AI Drafter 
TaxTMI 
TaxTMI 
2018 (5) TMI 1909
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....banking company and is carrying on the business of banking 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 shou....
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....ide the branch concerned preferably from the controlling office/Head Office. vii. The net amount credited to the Profit and Loss Account will not be available for declaration 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....
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....it is ultimately based on a proposition that no person can enter into contract with one self. Debiting or crediting one's account cannot alter the legal position. Applying the same principle as enunciated by the Hon'ble 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 ....
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....r the decision of the Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) or other decisions including the decision of Hon'ble Delhi High Court in the case of CIT Vs. Rajasthan Golden Transport Co.(P) Ltd. - 249 ITR 723 are applicable to 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 ....
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....d its branches. During the course of hearing, it was revealed to us that these were the transactions prior to computerization in the bank wherein each of the transactions were recorded in the books and was communicated through the internal advices by different branches of the bank to othere involved branches. The manual 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 don....
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....s income for the obligations on the part of the bank is not extinguished and Reserve bank of India has made it very clear that the assessee bank will be under obligation to discharge all the obligations arising therefrom. The assessee cannot be said to be making profit from transferring as though from one pocket to the other pocket when it had operated 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....
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....e assessable in the hands of the assessee. Here, in this case, the facts are slightly different. The amounts are lying in the accounts which are known as inter branch accounts. It is expected that all these inter branch accounts should get squared up on consolidation. Due to human error of accounting or lack of proper advise from different branches, the amounts 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 t....
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.... assessee it should not have been credited to its P&L A/c. Further, it needs to be clarified here that as per the RBI guidelines it is very clear that all the unreconciled credit entries should first be credited to the P&L A/C as miscellaneous income which should further be transferred to the General Reserve and if any claim out of these entries is made subsequently it must be honoured by debiting the same 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 treat....
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....ted to the P&L A/c which were originated upto 31.3.1999 how much amount was paid after 31.3.2006. In response to this query the banker has informed that in the F.Y. 2006-07 they have paid Rs. 7,46,655/-, in F.Y.2007-08 they have paid Rs. 10,09,145/- and in F.Y.2008-09 upto 12.11.2008 they have paid Rs. 20,58,600/- and to sum up after 31.3.2006 and till 12.11.2008 the total payment was made at Rs. 38,14,400/- out of the aforesaid 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 sho....
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...., then the further question remains as to whether the amount such as above becomes the income of the assessee in its hand. That question no more remains res Integra. The Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. MANU/SC/1251/1996 : [1996]222ITR344(SC) has concluded this question as also the claim of the assessee that these amounts which were in the nature of deposits or credits did not change their character and could not be said to be an 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 transactio....
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....the amounts to its profit and loss account because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its profit and loss account. The Commissioner of Income Tax (Appeal) held that these amounts were not revenue receipts but were of capital nature. Provisions of Section 41(1) were not attracted in the facts of this case because the assessee's liability to pay back the amounts to its customers had not 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 tr....
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....sistant Commissioner of Income Tax, ITA NO. 267/2017, RHC :- 10. The question arises because of amendment which has come into force w.e.f. 1.4.2006 prior to that the income of the Cooperative society was totally exempted, therefore, question of keeping it in reserve fund would not make any difference. The contention of Mr. Pathak that in view of the decision of State Bank of Patiala (supra), an entry should have been made prior to 2006 is supported by the observations made by the AO which reads as under:- i. Statutory reserve of Rs. 80,99,16,594.12/- as on 1.4.2006 has increase to Rs. 82,41,83,630.49/-. The increase in the amount of statutory reserve is contributed by transferred of Rs. 1,18,99,651/- from carried forward provisions written back in the relevant financial year by transferring the said amount to the statutory reserve account. 11. His further contention that for different assessment years 2003-04, 2004-05, 2005-06 & 2006-07, the entries could not have been made as on 31.3.2006 and the same has been made for the A.Y. 2007-08. In that view of the matter, we are of the opinion that case is covered by provisions of Section 41(1) of the Act as reproduced h....