Ita/63/2017 Of The Principal Commissioner Of Income Tax, Kochi 2 v. 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 31 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 2C. 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 LTDKOCHI-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 S.V.Bhatti, J. ITA No.63 of 2017 The Principal Commissioner of Income Tax/Revenue isthe appellant. Ernakulam District Co-operative BankLtd./Assessee is the respondent. 2. The Revenue filed instant appeal against the order dated 22.03.2017 of ITAT, Cochin Bench, Cochin in ITANo.508/Coch/2015. The controversies in the appeal relate tothe income tax return filed by the assessee for the assessmentyear 2010-2011, viz. claim of deduction of 7.5% of the totalincome of assessee as bad debts, and further deduction of10% on average advances made by assessee in rural branchesunder Section 36(1)(viia) of the Income Tax Act (for short 'theAct'). The following substantial questions are raised by theappellant: i) Whether, in the facts and circumstances of the case,has not the ITAT erred in directing the allowance ofdeduction @7.5% of the total income under the firstlimb of section 36(1)(viia) when the provision createdby 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 assessingofficer for fresh consideration the assessee's eligibilityfor deduction under the second limb of section 36(1)(viia) to be computed with reference to aggregateaverage advances of its branches claimed to be ruralbranches accepting the alternate plea of the assesseethat it has rural branches when the condition precedentof creating provision for bad and doubtful debtsremains 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 onwhich the Assessing Officer as well as theCommissioner of Income Tax (Appeals) disallowed theclaim u/s 36(1)(viia) of the Act? 3. Substantial Question No.1 relates to the claim ofdeduction at 7.5% of the total income as allowance under the firstlimb of Section 36(1)(viia). The circumstances relevant for thequestion of law are that the assessee in the return dated 30.8.2011for the assessment year 2010-2011 claimed total deductionamounting to Rs.100,84,14,242/-. The said allowance consists of3,50,88,588/- under first limb of Section 36(1)(viia) of the Act. TheAssessing Officer disallowed the claim on the ground that theassessee is not a scheduled bank. The Commissioner of IncomeTax (CIT) also denied the claim of allowance of 7.5% made by theassessee. 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 Tax[1] for reversing the findings of A.O. and CIT(A). Theoperative portion of the decision of this Court reads as under: ITA No.63 of 2017 4 Kannur District Co-operative Bank Ltd. v Commissioner of Income Tax[1] for reversing the findings of A.O. and CIT(A). Theoperative portion of the decision of this Court reads as under: “9. Admittedly, the appellants-assessees areco-operative banks. With the introduction ofthe Finance Act of 2007, coming into effectfrom April 1,2007, one has to understand whatwas the position prior to April 1, 2007, andafter Apri1, 2007. During the relevantassessment year, admittedly, the appellants-assessees were not entitled for any deductionprovided under section 80P of the Act. Priorto April, 2007, they were enjoying thebenefits provided under section 80P. With theintroduction of the Finance Act, 2007, witheffect from Apri1, 2007 they could claimdeductions as provided under section 36(1) ofthe Act. We are concerned with sub-clause (a)of clause (viia) of section 36(1). Prior tothe Finance Act of 2007, co-operative bank wasnot included in sub-clause (a) so far as theprovisions for bad and doubtful debts. Witheffect from April 1, 2007, co-operative bankwas included under sub-clause (a) of clause(viia) of section 36(1). It is furtherclarified that only such co-operative bankother than a primary agriculture creditsociety, etc., is included in sub-clause (a)of clause (viia). The provision is abeneficial one. No doubt, a plain reading ofthe main section 36(1)(viia)(a) and theExplanation under the said section presentcertain difficulties but situation is notwithout possibilities. The object and theintention of the Legislature is to beunderstood by harmonious construction of theprovisions. The policy was to include co-operative banks as well, as they could nottake shelter under section 80P of the IncomeTax Act any more. By restricting the scope ofthe provisions, the very purpose of inclusionof co-operative bank would be lost. Sub- ITA No.63 of 2017 5 clause (a)consists of two types of deductions.One refers to the deduction of an amount notexceeding 7.5 percent of the total income(computed before making any