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

## **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 ## **JUDGMENT** ## **Manjula Chellur, C.J.** The above appeal is filed for deciding the following substantial questions of law: “A. Whether on the facts and in the circumstances of the case the Tribunal is correct in law and fact in holding that the bad debt relating to the non rural branches in excess of the credit balance of the provisions for bad debts created under section 36(1)(viia) alone is admissible for deduction under Section 36(1)(vii) ? B. Whether on the facts and in the circumstances of the case the authorities are correct in law and fact in not allowing the claim for leave encashment ? C. Whether on the facts and in the circumstances of the case the Tribunal is correct in law and fact in holding that the surplus outstanding in the appellant's accounts acquired the character of trade surplus when the appellant had not credited the said sum in their P&L account and there is 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 substantial questions of law, the first issue refers to disallowance of 'bad debt' claimed under Section 36(1)(vii). The second issue is ITA No. 186 of 2011 -:2:- disallowance of 'leave encashment' claimed. The third issue is addition 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 under Section 36(1)(vii) amounting to `21,40,05,176/- being bad debts written off. As against this an appeal came to be filed by the assessee/appellant which came to be allowed by the Commissioner of Income Tax(Appeals)[for short 'CIT(Appeals)'] placing reliance on the Division Bench decision of this Court reported in **The South Indian Bank Ltd. v. The Commissioner** **of Income Tax** [(2003) 262 ITR 579] (Ker). So far as disallowance of leave encashment, CIT(Appeals) allowed the said claim also, placing reliance on **Exide Industries Ltd. And another 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 the orders of the Assessing Officer, CIT(Appeals) allowed the appeal. ITA No. 186 of 2011 -:3:- Aggrieved by the said judgment of the CIT(Appeals), Revenue preferred appeal before the Tribunal and Tribunal reversed the finding of CIT(Appeals) so far as Section 36(1)(vii) disallowance by placing reliance on the Full Bench judgment of this Court in **Commissioner of Income Tax v. South Indian Bank Ltd.** [326 ITR 174]. So far as Section 43B(f) claim, the Tribunal reversed the finding of the CIT(Appeals) in the light of judgment of Calcutta High Court in Exide Industries Case (pending in SLA (Civil) No.CC.12060 dated 08.09.2008). So far as the third issue, addition of `23,221/-, being the trade surplus, placing reliance on its earlier decision, the Tribunal, Cochin Bench, confirmed the order of the Assessing Officer reversing the opinion of CIT(Appeals). Aggrieved by the same, the appellant/assessee is 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 placed reliance on (2012) 343 ITR 270(SC) in the case of **Catholic** ITA No. 186 of 2011 -:4:- **Syrian Bank Ltd. v. Commissioner of Income Tax** . As a matter of fact the Full Bench of High Court of Kerala opined that by virtue of proviso to Section 36(1)(vii) the Bank is entitled to claim such bad debts only to the extent it exceeds the provision created for bad or doubtful debts arising out of rural advances under Clause (viia) of Section 36(1) of the Act. According to the Apex Court, the said view was erroneous as the Full Bench ignored the significant expression appearing in both the proviso to Section 36(1)(vii) and Clause (v) of Section 36(2) i.e., “assessee to which Clause (viia) of Sub-section (1) applies”. In other words, if the case of the assessee does not fall under Section 36(1)(vii), the proviso/limitation would not apply to the assessee. In that context three Judges Bench of the Apex Court opined that the provisions of Section 36(1)(vii) and (viia) of the Income Tax Act are distinct and independent items of deduction and 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 -:5:- while the proviso will operate in cases falling under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). Thus the proviso would not permit the benefit of double deduction operating with reference to rural loans while, under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. In the light of above observations of the Apex Court, the Full Bench judgment relied upon by the Tribunal is no longer good law, therefore the first substantial question of law is answered in favour of the assessee. 6. Then coming to the second issue, it pertains to the provision made for leave encashment and the disallowance claimed was under Section 43B(f). As already stated above, the opinion of the CIT(Appeals) was set aside by the Tribunal in the light of the stay order of the judgment of the High Court of ITA No. 186 of 2011 -:6:- Calcutta in Excide Industries case and the SLP stated above is still pending. Therefore, the opinion of the Tribunal so far as disallowance claimed in respect of leave encashment under Section 43B(f) of the Act, as on today, the provision seems to be in force in the light of the stay order granted by the Apex Court in the SLP. Therefore, as long as Section 43B(f) is on Statute, the said 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 was noticed by the Assessing Officer that over long number of years this amount of `23,221/- was reflected in the suspense account and according to the assessee, this cannot be considered as income because if the borrower demands return of money, it has to be paid back to the borrower. According to the learned Standing Counsel for the Revenue, the very fact that this amount is reflected in the account for long time over number of years as trade surplus amount it has to be considered as income as observed 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 on **CIT v. T.V. Sundaram Iyengar and Sons Ltd.** [(1996) 222 ITR 344 (SC)], as on today the law declared in **T.V. Sundaram Iyengar and Sons** 's case would cover the issue so far as the trade surplus amount. Hence, we cannot 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 of Revenue. **Manjula Chellur, Chief Justice.** **A.M. Shaffique, Judge.** ttb/24/01 ITA No. 186 of 2011 -:8:-