2014 (4) TMI 241 - HC - Income Tax

Court rules for Revenue on bad debt provision, upholds depreciation on investments and interest treatment.

The Court ruled in favor of the Revenue on the disallowance of the provision for bad and doubtful debts under Sec.36(1)(viia) of the Income Tax Act, ... Disallowance u/s 36(1)(viia) of the Act – rural branch of the bank - Provision for bad and doubtful debts – Whether the Tribunal is right in interfering with the disallowance qua the provision for bad and doubtful debts of the advances made by the rural branches of the assessee u/s 36(1)(viia) of the Act – Held that:- The decision in Commissioner of Income-tax v. Lord Krishna Bank Lt. [2010 (10) TMI 860 - Kerala High Court] followed – 'place' referred to in the 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 – Decided in favour of Revenue. Entitlement for depreciation - whether the assessee is entitled to depreciation on investments on securities like 'Held to Maturity' 'Available for sale' and 'Held for Trade' - Held that:- The decision in Commissioner of Income-tax v. Nedungadi Bank Ltd [2002 (11) TMI 29 - KERALA High Court ] followed - the securities held by the assessee-bank in are the stock-in-trade of the business of the assessee-banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits – Decided against Revenue. Accrual of interest - Interest credited to P/L account – Held that:- The decision in Commissioner of Income-tax vs. Federal Bank Ltd [2008 (1) TMI 195 - KERALA HIGH COURT] followed – Merely because the assessee has declared it as amount receivable in the course of time, it does not mean that interest on income had in fact accrued to the assessee – Decided against Revenue. Issues:1. Disallowance of provision for bad and doubtful debts under Sec.36(1)(viia) of the Income Tax Act.2. Entitlement to depreciation on investments on securities.3. Treatment of interest credited to P/L account as income.Issue 1: Disallowance of provision for bad and doubtful debts under Sec.36(1)(viia) of the Income Tax Act:The Tribunal had initially ruled in favor of the assessee regarding the disallowance of the provision for bad and doubtful debts. However, a Division Bench of the Court, citing previous decisions, held that the question must be answered in favor of the Revenue. The judgment in Commissioner of Income-tax v. Lord Krishna Bank Ltd was referenced, leading to a decision against the assessee on this issue.Issue 2: Entitlement to depreciation on investments on securities:The Tribunal's opinion, which favored the assessee on the entitlement to depreciation on investments on securities, was upheld. Citing the judgment in Lord Krishna Bank Ltd, the Court confirmed the Tribunal's decision on this matter.Issue 3: Treatment of interest credited to P/L account as income:The Tribunal had ruled in favor of the assessee regarding the treatment of interest credited to the P/L account as income. This decision was supported by referencing the judgment in Commissioner of Income-tax vs. Federal Bank Ltd. Consequently, the Court allowed the Revenue's appeal only in part, specifically concerning the disallowance of the provision for bad and doubtful debts under Sec.36(1)(viia) of the Income Tax Act.This judgment addressed three significant issues related to the disallowance of provisions for bad and doubtful debts, entitlement to depreciation on investments on securities, and the treatment of interest credited to the P/L account as income. While the Tribunal had initially ruled in favor of the assessee on all three issues, subsequent considerations based on relevant judgments led to a mixed outcome. The Court decided in favor of the Revenue on the disallowance of the provision for bad and doubtful debts, upheld the Tribunal's decision on depreciation entitlement, and supported the assessee's position on the treatment of interest credited to the P/L account. The judgment provides a nuanced analysis of each issue, drawing on legal precedents to reach a balanced conclusion.