So Far As The First Substantial Question Of Law; The v. The Commissionerof Income Tax[(2003) 262 Itr 579] (Ker). So Far Asdisallowance Of Leave Encashment, Cit(Appeals) Allowed The Saidclaim Also, Placing Reliance On

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE WEDNESDAY, THE 22ND DAY OF JANUARY 2014/2ND MAGHA, 1935 ITA.No. 186 of 2011 --------------------------- [AGAINST THE ORDER DATED 30/06/2011 IN I.T.A. NO.65/COCH/2009 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH FOR THE ASSESSMENT YEAR 2006-07] ............ APPELLANT/RESPONDENT: ---------------------------------------- THE SOUTH INDIAN BANK LTD., SIB HOUSE, TRICHUR, MISSION QUARTERS, P.B.NO.28, T.B. ROAD, TRICHUR-680 001. BY ADVS.SRI.P.BALAKRISHNAN, SRI.MOHAN PULICKAL. RESPONDENT/APPELLANT: ---------------------------------------- THE COMMISSIONER OF INCOME TAX,TRICHUR, AAYAKAR BHAVAN, SAKTHAN THAMPURAN NAGAR, TRICHUR-680 001. BY SRI.P.K.R.MENON,SR.COUNSEL, G.O.I(TAXES), SRI.JOSE JOSEPH, S.C. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22-01-2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Prv. I.T.A. NO.186/2011: APPENDIX PETITIONER'S ANNEXURES: ANNEXURE A: TRUE COPY OF THE ASST. ORDER DTD. 27/03/2008 OF THE ASSESSING OFFICER.ANNEXURE B: TRUE COPY OF THE ORDER DTD. 30/10/2008 OF THE COMMISSIONER OF INCOMETAX (APPEALS) V, KOCHI. ANNEXURE C: TRUE COPY OF THE ORDER DTD. 30/06/2011 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. RESPONDENT'S ANNEXURES: NIL. //TRUE COPY// P.A. TO JUDGE. Prv. Manjula Chellur, C.J. & A.M. Shaffique, J.- - - - - - - - - - - - - - - - - - - - - - - - - - - - I.T.A. No. 186 OF 2011 - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 22[nd] day of January, 2014 Manjula Chellur, C.J. JUDGMENT The above appeal is filed for deciding the followingsubstantial questions of law: “A. Whether on the facts and in the circumstances ofthe case the Tribunal is correct in law and fact in holdingthat the bad debt relating to the non rural branches inexcess of the credit balance of the provisions for bad debtscreated under section 36(1)(viia) alone is admissible fordeduction under Section 36(1)(vii) ? B. Whether on the facts and in the circumstances ofthe case the authorities are correct in law and fact in notallowing the claim for leave encashment ? C. Whether on the facts and in the circumstances ofthe case the Tribunal is correct in law and fact in holdingthat the surplus outstanding in the appellant's accountsacquired the character of trade surplus when the appellanthad not credited the said sum in their P&L account and thereis nothing to show that there is cessation of the liability ?” 2. The appellant Bank is before us for the assessment year 2006-07. In the above three substantialquestions of law, the first issue refers to disallowance of 'baddebt' claimed under Section 36(1)(vii). The second issue is ITA No. 186 of 2011 -:2:- disallowance of 'leave encashment' claimed. The third issue isaddition of an amount on account of 'jewellery sales surplus'. 3. So far as the first substantial question of law; the Assessing Officer disallowed the claim of the appellant underSection 36(1)(vii) amounting to `21,40,05,176/- being bad debtswritten off. As against this an appeal came to be filed by theassessee/appellant which came to be allowed by theCommissioner of Income Tax(Appeals)[for short 'CIT(Appeals)']placing reliance on the Division Bench decision of this Courtreported inThe South Indian Bank Ltd. v. The Commissionerof Income Tax[(2003) 262 ITR 579] (Ker). So far asdisallowance of leave encashment, CIT(Appeals) allowed the saidclaim also, placing reliance on Exide Industries Ltd. Andanother v. Union of India and others[(2007)292 ITR 470(Cal)]. 3. So far as the first substantial question of law; the Assessing Officer disallowed the claim of the appellant underSection 36(1)(vii) amounting to `21,40,05,176/- being bad debtswritten off. As against this an appeal came to be filed by theassessee/appellant which came to be allowed by theCommissioner of Income Tax(Appeals)[for short 'CIT(Appeals)']placing reliance on the Division Bench decision of this Courtreported inThe South Indian Bank Ltd. v. The Commissionerof Income Tax[(2003) 262 ITR 579] (Ker). So far asdisallowance of leave encashment, CIT(Appeals) allowed the saidclaim also, placing reliance on Exide Industries Ltd. Andanother v. Union of India and others[(2007)292 ITR 470(Cal)]. 4. Then coming to the third issue, addition of a sum of`23,221/-, i.e surplus realised on sale of Jewellery, as against theorders of the Assessing Officer, CIT(Appeals) allowed the appeal. ITA No. 186 of 2011 -:3:- Aggrieved by the said judgment of the CIT(Appeals), Revenuepreferred appeal before the Tribunal and Tribunal reversed thefinding of CIT(Appeals) so far as Section 36(1)(vii) disallowanceby placing reliance on the Full Bench judgment of this Court inCommissioner of Income Tax v. South Indian Bank Ltd.