Court In Catholic Syrian Bank v. I.t.a

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 16 DAY OF SEPTEMBER 2021/25TH BHADRA, 1943 ITA NO. 1284 OF 2009 AGAINST THE ORDER IN ITA 395/Coch/2006 OFI.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/Appellant: THE COMMISSIONER OF INCOME TAX,THRISSUR.BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/Respondent: M/S. THE SOUTH INDIAN BANK LTD.,MISSION QUARTERS, THRISSUR.BY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.ISAAC THOMASSHRI.ALEXANDER JOSEPH MARKOSSHRI.SHARAD JOSEPH KODANTHARA THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSIONON 16.09.2021, THE COURT ON THE SAME DAY DELIVERED THEFOLLOWING: S.V.BHATTI & BECHU KURIAN THOMAS, JJ. ---------------------------------------------- IT Appeal No.1284 of 2009 ------------------------------------------------ Dated: 16[th] September, 2021 J U D G M E N T S.V. Bhatti, J. Heard learned Standing Counsel Mr.Jose Joseph andlearned Senior Advocate Mr.Joseph Markos for the parties. 2.Commissioner of Income Tax, Trichur/Revenue is theappellant. M/s.South Indian Bank Ltd, Trichur/assessee is therespondent. The appeal is directed against the order of theIncome Tax Appellate Tribunal, Cochin Bench in I.T.A395/Coch/2006 dated 27.09.2007. The appeal deals with theissues arising from the tax return filed by the assessee for theassessment year 2004-05. 2.1The Assessing Officer through the assessment order in Annexure-A, disallowed the claim of the assessee under I.T.A. No.1284/2009 Section 36(1)(viia). Similarly, the Assessing Officer disallowedthe revaluation of unquoted securities adopted by the assessee.The assessee filed appeal before the Commissioner of IncomeTax (Appeals) and the appeal was allowed in part. In the appealfiled by the Revenue before Income Tax Appellate Tribunal,through Annexure-C order, the Tribunal partly allowed theappeal for statistical purposes. Hence, the instant Income TaxAppeal, at the instance of the Revenue under Section 260A ofthe Income Tax Act (for short 'the Act'). The questions of lawrelate to bad debts and provision for bad debts in ruralbranches of the assessee's bank. The following substantialquestions of law are raised by the revenue: “1.Whether, on the facts and in the circumstances of thecase, and also in the light of the relevant provisions especiallyproviso to Section 36(1)(vii) cannot be the claim of the assesseefor bad debts u/s 36(1)(vii), and the claim in the credit balancein the provision for bad and doubtful debts u/s. 36(1)(viia) bedisallowed? I.T.A. No.1284/2009 2.Whether, on the facts and in the circumstances of thecase, the claim of bad debts and bad and doubtful debts is anallowable deduction? 3.Whether, on the facts and in the circumstances of thecase, the Tribunal is right in law and in fact in holding thatvaluation of unquoted securities adopted by the assessee iscorrect?” 3. The first and the second questions are regarding the eligible deduction under Section 36(1)(vii) of the Act. Thecounsel appearing for parties state that the questionconcerning bad debts falling under Section 36(1)(vii) is coveredin favour of the assessee in reported judgment of the Supreme Court in Catholic Syrian Bank v. Commissioner of Income Tax[1] andhad answered the point in favour of assessee and against theRevenue. We are referring to the decision by the Apex Courtwith a view to comprehensively advert to the outcome on allthe substantial questions raised by the Revenue in the instantappeal. The operative portion in Catholic Syrian Bank Ltd1(2012) 343 ITR 270 (SC) judgment reads thus: “Firstly, the Full Bench ignored the significant expressionappearing 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 Court in Catholic Syrian Bank v. Commissioner of Income Tax[1] andhad answered the point in favour of assessee and against theRevenue. We are referring to the decision by the Apex Courtwith a view to comprehensively advert to the outcome on allthe substantial questions raised by the Revenue in the instantappeal. The operative portion in Catholic Syrian Bank Ltd1(2012) 343 ITR 270 (SC) judgment reads thus: “Firstly, the Full Bench ignored the significant expressionappearing 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 underSection 36(1)(viia) proviso/limitation would not comeinto play.” xxx xxxx xxxxx “Consequently, while answering the question in favour ofthe assessee, we allow the appeals of the assessee anddismiss the appeals preferred by the revenue. Further, wedirect that all matters be remanded to the AssessmentOfficer for computation in accordance with law, in light ofthe 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 ofunquoted securities, adopted by the assessee whether is correct I.T.A. No.1284/2009 or not. The question is no more res integra and is answered by following the precedents in Commissioner of Income Tax v.Nedungadi Bank Ltd[2] and Commissioner of Income Tax v. LordKrishna Bank Ltd[3], and