TaxTMI 
TaxTMI 
2012 (5) TMI 437
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....enture (v) Tiruanantpuram Road Dev.Corpn. (vi) Hind Vivekanand Toll Way Bridge (vii) NTPC Ltd. (viii) Malana Power (ix) Jas Toll Road Co.Ltd. (x) RS Infrastructure Ltd. (xi) Supreme Renewal Energy Ltd. (xii) ISP H Ltd. (xiii) PPN Power Generating Co. (xiv) GMR Tambaran Express Ways Pvt.Ltd. (xv) GMR Tuni Anakapalli Express Ways Pvt.Ltd. (xvi) Atriya Hydel Power Ltd. (xvii) Kona Seema EPS Oakwell Power Ltd. (xviii) International Power Corp.Ltd. (xix) Jindal Thermal Power Corpn.Ltd. (xx) Dhamashala Power Project Ltd. (xxi) Adani Ports Ltd. (xxii) Gujrat Chemical Port Ltd. (xxiii) Gujrat Adani Ports Ltd. (xxiv) HPL Cogen Ltd. (xxv) Suwarana Toll Ways Pvt.Ltd. (xxvi) Raja Mundry Express Highways (xxvii) Idea Cellular Ltd. (xxviii) Gujarat Phaguthan Energy Corp. (xxix) Reliance Infocom Ltd. (xxx) Nandi Economic Carrier Enterprises. (xxxi) JNB Road Infrastructure Project Pvt.Ltd. (xxxii) Vemagiri Power Generation Ltd. (xxxiii) STCMS Elect Co.Pvt.Ltd. (xxxiv) New Tripura Area Developmetn Cooperative Bank Ltd. (xxxv) Tata Tele Services Ltd. (xxxvi....
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....ernment for claiming exemption under Section 10(23G), which the Government had not disposed off in time. That is why, even before the learned CIT(A), certain new certificates were filed. Learned CIT(A), in our view, has rightly directed the granting of exemption under Section 10(23G) of the Act in respect of interest on such bonds whose certificate of exemption was filed before him. The assessee has now pleaded before us that new certificates have also been received after the disposal of the appeal by the CIT(A) and he has sought for rectification of the above in the light of these certificates. We, therefore, after having gone through these submissions and material placed on record, think it fit in the interest of justice to set aside this issue to the file of the Assessing Officer with a direction to consider the assessee's claim for exemption under Section 10(23G) on its merits on the basis of the certificates that it may now produce in respect of the addition that was sustained by the learned CIT(A). If the assessee, for any reason, is not able to produce such certificates when the Assessing Officer is giving effect to, the Assessing Officer is free to confirm the addition to t....
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....e Bank of India vide their letter dated 29.6.2004 permitted the bank to transfer Rs.387.07 crore lying in the Blocked account comprising credit IBR entries, to General Reserves/Float Provision towards non-performing assets. In terms of Reserve Bank of India approval a sum of Rs.387.07 crore was first credited to Miscellaneous Income in the Profit and Loss account and thereafter appropriated towards 'Statutory Reserve (Rs.96.77 crore) and 'Revenue and Other Reserves' (Rs.290.30 crores). The aforesaid credit entries depict basically a credit to the concerned branch for debit to be discharged by such branches later. The entry making office as well as the branch to which the credit is given are both the part of the same legal entity. The credit surplus relates to entries, mostly relating to moneys deposited in one branch for issuing drafts payable in another branch of the bank, which are not matched by the debit entries from the other branch. Even though reconciliation of the entries is done on regularly, such credit surplus arises mostly due to wrong accounting of the debit advice by the second branch or, in a few cases, non-encashment of drafts by the payees. The liability ....
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....has been decided that your bank may, as a special case, transfer the above amount of Rs.387.07 crore to 'General Reserve' subject to ensuring strict compliance with the following: (a) The amount of Rs.3887.07 crore should first be credited to Profit and Loss account and shown under item VII (miscellaneous income) under Schedule 14 (Other income). (b) Thereafter, it should be appropriate to the General Reserve to be utilized to meet future claim. Such appropriation should be 'below the line' (net of taxes, if any, and net of transfer to Statutory Reserve) as applicable to above amount. (c) Any claim in respect of these entries should be honoured by debit to the same head of Profit and Loss account viz. 'miscellaneous income' and an equivalent amount (net of tax benefit, if any, and not of consequent reduction in the transfer of Statutory Reserves) shall be transferred from General Reserves to the Profit and Loss Account. (d) Appropriate disclosures should be made in the 'Notes to Accounts' of the Balance Sheet. The disclosures should also contain information regarding the impact on the Profit and Loss Account. (e) As a safeguard, hon....
