STATE BANK OF BIKANERandJAIPUR V. DY CIT

ITA/361/2017

AI Insights

The case revolves around the Income Tax Appeal No. 361/2017, where the State Bank of India challenged the judgment of the Income Tax Appellate Tribunal. The core issue was whether the amount of Rs. 47,33,34,127, representing unreconciled entries in inter-branch accounts up to 31.03.1999, should be treated as income for tax purposes. The Reserve Bank of India had directed the bank to transfer these amounts to the General Reserves after initially crediting them to the Profit & Loss Account, under specific conditions. The Tribunal had treated this amount as income, which was contested by the bank, leading to this appeal.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 746114 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 15-05-2018
• Assessment Year: misc
• Other Referred Cases: State Bank of Hyderabad Vs. Addl. Commissioner of Income-tax Circle 3(2), Hyderabad, Punjab National Bank vs. Additional Commissioner of Income Tax, IT, Canara Bank Vs. The Commissioner of Income-tax LTU, Bangalore, Commissioner of Income Tax vs. Moonlight Builders and Developers, Commissioner of Income Tax vs. Aries Advertising Pvt. Ltd., Commissioner of Income Tax, Madurai vs. T.V. Sundaram Iyengar & Sons Ltd., M/s The Rajasthan State Co-operative Bank Ltd. vs. Assistant Commissioner of Income Tax, ITA NO. 267/2017, RHC
• Laws Referred To: Banking Regulation Act, 1949, Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: R B MATHUR; K D MATHUR; PRATEEK KEDAWAT
• Assessee Lawyers: SANJAY JHANWAR; ARCHANA
• Keywords: General Reserve; Income tax appeal; Profit and loss account; Inter Branch Account; Unreconciled Entries; RBI Instructions
• Section: 147; 148; 143(3); 153A; 68

Judgement Text

"HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 361/2017 State Of Bikaner Jaipur, Tilak Marg, C-Scheme, Jaipur (Now Known As State Bank Of India) Through Its Dgm And Cfo Shri Bhajan Lal S/o Shri Hargun Das Aged About 52 Years ----Appellant Versus Dy, Cit, Circle 6, Jaipur ----Respondent For Appellant(s) : Mr. Sanjay Jhanwar with Ms. Archana For Respondent(s) : Mr. R. B. Mathur with Mr. K. D. Mathur & Mr. Prateek Kedawat HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 15/05/2018 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal, whereby the Tribunal has partly allowed the appeal preferred by the assessee. 2. This court while admitting the appeal on 14.02.2018 framed the following question of law:- “Whether under the facts and circumstances of the case the addition of Rs. 47,33,34,127/- sustained by the ld. Tribunal treating the transfer of amount of un-reconciled outstanding entries originated up to 31.03.1999 in the inter branch account to the profit and loss account pursuant to RBI instructions is not without authorization of law?” 3. The brief facts of the case are that the appellant is a banking company and is carrying on the business of banking and other (2 of 20) [ITA-361/2017] allied activities in India under Banking Regulation Act, 1949 and has to abide itself by all the regulations and instructions being issued time to time by the Reserve Bank of India (hereinafter referred to as”the RBI” for brevity). 4. That the RBI vide its letter dated 19.12.2005, directed the assessee to transfer the net credit balance of unreconciled entries originated upto 31.03.1999 in the inter branch accounts to General Reserves subject to compliance amongst others with the following conditions: “i) The entries should have been originated upto 31st March, 1999. ii) The amount should first be credited to P&L Account. Iii) Thereafter, it should be appropriated to the General Reserve to be utilized to meet the future claim. iv) Any claim in respect of these entries should be honored by debit to the P&L account by transferring corresponding amount from general reserve. v) Complete record of all such entries should be maintained. vi) The net amount credited to the P&L Account will not be available for declaration of the dividend. vii) The bank should continue the efforts towards reconciliation of such entries.” 5. Counsel for the appellant Mr. Sanjay Jhanwar has firstly taken us to the guidelines issued by the RBI which reads as under:- “We have recently reviewed the position relating to reconciliation of old outstanding entries in inter branch accounts of the public sector banks. The review indicated that out of the entries (3 of 20) [ITA-361/2017] originated upto March 31,1999 int the inter branch account of your bank there are unreconciled entries with a net credit balance. Taking into account the representation received from several banks. It has been decided that in respect of entries originated in inter branch account upto March 31,1999 and still pending reconciliation, you may as a one time measure transfer the net credit balance (net value of debit and credit entries outstanding to ‘General Reserve’ subject to compliance with the following conditions. i) The amount should first be credited to Profit and Loss Account and shown under item VII(Miscellaneous