Punjab National Bank, V. Addl. CIT Range 14,

ITA 2047/DEL/2007

• Counselvise Citation: 204720114 RSA 2007
• Duration Of Justice: 4 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 19-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 24-04-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Earning of tax free income; Period of limitation; Assessment record; Time period of passing order; Revenue expenditure
• Section: 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI DELHI BENCH F : NEW DELHI DELHI BENCH F : NEW DELHI DELHI BENCH F : NEW DELHI BEFORE SHRI G.E.VEERABHADRAPPA, BEFORE SHRI G.E.VEERABHADRAPPA, BEFORE SHRI G.E.VEERABHADRAPPA, BEFORE SHRI G.E.VEERABHADRAPPA, HONBLE HONBLE HONBLE HONBLE PRESIDENT AND PRESIDENT AND PRESIDENT AND PRESIDENT AND SHRI A.D.JAIN, SHRI A.D.JAIN, SHRI A.D.JAIN, SHRI A.D.JAIN, HONBLE HONBLE HONBLE HONBLE JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ITA NO. ITA NO. ITA NO. ITA NO.2047/DEL/2007 2047/DEL/2007 2047/DEL/2007 2047/DEL/2007 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR : : : : 2005 2005 2005 2005- -- -06 0606 06 M/S PUNJAB NATIONAL BANK, M/S PUNJAB NATIONAL BANK, M/S PUNJAB NATIONAL BANK, M/S PUNJAB NATIONAL BANK, HO ACCOUNTS & TAXA HO ACCOUNTS & TAXA HO ACCOUNTS & TAXA HO ACCOUNTS & TAXATION TION TION TION DEPARTMENT, DEPARTMENT, DEPARTMENT, DEPARTMENT, HO : 5, SANSAD MARG, HO : 5, SANSAD MARG, HO : 5, SANSAD MARG, HO : 5, SANSAD MARG, NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 001. 110 001. 110 001. 110 001. PAN : PAN : PAN : PAN : AAACP0165G. AAACP0165G. AAACP0165G. AAACP0165G. VS. VS. VS. VS. ADDITIONAL COMMISSIONER OF ADDITIONAL COMMISSIONER OF ADDITIONAL COMMISSIONER OF ADDITIONAL COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, RANGE RANGE RANGE RANGE- -- -14, 14, 14, 14, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (APPELLANT) (RESPONDENT) ITA NO. ITA NO. ITA NO. ITA NO.2873/DEL/2007 2873/DEL/2007 2873/DEL/2007 2873/DEL/2007 ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : 2005 2005 2005 2005- -- -06 0606 06 ADDITIONAL COMMISSIO ADDITIONAL COMMISSIO ADDITIONAL COMMISSIO ADDITIONAL COMMISSIONER OF NER OF NER OF NER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, RANGE RANGE RANGE RANGE- -- -14, 14, 14, 14, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. VS. VS. VS. VS. M/S PUNJAB NATIONAL BANK, M/S PUNJAB NATIONAL BANK, M/S PUNJAB NATIONAL BANK, M/S PUNJAB NATIONAL BANK, HO ACCOUNTS & TAXATION HO ACCOUNTS & TAXATION HO ACCOUNTS & TAXATION HO ACCOUNTS & TAXATION DEPARTMENT, DEPARTMENT, DEPARTMENT, DEPARTMENT, HO : 5, SANSAD MARG, HO : 5, SANSAD MARG, HO : 5, SANSAD MARG, HO : 5, SANSAD MARG, NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 001. 110 001. 110 001. 110 001. PAN : AAACP0165G. PAN : AAACP0165G. PAN : AAACP0165G. PAN : AAACP0165G. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.SAMPATH, ADVOCATE. REVENUE BY : SHRI SUDESH GARG, CIT-DR. ORDER ORDER ORDER ORDER PER G.E.VEERABHADRAPPA PER G.E.VEERABHADRAPPA PER G.E.VEERABHADRAPPA PER G.E.VEERABHADRAPPA : :: : THESE ARE CROSS-APPEALS ARISING OUT OF THE ORDER D ATED 8 TH MARCH, 2007 PASSED BY LEARNED COMMISSIONER OF INCOME-TAX ( APPEALS) FOR THE ASSESSMENT YEAR 2005-06 2. THE FIRST ISSUE RAISED IN THE ASSESSEES APPEAL IS THAT LEARNED CIT(A) WAS NOT JUSTIFIED IN NOT ALLOWING DEDUCTION OF AN AMOUNT OF ITA-2047 & 2873/DEL/2007 2 `93,31,76,485/- BEING INCOME FROM INFRASTRUCTURE PR OJECTS COVERED UNDER SECTION 10(23G) OF THE INCOME-TAX ACT, 1961. 3. IN THIS CASE, THE ASSESSEE IS A PUBLIC SECTOR SC HEDULED BANK AND EARNED INCOME OF `146,33,70,763/- BY WAY OF INTERES T FROM INFRASTRUCTURE BONDS ISSUED IN RESPECT OF THE FOLLO WING PROJECTS:- (I) NOIDA TOLL BRIDGE (II) NORTH KARNATAKA EXPRESSWAYS (III) SATLUJ JAL VIDYUT NIGAM (IV) JAIPEE DSC VENTURE (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. ITA-2047 & 2873/DEL/2007 3 (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 (XXXIX) ADANI PORTS LTD. (XL) GIPCL (XLI) AAP INFRASTRUCTURE (XLII) JP HYDRO POWER LTD. (XLIII) BSES KERALA POWER LTD. (XLIV) 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 W ITHIN THE MEANING OF SECTION 10(23G):- (I) NTPC LTD. (II) MALANA POWER CO.LTD. (III) JAS TOLL ROAD CO.LTD. (IV) RS INFRASTRUCTURE LTD. ITA-2047 & 2873/DEL/2007 4 (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 ABOVE MENTIONED PROJECTS WERE FILED BEFORE THE ASSESSING OFFICER. 6. IT WAS NOTED BY THE ASSESSING OFFICER THAT THE T OTAL INTEREST WAS TO THE EXTENT OF `146,33,70,763/-. THE NOTIFICATIO N GRANTING THE APPROVAL BY THE CBDT IN RESPECT OF THE OTHER PROJEC TS WHICH INVOLVED THE INTEREST OF `109,56,32,636/- WAS NOT PRODUCED B EFORE THE ASSESSING OFFICER HENCE, THE ASSESSING OFFICER MADE THE ADD ITION. 7. BEFORE THE LEARNED CIT(A), CERTAIN NEW NOTIFICAT IONS WERE FILED IN RESPECT OF THE FOLLOWING PROJECTS:- AMOUNT (RS.) NOTIFICATION NO. 1. KONA SEEMA EPS OAKWELL POWER LTD. 46,40,677 205/186/99-ITAII(VOL.1) 2. GUJRAT CHEMICAL PORTS LTD. 517,92,000 205/1 4/1998/ITA.II 3. M/S RELIANCE INFOCOM.LTD. 1040,29,207 194/1 06/2005-ITA I. 4. STCMS ELECT CO.PVT.LTD. 19,94,267 205/38/2 001-ITAII 8. THE LEARNED CIT(A) GAVE A RELIEF TO THE EXTENT OF ` 16,94,56,151/-. THE BALANCE ADDITION MADE BY THE ASSESSING OFFICER WAS UPHELD. 9. AGAINST THE ABOVE ORDER, THE ASSESSEE IS AGGRIEV ED. ITA-2047 & 2873/DEL/2007 5 10. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RE CORDS. THE ASSESSEES CLAIM FOR EXEMPTION UNDER SECTION 10(23G ) WAS BASED ON THE CERTIFICATES ISSUED BY THE ENTERPRISES TO WHOM THE MONEYS HAVE BEEN LENT. THOSE ENTERPRISES HAVE MADE APPLICATION S TO THE GOVERNMENT FOR CLAIMING EXEMPTION UNDER SECTION 10( 23G), WHICH THE GOVERNMENT HAD NOT DISPOSED OFF IN TIME. THAT IS W HY, EVEN BEFORE THE LEARNED CIT(A), CERTAIN NEW CERTIFICATES WERE FILED . LEARNED CIT(A), IN OUR VIEW, HAS RIGHTLY DIRECTED THE GRANTING OF EXEM PTION UNDER SECTION 10(23G) OF THE ACT IN RESPECT OF INTEREST ON SUCH B ONDS WHOSE CERTIFICATE OF EXEMPTION WAS FILED BEFORE HIM. THE ASSESSEE HAS NOW PLEADED BEFORE US THAT NEW CERTIFICATES HAVE ALSO B EEN 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 CE RTIFICATES. WE, THEREFORE, AFTER HAVING GONE THROUGH THESE SUBMISSI ONS AND MATERIAL PLACED ON RECORD, THINK IT FIT IN THE INTEREST OF J USTICE TO SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A D IRECTION TO CONSIDER THE ASSESSEES CLAIM FOR EXEMPTION UNDER SECTION 10(23G ) ON ITS MERITS ON THE BASIS OF THE CERTIFICATES THAT IT MAY NOW PRODU CE 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 CERTIFICATE S 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 ASSESSEES APPEAL RELATE S TO CONFIRMATION OF THE ACTION OF THE ASSESSING OFFICER IN TREATING THE DIFFERENCE OF `97,50,61,903/- BETWEEN THE SALE PRICE AND COST PRI CE OF SECURITIES HELD IN HTM (HELD TILL MATURITY) CATEGORY AS BUSINESS IN COME AS ALSO THE ISSUE RELATING TO THE CLAIM FOR DEDUCTION IN RESPEC T OF EXPENDITURE OF `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 ITA-2047 & 2873/DEL/2007 6 THE DIRECTION OF THE CIT(A) TO THE ASSESSING OFFICE R FOR VERIFYING THE CLAIM OF TDS CERTIFICATES AMOUNTING TO `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 ASSESSEES APPEAL RELATES TO THE ACTION OF THE LEARNED CIT(A) IN CONFIRMING T HE ADDITION MADE BY THE ASSESSING OFFICER IN RESPECT OF AMOUNT OF `387, 07,00,000/- BEING THE AMOUNT TRANSFERRED FROM INTER BRANCH TRANSACTIO N BLOCKED ACCOUNTS TO RESERVES THROUGH THE MEDIUM OF PROFIT & LOSS ACC OUNT. 13. THE FACTS RELEVANT TO THIS ISSUE, AS DISCUSSED BY THE ASSESSING OFFICER, ARE THAT THE ASSESSEE BANK HAD REDUCED AN AMOUNT OF `387.07 CRORES FROM ITS COMPUTATION OF INCOME IN RESPECT OF BLOCKED ACCOUNTS. VIDE QUESTIONNAIRE DATED 14 TH MARCH, 2006, THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM. VIDE ITS REPLY DATED 17.3.2006, THE ASSESSEE BANK CONTENDED MAINLY AS UNDER:- IN TERMS OF RESERVE BANK OF INDIA LETTER DATED 29. 