deduction underthis clause and Chapter VI-A). The second onerefers to the deduction of an amount notexceeding 10 per cent of the aggregate averageadvances made by rural branches of such bankwhile computing in the prescribed manner. Sofar as the benefit of 7.5 per cent of thetotal income, there is no condition that itshould be in respect of any rural branch. Alltypes of banks described under sub-clause (a)of clause (viia) are entitled to seekdeduction of an amount not exceeding 7.5 percent, of the total income. Only condition is,there should be a provision for bad anddoubtful debts. Till April 1, 2007, there wasno need to make any provision for bad anddoubtful debts under this clause so far as co-operative bank and they were claiming benefitsapplicable to them under section 80P. Duringthe assessment year in question they claimeddeductions under section 36(1)(viia)(a) of theAct. Only with reference to the assessmentyear in question the appellants-assessees havecreated provision for bad and doubtful debtsin the books of account. So far as this issueis concerned, the opinion of the AssessingOfficer and the two appellate authorities isjustified and we need not interfere with theopinion of the authorities in restricting thedeductions only to 7.5 per cent of the totalincome as provided under clause (viia) ofsection 36(1).” 4. So far as the claim of deduction of 7.5% of the totalincome, there is no condition that it should be in respect of anyrural branch. All types of banks described under sub clause (a) ofclause (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, thereshould be a provision for bad and doubtful debts. 4. So far as the claim of deduction of 7.5% of the totalincome, there is no condition that it should be in respect of anyrural branch. All types of banks described under sub clause (a) ofclause (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, thereshould be a provision for bad and doubtful debts. 5. Adv.Christopher Abraham does not dispute theapplicability of the said ratio of Kannur Bank case, to claimallowance of 7.5% of the total income, however, develops anargument that the assessee has not made provision for claimingthe said allowance. The contention is merely noted to be rejected.The assessee is required to prepare its balance sheet as per theguidelines issued by the Reserve Bank of India from time to time.Considering the nature of business activity of the assessee theprovision for bad debts is provided for by the assessee. We wouldhave considered this alternative argument of Mr.ChristopherAbraham if the disallowance is by referring to this circumstance aswell by the AO/CIT(A). The Assessing Officer and theCommissioner have not disallowed the claim of assessee for 7.5%deduction on the ground that no provision was made. Since this isaltogether a new ground, we are reluctant to entertain the saidground now canvassed by the revenue to disturb the conclusionrecorded by the Tribunal. 6. Sr.Advocate Mr.Joseph Markose places before us theeffect 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 ofthe Trbunal in ITA No.508/Coch/2015 dated 22.3.2017. From theabove, it is clear that 7.5% is considered even as a matter of factfrom the provision made and accepted by the department in thisbehalf. For the above reasons Question No.1 is answered infavour of assessee and against the respondent. 7. Question No.2 deals with rural branches and whileanswering the said question, the Tribunal has rightly referred tothe dictum laid down by this Court in Commissioner of IncomeTax v Lord Krishna bank[2] and remanded the matter to theAssessing officer to examine the entitlement of assessee to claimallowance to the extent of rural branches. The order of remand isjustified in the facts and circumstances of the case, and theTribunal has rightly held that the assessee is entitled to thebenefit of dictum laid down by this Court in Lord Krishna Bankcase. As already noted, the effect order deals with the claim ofallowance towards bad debt of the rural branches. There is noinfirmity of law or fact, in the consideration of the Tribunal.Hence the question is answered in favour of assessee and againstthe revenue. 8. Question No.3 is a mixture of the conclusions recorded ITA No.63 of 2017 8 by the Tribunal in answering the above questions. In ourconsidered view, particularly, for the view we have taken in thepreceding paragraphs, this question is answered in favour ofassessee and against the revenue. The three questions raised areanswered in favour of assessee and against the revenue. ITA No.63 of 2017 is dismissed. css/ SD/- S.V.BHATTI JUDGESD/- VIJU ABRAHAMJUDGE 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