CIT Vs Bharat Overseas Bank Ltd. (Madras High Court)
Held to Maturity, Yet Stock-in-Trade: Madras High Court Allows Bank’s Revaluation Loss
A bank’s decision to hold Government securities until maturity does not, by itself, turn them into capital investments. That distinction was central to the Madras High Court’s decision in CIT v. Bharat Overseas Bank Ltd., TCA No. 399 of 2013, dated 22 September 2026 (2026:MHC:3953). The Court also upheld the bank’s claim for bad debts written off on non-rural advances, answering all five questions raised by the Revenue in favour of the assessee.
The dispute before the Court
For assessment year 2006-07, the Revenue challenged the Tribunal’s decision on two issues. First, it argued that securities classified as “held to maturity” were long-term investments and could not be treated as stock-in-trade. On that basis, it disputed the allowance of ₹27,76,08,025 as loss on revaluation. Secondly, it objected to the deduction of bad debts relating to non-rural advances without setting off the credit balance in the provision for bad and doubtful debts under section 36(1)(viia).
The Revenue’s argument on bad debts was that the provision was composite and that the write-off under section 36(1)(vii) should be reduced by the available provision balance without separating rural and non-rural advances. The appeal therefore required the Court to consider both the character of a bank’s securities and the relationship between the two bad-debt deductions.
Held to maturity does not decide the tax character
On the securities issue, the High Court followed its earlier ruling in CIT v. Karur Vysya Bank (273 ITR 510), which had settled that Government securities held by a bank constitute stock-in-trade. The Revenue’s reliance on the “held to maturity” description did not change that conclusion.
Once the securities were treated as stock-in-trade, the consequence for valuation followed. The Court held that they were to be valued at cost or market value, whichever was lower. The loss arising on revaluation was therefore allowable. It answered both the stock-in-trade question and the question concerning the ₹27.76 crore revaluation loss in favour of Bharat Overseas Bank.
This part of the ruling is useful where an addition rests mainly on the investment label assigned to securities or on the bank’s intention to retain them until maturity. The Court applied the tax treatment of Government securities as stock-in-trade and allowed the resulting valuation loss.
A write-off and a provision serve different purposes
The remaining questions concerned sections 36(1)(vii) and 36(1)(viia). The former deals with a bad debt actually written off; the latter permits eligible banks a deduction for a provision for bad and doubtful debts. The question was whether a balance in the provision account could restrict the bank’s deduction for debts written off on non-rural advances.
The High Court followed the Supreme Court’s ruling in Catholic Syrian Bank Ltd. v. CIT (343 ITR 270), as applied by the Madras High Court in its decision in CIT v. Karur Vysya Bank Ltd. dated 20 February 2026. The principle reproduced in the judgment is that the two deductions are distinct and independent. The proviso to section 36(1)(vii) prevents a double deduction where the same rural advance is covered by a provision under section 36(1)(viia) and is later written off.
That purpose matters. A write-off of an urban or other non-rural advance is not reduced merely because a credit balance exists in the section 36(1)(viia) provision account. On the reasoning adopted by the Court, the restriction in the proviso addresses the overlap arising from rural advances; it does not automatically absorb bad debts written off on non-rural advances.
What the decision actually decides
The Revenue had framed questions referring to the Finance Bill, 2013 and Explanation 2 to section 36(1)(vii). The judgment records those questions but resolves them by following Catholic Syrian Bank and the subsequent Karur Vysya Bank decision. It does not undertake a separate, detailed analysis of Explanation 2. That limit should be kept in mind when citing the ruling for a dispute that turns specifically on the wording or temporal application of that Explanation.
For bank assessments, the decision nevertheless gives two clear propositions. Government securities treated as stock-in-trade may be valued at cost or market value, whichever is lower, with the resulting loss allowed. And bad debts actually written off on non-rural advances are not automatically set off against the provision for bad and doubtful debts under section 36(1)(viia).
Author’s comments
The ruling shows why the nature of the asset and the nature of the debt must be examined separately. “Held to maturity” describes how long a bank expects to hold a security; the High Court did not accept it as a reason to deny stock-in-trade valuation. Equally, a single balance in a bad-debt provision account does not settle whether a particular write-off must be adjusted against it. The connection between the provision and the advance remains material.
The Revenue’s appeal was dismissed, and every substantial question was answered in favour of Bharat Overseas Bank.
Cases Discussed
- Commissioner of Income Tax v. Karur Vysya Bank, 273 ITR 510 (Madras High Court) — Followed for the settled position that Government securities held by a bank constitute stock-in-trade; consequently, valuation at market value or cost, whichever is lower, was accepted and the revaluation loss was allowed.
