I.t. Appeal v. Commissionerof Income-Tax And Another [(2010) 323 Itr 166 (Sc

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P. FRIDAY, THE 4 DAY OF AUGUST 2023 / 13TH SRAVANA, 1945 ITA NO. 59 OF 2020AGAINST THE ORDER DATED 07.11.2019 in ITA 191/2019 OF INCOME TAXAPPELLATE TRIBUNAL, COCHIN BENCH APPELLANT/APPELLANT RESPONDENT/REVENUE: THE PRINCIPAL COMMISSIONER OF INCOME TAXTHRISSUR BY ADVS.SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT APPELLANT/ASSESSEE: M/S.DHANALAXMI BANK LTD.,NAICKANAL, THRISSURBY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.ABRAHAM JOSEPH MARKOSSRI.V.ABRAHAM MARKOSSRI.ISAAC THOMASSRI.P.G.CHANDAPILLAI ABRAHAMSHRI.SHARAD JOSEPH KODANTHARASHRI.ALEXANDER JOSEPH MARKOS THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 04.08.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: JUDGMENT A.K.Jayasankaran Nambiar, J. The revenue is in appeal before us against the order dated07.11.2019 of the Income Tax Appellate Tribunal, Cochin Bench in I.T.Appeal No.191/Coch/2019 pertaining to the assessment year 2015-2016. The respondent assessee is a scheduled bank with Head Office atThrissur. It had filed its return of income for the assessment year 2015-2016 on 28.09.2015, declaring a net loss of Rs.283,37,80,796/-. Whilethe assessment under Section 143(3) of the Income Tax Act wascompleted on 07.12.2017, by disallowing an amount of Rs.1,80,04,849/-under Section 14A of the Income Tax Act, the said order was set asideby the Principal Commissioner of Income Tax, Thrissur, by an orderdated 18.12.2018 finding the assessment order as erroneous andprejudicial to the interests of the revenue. In the order of the PrincipalCommissioner, it was noticed that the respondent assessee had debitedan amount of Rs.294,76,94,000/-being provision for non-performingassets (NPA) in the profit and loss account under the head of provisionsand contingencies. While the assessee had initially not claimed the saidamount while computing the loss that was returned, it had subsequentlyclaimed the said amount towards bad debts written off in terms of I.T. Appeal No.59 of 2020. Section 36(1)(vii) of the Income Tax Act. The Principal commissionerfound that the actual bad debts that were written off in the auditedbalance sheet and profit and loss account of the assessee company wasonly in an amount of Rs.173,69,10,000/-. Accordingly, it was found thatanamountofRs.121,07,84,000/-(Rs.294,76,94,000/--Rs.173,69,10,000/-) was the excess provision made in the accountstowards NPA that was not allowable as a deduction as per Explanation-1 to Section 36 (1)(vii). 2. Aggrieved by the order of the Principal Commissioner, therespondent assessee preferred an appeal before the Income TaxAppellate Tribunal, Cochin, which by the order impugned in this appealallowed the assessee's appeal and quashed the order dated 18.12.2018passed by the Principal Commissioner of Income Tax and found theassessee entitled to the deduction under Section 36(1)(vii) relying onthe judgment of the Supreme Court in Vijaya Bank v. Commissionerof Income-Tax and Another [(2010) 323 ITR 166 (SC)]. 3. In the appeal before us, the revenue impugns the order of theTribunal and raises the following substantial questions of law:- 1. Whether on the facts and in the circumstances of the case and considering the facts presented before andconsidered by the Assessing Officer vis-a-vis thePrincipal Commissioner's conclusion on examination ofthe records, is not the consequential order of the Pr.Commissioner interfering with the assessment orderlegal and in accordance with law? 2. (a) Whether on the facts and in the circumstances ofthe case and in the light of the facts and figures foundby the Principal Commissioner on an examination ofrecords demonstrate the order of the Assessing Officeras an order erroneous and prejudicial to the interest ofthe Revenue? 3. In the appeal before us, the revenue impugns the order of theTribunal and raises the following substantial questions of law:- 1. Whether on the facts and in the circumstances of the case and considering the facts presented before andconsidered by the Assessing Officer vis-a-vis thePrincipal Commissioner's conclusion on examination ofthe records, is not the consequential order of the Pr.Commissioner interfering with the assessment orderlegal and in accordance with law? 2. (a) Whether on the facts and in the circumstances ofthe case and in the light of the facts and figures foundby the Principal Commissioner on an examination ofrecords demonstrate the order of the Assessing Officeras an order erroneous and prejudicial to the interest ofthe Revenue? (b) ls not the Revisional Order of the PrincipalCommissioner in accordance with law and the Tribunalis justified in interfering with the Revisional Order? 