Kerala H.C : Assessee’s claim for deduction of provision for bad debts in terms of section 36(1)(viia) of the Income-tax Act. Here the only question raised is as to basis of classifying Branches of the Bank as Rural Branches and other Branches. Rural Branch is defined under Explanation ( ia) to section 36(1)(viia)

High Court Of Kerala

CIT, Cochin vs. Lord Krishna Bank Ltd.

Assessment Year : 1994-95

Section : 28(i)

C.N. Ramachandran Nair And K. Surendra Mohan, JJ.

IT Appeal No. 234 Of 2009

October 7, 2010


C.N. Ramachandran Nair, J. – The appeal is filed by the Revenue against orders of the Income-tax Appellate Tribunal disposing of the assessment appeal pertaining to the respondent-Bank for the assessment year 1994-95. We have heard Standing Counsel appearing for the appellant and Senior counsel Sri Joseph Markose appearing for the respondent-assessee.

2. Of the three questions raised, one question relates to the deduction of loss allowed by the Tribunal on account of embezzlement that happened in one of the Branches of the respondent-Bank. We notice that the Tribunal has allowed it on the respondent establishing with evidence the actual loss on account of embezzlement that happened in one of its Branches. We do not find any substantial question of law arising from the order of the Tribunal on their finding on this issue. However, we proceed to consider the remaining two questions which are substantial questions of law.

3. The first question raised pertains to valuation of unquoted Government securities. Since securities involved are not quoted in the market, market price is not known. 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. The Assessing Officer, however, rejected the claim because according to him when shares are not quoted, the cost price has to be adopted and going by the cost price assessee has not suffered the loss as claimed. It is a settled position through various decisions including that of this Court in CIT v. Nedungadi Bank Ltd. [2003] 264 ITR 5451 that for the purpose of assessment cost price or market value whichever is low should be adopted. Admittedly market value is not known and so much so, some method has to be adopted to fix the market value and thereafter only the lower of the cost price or the market value has to be taken for the purpose of computation of profit or loss in respect of the unsecured securities. Senior counsel appearing for the assessee produced RBI guidelines before us wherein the RBI has suggested Banks to value unquoted Central Government securities on the basis of the prices/YTM rates put out by the PDAI/FIMMDA at periodical intervals. YTM is the yield to maturity method adopted for valuation of securities. It is seen that the 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, we feel 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. So much so, we feel the Tribunal rightly upheld assessee’s claim for valuation of unquoted Government securities based on RBI guidelines. We, therefore, dismiss the Revenue’s appeal on this issue.

4. Next question raised pertains to assessee’s claim for deduction of provision for bad debts in terms of section 36(1)(viia) of the Income-tax Act. Here the only question raised is as to basis of classifying Branches of the Bank as Rural Branches and other Branches. Rural Branch is defined under Explanation ( ia) to section 36(1)(viia) as follows :

‘”Rural branch” means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.’

What is clear from the above is 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. What is written in the Census Report 2001 is as follows :

“The basic unit for rural areas is the revenue village with definite surveyed boundaries. The rural area is however taken as the residual portion excluding the urban area and for that no strict definition is followed.”

5. In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee’s case accepted by the Tribunal that population in a Ward has to be reckoned for deciding as to whether the location of a Panchayat is in a rural area or not is accepted, then probably even in Municipal areas there may be Wards with less than 10,000 population thereby answering the branch located in such Municipal area also as a rural Branch. Going by the ordinary meaning of Rural Branch, we feel only Branches of the Bank located in rural areas are covered. When the Legislature adopts population as the basis for classification of rural Branches, that too, with reference to the last Census Report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel 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 its location is the revenue village. Therefore, in our view, 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 in our view, 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 10,000. 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 10,000. We, therefore, allow the appeal on this issue by reversing the order of the Tribunal and by restoring the assessment.

[Citation : 339 ITR 606]

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