Facts- The AO through the assessment order disallowed the claim of the assessee under Section 36(1)(viia).
Similarly, the AO disallowed the revaluation of unquoted securities adopted by the assessee. The appeal of the appellant before the Commissioner (Appeals) was allowed in part. Further, in the appeal filed by the Revenue before ITAT, through order, the Tribunal partly allowed the appeal for statistical purposes.
Hence, the instant Income Tax Appeal, at the instance of the Revenue under Section 260A of the Income Tax Act. The questions of law relating to bad debts and provision for bad debts in rural branches of the assessee’s bank.
The issue raised was whether the proviso to Section 36(1)(vii) cannot be the claim of the assessee for bad debts u/s 36(1)(vii), and the claim in the credit balance in the provision for bad and doubtful debts u/s. 36(1)(viia) be disallowed and whether the claim of bad debts and bad and doubtful debts is an allowable deduction.
Conclusion- Question concerning bad debts falling under Section 36(1)(vii) is covered in favor of the assessee in the reported judgment of the SC in Catholic Syrian Bank v. Commissioner of Income Tax and had answered the point in favor of the assessee and against the Revenue.
Relying on the decision of the SC in the case of Catholic Syrian Bank v. Commissioner of Income Tax allowed the appeals of the assessee and dismissed the appeals preferred by the revenue. Further, directed that all matters be remanded to the AO for computation in accordance with the law.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
Heard learned Standing Counsel Mr.Jose Joseph and learned Senior Advocate Mr. Joseph Markos for the parties.
2. Commissioner of Income Tax, Trichur/Revenue is the appellant. M/s.South Indian Bank Ltd, Trichur/assessee is the respondent. The appeal is directed against the order of the Income Tax Appellate Tribunal, Cochin Bench in I.T.A 395/Coch/2006 dated 27.09.2007. The appeal deals with the issues arising from the tax return filed by the assessee for the assessment year 2004-05.
2.1 The Assessing Officer through the assessment order in Annexure-A, disallowed the claim of the assessee under Section 36(1)(viia). Similarly, the Assessing Officer disallowed the revaluation of unquoted securities adopted by the assessee.
The assessee filed appeal before the Commissioner of Income Tax (Appeals) and the appeal was allowed in part. In the appeal filed by the Revenue before Income Tax Appellate Tribunal, through Annexure-C order, the Tribunal partly allowed the appeal for statistical purposes. Hence, the instant Income Tax Appeal, at the instance of the Revenue under Section 260A of the Income Tax Act (for short ‘the Act’). The questions of law relate to bad debts and provision for bad debts in rural branches of the assessee’s bank. The following substantial questions of law are raised by the revenue:
“1. Whether, on the facts and in the circumstances of the case, and also in the light of the relevant provisions especially proviso to Section 36(1)(vii) cannot be the claim of the assessee for bad debts u/s 36(1)(vii), and the claim in the credit balance in the provision for bad and doubtful debts u/s. 36(1)(viia) be disallowed?
2. Whether, on the facts and in the circumstances of the case, the claim of bad debts and bad and doubtful debts is an allowable deduction?
3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and in fact in holding that valuation of unquoted securities adopted by the assessee is correct?”
3. The first and the second questions are regarding the eligible deduction under Section 36(1)(vii) of the Act. The counsel appearing for parties state that the question concerning bad debts falling under Section 36(1)(vii) is covered in favour of the assessee in reported judgment of the Supreme Court in Catholic Syrian Bank v. Commissioner of Income Tax1 and had answered the point in favour of assessee and against the Revenue. We are referring to the decision by the Apex Court with a view to comprehensively advert to the outcome on all the substantial questions raised by the Revenue in the instant appeal. The operative portion in Catholic Syrian Bank Ltd judgment reads thus:
“Firstly, the Full Bench ignored the significant expression appearing in both the proviso to Section 36(1)(vii) clause (v) of Section 36(2) i.e .,
‘assessee to which clause (viia) sub-section(1) applies’. In other words, if the case of the assessee does not fall under Section 36(1)(viia) proviso/limitation would not come into play.”
xxx xxxx xxxxx
“Consequently, while answering the question in favour of the assessee, we allow the appeals of the assessee and dismiss the appeals preferred by the revenue. Further, we direct that all matters be remanded to the Assessment Officer for computation in accordance with law, in light of the law enunciated in this judgment.”
