South Indian Bank Ltd. Vs DCIT (Kerala High Court)
Appeal Against Section 263 Consequential Assessment Cannot Be Used to Introduce a Fresh Deduction Claim
The legal principle
The Kerala High Court distinguished between challenging a disallowance actually made in an assessment consequent to section 263 revision and introducing an additional deduction claim for the first time in the appeal against that assessment.
The Tribunal was required to examine the existing ₹14.10 crore bad-debt disallowance on merits. However, the Court upheld its refusal to entertain a separate claim of approximately ₹52 crore, first raised before the CIT(A), having regard to the fact that the assessment under appeal arose from a section 263 order.
The decision therefore produced a divided result: the original disallowance was remanded for adjudication, while the additional claim was held outside the permissible scope of that appellate proceeding.
Background of the dispute
South Indian Bank, a scheduled bank, had claimed deductions relating to non-performing assets written off. The claims were initially allowed in the assessment.
The Principal Commissioner subsequently invoked section 263 and remanded the matter to the Assessing Officer. In the consequential assessment, the Assessing Officer made a disallowance of ₹14.10 crore.
The bank challenged that assessment before the first appellate authority. During the appeal, it also sought an additional deduction relating to bad debts written off, described in the judgment broadly as ₹52 crore and in the questions framed as ₹51.52 crore, under section 36(1)(vii).
The first appeal was rejected, and the bank approached the Tribunal. According to the bank, the Tribunal treated the appeal as concerning only the additional claim and consequently failed to adjudicate even the ₹14.10 crore disallowance that directly arose from the consequential assessment.
The bank’s grievance
Before the High Court, the bank argued that even if the Tribunal was justified in refusing to entertain the additional claim, it could not decline to examine the ₹14.10 crore disallowance already forming part of the assessment order.
The bank also defended the additional claim. It submitted that the claim could properly be raised before the CIT(A) and that, since the first appellate authority had considered it on merits, the Tribunal should have examined it as well.
Accordingly, the bank sought a remand for consideration of both issues.
The Revenue opposed the appeal. It maintained that the ₹14.10 crore amount was not deductible and that the additional claim could not be pursued because it had been introduced for the first time at the first appellate stage.
Existing disallowance had to be examined on merits
The High Court disagreed with the Tribunal’s approach to the ₹14.10 crore disallowance.
That amount had been disallowed in the assessment under appeal. The Tribunal was therefore obliged to examine whether the disallowance was sustainable. The introduction of an additional claim could not justify refusing to decide the challenge to an existing assessment addition.
The Court held that the Tribunal should have considered the ₹14.10 crore issue on its own merits, rather than declining adjudication merely because a further claim had also been raised.
This part of the decision was in favour of the bank. However, the High Court did not itself allow the deduction. It restored the issue to the Tribunal for a fresh decision after hearing both parties.
Fresh claim could not enlarge the consequential appeal
On the additional claim of approximately ₹52 crore, the High Court upheld the Tribunal’s conclusion.
The Court attached particular importance to the nature of the assessment being challenged: it was an assessment made pursuant to the Commissioner’s section 263 order.
The additional deduction had been raised for the first time before the CIT(A), while that authority was considering the validity of the consequential assessment involving the ₹14.10 crore disallowance. In those circumstances, the Court held that the bank could not introduce the additional claim through that appellate remedy.
The bank’s submission that the CIT(A) had considered the claim on merits did not persuade the Court to require its adjudication by the Tribunal.
Nevertheless, the Court expressly preserved any other remedy available to the bank concerning the additional claim, subject to law.
Result of the appeal
The matter was remanded to the Tribunal only for fresh consideration of the ₹14.10 crore disallowance. Both the bank and the Revenue were to receive an opportunity of being heard.
The refusal to entertain the additional claim was sustained. Its substantive deductibility was not decided, and other lawful remedies were left open.
Author’s comments
The origin and scope of the assessment under appeal matter as much as the merits of the deduction. An appeal against a consequential assessment following section 263 cannot automatically be treated as an unrestricted opportunity to introduce further claims.
At the same time, an additional claim cannot distract the appellate authority from deciding the disallowance that actually arises from the assessment. The Tribunal had to separate the two issues and adjudicate the existing dispute.
The judgment should be read within its section 263 consequential-assessment context. It does not declare a general prohibition against fresh claims before appellate authorities. Equally, the remand does not establish that the ₹14.10 crore deduction is allowable; that question remains for the Tribunal.