[326 ITR 174]. So far as Section 43B(f) claim, the Tribunalreversed the finding of the CIT(Appeals) in the light of judgmentof Calcutta High Court in Exide Industries Case (pending in SLA(Civil) No.CC.12060 dated 08.09.2008). So far as the thirdissue, addition of `23,221/-, being the trade surplus, placingreliance on its earlier decision, the Tribunal, Cochin Bench,confirmed the order of the Assessing Officer reversing the opinionof CIT(Appeals). Aggrieved by the same, the appellant/assesseeis before us. 5. The argument of learned counsel appearing for the assessee so far as the first issue, i.e. disallowance of`21,40,05,176/- towards bad debts being written off, he placedreliance on (2012) 343 ITR 270(SC) in the case of Catholic Syrian Bank Ltd. v. Commissioner of Income Tax. As amatter of fact the Full Bench of High Court of Kerala opined thatby virtue of proviso to Section 36(1)(vii) the Bank is entitled toclaim such bad debts only to the extent it exceeds the provisioncreated for bad or doubtful debts arising out of rural advancesunder Clause (viia) of Section 36(1) of the Act. According to theApex Court, the said view was erroneous as the Full Benchignored the significantexpression appearing in both the provisoto Section 36(1)(vii) and Clause (v) of Section 36(2) i.e.,“assessee to which Clause (viia) of Sub-section (1) applies”. Inother words, if the case of the assessee does not fall underSection 36(1)(vii), the proviso/limitation would not apply to theassessee. In that context three Judges Bench of the Apex Courtopined that the provisions of Section 36(1)(vii) and (viia) of theIncome Tax Act are distinct and independent items of deductionand operate in their respective fields. The Bad debts written off,other than those for which the provision is made under clause(viia), will be covered under the main part of Section 36(1)(vii), ITA No. 186 of 2011 while the proviso will operate in cases falling under clause (viia)to limit deduction to the extent of difference between the debt orpart thereof written off in the previous year and credit balance inthe provision for bad and doubtful debts account made underclause (viia). Thus the proviso would not permit the benefit ofdouble deduction operating with reference to rural loans while,under Section 36(1)(vii), the assessee would be entitled togeneral deduction upon an account having become bad debt andbeing written off as irrecoverable in the accounts of the assesseefor the previous year. In the light of above observations of theApex Court, the Full Bench judgment relied upon by the Tribunalis no longer good law, therefore the first substantial question oflaw is answered in favour of the assessee. while the proviso will operate in cases falling under clause (viia)to limit deduction to the extent of difference between the debt orpart thereof written off in the previous year and credit balance inthe provision for bad and doubtful debts account made underclause (viia). Thus the proviso would not permit the benefit ofdouble deduction operating with reference to rural loans while,under Section 36(1)(vii), the assessee would be entitled togeneral deduction upon an account having become bad debt andbeing written off as irrecoverable in the accounts of the assesseefor the previous year. In the light of above observations of theApex Court, the Full Bench judgment relied upon by the Tribunalis no longer good law, therefore the first substantial question oflaw is answered in favour of the assessee. 6. Then coming to the second issue, it pertains to theprovision made for leave encashment and the disallowanceclaimed was under Section 43B(f). As already stated above, theopinion of the CIT(Appeals) was set aside by the Tribunal in thelight of the stay order of the judgment of the High Court of ITA No. 186 of 2011 Calcutta in Excide Industries case and the SLP stated above isstill pending. Therefore, the opinion of the Tribunal so far asdisallowance claimed in respect of leave encashment underSection 43B(f) of the Act, as on today, the provision seems to bein force in the light of the stay order granted by the Apex Court inthe SLP. Therefore, as long as Section 43B(f) is on Statute, thesaid disallowance is justified. 7. Then coming to the third issue, i.e. addition of`23,221/- in respect of trade surplus on sale of jewellery, it wasnoticed by the Assessing Officer that over long number of yearsthis amount of `23,221/- was reflected in the suspense accountand according to the assessee, this cannot be considered asincome because if the borrower demands return of money, it hasto be paid back to the borrower. According to the learnedStanding Counsel for the Revenue, the very fact that this amountis reflected in the account for long time over number of years astrade surplus amount it has to be considered as income asobserved by the Tribunal. In the light of Catholic Syrian Bank ITA No. 186 of 2011 -:7:- Ltd. CIT(Asst.) in ITA No.10/Coch/2009 dated 11.02.2011 which again places reliance onCIT v. T.V. Sundaram Iyengar and Sons Ltd.[(1996) 222 ITR 344 (SC)], as on today the lawdeclared in T.V. Sundaram Iyengar and Sons's case wouldcover the issue so far as the trade surplus amount. Hence, wecannot find fault with the opinion of the Tribunal. In the light of above observations, the appeal is partly allowed. Second and third issues are answered in favour ofRevenue. Manjula Chellur, Chief Justice. A.M. Shaffique, Judge. ttb/24/01 ITA No. 186 of 2011