INCOME TAX ACT, 1961

Section 4

Income - Assessability - Reversal of reserve account -

Assessee-bank was providing towards reserves from its profit and loss account every year. The said reserves debited in the profit and loss account were not claimed by the assessee as deduction. Subsequently, the assessee reversed the entries and brought back the amount transferred to the reserve account as and when it was found that those reserves were not required any more. AO was of the view that the credits by way of reversal made by the assessee were taxable, as its income for the concerned assessment year. Further, CIT (A) upheld the order passed by the AO. Held: At first instance when amounts were transferred to reserve as well as at the second instance when such amounts were taken out of the reserves and brought back to the profit and loss account, the transfers were only in the nature of appropriation. Thus, the appropriation entries and transfers of funds did not affect the computation of taxable income of the assessee either at the time of first appropriation or at the time of second appropriation. Therefore, the view taken by the AO that the credits found in the profit and loss account, as a result of reversal of the reserves was in the nature of taxable income, was not correct. However, it was found that the assessee had not placed the appropriate details regarding the transfer and re-transfer out of the reserves before the lower authorities. Therefore, the matter was remanded to the AO and the assessee was directed furnish year-wise details of crediting and debiting the reserve account through profit and loss account from year to year.

REFERRED :

FAVOUR : Matter remanded

A.Y. : 2008-09 to 2010-11

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