TMI Blog2012 (5) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... nter branch transaction blocked accounts to reserves through the medium of profit and loss account. - held that:- the disputed amounts were part of inter branch transactions and there was a mismatch of the transactions between different branches of the same bank and it was not reconciled and these are all carried forward from so many years from the bank and its branches. - 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. 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. When that primary requirement is absent, the question of bringing the sums in question to tax under Section 41(1) may not be legally permissible to the Revenue. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv) Cochin International Airport (xlv) Hardwar Dev. Authority (xlvi) GVK Jaipur Krishangarh Exp. Highway. 4. It was stated by the Assessing Officer that CBDT has approved the following projects as Infrastructure Projects within the meaning of Section 10(23G):- (i) NTPC Ltd. (ii) Malana Power Co.Ltd. (iii) Jas Toll Road Co.Ltd. (iv) RS Infrastructure Ltd. (v) Aban Power Co.Ltd. (vi) PPN Power Generating Co. (vii) GMR Tambaram Expressways Pvt.Ltd. (viii) GMR Tuni Anakapalli Expressways Pvt.Ltd. (ix) Suwarna Tollways Pvt.Ltd. (x) Tata Teleservices Ltd. (xi) Tata Teleservices (Maharashtra) Ltd. (xii) J.P. Hydro Power Ltd. (xiii) GVK Jaipur Kishangarh Exp. Highway. 5. The copies of notification relating to the abovementioned projects were filed before the Assessing Officer. 6. It was noted by the Assessing Officer that the total interest was to the extent of Rs.146,33,70,763/-. The notification granting the approval by the CBDT in respect of the other projects which involved the interest of Rs.109,56,32,636/- was not produced before the Assessing Officer Hence, the Assessing Officer made the addition. 7. Before the learned CIT(A), certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cost price of securities held in HTM (Held Till Maturity) category as business income as also the issue relating to the claim for deduction in respect of expenditure of Rs.302,75,00,000/- on account of wage revision, which was taken before the learned CIT(A) as an additional ground, as also the issue relating to the direction of the CIT(A) to the Assessing Officer for verifying the claim of TDS certificates amounting to Rs.66,47,244/- were not pressed by the assessee. Therefore, the order of the CIT(A) on these issues is to be treated as confirmed. 12. The main ground that survives in the assessee's appeal relates to the action of the learned CIT(A) in confirming the addition made by the Assessing Officer in respect of amount of Rs.387,07,00,000/- being the amount transferred from inter branch transaction blocked accounts to reserves through the medium of profit and loss account. 13. The facts relevant to this issue, as discussed by the Assessing Officer, are that the assessee bank had reduced an amount of Rs.387.07 crores from its computation of income in respect of blocked accounts. Vide questionnaire dated 14th March, 2006, the assessee was asked to justify its claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of any sum is whether it was income of the assessee in the year of receipt. This is certainly not the case. As stated earlier the credit balance is primarily due to inefficient accounting of debits against corresponding credits. By no stretch of imagination can such surplus be treated as income of the Bank. Only a fraction of this amount may relate to un- cashed drafts. Here again, the moneys received for transfer from one branch to another are not part Bank's 'revenue'. The bank renders service of transfer of funds from one place to another, for a commissions. It is this commission which is the 'revenue' of the Bank and is duly reflected in the profit and loss account. The amounts received for transfer were never the 'property' of the Bank, which merely acted as carrier for transferring these from one branch to another branch for being paid to the payer or any other person, as per the desire of the payer, for a commission. The Bank is always under obligation to refund any amount on account of un-cashed drafts, if a claimed is filed with supporting documents at any time. Such claims, howsoever small, are being entertained every year. It appears that the credit balance i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available for declaration of dividend." 15. The Assessing Officer was of the view that the two case laws cited by the assessee bank do not fit into the facts of the assessee and the assessee's reliance based upon the case laws relied upon was held to be not acceptable. The assessee's bank was directed by the Reserve Bank of India to credit the sum in question to the profit and loss account as miscellaneous income of the bank, which it has credited as its income in the profit and loss account and has appropriated to its general reserve, although below the line of the profit and loss account. The Assessing Officer, therefore, came to a view that the assessee had initially treated the sum in question as income but later reduced the same from the computation of taxable income. According to the Assessing Officer, the facts in the case of the assessee bank are directly covered in favour of the Revenue by the decision of the Hon'ble Supreme Court in the case of T.V.Sundaram Iyengar and Sons Limited - 222 ITR 344. 16. In addition, the Assessing Officer relied upon the following decisions:- (i) CIT vs. Rajasthan Golden Transport Co. (P) Ltd. - (2001) 249 ITR 723 (Del). (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, for which, reliance was placed on the decision of Hon'ble Gujarat High Court in the case of CIT vs. Pranlal P.Doshi - 201 ITR 756 (Guj.). 20. The learned CIT(A), after considering the submissions of the assessee, has given the following findings:- "9.3 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 appellant bank reduced an amount of Rs.387.07 crore on account of Blocked Account in its computation of income. I find that the amount represented credit entries and the RBI had directed the appellant to credit the same to the PandL Account as miscellaneous income. The appellant bank also treated the same as income in its profit and loss account and appropriated the same to its General Reserve 'below the line'. The appellant had initially treated the same as its income but later reduced it from its computation of income. I see merit in the view of the AO that in the present case, although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the appellant's own money. What remains after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking payment of any claims that may arise in future. At this juncture, I would like to refer to a recent decision of the Hon'ble High Court of Punjab and Haryana in the case of CIT vs. Modern Farm Services [(2007) 159 Taxman, 96]; the relevant observations of the Court are as under:- "A reference to section 41 shows that the amount representing trading liability is deemed to be profits and gains of the business, if during the year there is surplus of the amount received. Merely because the amount, when received, was not income, would not mean that the amount could not be treated as income later. The plea of the assessee in the instant case, that the amount had not been transferred to profit and loss account, did not make a difference on principle. If no liability accrued during the year, the amount could not be kept in suspense account. The same had to be treated as income. It is a different matter that if, at any time later, any expenditure is to be incurred on that amount, the same can be treated as permissible expenditure." In view of the above decision, as also other decisions relied upon by the AO, it cannot be said that the amount in the case of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the decisions relied upon by the appellant (supra), in relation to 'mere book entries', do not advance the case of the appellant for not treating the amount as income. On the other hand, the Revenue's case is further supported by the decisions in the following cases: (i) CIT vs. T.V.Sundaram Iyengar and Sons Ltd. (222 ITR 344)(SC). (ii) CIT vs. Rajasthan Golden Transport Co. (P) Ltd. (2001) 249 ITR 723 (Del). (iii) CIT vs. Aries Advertising (P) Ltd. (2002) 255 ITR 510 (Mad.). (iv) CIT vs. Sundaram Industries Ltd. (2002) 253 ITR 396 (Mad.). (v) CIT vs. Karam Chand Thapar and Ors. (222 ITR 112). On overall consideration of the facts of the case, in the light of the legal position as discussed herein above, I am of the considered view that the ASSESSING OFFICER has rightly treated the amount of Rs.387.07 crore as income of the appellant. This ground of appeal is, accordingly, dismissed." 21. The assessee is aggrieved. 22. The learned counsel for the assessee reiterated the contentions that were taken before the authorities including the submissions filed before the Assessing Officer on 17.3.2006 in which the assessee has explained the factual background nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to identify and pair the entries that the contingency to pass the mopping up entries as per RBI permission arose. There was nothing which came to the bank from outside and which had any flavour of income. The learned counsel contended that the credit balance was primarily due to the mismatch of the debit against relevant credit due to efflux of time. The negative entries continued to remain with the branches. The positive entries were a constant reminder of the payment obligation. Secondly, by no stretch of imagination, such transfers could be treated as bank's income. The moneys received for transfer by one branch to another branch qua a draft was not part of bank's revenue. The bank rendered the service of transferring funds from one place to another for a commission. It was only commission that was part of the bank's revenue which already stood reflected in the profit and loss account. The amount received for transfer through a draft was never the property of the bank. The bank merely acted as a carrier for transferring the relevant funds from one branch to another branch and there is always a suggesting obligation to refund the amount whenever the same are presented for encash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T - 157 ITR 67. (iv) Punjab Distilling Industries Ltd. vs. CIT - 35 ITR 519. 