2019 (3) TMI 16 - HC - Income Tax

Bad debts written off - non-rural branches claimed under clause (vii) of Section 36(1) - HELD THAT - Issue has to be decided in favour of the assessee and against the Revenue, going by the decision in Catholic Syrian Bank Ltd. v. C.I.T. 2012 (2) TMI 262 - SUPREME COURT OF INDIA AO 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. 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. Determination of non-rural branches - provision for bad debts u/s 36(1)(viia) - HELD THAT - On the second question, the issue stands covered in favour of the Revenue and against the assessee. In C.I.T. v. Lord Krishna Bank Ltd. 2010 (10) TMI 860 - KERALA HIGH COURT 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. Alternative submission before High Court - no contention before lower authorities - HELD THAT - A similar contention was raised in assessee s own case in a batch of cases decided 2018 (12) TMI 1611 - KERALA HIGH COURT 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. 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. Accrual of income - interest accrued on securities which are not yet matured has to be assessed as income for the year - HELD THAT - The third question stands covered in favour of the assessee as per the decision of this Court in C.I.T. v. Federal Bank Ltd 2008 (1) TMI 195 - KERALA HIGH COURT

Summary

Issues:
1. Whether bad debts written off for nonrural branches claimed under clause (vii) of Section 36(1) must be allowed only in excess of the provision made for rural branches under clause (viia) of Section 36(1)?
2. In determining the provision for bad debts under Section 36(1)(viia), should nonrural branches be determined based on a revenue village and the population thereat?
3. Whether the interest accrued on securities, which are not yet matured, has to be assessed as income for the year?

Analysis:
1. The first issue revolves around whether bad debts written off for nonrural branches should be allowed only in excess of the provision made for rural branches. The judgment refers to a decision of the Hon'ble Supreme Court in Catholic Syrian Bank Ltd. v. C.I.T., where it was established that the allowance of written off bad debts in non-rural branches should not consider the provision for bad debts for rural branches. The court ruled in favor of the assessee on this question, emphasizing the need for the Assessing Officer to verify the computation and any allowance granted for provision of bad debts in non-rural branches in previous years.

2. The second issue concerns the determination of nonrural branches for the provision of bad debts under Section 36(1)(viia). The court cited a previous decision in C.I.T. v. Lord Krishna Bank Ltd., where it was held that nonrural branches should be identified based on revenue villages, not solely on population. The judgment favored the Revenue on this issue, highlighting the anomaly in including wards in municipalities for identifying rural branches solely based on population.

3. The third issue addresses whether interest accrued on securities not yet matured should be assessed as income for the year. The court referred to a decision in C.I.T. v. Federal Bank Ltd., where it was ruled in favor of the assessee. The judgment indicated that the Special Leave Petition (S.L.P.) from the aforementioned decision was dismissed, further supporting the assessee's position on this matter.

Additionally, the judgment mentioned an alternative submission by the Senior Counsel for the assessee regarding the contention of claiming debts under clause (viia) of Section 36(1). However, the court refused to consider this contention as it was not raised before any authorities earlier and no appeal was filed by the assessee. Ultimately, the appeal was partly allowed, addressing the issues raised in the appeal.