Income) under Schedule 14(other income). ii) Thereafter, it should be appropriated to the General Reserve to be utilized to meet the future claims, if any. Such appropriation should be ‘below the line’ (Net of taxes, if any, and net of transfer to Statutory Reserve) as applicable to the above amount. iii) Any claim in respect of these entries, in future, should be honoured by debit to the same head of Profit and Loss Account viz. Miscellaneous income and an equivalent amount(net of tax benefit, if any, and net of subsequent reduction in transfer to Statutory Reserves) shall be transferred reduction in the transfer to Statutory Reserves) shall be transferred from the ‘General Reserve’ to the Profit and Loss Account. iv You should maintain a complete record of all the outstanding entries transferred to Profit and Loss Account for verification by internal inspection/audit/RBI inspection. It should be subjected to a 100 per cent audit by the internal auditors, the concurrent auditors and the statutory auditors. v Appropriate disclosure should be made in the ‘Notes to Account’ of the balance sheet. The disclosure should also contain information regarding the impact on the Profit and Loss Account. vi As a safeguard, honouring of any future claims exceeding Rs. one of whom should be from outside the branch concerned preferably from the controlling office/Head Office. vii. The net amount credited to the Profit and Loss (4 of 20) [ITA-361/2017] Account will not be available for declaration of dividend. viii) These entries will be dropped from the reporting system not be reported as outstanding entries in the quarterly reports to RBI. However, you should continue your efforts towards reconciliation of such entries. 3. Please advice the number of entries and amount transferred as above in due course. 4. In this connection, we reiterate the instructions contained in our circular DBOD No.BC.114/16.01.001/93 dated April 28, 1993 in terms of which banks are required to ensure that no entries are kept unadjusted for more than six months.“ 6. Pursuant to which resolution is made of the amount which was shown outstanding would be shifted to the Branch. He has pointed out that Tribunal has observed as under:- “Ld. Counsel for the assessee reiterated the submissions as made in the written submissions. Ld. Counsel submitted that the R.B.I. vide its letter dated 19/12/2005 directed the assessee to transfer the net credit balance of unreconciled entries originated upto 31.03.1999 in the inter branch accounts to General Reserves. The Assessing Officer treated the amount of Rs.47,33,34,127/- as income of the assessee chargeable to tax. The ld. CIT(A) confirmed the addition by relying upon the judgment of the Hon’ble Supreme Court rendered in the case of CIT Vs. T.V. Sundaram Iyengar & Sons 222 ITR 344. The Ld. Counsel submitted that the three important aspect about transfer of reconciled, entries in the inter branch accounts. One, the assessee is to maintain complete details, the second; the assessee does not have any right to forfeit the amount. It has to honor any claim in the respect and the third, the amount so transferred cannot be distributed as dividend. This amount can be utilized only for meeting the claims in respect of these unreconciled entries. “ 7. The contention of the appellant is that the Tribunal has held (5 of 20) [ITA-361/2017] against the assessee ignoring the fact that three other Tribunal In State Bank of Hyderabad Vs. Addl. Commissioner of Income-tax Circle 3(2), Hydrabad D.B. ITA No. 509/Hyd/2010 decided on 17.04.2013 it has been held as under:- 8. We heard both sides and perused the orders of the Revenue authorities and other material on record. As for the assess-ability in respect of income, if any, embedded in the inter-branch transactions, this issue has come up for consideration before the Delhi Bench of the Tribunal in the case of Punjab National Bank (supra), wherein the Tribunal, after detailed consideration of the contentions of the parties in the light of the various statutory provisions, examined the matter in the light of the decision of the Hon'ble Supreme Court in the case of T.V. Sundaram lyengar & Sons Ltd. (222 ITR 344), heavily relied upon in that case by the Assessing officer in the assessment order and the CIT-DR before the Tribunal, and proceeded to conclude this issue, vide paras 33 and 34 of the said order, in the following manner- \"33. The facts of the case of the assessee are exactly similar to the facts before the Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd.