Commissioner of Income Tax, Trichur v. 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. 207 OF 2009 AGAINST THE ORDER IN ITA 110/2001 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM ## APPELLANT/S: THE COMMISSIONER OF INCOME TAX TRICHUR. BY ADV SRI.JOSE JOSEPH, SC, FOR INCOME TAX ## RESPONDENT/S: M/S. THE SOUTH INDIAN BANK LTD., INVESTMENT DEPARTMENT,, MISSION QUARTERS, THRISSUR. SR ADV JOSEPH MARKOS BY ADV SRI.P.BALAKRISHNAN E ## OTHER PRESENT: 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.207/2009** **-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. M/s.South Indian Bank Ltd, Trichur/assessee is the respondent. The appeal is directed against the order of the Income Tax Appellate Tribunal, Cochin Bench in I.T.A No.110/Coch/2001 dated 04.11.2003. The appeal deals with the issues arising from the tax returns filed by the assessee for the assessment year 1997-98. 2.1 The Assessing Officer through the assessment order/ Annexure-A, added to the income of assessee on account of appreciation in the value of securities; disallowed the claim of **I.T.A. No.207/2009** **-3-** 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 assessee before Income Tax Appellate Tribunal, through Annexure-C order, the claims of the assessee referred to above were allowed 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'). The following substantial questions of law are raised by the revenue: “1. Whether on the facts and in the circumstances of the case and the current category of investments are being treated as trading assets by the bank and the appreciation in their value which is also credited to the P & L account should not the same be treated as revenue exigible to tax and hence should not the amount of Rs.3,17,19,000/- be brought to tax? 2. Whether, on the facts and in the circumstances of the case and also for the difference noted between the issues considered by the CIT (A) for the assessment year 1996-97 and **I.T.A. No.207/2009** **-4-** the Tribunal for the assessment year 1997-98 in the appeal memorandum, the Tribunal is right in law and fact in holding that the Commissioner (Appeals) considered the very same issue and is justified in remitting the case to the assessing officer and should not the Tribunal have confirmed the order of the Assessing Officer or considered the issue on merits? 3. Whether, on the facts and in the circumstances of the case read with Sec.36(1)(iv) of the Income Tax Act and also in the absence of the approval of the Commissioner for the Pension Trust being obtained and the amount of corpus due upto 31.03.1997 was yet to be transferred from the Provident Fund to the Pension Fund, the Tribunal is right in law and fact in allowing an amount of Rs.29,72,000/- debited to P&L account as pension? 4. Whether, on the facts and in the circumstances of the case and also in view of the fact that the claim did not exceed the credit balance in the provision for bad and doubtful debts as stipulated in provisos to section 36(1)(vii), the assessee is entitled to claim deduction of bad debt relating to urban Branch written off amounting to Rs.47,10,620/-? 5. Whether, on the facts and in the circumstances of the case and also in view of the fact that the amount of Rs.34,01,000/- being loss on amortisation on revaluation of permanent securities and the same being in the nature of **I.T.A. No.207/2009** **-5-** capital investment and as such a capital loss, the assessee is entitled to claim deduction of the same and should not the Tribunal have decided the issue on merits without being remitted? ” 3. Question nos.1 and 2 relate to the valuation of investments/trading assets. The assessee booked corresponding appreciation in P&L account, but not recognized/reflected the appreciation for the purposes of total income and taxability on the appreciation. These issues are covered by the judgment of Supreme Court in _United Commercial Bank v. Commissioner of Income Tax_[1] in favour of the assessee and against the Revenue. Hence the questions are answered accordingly. 4. Question no.3 deals with dis-allowance of Rs.29,72,000/- by the Assessing Officer paid by the assessee towards pension and debited the P&L account treating the 1 (1999) 240 ITR 355 **I.T.A. No.207/2009** **-6-** payment as outflow in the character of deductible expenses. The CIT (Appeals) and the Tribunal have held that the reason for disallowing the actual pension expenditure is incorrect and having regard to the admitted payment of pension to retired employees, allowed the claim of assessee. We have taken note of the reasoning in the orders of CIT (Appeals) and the Tribunal on this question. Having considered the reasons and conclusions recorded by the CIT (Appeals) and Tribunal, we are of the view that the findings do not merit as substantial questions of law within the scope of Section 260A of the Act. The allowance of expenditure towards pension payment is rightly granted and the finding of fact are hence not interfered with. The grounds of Revenue, in formulating the questions of law, are similar to the grounds raised before the CIT (Appeals) and the Tribunal. The substantial question no.3 is answered in favour of assessee and against the Revenue. **I.T.A. No.207/2009** **-7-** 5. The fourth question arises under Section 36(1)(viia) of the Act. The counsel appearing for parties state that the question concerning bad debts and provision for bad debts falling under Section 36(1)(vii) and 36(1)(viia) is covered in favour of the assessee in reported judgment of the _Supreme Court in Catholic Syrian Bank v. Commissioner of Income Tax_[2] and had answered the point in favour of assessee and against the Revenue. We are referring to the decision by the Apex Court with a view to comprehensively advert to the outcome on all the substantial questions raised by the Revenue in the instant appeal. The operative portion in _Catholic Syrian Bank Ltd_ judgment reads thus: “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 2 (2012) 343 ITR 270 (SC) **I.T.A. No.207/2009** **-8-** other words, if the case of the assessee does not fall under Section 36(1)(viia) proviso/limitation would not come into play.” xxx xxx xxx xxx “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.” The fourth question was answered by the Supreme Court in favour of assessee and against the Revenue. 6. The questions remaining for consideration are the appreciation in the value of securities and loss on securities _res_ amortized by the assessee. These questions are no more _integra_ and are answered in favour of assessee by following the precedents, _viz._ , _Commissioner of Income Tax v. Nedungadi Bank_ **I.T.A. No.207/2009** **-9-** _Ltd_[3] and _Commissioner of Income Tax v. Lord Krishna Bank Ltd_[4] . The 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 > 3 (2003) 264 ITR 545 (Ker.) 4 (2011) 339 ITR 606 (Ker) **I.T.A. No.207/2009** **-10-** 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 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 **-11-** ## **I.T.A. No.207/2009** 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. ” The questions of law framed, by following the judgments referred to above, are answered in favour of the Assessee and against the Revenue. Income Tax Appeal stands dismissed accordingly. Sd/S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj **-12-** ## **I.T.A. No.207/2009** ## **APPENDIX OF ITA 207/2009** PETITIONER ANNEXURE ANNEXURE A ANNEXURE B ANNEXURE C TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER DATED 17/12/1999. TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 15/01/2001. TRUE COPY OF THE ORDER OF THE APPELLATE TRIBUNAL DATED 04/11/2003.