25. The learned counsel for the assessee further argued that there is no question of applying the provisions of Section 41(1) of the Act in the given context. The pre-requisite for such an application is conspicuous by its blatant absence. The entries in question which are proposed to be considered as income are never allowed or deducted while computing the income for any assessment year. The entries in question do not represent a loss or expenditure or a trading liability. The entries, the learned counsel strongly contended, are based on a fiduciary liability, which liability has duly been discharged on capital account. The mandate of the Reserve Bank of India in relation to these transactions is clear and has not been properly appreciated by the tax authorities. The mandate clearly ordains and recognizes the bank's obligation to pay any unpaid draft and would remain sacrosanct for all times to come and further, the surplus erupting out of such credits could never be utilized for payments of dividend by the assessee bank. These directions in the mandate of the RBI clearly show that the RBI never inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars issued by the Reserve Bank of India in this regard. The impugned amount is stated to be credited to the profit and loss account on the basis of the Reserve Bank of India Circular to the assessee dated 29th June, 2004, which reads as under:- "Blocked Account of Credit entries outstanding for more than five years in the Inter-branch account Please refer to your letter dated December 19, 2003 requesting that your bank may be permitted to transfer Rs.387.07 crore lying in the blocked account, comprising of outstanding credit entries originated up to September 30, 1996 in the inter-branch account, to 'General Reserves'. 2. We have examined your request and it has been decided that your bank may, as a special case, transfer the above amount of Rs.387.07 crore to 'General Reserves' subject to ensuring strict compliance with the following: (a) The amount of Rs.387.07 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 appropriated to the General Reserve to be utilized to meet future claims. Such appropriation should be 'below the line' (net of taxes, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sheet. The position of balance outstanding and movement therein year wise in the Blocked Account is as under O/s. as on Upto 31.03.1995 01.04.1995 to 31.03.1996 01.04.1996 to 30.09.1996 Credit Debit Credit Debit Credit Debit 31.03.2000 413.55 -- -- -- -- -- 31.03.2001 -- 21.44 14.68 -- -- -- 31.03.2002 -- 15.73 -- 0.18 23.38 -- 31.03.2003 -- 1.69 -- 0.38 -- 0.12 Total 413.55 38.86 14.68 0.56 23.38 0.12 Net Outstanding 374.69 14.12 23.26 Balance outstanding in Blocked account for more than 7 years is Rs.412.07 crore. Out bank vide letter dated 7th June, 2003 had taken up with RBI seeking permission to transfer the amount lying in Blocked Account, comprising of entries for which no details are available with the Bank upto 30.09.1996, to General Reserves/Float Provision towards Non Performing assets. With referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "July 27, 1998 Shravana 5, 1920 (S) All Commercial Banks (Excluding RRBs) Dear Sir, Inter-branch Accounts - Old outstanding credit entries In terms of instructions contained in our circular DBOD.No.BP.BC.91/C.686-91 dated February 28, 1991 banks are required to show net balance in Inter-branch Account under 'Other Liabilities and Provisions' (Schedule 5) when in credit and under 'Other Assets' (Schedule 11) when in debit. It has been observed that some banks have ........................ in the reconciliation of Inter-branch Accounts which is a cause for serious concern. The matter was examined in detail recently and it has been decided that banks should first segregate the credit entries outstanding for more than five years in Inter Branch Account and transfer them to a separate Blocked Account and show it under 'Other Liabilities and Provisions - Others' (Schedule 5) in the Balance Sheet. While arriving at the net amount of Inter-branch transactions for inclusion under Schedule 5 or as the case may be, the aggregate amount of Blocked Account should be excluded and only the amount representing the remaining credit entries should be netted against debit entries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uance of the above directions contained in the Circular dated 28th February, 1991 and 27th July, 1998, the assessee bank has undertaken its exercise as is clear from its letter dated 19th December, 2003 to the Reserve Bank of India. The assessee has explained the balance outstanding and movement therein year-wise in the blocked accounts as is clear from the letter extracted earlier. While seeking permission to transfer the amount lying in the blocked account, the legal opinion and the opinion of the Chartered Accountant were obtained including the opinion of Shri Kanwarjit Singh, retired Commissioner of Income Tax on the subject issue. Based on the above opinions, the audit committee of the Board and the Board of Directors of the bank sought approval of the Reserve Bank of India for transfer of Rs.387.07 crores lying in the blocked account to the general account and retaining the amount of Rs.25 crores in the blocked account to be utilized for further claims. The Reserve Bank of India permitted the transfer of Rs.387.07 crores to general reserve account subject to the conditions Vide its letter dated 29.6.2004 (supra). 