06.2004 THE BANKS WERE REQUIRED TO SEGREGATE THE CREDIT ENT RIES OUTSTANDING FOR MORE THAN FIVE YEARS IN THE INTER B RANCH ACCOUNT AND TRANSFER THEM TO A SEPARATE BLOCKED ACC OUNT TO BE SHOWN UNDER THE HEAD OTHER LIABILITIES AND PROVISIONS OTHERS (SCHEDULE 5), IN THE BALANCE S HEET. WHILE ARRIVING AT THE NET AMOUNT OF INTER BRANCH TRANSACTIONS, THE AGGREGATE AMOUNT OF BLOCKED ACCOU NT WAS TO BE EXCLUDED AND ONLY THE REMAINING CREDIT EN TRIES NETTED AGAINST DEBIT ENTRIES. THE BANK WORKED OUT A SUM OF RS.413.55 CRORES AS THE AMOUNT OF CREDIT ENTRIES OUTSTANDING FOR MORE THAN 5 YEARS AND GOT THE SAME VERIFIED BY A FIRM OF CHARTERED ACCOUNTANTS. THIS AMOUNT HAS BEEN SHOWN SEPARATELY UNDER OTHER LIABILITIES OTHERS IN SCHEDULE 5 OF BALANCE SHEET. RESERVE BANK OF INDIA VIDE THEIR LETTER DATED 29.6. 2004 PERMITTED THE BANK TO TRANSFER RS.387.07 CRORE LYIN G IN THE BLOCKED ACCOUNT COMPRISING CREDIT IBR ENTRIES, TO G ENERAL RESERVES/FLOAT PROVISION TOWARDS NON-PERFORMING ASS ETS. ITA-2047 & 2873/DEL/2007 7 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 APPRO PRIATED TOWARDS STATUTORY RESERVE (RS.96.77 CRORE) AND RE VENUE AND OTHER RESERVES (RS.290.30 CRORES). THE AFORESAID CREDIT ENTRIES DEPICT BASICALLY A CRE DIT 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 PA RT OF THE SAME LEGAL ENTITY. THE CREDIT SURPLUS RELATES TO E NTRIES, MOSTLY RELATING TO MONEYS DEPOSITED IN ONE BRANCH F OR ISSUING DRAFTS PAYABLE IN ANOTHER BRANCH OF THE BAN K, 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 EARLI ER DOES NOT IN ANY WAY IMPLY THAT THE BANK CAN FOREGO ITS L IABILITY FOR ANY UNCLAIMED DRAFTS SHOULD ANY CLAIM BE FILE I N FUTURE. THE KEY ELEMENT IN DECIDING THE TAXABILITY OF ANY S UM IS WHETHER IT WAS INCOME OF THE ASSESSEE IN THE YEAR O F RECEIPT. THIS IS CERTAINLY NOT THE CASE. AS STATE D EARLIER THE CREDIT BALANCE IS PRIMARILY DUE TO INEFFICIENT ACCO UNTING OF DEBITS AGAINST CORRESPONDING CREDITS. BY NO STRETC H OF IMAGINATION CAN SUCH SURPLUS BE TREATED AS INCOME O F 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 BA NKS REVENUE. THE BANK RENDERS SERVICE OF TRANSFER OF FUNDS FROM ONE PLACE TO ANOTHER, FOR A COMMISSIONS. IT I S THIS COMMISSION WHICH IS THE REVENUE OF THE BANK AND I S DULY REFLECTED IN THE PROFIT AND LOSS ACCOUNT. THE AMOU NTS RECEIVED FOR TRANSFER WERE NEVER THE PROPERTY OF THE BANK, WHICH MERELY ACTED AS CARRIER FOR TRANSFERRING THES E 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 CLA IMED IS FILED WITH SUPPORTING DOCUMENTS AT ANY TIME. SUCH CLAIMS, HOWSOEVER SMALL, ARE BEING ENTERTAINED EVERY YEAR. ITA-2047 & 2873/DEL/2007 8 IT APPEARS THAT THE CREDIT BALANCE IS SOUGHT TO BE TAXED, ENTIRELY BECAUSE OF THE TRANSFER OF SURPLUS TO THE RESERVE ACCOUNTS THROUGH THE PROFIT AND LOSS ACCOUNT. IT I S SUBMITTED THAT THE ACCOUNTING TREATMENT DOES NOT DETERMINE THE TAXABILITY OF AN AMOUNT. WHEN THE CR EDIT BALANCE IN THE IBR WAS NOT INCOME AT ANY TIME OF BE ING RECEIPT AND HAS NEVER BECOME THE PROPERTY OF THE BA NK IT CAN NOT BE TAXED ONLY BECAUSE OF THE NATURE OF ACCO UNTING ADOPTED BY THE BANK. 14. THE ABOVE CONTENTIONS WERE PLEADED ON THE BASIS OF THE HON'BLE SUPREME COURT DECISION IN THE CASE OF SIR KIKABHAI PREM CHAND VS. CIT 24 ITR 506, AND THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF BETTS HARTLEY HUETT AND CO.LTD. VS. CIT 1 16 ITR 425. THE RELIANCE OF THE ASSESSEE BANK WAS ALSO ON A RESERVE BANK OF INDIA CIRCULAR DATED 29 TH JUNE, 2004, WHICH READ AS UNDER:- WE HAVE EXAMINED YOUR REQUEST AND IT HAS BEEN DECI DED THAT YOUR BANK MAY, AS A SPECIAL CASE, TRANSFER THE ABOVE AMOUNT OF RS.387.07 CRORE TO GENERAL RESERVE SUBJ ECT TO ENSURING STRICT COMPLIANCE WITH THE FOLLOWING: (A) THE AMOUNT OF RS.3887.07 CRORE SHOULD FIRST BE CREDITED TO PROFIT & LOSS ACCOUNT AND SHOWN UNDER I TEM VII (MISCELLANEOUS INCOME) UNDER SCHEDULE 14 (OTHER INC OME). (B) THEREAFTER, IT SHOULD BE APPROPRIATE TO THE GEN ERAL RESERVE TO BE UTILIZED TO MEET FUTURE CLAIM. SUCH APPROPRIATION SHOULD BE BELOW THE LINE (NET OF TA XES, IF ANY, AND NET OF TRANSFER TO STATUTORY RESERVE) AS A PPLICABLE TO ABOVE AMOUNT. (C) ANY CLAIM IN RESPECT OF THESE ENTRIES SHOULD BE HONOURED BY DEBIT TO THE SAME HEAD OF PROFIT AND LO SS ITA-2047 & 2873/DEL/2007 9 ACCOUNT VIZ. MISCELLANEOUS INCOME AND AN EQUIVALE NT AMOUNT (NET OF TAX BENEFIT, IF ANY, AND NOT OF CONS EQUENT REDUCTION IN THE TRANSFER OF STATUTORY RESERVES) SH ALL 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 TH E 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 OFF ICIALS, ONE OF WHOM 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 DECLARATI ON 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 FACT S OF THE ASSESSEE AND THE ASSESSEES RELIANCE BASED UPON THE CASE LAWS RE LIED UPON WAS HELD TO BE NOT ACCEPTABLE. THE ASSESSEES BANK WAS DIRE CTED BY THE RESERVE BANK OF INDIA TO CREDIT THE SUM IN QUESTION TO THE PROFIT & LOSS ACCOUNT AS MISCELLANEOUS INCOME OF THE BANK, WHICH IT HAS CREDITED AS ITS INCOME IN THE PROFIT & LOSS ACCOUNT AND HAS APP ROPRIATED TO ITS GENERAL RESERVE, ALTHOUGH BELOW THE LINE OF THE PRO FIT & LOSS ACCOUNT. THE ASSESSING OFFICER, THEREFORE, CAME TO A VIEW TH AT THE ASSESSEE HAD ITA-2047 & 2873/DEL/2007 10 INITIALLY TREATED THE SUM IN QUESTION AS INCOME BUT LATER REDUCED THE SAME FROM THE COMPUTATION OF TAXABLE INCOME. ACCOR DING TO THE ASSESSING OFFICER, THE FACTS IN THE CASE OF THE ASS ESSEE BANK ARE DIRECTLY COVERED IN FAVOUR OF THE REVENUE BY THE DE CISION OF THE HON'BLE SUPREME COURT IN THE CASE OF T.V.SUNDARAM I YENGAR 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) CIT VS. ARIES ADVERTISING PVT.LTD. (2002) 255 ITR 510 (MAD.). (III) CIT VS. SUNDARAM INDUSTRIES LTD. (2002) 253 ITR 3 96 (MAD.). 17. IN THE LIGHT OF THESE DISCUSSIONS, THE ASSESSIN G OFFICER WAS OF THE VIEW THAT SUCH ADJUSTMENT TO THE COMPUTATION OF INC OME IS NOT ALLOWABLE. HE REJECTED THE CLAIM FOR THE SAME AND BROUGHT AN ADDITION OF `387.07 CRORES TO THE DECLARED INCOME. 