Punjab National Bank v. Addl. CIT

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The Tax Publishers2012 TaxPub(DT) 2570 (Del-Trib) : (2012) 017 ITR (Trib) 0462 INCOME TAX ACT, 1961 --Business income--Profit chargeable to tax under section 41(1)Transfer of inter bank branch transaction blocked accounts blocked vis-a-vis condition precedent--The assessee was a public sector scheduled bank. The assessing officer observed that the assessee-bank had reduced an amount from its computation of income in respect of blocked accounts. Vide questionnaire dated 14-3-2006, 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 the Reserve Bank of India letter dated 29-6-2004, the banks were required to segregate the credit entries outstanding for more than five years in the inter-branch account and transfer them to a separate blocked account to be shown under the head 'Other Liabilities and Provisions' (Schedule 5), in the balance-sheet. While arriving at the net amount of inter-branch transactions, the aggregate amount of blocked account was to be excluded and only the remaining credit entries 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 and Provisions' Schedule 5 of the balance-sheet. The Reserve Bank of India vide their letter dated 29-6-2004 permitted the bank to transfer Rs. 387.07 crores lying in the blocked account comprising credit IBR entries, to the general reserves/float provision towards non-performing assets. The assessee's-bank was directed by the Reserve Bank of India to credit the sum in question to the profit and loss account as miscellaneous income of the bank, which it has credited as its income in the profit and loss account and has appropriated to its general reserve, although below the line of the profit and loss account. The assessing officer, therefore, came to a view that the assessee had initially treated the sum in question as income but later reduced the same from the computation of taxable income. The Commissioner (Appeals) upheld the views of assessing officer. Held: The Reserve Bank of India, in the course of its inspection of the banks, has found that large transactions remained to be reconciled in the inter-branch accounts which was a cause for serious concern. It is in this background that the Reserve Bank of India has directed the banks to first segregate the credit entries outstanding for more than five years in the inter-branch accounts and transfer them to a separate account called 'blocked accounts' and show them under 'other liabilities' in the balance-sheet. At least, the Reserve 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 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 the 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. The assessee being a public sector bank, all its transactions are under the scrutiny of the Reserve Bank of India and to some extent/even the accounting entries have to follow circulars and guidelines issued by the Reserve Bank of India from time to time. In fact, the accounts and transactions of the bank are always subject to the inspection by the Reserve Bank of India. It is clear from the circulars and there is no dispute as regards these matters. In terms of the instructions issued way back on 28-2-1991, the bank is required to show the net balance in inter-branch accounts and under 'other liabilities and provisions' (Schedule 5) when in credit and under 'other assets' (Schedule 11) when in debit. The Reserve Bank of India, in the course of its inspection of the banks, has found that large transactions remained to be reconciled in the inter-branch accounts which was a cause for serious concern. It is in this background that the Reserve Bank of India has directed the banks to first segregate the credit entries outstanding for more than five years in the inter-branch accounts and transfer them to a separate account called 'blocked accounts' and show them under 'Other liabilities' in the balance-sheet. [Para 31] Reserve Bank of India, while giving permission to close these inter-branch differences, has clearly stipulated that the amount so transferred shall not be treated as available for distribution of dividends, meaning thereby the Reserve Bank of India has not permitted the bank to treat it as an income once and for all and it has always stipulated certain conditions and prescribed certain procedures and formalities to safeguard the interest of the bank as a whole but that does not take away the basic nature of the amounts in question. It cannot, in any way, convert the transactions of this nature as revenue transactions of the bank necessitating the same to be treated as income on the revenue account. At least, the Reserve 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 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 the 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. The accounting entries, which according to the Revenue, yield the income are in the inter-branch accounts of the bank. It cannot be said that 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 give rise to generation of income which can attract the said transactions to tax. [Para 32] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2570 (Del-Trib) : (2012) 017 ITR (Trib) 0462

INCOME TAX ACT, 1961

--Business income--Profit chargeable to tax under section 41(1)Transfer of inter bank branch transaction blocked accounts blocked vis-a-vis condition precedent--The assessee was a public sector scheduled bank. The assessing officer observed that the assessee-bank had reduced an amount from its computation of income in respect of blocked accounts. Vide questionnaire dated 14-3-2006, 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 the Reserve Bank of India letter dated 29-6-2004, the banks were required to segregate the credit entries outstanding for more than five years in the inter-branch account and transfer them to a separate blocked account to be shown under the head 'Other Liabilities and Provisions' (Schedule 5), in the balance-sheet. While arriving at the net amount of inter-branch transactions, the aggregate amount of blocked account was to be excluded and only the remaining credit entries 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 and Provisions' Schedule 5 of the balance-sheet. The Reserve Bank of India vide their letter dated 29-6-2004 permitted the bank to transfer Rs. 387.07 crores lying in the blocked account comprising credit IBR entries, to the general reserves/float provision towards non-performing assets. The assessee's-bank was directed by the Reserve Bank of India to credit the sum in question to the profit and loss account as miscellaneous income of the bank, which it has credited as its income in the profit and loss account and has appropriated to its general reserve, although below the line of the profit and loss account. The assessing officer, therefore, came to a view that the assessee had initially treated the sum in question as income but later reduced the same from the computation of taxable income. The Commissioner (Appeals) upheld the views of assessing officer. Held: The Reserve Bank of India, in the course of its inspection of the banks, has found that large transactions remained to be reconciled in the inter-branch accounts which was a cause for serious concern. It is in this background that the Reserve Bank of India has directed the banks to first segregate the credit entries outstanding for more than five years in the inter-branch accounts and transfer them to a separate account called 'blocked accounts' and show them under 'other liabilities' in the balance-sheet. At least, the Reserve 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 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 the 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.

The assessee being a public sector bank, all its transactions are under the scrutiny of the Reserve Bank of India and to some extent/even the accounting entries have to follow circulars and guidelines issued by the Reserve Bank of India from time to time. In fact, the accounts and transactions of the bank are always subject to the inspection by the Reserve Bank of India. It is clear from the circulars and there is no dispute as regards these matters. In terms of the instructions issued way back on 28-2-1991, the bank is required to show the net balance in inter-branch accounts and under 'other liabilities and provisions' (Schedule 5) when in credit and under 'other assets' (Schedule 11) when in debit. The Reserve Bank of India, in the course of its inspection of the banks, has found that large transactions remained to be reconciled in the inter-branch accounts which was a cause for serious concern. It is in this background that the Reserve Bank of India has directed the banks to first segregate the credit entries outstanding for more than five years in the inter-branch accounts and transfer them to a separate account called 'blocked accounts' and show them under 'Other liabilities' in the balance-sheet. [Para 31] Reserve Bank of India, while giving permission to close these inter-branch differences, has clearly stipulated that the amount so transferred shall not be treated as available for distribution of dividends, meaning thereby the Reserve Bank of India has not permitted the bank to treat it as an income once and for all and it has always stipulated certain conditions and prescribed certain procedures and formalities to safeguard the interest of the bank as a whole but that does not take away the basic nature of the amounts in question. It cannot, in any way, convert the transactions of this nature as revenue transactions of the bank necessitating the same to be treated as income on the revenue account. At least, the Reserve 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 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 the 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. The accounting entries, which according to the Revenue, yield the income are in the inter-branch accounts of the bank. It cannot be said that 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 give rise to generation of income which can attract the said transactions to tax. [Para 32]