Kerala H.C : Appellants-assessees were not entitled to deduction of 10 per cent. of the aggregate average advances made by its rural branches under section 36(1)(viia)

High Court Of Kerala

Kannur District Co-Operative Bank Ltd. Vs. CIT

Section : 36(1)(Viia)

Assessment Year : 2007-08

Dr. Manjula Chellur, CJ. And A.M. Shaffique, J.

IT Appeal Nos. 179 Of 2012 And 33,37,238,241,243,254 & 258 Of 2013

April 3, 2014

JUDGMENT

Dr. Manjula Chellur, CJ. – In all the above appeals since the common questions of law are involved, they are heard and disposed of together. The following substantial questions of law arise for consideration in these appeals :

“1. Whether the Income-tax Appellate Tribunal was correct in holding that appellants-assessees were not entitled to deduction of 10 per cent. of the aggregate average advances made by its rural branches under section 36(1)(viia) of the Income-tax Act, 1961 ?

2.Whether, on the facts and in the circumstances of the above cases, the Income-tax Appellate Tribunal was correct in holding that the definition of rural branch in Explanation (ia) to section 36(1)(viia) is applicable to co-operative banks ?

3.Whether, on the facts and in the circumstances of the above cases, the Income-tax Appellate Tribunal was correct in holding that the definition of the term ‘banking company’ in section 5(c) of the Banking Regulation Act covers a co-operative bank, which is separately defined in section 5(cci) of the said Act ?”

2. All the above appeals are directed against the order of the Appellate Tribunal. It is clear from substantial questions of law stated above what exactly is the dispute. Admittedly, appellants-assessee are co-operative banks having its registered offices at the addresses mentioned in the cause title and they have several branches spread all over the State of Kerala. What we understand from the contentions raised by appellants-assessees is that though sub-clause (a) of clause (viia) of section 36(1) of Income-tax Act (for short “the Act”) particularly refers to co-operative bank, but under the Explanation, while defining rural branch, it does not refer to co-operative bank, therefore, irrespective of the Explanation of rural branch, they are entitled to claim deduction of an amount not exceeding 10 per cent. of the aggregate average advances made by them. The Assessing Officer and other two appellate authorities opined that the appellants-assessees are entitled to claim deduction in respect of bad and doubtful debts with the restriction of 7.5 per cent., of the total income. They further opined that the appellants-assessees are entitled to such benefit for the current year as they have created provisions for bad and doubtful debts in the books of account. So far as this issue, there is not much to ponder over the issue. Even otherwise, the appellants-assessees have no serious contest on this aspect of the matter. The entire controversy is whether rural branch defined under the Explanation would include rural branch of a co-operative bank or not.

3. The appellants-assessees claimed deductions under section 36(1)(viia) of the Act from its total income. It has two types of deductions, i.e., deduction of an amount not exceeding 7.5 per cent. of the total income and also the deduction of an amount not exceeding 10 per cent. of the aggregate average advances made by their rural branches. So far as the first deduction of 7.5 per cent., it was restricted with reference to the provision made in the books of account for the current year. So far as 10 per cent. of the aggregate average advances, it was rejected. Aggrieved by the same, appeals came to be filed before the Commissioner of Income-tax (Appeals). Those appeals were allowed following the decision of the Income-tax Appellate Tribunal, Kochi Bench, in the case of Lord Krishna Bank Ltd. v. Dy. CIT [IT Appeal No. 54/Coch/2000 dated July 21, 2003. Aggrieved by the same, the Revenue preferred appeals before the Income-tax Appellate Tribunal. By that time, the jurisdictional High Court had reversed the order of the Commissioner of Income lax (Appeals) so far as Lord Krishna Bank’s case (supra) with reference to rural branch. Therefore, the Tribunal allowed the appeals of the Revenue. Aggrieved by the same, the appellants-assessees are before us.

