INCOME TAX OFFICER, SURAT vs. THE SUTEX CO.OPERATIVE BANK LIMITED, SURAT

Aggrieved by the order of AO, the revenue filed appeal before the CIT(A). The CIT(A) has reproduced the submission of the appellant, which is at pages 3 to 10 of the appellate order. Before the CIT(A), the appellant relied on the decision of Hon’ble Supreme Court in case of Catholic Syrian Bank Limited vs. CIT, 343 ITR 270 (SC) and submitted that provisions of section 36(1)(vii) and 36(1)(viia) are distinct and independent of each other. The CIT(A) held that the appellant being co-operative bank, is duly entitled for deduction u/s 36(1)(viia) of the Act on account of provisions for bad and doubtful debts. He also referred to the decision of ITAT, Cochin in case of Kodungallur Town Co-op. Bank Ltd. vs. ACIT, in dated 18.07.2015 and the decision of ITAT, Mumbai in case of DCIT vs. Yes Bank Ltd., in ITA No.3239/Mum/2018, dated 30.06.2023 and held that assessee is entitled for claiming deduction u/s 36(1)(viia) of the Act on account of provisions for bad and doubtful debts. 4.1 Regarding the next ground of disallowance of Rs.1,75,00,000/- u/s 36(1)(viii) of the Act, he observed that the AO has referred to facts of AY.2014- 15 wherein the appellant had not properly created and maintained special reserve funds as per the provisions of section 36(1)(viii) of the Act. He observed that each assessment year is distinct and separate and has separate set of factual matrix. The appellant has fulfilled all four conditions required for claiming deduction u/s 36(1)(viii) of the Act. Accordingly, he allowed deduction claimed by the assessee. Thus, the appeal of the assessee is allowed by the CIT(A).

Aggrieved by the order of CIT(A), the revenue filed appeal before the Tribunal. The learned Senior Departmental Representative (ld. Sr. DR) for the revenue relied on the order of AO. He submitted that there are no rural branches and, hence, deduction u/s 36(1)(viia) of the Act, amounting to Rs.50,00,000/- is not eligible.

On the other hand, the learned Authorized Representative (ld. AR) of the assessee supported the order of CIT(A). He submitted that provisions of section 36(1)(vii) and 36(1)(viia) of the Act, pertain to independent items of deductions.

We have heard both the parties and perused the materials available on record. We have also deliberated upon the decisions relied upon by both sides. The deduction/s 36(1)(viia) pertains to provisions for bad and doubtful debts made by a scheduled bank or a non-scheduled bank or a co-operative bank, other than the primary agricultural credit society or a primary co-operative agricultural and rural development bank. An amount not exceeding 71/2 % of the total income computed before making any deduction under the above Clause and Chapter VI A, and an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank are allowed under Clause (viia) of sub-section (1) of section (36) of the Act. The Hon’ble Supreme Court in cases of Catholic Syrian Bank Ltd. (supra) and DCIT vs. Karnataka Bank Ltd., 349 ITR 705 (SC) has held that provisions of section 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The banks would continue to get the benefit of write off of /AY.2016-17 The Sutex Co-op. Bank Ltd. irrecoverable debts u/s 36(1)(vii) of the Act in addition to benefit of deduction of the provisions for bad and doubtful debts u/s 36(1)(viia) of the Act. A reading of Clause (viia) of section 36(1) of the Act makes it clear that provisions for bad and doubtful debt made by the eligible banks has two components; (i) amount not exceeding 7.5% of the total income computed before any deduction under the clause (viia) and Chapter VIA and (ii) an amount not exceeding 10% of aggregate average advances made by the rural branches of such bank. It is, therefore, clear that the first component of the deduction of 7.5% is independently available to the eligible bank and is not dependent on having any rural branches. In view of the clear statutory provisions, the appellant-bank was eligible for the first component of the deduction of 7.5% of the total income. The deduction u/s 36(1)(viia) of the Act may be calculated as under: Sr. No. Particulars Amount (Rs.) A Deduction u/s 36(1)(viia):- 1 Gross Total Income 27,38,18,770 2. Add:- Provisions for BDDR 50,00,000 Total Income For Claiming deduction u/s 27,88,18,770 36(1)(viia) (1 + 2) 3. Deduction Allowance to assessee u/s 36(1)(viia) (a) 7.5% of Total Income 2,09,11,408 Add: (b) 10% of avg rural advance 0 4. Amt eligible for deduction u/s 36(1)(viia) 2,09,11,408 (a +b) 5. Deduction claimed by assessee u/s 36(1)(viia) 50,00,000  7.1 Thus, even after ignoring the 10% of average rural advance, the assessee was still eligible for deduction of Rs.2,09,11,408/-. As against the above sum, it has claimed deduction of Rs.50,00,000/- u/s 36(1)(viia) of the Act. Hence, the /AY.2016-17 The Sutex Co-op. Bank Ltd. CIT(A) has rightly allowed the claim of the assessee and the same is upheld. Accordingly, ground no.1 raised by the revenue is dismissed.

The next ground is disallowance of deduction u/s 36(1)(viii) of the Act. The appellant had claimed deduction of Rs.1,75,00,000/-. The ld. Sr. DR supported the order of AO and submitted that the CIT(A) was not correct in deleting the addition in absence of any supporting evidence by the assessee.

On the other hand, ld. AR of the assessee supported the order of CIT(A).

We have heard both parties and perused the materials available on record. As per provisions of Clause (viii)of sub-section (1) of section 36 of the Act, the assessee is eligible for an amount not exceeding 20% of the profit derived from eligible business under the head profits and gains of the business before making any deduction under this clause, i.e., 36(1)(viii) of the Act, which is carried to a reserve account created and maintained by the specific entity. Therefore, what is necessary to claim the deduction under the aforesaid provisions are; (i) that the impugned transfer to the special reserve should not exceed 20% of the profit, (ii) the assessee should be a specific entity under Explanation (a) below section 36(1)(viii) of the Act, which includes a co- operative bank, (iii) the assessee should be engaged in the business of banking and (iv) the assessee is engaged in providing the long-term finance. We find that the assessee fulfils all four conditions required for claiming deduction u/s 36(1)(viii) of the Act. Accordingly, the assessee is eligible for 20% deduction of business profit without any deduction u/s 36(1)(viii), which is as under: