THE COMMISSIONER OF INCOME TAX vs. THE FEDERAL BANK LIMITED

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ITA/806/2009HC KeralaKLHC01025567200908 February 2019Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON6 pages
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What did the High Court hold?

On the first issue, the Tribunal held in favor of the assessee and against the Revenue, following the Supreme Court's decision in Catholic Syrian Bank Ltd. v. C.I.T. The Assessing Officer was directed to verify the computation, ensuring that any allowance for written-off bad debts in non-rural branches is confined to the excess allowed from provisions made for non-rural branches, without considering provisions for rural branches under Section 36(1)(viia). The second issue was held in favor of the Revenue and against the assessee, based on the High Court's decision in C.I.T. v. Lord Krishna Bank Ltd., which stipulated that the determination of non-rural branches must be with reference to revenue villages, not solely population. The alternative submission by the assessee for this issue was not considered as it was not raised before lower authorities and no appeal was filed by the assessee. The third issue was held in favor of the assessee, following the High Court's decision in C.I.T. v. Federal Bank Ltd., which was also upheld by the dismissal of an SLP. The appeal was partly allowed.

What were the facts?

The Commissioner of Income Tax (Revenue) filed an appeal against an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, dated August 25, 2006. The appeal concerned assessment years not explicitly stated in the judgment. The assessee is The Federal Bank Limited. The dispute revolves around the deductibility of bad debts written off and the assessment of accrued interest on securities. The procedural history indicates that the Revenue is challenging the ITAT's decision, which had previously ruled in favor of the assessee on certain aspects.

What were the issues?

The Tribunal had to decide three questions of law, re-framed by the Revenue: 1. Whether bad debts written off for non-rural branches, claimed under Section 36(1)(vii) of the Income Tax Act, 1961, should be allowed only in excess of the provision made for rural branches under Section 36(1)(viia)? 2. In determining the provision for bad debts under Section 36(1)(viia), should non-rural branches be determined based on a revenue village and its population? 3. Whether interest accrued on securities that have not yet matured should be assessed as income for the year? Assessee's arguments: For issue 1, the assessee implicitly argued for allowance of bad debts written off for non-rural branches without reference to provisions for rural branches, supported by the Supreme Court decision in Catholic Syrian Bank Ltd. v. C.I.T. For issue 3, the assessee relied on the High Court's decision in C.I.T. v. Federal Bank Ltd. An alternative submission was made for issue 2, that since debts were written off, the distinction between rural and non-rural branches was irrelevant, and the claim could be made under Section 36(1)(viia). Revenue's arguments: The Revenue argued that bad debts for non-rural branches should be limited to the excess over provisions for rural branches (issue 1). For issue 2, the Revenue contended that the determination of non-rural branches should be based on revenue villages and population. The Revenue did not explicitly argue for issue 3, as it was covered by precedent.

Which sections of the Income-tax Act were involved?

Section 36(1)(vii),Section 36(1)(viia)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON FRIDAY ,THE 08TH DAY OF FEBRUARY 2019 / 19TH MAGHA, 1940 ITA.No. 806 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 490/2004 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 25-08-2006 APPELLANT/S: THE COMMISSIONER OF INCOME TAX COCHIN BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: THE FEDERAL BANK LIMITED FEDERAL TOWERS,ALWAYE. BY ADVS. SRI.JOSEPH KODIANTHARA (SR.) SRI.TERRY V.JAMES THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 08.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA No.806/2009 ::2::

J U D G M E N T Vinod Chandran, J. Revenue is in appeal raising questions of law, which are re-framed as follows: I) Whether the bad debts written off, for non- rural branches claimed under clause (vii) of Section 36(1) has to be allowed only in excess of the provision made for rural branches under clause (viia) of Section 36(1) ? II) In determining the provision for bad debts under Section 36(1)(viia), has the non- rural branches to be determined on the basis of a revenue village and the population thereat ? III) Whether the interest accrued on securities, which are not yet matured has to be assessed as income for the year ?

2.

On the first question the issue has to be answered in favour of the assesee and against the Revenue, going by the decision of the Hon'ble Supreme Court in [2012] 343 ITR 270 (SC), Catholic Syrian Bank Ltd. v. C.I.T. The Assessing Officer shall verify the computation, looking into whether there is any allowance granted for provision of bad debts in non-rural branches for the previous years. In which event alone, the allowance of written off bad debts in non-rural branches, will be confined to the excess allowed from the provision made, and deduction allowed, for non-rural branches. We make it clear that in making the computation, there can be no consideration of the provision for bad debts for rural branches as granted under clause (viia) of Section 36(1). Hence, the first question is answered in favour of the assessee and against the Revenue.

3.

On the second question, the issue stands covered in favour of the Revenue and against the assessee. In [2011] 339 ITR 606 (Ker), C.I.T. v. Lord Krishna Bank Ltd., this Court had held that the determination of non-rural branches shall be only with reference to the revenue villages and not solely on the basis of the population. This Court specifically noticed the anomaly insofar as even wards in municipalities being included for identification of rural branches, when the identification is on the basis of the population alone in wards of the local authorities.

4.

The learned Senior Counsel appearing for the assessee has an alternative submission insofar as the assessee having written off the said debts and there being no requirement to find out whether those are rural branches or not. The contention is that the assessee could have claimed it under clause (viia) of Section 36(1). A similar contention was raised in assessee's own case in a batch of cases decided on 11.12.2018 in I.T.A.No.533/2009 and connected cases. We have found that such a question does not arise in the Revenue's appeal. The assessee had also not taken up such a contention before any of the authorities. In such circumstances, the assessee cannot be permitted to take that contention at this stage, especially when there is no appeal filed by the assessee. We hence refuse to look into the said contention.

5.

The third question also stands covered in favour of the assessee as per the decision of this Court in [2008] 301 ITR 188 (Ker.), C.I.T. v. Federal Bank Ltd. The S.L.P. from the aforesaid decision numbered as S.L.P.(CC) No.17071/2008 also stands dismissed. The appeal is partly allowed. K.VINOD CHANDRAN Judge ASHOK MENON Judge jma

Appendix — schedule of exhibits
APPENDIX PETITIONER'S/S EXHIBITS: ANNEXURE-A COPY OF ORIGINAL ASSESSMENT ORDER U/S 143930 READ WITH SECTION 147 DATED 31.01.2003 FOR THE ASST.YEAR 2000-01 ANNEXURE-B COPY OF THE ORDER DATED 26.02.2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS) ANNEXURE-C COPY OF THE ORDER DATE 25.08.2006 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN IN ITA NO.490/ (COCH)/2004 FOR THE ASST. YEAR 2000-01

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