Commissioner Of Income Tax Ii,Trichy v. M/S.city Union Bank Ltd.,Kumbakonam

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 26.2.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A).Nos.22, 196 and 466 of 2004 Commissioner of Income Tax II,Trichy...Appellant Vs. M/s.City Union Bank Ltd.,Kumbakonam...Respondent Prayer in TC.[A] No.22/2004: Appeal under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax Appellate Tribunal, Madras'B' Bench dated 18.6.2003 made in ITA No.2483/Mds/1995 for the assessmentyear 1992-93 and against the order of the commissioner of Income Tax[Appeals] VI Madras 600 034 in ITA.No.113/95-96/D.O.Spl.R.Try dated9.9.1995 and against the Order dated 28.3.1995 in PAN/GIR.No.0349 of theDeputy Commissioner of Income Tax, special Range, Tiruchirappalli. Prayer in TC[A].No.196/2004: Appeal under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax Appellate Tribunal, Madras'C' Bench dated 5.11.2003 made in ITA No.1341/Mds/1995 for the assessmentyear 1991-92 and against order dated 31.3.1995 in ITA.No.622/93-94/Try ofthe Commissioner of Income Tax [Appeals] VI, Madras and against the orderdated 10.1.1994 in PAN/GIR NO.CN-0349 of the Deputy Commissioner of IncomeTaxx, Special Range, Tiruchirappalli. Prayer in TC[A].No.466/2004: Appeal under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax Appellate Tribunal, Madras'B' Bench dated 5.8.2003 made in ITA No.2159/Mds/1996 for the assessmentyear 1993-94 and against Order of the Commissioner of Income Tax [Appeals]VI Madras in ITA.No.256/96-97/DL.Spl.TRY dated 9.7.96 and against theorder dated 22.3.1994 in PAN/GIR No.CN-0349 of the Deputy Commissioner ofIncome Tax Special Range, Tiruchirappalli. For Appellant :Mr.MuralikumaranSenior Standing Counsel (IT)For Respondent :Mr.V.D.GopalJ U D G M E N T (Delivered by P.D. DINAKARAN, J.) The above tax case appeals were admitted on the following questions oflaw:T.C.(A) No.22 of 2004 1. Whether on the facts and in the circumstances of the case, theTribunal was right in holding that in the case of the assesseebank interest on securities has to be assessed only on the basisof the interest due on the half-yearly due dates and the interestaccrued as at the end of the assessment year is not be taken?Tribunal was right in holding that in the case of the assesseebank interest on securities has to be assessed only on the basisof the interest due on the half-yearly due dates and the interestaccrued as at the end of the assessment year is not be taken? 2.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia) when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)?Tribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia) when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)? 2.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia) when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)?Tribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia) when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)? 3.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that the reduction of Rs.47,38,984/-claimed by the assessee bank as diminution in the value ofinvestments is allowable when the loss has been claimed only onnotional basis in the adjusted statement filed along with thereturn of income and not on the basis of any definite method ofaccounting followed in the books of accounts?Tribunal was right in holding that the reduction of Rs.47,38,984/-claimed by the assessee bank as diminution in the value ofinvestments is allowable when the loss has been claimed only onnotional basis in the adjusted statement filed along with thereturn of income and not on the basis of any definite method ofaccounting followed in the books of accounts? T.C.(A) No.196 of 2004 1.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia), when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)?Tribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia), when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)? T.C.(A) No.466 of 2004:1.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that in the case of the assesseebank interest on securities has to be assessed only on the basisof the interest due on the half-yearly due dates and the interestaccrued as at the end of the assessment year is not be taken? and 1.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that in the case of the assesseebank interest on securities has to be assessed only on the basisof the interest due on the half-yearly due dates and the interestaccrued as at the end of the assessment year is not be taken? and 2.