(supra). In that case, it was held that the transaction between the head office of the assessee and its branch in India was a transaction between the principal and principal. In law, there cannot be a valid transaction of sale between the branch and its head office. As it is ultimately based on a proposition that no person can enter into contract with one self. Debiting or crediting one's account cannot alter the legal position. Applying the same principle as enunciated by the Hon'ble Calcutta High Court, it cannot be said that the transactions between the branches gave rise to an income Assessable under the Income-tax Act. The substance of the entire transaction, in our view, appears to be pure accounting lapses on the part of the bank or its branches to properly reconcile the transactions. In fact, it is always understood that all these accounts must have cancelled each other. It did not take place that way due to human errors or lack of advice forthcoming as regards the closure of the accounts. In any case, any imbalance in the inter branch accounts, in our considered view, cannot give rise to a taxable income under the Income-tax Act. The Assessing Officer as well (6 of 20) [ITA-361/2017] as CIT-DR has heavily relied upon the decision of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. - 222 ITR 344. In that case, the assessee received the deposits from customers in the course of its business and transferred the amounts which were not claimed by the customers to its profit & loss accounts. The Assessing Officer was of the view that the sums in question have become the income of the assessee because of the expiry of limitation period or other statutory or State Bank of Hyderabad, Hyderabad. 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 of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. 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 sightly different. The amounts are lying in the accounts which are known as inter branch accounts. It is expected that all these inter branch accounts should get squared up on consolidation. Due to human error of accounting or lack of proper advise from different branches, the amounts in question have remained either in debit or credit in different inter branch Accounts and the bank has admittedly not reconciled these accounts for over a long period of time. It is very difficult to say that these have traces of income either at the time of receipt or at the time of write off to the profit & loss account. In fact, the Reserve Bank of India has permitted them to close these differences to the profit & loss account with a rider that the obligation to discharge the liabilities arising thereunder is upon the bank. Meaning thereby, there is no question of the amounts being treated as income in the hands of the bank. We must appreciate that these transactions in the inter branch accounts are mere accounting entries. When the transactions were made to these accounts initially, these were not in the nature of income either of the branches involved or of the bank as a whole. It is difficult to say that the amounts in question bear the same character as unclaimed deposit received from the customers by the assessee T.V. Sundaram Iyengar & Sons Ltd. 34. In the light of the discussions of these facts, it is difficult to say that either the decision of the Apex Court in the case of T.V. Sundaram Iyengar & (7 of 20) [ITA-361/2017] Sons Ltd. (supra) or other decisions including the decision of Hon'ble Delhi High Court in the case of CIT Vs. Rajasthan Golden Transport Co.(P) Ltd. - 249 ITR 723 are applicable to the facts of the case. In fact, the Hon'ble Delhi High Court in the case of Rajasthan Golden Transport Co.(P) Ltd. (supra) was concerned with the amounts received in the course of trade transactions. In the decision of the Hon'ble Delhi High Court, the amounts in question were held to be taxable under Section 41(1) of the Act. As regards the applicability of Section 41(1), we may again state that such provisions of Section 41(1) cannot be invoked to bring these amounts in question to be taxed as a part of the receipts in the aforesaid provision. The Revenue has to first establish that the sum in question which is now being brought to tax has once been allowed in the past as a deduction while computing the income of the bank. It is not the case of the Revenue or at least the Revenue has not brought any material to show that the sum in question forming part of the so-called inter branch transactions were once allowed by the Revenue as a deduction in the computation of profits and gains of business. When that primary requirement is absent, the question of bringing the sums in question to tax under Section 41(1) State Bank of Hyderabad, Hyderabad. May not be legally permissible to the Revenue. In the light of the discussions above, we do not agree with the stand of the Department that the amounts in question which are part of the inter-branch transactions requires to be brought to tax as income of the assessee in the year in question.