3. Whether on the facts and in the circumstances of thecase and since the excess provision made in accountsfor non performing assets (NPA) being not allowable asper Explanation-1 to Section 36(1)(vii) of the I.T Act andwill not non consideration of such an aspect by theAssessing Officer result in the order being erroneousand prejudicial to the interest of the Revenue,empowering the Principal Commissioner to subject thesame to revision? 4. Inasmuch as the questions of law raised are essentially with I.T. Appeal No.59 of 2020. regard to whether or not the Appellate Tribunal was right in allowingthe appeal of the assessee merely by relying on the decision of theSupreme Court in Vijaya Bank (Supra), we deem it appropriate todiscuss the three questions of law raised together for the purposes ofdisposing this appeal. 5. The decision of the Supreme Court in the case of Vijaya Bank(Supra) considered, inter alia, the question as to whether it wasimperative for a bank to close the individual account of each debtor inits books or a mere reduction in the “Loans and Advances Account” ordebtors to the extent of the provision for bad and doubtful debt wouldsuffice. Answering the said question, the court found as follows:- " 8. Coming to the second question, we may reiteratethat it is not in dispute that section 36(1)(vii) of the1961 Act applies both to banking and non-bankingbusinesses. The manner in which the write off is to becarried out has been explained hereinabove. It isimportant to note that the assessee-bank has not onlybeen debiting the profit and loss account to the extentof the impugned bad debt, it is simultaneouslyreducing the amount of loans and advances or thedebtors at the year-end, as stated hereinabove. Inother words, the amount of loans and advances or thedebtors at the year-end in the balance-sheet is shownas net of the provisions for the impugned debt.However, what is being insisted upon by the AssessingOfficer is that mere reduction of the amount of loansand advances or the debtors at the year-end would notsuffice and, in the interest of transparency, it would bedesirable for the assessee- bank to close each and every individual account of loans and advances ordebtors as a precondition for claiming deductionunder section 36(1)(vii)of the 1961 Act. This view hasbeen taken by the Assessing Officer because theAssessing Officer apprehended that the assessee-bankmight be taking the benefit of deduction under section36(1)(vii)of the 1961 Act, twice over. [See order of theCommissioner of Income-Tax (Appeals) at pages. 66,67 and 72 of the paper book, which refers to theapprehensions of the Assessing Officer]. In thiscontext, it may be noted that there is no finding of theAssessing Officer that the assessee had unauthorisedlyclaimed the benefit of deduction under section 36(1)(vii), twice over. The order of the Assessing Officer isbased on an apprehension that, if the assessee fails toclose each and every individual account of its debtor,it may result in the assessee claiming deduction twiceover. In this case, we are concerned with theinterpretation of section 36(1)(vii)of the 1961 Act. Wecannot decide the matter on the basis ofapprehensions/desirability. It is always open to theAssessing Officer to call for details of individualdebtor's account if the Assessing Officer hasreasonable grounds to believe that the assessee hasclaimed deduction, twice over. In fact, that exercisehas been undertaken in subsequent years. There isalso a flipside to the argument of the Department. Theassessee has instituted recovery suits in Courtsagainst its debtors. If individual accounts are to beclosed, then the debtor/defendant in each of thosesuits would rely upon the bank statement and contendthat no amount is due and payable in which event thesuit would be dismissed.” 