4. According to the appellants-assessee, in the absence of mentioning co-operative bank under the Explanation to section 36(1)(viia), one has to understand rural branch of a co-operative bank in its general meaning and not as explained under the Explanation to section 36(1)(viia) of the Act. Therefore, the benefit of deduction of 10 per cent. of the aggregate average advances made by rural branch of co-operative banks, i.e., the appellants-assessees deserves to be extended to them also. In other words, irrespective of quantum of population at a place where branch of co-operative bank is situated, as long as it has licence as rural branch issued by the Reserve Bank of India and fits within the general meaning of rural area, they are entitled for deduction of 10 per cent. of the aggregate average advances made by such rural branches.

5. Learned counsel took us through several definitions provided under the Income-tax Act, the Banking Regulation Act, 1949, and also the Reserve Bank of India Act, 1934, to understand what is a banking company, scheduled bank, non-scheduled bank and co-operative bank. They also refer to the dictionary meanings of banking terminologies. Further, reliance is placed on several materials to understand what exactly the words “rural” and “urban” would mean. According to them, the judgment in CIT v. Lord Krishna Bank Ltd. [2011] 339 ITR 606/[2010] 7 taxmann.com 118/195 Taxman 57 (Ker.) is not applicable so far as co-operative bank is concerned.

6. As against this, the learned standing counsel appearing for the Revenue took us through the very same judgment of a Division Bench of this court in Lord Krishna Bank’s case (supra) and contends that once the provision under the Income-tax Act refers to a particular bank and its rural branch, it has to be understood with reference to the object of such provision, therefore, one cannot place reliance on generic terms. According to him, by virtue of the inclusion of co-operative bank in the main section, even if the name of co-operative bank under the Explanation to clause (viia) of section 36(1) is absent, it would not assist the appellants-assessees in any manner as co-operative bank not being a scheduled bank would come under the purview of non-scheduled bank, therefore, under the Explanation with reference to rural branch of a non-scheduled bank would automatically bring into its fold co-operative bank also.

7. The appellants-assessees further contended that having selected to open their rural branches mostly in rustic areas inhabited by rural artisans engaged in their traditional avocation, factually also, they would get the benefit even if the court holds that the appellants-banks being co-operative banks would fall under the category of non-scheduled bank. They substantiate this contention by bringing on record certain facts. According to them, for obtaining licences from the Reserve Bank of India, at the time of submitting the application itself each bank would indicate the areas in which it proposes to open new branches. The Reserve Bank of India issues licences only on being satisfied of the categorization made as rural branches. In order to understand and decide the real question of controversy raised in the above appeals we have to analyse various definitions and meanings of certain words to answer the substantial questions of law raised in the above appeals.

8. Section 36 of the Act deals with various deductions that could be allowed in computing the income referred to in section 28 of the Act. Section 36 has various clauses and each clause refers to deductions allowable to a particular assessee like amount of premium paid in respect of insurance against risk of damages, federal milk co-operative society, general insurance, etc. We are concerned with sub-clause (a) of clause (viia) of section 36(1). This clause makes provision for bad and doubtful debts. In other words, deduction could be claimed by banks referred to in clause (viia) in respect of bad and doubtful debts. It provides certain terms and conditions under which such deductions could be claimed by a particular bank. Section 36(1)(viia) commences with the following words “in respect of any provision for bad and doubtful debt made by” and sub-clause (a) reads as under :

“A scheduled bank not being a bank approved by the Central Government for the purposes of clause (viiia) or a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent. of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.”

Under the Explanation to section 36 for better understanding of certain terms used in sub-clause (a) of clause (viia) definitions are provided. For the purpose of the above appeals, we need to know what exactly non-scheduled bank, rural branch, co-operative bank and scheduled bank mean as per the Explanation which read as under :

“‘non-scheduled bank’ means a baking company as defined under clause (c) of section 5 of the Banking Regulation Act, 1949, which is not a scheduled bank.