\" 2. In M/s Canara Bank Vs. The Commissioner of Income-tax LTU, Bangalore D.B. ITA No. 390/Bang/2011 decided on 08.06.2012 it has been held as under:- 6.3 In the instant case, as mentioned earlier, the Reserve Bank of India had categorically directed that the amounts are to be kept in general reserve account though routed through the profit and loss accoubt. It is the direction of the RBI that the assessee bank is under an obligation to meet the future claims out of General Reserve so created. The RBI had also stipulated that the amounts so transferred shall not be used in the form of distribution of dividend. In this context of the matter, it cannot be said that it is the money of assessee bank. The RBI instructions are issued as per section 35A of the Banking Regulation Act, 1949 and the same are binding on the assessee bank. Therefore, though it is routed through the profit and loss account, it does not have income (8 of 20) [ITA-361/2017] character in the hands of the assessee bank and hence, it cannot be brought to tax. Accordingly, the CIT's order invoking revisionary jurisdiction under section 263 of the ACT directing the Assessing Officer the assess an amount of Rs. 52.77 crores is not justified and therefore, is quashed to that extent. It is ordered accordingly. 3. Punjab National Bank vs. Additional Commissioner of Income Tax, ITA No. 2047/Del/2007 & ITA No. 2873/Del/2007 decided on 25.10.2011 it has been held as under :- 32. A careful reading of the various instructions issued bt the Reserve Bank of India from time to time to PNB shows that the disputed amounts were part of enter branch transactions and there was 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. During the course of hearing, it was revealed to us that these were the transactions prior to computerization in the bank wherein each of the transactions were recorded in the books and was communicated through the internal advices by different branches of the bank to othere involved branches. The manual accounting has generated these outstanding transactions in its enter branch accounts although at the time of the conslidation of the bank accounts, all these accounts should have been squared up by the accounting process of the consolidation. Unfortunately, this was not done and the Reserve Bank of India was aware of all these imbalance in the reconcilation of the inter branch transactions. None of these transactions, as we see from the records presented before us and the information available with us, show that the involved transactions have revenue implications by nature which could spring the income subject to assessment under the Income Tax Act. To put it straight, they were not on the revenue account but they were more in the nature of the inter branch transactions. In a bank of the size of the Punjab National bank, when the accounting was done manually earlier, all these differences have cropped up and the management was not able to reconcile these balances. In the inter account branch transactions, in none of the proposals made by the bank or the assessment made by the Reserve Bank of India, it is discernible that these entries or differences have any implications on the revenue transactions of the bank. Therfore, there is an absolute absence of any flavour of income (9 of 20) [ITA-361/2017] either in the recipt ot in the payment or accounting transactions in what is known as inter branch transactions. It is just like the money of the bank as though under circulation between different branches. Over the years, the differences have been carried forward and have become significant and material figures. But the basic character remains the same that it has no character of income in any of these transactions either when the transaction arose for the first time or was dealt with by the different branches. It is difficult to say these unreconciled inter branch transactions should be automatically be treated as the income of the bank arising in the course of its business activity. It is nobody's case that these transactions arose out of revenue transations 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 the inter branch differences, has clearly stipulated that the amount so trasferred shall not be treated as available for distribution of dividends, meaning therby 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 doesnot take away the basic nature of amounts in question. It cannot in anyway convert the transaction of this nature as revenue transactions of the bank necessitating the same to be treated as income on the revenue account. Atleast, the Reserve Bank of India which was ceased of the issue when it was posted to it didnopt accept the claims of the assessee that this should be treated as miscellaneous income, meaning thereby, these amounts in question, even by efflux of time, cannot be treated as income for the obligations on the part of the bank is not extinguished and Reserve bank of India has made it very clear that the assessee bank will be under obligation to discharge all the obligations arising therefrom. The assessee cannot be said to be making profit from transferring as though from one pocket to the other pocket when it had operated the inter branch accounts of this nature. In our view, the decision of the Hon'ble Apex Court in the case of Sir Kikabhai Premchand vs. CIT-24ITR506 and Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. vs. CIT-116ITR425 are clearly in favor of the assessee. The accounting entries, which acording (10 of 20) [ITA-361/2017] to the revenue, yield the income are in the inter branch accoutns of the