Is a co-operative bank a non-scheduled bank entitled to claim deduction under Section 36(1)(viia) of the Income Tax Act?

(Judgment of the Court was delivered by Dr.Anita Sumanth J.) This is a Departmental appeal challenging the order of the Income Tax Appellate Tribunal (in short ‘Tribunal’/’ITAT’) dated 17.07.2013. The assessee/respondent is a District Central Cooperative Bank. For assessment year (AY) 2008-09, the assessee filed a return of income declaring total loss and claiming inter alia, deduction under Section 36(1)(viia) of the Income Tax Act, 1961 (in short ‘Act’), being 10% of the advances made by the rural branches of the Bank.

The assessment was taken up for scrutiny and in order under Section 143(3) dated 09.09.2010, the Assessing Authority has specifically verified the assessee’s accounts calling for various particulars in regard to deduction under Section 36(1)(viia) of the Act. On a discussion with the assessing officer, the assessee furnished a re-computation of the deduction restricting the amount to Rs.19.36 crores as against Rs.32.39 crores originally claimed. The claim found favour with the Assessing Authority who allowed the same as being in line with the statutory provisions.

While so, the Commissioner of Income Tax was of the view that the order of assessment was erroneous and prejudicial to the interests of the revenue and issued show cause notice dated 29.01.2013 to the assessee on two grounds. The first was that, being a Cooperative Bank, it would not be entitled to claim deduction under Section 36(1)(viia) and secondly, that there was no reserve/provision created for bad and doubtful debts.

The assessee responded to the show cause notice reiterating its entitlement to the claim and also pointing out that it was a Non-Scheduled Bank under the Banking Regulation Act, 1949 and hence eligible to make the claim. As regards the point that it had not created a reserve for bad and doubtful doubts, the assessee stated that it had created a provision for Non-Performing Assets (NPA).

The objections of the assessee were overruled and an order under Section 263 of the Act came to be passed on 13.02.2013 setting aside the assessment and directing the Assessing Authority to pass an assessment order de novo taking note of the Section 263 order.

As against the order under Section 263, the assessee approached the Tribunal that allowed the appeal. It is as against the aforesaid order of the Tribunal that the present appeal has been filed by the Department raising the following substantial question of law: Whether under the facts and circumstances of the case, the Tribunal was right in setting aside the order passed under Section 263 of the Income Tax Act holding that the assessee, a cooperative Bank is entitled to deduction under Section 36(1)(viia) of the Act as regards the provision made for bad and doubtful debts as a reserve for NPA?

We have heard in detail both learned counsel. On the issue of whether a CooperativeBank was entitled to deduction under Section 36(1)(viia), a ‘banking company’ is defined under Section 5(c) of the Banking regulation Act as ‘any company which transacts the business of banking in India’. A ‘Scheduled Bank’is defined under Section 2(e) of the Reserve Bank of India Act, 1934 (in short ‘RBI Act’), as a bank included in the second schedule to the RBI Act.

The Tribunal notes that all companies not included in the second schedule to the RBI Act would be Non-Scheduled Banks, that would include Cooperative Banks as well. Hence the Tribunal finds no merit in the point that a co-operative Bank is not entitled to claim deduction under Section 36(1)(vii) of the Act, and we concur.

The second objection related to the reserve for bad and doubtful debts that has admittedly been created, except with the nomenclature of NPA. This objection too does not merit acceptance. We are hence of the considered view that the Commissioner of Income Tax erred in assuming jurisdiction under Section 263 of the Act in the absence of any error in order of assessment dated 09.09.2010.

Section 263 empowers the Commissioner of Income Tax to suo motu revise any order which is both erroneous and prejudicial to the interests of the revenue. It is a settled position that the powers under Section 263 cannot be invoked by the CIT merely to substitute his views for those of the Assessing Officer.

In the present case, the Assessing Authority has scrutinised the return filed by the assessee and has specifically noted the claim under Section 36(1) (viia) of the Act. The acceptance of the claim is after calling for various particulars and satisfying himself of the same. On reconciliation of the deduction claimed, and discussions with the assessing officer, the claim was whittled down to almost 50% by the assessee.

The books of accounts have also been taken note of and evidently the financials as well, that would include the provisions made towards NPA. It is after a detailed verification of the issue that the officer has accepted the reduced claim and far from being a plausible view, we find that the view taken in order dated 09.09.2010 is to be affirmed.

For the aforesaid reasons, the question of law is answered adverse to the revenue and in favour of the assessee. This Tax Case (Appeal) is dismissed. No costs. (A.S.M.,J.) (S.R.K.,J.) 29-09-2026