Ita/264/2009 Of The South Indian Bank Ltd v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 04TH DAY OF DECEMBER 2018 / 13TH AGRAHAYANA, 1940 I.T.A.No.264 of 2009 AGAINST THE ORDER IN I.T.A.122/COCH/1997 DATED 27-06-2003OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN APPELLANT/APPELLANT: THE SOUTH INDIAN BANK LTD.,TRICHUR. BY ADVS.SRI.P.BALAKRISHNAN (E)SRI.K.S.MENON (K) RESPONDENT/RESPONDENT: THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04.12.2018, ALONG WITH ITA.361/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.Nos.264/2009 & 361/2009 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 04TH DAY OF DECEMBER 2018 / 13TH AGRAHAYANA, 1940 I.T.A.No.361 of 2009 AGAINST THE ORDER IN I.T.A.113/COCH/1996 DATED 27-06-2003OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN APPELLANT/APPELLANT: THE SOUTH INDIAN BANK LTD.,TRICHUR. BY ADV. SRI.P.BALAKRISHNAN (E) RESPONDENT/RESPONDENT: THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04.12.2018, ALONG WITH ITA.264/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.Nos.264/2009 & 361/2009 JUDGMENT [ I.T.A.264/2009, I.T.A.361/2009 ] Vinod Chandran,J. The question arising in the above two appeals, for theyears 1993-94 and 1994-95, is the following: ITA.361/2009 Whether on the facts and in the circumstances ofthe case, the Tribunal is correct in law and fact inholding that the write off is not complete in theappellant's case in spite of the fact that the appellanthas debited the said sum of Rs.2,18,56,250/- in the P&Laccount and netted the same from the total advancesoutstanding in the balance sheet? ITA.264/2009 Whether on the facts and in the circumstances ofthe case, the Tribunal is correct in law and fact inholding that the write off is not complete in theappellant's case in spite of the fact that theappellant has debited the said sum of Rs.3,04,22,000/-in the P&L account and netted the same from the totaladvances outstanding in the balance sheet? 2. We have heard Sri.Mohanan Pulickal for the appellant and Sri.Jose Joseph, Standing Counsel for the Department. 3. In fact, we do not think such a question arisesat all on a reading of the assessment order. We will have tocompare the figures for both the years to understand the real ITA.264/2009 Whether on the facts and in the circumstances ofthe case, the Tribunal is correct in law and fact inholding that the write off is not complete in theappellant's case in spite of the fact that theappellant has debited the said sum of Rs.3,04,22,000/-in the P&L account and netted the same from the totaladvances outstanding in the balance sheet? 2. We have heard Sri.Mohanan Pulickal for the appellant and Sri.Jose Joseph, Standing Counsel for the Department. 3. In fact, we do not think such a question arisesat all on a reading of the assessment order. We will have tocompare the figures for both the years to understand the real controversy in the cases. Annexure-C produced in I.T.A.No.361of 2009 is the assessment order for the year 1993-94.Therein, the assessee had made a claim for Rs.2,18,56,250/-as “amount written off by way of provision in the Profit andloss account in respect of advances considered asirrecoverable”. The assessee also relied on the judgment ofthe Gujarat High Court in Vithaldas H.Dhanjibhai Bardanwalav. C.I.T. [(1981) 130 ITR 95 (Guj.)]. The Assessing Officer[for brevity “AO”] found that the same is not applicable toBanks. The AO also found that in the financial year 1993-94,which is the previous year of the assessment year 1994-95, anamount of Rs.8,97,66,930/- was claimed as written off. Thissum was found to include an amount of Rs.2,04,60,000/- out ofthe provision of Rs.2,18,56,250/- claimed for the assessmentyear 1992-93. Holding that the written off value will beconsidered for deduction in the assessment year 1994-95, theclaim raised for the assessment year 1993-94 was notconsidered. We notice that even if a major portion of theclaim raised for that year was found to be included in thewritten off amounts for the next year, there remained anamount of Rs.13,96,250/-, which was claimed as written offfor the said year. We will deal with it a little later. 