18. BEFORE THE LEARNED CIT(A), IT WAS CONTENDED :- (I) THE TRANSFER WAS PERMITTED BY THE RESERVE BANK OF I NDIA TO GENERAL RESERVE ALTHOUGH THE ROUTING WAS THROUGH PR OFIT & LOSS ACCOUNT. RESERVE BANK OF INDIA HAS VERY CLEAR LY SAID THAT THE AMOUNTS SO TRANSFERRED TO GENERAL RESERVE SHOULD BE UTILIZED TO MEET FUTURE CLAIMS. THEREFORE, IT D OES NOT BECOME BANKS OWN MONEY. ITA-2047 & 2873/DEL/2007 11 (II) THE BANK IS BOUND TO ENTERTAIN THE CLAIMS MADE BY T HE CUSTOMERS OUT OF THE SAID TRANSFER TO GENERAL RESER VE. THE CUSTOMERS MONEY IS, THEREFORE, NOT BARRED BY LIMIT ATION SINCE RESERVE BANK OF INDIA HAS DIRECTED TO HONOUR THE CLAIM. (III) THE MONEY TRANSFERRED TO GENERAL RESERVE ACCOUNT CA NNOT 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 4 1(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 ASSESSEES INCOME AND THAT CAN BE DISCHARGED BY THE PRODUCTION OF MATERIAL EVIDENCE BY WAY OF CONNECTED ASSESSMENT RECORDS. R ELIANCE WAS PLACED ON THE HON'BLE DELHI HIGH COURT DECISION IN THE CASE OF STEEL & GENERAL MILLS CO.LTD. VS. CIT 96 ITR 438 (DELHI) AND ON THE DECISION OF HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF CI T 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 RECOR D. IN THAT VIEW OF THE MATTER, UNLESS A CLEAR FINDING IS GIVEN THAT A PARTICULAR EXPENDITURE ETC. HAD BEEN ALLOWED IN AN EARLIER YEAR AS A DEDUC TION, THE PROVISIONS OF SECTION 41(1) CANNOT BE INVOKED, FOR WHICH, RELI ANCE WAS PLACED ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. PRANLAL P.DOSHI 201 ITR 756 (GUJ.). ITA-2047 & 2873/DEL/2007 12 20. THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE, HAS GIVEN THE FOLLOWING FINDINGS:- 9.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND HAVE GONE THROUGH THE ORDER OF THE A.O. AND THE SUBMISSIONS MADE ON BEHALF OF THE APPELLANT. I FIN D THAT THE APPELLANT BANK REDUCED AN AMOUNT OF RS.387.07 C RORE 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 TH E SAME TO THE P&L ACCOUNT AS MISCELLANEOUS INCOME. THE APPELLANT BANK ALSO TREATED THE SAME AS INCOME IN I TS PROFIT AND LOSS ACCOUNT AND APPROPRIATED THE SAME TO ITS G ENERAL RESERVE BELOW THE LINE. THE APPELLANT HAD INITIA LLY 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 A S DEPOSIT AND WAS OF CAPITAL NATURE AT THE POINT OF TIME IT W AS RECEIVED, BY EFFLUX OF TIME THE MONEY HAS BECOME TH E APPELLANTS OWN MONEY. WHAT REMAINS AFTER THE CUST OMERS HAVE CLAIMED THE ADJUSTMENT OF THE DEPOSITS HAS NOT BEEN CLAIMED BY THE CUSTOMERS. THE APPELLANT ITSELF HAS TREATED THE MONEY AS ITS OWN MONEY AND TAKEN THE AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THERE IS NO EXPLANATION A S TO WHY THE SURPLUS MONEY WAS TAKEN TO ITS PROFIT AND LOSS ACCOUNT IF IT WAS SOMEBODY ELSES MONEY. IN FACT, WHAT THE APPELLANT DID WAS THE COMMON-SENSE WAY OF DEALING W ITH THE AMOUNTS. I FIND THAT THE RBI DIRECTED THE APPE LLANT BANK AS UNDER: ITA-2047 & 2873/DEL/2007 13 THE AMOUNT OF RS.387.07 CRORES SHOULD BE FIRST CRE DITED TO P&L ACCOUNT AND SHOWN UNDER ITEM VII (MISC. INCOME) UNDER SCHEDULE 14 (OTHER INCOME). THEREAFTER, IT SHOULD BE APPROPRIATED TO THE GENERA L RESERVE TO BE UTILIZED TO MEET FUTURE CLAIM. SUCH APPROPRIATION SHOULD BE BELOW THE LINE (NET OF TA XES IF ANY, AND NET OF TRANSFER TO STATUTORY RESERVE) AS A PPLICABLE TO ABOVE AMOUNT. ANY CLAIM IN RESPECT OF THESE ENTRIES SHOULD BE HON OURED BY DEBIT TO THE SAME HEAD OF P&L ACCOUNT VIZ. MISC . INCOME AND AN EQUIVALENT AMOUNT (NET OF TAX BENEFI T, IF ANY) AND NOT OF CONSEQUENT REDUCTION IN THE TRANSFE R OF STATUTORY RESERVES) SHALL BE TRANSFERRED FROM GENER AL RESERVES TO THE P&L ACCOUNT. IT IS OBVIOUS FROM THE ABOVE CIRCULAR THAT THE RBI HAVE DIRECTED THE APPELLANT TO TREAT THE AMOUNT OF RS.38 7.07 CRORE AS MISC. INCOME AND REQUIRED THE BANK TO CRED IT THE AMOUNT TO THE P&L ACCOUNT (SCHEDULE 14 OTHER INC OME). THE RBI HAVE FURTHER DIRECTED THAT THE AMOUNT SHOUL D 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 P&L ACCOUNT, I.E. MISC. INCOME AND BY TRANSFERRING AN EQUIVALENT AMOUNT FROM GENERAL RESE RVE TO THE P&L ACCOUNT. AFTER GOING THROUGH SUCH UNEQUIVO CAL DIRECTIONS OF THE RBI, I DO NOT SEE ANY REASON FOR NOT TREATING THE SAID AMOUNT OF RS.387.07 CRORE AS THE MISC. ITA-2047 & 2873/DEL/2007 14 INCOME OF THE APPELLANT. IN THIS VIEW OF THE MATTE R, I DO NOT SEE MUCH MERIT IN THE SUBMISSION OF THE APPELLANT T HAT THE AMOUNT SHOULD NOT BE TREATED AS HAVING BECOME THE APPELLANTS OWN MONEY SINCE THE CLAIMS ARE NOT BARR ED BY LIMITATION. EVEN THOUGH THE CLAIMS BY THE CUSTOMER S MAY NOT HAVE TECHNICALLY BECOME BARRED BY LIMITATION, T HE IMPLEMENTATION OF THE RBIS CIRCULAR PROVIDES AN IN -BUILT MECHANISM FOR MAKING PAYMENT OF ANY CLAIMS THAT MAY ARISE IN FUTURE. AT THIS JUNCTURE, I WOULD LIKE TO REFER TO A RECENT DECISION OF THE HONBLE HIGH COURT OF PUNJAB & 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 PROF ITS 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. I F NO LIABILITY ACCRUED DURING THE YEAR, THE AMOUNT COULD NOT BE KEPT IN SUSPENSE ACCOUNT. THE SAME HAD TO BE TREAT ED AS INCOME. IT IS A DIFFERENT MATTER THAT IF, AT ANY T IME LATER, ANY EXPENDITURE IS TO BE INCURRED ON THAT AMOUNT, T HE SAME CAN BE TREATED AS PERMISSIBLE EXPENDITURE. ITA-2047 & 2873/DEL/2007 15 IN VIEW OF THE ABOVE DECISION, AS ALSO OTHER DECISI ONS RELIED UPON BY THE AO, IT CANNOT BE SAID THAT THE AMOUNT I N THE CASE OF THE APPELLANT CAN NOT BE TREATED AS INCOME AT A LATER POINT OF TIME, MERELY BECAUSE AT THE TIME OF RECEIPT THE SAID AMOUNT WAS NOT INCOME. IN OTHER WORDS, AN AMOUNT CAN PARTAKE THE NATURE OF INCOME AT A SUBSEQ UENT POINT OF TIME; SIMILAR IS THE CASE IN REGARD TO THE AFORESAID AMOUNT OF RS.387.07 CRORE IN THE APPELLANTS CASE, WHICH WAS NOT INCOME AT THE TIME OF ITS RECEIPT BUT HAS T AKEN THE CHARACTER OF INCOME IN THE YEAR UNDER CONSIDERATION . I WOULD ALSO REFER TO THE DECISION OF THE HON'BLE S UPREME COURT IN THE CASE OF CIT VS. THIRUMALAISWAMY NAIDU & SONS (230 ITR 534), WHEREIN THE APEX COURT WAS CONCERNED WITH A SITUATION WHERE THE LIABILITY TO SALES TAX WAS NO T REQUIRED TO BE MET. THE RECEIPT ON THAT 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 HONBLE APEX COURT TO T HE FACTS OF THE APPELLANTS CASE, I AM OF THE CONSIDERED VIE W THAT THE AFORESAID AMOUNT OF RS.387.07 CRORE HAS TO BE T REATED 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 COURTS DECISION. IN VIEW OF THE ABOVE CITED DECISIONS OF THE HONBLE PUNJAB & HARYANA HIGH COURT AND HON'BLE SUPREME COURT, I D O NOT ITA-2047 & 2873/DEL/2007 16 SEE MUCH MERIT IN THE CONTENTION OF THE APPELLANT T HAT 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 S ECTION 28 OF THE ACT, AS READ IN THE LIGHT OF THE ABOVE CITED COURTS DECISIONS. THERE IS ALSO NO SUBSTANCE IN THE CONTE NTION OF THE APPELLANT THAT IT IS A CASE OF PASSING MERE BOO K 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 RECE IVED BY THE BANK AND SINCE THE SAME HAS REMAINED UNCLAIM ED BY THE CUSTOMERS OVER A PERIOD OF TIME, THE RBI DIR ECTED IT TO TREAT THE SAME AS MISC. INCOME. ACCORDINGLY, TH ERE IS NO MERIT AT ALL IN THE CLAIM THAT IT IS A CASE OF MERE BOOK ENTRIES, SINCE THE AMOUNT IN QUESTION IS ALREADY IN THE POSSESSION OF THE APPELLANT. IN VIEW OF THESE FACT S, I AM OF THE VIEW THAT THE DECISIONS RELIED UPON BY THE APPE LLANT (SUPRA), IN RELATION TO MERE BOOK ENTRIES, DO NOT ADVANCE THE CASE OF THE APPELLANT FOR NOT TREATING THE AMOU NT AS INCOME. ON THE OTHER HAND, THE REVENUES CASE IS F URTHER 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 IT R 396 (MAD.). ITA-2047 & 2873/DEL/2007 17 (V) CIT VS. KARAM CHAND THAPAR & ORS. (222 ITR 112) . ON OVERALL CONSIDERATION OF THE FACTS OF THE CASE, IN THE LIGHT OF THE LEGAL POSITION AS DISCUSSED HEREIN ABO VE, I AM OF THE CONSIDERED VIEW THAT THE ASSESSING OFFICER H AS RIGHTLY TREATED THE AMOUNT OF RS.387.07 CRORE AS IN COME OF THE APPELLANT. THIS GROUND OF APPEAL IS, ACCORDING LY, DISMISSED. 