THE COMMISSIONER OF INCOME TAX vs. THE 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 14TH DAY OF JULY 2021 / 23RD ASHADHA, 1943 ITA NO. 802 OF 2009 AGAINST THE ORDER IN ITA 1263/2004 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: THE COMMISSIONER OF INCOME TAX THRISSUR BY ADV SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: THE SOUTH INDIAN BANK LTD. THRISSUR. BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.ISAAC THOMAS SHRI.ALEXANDER JOSEPH MARKOS SHRI.SHARAD JOSEPH KODANTHARA 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.802/2009 -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. Revenue is the appellant. South Indian Bank Ltd, Mission Quarters, Thrissur/assessee is the respondent. The appeal is directed against the order of Income Tax Appellate Tribunal (for short ‘Tribunal'), Cochin Bench in ITA No.1263/Coch/2004 dated 16.02.2007. The appeal deals with the issues arising from the tax return filed by the assessee for the Assessment Year 1998-99. 3. The assessee is a scheduled bank. In the instant case, on 16.02.2001, the assessment was completed under Section 143(3) of the Act. The Assessing Officer while completing the assessment under Section 143(3) among others made a few

I.T.A. No.802/2009 -3- additions and deletions on account of loss of amortization of excess book value over face value of securities, adhoc payment of pension and excess claim of deduction in respect of bad debts under Section 36(1)(viia). The assessee filed appeal before CIT (Appeals) and the first appellate authority through the order in Annexure-B allowed the appeal in part. The Revenue filed appeal before the Tribunal and the Tribunal, through order in Annexure-C, allowed the appeal in part for statistical purpose. In other words, substantially confirmed the order in CIT (Appeals). Hence, the appeal under Section 260A of the Act. 4. The Revenue has framed the following substantial questions of law for decision in the subject appeal. “1. Whether on the facts and in the circumstances of the case the Tribunal is right in law and in fact in holding that valuation of unquoted securities adopted by the assessee is correct? 2. Whether, on the facts and circumstances of the case, the Tribunal is correct in law in allowing assessee's claim regarding the

I.T.A. No.802/2009 -4- provision for bad and doubtful debts of the rural branches amounting to Rs. 8,67,52,748/-. 3. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in allowing assessee bank's claim ofRs. 50,17,000/ as expenditure on account of payment of pension? 4. Whether, on the facts and circumstances of the case, the Tribunal is right in law in following the decision of the Tribunal in ITA 110/Coch/01 for assessment year 1997-98 wherein the facts are basically different from the facts of this case?” 4.1 At the outset we notice that the substantial questions of law raised by the Revenue are no more res integra and are covered by a few reported judgments. Hence, we make our consideration of these questions precise and limit ourselves to the extent required in this behalf. 5. Question no.1 deals with valuation of unquoted securities, adopted by the assessee whether is correct or not. This Court in Commissioner of Income Tax v. Nedungadi Bank Ltd1 and Commissioner of Income Tax v. Lord Krishna Bank Ltd2 has 1 (2003) 264 ITR 545 (Ker.) 2 (2011) 339 ITR 606 (Ker)

I.T.A. No.802/2009 -5- answered the said issue in favour of the assessee and against the Revenue. The operative portion of the reported judgments reads thus: “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 the RBI guidelines for valuation of unquoted Government securities and based on the same it claimed a substantial loss.

I.T.A. No.802/2009 -6- 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 Assessing Officer also has not come out with any formula for computation of market value of unquoted securities and he has

I.T.A. No.802/2009 -7- 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.” By following the principle laid down in Lord Krishna Bank Ltd, the question under consideration is answered in favour of the assessee and against the Revenue. 5.1 Substantial question no.2 deals with the claim of assessee under Section 36(1)(viia) of the Act. The claim of assessee has been accepted both by the CIT (Appeals) and the Tribunal. 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. The relevant paragraphs 4, 5 and 6, read as under “Next question raised pertains to the assessee's claim for deduction of provision for bad debts in terms of section 36(1) (viia) of the Income-tax Act. Here the only question raised is as

I.T.A. No.802/2009 -8- to basis of classifying branches of the bank as rural branches and other branches, Rural branch is defined under Explanation (ia) to section 36(1)(viia) as follows: " 'rural branch' means a branch of a scheduled bank or a non scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding which the relevant figures have been published before the first day of the previous year." 5 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:

I.T.A. No.802/2009 -9- "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 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 clasification 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.

I.T.A. No.802/2009 -10- 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 Tural 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 the assessment.” By following the said principle, we answer the issue in favour of Revenue and against the assessee. Having regard to what is laid down by this court in the reported judgment, we are further holding that the matter to this extent requires reconsideration in the light of decision of this Court in Lord Krishna Bank Ltd. The question is answered accordingly. 5.2 Substantial question no.3 deals with payment of

I.T.A. No.802/2009 -11- pension on adhoc basis. The CIT (Appeals) and the Tribunal have held that the reason for disallowing payment of pension is incorrect and having regard to the actual payment of pension which is not doubted in any manner, allowed the claim of assessee. We have taken note of the reasoning in the orders of CIT (Appeals) and the Tribunal and are of the view that the substantial question does not merit requirements of Section 260A of the Act for answering the question in favour of Revenue. The finding of fact, both by CIT (Appeals) and the Tribunal, is tenable and not interfered with by us. Hence, the substantial question no.3 is answered in favour of assessee and against the Revenue. Having regard to the above, substantial question no.4 does not survive for consideration and accordingly not taken up for consideration. Having regard to the above discussion and consideration, the appeal is allowed in part, answering question no. 2 in favour

I.T.A. No.802/2009 -12- of Revenue and against assessee; other questions in favour of assessee and against Revenue. In conclusion, the matter is remitted to Assessing Officer for reconsideration of entitlement of assessee for deduction under Section 36(1)(viia), in the light of dictum laid down in Lord Krishna Bank Ltd case. The Assessing Officer completes assessment proceedings as expeditiously as possible, preferably within six months from the date of receipt of copy of this judgment. Sd/- S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj

I.T.A. No.802/2009 -13- APPENDIX OF ITA 802/2009 PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER U/S.143(3) OF THE I.T.ACT DATED 16.02.2001. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN ITA NO. 1/ADDL.CIT/TCR/CIT-V/01-02 DATED 17.09.2004. ANNEXURE C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IN I.T.A.NO.1263(COCH)/2004 DATED 16.02.2007.