4. In first appeal, again the Gujarat High Court judgment was relied on. In first appeal, the disallowance wasaffirmed. Before the Tribunal, the appeal was connected withthe appeal for the assessment year 1994-95 and heardtogether. There again a contention was raised that the AO haddeclined the deduction on account of the ledger accounts ofthe account holders having not been credited with the writtenoff amounts; thus closing the said accounts. It was alsocontended that with effect from 01.04.2000 a proviso andExplanation was introduced in Section 36(1)(viia)(a) allowinga deduction to Scheduled Banks for any provision made by itfor assets classified by the RBI as doubtful debts. TheTribunal held that the proviso was introduced only from01.04.2000 and, hence, not applicable in the subjectassessment year.5. The Tribunal was referring to the provisoinserted to Section 36(1)(viia) by Finance Act, 1999 witheffect from 01.04.2000, which made possible deduction inrespect of any provision made by a Bank for any assetsclassified by the Reserve Bank of India as doubtful assets orloss assets in accordance with the guidelines issued by theRBI in this behalf. The assessee's contention is that therewas absolutely no reason why the written off amounts bedeclined, since the same is made under clause (vii) of Section 36(1). In this context, we have to notice Section 36(1)(vii) as it existed then and as it exists now: “S.36(1)(vii): (vii) subject to the provisions of sub-section (2),the amount of any bad debt or part thereofwhich is written off as irrecoverable in theaccounts of the assessee for the previous year:the amount of any bad debt or part thereofwhich is written off as irrecoverable in theaccounts of the assessee for the previous year: Section 36(1). In this context, we have to notice Section 36(1)(vii) as it existed then and as it exists now: “S.36(1)(vii): (vii) subject to the provisions of sub-section (2),the amount of any bad debt or part thereofwhich is written off as irrecoverable in theaccounts of the assessee for the previous year:the amount of any bad debt or part thereofwhich is written off as irrecoverable in theaccounts of the assessee for the previous year: Provided that in the case of an assessee towhich clause (viia) applies, the amount of thededuction relating to any such debt or partthereof shall be limited to the amount by whichsuch debt or part thereof exceeds the creditbalance in the provision for bad and doubtfuldebts account made under that clause”. The proviso to Section 36(1)(viia), which was inserted in2000, made possible a deduction with respect to provisionsmade for all doubtful assets or loss assets as classified bythe Reserve Bank of India with respect to Annexure-DCircular. Admittedly for the subject years though theCircular of the RBI was in existence, there was no provisionto grant deduction for provision for bad and doubtful debtsunless they are bad and doubtful debts with respect to ruralbank advances, which was governed by sub-clause (viia) ofSection 36(1) as it existed then. We are of the opinion thatthe assessee is labouring under a misapprehension that the AO declined their claim only on the basis of the fact that theloan accounts were not credited with the amounts shown aswritten off. In the subject assessment years, the deductionwas permissible only for the written off amounts and notprovision for debts classified as bad and doubtful debts bythe RBI. 6. It is in this context, we also have to refer tothe assessment for the year 1994-95 keeping in mind the factthat the AO, for the year 1993-94, had specifically said thata claim has been made in the financial year 1993-94 withrespect to written off bad debts coming to Rs.8,97,66,930/-,in which is included the major component which was claimed asa deduction, being provision made in the relevant previousyear. Annexure-C, the assessment order for 1994-95, producedin I.T.A.No.264 of 2009, shows the consideration as below: “Accordingly the admissible deduction for bad debts isworked out as under: Amount of bad debts written off -as mentioned above.… Rs.8,97,66,930 Less: Provision outstanding in the balance sheet against rural branch advances the balance sheet against rural branch advances u/s.36(1)(viia) … Rs.4,63,64,000 --------------- Balance admissible deduction … Rs.4,34,02,930”. “Accordingly the admissible deduction for bad debts isworked out as under: Amount of bad debts written off -as mentioned above.