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia), when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)? 2.1. The Assessing Officer observing that interest on securities wasto be assessed in accordance with the method of accounting regularlyemployed by the assessee, and as the assessee was following accrual basisfor recording interest in the books of accounts, included the interest onaccrual basis for computing the total income. 2.Whether on the facts and in the circumstances of the case, theTribunal was right in holding that the claim of bad debts inrelation to non-rural branches of the assessee bank is allowablewithout first setting off against the provision already allowedunder Section 36(1)(viia), when no distinction is made betweenadvances relating to non-rural and rural advances has been made inSection 36(1)(vii)? 2.1. The Assessing Officer observing that interest on securities wasto be assessed in accordance with the method of accounting regularlyemployed by the assessee, and as the assessee was following accrual basisfor recording interest in the books of accounts, included the interest onaccrual basis for computing the total income. 2.2. With regard to the claim of the assessee qua bad debts writtenoff, the Assessing Officer observing that as per the proviso to Section 36(1)(viia) of the Act, any bad debt in excess of the provision has to bedisallowed and the section does not distinguish the debt that is arisingfrom urban advances and rural advances, rejected the stand of theassessee that the provision referred to in Section 36(1)(viia) relates toonly the rural branches and does not apply to bad debts of urban branches,and held that the actual bad debts irrespective of the question as towhether they are related to urban or rural branches should be first setoff against the provision which has already been allowed and only theexcess should be allowed to be deducted under Section 36(1)(vii) of theAct. 2.3. Apropos the claim of the assessee with regard to diminution inthe value of investments written off, the assessing officer declined toallow the claim on the ground that a reference application on this issuewas pending before this Court. 2.4. On appeals filed by the assessee, the Commissioner of Income Tax(Appeals), held in favour of the assessee, which was on further appeal, atthe instance of the Revenue, confirmed by the Tribunal. Hence, theseappeals raising the questions of law referred to above. 3. Heard both sides. 4.1. With regard to the first substantial question of law raised inT.C.(A) No.22 of 2004 and the first substantial question of law raised inT.C.(A) No.466 of 2004, the Division Bench of this Court by judgment dated23.1.2007 made in T.C.(A) Nos.15 and 24 of 2003 (Commissioner of IncomeTax, Madurai v. Tamilnadu Mercantile Bank Ltd., Tuticorin), afterreferring to the decisions in Commissioner of Income-tax v. Canara Bank[1992] 195 ITR 66, CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144,H.M.Kashiparekh and Co. Ltd. v. CIT [1960] 39 ITR 706, Poona ElectricSupply Co. Ltd. v. CIT [1965] 57 ITR 521, Morvi Industries Ltd. v. CIT,[1971] 82 ITR 835, State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), Godhra Electricity Co. Ltd., v. Commissioner of Income-tax, [1997]225 ITR 746 held that the assessee is taxable for interest on securitiesonly on specified dates when it becomes due for payment, in view of thirdproviso to Section 145(1) of the Act, which was in force during therelevant assessment years. 4.2. In view of the ratio laid down in the decisions referred supra,the first substantial question of law raised in T.C.(A) No.22 of 2004 andthe first substantial question of law raised in T.C.(A) No.466 of 2004 isanswered in favour of the assessee and against the revenue. 5.1. With regard to the second question of law in T.C.(A) No.22 of2004, the only question of law in T.C.(A) No.196 of 2004 and the secondquestion of law in T.C.(A) No.466 of 2004, the learned counsel for theassessee submitted that a similar issue has been answered in favour of theassessee in South Indian Bank Ltd. v. Commissioner of Income-tax, [2003]262 ITR 0579. 4.2. In view of the ratio laid down in the decisions referred supra,the first substantial question of law raised in T.C.(A) No.22 of 2004 andthe first substantial question of law raised in T.C.(A) No.466 of 2004 isanswered in favour of the assessee and against the revenue. 5.1. With regard to the second question of law in T.C.(A) No.22 of2004, the only question of law in T.C.(A) No.196 of 2004 and the secondquestion of law in T.C.