this Court had answered in favour of theassessee. The operative portion of the reported judgments isexcerpted hereunder: “Nedungadi Bank Ltd (supra) For all these reasons, we are of the view that the Income-taxAppellate Tribunal has rightly held that the securities held bythe assessee-bank in all these cases are the stock-in-trade of thebusiness of the assessee-banks and the notional loss suffered onaccount of the revaluation of the said securities at the close ofthe year is an allowablededuction in the computation of theprofits of the appellant. This disposes of the first two questionsmentioned in para. 10 (page 552) above” Lord Krishna Bank Ltd (supra) “The first question raised pertains to valuation of unquotedGovernment securities. Since securities involved are not 2(2003) 264 ITR 545 (Ker.)3(2011) 339 ITR 606 (Ker)3(2011) 339 ITR 606 (Ker) quoted in the market, market price is not known. The assesseetreats the unquoted Government securities as current assetsand, therefore, it has to work out the profit or loss in the end ofthe year for the purpose of payment of tax. The assesseeadopted the RBI guidelines for valuation of unquotedGovernment securities and based on the same it claimed asubstantial loss. The Assessing Officer, however, rejected theclaim because according to him when shares are not quoted,the cost price has to be adopted and going by the cost price theassessee has not suffered the loss as claimed. It is a settledposition through various decisions including that of this CIT v.Nedungadi Bank Ltd. reported in [2003] 264 ITR 545 (Ker) thatfor purpose of assessment cost price or market value,whichever is lower, should be adopted. Admittedly, marketvalue is not known and so much so, some method has beadopted to fix the market value and thereafter only the lowerof the cost price or the market value has to be taken for thepurpose of computation of profit or loss in respect of theunsecured securities. Senior counsel appearing for the assesseeproduced the RB guidelines before us wherein the RBI hassuggested banks to value unquoted Central Governmentsecurities on the basis of the prices/YTM rates put out by thePDAI/FIMMDA at periodical intervals. YTM is the yield tomaturity method adopted for valuation of securities. It is seen I.T.A. No.1284/2009 I.T.A. No.1284/2009 that the Tribunal accepted the assessee's valuation which isbased on the RBl guidelines. RBI being the apex body issuingguidelines to the banks for valuation of unquoted Governmentsecurities, we feel it is the rational basis which the assessee wasbound to adopt. The Assessing Officer also has not come outwith any formula for computation of market value of unquotedsecurities and he has no case that the RBI guidelines forvaluation is irrational. So much so, we feel the Tribunal rightlyupheld the assessee's claim for valuation of unquotedGovernment 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 dated14.7.2021 and concluded as follows: “5.2 Additional question no.4 deals with the claim of assesseeunder Section 36(1)(viia) of the Act. The extent to which theassessee is entitled to claim provision under Section 36(1)(viia)is again considered by the reported judgment of this Court inLord Krishna Bank Ltd. (supra). The relevant paragraphs 4, 5 and6, read as under: I.T.A. No.1284/2009 “Next question raised pertains to the assessee's claim fordeduction of provision for bad debts in terms of section 36(1)(viia) of the Income-tax Act. Here the only question raised isas to basis of classifying branches of the bank as rural branchesand 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 anon scheduled bank situated in a place which has apopulation of not more than ten thousand according to thelast preceding which the relevant figures have beenpublished before the first day of the previous year.”non scheduled bank situated in a place which has apopulation of not more than ten thousand according to thelast preceding which the relevant figures have beenpublished before the first day of the previous year.” 5.What is clear from the above is that the classificationbetween rural and other branches of a bank is made based onthe population in the place where the concerned branch islocated. While the assessee's case that found acceptance withthe Tribunal is that “place” referred to in the above definitionclause is the ward of a panchayat or municipality, theAssessing Officer took the view that “place” contained in thedefinition clause should mean a revenue village. No doubt,“place” as such is not defined in the definition clauses and somuch so, we have to find out the scope and meaning of “place”referred to in the section. Standing counsel for theDepartment produced before us last published Census Reportof 2001. Even though the previous Census Report may be therelevant one, we feel the scope of “place” as referred to in theCensus Report produced could be adopted for the purpose ofthis case. What is written in