… Rs.8,97,66,930 Less: Provision outstanding in the balance sheet against rural branch advances the balance sheet against rural branch advances u/s.36(1)(viia) … Rs.4,63,64,000 --------------- Balance admissible deduction … Rs.4,34,02,930”. In this context, we have to refer to the extracted Section36(1)(vii). Sub-section (vii) enables deduction of any baddebt or part thereof which is written off as irrecoverable inthe accounts of the assessee for the previous year but not aprovision made for bad and doubtful debts. Here, in thefinancial year 1993-94, as we saw from both the orders ofassessment years 1993-94 and 1994-95 what was written off isRs.8,97,66,930/-. Then, the proviso to Section 36(1)(vii) hasto be applied in case of a Bank. The proviso mandates that inthe case of a Bank to which clause (viia) applies, i.e., aprovision is made for bad debts with respect to its ruralbranch advances, then the amount of deduction granted undersub-section (vii) of Section 36(1) shall be limited to theamount by which the written off amounts exceed the creditbalance in the provision for bad and doubtful debts account.We also notice that this provision was exclusively withrespect to the rural advances, since the written off debts ofadvances other than rural advances was claimed by theassessee separately for Rs.6,32,796/-; which was declined inpara 3 of Annexure-C of I.T.A.No.361/2009 (Assessment Year1993-94). The disallowance was interfered with in firstappeal. We saw from the extracted portion of the assessmentorder for the year 1994-95 that from Rs.8,97,66,930/-, which is the amount of bad debts of rural advances written off inthe said year, the provision made under sub-clause (viia) ofSection 36(1) of Rs.4,63,64,000/- has been deducted. Theexcess amounts written off in excess of the provision for baddebts under Section 36(1)(viia) is allowed as deduction tothe extent of Rs.4,34,02,930/-. 7. In this context, we revert back to the assessmentyear 1993-94, where we found that the major portion of theclaim made under Section 36(1)(viia) was included in the nextassessment year. What remained was Rs.13,96,250/-. Therecould be no deduction claimed because obviously even if thesaid amounts are written off in the said year, it would notexceed the provision under Section 36(1)(viia). In suchcircumstances, we do not think that the question raisedrequires an answer. The amounts written off were not declineddeduction, merely for the reason of the same having not beencredited in the party's account; in which context alone, thedecision of the Gujarat High Court applies. The learnedStanding Counsel for Government of India (Taxes) alertlypoints out that Gujarat High Court decision as relied on bythe assessee is no longer good law in view of the decision inSouthern Technologies Ltd. v. Joint CIT[(2010) 320 ITR 577].The very same Section 36(1)(vii) and (viia) came up for consideration before the Hon'ble Supreme Court. The Hon'bleSupreme Court noticed the Explanation brought in by FinanceAct, 2001 with retrospective effect from 01.04.1989. Here,the written off amounts have been granted deduction, only tothe extent of the same exceeding the provision under clause(viia) of Section 36(1), which is in accordance with thestatutory prescription.Accordingly, we refuse to answer the question of lawraised and dismiss the appeals, leaving the parties to suffertheir respective costs in these appeals. Sd/-K.VINOD CHANDRANJUDGE Vku/- Sd/-ASHOK MENONJUDGE 361/2009 APPENDIX OF ITA 264/2009 APPELLANT'S ANNEXURES: ANNEXURE-A TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN DATED 27/6/2003 IN ITA 122/COCH/1997. ANNEXURE-B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) COCHIN DATED 3/3/97. ANNEXURE-C Sd/-K.VINOD CHANDRANJUDGE Vku/- Sd/-ASHOK MENONJUDGE 361/2009 APPENDIX OF ITA 264/2009 APPELLANT'S ANNEXURES: ANNEXURE-A TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN DATED 27/6/2003 IN ITA 122/COCH/1997. ANNEXURE-B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) COCHIN DATED 3/3/97. ANNEXURE-C TRUE COPY OF THE ASSESSMENT ORDER DATED 27/9/1996 OF THE ASSESSING OFFICER. ANNEXURE-D TRUE COPY OF THE LETTER DATED 27/4/1992 OF THE RESERVE BANK OF INDIA. 361/2009 APPENDIX OF ITA 361/2009 APPELLANT'S ANNEXURES: ANNEXURE -ATRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN DATED 27/06/2003 IN ITA 113/COCH/1996. ANNEXURE-BTRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) COCHIN DATED 30/11/95. ANNEXURE-CTRUE COPY OF THE ASSESSMENT ORDER DATED 14/03/1995 OF THE ASSESSING OFFICER. ANNEXURE-DTRUE COPY OF THE LETTER DATED 27/04/1992 OF THE RESERVE BANK OF INDIA. ANNEXURE-ECERTIFIED COPY OF ANNEXURE-A. Vku/-