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....The bank is bound to entertain the claims made by the customers out of the said transfer to general reserve. The customer's money is, therefore, not barred by limitation since Reserve Bank of India has directed to honour the claim. (iii) The money transferred to general reserve account cannot be used for declaration of dividend, therefore, it is not the income as the bank does not have liberty to use the money in a manner it likes as its own income. It is only an accounting entry and not giving rise to any income taxable under the Act. 19. As regards the applicability of Section 41(1), it was stated that in order to include the same as income under Section 41(1), it has to be proved that an allowance of deduction has been made for that amount in any of the earlier assessment years. The burden of such proof lies on the Department which seeks to include the amount in assessee's income and that can be discharged by the production of material evidence by way of connected assessment records. Reliance was placed on the Hon'ble Delhi High Court decision in the case of Steel and General Mills Co.Ltd. vs. CIT - 96 ITR 438 (Delhi) and on the decision of Hon'ble Madhya Pra....
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....on should be 'below the line' (net of taxes if any, and net of transfer to Statutory Reserve) as applicable to above amount. Any claim in respect of these entries should be honoured by debit to the same head of PandL account viz. 'misc. income' and an equivalent amount (net of tax benefit, if any) and not of consequent reduction in the transfer of Statutory Reserves) shall be transferred from General Reserves to the PandL Account." It is obvious from the above circular that the RBI have directed the appellant to treat the amount of Rs.387.07 crore as Misc. income and required the bank to credit the amount to the PandL Account (Schedule 14 - 'Other Income'). The RBI have further directed that the amount should be appropriated to the General Reserve 'below the line' (net of taxes) to be utilized to meet any future claims. Not only this, the RBI have made it clear that any claims in respect of these entries should be honoured by debit to the same head of PandL Account, i.e. 'Misc. Income' and by transferring an equivalent amount from General Reserve to the PandL Account. After going through such unequivocal directions of the RBI, I do not see any reason for not tre....
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....account was held as income, though the amount was liable to be refunded to the purchasers; the Court held that as and when the amount was required to be refunded, same could be claimed by the assessee as deduction. Applying the principles laid down by the Hon'ble Apex Court to the facts of the appellant's case, I am of the considered view that the aforesaid amount of Rs.387.07 crore has to be treated as income and the appellant can claim deduction in respect of any amount refunded in future, following the RBI's directions in its own case and in terms of the Apex Court's decision. In view of the above cited decisions of the Hon'ble Punjab and Haryana High Court and Hon'ble Supreme Court, I do not see much merit in the contention of the appellant that Section 41(1) of the Act has no application in its case as no allowance or deduction was made in any earlier year's assessment. The amount in question in the case of the appellant is to be treated as income by virtue of Section 28 of the Act, as read in the light of the above cited Court's decisions. There is also no substance in the contention of the appellant that it is a case of passing mere book entries not resulting in an....
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....ischarged by such branch later. The entry making branch as well as the branch to which the credit was given on account of its having made payment for the draft were indeed both part of the same legal entity. The credit surplus related to the entries mostly concerning moneys deposited in one branch issuing drafts payable by another branch of the bank which entries remained unreciprocated and unadjusted. Even though the reconciliation of entries was done regularly, yet such credit surplus arose mainly due to wrong accounting of the debit advice by the second branch or, in a few cases due to non-encashment of the draft. These credit entries were such as were outstanding for several years and were at least five years old which had been got duly verified by a firm of Chartered Accountants. It was further contended that the liability to pay any unclaimed draft remained with the bank irrespective of the time-lag. The accounting for credit entries did not in any way imply that the bank could forego its liability for any unclaimed draft should any be presented at any point of time in future. Such terms had been stated by the Reserve Bank of India vide their letter dated 29th June, 2004, cop....