21. THE ASSESSEE IS AGGRIEVED. 22. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE CONTENTIONS THAT WERE TAKEN BEFORE THE AUTHORITIES INCLUDING TH E SUBMISSIONS FILED BEFORE THE ASSESSING OFFICER ON 17.3.2006 IN WHICH THE ASSESSEE HAS EXPLAINED THE FACTUAL BACKGROUND NECESSITATING THE MAKING OF ENTRIES AND CLAIMING OF DEDUCTION IN THE COMPUTATION OF INC OME. THE MAIN CONTENTION OF THE ASSESSEE WAS THAT THE ASSESSEE WA S ASKED BY THE RESERVE BANK OF INDIA TO SEGREGATE THE CREDIT ENTRI ES OUTSTANDING FOR MORE THAN FIVE YEARS IN THE INTER BRANCH ACCOUNT AN D TRANSFER THEM TO A SEPARATE BLOCKED ACCOUNT. WHILE ARRIVING AT THE NET AMOUNT OF INTER BRANCH TRANSACTIONS, THE AGGREGATE AMOUNT OF BLOCKE D ACCOUNT SHOULD BE EXCLUDED AND ONLY THE AMOUNT REPRESENTING THE RE MAINING CREDIT ENTRIES SHOULD BE NETTED AGAINST DEBIT ENTRIES. SU CH ACCOUNTS, THE LEARNED COUNSEL SUBMITTED, DEPICTED BASICALLY A CRE DIT TO THE CONCERNED BRANCH FOR DEBIT TO BE DISCHARGED 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 SUR PLUS RELATED TO THE ENTRIES MOSTLY CONCERNING MONEYS DEPOSITED IN ONE B RANCH ISSUING DRAFTS PAYABLE BY ANOTHER BRANCH OF THE BANK WHICH ENTRIES REMAINED UNRECIPROCATED AND UNADJUSTED. EVEN THOUGH THE REC ONCILIATION OF ENTRIES WAS DONE REGULARLY, YET SUCH CREDIT SURPLUS AROSE MAINLY DUE TO ITA-2047 & 2873/DEL/2007 18 WRONG ACCOUNTING OF THE DEBIT ADVICE BY THE SECOND BRANCH OR, IN A FEW CASES DUE TO NON-ENCASHMENT OF THE DRAFT. THESE CR EDIT 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 C HARTERED ACCOUNTANTS. IT WAS FURTHER CONTENDED THAT THE LIA BILITY TO PAY ANY UNCLAIMED DRAFT REMAINED WITH THE BANK IRRESPECTIVE OF THE TIME-LAG. THE ACCOUNTING FOR CREDIT ENTRIES DID NOT IN ANY WA Y IMPLY THAT THE BANK COULD FOREGO ITS LIABILITY FOR ANY UNCLAIMED D RAFT SHOULD ANY BE PRESENTED AT ANY POINT OF TIME IN FUTURE. SUCH TER MS HAD BEEN STATED BY THE RESERVE BANK OF INDIA VIDE THEIR LETTER DATE D 29 TH 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 B E UTILIZED FOR THE PAYMENT OF ANY DIVIDEND BY THE BANK. THE LEARNED C OUNSEL SUBMITTED THAT THE AMOUNTS IN QUESTION CANNOT BE CONSTRUED AS THE BANKS INCOME. FIRSTLY, BECAUSE THE TWO ENTITIES RESPONSI BLE FOR THE CREDIT AND DEBIT ENTRIES WERE OWNED BY THE ASSESSEE. AT THE L EVEL OF THE HEAD OFFICE, THE ENTRIES OUGHT TO NEUTRALIZE ONE ANOTHER . IT WAS BECAUSE OF THE INABILITY TO IDENTIFY AND PAIR THE ENTRIES THAT THE CONTINGENCY TO PASS THE MOPPING UP ENTRIES AS PER RBI PERMISSION A ROSE. THERE WAS NOTHING WHICH CAME TO THE BANK FROM OUTSIDE AND WHI CH HAD ANY FLAVOUR OF INCOME. THE LEARNED COUNSEL CONTENDED T HAT THE CREDIT BALANCE WAS PRIMARILY DUE TO THE MISMATCH OF THE DE BIT AGAINST RELEVANT CREDIT DUE TO EFFLUX OF TIME. THE NEGATIV E ENTRIES CONTINUED TO REMAIN WITH THE BRANCHES. THE POSITIVE ENTRIES WER E A CONSTANT REMINDER OF THE PAYMENT OBLIGATION. SECONDLY, BY N O STRETCH OF IMAGINATION, SUCH TRANSFERS COULD BE TREATED AS BAN KS INCOME. THE MONEYS RECEIVED FOR TRANSFER BY ONE BRANCH TO ANOTH ER BRANCH QUA A DRAFT WAS NOT PART OF BANKS REVENUE. THE BANK REN DERED THE SERVICE OF TRANSFERRING FUNDS FROM ONE PLACE TO ANOTHER FOR A COMMISSION. IT WAS ITA-2047 & 2873/DEL/2007 19 ONLY COMMISSION THAT WAS PART OF THE BANKS REVENUE WHICH ALREADY STOOD REFLECTED IN THE PROFIT & 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 RELE VANT FUNDS FROM ONE BRANCH TO ANOTHER BRANCH AND THERE IS ALWAYS A SUGG ESTING OBLIGATION TO REFUND THE AMOUNT WHENEVER THE SAME ARE PRESENTE D FOR ENCASHMENT. AT ANY TIME, SUCH CLAIMS HAD ALWAYS BE EN ENTERTAINED YEAR AFTER YEAR BY THE BANK WITHOUT FAIL. MERELY B ECAUSE THE NET CREDIT BALANCE OF THE BLOCKED ACCOUNTS HAD BEEN TRANSFERRE D TO THE RESERVE ACCOUNT IN THE BALANCE SHEET, SUCH ACCOUNTING ENTRI ES DO NOT YIELD ANY INCOME THAT IS LIABLE TO TAX UNDER THE INCOME-TAX A CT. IT WAS A MANIFESTATION OF THE ACCOUNTING ERROR OF THE PAST S EVERAL DECADES. THE BANK WAS UNABLE TO TRADE WITH ITSELF IN RESPECT OF THESE AMOUNTS AND, THEREFORE, IN THE LIGHT OF THE HON'BLE SUPREME COUR T JUDGMENT IN THE CASE OF SIR KIKABHAI PREMCHAND (SUPRA), THE SUM IN QUESTION CANNOT BE CONSTRUED AS ITS INCOME. THE LEARNED COUNSEL FURTH ER RELIED UPON THE DECISION OF THE HONBLE 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 O F TRANSACTIONS OF SALE BY THE HEAD OFFICE TO ITS BRANCH AS AN INCOME. 24. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SU BMITTED THAT THE REVENUE AUTHORITIES HAVE MISUNDERSTOOD THE TRANSACT ION AND REACHED AN ERRONEOUS CONCLUSION THAT THE ACCOUNTING ENTRIES RESULTED IN THE COMPUTATION OF TAXABLE INCOME IN THE HANDS OF THE A SSESSEE BANK. THE AMOUNTS WERE RECEIVED BY THE BANK IN A FIDUCIARY CA PACITY AND DEFINITELY NOT AS A TRADING RECEIPT. THE LEARNED C OUNSEL SUBMITTED THAT THE RECEIPT OF MONEY BY THE BANK OR ITS TRANSFER TH ROUGH THE BANKS BLOCKED ACCOUNTS TO THE PROFIT & LOSS ACCOUNT DO NO T HAVE ATTRIBUTES OF ANY INCOME. INTER BRANCH ADJUSTMENT ENTRIES CANNOT GIVE RISE TO ANY INCOME THAT WOULD BE ASSESSED FOR TAX. THE GIVER A ND TAKER MUST BE ITA-2047 & 2873/DEL/2007 20 DISTINCT AND SEPARATE PERSONS. SOMETHING HAS TO FL OW TO A PERSON FROM OUTSIDE BEFORE AN INCOME CAN BE SAID TO ARISE. THE RE MUST BE ESSENTIALLY BE TWO DISTINCT AND SEPARATE PERSONS TO CAUSE THE INCIDENT OF INCOME TO ARISE. RELIANCE WAS PLACED ON THE DEC ISIONS OF THE APEX COURT IN THE CASE OF CIT VS. SHOORJI VALLBHADAS & C O. 46 ITR 144, GODHRA ELECTRICITY CO.LTD. VS. CIT 225 ITR 746 AN D CIT VS. CHAMANLAL MANGALDAS & CO. 39 ITR 14, TO THE PROPOSITION THA T MERE ACCOUNTING ENTRIES CANNOT BE DECISIVE OR CONCLUSIVE OF THE TAX ABILITY OF THE SAME. RELIANCE WAS ALSO PLACED ON THE FOLLOWING DECISIONS OF THE APEX COURT:- (I) KEDARNATH JUTE MFG.CO.LTD. VS. CIT 82 ITR 363. (II) SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 5. (III) STATE BANK OF INDIA VS. CIT 157 ITR 67 (IV) PUNJAB DISTILLING INDUSTRIES LTD. VS. CIT 35 ITR 519. 25. