2021 (12) TMI 17 - HC - Income Tax

Allowability of bad debts and bad and doubtful debts u/s 36(1)(vii) - Determination of Rural Branch - Place - claim of the assessee for bad debts u/s 36(1)(vii), and the claim in the credit balance in the provision for bad and doubtful debts u/s. 36(1)(viia) be disallowed? - HELD THAT - The question concerning bad debts falling under Section 36(1)(vii) is covered in favour of the assessee in reported judgment of the Supreme Court in Catholic Syrian Bank v. Commissioner of Income Tax 2012 (2) TMI 262 - SUPREME COURT and had answered the point in favour of assessee and against the Revenue. Valuation of unquoted securities - HELD THAT - The question is no more res integra and is answered by following the precedents in Commissioner of Income Tax v. Nedungadi Bank Ltd 2002 (11) TMI 29 - KERALA HIGH COURT and Commissioner of Income Tax v. Lord Krishna Bank Ltd (2011) 2010 (10) TMI 860 - KERALA HIGH COURT , and this Court had answered in favour of the assessee Provision for Bad debts - Rural branch - HELD THAT - Classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. While the assessee's case that found acceptance with the Tribunal is that place referred to in the above definition clause is the ward of a panchayat or municipality, the Assessing Officer took the view that place contained in the definition clause should mean a revenue village. No doubt, place as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of place referred to in the section. Standing counsel for the Department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of place as referred to in the Census Report produced could be adopted for the purpose of this case - Thus the question is answered in favour of revenue and against the assessee

Summary

Issues:
1. Disallowance of claim under Section 36(1)(viia) and revaluation of unquoted securities by the Assessing Officer.
2. Appeal against the order of the Income Tax Appellate Tribunal regarding the tax return filed by the assessee for the assessment year 2004-05.
3. Substantial questions of law raised by the Revenue regarding bad debts, provision for bad debts in rural branches, and valuation of unquoted securities.
4. Interpretation of the definition of "rural branch" under Section 36(1)(viia) based on population criteria.

Issue 1: Disallowance of claim under Section 36(1)(viia) and revaluation of unquoted securities:
The Assessing Officer disallowed the claim of the assessee under Section 36(1)(viia) and also disallowed the revaluation of unquoted securities adopted by the assessee. The appeal filed by the Revenue before the Income Tax Appellate Tribunal was partly allowed for statistical purposes. The questions of law raised by the Revenue relate to bad debts and provision for bad debts in rural branches. The Supreme Court judgment in Catholic Syrian Bank case favored the assessee, directing all matters to be remanded to the Assessment Officer for computation in accordance with law. The revaluation of unquoted securities was also addressed, following precedent judgments in favor of the assessee.

Issue 2: Appeal against the order of the Income Tax Appellate Tribunal:
The appeal was directed against the order of the Income Tax Appellate Tribunal regarding the tax return filed by the assessee for the assessment year 2004-05. The Tribunal partly allowed the appeal for statistical purposes, leading to the instant Income Tax Appeal by the Revenue under Section 260A of the Income Tax Act. The questions of law raised by the Revenue were comprehensively analyzed, with references made to relevant judgments and legal provisions.

Issue 3: Substantial questions of law regarding bad debts, provision for bad debts in rural branches, and valuation of unquoted securities:
The substantial questions raised by the Revenue revolved around the eligibility of deductions under Section 36(1)(vii) of the Act, particularly concerning bad debts and provision for bad debts in rural branches. The Supreme Court judgment in Catholic Syrian Bank case favored the assessee on these issues. The revaluation of unquoted securities was also a point of contention, with the Court referring to precedent judgments supporting the assessee's position.

Issue 4: Interpretation of the definition of "rural branch" under Section 36(1)(viia):
The classification between rural and other branches of a bank based on the population in the place where the branch is located was a key issue. The Court analyzed the definition of "rural branch" under Section 36(1)(viia) and interpreted the term "place" in the context of population criteria. The Court referred to the Census Report and concluded that the location of a panchayat or municipality should be considered as a rural branch based on the population criteria. The judgment in Lord Krishna Bank case was cited to support this interpretation, leading to the appeal being allowed in part and remitted to the Assessing Officer for further consideration.

This detailed analysis of the judgment addresses the various issues involved, including the disallowance of claims, substantial questions of law, and the interpretation of legal provisions, providing a comprehensive overview of the court's decision.