THE COMMISSIONER OF INCOME TAX V. KARNATAKA BANK LTD

ITA/166/2009

AI Insights

The case involves the Commissioner of Income-Tax and the Assistant Commissioner of Income Tax as appellants, against Karnataka Bank Ltd. as the respondent. The dispute centered on two main issues for the assessment year 2004-05: the deductibility of bad debts amounting to Rs.25,95,60,772/- and the taxability of interest from government securities amounting to Rs.23,88,75,850/-. The Assessing Authority initially disallowed both claims, which were later overturned by the First Appellate Authority and the Tribunal, leading to the revenue's appeal to the High Court.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 738556 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 25-11-2014
• Assessment Year: misc
• Other Referred Cases: (2014) 226 Taxman page 187
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: G SARANGAN
• Assessee Lawyers: K V ARVIND
• Keywords: Assessment Year 2004-05; Bad debts; Deduction; Mercantile system of accounting; Written off; Interest from Government securities
• Section: 36(1)(vii); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 25TH DAY OF NOVEMBER, 2014 PRESENT: THE HON'BLE Mr.JUSTICE N.KUMAR AND THE HON'BLE Mr.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.166 OF 2009 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX C.R.BUILDING ATTAVARA MANGALORE 2. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-2(1) C.R.BUILDING QUEENS ROAD BANGALORE ...APPELLANTS (BY SRI.K.V.ARVIND, ADV.) AND: M/S. KARNATAKA BANK LTD., HEAD OFFICE MANGALORE – 575 002 ...RESPONDENT (BY SRI.G.SARANGAN, SR. ADV., FOR BALRAM R RAO, ADV.) THIS APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 21.11.2008 PASSED IN ITA NO.1160/BANG/2007, FOR THE ASSESSMENT YEAR 2004-05, PRAYING TO i. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. 2 ii. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA No.1160/BANG/2007 DATED 21.11.2008 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(1), BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. THIS APPEAL COMING ON FOR HEARING, THIS DAY, N.KUMAR, J., DELIVERED THE FOLLOWING: J U D G M E N T The revenue has preferred this appeal against the order passed by the Tribunal granting relief to the assessee. 2. The assessee is carrying on banking business. In respect of assessment year 2004-05, the assessee filed the return of income. Subsequently, he proceeded to file a revised return. The assessee claimed a sum of Rs.25,95,60,772/- as bad debts and written off. Further, the assessee also claimed that interest from Government securities of Rs.23,88,75,850/- accrued on mercantile basis is not taxable. The Assessing Authority held that the claim for bad debts written off is not an allowable deduction under Section 36(1)(vii) of the Act. Similarly, the claim of the assessee insofar as the interest from the 3 Government Securities was also disallowed as the assessee was following a mercantile system of accounting and the contention of the assessee that the interest on Government securities does not accrued from day today basis, but it accrued only on the due date. The Assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The First Appellate Authority relying on the judgment of the Tribunal in the assessee’s own case in the earlier assessment year has allowed the appeal. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal has dismissed the appeal affirming the order passed by the First Appellate Authority. It is against the said order, the revenue is in appeal. 3. There are two substantial questions of law that arises for our consideration which are as under: i) Whether the Appellate Authorities were correct in holding that the assessee would be entitle to claim a deduction under Section 36(1)(vii) of the Act in respect of bad debts written off of Rs.25,95,60,772/- when the mandatory requirement of proviso to Section 36(1)(vii) 4 contemplated that the same is limited to the amount set apart as per Clause (viia) of the Act which had been only to the extent of Rs.22,86,23,971/- and the excess was correctly disallowed by the Assessing Officer? ii) Whether the Appellate Authorities were correct in holding that the interest on securities of Rs.23,88,75,850/- cannot be added as the income of the assessee when it was following mercantile system of accounting as such income on government security do not accrue on day to day basis and only on maturity? 4. Insofar as the first substantial question of law is concerned, the Assessing Authority has not disputed the fact that the assessee’s claim for bad debt under Section 36(1)(vii) does not represent those debt in which deduction has been claimed under Section 36(1)(vii) of the Act, out of the provision for bad and doubtful debts. In view of the factual position, the law laid down by the Apex Court in the case of the assessee itself reported in (2014) 226 Taxman page 187 is attracted and the first substantial question of 5 law is to be answered in favour of the assessee and against the revenue as rightly held by the Tribunal. 5. In respect of second substantial question of law is concerned, the said question is also covered by the aforesaid judgment, where the substantial question of law is answered in favour of the assessee and against the revenue. In that view of the matter, we do not find any merit in this appeal. Accordingly, it is dismissed. Sd/- JUDGE Sd/- JUDGE GH "