- Catholic Syrian Bank Ltd. v. Commissioner of Income-tax, 343 ITR 270 (Supreme Court) — Followed on the independent operation of Sections 36(1)(vii) and 36(1)(viia) and the treatment of bad debts actually written off relating to non-rural advances.
- Commissioner of Income Tax I v. The Karur Vysya Bank Ltd., T.C.(A) Nos. 290 to 295 and 663 of 2010, decided 20.02.2026 (Madras High Court) — Followed for Questions (iii) to (v), applying Catholic Syrian Bank Ltd. to the bank’s claim for bad debts.
FULL TEXT OF THE MADRAS HIGH COURT JUDGMENT/ORDER
1. This Tax Case (Appeal) has been filed at the instance of the Department challenging order of the Income Tax Appellate Tribunal dated 30.10.2012 relating to assessment year 2006-07. Following are the substantial questions of law that have been admitted on 12.08.2013:
(i) Whether the finding of the Tribunal is proper especially when the investments were held to maturity being long term investment and therefore could not be considered as stock in trade?”
(ii) Whether the Tribunal was right in upholding the order of the CIT(A) as regard loss on revaluation of assets amounting Rs.27,76,08,025/- ?
(iii) Whether the Tribunal was right in directing the Assessing officer to allow the entire bad debts pertaining to non rural advances?
(iv) Whether the Tribunal was right in dismissing the appeal of the revenue especially when the Finance Bill, 2013 had clarified that write off u/s.36(1)(vii) had to be set off against the credit balance in the provisions for bad and doubtful debts u/s.36(1)(viia)without bifurcation as to urban advance and rural advances?
(v) The finding of the Tribunal is contrary to the scope and applicability of provisions for bad and doubtful debts as it was sought to be clarified by Finance, Bill in explanation (2) to Sec.36(1)(vii)?”
2. We have heard Mrs.V.Pushpa, learned Senior Standing Counsel for the Department and Mr.R.Vijayaraghavan, learned counsel for the assessee.
3. Both learned counsel accede to the position that the aforesaid substantial questions of law are covered by the judgment of the Supreme Court in Catholic Syrian Bank Ltd. V. Commissioner of Income-tax (343 ITR 270) and decision of this Court in Commissioner of Income Tax 1 v. The Karur Vysya Bank Ltd. (T.C.(A) Nos.290 to 295 and 663 of 2010 dated 20.02.2026).
4. As far as question No.(i) is concerned, it is covered by a decision in Commissioner of Income Tax v. Karur Vysya Bank (273 ITR 510) settling the position that Government Securities held by the bank would constitute stock-in-trade. This question is answered in favour of the assessee.
5. As a sequitur, the valuation of the surplus would have to be on the basis of the market value or cost, whichever is lower and hence the loss that has been arrived at on re-valuation is liable to be allowed. Question No.(ii) is answered in favour of the assessee.
6. As far as question Nos.(iii) to (v) are concerned, having regard to the decision in Commissioner of Income Tax I v. Karur Vysya Bank Ltd. (TCA Nos.290 to 295 and 663 of 2010 dated 20.02.2026) applying the judgement in Catholic Syrian Bank Ltd. (supra), these questions are answered in favour of the assessee. The operative portion of order dated 20.02.2026 reads as follows:
14. Substantial question of law arising in TCA.Nos.291 & 292 of 2010 (A.Ys.1997-98 and 1998-99) and admitted on 28.06.2010:
Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in allowing the claim of bad debts without applying the proviso under Section 36(1)(vii) and without appreciating that the provision was a composite one composed of a percentage of total income and a percentage of aggregate advances of Rural Branches of the Bank?
15. Both learned counsel agree that the above issue has been answered against the revenue and in favour of the assessee by a judgment of the Supreme Court in Catholic Syrian Bank Ltd. v. Commissioner of Income-tax1. The operative portion of the judgment reads as follows:
S.H.Kapadia, CJI. – I have gone through the judgment of my esteemed brother Swatanter Kumar, J. and I agree with the conclusions contained therein. However, I would like to give my own reasons.
The question for our consideration is – whether on the facts and circumstances of the case, the assessee(s) is eligible for deduction of the bad and doubtful debts actually written off in view of section 36(1)(vii) which limits the deduction allowable under the proviso to the excess over the credit balance made under clause (viia) of Section 36(1) of Income Tax Act, 1961 (“ITA” for short)?
2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in sub-section (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962.
Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(1)(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under Section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off.
However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii).
3. Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee(s). For the above reasons, I agree that the appeals filed by the assessees stand allowed and the appeals filed by the Revenue stand dismissed with no order as to costs.
This question of law is answered in the affirmative and in favour of the assessee.
7. In fine, the Tax Case (Appeal) stands dismissed answering the questions of law in favour of the assessee.
Note:
1 (343 ITR 270)
