Ita v. Ita

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN THURSDAY, THE 7TH OCTOBER 2010 / 15TH ASWINA 1932 ITA.No. 234 of 2009() --------------------- ITA.54/COCH/2000 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: ----------------------------- THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT: --------------- THE LORD KRISHNA BANK LTD., KALOOR,KOCHI-17. ADV. SRI.JOSEPH KODIANTHARA FOR R SRI.TERRY V.JAMES FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07/10/2010, THE COURT ON 07/10/2010 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &K.SURENDRA MOHAN, JJ. ....................................................................I.T. Appeal No.234 of 2009 .................................................................... Dated this the 7th day of October, 2010. JUDGMENT Ramachandran Nair, J. The appeal is filed by the Revenue against orders of the Income Tax Appellate Tribunal disposing of the assessment appeal pertainingto the respondent-Bank for the assessment year 1994-95. We haveheard Standing Counsel appearing for the appellant and Senior counselSri.Joseph Markose appearing for the respondent-assessee. 2. Of the three questions raised, one question relates to thededuction of loss allowed by the Tribunal on account of embezzlement that happened in one of the Branches of the respondent-Bank. Wenotice that the Tribunal has allowed it on the respondent establishingwith evidence the actual loss on account of embezzlement thathappened in one of it's Branches. We do not find any substantialquestion of law arising from the order of the Tribunal on their finding on this issue. However, we proceed to consider the remaining twoquestions which are substantial questions of law. ITA No.234/2009 3. The first question raised pertains to valuation of unquotedGovernment securities. Since securities involved are not quoted in themarket, market price is not known. Assessee treats unquotedGovernment securities as current assets and, therefore, it has to workout the profit or loss in the end of the year for the purpose of paymentof tax. The assessee adopted RBI guidelines for valuation of unquotedGovernment securities and based on the same it claimed a substantialloss. The Assessing Officer, however, rejected the claim becauseaccording to him when shares are not quoted, the cost price has to beadopted and going by the cost price assessee has not suffered the lossas claimed. It is a settled position through various decisions includingthat of this court in COMMISSIONER OF INCOME-TAX VS.NEDUNGADI BANK LTD. reported in (2003) 264 ITR 545 that forthe purpose of assessment cost price or market value whichever is lowshould be adopted. Admittedly market value is not known and so muchso, some method has to be adopted to fix the market value andthereafter only the lower of the cost price or the market value has to betaken for the purpose of computation of profit or loss in respect of theunsecured securities. Senior counsel appearing for the assessee ITA No.234/2009 ITA No.234/2009 produced RBI guidelines before us wherein the RBI has suggestedBanks to value unquoted Central Government securities on the basis ofthe prices/YTM rates put out by the PDAI/FIMMDA at periodicalintervals. YTM is the yield to maturity method adopted for valuationof securities. It is seen that the Tribunal accepted the assessee'svaluation which is based on RBI guidelines. RBI being the apex bodyissuing guidelines to the Banks for valuation of unquoted Governmentsecurities, we feel it is the rational basis which assessee was bound toadopt. The Assessing Officer also has not come out with any formulafor computation of market value of unquoted securities and he has nocase that the RBI guidelines for valuation is irrational. So much so, wefeel the Tribunal rightly upheld assessee's claim for valuation ofunquoted Government securities based on RBI guidelines. We,therefore, dismiss the Revenue's appeal on this issue. 4. Next question raised pertains to assessee's claim for deductionof provision for bad debts in terms of Section 36(1)(viia) of the IncomeTax Act. Here the only question raised is as to basis of classifyingBranches of the Bank as Rural Branches and other Branches. RuralBranch is defined under Explanation (ia) to Section 36(1)(viia) as ITA No.234/2009 follows: “Rural branch” means a branch of a scheduled bank ora non-scheduled bank situated in a place which has apopulation of not more than ten thousand according to thelast preceding census of which the relevant figures havebeen published before the first day of the previous year.” What is clear from the above is that classification between Rural andother Branches of a Bank is made based on the population in the placewhere the concerned Branch is located. While the assessee's case thatfound acceptance with the Tribunal is that “place” referred to in theabove definition clause is the Ward of a Panchayat or Municipality, theAssessing Officer took the view that “place” contained in the definitionclause should mean a Revenue Village. No doubt, "place" as such isnot defined in the definition clauses and so much so, we have to findout the scope and meaning of "place" referred to in the Section.Standing counsel for the department produced before us last publishedCensus Report of 2001. Even though the previous Census Report maybe the relevant one, we feel the scope of "place" as referred to in theCensus Report produced could be adopted for the purpose of this case.What is written in the Census Report 2001 is as follows: "The basic unit for rural areas is the revenue village with ITA No.234/2009 definite surveyed boundaries. The rural area is howevertaken as the residual portion excluding the urban area and forthat no strict definition is followed." 5. In our view, the definition clause does not exclude the literalmeaning of rural branch which necessarily excludes urban areas. If theassessee's case accepted by the Tribunal that population in a Ward hasto be reckoned for deciding as to whether the location of a Panchayat isin a rural area or not is accepted, then probably even in Municipal areasthere may be Wards with less than 10000 population thereby answeringthe branch located in such Municipal area also as a rural Branch.Going by the ordinary meaning of Rural Branch, we feel only Branchesof the Bank located in rural areas are covered. When the Legislatureadopts population as the basis for classification of rural Branches, thattoo, with reference to the last Census Report, we feel the basic unit asavailable for identification of rural area in the Census Report can belegitimately adopted. So much so, we feel the above meaning of ruralarea contained in the Census Report wherein revenue village is treatedas a unit of rural area, can be rightly adopted. So much so, "place"referred to in the above definition clause for the purpose of identifyingthe branch of a Bank as a rural Branch with reference to it's location is ITA No.234/2009 ITA No.234/2009 the revenue village. Therefore, in our view, the finding of the Tribunalthat "place" referred to in the definition is the Ward of a local authoritylike Panchayat or Municipality is incorrect and in our view, a ruralBranch has to be always in rural areas and the place referred can easilybe taken as a Village. Several Wards may come within a village,whether it be in Corporation, Municipality or Panchayats. There canbe no Village in a Municipal or Corporation area where the populationis less than 10000. So much so, rural Branches are such of theBranches located in a Village where the population in the Village as aunit is less than 10000. We, therefore, allow the appeal on this issue byreversing the order of the Tribunal and by restoring the assessment. C.N.RAMACHANDRAN NAIRJudge pms K.SURENDRA MOHANJudge