32. A careful reading of the various instructions issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealt with by the different branches. It is difficult to say that these unreconciled inter branch transactions should be automatically be treated as income of the bank arising in the course of its business activity. It is nobody's case that these transactions arose out of revenue transactions of any of the branches involved. These are mainly inter branch transactions which remained unreconciled. In a way as the bank has pleaded, it is a transaction of its own money with different branches. The Reserve Bank of India, while giving permission to close these inter branch differences, has clearly stipulated that the amount so transferred shall not be treated as available for distribution of dividends, meaning thereby the Reserve Bank of India has not permitted the bank to treat it as an income once and for all and it has always stipulated certain conditions and prescribed certain procedures and formalities to safeguard the interest of the bank as a whole but that does not take away the basic nature of the amounts in question. It cannot in any way convert the transactions of this nature as revenue transactions of the bank necessitating the same to be treated as income on the revenue acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lways 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 and 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 and loss account. 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 or contractual rights. The amounts had the character of income and therefore, assessable to tax. The Hon'ble Supreme Court held that although the amounts received originally were not in the nature of an income, the amounts remained with the assessee for a long period unclaimed by the trade parties. By the lapse of time, the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 receipt 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) may not be legally permissible to the Revenue. In the light of the discussions above, we do not agree with the stand of the Department that the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and out of these funds, Rs.2505.86 crores had been invested to acquire tax free bonds and securities. The assessee contended that the expenditure in relation to income must have a direct connection with the transaction of purchases of exempted assets and there is no such relation with reference to the income which is exempt and no such expenditure can be attributable to this income. The Assessing Officer, however, did not agree with the contention of the assessee based on his own order for the AY 2004-05 and the disallowance was made notwithstanding the fact that such amount was deleted by the CIT(A) on the reasoning that the said order of the CIT(A) was contested in appeal before the ITAT. The Assessing Officer arrived at a proportionate expenditure as attributable to the earning of the exempt income in the same manner as the exempt income bears to the total income. Before the CIT(A), the order of the ITAT for AY 1999-2000 on an identical issue was available. The disallowance made by the Assessing Officer to the tune of Rs.111.34 crores was not upheld in the light of the order of the ITAT. The matter was restored to him for verification of the expenditure as was done by the ITAT. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the issue of Broken Period Interest has been decided in favour of the assessee by Hon'ble ITAT vide its order dated 24.02.2006 for AY 1995-96 in the case of Punjab and Sind Bank. The issue of Broken Period Interest has also been considered by the Hon'ble Bombay High Court and the same has been allowed as revenue expenditure in the case of American Express International Banking Corporation vs. CIT [258 ITR 601 (2002)] = (2003-TII-85-HC-MUM-INTL). Further, in the case of Union Bank of India also, the issue of Broken Period Interest has been allowed as revenue expenditure by the Hon'ble Bombay High Court. Against this, the Department filed an SLP before Hon'ble Supreme Court which has been dismissed by the Hon'ble Supreme Court [268 ITR 216A(2004)]. In view of the above legal position, this ground of appeal is decided in favour of the appellant who gets a relief of Rs.102.83 crore." 46. The above findings of the CIT(A) are based on the decision of the Hon'ble Kerala High Court in the case of CIT vs. Nedungadi Bank Ltd. - 264 ITR 545 and also the decision of the Hon'ble Bombay High Court in the case of American Express International Banking Corporation vs. CIT - 258 ITR 601 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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