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER AR GUED THAT THERE IS NO QUESTION OF APPLYING THE PROVISIONS OF SECTION 4 1(1) OF THE ACT IN THE GIVEN CONTEXT. THE PRE-REQUISITE FOR SUCH AN APPLI CATION IS CONSPICUOUS BY ITS BLATANT ABSENCE. THE ENTRIES IN QUESTION WH ICH ARE PROPOSED TO BE CONSIDERED AS INCOME ARE NEVER ALLOWED OR DEDUCT ED 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 APP RECIATED BY THE TAX AUTHORITIES. THE MANDATE CLEARLY ORDAINS AND RECOG NIZES THE BANKS 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 ITA-2047 & 2873/DEL/2007 21 NEVER INTENDED THAT SUCH RECORDED ENTRIES SHOULD BE RECKONED AS A PROFIT FOR WHATEVER PURPOSE. THE INTER BRANCH ADJU STMENT ENTRIES WERE MADE WITH DUE CONCURRENCE OF THE RESERVE BANK OF IN DIA. THE RBIS PERMISSION CANNOT BE READ AS CONFERRING THE STATUS OF ANY INCOME TO THE BLOCKED ACCOUNTS ADJUSTMENT ENTRIES. MERE BOOK ENTRIES CANNOT CULMINATE INTO A TAXABLE INCOME. IT WAS STRONGLY A RGUED THAT THE ADDITION SUSTAINED BY THE CIT(A) REQUIRES TO BE DEL ETED ON PROPER APPRECIATION OF THE ACCOUNTING ENTRIES, THEIR NATUR E AS ALSO THE MANDATES AND DIRECTIONS OF THE RESERVE BANK OF INDI A ISSUED IN THIS REGARD. 26. THE LEARNED DR, ON THE OTHER HAND, STRONGLY SUP PORTED THE IMPUGNED ADDITION. HE STRONGLY ARGUED THAT THE ASS ESSING OFFICER AS WELL AS THE LEARNED CIT(A) HAVE ELABORATELY DEALT W ITH THE ISSUE, AND THE ASSESSEES FAILURE, TO GIVE THE EXACT DETAILS O F ENTRIES MADE WHICH RESULTED INTO CREDITING OF MISCELLANEOUS INCOME OF `387.07 CRORES AND THE ASSESSEES PLEA THAT THEY ARE INTER BRANCH TRAN SACTIONS NOT RESULTING IN INCOME, SHOULD NOT BE ACCEPTED ON THE FACE OF IT. THE UNDISPUTED FACT WHICH MUST BE APPRECIATED IS THAT T HE AMOUNTS IN QUESTION HAVE BEEN CREDITED AS INCOME TO THE PROFIT & LOSS ACCOUNT. THE ONUS, THE LEARNED DR STRONGLY EMPHASIZED, IS EN TIRELY ON THE ASSESSEE TO PROVE IF THE SAID CREDITS ARE NOT TAXAB LE. IT IS UNDER OBLIGATION TO FURNISH THE FACTS IN ENTIRETY. THE S AME HAVE NOT BEEN PRODUCED BEFORE ANY OF THE AUTHORITIES INCLUDING TH E TRIBUNAL. THE LEARNED DR STRONGLY ARGUED THAT APPRECIATION OF COR RECT FACTS IS SINE QUA NON FOR ADJUDICATION OF ANY ISSUE. APPLICATION OF LAW WITHOUT UNDERSTANDING THE BASIC FACTS MAY LEAD TO GRAVE MIS CARRIAGE OF JUSTICE. THE LEARNED DR HAS FILED WRITTEN SUBMISSIONS IN THI S REGARD. HE CONTENDED THAT IT IS THE REVENUES PRIMARY CONTENTI ON THAT THE MONEY WAS ACTUALLY RECEIVED BY THE BANK IN THE PAST AND W ITH THE EFFLUX OF TIME, THESE MONIES RECEIVED EARLIER BECAME NO LONGE R PAYABLE AND ITA-2047 & 2873/DEL/2007 22 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 CREDITED TO THE PROFIT & LOSS ACCOUNT AS INCOM E. 27. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS AND GONE THROUGH THE RECORDS. BEFORE GETTING INTO THE ISSUE IN DETAIL, IT IS NECESSARY FOR US TO GO INTO THE BACKGROUND OF THE C IRCULARS ISSUED BY THE RESERVE BANK OF INDIA IN THIS REGARD. THE IMPU GNED AMOUNT IS STATED TO BE CREDITED TO THE PROFIT & LOSS ACCOUNT ON THE BASIS OF THE RESERVE BANK OF INDIA CIRCULAR TO THE ASSESSEE DATE D 29 TH JUNE, 2004, WHICH READS AS UNDER:- BLOCKED ACCOUNT OF CREDIT ENTRIES OUTSTANDING FOR MORE THAN FIVE YEARS IN THE INTER-BRANCH ACCOUN T PLEASE REFER TO YOUR LETTER DATED DECEMBER 19, 2003 REQUESTING THAT YOUR BANK MAY BE PERMITTED TO TRANS FER RS.387.07 CRORE LYING IN THE BLOCKED ACCOUNT, COMPR ISING OF OUTSTANDING CREDIT ENTRIES ORIGINATED UP TO SEPTEMB ER 30, 1996 IN THE INTER-BRANCH ACCOUNT, TO GENERAL RESER VES. 2. WE HAVE EXAMINED YOUR REQUEST AND IT HAS BEEN DECIDED THAT YOUR BANK MAY, AS A SPECIAL CASE, TRAN SFER THE ABOVE AMOUNT OF RS.387.07 CRORE TO GENERAL RESERVE S SUBJECT TO ENSURING STRICT COMPLIANCE WITH THE FOLL OWING: (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). ITA-2047 & 2873/DEL/2007 23 (B) THEREAFTER, IT SHOULD BE APPROPRIATED TO THE GE NERAL RESERVE TO BE UTILIZED TO MEET FUTURE CLAIMS. SUCH APPROPRIATION SHOULD BE BELOW THE LINE (NET OF TA XES, IF ANY, AND NET OF TRANSFER TO STATUTORY RESERVES) 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 LO SS ACCOUNT VIZ. MISCELLANEOUS INCOME AND AN EQUIVALE NT AMOUNT OF TAX BENEFIT, IF ANY, AND NET OF CONSEQUEN T REDUCTION IN THE TRANSFER TO STATUTORY RESERVES SHA LL 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 TH E PROFIT AND LOSS ACCOUNT. (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 OFF ICIALS, ONE OF WHOM SHOULD BE FROM OUTSIDE THE BRANCH CONCERNED, PREFERABLY FROM THE CONTROLLING OFFICE/H EAD OFFICE. (F) THIS AMOUNT WILL NOT BE AVAILABLE FOR DECLARATI ON OF DIVIDEND. 28. THE ABOVE LETTER WAS ISSUED BASED ON THE REQUES T BY THE BANK VIDE ITS LETTER DATED 19 TH DECEMBER, 2003 WRITTEN BY THE BANK. THE ITA-2047 & 2873/DEL/2007 24 BANKS LETTER IN THIS REGARD WHICH WAS DIRECTED TO BE FILED BY US IS ON RECORD, WHICH READS AS UNDER:- CHIEF GENERAL MANAGER, DT. 19 TH DECEMBER, 2003 RESERVE BANK OF INDIA, DEPARTMENT OF BANKING OPERATIONS & 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 WER E REQUIRED TO SEGREGATE THE CREDIT ENTRIES OUTSTANDING FOR MORE T HAN FIVE YEARS IN THE INTER BRANCH ACCOUNT AND TRANSFER THEM TO A SEPARATE BLOCKED ACCOUNT AND SHOW THEM UNDER OTHER LIABILIT IES AND PROVISIONS OTHERS (SCHEDULE 5) IN THE BALANCE SH EET. WHILE ARRIVING AT THE NET AMOUNT OF INTER BRANCH TRANSACT IONS, THE AGGREGATE AMOUNT OF BLOCKED ACCOUNT SHOULD BE EXCLU DED AND ONLY THE AMOUNT REPRESENTING THE REMAINING CREDIT E NTRIES SHOULD BE NETTED AGAINST DEBIT ENTRIES. AS PER RBI GUIDELINES, THE BANK WORKED OUT A SUM OF RS.413.55 CRORE AS THE AMOUNT OF CREDIT ENTRIES OUTSTANDING F OR MORE THAN 5 YEARS ON THE BASIS OF AVAILABLE RECORDS AS ON 31.3. 2000 AND GOT THE SAME VERIFIED BY A FIRM OF CHARTERED ACCOUNTANT S. THIS AMOUNT HAS BEEN SHOWN SEPARATELY UNDER OTHER LIABI LITIES OTHERS IN SCHEDULE 5 OF BALANCE SHEET. THE POSITION OF BALANCE OUTSTANDING AND MOVEMENT TH EREIN 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 ITA-2047 & 2873/DEL/2007 25 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 THA N 7 YEARS IS RS.412.07 CRORE. OUT BANK VIDE LETTER DATED 7 TH 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 REFERENCE TO THE ABOVE, RBI CONVENED A MEETING ON 30.6.2003 AT RBI MUMBAI. THE RBI DECIDED THAT THE BANK SHOULD TAKE EXPERT OPINION DISCUSSED HERE UNDER BEFORE REF ERRING THE MATTER TO RBI. LEGAL OPINION FROM AN ADVOCATE WHETHER THE AMOUNT L YING IN THE BLOCKED ACCOUNT IS AN OUTSIDE LIABILITY OR NOT. IN CASE, IT IS AN OUTSIDE LIABILITY WHETHER IT IS ENFORCEABLE OR NOT. SEEK AN OPINION FROM A CHARTERED ACCOUNTANT IF THE AMOUNT LYING IN BLOCKED ACCOUNT IS TRANSFERRED TO GENERAL RESERV E OR FLOAT PROVISION TOWARDS NPA, IT IS IN ACCORDANCE WITH THE ACCOUNTING CONVENTION AND IN CONFORMITY WITH THE ACCOUNTING ST ANDARD. SEEK APPROVAL OF THE AUDIT COMMITTEE OF THE BOARD F OR PROPOSAL TO TRANSFER THE AMOUNT LYING IN THE BLOCKED ACCOUNT. ITA-2047 & 2873/DEL/2007 26 ON THE ABOVE LINES, WE HAVE OBTAINED EXPERT OPINION OF CHARTERED ACCOUNTANTS M/S A.SHARMA & CO., LAW DIVISION OF OUR BANK, SHRI R.GANESHAN, CHARTERED ACCOUNTANT, SHRI SUBASH MANN, TAX CONSULTANT OF THE BANK AND FROM AN INDEPENDENT ADVO CATE OF THE SUPREME COURT M/S K.L.MEHTA & CO. WE HAVE ALSO OBT AINED 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 BE FORE THE BOARD OF DIRECTORS FOR SEEKING APPROVAL FOR RECOMME NDING THE MATTER TO RESERVE BANK OF INDIA, FOR TRANSFERRING T HE AMOUNT OF RS.387.07 CRORE LYING IN THE BLOCKED ACCOUNT TO GEN ERAL RESERVE AND RETAINING THE AMOUNT OF RS.25.00 CRORE IN THE B LOCKED ACCOUNT (TO BE UTILIZED FOR ANY FURTHER CLAIMS). T HE AMOUNT OF RS.387.07 CRORE WILL BE FIRST CREDITED TO THE PROFI T & LOSS APPROPRIATION ACCOUNT FORMING PART OF THE PROFIT & LOSS ACCOUNT AND FROM THERE IT WILL BE TRANSFERRED TO GENERAL RE SERVE. 