Facts of the Case

The assessee, a District Co-operative Bank engaged in banking activities, created a provision for bad and doubtful debts in respect of advances made by its rural branches and claimed deduction under Section 36(1)(viia) of the Income-tax Act, 1961.

During scrutiny assessment under Section 143(3), the Assessing Officer disallowed or restricted the deduction claimed, holding that the assessee was not entitled to the full benefit under the provision. The CIT(A) confirmed the action of the Assessing Officer. Aggrieved, the assessee filed appeals before the ITAT.

The provision had been created in accordance with regulatory requirements applicable to banking institutions.

Issues Involved

  1. Whether a co-operative bank is eligible for deduction under Section 36(1)(viia).
  2. Whether advances made by rural branches qualify for the prescribed deduction.
  3. Extent of verification required to determine eligibility.

Petitioner’s Arguments (Assessee)

  • The provision was made in compliance with statutory and regulatory norms governing banking operations.
  • Advances were granted through rural branches satisfying prescribed criteria.
  • Detailed information regarding branch locations, population, and advances was furnished.
  • Deduction was specifically permitted under Section 36(1)(viia).

Respondent’s Arguments (Revenue)

  • The assessee was not entitled to the full deduction claimed.
  • Eligibility conditions for rural branch advances were allegedly not fulfilled.
  • The Assessing Officer had correctly restricted the deduction. 

Court Order / Findings (ITAT Allahabad)

  • Section 36(1)(viia) provides specific deduction to banks in respect of provisions relating to rural branch advances.
  • Determination of eligibility requires factual verification of branch status and advances.
  • The lower authorities had not properly examined all relevant details.

 Important Clarification

  • Co-operative banks can claim deduction for provisions relating to rural advances.
  • Regulatory guidelines support creation of such provisions.
  • Detailed verification of branch eligibility is essential.
  • Deduction cannot be denied outright without examining factual data.
  • Remand is appropriate where computation requires factual scrutiny.

Link to download the order - 

https://itat.gov.in/public/files/upload/1632986392-ita%20135%20and%20136.pdf

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