia)) 19,96,89,544 TOTAL 19,96,89,544

Aggrieved by the order of the ld.CIT(A), both the assessee & Revenue are in appeal before us. 8. Ground No.1 of the assessee’s appeal is general ground and hence requires no adjudication. 8.1 The first issue that came up for our consideration from Ground Nos. 2, 2.1 to 2.6 of the assessee’s appeal is disallowance of provision for bad and doubtful debts u/s 36(1)(viia) – Rs. 19,96,89,544/- 8.2 The assessee had claimed a deduction of Rs.227,08,23,702/- u/s.36(1)(viia) of the Act. The AO restricted this deduction to Rs.207,11,34,158/- and disallowed Rs.19,96,89,544/- on account of the fact that 11 branches of the Bank does not fall under the category of rural branches since some of the branches are situated in village panchayats which are part of greater metropolitan area and as such, the same cannot

5 We have given our thoughtful consideration to the reasons given by the ld.CIT(A) in light of various arguments advanced by the assessee and we ourselves do not subscribe to reasons given by the CIT(A), for the simple reason that assessee had classified bank branches into rural, semi-urban and urban branches as per guidelines issued by the RBI. In the present case, for the impugned assessment year, the assessee has strictly gone by Circular issued by RBI which is based on 2001 census, as per which those 3 branches are rural branches. Admittedly, the assessee does not have any right to classify branches according to its own wish or whims because banks are covered by RBI guidelines and further, they have to strictly follow guidelines issued by RBI for all purposes including accounting of provisions, etc. In this case, as per the evidences filed by the assessee, the RBI has classified those 3 branches as rural branches, when the assessee has made provision for bad debts u/s.36(1)(viia) of the Act. Therefore, in our considered view, provision made by the assessee u/s.36(1)(viia) of the Act is in accordance guidelines of RBI and further in accordance with law.

6 Be that as it may. As per the provisions of section 36(1)(viia) of the Act, “rural branch” means a branch of a 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”. In this case, for the impugned assessment year the first day of relevant previous year is 01.04.2012. Therefore, the assessee while making provisions u/s.36(1)(viia) of the Act, should consider population figure of that place as on first day of relevant previous year. If you go by said analogy then, whether the assessee needs to consider population data of 2001 census or 2011 census is the question. Admittedly, the assessee has followed 2001 census for the purpose of classification of those 3 branches as rural branches. The assessee has adduced reasons for classifying those branches, as per 2001 census. According to the assessee, population data of 2011 was not available when the assessee has finalized its accounts and provision was created u/s.36(1)(viia) of the Act. For this purpose, the assessee has furnished necessary evidences including reply received from