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 AM OUNT OUTSTANDING UNDER BLOCKED ACCOUNT (AFTER RETAINING RS.25 CRORE TO MEET FUTURE CLAIMS) AS AT 30.9.1996, FOR WHICH NO D ETAILS OF ENTRIES ARE AVAILABLE WITH THE BANK, TO GENERAL RES ERVES AS OUTLINED ABOVE. 29. THE LETTER OF THE BANK DATED 19 TH DECEMBER, 2003 HAS A REFERENCE TO THE RBI LETTER DATED 27 TH JULY, 1998 IN RESPECT OF THE IMPUGNED SUBJECT WHICH MAY BE RELEVANT FOR OUR APPR ECIATION AND IS REPRODUCED HEREUNDER:- ITA-2047 & 2873/DEL/2007 27 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 B ANKS ARE REQUIRED TO SHOW NET BALANCE IN INTER-BRANCH ACCOUN T UNDER OTHER LIABILITIES AND PROVISIONS (SCHEDULE 5) WHEN IN CR EDIT 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 B EEN DECIDED THAT BANKS SHOULD FIRST SEGREGATE THE CREDIT ENTRIE S OUTSTANDING FOR MORE THAN FIVE YEARS IN INTER BRANCH ACCOUNT AND TR ANSFER THEM TO A SEPARATE BLOCKED ACCOUNT AND SHOW IT UNDER OTHER LIABILITIES AND PROVISIONS OTHERS (SCHEDULE 5) IN THE BALANC E SHEET. WHILE ARRIVING AT THE NET AMOUNT OF INTER-BRANCH TRANSACT IONS FOR INCLUSION UNDER SCHEDULE 5 OR AS THE CASE MAY BE, T HE AGGREGATE AMOUNT OF BLOCKED ACCOUNT SHOULD BE EXCLUDED AND ON LY THE AMOUNT REPRESENTING THE REMAINING CREDIT ENTRIES SH OULD BE NETTED AGAINST DEBIT ENTRIES. THE BALANCE IN THE B LOCKED ACCOUNT WILL BE RECKONED FOR THE PURPOSE OF MAINTENANCE OF CRR/SLR. 2. WE FURTHER ADVISE THAT ANY ADJUSTMENT FROM THE B LOCKED ACCOUNT SHOULD BE PERMITTED ONLY WITH THE AUTHORIZA TION OF 2 OFFICIALS, ONE OF WHOM SHOULD BE FROM OUTSIDE THE B RANCH CONCERNED, PREFERABLY FROM THE CONTROLLING/HEAD OFF ICE IF THE AMOUNT EXCEEDS RUPEES ONE LAKH. 3. PLEASE ACKNOWLEDGE RECEIPT. ITA-2047 & 2873/DEL/2007 28 30. THE ABOVE LETTER OF THE RESERVE BANK OF INDIA DATED 27 TH JULY, 1998 HAS A REFERENCE TO THE INSTRUCTIONS IN THE CIR CULAR ISSUED BY THE RESERVE BANK OF INDIA DATED 28 TH FEBRUARY, 1991. ALL THESE CIRCULARS AND INSTRUCTIONS OF THE RBI ARE IN RELATION TO THE PRESENTATION OF THE FINANCIAL STATEMENTS OF A BANK JUST TO ENSURE THE U NIFORMITY IN THE ACCOUNTING TREATMENT BY ALL THE BANKS IN THE BANKIN G SYSTEM OF THE COUNTRY. 31. THE ASSESSEE BEING A PUBLIC SECTOR BANK, ALL IT S TRANSACTIONS ARE UNDER THE SCRUTINY OF THE RBI AND TO SOME EXTENT, E VEN THE ACCOUNTING ENTRIES HAVE TO FOLLOW CIRCULARS AND GUIDELINES ISS UED BY THE RBI FROM TIME TO TIME. IN FACT, THE ACCOUNTS AND TRANSACTIO NS OF THE BANK ARE ALWAYS SUBJECT TO THE INSPECTION BY THE RESERVE BAN K OF INDIA. IT IS CLEAR FROM THE CIRCULARS EXTRACTED ABOVE AND THERE IS NO DISPUTE AS REGARDS THESE MATTERS. IN TERMS OF THE INSTRUCTION S ISSUED WAY BACK ON 28 TH FEBRUARY, 1991, THE BANK IS REQUIRED TO SHOW THE N ET 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 C OURSE OF ITS INSPECTION OF THE BANKS, HAS FOUND THAT LARGE TRANS ACTIONS REMAINED TO BE RECONCILED IN THE INTER-BRANCH ACCOUNTS WHICH WA S A CAUSE FOR SERIOUS CONCERN. IT IS IN THIS BACKGROUND THAT THE RESERVE BANK OF INDIA HAS DIRECTED THE BANKS TO FIRST SEGREGATE THE CREDI T ENTRIES OUTSTANDING FOR MORE THAN FIVE YEARS IN THE INTER-BRANCH ACCOUN TS AND TRANSFER THEM TO A SEPARATE ACCOUNT CALLED BLOCKED ACCOUNTS AND SHOW THEM UNDER OTHER LIABILITIES IN THE BALANCE SHEET. TH E BALANCE IN THE BLOCKED ACCOUNT WILL BE RECKONED FOR THE PURPOSE OF MAINTENANCE OF CRR AND SLR. ANY ADJUSTMENT FROM THE BLOCKED ACCOU NT SHOULD BE PERMITTED ONLY WITH THE AUTHORIZATION OF TWO OFFICI ALS, ONE OF WHOM SHOULD BE OUTSIDE THE BRANCH CONCERNED, PREFERABLY FROM THE CONTROLLING/HEAD OFFICE IF THE AMOUNT EXCEEDS RUPEE S ONE LAKH. IN ITA-2047 & 2873/DEL/2007 29 PURSUANCE OF THE ABOVE DIRECTIONS CONTAINED IN THE CIRCULAR DATED 28 TH FEBRUARY, 1991 AND 27 TH JULY, 1998, THE ASSESSEE BANK HAS UNDERTAKEN ITS EXERCISE AS IS CLEAR FROM ITS LETTER DATED 19 TH DECEMBER, 2003 TO THE RESERVE BANK OF INDIA. THE ASSESSEE HAS EXPLAINED THE BALANCE OUTSTANDING AND MOVEMENT THEREIN YEAR-WISE IN THE B LOCKED ACCOUNTS AS IS CLEAR FROM THE LETTER EXTRACTED EARLIER. WHI LE SEEKING PERMISSION TO TRANSFER THE AMOUNT LYING IN THE BLOCKED ACCOUNT , THE LEGAL OPINION AND THE OPINION OF THE CHARTERED ACCOUNTANT WERE OB TAINED INCLUDING THE OPINION OF SHRI KANWARJIT SINGH, RETIRED COMMIS SIONER OF INCOME TAX ON THE SUBJECT ISSUE. BASED ON THE ABOVE OPINI ONS, THE AUDIT COMMITTEE OF THE BOARD AND THE BOARD OF DIRECTORS O F THE BANK SOUGHT APPROVAL OF THE RESERVE BANK OF INDIA FOR TRANSFER OF `387.07 CRORES LYING IN THE BLOCKED ACCOUNT TO THE GENERAL ACCOUNT AND RETAINING THE AMOUNT OF `25 CRORES IN THE BLOCKED ACCOUNT TO BE U TILIZED FOR FURTHER CLAIMS. THE RESERVE BANK OF INDIA PERMITTED THE TR ANSFER OF `387.07 CRORES TO GENERAL RESERVE ACCOUNT SUBJECT TO THE CO NDITIONS VIDE ITS LETTER DATED 29.6.2004 (SUPRA). 32. A CAREFUL READING OF THE VARIOUS INSTRUCTIONS I SSUED BY THE RESERVE BANK OF INDIA FROM TIME TO TIME TO PNB SHOW S THAT THE DISPUTED AMOUNTS WERE PART OF INTER BRANCH TRANSACT IONS AND THERE WAS A MISMATCH OF THE TRANSACTIONS BETWEEN DIFFERENT BR ANCHES OF THE SAME BANK AND IT WAS NOT RECONCILED AND THESE ARE A LL CARRIED FORWARD FROM SO MANY YEARS FROM THE BANK AND ITS BRANCHES. DURING THE COURSE OF HEARING, IT WAS REVEALED TO US THAT THESE WERE T HE 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 OTHER INVOLVED BRANCHES. THE MANUAL ACCOUNTING HAS GENERATED THESE OUTSTANDI NG TRANSACTIONS IN ITS INTER BRANCH ACCOUNTS ALTHOUGH AT THE TIME O F CONSOLIDATION OF THE BANK ACCOUNTS, ALL THESE ACCOUNTS SHOULD HAVE BEEN SQUARED UP BY THE ITA-2047 & 2873/DEL/2007 30 ACCOUNTING PROCESS OF CONSOLIDATION. UNFORTUNATELY , THIS WAS NOT DONE AND THE RESERVE BANK OF INDIA WAS AWARE OF ALL THES E IMBALANCES IN THE RECONCILIATION OF THE INTER BRANCH TRANSACTIONS. N ONE OF THESE TRANSACTIONS, AS WE SEE FROM THE RECORDS PRESENTED BEFORE US AND THE INFORMATION AVAILABLE WITH US, SHOW THAT THE INVOLV ED TRANSACTIONS HAVE REVENUE IMPLICATIONS BY NATURE WHICH COULD SPRING T HE 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 TH E NATURE OF THE INTER BRANCH TRANSACTIONS. IN A BANK OF THE SIZE O F 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 BRA NCH TRANSACTIONS, IN NONE OF THE PROPOSALS MADE BY THE BANK OR THE ASSES SMENT MADE BY THE RESERVE BANK OF INDIA, IT IS DISCERNIBLE THAT T HESE ENTRIES OR DIFFERENCES