bank. It cannot be said that the transactions between the branch can result in an income to the bank as a whole. No man can make profit to himself by the transactions with the self. Each branch of the bank is the assessee itself. So, the transactions between different branches cannot, in our view, give rise to generation of income which can attract the said transactions to tax. 33. The facts of the case of the assessee are exactly similar to the facts before the Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. (supra). In that case, it was held that the transaction between the head office of the assessee and its branch in India was a transaction between the principal and principal. In law, there cannot be a valid transaction of sale between the branch and its head office. As it is ultimately based on a proposition that no person can enter into contract with one self. Debiting or crediting one's account cannot alter the legal position. Applying the same principle as enunciated by the Hon'ble Calcutta High Court, it cannot be said that the transactions between the branches gave rise to an income assessable under the Income-tax Act. The substance of the ntire transaction, in our view, appears to be pure accounting lapses on the part of the bank or its branches to properly reconcile the transactions. In fact, it is always understood that all these accounts must have cancelled each other. It did not take place that way due to human errors or lack of advice forthcoming as regards the closure of the accounts. In any case, any imbalance in the inter branch accounts, in our considered view, cannot give rise to a taxable income under the Income-tax Act. The Assessing Officer as well as CIT-DR has heavily relied upon the decision of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. - 222 ITR 344. In that case, the assessee received the deposits from customers in the course of its business and transferred the amounts which were not claimed by the customers to its profit & loss 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 (11 of 20) [ITA-361/2017] time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself 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 slightly different. The amounts are lying in the accounts which are known as inter branch accounts. It is expected that all these inter branch accounts should get squared up on consolidation. Due to human error of accounting or lack of proper advise from different branches, the amounts in question have remained either in debit or credit in different inter branch accounts and the bank has admittedly not reconciled these accounts for over a long period of time. It is very difficult to say that these have traces of income either at the time of receipt or at the time of write off to the profit & loss account. In fact, the Reserve Bank of India has permitted them to close these differences to the profit & loss account with a rider that the sums in question are not permitted by the Reserve Bank of India that the obligation to discharge the liabilities arising thereunder is upon the bank. Meaning thereby, there is no question of the amounts being treated as income in the hands of the bank. We must appreciate that these transactions in the inter branch accounts are mere accounting entries. When the transactions were made to these acounts initially, these were not in the nature of income either of the branches involved or of the bank as a whole. It is a part of transactions on the real accounts and not on what is known as revenue accounts. Therefore, it is difficult to say that the amounts in question bear the same character as unclaimed deposit received from the customers by the assessee T.V. Sundaram Iyengar & Sons Ltd. 08. Against the judgment passed by Hydrabad Tribunal, appeal was preferred but the same was dismissed. However, as contended Mr. R.B.Mathur appeal against Delhi Tribunal is pending before the Delhi High Court and Banglore Bench is pending before the High Court of Karnataka. 09. Counsel for the appellant relied on decision of the Supreme (12 of 20) [ITA-361/2017] Court of India in Commissioner of Income Tax vs. Moonlight Builders and Developers (2008) 307 ITR 0197 wherein it has been held as under:- 8. Precisely the same thing has happened insofar as these appeals are concerned. The revenue has accepted the primary orders passed by the Tribunal on 14-7- 2003 and 14-6-2004 but has chosen to challenge the orders passed by the Tribunal in the present appeals which merely follow these primary orders. There is no reason given by the revenue for this pick and choose attitude or this attitude of accepting favorable orders in respect of one assessed but not accepting the same favorable order in respect of another assessed, without there being any distinction between their cases. Consequently, in view of the arbitrary manner of proceeding in the matter, we do not think that it will be proper or in the interest of justice to allow the revenue to seek to recover tax from one assessed while declining to recover tax from another assessed on identical facts. 