2010 (10) TMI 860 - HC - Income Tax

Valuation of unquoted Government securities - Assessee treats 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 RBI guidelines for valuation of unquoted Government securities and based on the same it claimed a substantial loss Held that - Tribunal accepted the assessee s valuation which is based on RBI guidelines. RBI being the apex body issuing guidelines to the Banks for valuation of unquoted Government securities, it is the rational basis which 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. Thus Tribunal rightly upheld assessee s claim for valuation of unquoted Government securities based on RBI guidelines. Deduction of provision for bad debts in terms of Section 36(1)(viia) - basis of classifying Branches of the Bank as Rural Branches and other Branches Held that - Basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, 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 it s location is the revenue village. Therefore, 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 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. Therefore, allow the appeal on this issue by reversing the order of the Tribunal and by restoring the assessment.

Summary

Issues:
1. Deduction of loss due to embezzlement in a bank branch.
2. Valuation of unquoted Government securities for tax purposes.
3. Classification of bank branches as Rural or other for deduction of bad debts provision.

Issue 1: Deduction of Loss due to Embezzlement
The Tribunal allowed the deduction of loss on account of embezzlement in one of the bank branches after the respondent established the actual loss with evidence. The High Court found no substantial question of law arising from this issue and proceeded to consider the remaining two questions.

Issue 2: Valuation of Unquoted Government Securities
The dispute centered around the valuation of unquoted Government securities for tax assessment purposes. The assessee adopted RBI guidelines for valuation, claiming a substantial loss. The Assessing Officer rejected this, arguing that cost price should be adopted when market price is unknown. The High Court referred to established principles that the lower of cost price or market value should be adopted for assessment. The Tribunal accepted the assessee's valuation based on RBI guidelines, which the High Court deemed rational and upheld, dismissing the Revenue's appeal on this issue.

Issue 3: Classification of Bank Branches for Deduction of Bad Debts Provision
The question revolved around the classification of bank branches as Rural or other for the deduction of bad debts provision under Section 36(1)(viia) of the Income Tax Act. The definition of a Rural branch based on population criteria was crucial. The Tribunal accepted the assessee's interpretation that the "place" referred to in the definition is the Ward of a Panchayat or Municipality. However, the Assessing Officer argued for a different interpretation, considering "place" as a Revenue Village. The High Court analyzed the Census Report and concluded that the basic unit for rural areas is the revenue village, supporting the view that a rural branch must be in a rural area with a population of less than 10,000. Consequently, the High Court reversed the Tribunal's decision, holding that a rural branch must be situated in a village with a population below 10,000, thereby allowing the appeal and restoring the assessment.

This detailed analysis of the judgment provides insights into the legal reasoning and interpretations applied by the High Court in resolving the issues raised in the case.