Commissioner of Income Tax, Thrissur v. The South Indian Bank Ltd.

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR.JUSTICE S.V.BHATTI** **&** **THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS WEDNESDAY, THE 14[TH] DAY OF JULY 2021 / 23RD ASHADHA, 1943 ITA NO. 1327 OF 2009** **AGAINST THE ORDER IN ITA 394/2006 OF I.T.A.TRIBUNAL,COCHIN BENCH,** ## **ERNAKULAM** ## **APPELLANT/S:** THE COMMISSIONER OF INCOME TAX, TRICHUR THRISSUR. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX ## **RESPONDENT/S:** M/S. THE SOUTH INDIAN BANK LTD., TRICHUR MISSION QUARTERS, THRISSUR. BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.ISAAC THOMAS SHRI.ALEXANDER JOSEPH MARKOS SHRI.SHARAD JOSEPH KODANTHARA THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 14.07.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **I.T.A. No.1327/2009** **-2-** ## **J U D G M E N T** S.V. Bhatti, J. Heard learned Standing Counsel Mr.Jose Joseph and learned Senior Advocate Mr. Joseph Markos for the parties. 2. Commissioner of Income Tax, Thrissur/Revenue is the appellant. M/s.South Indian Bank Ltd, Thrissur/assessee is the respondent. The appeal is directed against the order of Income Tax Appellate Tribunal (for short ‘Tribunal), Cochin Bench in ITA No.394/Coch/2006 dated 27.09.2007. The appeal deals with the issues arising in the tax return filed by the assessee for the Assessment Year 2003-04. 3. The Assessing Officer through the assessment order in Annexure-A, added appreciation in the value of securities; **I.T.A. No.1327/2009** **-3-** disallowed the claim of pension payment, bad debts in urban branches, and asset amortization. The assessee filed appeal before the Commissioner of Income Tax (Appeals) and the appeal was allowed in part. In the appeal filed by the Revenue before Income Tax Appellate Tribunal, through Annexure-C order, the claims of the Revenue were allowed in part by the Tribunal. Hence, the instant Income Tax Appeal, at the instance of the Revenue under Section 260A of the Income Tax Act (for short 'the Act'). 4. The Revenue has framed the following substantial questions of law for decision in the subject appeal. “1. Whether, on the facts and in the circumstances of the case, and also in the light of the relevant provisions especially proviso to Section 36(1)(vii) cannot be the claim of the assessee for bad debts u/s 36(1)(vii), and the claim in the credit balance in the provision for bad and doubtful debts u/s.36 (1)(viia) be disallowed? **I.T.A. No.1327/2009** **-4-** 2. Whether on the facts and in the circumstances of the case, the claim of bad debts and bad and doubtful debts is an allowable deduction? 3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law and in fact in holding that valuation of unquoted securities adopted by the assessee is correct?” ## 4.1 The Revenue later incorported additional question no.4 through memo dated 13.07.2021, which reads: “4. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in affirming the order of CIT(A) allowing the claim of provision of Rs.12,11,97,165/created u/s 36(1)(viia) of the I T Act in repect of advance made by 32 branches which were found to be not 'rural branches' by the Assessing Officer?” 5. Substantial question nos.1 and 2 deal with bad debts and provision for bad debts. These questions are covered by the decision of the Supreme Court in _Catholic Syrian Bank v. Commissioner of Income Tax_[1] and the Apex Court has already answered the question in the following terms: > 1[2012] 343 ITR 270 (SC) **I.T.A. No.1327/2009** **-5-** “Firstly, the Full Bench ignored the significant expression appearing 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 under Section 36(1)(viia) proviso/limiations would not come into play. xxxx xxxx xxxx “Consequently, while answering the question in favour of the assessee, we allow the appeals of the assessee and dismiss the appeals preferred by the revenue. Further, we direct that all matters be remanded to the Assessment Officer for computation in accordance with law, in light of the law enunciated in this judgment.” 5.1 Substantial question no.3 deals with whether the method of valuation of unquoted securities adopted by the assessee is correct and valid. The question is covered against the Revenue and in favour of assessee by following the precedents in _Commissioner of Income Tax v. Nedungadi Bank Ltd_[2] and _Commissioner of Income Tax v. Lord Krishna Bank Ltd_[3] . The > 2 (2003) 264 ITR 545 (Ker.) 3 (2011) 339 ITR 606 (Ker) **I.T.A. No.1327/2009** **-6-** ## operative portion of the reported judgments is excerpted hereunder: ## “ _Nedungadi Bank Ltd (supra)_ For all these reasons, we are of the view that the Income-tax Appellate Tribunal has rightly held that the securities held by the assessee-bank in all these cases are the stock-in-trade of the business of the assessee-banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits of the appellant. This disposes of the first two questions mentioned in para. 10 (page 552) above” ## _Lord Krishna Bank Ltd (Supra)_ “The first question raised pertains to valuation of unquoted Government securities. Since securities involved are not quoted in the market, market price is not known. The assessee treats the unquoted Government securities as current assets and, therefore, it has to work out the profit or loss in the end of the year for the purpose of payment of tax. The assessee adopted the RBI guidelines for valuation of unquoted Government securities and based on the same it claimed a substantial loss. The Assessing Officer, however, rejected the claim because according to him when shares are not quoted, the cost price has to be adopted and going by the cost price the assessee has not suffered the loss as claimed. It is a settled **I.T.A. No.1327/2009** **-7-** position through various decisions including that of this CIT v. Nedungadi Bank Ltd. reported in [2003] 264 ITR 545 (Ker) that for purpose of assessment cost price or market value, whichever is lower, should be adopted. Admittedly, market value is not known and so much so, some method has be adopted to fix the market value and thereafter only the lower of the cost price or the market value has to be taken for the purpose of computation of profit or loss in respect of the unsecured securities. Senior counsel appearing for the assessee produced the RB guidelines before us wherein the RBI has suggested banks to value unquoted Central Government securities on the basis of the prices/YTM rates put out by the PDAI/FIMMDA at periodical intervals. YTM is the yield to maturity method adopted for valuation of securities. It is seen that the Tribunal accepted the assessee's valuation which is based on the RBl guidelines. RBI being the apex body issuing guidelines to the banks for valuation of unquoted Government securities, we feel it is the rational basis which the assessee was bound to adopt. The Assessing Officer also has not come out with any formula for computation of market value of unquoted securities and he has no case that the RBI guidelines for valuation is irrational. So much so, we feel the Tribunal rightly upheld the assessee's claim for valuation of unquoted Government securities based on the RBI guidelines. We, therefore, dismiss the Revenue's appeal on this issue.” ## Hence the question is answered in favour of assessee and **I.T.A. No.1327/2009** **-8-** against the Revenue. 5.2 Additional question no.4 deals with the claim of assessee under Section 36(1)(viia) of the Act. The extent to which the assessee is entitled to claim provision under Section 36(1)(viia) is again considered by the reported judgment of this Court in _Lord Krishna Bank Ltd (supra)_ . The relevant paragraphs 4, 5 and 6, read as under “Next question raised pertains to the assessee's claim for deduction of provision for bad debts in terms of section 36(1) (viia) of the Income-tax Act. Here the only question raised is as to basis of classifying branches of the bank as rural branches and 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 a non scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding which the relevant figures have been published before the first day of the previous year." 5 What is clear from the above is that the classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. **I.T.A. No.1327/2009** **-9-** While the assessee's case that found acceptance with the Tribunal is that "place" referred to in the above definition clause is the ward of a panchayat or municipality, the Assessing Officer took the view that "place" contained in the definition clause should mean a revenue village. No doubt, "place" as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of "place" referred to in the section. Standing counsel for the Department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of "place" as referred to in the Census 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 definite surveyed boundaries. The rural area is, however, taken as the residual portion excluding the urban area and for that no strict definition is followed." In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee's case accepted by the Tribunal that population in a ward has to be reckoned for deciding as to whether the location of a panchayat is in a rural area or not is accepted, then probably even in municipal areas there may be wards with less than 10000 population thereby answering the **I.T.A. No.1327/2009** **-10-** branch located in such municipal area also as a rural branch. Going by the ordinary meaning of rural branch, we feel only branches of the bank located in rural areas are covered. When the Legislature adopts population as the basis for clasification of rural branches, that too, with reference to the last Census Report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel the above meaning of rural area contained in the Census Report wherein revenue village is treated as a unit of rural area, can be rightly adopted. So much so, "place" referred to in the above definition clause for the purpose of identifying the branch of a bank as a rural branch with reference to its location is the revenue village. Therefore, in our view, the finding of the Tribunal that "place" referred to in the definition is the ward of a local authority like panchayat or municipality is incorrect and, in our view, a Tural branch has to be always in rural areas and the place referred can easily be taken as a village. Several wards may come within a village, whether it be in corporation, municipality or panchayats. There can be no village in a municipal or corporation area where the population is less than 10000. So much so, rural branches are such of the branches located in a village where the population in the village as a unit is less than 10000. We, therefore, allow the appeal on this issue by **I.T.A. No.1327/2009** **-11-** reversing the order of the Tribunal and by restoring the assessment.” By following the said principle, we answer the issue in favour of Revenue and against the assessee. Having regard to the above narrative, the appeal is allowed in part, matter remitted to Assessing Officer for a decision in accordance with . law, on substantial question no.4 Sd/S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj **-12-** ## **I.T.A. No.1327/2009** ## **APPENDIX OF ITA 1327/2009** PETITIONER ANNEXURE ANNEXURE A ANNEXURE B ANNEXURE C A 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 69/R.I/TCR/CIT-V05/06 DATED 17.03.2006. TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IN ITA.394(COCH)/2006 DATED 27.09.2007.