9. Following the decisions of the Supreme Court as well as of his Court, we dismiss these appeals and hold that no substantial question of law has arisen for our consideration. 10. Counsel for the respondent Mr. R.N. Mathur has taken us to the finding of AO which reads as under:- Ratio of the above decision apply in the instant case also because there are no claimants of the credit balance available with the assessee. The assessee has therefore, written back that amount in it’s books of accounts and has become richer by that amount. Had that amount not been the income of the assessee it should not have been credited to its P&L A/c. Further, it needs to be clarified here that as per the RBI guidelines it is very clear that all the unreconciled credit entries should first be credited to the P&L A/C as miscellaneous income which should further be transferred to the General Reserve and if any claim out of these entries is made subsequently it must be honoured by debiting the same head of P&L A/C. In view of the above discussions it is held that (13 of 20) [ITA-361/2017] sum of Rs.47,33,34,127 shown as capital receipt is treated as income and added to the total income of the assessee” 11. He has taken us to the finding recorded by CIT(A) which reads as under:- “7.3 I have considered facts of the case and arguments taken by Sh. Jhanwar and Sh. Parwal quite carefully. In my considered view the issue under consideration is farily covered by Hon'ble Supreme Court judgment in the case of CIT V/s T.V. Sundaram Jyangar & Sons Ltd. 222 ITR 344. After matching the facts of the present case vis-a-vis the aforesaid case decided by Hon'ble Supreme Court it is seen that in that case the appellant has received deposits in the course of its business which were originally treated as capital receipts and some of the deposits were neither claimed by nor returned to the depositor and there was no dispute that deposits were received in the course of the carrying on of the business of the assessee and the amount under consideration was not in the nature of security deposit held by the appellant for performance of contract by its constituents. When facts of the present case are compared then it can be seen that the appellant bank also at the time of receipt of such amount has not treated the same as revenue receipt and undisputedly said amount/deposit was received by the appellant banker also in the course of carrying on the business of the appellant and the said amount was also not in the nature of security deposit held by the appellant bank. It is also a fact that during the relevant accounting year the appellant banker has only credited such amount in the P&L A/c which were received till 31.3.1999 and these were not claimed by the respective claimant. Further, the appellant banker itself has treated the said amount as its trading receipts by crediting the same to the P&L A/c. Matching the observation of Hon'ble Supreme Court in the case of CIT v/s T.V. Sundaram Iyangar & Sons Ltd. If a common sense view of the matter is taken even in the present case then the appellant banker had become richer by the amount which it transferred to its P&L A/c. In the similar manner in the present case also the appellant banker has received said money out of its ordinary banking transactions and though originally when the amount was received it was not in the nature of income but the amount remained with the appellant bank for a long period unclaimed by the concerned persons. True that the banker has (14 of 20) [ITA-361/2017] not got any right ot forfeit the money but fact remains that for a period of more than 7 years it remained unclaimed by the respective claimants. Though, I agree with the arguments taken by Sh.Jhanwar that strictly the provisions of S.41(1) of I.T. Act cannot be made applicable before treating the same as income but fact remains that when it remained unclaimed for a period of more than 7 years then only it had been credited to the P&L A/c of the appellant bank. In this connection, during the course of appellate proceedings further information was required from the appellant bank that out of said outstanding unreconciled entries credited to the P&L A/c which were originated upto 31.3.1999 how much amount was paid after 31.3.2006. In response to this query the banker has informed that in the F.Y. 2006-07 they have paid Rs.7,46,655/-, in F.Y.2007-08 they have paid Rs.10,09,145/- and in F.Y.2008-09 upto 12.11.2008 they have paid Rs.20,58,600/- and to sum up after 31.3.2006 and till 12.11.2008 the total payment was made at Rs.38,14,400/- out of the aforesaid amount credited in the P&L A/c of the year at Rs.47,33,34,127/- which is barely 0.80%. In this respect, it shall be appropriate to discuss the provisions of S.36(1)(vii) of I.T. Act which is in connection of amount written off as bad debts and the relevant provision specifies that if in the books of accounts it is debited as bad debts and written off as irrecoverable then it will be allowed as a deduction while computing total income. Though, this provision