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....r relied upon the decision of the Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co.Ltd. (supra), wherein it was observed that it was a misconception to consider any flow of revenue out of transactions of sale by the head office to its branch as an income. 24. The learned counsel for the assessee further submitted that the Revenue authorities have misunderstood the transaction and reached an erroneous conclusion that the accounting entries resulted in the computation of taxable income in the hands of the assessee bank. The amounts were received by the bank in a fiduciary capacity and definitely not as a trading receipt. The learned counsel submitted that the receipt of money by the bank or its transfer through the bank's blocked accounts to the profit and loss account do not have attributes of any income. Inter branch adjustment entries cannot give rise to any income that would be assessed for tax. The giver and taker must be distinct and separate persons. Something has to flow to a person from outside before an income can be said to arise. There must be essentially be two distinct and separate persons to cause the incident of income to arise. Reliance....
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....ongly supported the impugned addition. He strongly argued that the Assessing Officer as well as the learned CIT(A) have elaborately dealt with the issue, and the assessee's failure, to give the exact details of entries made which resulted into crediting of miscellaneous income of Rs.387.07 crores and the assessee's plea that they are inter branch transactions not resulting in income, should not be accepted on the face of it. The undisputed fact which must be appreciated is that the amounts in question have been credited as income to the profit and loss account. The onus, the learned DR strongly emphasized, is entirely on the assessee to prove if the said credits are not taxable. It is under obligation to furnish the facts in entirety. The same have not been produced before any of the authorities including the Tribunal. The learned DR strongly argued that appreciation of correct facts is sine qua non for adjudication of any issue. Application of law without understanding the basic facts may lead to grave miscarriage of justice. The learned DR has filed written submissions in this regard. He contended that it is the Revenue's primary contention that the money was actually received by....
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....ount. (e) As a safeguard, honouring of any future claim exceeding Rs.one lakh in respect of these entries should be permitted only with the authorization of two officials, one of whom should be from outside the branch concerned, preferably from the controlling office/head office. (f) This amount will not be available for declaration of dividend." 28. The above letter was issued based on the request by the bank vide its letter dated 19th December, 2003 written by the bank. The bank's letter in this regard which was directed to be filed by us is on record, which reads as under:- Dated: December 19, 2003 "Chief General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, Centre 1, Cuffe Parade, Colaba, Mumbai - 400 005. Dear Sir, Blocked Account of Credit Entries outstanding for more than Seven years in Inter Branch Account In terms of RBI letter dated 27.7.98, the banks were required to segregate the credit entries outstanding for more than five years in the Inter Branch Account and transfer them to a separate Blocked Account and show them under 'Other Liabilities an....
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....nt. On the above lines, we have obtained expert opinion of Chartered Accountants M/s A.Sharma and Co., Law Division of our bank, Shri R.Ganeshan, Chartered Accountant, Shri Subash Mann, Tax Consultant of the Bank and from an independent advocate of the Supreme Court M/s K.L.Mehta and Co. We have also obtained the opinion of Shri Kanwarjit Singh, Retd. Commissioner, Income Tax on the above matter. Based on opinions received as above, the matter was placed first before the Audit Committee of the Board and then before the Board of Directors for seeking approval for recommending the matter to Reserve Bank of India, for transferring the amount of Rs.387.07 crore lying in the Blocked Account to General Reserve and retaining the amount of Rs.25.00 crore in the Blocked Account (to be utilized for any further claims). The amount of Rs.387.07 crore will be first credited to the Profit and Loss Appropriation account forming part of the Profit and Loss Account and from there it will be transferred to General Reserve. The Board of the Bank in its meeting held on 15.12.2003 at New Delhi, has approved the same. In view of the foregoing, it is requested that the Bank ....
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.... of the financial statements of a bank just to ensure the uniformity in the accounting treatment by all the banks in the banking system of the country. 31. The assessee being a public sector bank, all its transactions are under the scrutiny of the RBI and to some extent, even the accounting entries have to follow circulars and guidelines issued by the RBI from time to time. In fact, the accounts and transactions of the bank are always subject to the inspection by the Reserve Bank of India. It is clear from the circulars extracted above and there is no dispute as regards these matters. In terms of the instructions issued way back on 28th February, 1991, the bank is required to show the net balance in inter-branch accounts and under 'Other Liabilities and Provisions' (Schedule 5) when in credit and under 'Other Assets' (Schedule 11) when in debit. The Reserve Bank of India, in the course of its inspection of the banks, has found that large transactions remained to be reconciled in the inter-branch accounts which was a cause for serious concern. It is in this background that the Reserve Bank of India has directed the banks to first segregate the credit entries outstanding fo....
