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Issues: Whether the revisional order under section 263 of the Income-tax Act, 1961, directing addition of the amount transferred by the bank towards stale demand drafts, was justified.
Analysis: The amount was transferred to the profit and loss account only in accordance with the Reserve Bank of India's binding directions, and was simultaneously appropriated to general reserve to meet future claims. The bank was not free to treat the amount as its own income or to use it as distributable surplus, and the liability to honour future claims continued. In these circumstances, the amount retained its character as a liability held for contingent claims and did not assume the character of income in the bank's hands. The revisional view based on the principle applicable to unclaimed trading deposits was therefore not sustainable on these facts.
Conclusion: The revision under section 263 was quashed insofar as it related to the addition of the stale demand drafts amount, and the issue was decided in favour of the assessee.
Final Conclusion: The assessee succeeded on the substantive taxability issue relating to stale demand drafts, while the appeal was otherwise only partly successful.
Ratio Decidendi: Amounts routed through the profit and loss account pursuant to binding regulatory directions, but retained in reserve for meeting future claims and not available for free commercial use, do not acquire the character of taxable income.
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