‘rural branch’ means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

co-operative bank’, ‘primary agricultural credit society’ and ‘primary co-operative agricultural and rural development bank’ shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.

‘scheduled bank’ means a bank for the time being included in the Second Schedule to the Reserve Bank of India Act.”

In order to understand what is a banking company, one has to refer to the Banking Regulation Act and to understand whether a particular bank is a scheduled bank, one has to see whether such bank finds a place in the Second Schedule to the Reserve Bank of India Act. “Co-operative bank” means a bank as explained under sub-section (4) of section 80P of the Act. Section 5(c) of the Banking Regulation Act, defines banking company as under :

‘banking company’ means any company which transacts the business of banking in India.”

Under section 80P, it again refers to section 56 of the Banking Regulation Act. Under section 56, falling under Chapter V of the Banking Regulation Act, the entire provisions deal with co-operative societies. Section 56 says, after clause (cc) clause (cci), the definition of co-operative bank, is to be included. Section 56(c) of the Banking Regulation Act says :

“in section 5,—

(i) after clause (cc), the following clause shall be inserted, namely :—

(cci) ‘co-operative bank’ means a state co-operative bank, a central co-operative bank and a primary co-operative bank.”

The meaning of different terms useful for the purpose of deciding the controversy, one has to see how presence of a particular term in a particular provision and simultaneously being absent in the Explanation to the said provision would change the position of the appellants-banks with reference to the context.

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 April 1, 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 1, 2007, they were enjoying the benefits provided under section 80P. With the introduction of the Finance Act, 2007, with effect from April 1, 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-clause (a) consists of two types of deductions. One refers to the deduction of an amount not exceeding 7.5 per cent. 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).

10. Then coming to the other controversial issue whether a co-operative bank, irrespective of having rural branch as explained under the Explanation, is entitled to have the benefit of the second part of section 36(1)(viia)(a), we have to see, in the absence of co-operative bank in the definition of rural branch under the Explanation to section 36(1) would it make any difference. Learned counsel appearing for the appellants tried to convince the court that the adjective of rural would mean in relation to or characteristic of the countryside rather than the town ; remote rural areas. Urban, no doubt, is opposite to rural. Urban is in relation to or characteristic of a town or city.

11. According to us, there is no necessity to find out the generic meaning of either urban or rural for the simple reason that the Explanation under section 36(1) itself defines what could be considered as a rural branch so far as section 36(1) of the Act. In the light of giving a particular definition for the purpose of understanding rural branch with reference to sub-clause (a) of clause (viia) of section 36(1) one need not go in search of the meaning of rural or what exactly would constitute rural branch. This court had an occasion to decide the said controversy pertaining to bad and doubtful debts of a rural branch. While explaining the meaning of “place” in Explanation (ia) to section 36(1)(viia), their Lordships opined as under (page 608 of 339 ITR) :

‘Next question raised pertains to the assessee’s claim for deduction of provision for bad debts in terms of section 36(1)(viia) of the Income-tax Act. Here the only question raised is as to basis of classifying branches of the bank as rural branches and other branches. Rural branch is defined under Explanation (ia) to section 36(1)(viia) as follows :

“rural branch” means a branch of a “scheduled bank” or a “non-scheduled bank” situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.’

What is clear from the above is that the classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. While the assessee’s case that found acceptance with the Tribunal is that ‘place’ referred to in the above definition clause is the ward of a panchayat or municipality, the Assessing Officer took the view that ‘place’ contained in the definition clause should mean a revenue village. No doubt, ‘place’ as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of ‘place’ referred to in the section. Standing counsel for the Department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of ‘place’ as referred to in the Census Report produced could be adopted for the purpose of this case. What is written in the Census Report 2001 is as follows :

‘The basic unit for rural areas is the revenue village with definite surveyed boundaries. The rural area is, however, taken as the residual portion excluding the urban area and for that no strict definition is followed.’

