TaxTMI 
TaxTMI 
2018 (5) TMI 1909
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....anking and other allied activities in India under Banking Regulation Act, 1949 and has to abide itself by all the regulations and instructions being issued time to time by the Reserve Bank of India (hereinafter referred to as"the RBI" for brevity). 4. That the RBI vide its letter dated 19.12.2005, directed the assessee to transfer the net credit balance of unreconciled entries originated upto 31.03.1999 in the inter branch accounts to General Reserves subject to compliance amongst others with the following conditions: "i) The entries should have been originated upto 31st March, 1999. ii) The amount should first be credited to P&L Account. Iii) Thereafter, it should be appropriated to the General Reserve to be utilized to meet the future claim. iv) Any claim in respect of these entries should be honored by debit to the P&L account by transferring corresponding amount from general reserve. v) Complete record of all such entries should be maintained. vi) The net amount credited to the P&L Account will not be available for declaration of the dividend. vii) The bank should continue the efforts towards reconciliation of such entries." 5. Counsel for the appellant Mr. Sanj....
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....laration of dividend. viii) These entries will be dropped from the reporting system not be reported as outstanding entries in the quarterly reports to RBI. However, you should continue your efforts towards reconciliation of such entries. 3. Please advice the number of entries and amount transferred as above in due course. 4. In this connection, we reiterate the instructions contained in our circular DBOD No.BC.114/16.01.001/93 dated April 28, 1993 in terms of which banks are required to ensure that no entries are kept unadjusted for more than six months." 6. Pursuant to which resolution is made of the amount which was shown outstanding would be shifted to the Branch. He has pointed out that Tribunal has observed as under:- "Ld. Counsel for the assessee reiterated the submissions as made in the written submissions. Ld. Counsel submitted that the R.B.I. vide its letter dated 19/12/2005 directed the assessee to transfer the net credit balance of unreconciled entries originated upto 31.03.1999 in the inter branch accounts to General Reserves. The Assessing Officer treated the amount of Rs. 47,33,34,127/- as income of the assessee chargeable to tax. The ld. CIT(A) confirmed t....
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....Calcutta High Court, it cannot be said that the transactions between the branches gave rise to an income Assessable under the Income-tax Act. The substance of the entire transaction, in our view, appears to be pure accounting lapses on the part of the bank or its branches to properly reconcile the transactions. In fact, it is always understood that all these accounts must have cancelled each other. It did not take place that way due to human errors or lack of advice forthcoming as regards the closure of the accounts. In any case, any imbalance in the inter branch accounts, in our considered view, cannot give rise to a taxable income under the Income-tax Act. The Assessing Officer as well as CIT-DR has heavily relied upon the decision of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. - 222 ITR 344. In that case, the assessee received the deposits from customers in the course of its business and transferred the amounts which were not claimed by the customers to its profit & loss accounts. The Assessing Officer was of the view that the sums in question have become the income of the assessee because of the expiry of limitation period or other statutory....
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....o the facts of the case. In fact, the Hon'ble Delhi High Court in the case of Rajasthan Golden Transport Co.(P) Ltd. (supra) was concerned with the amounts received in the course of trade transactions. In the decision of the Hon'ble Delhi High Court, the amounts in question were held to be taxable under Section 41(1) of the Act. As regards the applicability of Section 41(1), we may again state that such provisions of Section 41(1) cannot be invoked to bring these amounts in question to be taxed as a part of the receipts in the aforesaid provision. The Revenue has to first establish that the sum in question which is now being brought to tax has once been allowed in the past as a deduction while computing the income of the bank. It is not the case of the Revenue or at least the Revenue has not brought any material to show that the sum in question forming part of the so-called inter branch transactions were once allowed by the Revenue as a deduction in the computation of profits and gains of business. When that primary requirement is absent, the question of bringing the sums in question to tax under Section 41(1) State Bank of Hyderabad, Hyderabad. May not be legally per....
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....al accounting has generated these outstanding transactions in its enter branch accounts although at the time of the conslidation of the bank accounts, all these accounts should have been squared up by the accounting process of the consolidation. Unfortunately, this was not done and the Reserve Bank of India was aware of all these imbalance in the reconcilation 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 ....
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....perated the inter branch accounts of this nature. In our view, the decision of the Hon'ble Apex Court in the case of Sir Kikabhai Premchand vs. CIT-24ITR506 and Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. vs. CIT-116ITR425 are clearly in favor of the assessee. The accounting entries, which acording to the revenue, yield the income are in the inter branch accoutns of the bank. It cannot be said that the 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 t....
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....unts in question have remained either in debit or credit 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 & loss account. In fact, the Reserve Bank of India has permitted them to close these differences to the profit & loss account with a rider that the sums in question are not permitted 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 acounts 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 bear the same character as unclaimed deposit received from the c....
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.... head of P&L A/C. In view of the above discussions it is held that sum of Rs.47,33,34,127 shown as capital receipt is treated as income and added to the total income of the assessee" 11. He has taken us to the finding recorded by CIT(A) which reads as under:- "7.3 I have considered facts of the case and arguments taken by Sh. Jhanwar and Sh. Parwal quite carefully. In my considered view the issue under consideration is farily covered by Hon'ble Supreme Court judgment in the case of CIT V/s T.V. Sundaram Jyangar & Sons Ltd. 222 ITR 344. After matching the facts of the present case vis-a-vis the aforesaid case decided by Hon'ble Supreme Court it is seen that in that case the appellant has received deposits in the course of its business which were originally treated as capital receipts and some of the deposits were neither claimed by nor returned to the depositor and there was no dispute that deposits were received in the course of the carrying on of the business of the assessee and the amount under consideration was not in the nature of security deposit held by the appellant for performance of contract by its constituents. When facts of the present case are compared then i....
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.... amount credited in the P&L A/c of the year at Rs. 47,33,34,127/- which is barely 0.80%. In this respect, it shall be appropriate to discuss the provisions of S.36(1)(vii) of I.T. Act which is in connection of amount written off as bad debts and the relevant provision specifies that if in the books of accounts it is debited as bad debts and written off as irrecoverable then it will be allowed as a deduction while computing total income. Though, this provision is not directly on this issue but it gives a rational that if on the debit to P&L A/c any specific debt is treated as bad debt and allowed as a deduction then as a corollary when there is unclaimed credit entries that too for a period of more than 7 years and these are credited to the P&L A/c why it should not be treated as income of appellant particularly when these were received during the course of normal trading operations of the banker and were not retained as security. Certainly, in a reasonable manner in the subsequent period whenever any amount out of the same is paid to the respective claimant it has to be allowed as a deduction sicne earlier at the time of credit to the P&L A/c it has been treated as inome of the a....
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....n income in the hands of the assessee. The Supreme Court, by majority, has answered the question that such amounts after they were treated to be profits, as has happened in this case, changed character and therefore could be held to be income particularly because the assessee had become richer by reason of such amount having been treated as a profit and further having been transferred to the general reserve. The apex court came to the following conclusion (headnote): "... that, if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its profit and loss account. The amounts were assessable in the hands of the asse....
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....t ceased. The Tribunal agreed with this view. 19. We fail to see how these deposits were in any way different from the deposits which came for consideration in the case of Punjab Distilling Industries Ltd. v. Commissioner of Income Tax, Simla MANU/SC/0066/1958 : [1959]35ITR519(SC) . The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no finding to that effect. The deposits were taken in course of the trade and adjustments were made against these deposits in course of trade. The unclaimed surplus retained by the assessee will be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its profit and loss account. 22. The principle laid down by Atkinson, J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by t....