Bank inter-branch balances are not taxable income; revision over income treatment and loss set-off was unsustainable.

Unreconciled inter-branch balances of a banking company were treated as accounting entries, not taxable income, because they did not constitute trading receipts and section 41(1) was inapplicable absent proof of an earlier deduction for corresponding expenditure; revision under section 263 on that ground was therefore unjustified. The Tribunal also held that set-off of brought forward loss from the preceding year was correctly allowed, since the loss was shown in the accounts and could not be denied merely because the earlier assessment was later adjusted in appellate proceedings. The revisional order was cancelled in full.

---

---

Issues: (i) whether amounts arising from unreconciled inter-branch accounts of a banking company were taxable income and could validly be brought to tax in revision under section 263; (ii) whether the Assessing Officer was in allowing set-off of brought forward loss of the preceding assessment year.

Issue (i): Whether amounts arising from unreconciled inter-branch accounts of a banking company were taxable income and could validly be brought to tax in revision under section 263.

Analysis: The amounts in inter-branch accounts were treated as mere accounting entries arising from reconciliation differences, not as trading receipts or income. The Tribunal followed earlier decisions holding that, in the case of a bank, such inter-branch balances do not acquire the character of taxable income, especially where the Reserve Bank of India permits routing through profit and loss account but obliges the bank to meet future claims and prohibits distribution as dividends. Section 41(1) was also found inapplicable because the Revenue had not shown that any corresponding expenditure had earlier been allowed as a deduction.

Conclusion: The inter-branch account balances were not taxable income, and the revision under section 263 on this issue was not justified.

Issue (ii): Whether the Assessing Officer was in allowing set-off of brought forward loss of the preceding assessment year.

Analysis: The Tribunal held that the loss brought forward by the assessee as reflected in its accounts could not be denied merely because the earlier year's assessment was later reworked by appellate orders. The existence of the brought forward loss for the year under appeal was accepted, and the Assessing Officer's allowance of set-off was held to be proper. The Commissioner's view that the loss was non-existent was rejected.

Conclusion: The set-off of brought forward loss was correctly allowed, and the revisionary order on this issue was unsustainable.

Final Conclusion: The assessee succeeded on both issues, and the Commissioner's revisional order was cancelled in entirety.

Ratio Decidendi: Mere unreconciled inter-branch accounting balances of a bank do not, by themselves, constitute taxable income, and revision under section 263 cannot be sustained where the Assessing Officer's allowance of such treatment or of a bona fide brought forward loss set-off is not shown to be erroneous and prejudicial to revenue.

---