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....ing transactions in its inter branch accounts although at the time of consolidation of the bank accounts, all these accounts should have been squared up by the accounting process of consolidation. Unfortunately, this was not done and the Reserve Bank of India was aware of all these imbalances in the reconciliation of the inter branch transactions. None of these transactions, as we see from the records presented before us and the information available with us, show that the involved transactions have revenue implications by nature which could spring the income subject to assessment under the Income-tax Act. To put it straight, they were not on the revenue account but they were more in the nature of the inter branch transactions. In a bank of the size of the Punjab National Bank, when the accounting was done manually earlier, all these differences have cropped up and the management was not able to reconcile these balances. In the inter account branch transactions, in none of the proposals made by the bank or the assessment made by the Reserve Bank of India, it is discernible that these entries or differences have any implications on the revenue transactions of the bank. Therefore, th....
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....ature. In our view, the decision of the Hon'ble Apex Court in the case of Sir Kikabhai Premchand vs. CIT - 24 ITR 506 and Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co.Ltd. vs. CIT - 116 ITR 425 are clearly in favour of the assessee. The accounting entries, which according to the Revenue, yield the income are in the inter branch accounts of the bank. It cannot be said that transactions between the branch can result in an income to the bank as a whole. No man can make profit to himself by the transactions with the self. Each branch of the bank is the assessee itself. So, the transactions between different branches cannot, in our view, give rise to generation of income which can attract the said transactions to tax. 33. The facts of the case of the assessee are exactly similar to the facts before the Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. (supra). In that case, it was held that the transaction between the head office of the assessee and its branch in India was a transaction between the principal and principal. In law, there cannot be a valid transaction of sale between the branch and its head office. As it is ulti....
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.... in different inter branch accounts and the bank has admittedly not reconciled these accounts for over a long period of time. It is very difficult to say that these have traces of income either at the time of receipt or at the time of write off to the profit and loss account. In fact, the Reserve Bank of India has permitted them to close these differences to the profit and loss account with a rider that the sums in question are not permitted by the Reserve Bank of India to be used in the form of distribution of dividends and it was specifically made clear by the Reserve Bank of India that the obligation to discharge the liabilities arising thereunder is upon the bank. Meaning thereby, there is no question of the amounts being treated as income in the hands of the bank. We must appreciate that these transactions in the inter branch accounts are mere accounting entries. When the transactions were made to these accounts initially, these were not in the nature of income either of the branches involved or of the bank as a whole. It is a part of transactions on the real accounts and not on what is known as revenue accounts. Therefore, it is difficult to say that the amounts in question b....
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....ch, 2005 is to the tune of Rs.10,135.53 crores and the total expenditure is Rs.8,725.41 crores. The amounts in question are insignificant and the accounting concept of materiality should be kept in mind. The accounting entries made are subject to audit and no specific quantification has been made in respect of these debits to the profit and loss account. The CIT(A) further found that the assessee has produced all the details before the Assessing Officer to show that the expenditure under different heads got crystallized during the year under consideration. 37. We have heard both the sides and are unable to find any infirmity in the order of the learned CIT(A) on the disputed issue. Having regard to the insignificant nature of these claims, the Department should have accepted the audited accounts in all fairness. We agree with the learned CIT(A) that the principle of materiality and concept of consistency on the same issue deserve to be given relevance in the computation of income. We, therefore, concur with the findings of the CIT(A) and decline to interfere. 38. The next dispute relates to the disallowance made under Section 14A of the Income-tax Act. ....
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....llowed the principle laid down by the Apex Court in the case of UCO Bank - 240 ITR 355. In the light of the aforesaid binding decision of the Apex Court, we do not find any infirmity in the order of CIT(A). The same is confirmed. 44. The next dispute in the Revenue's appeal relates to deletion of an addition of Rs.102.83 crores made by the Assessing Officer on account of interest accrued but not due. 45. It was claimed by the assessee that the assessee was maintaining mercantile system of accounting and has to account for all incomes which have accrued. It reduced an amount of Rs.102.83 crores on account of interest accrued but not due. The assessee furnished all the details of interest accrued but not due. The assessee has consistently followed the practice of offering only interest income which was accrued. Interest accrued but not due was accounted in the books. Based on the opening balance and the closing balance, the sum in question is brought to an addition. It was submitted that when the assessee purchased the securities, the purchase price of the securities (excluding broken period interest) and broken period interest (i.e. interest at coupon rate for the period since....