Inter-branch reconciliation entries routed through profit and loss account were not treated as taxable income

Unreconciled inter-branch entries routed through the profit and loss account under Reserve Bank of India directions were treated as a regulatory reconciliation mechanism, not as receipts from external trading transactions or revenue surplus. Because the underlying accounting difference retained its character as an internal adjustment and remained subject to future claims and record-keeping obligations, the transfer did not change the amount into taxable income. On that basis, the entries were not brought to tax as income in the bank's hands.

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Issues: Whether unreconciled inter-branch entries transferred to the profit and loss account pursuant to Reserve Bank of India directions constituted taxable income in the hands of the bank.

Analysis: The entries arose from internal inter-branch accounting and were not shown to be receipts from external trading transactions or amounts whose character had changed into a revenue surplus. The Reserve Bank of India permitted routing the amount through the profit and loss account only as a regulatory mechanism, with a continuing obligation to meet future claims and maintain records. Such directions did not convert the underlying accounting difference into income. The court found that the transfer was a system-driven reconciliation entry and not a receipt giving rise to taxable profits. On these facts, the amount could not be brought to tax as income.

Conclusion: The issue was answered in favour of the assessee. The unreconciled inter-branch entries transferred pursuant to Reserve Bank of India instructions were not taxable income.

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