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IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS TUESDAY, THE 13TH DAY OF JULY 2021 / 22ND ASHADHA, 1943 ITA NO. 178 OF 2009 AGAINST THE ORDER IN ITA 113/1996 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: THE SOUTH INDIAN BANK LTD.,. TRICHUR. 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 13.07.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:
I.T.A. No.178/2009 -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 113/Coch/1996 dated 27.06.2003. The appeal deals with the issues arising from the tax return filed by the assessee for the assessment year 1993-94. 2.1 The Assessing Officer through the assessment order in Annexure-A, disallowed the claim of the assessee under Section 36(1)(viia). Similarly, the Assessing Officer disallowed the revaluation of unquoted securities adopted by the assessee.
I.T.A. No.178/2009 -3- 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 Tribunal partly allowed the appeal. 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 in the light of the decision in British Paints (188 ITR 44) should not the Tribunal have sustained the disallowance of depreciation made by the Assessing Officer? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the investments made by the assessee in approved government securities form part of its stock in trade and therefore, the claim of depreciation on the revaluation of the securities was rightly claimed by the assessee? 3. Whether, on the facts and circumstances of the case and since the assessee was regularly following the method of
I.T.A. No.178/2009 -4- valuation of government securities on book value is it permissible for the assessee to change the method of accounting and revalue the same adopting market value? 4. Whether, on the facts and in the circumstances of the case the Tribunal is correct in law in reversing the decision of the Commissioner of Income Tax (Appeals) on the issue regarding the debiting of bad debts relating to the non-rural branches in the provisions for bad debt account created in accordance with the provisions of section 36(1) (vii) (a) of the Act?” 3. The fourth question is regarding the eligible deduction 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 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 1 (2012) 343 ITR 270 (SC)
I.T.A. No.178/2009 -5- 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 other words, if the case of the assessee does not fall under Section 36(1)(viia) proviso/limitation would not come into play.” xxx xxxx xxxxx “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.” Thus the fourth question is answered by the Supreme Court in favour of assessee and against the Revenue.
I.T.A. No.178/2009 -6- 4. The other questions for consideration are whether the appreciation in the value of securities; revaluation of unquoted securities adopted by the assessee is legal or not. These questions are no more res integra and are 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 the issue 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” 2 (2003) 264 ITR 545 (Ker.) 3 (2011) 339 ITR 606 (Ker)
I.T.A. No.178/2009 -7- 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. 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
I.T.A. No.178/2009 -8- 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 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
I.T.A. No.178/2009 -9- APPENDIX OF ITA 178/2009 PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF THE ORDER UNDER SECTION 143(3) OF THE ASSESSING OFFICER DATED 14.03.1995. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 30.11.1995. ANNEXURE C TRUE COPY OF THE ORDER OF THE APPELLATE TRIBUNAL DATED 27.06.2003.