Tribunal's dismissal of appeal over Rs.14.10 crore disallowance for bad debts quashed; additional Rs.52 crore claim raised late remains inadmissible but alternative remedies left open
In a significant judgment delivered on September 28, 2026, the Division Bench of the Kerala High Court comprising Justices Devan Ramachandran and Basant Balaji overturned the Income Tax Appellate Tribunal's (ITAT) refusal to consider the South Indian Bank Ltd.'s challenge to a Rs.14.10 crore disallowance of bad debts written off in the bank's income tax assessment. The case arose from an assessment order finalized under Section 143(3) read with Section 263 of the Income Tax Act, 1961, following a remand by the Principal Commissioner of Income Tax.
The appellant bank, a Scheduled Bank under the Banking Regulation Act, initially had its claim for disallowance of bad debts allowed. However, after the Commissioner invoked Section 263 to revise the assessment, an additional disallowance of Rs.14.10 crore was made. The bank contested this before the First Appellate Authority, and subsequently before the ITAT. During the first appeal, the bank also raised an additional claim of Rs.52 crore for bad debts written off, which was not part of the original assessment.
The ITAT had refused to entertain the challenge to the Rs.14.10 crore disallowance, holding that since the appeal related to the additional claim of Rs.52 crore made for the first time before the First Appellate Authority, it could not consider the original disallowance issue. This prompted the bank to approach the Kerala High Court.
The High Court found fault with the Tribunal's reasoning. It held that the ITAT was duty-bound to consider the validity of the Rs.14.10 crore disallowance on its merits and could not refuse to do so merely because of the additional Rs.52 crore claim raised later. The Court emphasized that the additional Rs.52 crore claim, being introduced for the first time before the First Appellate Authority in an appeal arising from an order passed under Section 263, was not admissible in that appellate forum. However, the Court clarified that the bank was free to explore any other legal remedy available in respect of this additional claim.
Consequently, the Kerala High Court set aside the ITAT's order dismissing the appeal and remanded the matter to the Tribunal for fresh consideration solely on the Rs.14.10 crore disallowance. The Tribunal was directed to afford both the bank and the revenue an opportunity of hearing before passing a fresh order.
This judgment reinforces procedural propriety in income tax appeals, underscoring the limited scope of first appeals arising from Section 263 assessments and ensuring that substantive issues arising directly from such assessments receive due adjudication.
Bottom Line:
Income Tax - Appellate Tribunal erred in refusing to consider assessee's challenge to disallowance of Rs.14.10 crores of bad debts written off merely because an additional claim of Rs.52 crores had also been raised - However, additional claim made for first time before First Appellate Authority could not be entertained in appeal arising from assessment order passed pursuant to Section 263 - Matter remanded to Tribunal for fresh consideration limited to Rs.14.10 crores claim.
Statutory provision(s): Income Tax Act, 1961 Sections 143(3), 263, 36(1)(vii)