Cases Discussed
- National Thermal Power Co. Ltd. v. Commissioner of Income Tax, (1998) 229 ITR 383 (SC); (1997) 7 SCC 489 (Supreme Court) — The decision is identified in Annexure I of the judgment as a Supreme Court authority included among the appellant’s annexures. The Kerala High Court did not expressly analyse or apply its ratio in the operative reasoning. The precedent concerns the Tribunal’s jurisdiction to examine additional legal questions arising from facts already on record. Its inclusion here records the annexure reference and does not imply that the Kerala High Court relied upon or distinguished it.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The appellant is a Scheduled Bank under the provisions of the Banking Regulation Act and they challenge the order of the learned Income Tax Appellate Tribunal (ITAT), Cochin Bench (Tribunal for short).
2. The facts involved are not in dispute; and therefore, we will record them very briefly.
3. The appellant suffered an initial assessment, in which, their claim for disallowance of large sums, written off in relation to Non -Performing Assets (NPA), were allowed. The Principal Commissioner of Income Tax, invoking the provisions of Section 263 of the Income Tax Act (‘Act’ for short), however, remanded the matter to the Assessing Authority; consequent to which, the latter Authority finalized the assessment, adding an amount of Rs.14.10 crores.
4. The appellant took up the matter in First Appeal; in which they also additionally sought reduction of Rs.52 crores also claimed as written off NPA. The said appeal was also rejected.
5. The appellant, thereupon filed a Second Appeal before the learned Tribunal, which, according to them, has refused to consider even their contentions qua the aforementioned Rs.14.10 crores, being misdirected by the impression that the appeal relates only to the claim as regards additional Rs.52 crores thus to be not one that arises before them under the ambit of Section 36(1)(vii) of the Act. They are thus in appeal before this Court.
6. Sri.Joseph Markos, learned senior counsel, instructed by Sri.Alexander Joseph Markos – appearing for the appellant, submitted that, even assuming that the Tribunal can be found to be justified in not entering into the question regarding Rs.52 crores – which is an additional claim made by his client, while the matter was pending before the First Appellate Authority – its refusal to consider even the case qua Rs.14.10 crores is illegal and unlawful. The learned senior counsel then maintained that, as regards Rs.52 crores, his client justified in making it an issue before the First Appellate Authority; and that since the said Authority has already considered it on its merits, the Appellate Tribunal could not have refused to consider it as it has now done. He prayed that, therefore, this appeal be allowed and the matter be remanded to the learned Tribunal for consideration of both issues.
7. Sri.Harikumar G. – learned senior panel counsel for the respondent, in response, submitted that the learned Tribunal has committed no error because the amount of Rs.14.10 crores is not eligible to be allowed, as asserted by the appellant; while the issue relating to Rs.52 crores could not have been impelled before the Tribunal – it having been projected for the first time at the stage of First Appeal. He prayed that this appeal be hence dismissed.
8. As ineluctable from the afore narrative, there are two broad issues; and the questions we have framed also reflect them, as under:
“1) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in dismissing the Appeal on the ground that the issues raised in the Appeal did not emanate from the Assessment Order passed under Section 143(3) read with Section 263 of the Act?
3) Whether on the facts and in the circumstances of the case, the disallowance made in the assessment order of an amount of Rs.14.10 Crores with respect to bad debts written off is erroneous and arbitrary?
4) Whether on the facts and in the circumstances of the case, the additional claim of Rs.51.52 Crores with respect to bad debts written of under Section 36(1)(vii) is an allowable deduction?”
9. On the aspect of Rs.14.10 crores, we are afraid that we cannot find favour with the learned Tribunal at all because, it was enjoined to consider the validity of its addition, or otherwise, on its merits, rather than have refused to do so solely because an additional claim of Rs.52 crores has been raised. Hence, on the first of the afore questions of law, we find in favour of the appellant.
10. Coming to the question of Rs.52 crores, we are in favour with the conclusions of the learned Tribunal because, this was a claim made by the appellant for the first time before the First Appellate Authority, when it was considering the validity of the assessment made by the Assessing Authority disallowing the claim for Rs.14.10 crores. It is crucial that the second assessment order was based on the order of the Commissioner under Section 263 of the Act; and obviously therefore, an additional disallowance claimed by the Bank could not have been projected in the first appellate remedy against it.
11. In such circumstances, we answer the second question against the assessee; however, clarifying that any other remedy that they may have qua Rs.52 crores, which they now claim, is left open, subject to law.
12. Consequently, the matter will stand remanded to the learned Tribunal for fresh consideration on the question of disallowance of Rs.14.10 crores, as has been claimed by the appellant, after affording them and the revenue necessary opportunity of being heard; thus culminating in a fresh order.
This appeal is thus ordered.