In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee’s case accepted by the Tribunal that population in a ward has to be reckoned for deciding as to whether the location of a panchayat is in a rural area or not is accepted, then probably even in municipal areas there may be wards with less than 10000 population thereby answering the branch located in such municipal area also as a rural branch. Going by the ordinary meaning of rural branch, we feel only branches of the bank located in rural areas are covered. When the Legislature adopts population as the basis for classification of rural branches, that too, with reference to the last Census Report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel the above meaning of rural area contained in the Census Report wherein revenue village is treated as a unit of rural area, can be rightly adopted. So much so, ‘place’ referred to in the above definition clause for the purpose of identifying the branch of a bank as a rural branch with reference to its location is the revenue village. Therefore, in our view, the finding of the Tribunal that ‘place’ referred to in the definition is the ward of a local authority like panchayat or municipality is incorrect and, in our view, a rural branch has to be always in rural areas and the place referred can easily be taken as a village. Several wards may come within a village, whether it be in corporation, municipality or panchayats. There can be no village in a municipal or corporation area where the population is less than 10000. So much so, rural branches are such of the branches located in a village where the population in the village as a unit is less than 10000.’

It is clear from the above judgment that this court had already an occasion to consider the meaning of place with reference to the above section. Therefore, rural branch is a branch which falls under Explanation (ia) to section 36(1)(viia). The Tribunal had to reverse the judgment of the Commissioner of Income-tax (Appeals) in the light of the decision in Lord Krishna Bank’s case (supra).

12. Then coming to the controversy whether co-operative bank could claim deduction of 10 per cent. of the aggregate average advances while computing the income irrespective of falling under rural branch as per the Explanation, in order to consider a company as a banking company it must transact business of banking in India as defined under section 5(c) of the Banking Regulation Act. The Explanation to section 5(c) clearly indicates which are the transactions which would not come within the meaning of banking business. Non-schedule bank means a banking company as defined under section 5(c) which is not a scheduled bank. As already stated above, co-operative bank cannot be considered as a scheduled bank as the Second Schedule to the Reserve Bank of India Act does not include any of the co-operative banks. Reading of section 5(c) along with the Explanation, clearly indicates though any company which transacts business of banking in India would come within the meaning of non-scheduled bank, by virtue of Explanation (1) under this, clause scheduled bank is excluded. So far as sub-clause (a) of clause (viia) of section 36(1), two types of deductions are provided to non-scheduled bank, a scheduled bank and a co-operative bank other than a primary agricultural credit society, etc. It is to be noted that the appellants-assessees are not primary agricultural credit co-operative society or other kind of bank so as to go out of the definition of co-operative bank under sub-clause (a) to clause (viia) of section 36(1). No doubt, Explanation (ia) to section 36(1)(viia) defines what is a rural branch. It is with reference to a place and certain number of population. It refers to branch of a scheduled bank or a non-scheduled bank. Apparently, we do not find the term “co-operative bank”. Section 5(cci) of the Banking Regulation Act though has brought in the definition of co-operative bank, virtually every bank which is not scheduled bank would fall under the definition of non-scheduled bank. Reading of the definition of non-scheduled bank along with the meaning of rural branch under the Explanation to section 36(1) of the Act, clearly indicate that co-operative bank also falls under the category of non-scheduled bank for the purpose of this section. Therefore, reading of the entire section 36(1)(viia)(a) along with the Explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision.

13. Therefore, we are of the opinion, the authorities below were justified in opining that the benefit of deduction of 10 per cent. of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts. Such rural branch means a branch as explained under Explanation (ia), as opined in the decision of Lord Krishna Bank’s case (supra).

14. In the light of above observations and reasoning, none of the contentions raised by appellants are sustainable. Hence, these appeals are dismissed answering the substantial questions of law in favour of the Revenue.

[Citation : 365 ITR 343]