Commissioner of Income Tax, Trichur v Catholic Syrian Bank Ltd, Trichur

# **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. 1407 OF 2009** **AGAINST THE ORDER IN ITA 380/1993 OF I.T.A.TRIBUNAL,COCHIN BENCH,** ## **ERNAKULAM** ## **APPELLANT/S:** COMMISSIONER OF INCOME TAX, TRICHUR. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX ## **RESPONDENT/S:** CATHOLIC SYRIAN BANK LTD, TRICHUR. BY ADVS. SMT.R.S.GEETHA SRI.K.P.ABDUL AZEES SRI.V.B.UNNIRAJ SR. ADV JOSEPH MARKOS 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. 1407/2009** **-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, Trichur/Revenue is the appellant. Catholic Syrian Bank Ltd, Trichur/assessee is the respondent. The appeal is directed against the order of Income Tax Appellate Tribunal (for short ‘Tribunal'), Cochin Bench in ITA No.380/Coch/1993 dated 14.02.2003. The appeal deals with the issues arising in the tax return filed by the assessee for the Assessment Year 1990-91. 3. The Assessing Officer through the assessment order in Annexure-A, disallowed the claim of the assessee under Section 36(1)(viia), bad debts in urban branches etc. The **I.T.A. No. 1407/2009** **-3-** assessee filed appeal before the Commissioner of Income Tax (Appeals) and the appeal was allowed in part. The Revenue filed appeal before the Tribunal and the Tribunal through order in Annexure-C partly allowed the appeal for statistical purpose, in other words confirmed the order in CIT (Appeals) substantially. Hence, the instant Tax Appeal at the instance of the Revenue under Section 260A of the Income Tax Act (for short 'the Act'). The following substantial questions of law are raised by the Revenue: “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? 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 is not the expenditure on account of payment of penal **I.T.A. No. 1407/2009** **-4-** interest to RBI in the nature of penalty for violation of the provisions of Banking Regulation Act and hence an impermissible deduction? 4. Whether, on the facts and in the circumstances of the case is not the order of the Assessing Officer while computing the profit under Section 115J restricting the deduction of provision for bad and doubtful debt to the actual ascertained liability in accordance with law and is the Tribunal justified in interfereing with the same?” 4. Question nos. 1 and 2 are decided by the Supreme Court in case. _Catholic Syrian Bank v. Commissioner of Income Tax_[1] The operative portion of the reported judgment is excerpted hereunder: ## “ _Catholic Syrian Bank_ “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 1 (2012) 343 ITR 270 (SC) **I.T.A. No. 1407/2009** **-5-** Section 36(1)(viia) proviso/limitation would not come into play.” xxx xxxx xxxxx “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.” Therefore, question nos.1 and 2 are answered in favour of assessee and against the Revenue. 4.1 Question no.3 is covered against Revenue by the reported judgment in Commissioner of _Income Tax v. Catholic Syrian Bank_[2] which reads: “We have already noted the principles laid down by the Supreme Court and by this court in the matter of ascertaining the nature of the payment of interest. The Supreme Court has taken the view that if the payment made is compensatory in 2 [2004] 265 ITR 177 (Ker) **I.T.A. No. 1407/2009** **-6-** nature certainly it will not be penal in character. In these cases in the light of the discussions which we have already made it has to be treated that the payment of penal interest provided for the first default has to be treated as compensatory. There is also an element of compensation in so far as the Reserve Bank of India is concerned, for, section 42(1) of the Act requires the deposit of the amount provided therein in the Reserve Bank of India itself in which case the Reserve Bank of India can turnover the said deposit and get interest on the said amount so long as the deposit continues. To the extent of not maintaining the said requirement the Reserve Bank did not get the opportunity to turnover the amount and to get interest. In that view of the matter, there is an element of compensation also involved. Now that we have considered the provisions of section 37 of the Income-tax Act as also the relevant provisions of the Reserve Bank of India Act as well as the Banking Regulation Act and have decided the main issue with regard to the nature of the levy with reference to the principles laid down by the Supreme Court and this court now the matter must go back to the assessing authority for consideration of the claim made by the assessees in all these appeals in the light of the interpretation placed by us in this judgment. We accordingly set aside the orders of the two appellate authorities relating to this question and direct the assessing ## **I.T.A. No. 1407/2009** **-7-** authority to modify the assessment in the light of the directions issued in this judgment.” 4.2 Substantial question no.4 is covered against the Renenue and in favour of the assessee by the judgment reported in _Commissioner of Income-Tax v. HCL Comnet Systems and Services Ltd_[3] . The operative portion of the judgment is excerpted hereunder: “As stated above, the said Explanation has provided six items, i.e., item Nos. (a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with item No. (c) which refers to the provision for bad and doubtful debts. The provision for bad and doubtful debts can be added back to the net profit only if item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The assessee's case would, therefore, fall within the ambit of item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than an ascertained liability, i.e., it should be for an unascertained 3 [2008] 305 ITR 409 (SC) **I.T.A. No. 1407/2009** **-8-** liability. In other words, all the ingredients should be satisfied to attract item (c) of the Explanation to section 115JA. In our view, item (c) is not attracted. There are two types of "debt". The debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case, the "debt" under consideration is a "debt receivable" by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of the asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a pro-vision cannot be said to be a provision for a liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view, item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs. 92, 15, 18 under clause (c) of the Explanation to section 115JA of the 1961 Act.” **I.T.A. No. 1407/2009** **-9-** Having regard to above discussion, the questions are answered in favour of assessee, against Revenue. ITA stands dismissed. Sd/S.V.BHATTI JUDGE Sd/BECHU KURIAN THOMAS JUDGE jjj **-10-** ## **I.T.A. No. 1407/2009** ## **APPENDIX OF ITA 1407/2009** PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER DATED 30.11.1992 ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 26.2.1993 ANNEXURE C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL DATED 14.2.2003 ANNEXURE D TRUE COPY OF THE ORDER OF THE APPELLATE TRIBUNAL, SPECIAL BENCH, COCHIN DATED 09.08.2002