THE COMMISSIONER OF INCOME TAX, vs. M/S. THE SOUTH INDIAN BANK LTD.,

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 395/Coch/2006 dated 27.09.2007. The appeal deals with the issues arising from the tax return filed by the assessee for the assessment year 2004-05. 2.1 The Assessing Officer through the assessment order in Annexure-A, disallowed the claim of the assessee under -3- Section 36(1)(viia). Similarly, the Assessing Officer disallowed the revaluation of unquoted securities adopted by the assessee. 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 Tribunal partly allowed the appeal for statistical purposes. 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 questions of law relate to bad debts and provision for bad debts in rural branches of the assessee's bank. The following substantial questions of law are raised by the revenue:

The first and the second questions are regarding the eligible deduction under Section 36(1)(vii) of the Act. The counsel appearing for parties state that the question concerning bad debts falling under Section 36(1)(vii) is covered in favour of the assessee in reported judgment of the Supreme Court in Catholic Syrian Bank v. Commissioner of Income Tax1 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 1 (2012) 343 ITR 270 (SC)

The next question deals with the revaluation of unquoted securities, adopted by the assessee whether is correct -6- or not. The question is no more res integra and is answered by following the precedents in Commissioner of Income Tax v. Nedungadi Bank Ltd2 and Commissioner of Income Tax v. Lord Krishna Bank Ltd3, and this Court had answered in favour of the assessee. 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 2 (2003) 264 ITR 545 (Ker.) 3 (2011) 339 ITR 606 (Ker)

We have heard the learned counsel on Additional Question No.4 after the judgment dated 13.7.2021 has been recalled. A similar question raised by revenue in I.T.A.No.1327 of 2009 has been considered by this Court in judgment dated 14.7.2021 and concluded as follows: “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:

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. 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 -10- 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 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 classification 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 Rural 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 reversing the order of the Tribunal and by restoring assessment”.

The reasons referred to above are applicable to the subject appeal as well and by adopting the same reason, the -11- question is answered in favour of revenue and against the assessee in the manner indicated above.

Accordingly, ITA No.1284 of 2009 is also remitted to the Assessing Officer for consideration and disposal in accordance with law along with ITA No.1327 of 2009. 8. Mr.Joseph Markose introduces by placing reliance on the judgment reported in Vijaya Bank v Commissioner of Income Tax4 (supra) another dimension to the objections available to the assessee in this behalf, upon remand. He suggests that the assessee may be given liberty to raise the objections available by referring to the ratio laid down by the Supreme Court in Vijaya Bank case. The assessee is granted liberty to raise the objections available by referring to the ratio laid down by the Supreme Court in Vijaya Bank case. The assessee is granted liberty to raise objections or file reply, as the case may be, as 4 [2010] 323 ITR 166(SC)