is not directly on this issue but it gives a rational that if on the debit to P&L A/c any specific debt is treated as bad debt and allowed as a deduction then as a corollary when there is unclaimed credit entries that too for a period of more than 7 years and these are credited to the P&L A/c why it should not be treated as income of appellant particularly when these were received during the course of normal trading operations of the banker and were not retained as security. Certainly, in a reasonable manner in the subsequent period whenever any amount out of the same is paid to the respective claimant it has to be allowed as a deduction sicne earlier at the time of credit to the P&L A/c it has been treated as inome of the appellant. Similar provisions are in S.41(4) of I.T. Act where a deduction has been allowed in respect of a bad debts earlier u/s36(1)(vii) of I.T. Act and subsequently if it is recovered then in the year of recovery it shall be chargeable to income- tax. Further, the Hon'ble Madras High Court judgment in the case of CIT v/s Aries Advertising P.Ltd. 255 ITR 510 relied upon by A.O. supports the view of assessing officer. With this discussion in my (15 of 20) [ITA-361/2017] considered view the assessing officer was justified in not allowing the said deduction as capital receipt of Rs.47,33,34,127/- and relevant ground of appeal is hereby rejected.” 12. Thereafter, he has taken us to the finding of the Tribunal which reads as under:- “We have heard the rival contentions, perused the material available on record and gone through the order of the authorities below. Ld. Counsel for the assessee was not in a position to assist the bench with regard to exact character of the reconciled entries. He submitted that this reconciliation entries cannot be treated as income of the bank even if it is presumed that this money belonging to the depositors. The submissions of the assessee is not supported by any evidence demonstrating that the amount credited in the accounts of the assessee bank would be paid to the concerned account holder or alternatively such entries pertain to its own funds. In our considered opinion, it was incumbent upon the assessee’s bank to demonstrate the nature of reconciliation entries of the same, the order of the AO cannot be disturbed. Accordingly, this ground of the assessee’s appeal is rejected.” 13. He relied upon the following judgments :- Commissioner of Income Tax vs. Aries Advertising Pvt. Ltd. [2002] 255 ITR 510 (Mad) :- 8. Therefore, it would have to be held that once the assessee transferred this amount to the general reserve, it treated the same as the profit. Once this position is clear, then the further question remains as to whether the amount such as above becomes the income of the assessee in its hand. That question no more remains res Integra. The Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. MANU/SC/1251/1996 : [1996]222ITR344(SC) has concluded this question as also the claim of the assessee that these amounts which were in the nature of deposits or credits did not change their character and could not be said to be an income in the hands of the assessee. The Supreme (16 of 20) [ITA-361/2017] Court, by majority, has answered the question that such amounts after they were treated to be profits, as has happened in this case, changed character and therefore could be held to be income particularly because the assessee had become richer by reason of such amount having been treated as a profit and further having been transferred to the general reserve. The apex court came to the following conclusion (headnote): \"... that, if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its profit and loss account. The amounts were assessable in the hands of the assessee.\" 9. The situation is no different in the present case. The amount represents the various credits and deposits during the trading with the aforementioned Aries Advertising Bureau. They remained for a long time to be recovered (even before the limitation period) and thus remained unclaimed. The amounts were then transferred by the assessee-company to the general reserve obviously treating them to be the profits. Therefore, in our opinion, the Supreme Court's decision cited supra applies on all fours. In that view we are of the clear opinion that the amount of Rs. 1,77,186 being the credit balances written off and transferred to the general reserve account has to be treated as income of the assessee chargeable to Income Tax. We answer the reference accordingly against the assessee. 2. Commissioner of Income Tax, Madurai vs. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 (SC) :- (17 of 20) [ITA-361/2017] 17. There is no dispute that the deposits in the case before us were received from trade parties who had not made any claim for repayment of the balance. The Income Tax Officer has pointed out that the amount had arisen as a result of trading transaction and had a character of income. The Tribunal has, however, held that the amount received in course of trade was of capital nature. The Tribunal, thereafter, straightaway applied the principle of Motley v. Tattersall (supra) and held since it was of a capital nature at the time of the receipt, it could not become assessee's income later on. 18. We are unable to uphold the decision of the Tribunal. The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constituents, As it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The Commissioner of Income Tax (Appeal) found that the assessee wrote back the amounts to its profit and loss account because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its profit and loss account. The Commissioner of Income Tax (Appeal) held that these amounts were not revenue receipts but were of capital nature. Provisions of Section 41(1) were not attracted in the facts of this case because the assessee's liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view. 19. We fail to see how these deposits were in any way different from the deposits which came for consideration in the case of Punjab Distilling Industries Ltd. v. Commissioner of Income Tax, Simla MANU/SC/0066/1958 : [1959]35ITR519(SC) . The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no finding to that effect. The deposits were taken in course of the trade and adjustments were made against these deposits in course of trade. The unclaimed surplus retained by the assessee will be its trade receipt. The assessee itself treated (18 of 20) [ITA-361/2017] the amount as its trade receipt by bringing it to its profit and loss account. 22. The principle laid down by Atkinson, J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson, J. pointed out that in Tattersall's case no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into bring automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. 23. In the present case, the money was received by the assessee in course of carrying on his business. 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 assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss (19 of 20) [ITA-361/2017] account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson, J. pointed out that what the assessee did was the common-sense way of dealing with the amounts. 3. M/s The Rajasthan State Co-operative Bank Ltd. vs. Assistant Commissioner of Income Tax, ITA NO. 267/2017, RHC :- 10. The question arises because of amendment which has come into force w.e.f. 1.4.2006 prior to that the income of the Cooperative society was totally exempted, therefore, question of keeping it in reserve fund would not make any difference. The contention of Mr. Pathak that in view of the decision of State Bank of Patiala (supra), an entry should have been made prior to 2006 is supported by the observations made by the AO which reads as under:- i. Statutory reserve of Rs.80,99,16,594.12/- as on 1.4.2006 has increase to Rs.82,41,83,630.49/-. The increase in the amount of statutory reserve is contributed by transferred of Rs.1,18,99,651/- from carried forward provisions written back in the relevant financial year by transferring the said amount to the statutory reserve account. 11. His further contention that for different assessment years 2003-04, 2004-05, 2005-06 & 2006-07, the entries could not have been made as on 31.3.2006 and the same has been made for the A.Y. 2007-08. In that view of the matter, we are of the opinion that case is covered by provisions of Section 41(1) of the Act as reproduced hereinabove. 12. The further contention which has been raised by counsel for the appellant that this exemption of income and entries already made are only to rectify the book entry, in our considered opinion, at the relevant time, the said contention would have been valid because the total income was exempted but when the entries were made in the books of account, the said income was not totally exempted. In that view of the matter, the view taken by all the authorities is required to be upheld. (20 of 20) [ITA-361/2017] 14. He, therefore, contended that this is an income of the assessee. 15. We have heard counsel both the parties. 16. Taking into consideration the facts which are on record, in our considered opinion, the entries which are made are only for the purpose of maintaining system which was lying in the branch office of head-office and by no stretch of imagination, on any accounting principle, this could be treated as income of the assessee once it has been shown reserve fund and as and when accrued it will be treated as income today it will not found favour under the Income Tax Act to be income of the assessee. This is only an assessment of accounts pursuant to the guidelines issued by the Reserve Bank of India. 18. In that view of the matter, in our considered opinion, the view taken by the Tribunal is required to be reversed & quashed and the question is required to be answered in favour of the assessee holding inasmuch as that the reconciled entries in another branch account cannot be treated as income in the hands of assessee. 19. In view of the above, the appeal stands allowed. (VIJAY KUMAR VYAS),J (K.S.JHAVERI),J B.M.G/Gourav/22 "