THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI 2 vs. ERNAKULAM DISTRICT CO-OPERATIVE BANK LTD

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM TUESDAY, THE 31ST DAY OF AUGUST 2021 / 9TH BHADRA, 1943 ITA NO. 63 OF 2017 AGAINST THE ORDER IN ITA 508/Coch/2015 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/RESPONDENT/RESPONDENT/REVENUE: THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI 2 C. R. BUILDINGS, I. S. PRESS ROAD, KOCHI-682018. BY ADV SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEP RESPONDENT/APPELLANT/APPELLANT/ASSESSEE: ERNAKULAM DISTRICT CO-OPERATIVE BANK LTD KOCHI-682016. BY ADVS. SRI.N.RAGHURAJ, SC, ERNAKULAM DISTRICT CO-OPERATIVE BANK LTD. JOSEPH MARKOSE (SR.) OTHER PRESENT: SR ADV JOSEPH MARKOS THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 31.08.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA No.63 of 2017 2 JUDGMENT ITA No.63 of 2017 S.V.Bhatti, J. The Principal Commissioner of Income Tax/Revenue is the appellant. Ernakulam District Co-operative Bank Ltd./Assessee is the respondent. 2. The Revenue filed instant appeal against the order dated 22.03.2017 of ITAT, Cochin Bench, Cochin in ITA No.508/Coch/2015. The controversies in the appeal relate to the income tax return filed by the assessee for the assessment year 2010-2011, viz. claim of deduction of 7.5% of the total income of assessee as bad debts, and further deduction of 10% on average advances made by assessee in rural branches under Section 36(1)(viia) of the Income Tax Act (for short 'the Act'). The following substantial questions are raised by the appellant: i) Whether, in the facts and circumstances of the case, has not the ITAT erred in directing the allowance of deduction @7.5% of the total income under the first limb of section 36(1)(viia) when the provision created by the assessee does not qualify to be treated as

ITA No.63 of 2017 3 provision for bad and doubtful debts? ii) Has not the ITAT erred in restoring to the assessing officer for fresh consideration the assessee's eligibility for deduction under the second limb of section 36(1) (viia) to be computed with reference to aggregate average advances of its branches claimed to be rural branches accepting the alternate plea of the assessee that it has rural branches when the condition precedent of creating provision for bad and doubtful debts remains unfulfilled? iii) Whether in the facts and circumstances of the case, is the ITAT right in deciding the questions raised in (i) and (ii) above without adjudicating the ground based on which the Assessing Officer as well as the Commissioner of Income Tax (Appeals) disallowed the claim u/s 36(1)(viia) of the Act? 3. Substantial Question No.1 relates to the claim of deduction at 7.5% of the total income as allowance under the first limb of Section 36(1)(viia). The circumstances relevant for the question of law are that the assessee in the return dated 30.8.2011 for the assessment year 2010-2011 claimed total deduction amounting to Rs.100,84,14,242/-. The said allowance consists of 3,50,88,588/- under first limb of Section 36(1)(viia) of the Act. The Assessing Officer disallowed the claim on the ground that the assessee is not a scheduled bank. The Commissioner of Income Tax (CIT) also denied the claim of allowance of 7.5% made by the assessee. The Tribunal referred to the judgment of this Court in

ITA No.63 of 2017 4 Kannur District Co-operative Bank Ltd. v Commissioner of Income Tax1 for reversing the findings of A.O. and CIT(A). The operative portion of the decision of this Court reads as under: “9. Admittedly, the appellants-assessees are co-operative banks. With the introduction of the Finance Act of 2007, coming into effect from April 1,2007, one has to understand what was the position prior to April 1, 2007, and after Apri1, 2007. During the relevant assessment year, admittedly, the appellants- assessees were not entitled for any deduction provided under section 80P of the Act. Prior to April, 2007, they were enjoying the benefits provided under section 80P. With the introduction of the Finance Act, 2007, with effect from Apri1, 2007 they could claim deductions as provided under section 36(1) of the Act. We are concerned with sub-clause (a) of clause (viia) of section 36(1). Prior to the Finance Act of 2007, co-operative bank was not included in sub-clause (a) so far as the provisions for bad and doubtful debts. With effect from April 1, 2007, co-operative bank was included under sub-clause (a) of clause (viia) of section 36(1). It is further clarified that only such co-operative bank other than a primary agriculture credit society, etc., is included in sub-clause (a) of clause (viia). The provision is a beneficial one. No doubt, a plain reading of the main section 36(1)(viia)(a) and the Explanation under the said section present certain difficulties but situation is not without possibilities. The object and the intention of the Legislature is to be understood by harmonious construction of the provisions. The policy was to include co- operative banks as well, as they could not take shelter under section 80P of the Income Tax Act any more. By restricting the scope of the provisions, the very purpose of inclusion of co-operative bank would be lost. Sub- 1 Judgment dated 3.4.2014 of High Court of Kerala in ITA No.179 of 2012

ITA No.63 of 2017 5 clause (a)consists of two types of deductions. One refers to the deduction of an amount not exceeding 7.5 percent of the total income (computed before making any deduction under this clause and Chapter VI-A). The second one refers to the deduction of an amount not exceeding 10 per cent of the aggregate average advances made by rural branches of such bank while computing in the prescribed manner. So far as the benefit of 7.5 per cent of the total income, there is no condition that it should be in respect of any rural branch. All types of banks described under sub-clause (a) of clause (viia) are entitled to seek deduction of an amount not exceeding 7.5 per cent, of the total income. Only condition is, there should be a provision for bad and doubtful debts. Till April 1, 2007, there was no need to make any provision for bad and doubtful debts under this clause so far as co- operative bank and they were claiming benefits applicable to them under section 80P. During the assessment year in question they claimed deductions under section 36(1)(viia)(a) of the Act. Only with reference to the assessment year in question the appellants-assessees have created provision for bad and doubtful debts in the books of account. So far as this issue is concerned, the opinion of the Assessing Officer and the two appellate authorities is justified and we need not interfere with the opinion of the authorities in restricting the deductions only to 7.5 per cent of the total income as provided under clause (viia) of section 36(1).” 4. So far as the claim of deduction of 7.5% of the total income, there is no condition that it should be in respect of any rural branch. All types of banks described under sub clause (a) of clause (viia) are entitled to seek deduction of an amount of not

ITA No.63 of 2017 6 exceeding 7.5% of the total income. Only condition is, there should be a provision for bad and doubtful debts. 5. Adv.Christopher Abraham does not dispute the applicability of the said ratio of Kannur Bank case, to claim allowance of 7.5% of the total income, however, develops an argument that the assessee has not made provision for claiming the said allowance. The contention is merely noted to be rejected. The assessee is required to prepare its balance sheet as per the guidelines issued by the Reserve Bank of India from time to time. Considering the nature of business activity of the assessee the provision for bad debts is provided for by the assessee. We would have considered this alternative argument of Mr.Christopher Abraham if the disallowance is by referring to this circumstance as well by the AO/CIT(A). The Assessing Officer and the Commissioner have not disallowed the claim of assessee for 7.5% deduction on the ground that no provision was made. Since this is altogether a new ground, we are reluctant to entertain the said ground now canvassed by the revenue to disturb the conclusion recorded by the Tribunal. 6. Sr.Advocate Mr.Joseph Markose places before us the effect order dated 31.7.2017 issued by the Asst.Commissioner of

ITA No.63 of 2017 7 Income Tax non-co-operate Range, Kochi pursuant to the order of the Trbunal in ITA No.508/Coch/2015 dated 22.3.2017. From the above, it is clear that 7.5% is considered even as a matter of fact from the provision made and accepted by the department in this behalf. For the above reasons Question No.1 is answered in favour of assessee and against the respondent. 7. Question No.2 deals with rural branches and while answering the said question, the Tribunal has rightly referred to the dictum laid down by this Court in Commissioner of Income Tax v Lord Krishna bank2 and remanded the matter to the Assessing officer to examine the entitlement of assessee to claim allowance to the extent of rural branches. The order of remand is justified in the facts and circumstances of the case, and the Tribunal has rightly held that the assessee is entitled to the benefit of dictum laid down by this Court in Lord Krishna Bank case. As already noted, the effect order deals with the claim of allowance towards bad debt of the rural branches. There is no infirmity of law or fact, in the consideration of the Tribunal. Hence the question is answered in favour of assessee and against the revenue. 8. Question No.3 is a mixture of the conclusions recorded 2 (2011) 339 ITR 606 Ker.

ITA No.63 of 2017 8 by the Tribunal in answering the above questions. In our considered view, particularly, for the view we have taken in the preceding paragraphs, this question is answered in favour of assessee and against the revenue. The three questions raised are answered in favour of assessee and against the revenue. ITA No.63 of 2017 is dismissed. SD/- S.V.BHATTI JUDGE SD/- VIJU ABRAHAM JUDGE css/

ITA No.63 of 2017 9 APPENDIX OF ITA 63/2017 PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER DATED 21.03.2013 ANNEXURE B TRUE COPY OF THE APPELLATE ORDER DATED 14.07.2015 PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) III, KOCHI ANNEXURE C TRUE COPY OF THE COMMON ORDER PASSED BY THE INCOME- TAX APPELLATE TRIBUNAL ON 22.03.2017 IN ITA NO.508/COCH/2015 AND ITA NO.522/COCH/2015