(A) No.466 of 2004, the learned counsel for theassessee submitted that a similar issue has been answered in favour of theassessee in South Indian Bank Ltd. v. Commissioner of Income-tax, [2003]262 ITR 0579. 5.2. The Division Bench of Kerala High Court in South Indian Bank Ltd.Case referred supra, held that:"The proviso to clause (vii) of section 36(1) and clause (v) ofsection 36(2) of the Income-tax Act, 1961, were insertedsimultaneously with effect from April 1, 1985, by the Finance Act,1985. The scope of the proviso to clause (vii) of section 36(1) hasto be ascertained from a cumulative reading of the provisions ofclauses (vii), (viia) of section 36(1) and clause (v) of section 36(2). The intention of the Legislature in enacting the proviso toclause (vii) of section 36(1) and clause (v) of section 36(2)simultaneously is only to see that a double benefit in respect ofthe same bad debt is not given to a scheduled bank. A scheduledbank may have both urban and rural branches and advances given fromboth branches. Having regard to the hazards involved in realisingthe advances made by rural branches particularly to agriculturists,certainly the assessee-bank might prefer to make provision for baddebt in respect of advances made in the rural branches. As a resultof the amendment the scheduled bank will be entitled to thededuction of the entire bad debt relating to advances made by theurban branches written off in the books and also the differencebetween the amount written off in the books relating to advancesmade by the rural branches during the previous year relevant to theassessment year and the credit balance in the provisions for badand doubtful debts account relating to advances made by the ruralbranches made under clause (viia). If the bad debt written offrelates to debts other than for which provision is made underclause (viia) such debt will fall squarely under the main part ofclause (vii) which is entitled to deduction and in respect of thatpart of the debt with reference to which a provision is made underclause (viia), the proviso will operate to limit the deduction tothe extent of the difference between that part of debt written off in the previous year and the credit balance in the provision forbad and doubtful debts account made under clause (viia)." 5.3. In the instant case, while allowing the claim for bad debtswritten off in respect of advances made by rural branches, theCommissioner of Income Tax (Appeals) as well as the Tribunal, was of thefirm opinion that the assessee has not claimed any debts written off inrespect of rural branch in the earlier year. If that be so, we find noerror in the order of the Tribunal in holding that the claim of bad debtsin relation to non-rural branches of the assessee bank is allowable.Accordingly, this issue is answered in favour of the assessee and againstthe Revenue. 6.1. Qua the third question of law in T.C.(A) No.22 of 2004 isconcerned, the Tribunal held that when investments are made in accordancewith the requirements of the Act, wherein the market price changed fromthe value shown in the opening balance and at the end of the year, thesame could be allowed as depreciation. 6.2. That apart, it is a settled law that the assessee is entitled tochange the method of valuation of Government securities to market valuefrom cost, and claim depreciation on the difference, vide Commissioner ofIncome Tax v. Karur Vysya Bank Ltd., [2005] 273 ITR 510. 6.1. Qua the third question of law in T.C.(A) No.22 of 2004 isconcerned, the Tribunal held that when investments are made in accordancewith the requirements of the Act, wherein the market price changed fromthe value shown in the opening balance and at the end of the year, thesame could be allowed as depreciation. 6.2. That apart, it is a settled law that the assessee is entitled tochange the method of valuation of Government securities to market valuefrom cost, and claim depreciation on the difference, vide Commissioner ofIncome Tax v. Karur Vysya Bank Ltd., [2005] 273 ITR 510. 6.3. In view of the ratio enunciated from the decision referredsupra, we find no infirmity in the decision of the Tribunal in this regard. Resultantly, the appeals are dismissed. No costs. Sd/-Asst. Registrar. /true copy/ sasi Sub Asst. Registrar. To: 1. The Assistant Registrar,Income Tax Appellate Tribunal,III Floor, Rajaji Bhavan,Besant Nagar, Chennai. 2.The Commissioner of Income Tax-II, Tiruchirappalli. 3. The Commissioner of IncomeTax (Appeals)-VI, Madras. 4.The Deputy Commissioner of Income Tax, Special Range Tiruchirapalli. + 2 CCs to Mr.N.Muralikumaran, Advocate SR NO 12000, 12001+ 1 CC To Mr. V.N.Gopal, Advocate SR NO.11673 ssv[co]gp/9.3. T.C.(A).Nos.22, 196 and 466 of 2004