The Surat Bench of the Income Tax Appellate Tribunal ( ITAT ), in a recent ruling, rejected a cooperative bank’s claim of bank debt reserves under Section 36(1)(viia) of the Income Tax Act 1961, stating the authenticity of such claims.
Surat National Co.op Bank Ltd the assessee, pursued two appeals against the orders passed by the Commissioner of Income Tax (Appeals) CIT(A), National Faceless Appeal Centre ( NFAC ) on 03.10.2024 and 19.01.2023, for the assessment years (AYs) 2013-14 and 2014-15.
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In the first matter concerning 2013-14 AY, the assessee had claimed for a dedication under Section 36(1)(viia) of the Act in which provisions for deduction related to bad debts are given. The Assessing officer ( AO ) held that the Deduction claimed by the assessee applied only to rural branches, but on assessment, it was found that the assessee had no rural branches; therefore, a deduction of 35Lakhs contended by the assessee was disallowed.
The assessee’s appeal of the AO’s order to the CIT(A) further ended in disappointment. The CIT(A) upheld the AO’s order, stating that deductions under section 36(1)(viia) were only applicable to banks with rural branches. As the assessee had no such branch, it had failed to meet this requirement provided by law.
In the second matter concerning the 2014-15 AY, the assessee had held Fixed deposits in Madhavapura Mercantile Co-op bank, which became insolvent and lost its banking license. The RBI had directed banks to write off such deposits. The assessee transferred ₹7.82 crores from its reserves to its profit and loss account and then wrote off the same amount as bad debt and claimed deductions on it. The AO denied the claim and held that the FDs were investments, representing a capital loss, and the accounting of the ₹7.81 crores led to double dedication by the assessee. The CIT(A), who was appealed to by the assessee on the AO’s order, upheld the order, stating that the write-off cannot be dedicated as per provisions of the Act.
The assessee approached the tribunal against both of these orders. The Authorized Representative ( AR ) submitted that in the case of 2013-14 AY, the deduction claimed was correct and argued that 7.5% of the total income was permitted for such deductions even if the rural branch condition was not fulfilled. The AR also argued that the assessee had not claimed any such deductions under the provisions, and the submission of record books substantiated this.
The AR held that regarding 2014-15 AY, the FDs were made as part of its business operations, namely stock in trade, and any loss arising from the write-off of those is to be considered a business loss. The AR further submitted that the double deduction allegation was baseless as the ₹7.81 crores were transferred from the assessee’s reserves to its Profit and loss account, which was then written off. Ar argued that this was considered a deduction. The AR further contended that the write-off was made per the RBI directions. The AR relied on the Dharangadhra People’s Co-op Bank Ltd case in which FDs written off were treated as business loss.
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The ITAT, upon hearing both sides, observed that the lower authorities were proper in the matter concerning the 2013-14 AY. One of the criteria that the assessee requires to claim deductions under Section 36(1)(viia) is to have a branch or some operation in rural areas, and the assessee did not have such a rural branch. The tribunal Further observed that the amount claimed for deduction was a reserve. As per the matter of the 2014-15 AY the tribunal ruled that FDs were part of the bank’s stock in trade, which is an essential part for a bank to operate. The tribunal observed the loss incurred by the assessee as a business loss that happened in the course of business, and this was read in section 37 of the Act.
The two-member bench consisting of Pawan Singh ( Judicial member ) and Binjayananda Pruseth ( Accountant Member ) rejected the AO’s allegation that the assessee had claimed a double deduction. It held that the accounting system followed by the assessee resulted in only one deduction. The tribunal further observed that there was a delay in recognising the loss, but it was an issue that the RBI had to sort. As a result the bad debt claim made by the assessee was rejected.
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