July 31, 2008

Instruction No. 10/2008

Kindly refer to above.

2. While computing the income under the head ‘Profit and Gains of Business & Profession’ a scheduled bank (not being a bank incorporated by or under the laws of a foreign country) or a non-scheduled bank or a cooperate bank other than a primary agricultural credit society or a primary co-operative agricultural and rural bank is entitled to claim deduction of provision for bad debt of 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. The term ‘rural branch’ has been defined in Explanation (ia) to section 36(1)(viia) to be a branch of a scheduled 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.

3. It has, however, come to the notice of the Board through the report of the C&AG’s office that, in many instances, claims made by banks for deduction under section 36(1)(viia) of the Income-tax Act, 1961 are being allowed without verification as to whether the concerned branches come with the definition of ‘rural branch’. In several cases, this has resulted in large under-assessment of income.

4. The Assessing Officers should, therefore, ensure that the claims of deduction towards advances given by rural branches of banks are allowed only after verifying (at least by way of test check) as to whether such branches are eligible to be treated as a ‘rural branch’ according to the definition given in Explanation (ia) to section 36(1)(viia) of the Income-tax Act, 1961.

5. A review of completed assessments may also be carried out and appropriate remedial action may be taken as may be necessary.

This may be brought to the notice of all concerned for strict compliance.

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