Ernakulam District Co-operative Bank Ltd. v. Commissioner of Income Tax

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT:** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **& THE HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI** **MONDAY, THE 4TH DAY OF JUNE 2018 / 14TH JYAISHTA, 1940** **ITA.No. 54 of 2013** **(AGAINST THE ORDER IN ITA 689/2010 OF I.T.A.TRIBUNAL, COCHIN BENCH DATED 12-10-2012)** ## **APPELLANT/APPELLANT IN ITA:** **THE ERNAKULAM DISTRICT CO-OPERATIVE BANK LTD., P B NO. 4, KAKKANAD P.O., KOCHI 682 030.** **BY ADVS.SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.GOPINATH MENON SRI.P.BENNY THOMAS SRI.K.JOHN MATHAI SMT.PREETHA S.NAIR** ## **RESPONDENT/RESPONDENT IN ITA:** **THE COMMISSIONER OF INCOME TAX, C R BUILDINGS, I S PRESS ROAD, ERNAKULAM, KOCHI 682 018.** **BY SRI.JOSE JOSEPH, SC, FOR INCOME TAX** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04-06-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ss ## **K. VINOD CHANDRAN, J & R.NARAYANA PISHARADI, J** **----------------------** ------------------------- ## **I.T.A.No.54 of 2013** ---------------------------------------------------------Dated this the 4[th] day of June, 2018 ## **JUDGMENT** ## _**K. Vinod Chandran, J**_ The issue raised in the above appeal is as to whether the petitioner bank is entitled to the benefit under the second limb of clause (viia) of Section 36(1) of the Income Tax Act without reference to the definition of rural branch in the Explanation under Section 36, at (i)(a). The issue is no longer _res integra_ and is covered by a decision of a Division Bench of this court. It is hence, the question framed on admission by another Division Bench, was as follows: “ _Whether the decision of the Division Bench in_ _**Kannur District Co-operative Bank Lt., v. Commissioner of Income Tax** (2014) 365 ITR 343 (Ker.) requires to be reconsidered ?.”_ _2._ We hence would not refer to any facts. If there is a reconsideration possible, then, we have to refer it to a Larger Bench. If not, the appeal has to be simply rejected. We have to notice the history of the deductions as available to Co-operative Banks. All Co-operative Banks were granted deduction under Section 80P of the Act, by reason of which, they stood excluded 2 ## **I.T.A.No.54 of 2013** from the deductions as available under Section 36. On 1.4.2007, the deduction applicable under Section 80P was sought to be confined to Primary Agricultural Credit Societies and Primary Co-operative Agricultural and Rural Development Banks. The other Co-operative Banks were excluded from such relief under Section 80P, by virtue of introduction of sub-section (4) to Section 80P. The legislature quite conscious of the exclusion made, sought to include the Co-operative Banks also under Section 36, granting them benefits at par with the other scheduled and non-scheduled banks. Co-operative Banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank was thus included in clause (a) of Section 36(1)(viia). Those Co-operative Banks retained with the benefits under Section 80P, continued there and would not get the benefit under Section 36. 3. A Division Bench of this court, was faced with the question of whether the additional benefit granted to a bank with respect to the advances made by a 'Rural Branch' could be extended to the Co-operative Banks without reference to the definition of 'Rural Branch' under the Explanation at (i)(a) under section 36(1)(viia). The said question was decided in ## _**Commissioner of Income Tax v. Lord Krishna Bank Ltd.,**_ _(2011) 339 ITR 606 (Ker.)_ . The Tribunal in the said case had found that on the basis of the population, even a branch existing in a ward 3 ## **I.T.A.No.54 of 2013** within a Panchayat or Municipality could be granted rural banks status, going by the definition of ' **Rural Branch** '. The Division Bench looked at the definition of ' **Rural Branch** ' which indicated the citus for determination of population as “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”. A place with reference to rural area as referred to in the census report was found to be a Revenue Village with definite survey boundaries. The legislature having adopted population as the basis for classification of rural branches, with specific reference to the last census report, the Division Bench held that, “the basic unit as available for identification of rural area, in the census report can be legitimately adopted”. ( _Sic page 608)_ 4. The revenue village being treated as a unit of rural area in the census report, the same was found to be capable of adoption without any artificial definition being imported of a ward within the Panchayat or the Municipality. The rural area as found in the census report, 2001 was extracted 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.”