1 IN HIGH COURT OF KARNATAKA, BANGALORE DATED THIS 25TH DAY OF NOVEMBER, 2014 PRESENT: HON'BLE Mr.JUSTICE N.KUMAR AND HON'BLE Mr.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.166 OF 2009 BETWEEN: 1. COMMISSIONER OF INCOME-TAX C.R.BUILDING ATTAVARA MANGALORE 2. 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 575002 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 ASSESSMENT YEAR 2004-05, PRAYING TO i. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. 2 ii. ALLOW APPEAL AND SET ASIDE ORDER PASSED BY ITAT BANGALORE IN ITA No.1160/BANG/2007 DATED 21.11.2008 CONFIRMING ORDER OF APPELLATE COMMISSIONER AND CONFIRM ORDER PASSSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(1), BANGALORE IN INTEREST OF JUSTICE AND EQUITY. THIS APPEAL COMING ON FOR HEARING, THIS DAY, N.KUMAR, J., DELIVERED FOLLOWING: JUDGMENT revenue has preferred this appeal against order passed by Tribunal granting relief to assessee. 2. assessee is carrying on banking business. In respect of assessment year 2004-05, assessee filed return of income. Subsequently, he proceeded to file revised return. assessee claimed sum of Rs.25,95,60,772/- as bad debts and written off. Further, assessee also claimed that interest from Government securities of Rs.23,88,75,850/- accrued on mercantile basis is not taxable. Assessing Authority held that claim for bad debts written off is not allowable deduction under Section 36(1)(vii) of Act. Similarly, claim of assessee insofar as interest from 3 Government Securities was also disallowed as assessee was following mercantile system of accounting and contention of assessee that interest on Government securities does not accrued from day today basis, but it accrued only on due date. Assessee preferred appeal to Commissioner of Income Tax (Appeals). First Appellate Authority relying on judgment of Tribunal in assessee s own case in earlier assessment year has allowed appeal. Aggrieved by said order, revenue preferred appeal to Tribunal. Tribunal has dismissed appeal affirming order passed by First Appellate Authority. It is against said order, revenue is in appeal. 3. There are two substantial questions of law that arises for our consideration which are as under: i) Whether Appellate Authorities were correct in holding that assessee would be entitle to claim deduction under Section 36(1)(vii) of Act in respect of bad debts written off of Rs.25,95,60,772/- when mandatory requirement of proviso to Section 36(1)(vii) 4 contemplated that same is limited to amount set apart as per Clause (viia) of Act which had been only to extent of Rs.22,86,23,971/- and excess was correctly disallowed by Assessing Officer? ii) Whether Appellate Authorities were correct in holding that interest on securities of Rs.23,88,75,850/- cannot be added as income of 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 first substantial question of law is concerned, Assessing Authority has not disputed fact that 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 Act, out of provision for bad and doubtful debts. In view of factual position, law laid down by Apex Court in case of assessee itself reported in (2014) 226 Taxman page 187 is attracted and first substantial question of 5 law is to be answered in favour of assessee and against revenue as rightly held by Tribunal. 5. In respect of second substantial question of law is concerned, said question is also covered by aforesaid judgment, where substantial question of law is answered in favour of assessee and against revenue. In that view of matter, we do not find any merit in this appeal. Accordingly, it is dismissed. Sd/- JUDGE Sd/- JUDGE GH Commissioner of Income-tax, Mangalore / Assistant Commissioner of Income-tax Circle-2(1), Bangalore v. Karnataka Bank Ltd