HAVE ANY IMPLICATIONS ON THE REVENUE TR ANSACTIONS OF THE BANK. THEREFORE, THERE IS AN ABSOLUTE ABSENCE OF A NY FLAVOUR OF INCOME EITHER IN THE RECEIPT OR IN THE PAYMENT OR ACCOUNTI NG TRANSACTIONS IN WHAT IS KNOWN AS INTER BRANCH TRANSACTIONS. IT IS JUST LIKE THE MONEY OF THE BANK AS THOUGH UNDER CIRCULATION BETWEEN DIFFER ENT BRANCHES. OVER THE YEARS, THE DIFFERENCES HAVE BEEN CARRIED F ORWARD AND HAVE BECOME SIGNIFICANT AND MATERIAL FIGURES. BUT THE B ASIC CHARACTER REMAINS THE SAME THAT IT HAS NO CHARACTER OF INCOME IN ANY OF THESE TRANSACTIONS EITHER WHEN THE TRANSACTION AROSE FOR THE FIRST TIME OR WAS DEALT WITH BY THE DIFFERENT BRANCHES. IT IS DIFFIC ULT TO SAY THAT THESE UNRECONCILED INTER BRANCH TRANSACTIONS SHOULD BE AU TOMATICALLY BE TREATED AS INCOME OF THE BANK ARISING IN THE COURSE OF ITS BUSINESS ACTIVITY. IT IS NOBODYS CASE THAT THESE TRANSACTI ONS AROSE OUT OF REVENUE TRANSACTIONS OF ANY OF THE BRANCHES INVOLVE D. THESE ARE MAINLY INTER BRANCH TRANSACTIONS WHICH REMAINED UNR ECONCILED. IN A WAY AS THE BANK HAS PLEADED, IT IS A TRANSACTION OF ITS OWN MONEY WITH DIFFERENT BRANCHES. THE RESERVE BANK OF INDIA, WHI LE GIVING PERMISSION ITA-2047 & 2873/DEL/2007 31 TO CLOSE THESE INTER BRANCH DIFFERENCES, HAS CLEARL Y STIPULATED THAT THE AMOUNT SO TRANSFERRED SHALL NOT BE TREATED AS AVAIL ABLE FOR DISTRIBUTION OF DIVIDENDS, MEANING THEREBY THE RESERVE BANK OF I NDIA HAS NOT PERMITTED THE BANK TO TREAT IT AS AN INCOME ONCE AN D FOR ALL AND IT HAS ALWAYS STIPULATED CERTAIN CONDITIONS AND PRESCRIBED CERTAIN PROCEDURES AND FORMALITIES TO SAFEGUARD THE INTEREST OF THE BA NK AS A WHOLE BUT THAT DOES NOT TAKE AWAY THE BASIC NATURE OF THE AMO UNTS IN QUESTION. IT CANNOT IN ANY WAY CONVERT THE TRANSACTIONS OF TH IS NATURE AS REVENUE TRANSACTIONS OF THE BANK NECESSITATING THE SAME TO BE TREATED AS INCOME ON THE REVENUE ACCOUNT. AT LEAST, THE RESER VE BANK OF INDIA WHICH WAS CEASED OF THE ISSUE WHEN IT WAS POSED TO IT DID NOT ACCEPT THE CLAIMS OF THE ASSESSEE THAT THIS SHOULD BE TREA TED AS MISCELLANEOUS INCOME, MEANING THEREBY, THESE AMOUNTS IN QUESTION, EVEN BY EFFLUX OF TIME, CANNOT BE TREATED AS INCOME FOR THE OBLIGATIO NS 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 OBLIGATI ON TO DISCHARGE ALL THE OBLIGATIONS ARISING THEREFROM. THE ASSESSEE CA NNOT BE SAID TO BE MAKING PROFIT FROM TRANSFERRING AS THOUGH FROM ONE POCKET TO THE OTHER POCKET WHEN IT HAD OPERATED THE INTER BRANCH ACCOUN TS OF THIS NATURE. IN OUR VIEW, THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SIR KIKABHAI PREMCHAND VS. CIT 24 ITR 506 AND HONBLE 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 ACC OUNTING ENTRIES, WHICH ACCORDING TO THE REVENUE, YIELD THE INCOME AR E IN THE INTER BRANCH ACCOUNTS OF THE BANK. IT CANNOT BE SAID THA T TRANSACTIONS BETWEEN THE BRANCH CAN RESULT IN AN INCOME TO THE B ANK AS A WHOLE. NO MAN CAN MAKE PROFIT TO HIMSELF BY THE TRANSACTIO NS WITH THE SELF. EACH BRANCH OF THE BANK IS THE ASSESSEE ITSELF. SO , THE TRANSACTIONS BETWEEN DIFFERENT BRANCHES CANNOT, IN OUR VIEW, GIV E RISE TO GENERATION OF INCOME WHICH CAN ATTRACT THE SAID TRANSACTIONS T O TAX. ITA-2047 & 2873/DEL/2007 32 33. THE FACTS OF THE CASE OF THE ASSESSEE ARE EXACT LY SIMILAR TO THE FACTS BEFORE THE HONBLE 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 P RINCIPAL. IN LAW, THERE CANNOT BE A VALID TRANSACTION OF SALE BETWEEN THE BRANCH AND ITS HEAD OFFICE. AS IT IS ULTIMATELY BASED ON A PROPOS ITION THAT NO PERSON CAN ENTER INTO CONTRACT WITH ONE SELF. DEBITING OR CREDITING ONES ACCOUNT CANNOT ALTER THE LEGAL POSITION. APPLYING THE SAME PRINCIPLE AS ENUNCIATED BY THE HONBLE CALCUTTA HIGH COURT, IT C ANNOT 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 ACCOUN TING LAPSES ON THE PART OF THE BANK OR ITS BRANCHES TO PROPERLY RECONC ILE THE TRANSACTIONS. IN FACT, IT IS ALWAYS UNDERSTOOD THAT ALL THESE ACC OUNTS MUST HAVE CANCELLED EACH OTHER. IT DID NOT TAKE PLACE THAT W AY 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 C IT-DR HAS HEAVILY RELIED UPON THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF T.V.SUNDARAM IYENGAR & SONS LTD. 222 ITR 344. IN THAT CASE, THE ASSESSEE RECEIVED THE DEPOSITS FROM CUSTOMERS IN TH E COURSE OF ITS BUSINESS AND TRANSFERRED THE AMOUNTS WHICH WERE NOT CLAIMED BY THE CUSTOMERS TO ITS PROFIT & LOSS ACCOUNT. THE ASSESS ING OFFICER WAS OF THE VIEW THAT THE SUMS IN QUESTION HAVE BECOME THE INCO ME OF THE ASSESSEE BECAUSE OF THE EXPIRY OF LIMITATION PERIOD OR OTHER STATUTORY OR CONTRACTUAL RIGHTS. THE AMOUNTS HAD THE CHARACT ER OF INCOME AND THEREFORE, ASSESSABLE TO TAX. THE HON'BLE SUPREME COURT HELD THAT ALTHOUGH THE AMOUNTS RECEIVED ORIGINALLY WERE NOT I N THE NATURE OF AN INCOME, THE AMOUNTS REMAINED WITH THE ASSESSEE FOR A LONG PERIOD ITA-2047 & 2873/DEL/2007 33 UNCLAIMED BY THE TRADE PARTIES. BY THE LAPSE OF TI ME, THE CLAIM OF THE DEPOSIT BECAME TIME BARRED AND THE AMOUNT ATTAINED A TOTALLY DIFFERENT QUALITY. IT BECAME A DEFINITE TRADE SURP LUS. THE ASSESSEE ITSELF TREATED THE MONEY AS ITS OWN MONEY AND TAKEN THE AMOUNT TO ITS PROFIT & LOSS ACCOUNT. THE AMOUNTS WERE ASSESSABLE IN THE HANDS OF THE ASSESSEE. HERE, IN THIS CASE, THE FACTS ARE SL IGHTLY DIFFERENT. THE AMOUNTS ARE LYING IN THE ACCOUNTS WHICH ARE KNOWN AS INTER BRANCH ACCOUNTS. IT IS EXPECTED THAT ALL THESE INTER BRAN CH ACCOUNTS SHOULD GET SQUARED UP ON CONSOLIDATION. DUE TO HUMAN ERRO R OF ACCOUNTING OR LACK OF PROPER ADVISE FROM DIFFERENT BRANCHES, THE AMOUNTS IN QUESTION HAVE REMAINED EITHER IN DEBIT OR CREDIT IN DIFFEREN T INTER BRANCH ACCOUNTS AND THE BANK HAS ADMITTEDLY NOT RECONCILED THESE ACCOUNTS FOR OVER A LONG PERIOD OF TIME. IT IS VERY DIFFICU LT TO SAY THAT THESE HAVE TRACES OF INCOME EITHER AT THE TIME OF RECEIPT OR A T 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 PR OFIT & LOSS ACCOUNT WITH A RIDER THAT THE SUMS IN QUESTION ARE NOT PERM ITTED BY THE RESERVE BANK OF INDIA TO BE USED IN THE FORM OF DISTRIBUTIO N OF DIVIDENDS AND IT WAS SPECIFICALLY MADE CLEAR BY THE RESERVE BANK OF INDIA THAT THE OBLIGATION TO DISCHARGE THE LIABILITIES ARISING THE REUNDER IS UPON THE BANK. MEANING THEREBY, THERE IS NO QUESTION OF THE AMOUNTS BEING TREATED AS INCOME IN THE HANDS OF THE BANK. WE MUS T 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 TH E BRANCHES INVOLVED OR OF THE BANK AS A WHOLE. IT IS A PART OF TRANSAC TIONS ON THE REAL ACCOUNTS AND NOT ON WHAT IS KNOWN AS REVENUE ACCOUN TS. THEREFORE, IT IS DIFFICULT TO SAY THAT THE AMOUNTS IN QUESTION BE AR THE SAME CHARACTER AS UNCLAIMED DEPOSIT RECEIVED FROM THE CUSTOMERS BY THE ASSESSEE T.V.SUNDARAM IYENGAR & SONS LTD. ITA-2047 & 2873/DEL/2007 34 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 C ASE OF T.V.SUNDARAM IYENGAR & SONS LTD. (SUPRA) OR OTHER DECISIONS INCL UDING THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. RAJ ASTHAN 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 T HE DECISION OF THE HON'BLE DELHI HIGH COURT, THE AMOUNTS IN QUESTION W ERE 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 PROVISI ONS OF SECTION 41(1) CANNOT BE INVOKED TO BRING THESE AMOUNTS IN QUESTIO N TO BE TAXED AS A PART OF THE RECEIPT IN THE AFORESAID PROVISION. TH E REVENUE HAS TO FIRST ESTABLISH THAT THE SUM IN QUESTION WHICH IS NOW BEI NG BROUGHT TO TAX HAS ONCE BEEN ALLOWED IN THE PAST AS A DEDUCTION WH ILE COMPUTING THE INCOME OF THE BANK. IT IS NOT THE CASE OF THE REVE NUE OR AT LEAST THE REVENUE HAS NOT BROUGHT ANY MATERIAL TO SHOW THAT T HE SUM IN QUESTION FORMING PART OF THE SO-CALLED INTER BRANCH TRANSACTIONS WERE ONCE ALLOWED BY THE REVENUE AS A DEDUCTION IN THE C OMPUTATION OF PROFITS AND GAINS OF BUSINESS. WHEN THAT PRIMARY R EQUIREMENT IS ABSENT, THE QUESTION OF BRINGING THE SUMS IN QUESTI ON 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 WIT H THE STAND OF THE DEPARTMENT THAT THE AMOUNTS IN QUESTION WHICH ARE P ART OF THE INTER BRANCH TRANSACTIONS REQUIRES TO BE BROUGHT TO TAX A S INCOME OF THE ASSESSEE IN THE YEAR IN QUESTION. 