the Census Report 2001 is asfollows: “The basic unit for rural areas is the revenue village withdefinite surveyed boundaries. The rural area is, however,taken as the residual portion excluding the urban area andfor that no strict definition is followed.”definite surveyed boundaries. The rural area is, however,taken as the residual portion excluding the urban area andfor that no strict definition is followed.” In our view, the definition clause does not exclude the literal “The basic unit for rural areas is the revenue village withdefinite surveyed boundaries. The rural area is, however,taken as the residual portion excluding the urban area andfor that no strict definition is followed.”definite surveyed boundaries. The rural area is, however,taken as the residual portion excluding the urban area andfor that no strict definition is followed.” In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urbanareas. If the assessee's case accepted by the Tribunal thatpopulation in a ward has to be reckoned for deciding as towhether the location of a panchayat is in a rural area or not isaccepted, then probably even in municipal areas there may bewards with less than 10000 population thereby answering thebranch located in such municipal area also as a rural branch.Going by the ordinary meaning of rural branch, we feel onlybranches of the bank located in rural areas are covered. Whenthe Legislature adopts population as the basis for classificationof rural branches, that too, with reference to the last CensusReport, we feel the basic unit as available for identification ofrural area in the Census Report can be legitimately adopted.So much so, we feel the above meaning of rural area containedin the Census Report wherein revenue village is treated as aunit of rural area, can be rightly adopted. So much so, “place”referred to in the above definition clause for the purpose ofidentifying the branch of a bank as a rural branch withreference to its location is the revenue village. Therefore, inour view, the finding of the Tribunal that “place” referred toin the definition is the ward of a local authority like panchayator municipality is incorrect and, in our view, a Rural branchhas to be always in rural areas and the place referred caneasily be taken as a village. Several wards may come within avillage, whether it be in corporation, municipality orpanchayats. There can be no village in a municipal orcorporation area where the population is less than 10000. Somuch so, rural branches are such of the branches located in avillage where the population in the village as a unit is less than10000. We, therefore, allow the appeal on this issue byreversing the order of the Tribunal and by restoringassessment”. 6. The reasons referred to above are applicable to the subject appeal as well and by adopting the same reason, the I.T.A. No.1284/2009 question is answered in favour of revenue and against theassessee in the manner indicated above. 7. Accordingly, ITA No.1284 of 2009 is also remitted to the Assessing Officer for consideration and disposal inaccordance with law along with ITA No.1327 of 2009. 8. Mr.Joseph Markose introduces by placing reliance on v the judgment reported in Vijaya Bank Commissioner of Income Tax[4] (supra) another dimension to the objections available tothe assessee in this behalf, upon remand. He suggests that theassessee may be given liberty to raise the objections availableby referring to the ratio laid down by the Supreme Court inVijaya Bank case. The assessee is granted liberty to raise theobjections available by referring to the ratio laid down by theSupreme Court in Vijaya Bank case. The assessee is grantedliberty to raise objections or file reply, as the case may be, as I.T.A. No.1284/2009 and when a notice is issued by the Assessing Officer uponremand. The objections are considered in accordance with lawand the assessment orders are made. Appeal is allowed in part as indicated above. Sd/- S.V. BHATTI JUDGE sd/- BECHU KURIAN THOMAS JUDGE css/ I.T.A. No.1284/2009 PETITIONER ANNEXURE ANNEXURE A ANNEXURE B ANNEXURE C APPENDIX OF ITA 1284/2009 TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER U/S.143(3) DATED 15/12/2005. TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN ITA 68/R.I/TCR/CIT-V/05-06 DATED 17/3/2006. I.T.A. No.1284/2009 and when a notice is issued by the Assessing Officer uponremand. The objections are considered in accordance with lawand the assessment orders are made. Appeal is allowed in part as indicated above. Sd/- S.V. BHATTI JUDGE sd/- BECHU KURIAN THOMAS JUDGE css/ I.T.A. No.1284/2009 PETITIONER ANNEXURE ANNEXURE A ANNEXURE B ANNEXURE C APPENDIX OF ITA 1284/2009 TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER U/S.143(3) DATED 15/12/2005. TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN ITA 68/R.I/TCR/CIT-V/05-06 DATED 17/3/2006. TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IN ITA 395 (COCH)/2006 DATED 27/09/2007.