2018 (5) TMI 1909 - HC - Income Tax

Transfer to General Reserve per RBI guidelines not taxable income, rules Court. Entries for system maintenance, not revenue.

The Court held that the transfer of un-reconciled entries to the General Reserve, as directed by the RBI, did not constitute taxable income. The Court ... Accrual of income - Transfer of amount of un-reconciled outstanding entries originated up to 31.03.1999 in the inter branch account to the profit and loss account pursuant to RBI instructions - HELD THAT:- The entries which are made are only for the purpose of maintaining system which was lying in the branch office of head-office and by no stretch of imagination, on any accounting principle, this could be treated as income of the assessee once it has been shown reserve fund and as and when accrued it will be treated as income today it will not found favour under the Income Tax Act to be income of the assessee. This is only an assessment of accounts pursuant to the guidelines issued by the Reserve Bank of India. View taken by the Tribunal is required to be reversed & quashed and the question is required to be answered in favour of the assessee holding inasmuch as that the reconciled entries in another branch account cannot be treated as income in the hands of assessee. Issues Involved:1. Whether the addition of Rs. 47,33,34,127/- sustained by the Tribunal treating the transfer of un-reconciled outstanding entries in the inter-branch account to the profit and loss account pursuant to RBI instructions is without authorization of law.Issue-wise Detailed Analysis:1. Facts of the Case:The appellant is a banking company operating under the Banking Regulation Act, 1949, and must adhere to RBI regulations. The RBI, through a letter dated 19.12.2005, directed the appellant to transfer the net credit balance of unreconciled entries originated up to 31.03.1999 in the inter-branch accounts to the General Reserves, subject to specific conditions.2. RBI Guidelines:The RBI’s directive included several conditions:- The entries should have originated up to 31st March 1999.- The amount should first be credited to the Profit and Loss (P&L) Account.- Thereafter, it should be appropriated to the General Reserve for future claims.- Any future claims should be honored by debiting the P&L account and transferring the corresponding amount from the General Reserve.- Complete records of such entries should be maintained.- The net amount credited to the P&L Account would not be available for dividend declaration.- The bank should continue efforts towards reconciliation of such entries.3. Tribunal’s Findings:The Tribunal observed that the RBI directed the transfer of unreconciled entries to the General Reserves. The Assessing Officer (AO) treated the amount of Rs. 47,33,34,127/- as income chargeable to tax, which was confirmed by the CIT(A) based on the Supreme Court judgment in CIT Vs. T.V. Sundaram Iyengar & Sons (222 ITR 344). The Tribunal noted the appellant's arguments that the amount transferred could not be distributed as dividends and was to be used only for meeting future claims.4. Appellant’s Contention:The appellant argued that the Tribunal ignored precedents from other Tribunal decisions, such as State Bank of Hyderabad Vs. Addl. Commissioner of Income-tax, Canara Bank Vs. The Commissioner of Income-tax, and Punjab National Bank vs. Additional Commissioner of Income Tax, which held that such transfers did not constitute taxable income.5. Precedents Cited:- State Bank of Hyderabad: The Tribunal held that inter-branch transactions did not give rise to taxable income, as they were mere accounting lapses and not revenue transactions.- Canara Bank: The Tribunal held that amounts transferred to the General Reserve as per RBI’s direction, though routed through the P&L account, did not have an income character and could not be taxed.- Punjab National Bank: The Tribunal held that unreconciled inter-branch transactions were not revenue transactions and did not generate taxable income.6. Respondent’s Argument:The respondent relied on the AO's findings that the amount credited to the P&L Account should be treated as income. The CIT(A) supported this view, comparing it to the Supreme Court’s decision in T.V. Sundaram Iyengar & Sons, where unclaimed deposits were treated as income after being credited to the P&L account.7. Court’s Decision:The Court held that the entries made were for maintaining the system and could not be treated as income of the assessee. The Court noted that the transfer to the General Reserve was in compliance with RBI guidelines and was not revenue in nature. The Court reversed the Tribunal's decision, ruling that the reconciled entries in the inter-branch account could not be treated as income in the hands of the assessee.8. Conclusion:The appeal was allowed, and the question was answered in favor of the assessee, holding that the transfer of un-reconciled entries to the General Reserve, as directed by the RBI, did not constitute taxable income. The Court emphasized that these were mere accounting entries and not revenue transactions, aligning with the precedents set by other Tribunal decisions.