35. IN THE REVENUES APPEAL, THE FIRST ISSUE RELATE S TO THE DIRECTION OF THE LEARNED CIT(A) TO DELETE THE DISALLOWANCE OF PR IOR PERIOD EXPENSES OF `74,90,249/-. ITA-2047 & 2873/DEL/2007 35 36. THE ADDITIONS HAVE BEEN MADE BY THE ASSESSING O FFICER ON THE GROUND THAT SIMILAR DELETIONS BY THE LEARNED CIT(A) IN THE EARLIER YEARS HAVE NOT BEEN ACCEPTED AND QUESTIONED BEFORE THE IT AT. THE CIT(A) DISCUSSED THE DETAILS IN PARAGRAPH 3.2.2 OF THE IMP UGNED ORDER AND FOUND THAT THE BANKS TOTAL INCOME FOR THE YEAR END ED 31 ST MARCH, 2005 IS TO THE TUNE OF `10,135.53 CRORES AND THE TOTAL E XPENDITURE IS `8,725.41 CRORES. THE AMOUNTS IN QUESTION ARE INSI GNIFICANT 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 DE BITS TO THE PROFIT & LOSS ACCOUNT. THE CIT(A) FURTHER FOUND THAT THE AS SESSEE HAS PRODUCED ALL THE DETAILS BEFORE THE ASSESSING OFFICER TO SHO W 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 ACCOUNT S 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, THEREF ORE, CONCUR WITH THE FINDINGS OF THE CIT(A) AND DECLINE TO INTERFERE . 38. THE NEXT DISPUTE RELATES TO THE DISALLOWANCE MA DE UNDER SECTION 14A OF THE INCOME-TAX ACT. 39. THE FOLLOWING INCOMES HAVE BEEN CLAIMED AS EXEM PT IN THE COMPUTATION OF INCOME:- ITA-2047 & 2873/DEL/2007 36 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 `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 `16, 266 CRORES NON- INTEREST BEARING FUNDS AVAILABLE WITH THEM AND OUT OF THESE FUNDS, `2505.86 CRORES HAD BEEN INVESTED TO ACQUIRE TAX FR EE BONDS AND SECURITIES. THE ASSESSEE CONTENDED THAT THE EXPEND ITURE IN RELATION TO INCOME MUST HAVE A DIRECT CONNECTION WITH THE TRANS ACTION OF PURCHASES OF EXEMPTED ASSETS AND THERE IS NO SUCH R ELATION WITH REFERENCE TO THE INCOME WHICH IS EXEMPT AND NO SUCH EXPENDITURE CAN BE ATTRIBUTABLE TO THIS INCOME. THE ASSESSING OFFI CER, 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 NOTWIT HSTANDING 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 APPEA L BEFORE THE ITAT. THE ASSESSING OFFICER ARRIVED AT A PROPORTIONATE EX PENDITURE AS ATTRIBUTABLE TO THE EARNING OF THE EXEMPT INCOME IN THE SAME MANNER AS THE EXEMPT INCOME BEARS TO THE TOTAL INCOME. BE FORE THE CIT(A), THE ORDER OF THE ITAT FOR AY 1999-2000 ON AN IDENTI CAL ISSUE WAS AVAILABLE. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER TO THE TUNE OF `111.34 CRORES WAS NOT UPHELD IN THE LIGHT OF TH E ORDER OF THE ITAT. THE MATTER WAS RESTORED TO HIM FOR VERIFICATION OF THE EXPENDITURE AS WAS DONE BY THE ITAT. 41. WE HAVE HEARD BOTH THE SIDES AND AGREE WITH THE ACTION OF THE LEARNED CIT(A) IN GIVING CERTAIN DIRECTIONS TO THE ASSESSING OFFICER IN THE LIGHT OF THE ORDER OF THE TRIBUNAL FOR THE AY 1 999-2000. THE MATTER ITA-2047 & 2873/DEL/2007 37 IS ALREADY RESTORED TO THE ASSESSING OFFICER AND TH E DEPARTMENT HAS NO REASON TO FEEL AGGRIEVED THEREOF. WE DECLINE TO IN TERFERE. 42. THE NEXT DISPUTE IN THE REVENUES APPEAL RELATE S TO THE DELETION OF DISALLOWANCE OF DEPRECIATION IN INVESTMENT OF 48 ,82,82,014/-. 43. WE HAVE HEARD BOTH THE SIDES AND FIND THAT THE ISSUE IS FULLY COVERED BY THE EARLIER YEARS ORDERS RIGHT FROM AY 2000-01 TO 2004-05. THE LEARNED CIT(A) HAS ONLY FOLLOWED 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 CONF IRMED. 44. THE NEXT DISPUTE IN THE REVENUES APPEAL RELATE S TO DELETION OF AN ADDITION OF `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 ASSESSE E WAS MAINTAINING MERCANTILE SYSTEM OF ACCOUNTING AND HAS TO ACCOUNT FOR ALL INCOMES WHICH HAVE ACCRUED. IT REDUCED AN AMOUNT O F `102.83 CRORES ON ACCOUNT OF INTEREST ACCRUED BUT NOT DUE. THE AS SESSEE FURNISHED ALL THE DETAILS OF INTEREST ACCRUED BUT NOT DUE. THE A SSESSEE HAS CONSISTENTLY FOLLOWED THE PRACTICE OF OFFERING ONLY INTEREST INCOME WHICH WAS ACCRUED. INTEREST ACCRUED BUT NOT DUE WA S ACCOUNTED IN THE BOOKS. BASED ON THE OPENING BALANCE AND THE CLOSIN G 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 B ROKEN 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) ITA-2047 & 2873/DEL/2007 38 EXAMINED THE METHOD OF ACCOUNTING FOLLOWED BY THE A SSESSEE OVER A PERIOD OF TIME AND HAS GIVEN THE FOLLOWING FINDING: - 8.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND HAVE GONE THROUGH THE ORDER OF THE A.O. AND THE SUBMISSIONS MADE ON BEHALF OF THE APPELLANT. I FIN D 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 P&L ACCOUNT. I FI ND THAT THE ISSUE OF BROKEN PERIOD INTEREST HAS BEEN DECIDE D IN FAVOUR OF THE ASSESSEE BY HONBLE ITAT VIDE ITS ORD ER DATED 24.02.2006 FOR AY 1995-96 IN THE CASE OF PUNJAB & S IND BANK. THE ISSUE OF BROKEN PERIOD INTEREST HAS ALSO BEEN CONSIDERED BY THE HONBLE BOMBAY HIGH COURT AND THE SAME HAS BEEN ALLOWED AS REVENUE EXPENDITURE IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATI ON VS. CIT [258 ITR 601 (2002)]. FURTHER, IN THE CASE OF UNION BANK OF INDIA ALSO, THE ISSUE OF BROKEN PERIOD INTE REST HAS BEEN ALLOWED AS REVENUE EXPENDITURE BY THE HON'BLE BOMBAY HIGH COURT. AGAINST THIS, THE DEPARTMENT FI LED 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 APPELL ANT WHO GETS A RELIEF OF RS.102.83 CRORE. 46. THE ABOVE FINDINGS OF THE CIT(A) ARE BASED ON T HE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. NE DUNGADI BANK LTD. 264 ITR 545 AND ALSO THE DECISION OF THE HON'BLE BO MBAY HIGH COURT IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION VS. CIT ITA-2047 & 2873/DEL/2007 39 258 ITR 601. WE, THEREFORE, DO NOT FIND ANY INFI RMITY IN THE ORDER OF THE CIT(A). THE SAME IS CONFIRMED. 47. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AND THAT OF THE REVENUE DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 25 TH OCTOBER, 2011. SD/- SD/- (A.D.JAIN (A.D.JAIN (A.D.JAIN (A.D.JAIN) )) ) (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA) )) ) JUDICIAL JUDICIAL JUDICIAL JUDICIAL MEM MEM MEM MEMBER BER BER BER PRESIDENT PRESIDENT PRESIDENT PRESIDENT DATED : 25.10.2011 VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR