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TMI Blog2012 (5) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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) Tata Tele Services (Maharashtra) Ltd. (xxxvii) Gujarat Pipavav Port Ltd. (xxxviii) JMC Brite Infra Bharat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 that extent. This issue is, therefore, to be treated as allowed for statistical purposes. 11. The next ground in the assessee's appeal relates to confirmation of the action of the Assessing Officer in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets. 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 to pay any unclaimed drafts etc. remains with the bank irrespective of the time lag. The accounting of the credit balance as mentioned earlier does not in any way imply that the bank can forego its liability for any uncl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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, honouring of any future claim exceedings Rs.One lakh in respect of these entries should be permitted only with the authorization of two officials, one of whom should be permitted only with the authorization of two officials, one of whom shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred 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 Pradesh High Court in the case of CIT vs. Nathuabhai Desabhai - 130 ITR 238 (MP). The assessee further contended that the anterior pre-conditional facts cannot be presumed. They have to be proved as any other fact from the evidence on record. In that view of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 treating the said amount of Rs.387.07 crore as the Misc. Income of the appellant. In this view of the matter, I do not see much merit in the submission of the appellant that the amount should not be treated as having become the appellant's own money since the claims are not ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts 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 any income to the appellant bank. As would be seen from the facts of the case, the money amounting to Rs.387.07 crore has actually been received by the bank and since the same has remained unclaimed by the customers over a period of time, the RBI directed it to treat the same as Misc. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uing 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, copy of which is at pages 28 to 32. 23. The learned counsel further contended that RBI had additionally provided that the amount in question should never be utilized for the payment of any dividend by the bank. The learned counsel submitted that the amounts in question cannot be construed as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel 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 was placed on the decisions of the Apex Court in the case of CIT vs. Shoorji Vallbhadas and Co. - 46 ITR 144, Godhra Electricity Co.Ltd. vs. CIT - 225 ITR 746 and CIT vs. Chamanlal Mangaldas and Co. - 39 ITR 14, to the proposition that mere accounting entries cannot be decisive or conclusive of the taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lea 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 the bank in the past and with the efflux of time, these monies received earlier became no longer payable and attained the nature of income. This contention of the Revenue is based on the decision of the Apex Court in the case of T.V.Sundaram Iyengar and Sons Limited cited supra. The amounts in dispute have been cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 and Provisions - Others' (Schedule 5) in the Balance Sheet. While arriving at the net amount of inter branch transactions, the aggregate amount of Blocked Account should be excluded and only the amount representing the remaining credit entries should be netted against debit entries. As per RBI guidelines, the Bank worked out a sum of Rs.413.55 crore as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 may be permitted to transfer Rs.387.07 crore, being the amount outstanding under Blocked Account (after retaining Rs.25 crore to meet future claims) as at 30.9.1996, for which no details of entries are available with the bank, to General Reserves as outlined above." 29. The letter of the bank dated 19th December, 2003 has a reference to the RBI letter dated 27th July, 1998 in respect of the impugned subject which may be relevant for our appreciation and is reproduced hereunder:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for more than five years in the inter-branch accounts and transfer them to a separate account called 'blocked accounts' and show them under 'other liabilities' in the balance sheet. The balance in the blocked account will be reckoned for the purpose of maintenance of CRR and SLR. Any adjustment from the blocked account should be permitted only with the authorization of two officials, one of whom should be outside the branch concerned, preferably from the controlling/head office if the amount exceeds Rupee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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, there is an absolute absence of any flavour of income either in the receipt or in the payment or accounting transactions in what is known as inter branch transactions. It is just like the money of the bank as though under circulation between different branches. Over the years, the differences have been carried forward and have become significant and material figures. But the basic character remains the same that it has no character of income in any of these transactions either when the transaction arose for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf 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 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 bear the same character as unclaimed deposit received from the customers by the assessee T.V.Sundaram Iyengar and Sons Ltd. 34. In the light of the discussions of these facts, it is difficult to say that either the decision of the Apex Court in the case of T.V.Sundaram Iyengar and 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'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allized 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. 39. The following incomes have been claimed as exempt in the computation of income:- Income from Tax Free Bonds 456343390/- Income from Infrastructure Projects 1463370763/- Dividend Shares and Investment 283830265/- Dividend Subsidiaries 185524000/- 40. The assessee deducted a sum of Rs.10,31,698/- as expenses attributable to earning of such incomes in terms of Section 14A of the Act. It was explained by the bank that it had Rs.16,266 crores non- interest bearing funds available with them and out of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the last coupon date of the security till date of purchase) is paid to the seller. The CIT(A) examined the method of accounting followed by the assessee over a period of time and has given the following finding:- "8.3 I have carefully considered the facts of the case and have gone through the order of the A.O. and the submissions made on behalf of the appellant. I find that the bank holds the investments as stock-in-trade on whose acquisition Broken Period interest is paid. It is such interest which is charged to the PandL Account. I fin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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