Thus the question is answered by the Supreme Court in favour of assessee and against the Revenue.
4. The next question deals with the revaluation of unquoted securities, adopted by the assessee whether is correct or not. The question is no more res integra and is answered by following the precedents in Commissioner of Income Tax v. Nedungadi Bank Ltd2 and Commissioner of Income Tax v. Lord Krishna Bank Ltd3, and this Court had answered in favour of the assessee. The operative portion of the reported judgments is excerpted hereunder:
“Nedungadi Bank Ltd (supra)
For all these reasons, we are of the view that the Income-tax Appellate Tribunal has rightly held that the securities held by the assessee-bank in all these cases are the stock-in-trade of the business of the assessee-banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits of the appellant. This disposes of the first two questions mentioned in para. 10 (page 552) above”
Lord Krishna Bank Ltd (supra)
“The first question raised pertains to valuation of unquoted Government securities. Since securities involved are not quoted in the market, market price is not known. The assessee treats the unquoted Government securities as current assets and, therefore, it has to work out the profit or loss in the end of the year for the purpose of payment of tax. The assessee adopted the RBI guidelines for valuation of unquoted Government securities and based on the same it claimed a substantial loss. The Assessing Officer, however, rejected the claim because according to him when shares are not quoted, the cost price has to be adopted and going by the cost price the assessee has not suffered the loss as claimed. It is a settled position through various decisions including that of this CIT v. Nedungadi Bank Ltd. reported in  264 ITR 545 (Ker) that for purpose of assessment cost price or market value, whichever is lower, should be adopted. Admittedly, market value is not known and so much so, some method has be adopted to fix the market value and thereafter only the lower of the cost price or the market value has to be taken for the purpose of computation of profit or loss in respect of the unsecured securities. Senior counsel appearing for the assessee produced the RB guidelines before us wherein the RBI has suggested banks to value unquoted Central Government securities on the basis of the prices/YTM rates put out by the PDAI/FIMMDA at periodical intervals. YTM is the yield to maturity method adopted for valuation of securities. It is seen that the Tribunal accepted the assessee’s valuation which is based on the RBl guidelines. RBI being the apex body issuing guidelines to the banks for valuation of unquoted Government securities, we feel it is the rational basis which the assessee was bound to adopt. The Assessing Officer also has not come out with any formula for computation of market value of unquoted securities and he has no case that the RBI guidelines for valuation is irrational. So much so, we feel the Tribunal rightly upheld the assessee’s claim for valuation of unquoted Government securities based on the RBI guidelines. We, therefore, dismiss the Revenue’s appeal on this issue.”
5. We have heard the learned counsel on Additional Question No.4 after the judgment dated 13.7.2021 has been recalled. A similar question raised by revenue in I.T.A. No. 1327 of 2009 has been considered by this Court in judgment dated 14.7.2021 and concluded as follows:
“5.2 Additional question no.4 deals with the claim of assessee under Section 36(1)(viia) of the Act. The extent to which the assessee is entitled to claim provision under Section 36(1)(viia) is again considered by the reported judgment of this Court in Lord Krishna Bank Ltd. (supra). The relevant paragraphs 4, 5 and 6, read as under:
“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 which the relevant figures have been published before the first day of the previous year.”
5. 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. We, therefore, allow the appeal on this issue by reversing the order of the Tribunal and by restoring assessment”.
6. The reasons referred to above are applicable to the subject appeal as well and by adopting the same reason, the question is answered in favour of revenue and against the assessee in the manner indicated above.
7. Accordingly, ITA No.1284 of 2009 is also remitted to the Assessing Officer for consideration and disposal in accordance with law along with ITA No. 1327 of 2009.
8. Mr. Joseph Markose introduces by placing reliance on the judgment reported in Vijaya Bank v Commissioner of Income Tax4 (supra) another dimension to the objections available to the assessee in this behalf, upon remand. He suggests that the assessee may be given liberty to raise the objections available by referring to the ratio laid down by the Supreme Court in Vijaya Bank case. The assessee is granted liberty to raise the objections available by referring to the ratio laid down by the Supreme Court in Vijaya Bank case. The assessee is granted liberty to raise objections or file reply, as the case may be, as and when a notice is issued by the Assessing Officer upon remand. The objections are considered in accordance with law and the assessment orders are made.
Appeal is allowed in part as indicated above.