6. In the appeal before us, the essential contention of the revenueis that in the case of the assessee herein, the Appellate Tribunal failedto verify whether, as a matter of fact, the assessee had reduced thevalue of its assets in an amount equivalent to the amount claimed by way of bad debts that were allegedly written off as irrecoverable. It ispointed out that the Supreme Court in Vijaya Bank (Supra) hadclearly found that the assessee bank had not only debited the profit andloss account to the extent of the impugned bad debt but was alsosimultaneously reducing the amount of loans and advances of thedebtors at the year-end. In other words, the Court, in the judgmentabove, had clearly recognised that it was open to an assessee companyto not only show a write-off of the bad debts in its profit and lossaccount but it could also simultaneously reduce the value of its assets ina like amount in the balance sheet of the company. In either event, theassessee could claim the benefit of reduction permissible under theIncome Tax Act for bad debts written off. It is the case of the revenuethat such a factual verification was not resorted to in the instant case. 7. Since we found force in the submission of learned Standingcounsel for the Income Tax Department that the Appellate Tribunal hadnot examined the factual aspect as to whether or not the respondentassessee in the instant case had actually reduced the amountrepresenting bad debts from the value of its assets in the balance sheetand had merely adopted the ratio of Supreme Court judgment in VijayaBank (Supra), we requested the learned Senior counsel for therespondent assessee to make available a copy of the audited balance 7. Since we found force in the submission of learned Standingcounsel for the Income Tax Department that the Appellate Tribunal hadnot examined the factual aspect as to whether or not the respondentassessee in the instant case had actually reduced the amountrepresenting bad debts from the value of its assets in the balance sheetand had merely adopted the ratio of Supreme Court judgment in VijayaBank (Supra), we requested the learned Senior counsel for therespondent assessee to make available a copy of the audited balance sheet and profit and loss account of the company for the assessmentyear in question so as to verify the factual aspects therein. We havetoday been handed over a copy of the printed balance sheet and profitand loss account of the assessee company for the year 2014-2015. Aperusal of the said balance sheet, however, does not show that theassessee had, in fact, reduced the value of its assets by a figurecorresponding to the bad debts written off by it. The learned Seniorcounsel for the assessee, however, brings to our notice an additionaldocument titled “Schedule of advances as on 31.03.2023”, which showsthat the advances shown in the balance sheet is the net figure arrivedat after reducing the provisions made for NPA (including bad debtswritten off and write back). It is also his submission that this documentforms part of the audited balance sheet and profit and loss account,although it does not find a place in the printed annual report of thecompany that is produced before us. 8. Taking note of the said annual report as also the submissions ofthe learned Senior counsel in relation to the additional documentsproduced before us, we are of the view that the Tribunal was clearly inerror in allowing the appeal preferred by the assessee through a mereapplication of a ratio in Vijaya Bank (Supra). In our view, the Tribunalought to have ascertained whether the factual situation that was I.T. Appeal No.59 of 2020. established in Vijaya Bank (Supra) existed in the instant case. We,therefore, find that the substantial questions of law raised by therevenue in this appeal has to be answered in favour of the revenue andagainst the assessee. We, therefore, answer the questions as such infavour of the revenue and against the assessee by setting aside theAnnexure (C) order of the Tribunal and restoring Annexure (B) order ofthe Principal Commissioner of Income Tax. The Assessing Officer shall now re-do the assessment based onthe directions in Annexure (B) order of the Principal Commissioner andafter taking note of the documents produced by the learned Seniorcounsel before us to substantiate his contention that for the assessmentyear in question the audited balance sheet of the company did containdocuments which showed that the value of the assets had been reducedby the amount of bad debts/provision written off. Sd/- A.K.JAYASANKARAN NAMBIAR JUDGE Sd/- MOHAMMED NIAS C.P. JUDGE I.T. Appeal No.59 of 2020. APPENDIX OF ITA 59/2020 PETITIONER ANNEXURES ANNEXURE A A TRUE COPY OF THE ASSESSMENT ORDER U/S.143(3) DATED 07-12-2017 ANNEXURE B TRUE COPY OF THE ORDER U/S 263 PASSED BYTHE PR. COMMISSIONER OF INCOME TAX,THRISSUR DATED 18-12-2018 ANNEXURE C CERTIFIED COPY OF THE ORDER OF THE INCOMETAX APPELLATE TRIBUNAL DATED 07-11-2019 INITA NO.191/COCH/2019