2014 (8) TMI 604 - HC - Income Tax

Accrual of income - Interest on securities to be assessed on half yearly due dates Interest accrued at the end of assessment year Claim of Bad debts to non-rural branches u/s 36(1)(viia) - Following the decision in Commissioner of Income Tax v. City Union Bank Ltd. 2007 (2) TMI 187 - MADRAS High Court - the assessee is taxable for interest on securities only on specified dates when it becomes due for payment, in view of third proviso to Section 145(1) of the Act, which was in force during the relevant assessment years. Bad debts - The scheduled bank will be entitled to the deduction of the entire bad debt relating to advances made by the urban branches written off in the books and also the difference between the amount written off in the books relating to advances made by the rural branches during the previous year relevant to the assessment year and the credit balance in the provisions for bad and doubtful debts account relating to advances made by the rural branches made under clause (viia) - while allowing the claim for bad debts written off in respect of advances made by rural branches, the CIT(A) as well as the Tribunal, was of the opinion that the assessee has not claimed any debts written off in respect of rural branch in the earlier year there was no error in the order of the Tribunal in holding that the claim of bad debts in relation to non-rural branches of the assessee bank is allowable Decided against Revenue.

Summary

Issues:
1. Assessment of interest on securities for the assessee bank.
2. Allowability of bad debts claim in relation to non-rural branches without setting off against the provision already allowed under Section 36(1)(viia).

Analysis:

Issue 1: Assessment of interest on securities
The appeal challenged the order of the Income Tax Appellate Tribunal regarding the assessment of interest on securities for the assessee bank for the assessment year 1994-1995. The Tribunal held that interest on securities should be assessed based on the interest due on half-yearly due dates, excluding the interest accrued at the end of the assessment year. The High Court referred to a previous decision concerning a similar issue for the same assessee. The Division Bench of the Court had ruled that the assessee should be taxed for interest on securities only on specified dates when it becomes due for payment, in accordance with the relevant provisions of the Income Tax Act. The Court upheld the Tribunal's decision, dismissing the appeal and ruling in favor of the assessee.

Issue 2: Allowability of bad debts claim
The second issue revolved around the claim of bad debts in relation to non-rural branches of the assessee bank without setting off against the provision already allowed under Section 36(1)(viia). The Court referred to a decision in a similar case involving South Indian Bank Ltd., where the Kerala High Court had provided a detailed analysis of the relevant provisions of the Income Tax Act concerning bad debts. In this case, the Commissioner of Income Tax (Appeals) and the Tribunal had allowed the claim for bad debts written off in respect of advances made by rural branches. The Court found no error in this decision as the assessee had not claimed any debts written off in respect of rural branches in the earlier year. Therefore, the Court ruled in favor of the assessee, stating that the claim of bad debts in relation to non-rural branches is allowable. The Court dismissed the appeal, upholding the decisions of the lower authorities and ruling against the Revenue.

In conclusion, the High Court of Madras upheld the decisions of the lower authorities in both issues, ruling in favor of the assessee and against the Revenue. The Court provided detailed analyses based on previous judgments and relevant provisions of the Income Tax Act, ultimately dismissing the appeal and answering the substantial questions of law against the Revenue.