_ 5. There was an additional issue as to whether a 4 ## **I.T.A.No.54 of 2013** 'Co-operative Bank' could claim the benefit under the second limb of Section 36(1)(viia). This issue was not raised either by the revenue or by the assessee at that point of time. A second round of litigation resulted in another Division Bench speaking on this issue also, in **Kannur District Co-operative Bank Ltd.** , 6. We deem it appropriate to extract the provisions at this stage. _Section 36(1)[(viia)[in respect of any provision for bad and doubtful debts made by -_ _(a) scheduled bank [not being [***] a bank incorporated by or under the laws of a country outside India] or a nonscheduled 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 VIA) 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._ _xxx xxx xxx xxx_ ## Explanation- _[(ia)] “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._ 7. We notice that when making amendments in 2007; confining the benefit under Section 80 P to certain types of 5 ## **I.T.A.No.54 of 2013** co-operative banks and granting such benefit to other 'Co-operative Banks' under Section 36; there was no specific inclusion of a Co-operative bank in the definition of rural branch. The benefit under Section 36(1)(viia), in the first limb is with respect to any provision for bad and doubtful debts, being granted a deduction to the extend of 7½% of the total income computed before making deductions under that clause as also Chapter VI A. The second limb granted a further benefit, in so far as permitting deductions not exceeding 10% of the aggregate average advances made by the 'rural branches' of such banks. The definition of 'rural branch' as extracted herein above did not include a 'Co-operative Bank'. Even then, the Division Bench in **Kannur District Co-operative Bank** found that the co-operative banks other than primary agricultural credit society or a primary co-operative agricultural and rural development bank, being included under the definition of non-scheduled bank, this rural branches would be entitled to the benefit under the second limb of section 36(1)(viia). The definition of nonscheduled bank as noticed from the Banking Regulation Act was “any bank which is not included in the second schedule to the Act”. Though there was a separate definition of co-operative banks in the Banking Regulation Act, the Division Bench held that the co-operative banks for the purpose of section 36(1)(viia) would be treated as included and entitled to such benefit. 6 ## **I.T.A.No.54 of 2013** 8. A reading of clause (a) under section 36 (1)(viia) would dispel any doubts regarding such inclusion. The deduction in respect of any provision for bad and doubtful debts to the extent of 7½% of the total income is applicable to scheduled banks not being one incorporated outside India, a non scheduled bank or a co-operative bank other than those specified. Under the second limb the deduction is to the extent of 10% of the aggregate average advances by the rural branches of such bank. The rural branches of the category of banks referred to in the first limb would be entitled under the second limb. We agree with the decision and there is no reason for us to take a different view in the present case especially in an appeal instituted by another assessee. 9. The question raised is also as to the sustainability of the dictum in _**Kannur District Co-operative Bank** ,_ that while identifying the 'rural branches', the co-operative banks are also to be brought under the rigour of the definition of a "Rural Branch". The Division Bench found that the view was covered by the earlier judgment in _**Lord Krishna Bank Ltd.**_ We also notice that another Division Bench of this Court in I.T.A.No.214 of 2013, the _**Malappuram District Co-operative Bank Ltd v. I.T.O.**_ by judgment dated 29.10.2014, followed _**Lord Krishna Bank**_ and _**Kannur District Co-operative Bank**_ . We are also of the opinion, as already stated that the issue is no longer _res integra_ . 7 ## **I.T.A.No.54 of 2013** On the question of law raised in this appeal, we are of the opinion that there is nothing to be doubted in so far as the declaration made in _**Kannur District Co-operative Bank Ltd**_ . We answer the question in the _negative_ against the assessee and in favour of the revenue and reject the appeal. _Sd/-_ ## **(K. Vinod Chandran, Judge)** _Sd/-_ ## **(R. Narayana Pisharadi, Judge)** _//True Copy//_ _P.A. To Judge_ ss