2019 (1) TMI 410 - HC - Income Tax

Bad debts written off for non-rural branches claimed under clause (vii) of Section 36(1) - whether claim has to be allowed only in excess of the provision made for rural branches under clause (viia) of Section 36(1)? - Held that - Issue has to be answered 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 of bad debts in non-rural branches will be confined to the excess allowed from the provision made, and deduction allowed, for non-rural branches. We make it clear that 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). - decided in favour of assessee. Depreciation or loss on revaluation of securities - whether can be permitted on the basis of the market value or cost price, whichever is less, as stipulated by the Reserve Bank of India? - Held that - The issue of revaluation of securities is covered in C.I.T. v. Nedungadi Bank Ltd. 2002 (11) TMI 29 - KERALA HIGH COURT and C.I.T. v. Lord Krishna Bank Ltd 2010 (10) TMI 860 - KERALA HIGH COURT . This Court had held that revaluation of securities can be only on the basis of market value or cost price, whichever is lesser, as stipulated by the Reserve Bank of India. The Tribunal s order to that extent is upheld. - Decided in favour of assessee. Determining the provision for bad debts u/s 36(1)(viia) - has the non-rural branches to be determined on the basis of a revenue village and the population thereat? - Held that - The issue stands covered in favour of the Revenue and against the assessee. In Lord Krishna Bank Ltd. 2017 (10) TMI 598 - 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. We hence answer the third question in favour of the Revenue Accrual of income - interest accrued on securities, which are not yet matured has to be assessed as income for the year - Held that - This question also 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 Expenditure for purchase of gifts given to shareholders, who participated in the annual general meeting - permissible business expenditure under Section 37 - Held that - A permissible allowance as business expenditure under Section 37. Non application of Section 14A for the assessment year 2004-05 - Held that - The Hon ble Supreme Court in C.I.T. v. ESSAR Teleholdings Pvt.Ltd. 2018 (2) TMI 115 - SUPREME COURT OF INDIA had found that the provision can be made applicable only from the assessment year 2007-08. Hence, for the assessment year 2004-05, Section 14A has no application. Hence, the said question is answered in favour of the assessee Current investments written off - whether can be claimed as loss for the assessment year in which it has been written off ? - Held that - On current investments written off, this Court in C.I.T. v. Lord Krishna Bank Ltd. (2017 (10) TMI 598 - KERALA HIGH COURT) followed the decision in Nedungadi Bank Ltd. 2002 (11) TMI 29 - KERALA HIGH COURT and United Commercial Bank, Calcutta v. C.I.T., WB-II, Calcutta 1999 (9) TMI 4 - SUPREME COURT to rule in favour of the assessee. Enhancement made FAA u/s 14A - addition in view of the specific proviso prohibiting enhancement before the assessment year 2001-02 ? - Held that - The issue has to be answered in favour of the assessee in view of the prohibition contained in the proviso to Section 14A, as also the decision of the Hon ble Supreme Court in ESSAR Teleholdings Pvt.Ltd. 2018 (2) TMI 115 - SUPREME COURT OF INDIA .The prohibition is specific and there can be no application of Section 14A also in the assessment year 1998-99 in which the enhancement was attempted by the First Appellate Authority. Hence, the question is answered in favour of the assessee Allowance of write off of an amount, which the assessee was entitled to, as dividend from another company, which was returned as income on receipt of a cheque, which subsequently got dishonoured? - Held that - In the previous assessment year, the assessee had returned as income the dividend received from another company, when the cheque on that count was received. However, later the cheque presented got dishonoured. The assessee hence wrote off the said amount due to it as dividend and claimed for allowance under Section 36(1). The Tribunal allowed the same. We do not find any infirmity in the allowance, since if at all the assessee gets the dividend in a later year, it could be treated as income in that year. The write off on the ground of dishonour of cheque cannot at all be disputed and is evident from the books of accounts. We, hence, answer this question in favour of the assessee

Issues:
1. Bad debts written off for non-rural branches under Section 36(1).
2. Depreciation or loss on revaluation of securities.
3. Determination of non-rural branches under Section 36(1)(viia).
4. Assessment of interest accrued on securities.
5. Expenditure for purchase of gifts to shareholders under Section 37.
6. Application of Section 14A for the assessment year 2004-05.
7. Claiming current investments written off as loss.
8. Enhancement made by the First Appellate Authority under Section 14A.
9. Write off of dividend amount due to dishonored cheque.

Analysis:

1. Bad Debts for Non-Rural Branches: The court ruled in favor of the assessee, citing a Supreme Court decision. The computation should exclude any allowance for bad debts in non-rural branches from previous years. The provision for bad debts in rural branches should not be considered. The decision was in favor of the assessee and against the Revenue.

2. Depreciation or Loss on Revaluation of Securities: The court upheld the Tribunal's order that revaluation of securities should be based on the lesser of market value or cost price, as per the Reserve Bank of India guidelines. The decision was in favor of the assessee and against the Revenue.

3. Determination of Non-Rural Branches: The court held that non-rural branches should be determined with reference to revenue villages, not solely based on population. The identification of rural branches should not include wards in municipalities based solely on population. The decision was in favor of the Revenue and against the assessee.

4. Assessment of Interest Accrued on Securities: The court ruled in favor of the assessee based on a previous decision, stating that interest accrued on securities not yet matured should not be assessed as income for the year.

5. Expenditure for Purchase of Gifts: The court found that the expenditure for gifts to shareholders participating in the annual general meeting can be considered a permissible business expenditure under Section 37.

6. Application of Section 14A: For the assessment year 2004-05, the court held that Section 14A has no application, based on a Supreme Court decision.

7. Current Investments Written Off: The court ruled in favor of the assessee, allowing the claim of current investments written off as a loss.

8. Enhancement by First Appellate Authority: The court found in favor of the assessee, citing a specific prohibition in the proviso to Section 14A, and upheld the decision of the First Appellate Authority.

9. Write Off of Dividend Amount: The court allowed the write off of a dividend amount due to a dishonored cheque, as it was evident from the books of accounts. The decision was in favor of the assessee and against the Revenue.

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