Director of Income Tax (International Taxation) vs. Dr. K. Kalpana Reddy

4 assessee had credited a sum of Rs.52,77,81,540/- towards write back of stale demand drafts as an income for assessment year 2007-08 and the aforesaid amount was allowed as deduction in computation statement. The Commissioner of Income Tax invoked the powers under Section 263 of the Act and inter alia noticed that there is no provision to exclude the receipts from taxable income when the same have been credited by the assessee to the profit and loss account to his income. It was further held that the order passed by the Assessing Officer is erroneous and is prejudicial to the interest of the revenue. 3. The Commissioner of Income Tax by an order dated 07.03.2011 inter alia held that under the Act there is no provision to allow any deduction from the profit of business in respect of the amount accrued to the assessee on account of demand drafts and gift cheques, which have lost its validity. It is further held that since, the aforesaid amount has been credited in

5 the books of accounts, therefore, it is a receipt from business. It was further held that money was received by the assessee in the course of its business and though it was treated as deposit and was capital in nature at the point of time when it was received, by efflux of time, the same became assessee's own money. It was also observed that the assessee himself treated the money as his own and taken the amount in the profit and loss account. By placing reliance on decision of the Supreme Court in 'CIT VS. T.V.SUNDARAM IYYENGER AND SONS', 222 ITR 344 (SC), it was held that an amount of Rs.52,77,81,539/- clearly represents a taxable receipt and there is no provision in the Act to allow the same as deduction from total income. Accordingly, the Assessing Officer was directed to withdraw the deduction of Rs.52,77,81,539/-. 4. The assessee thereupon approached the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short) by filing an appeal. The

6 tribunal by an order dated 08.06.2012 inter alia held that Reserve Bank of India vide its instruction dated 30.03.2007 had categorically directed that amounts in question are to be kept in general reserve account though routed through profit and loss account. It was further held that a direction has been issued by Reserve Bank of India that assessee is under an obligation to meet the future claims out of general reserve so created. It was further held that the instruction issued by Reserve Bank of India under Section 35A of the Banking Regulation Act, 1949 are binding on the assessee and even though, the same is routed through profit and loss account, it does not par take the character of income in the hands of the assessee and cannot be subjected to tax. Accordingly, the order passed by the Commissioner of Income Tax directing the Assessing Officer to assess an amount of Rs.52,77,81,539/- is quashed and the appeal preferred by the assessee was partly allowed. In the aforesaid

7 factual background, the revenue has filed this appeal before us. 5. Learned counsel for the revenue submitted that directions issued by the Reserve Bank of India would not alter the chargeability of the amount to tax under the Act. It is submitted that the Act and the directions issued by the Reserve Bank of India operate in different fields. It is also urged that directions have been issued by the Reserve Bank of India for maintaining books of accounts and cannot alter the issue of taxability of the amount under the Act. In support of aforesaid submissions, reliance has been placed on decisions in 'COMMISSIONER OF INCOME-TAX VS. T.V.SUNDARAM IYENGAR & SONS LTD.', (1996) 88 TAXMAN 492 (SC), 'COMMISSIONER OF INCOME- TAX VS. KARAM CHAND THAPAR', (1996) 88 TAXMAN 40 (SC), 'SOLID CONTAINERS LTD. VS. DEPUTY COMMISSIONER OF INCOME-TAX, SPL. RANGE-1, MUMBAI', (2009) 178 TAXMAN 192

8 (BOMBAY), 'COMMISSIONER OF INCOME-TAX VS. ARIES ADVERTISING (P.) LTD.', (2002) 125 TAXMAN 969 (MADRAS), 'SOUTHERN TECHNOLOGIES LTD. VS. JOINT COMMISSIONER OF INCOME-TAX, COIMBATORE', (2010) 187 TAXMAN 346 (SC). 6. On the other hand, learned counsel for the assessee submitted that in T.V.Sundaram Iyengar and Sons Ltd., supra, Supreme Court was dealing with a case of trading liability and there was a cessation of liability on account of liability becoming time barred, whereas in the instant case, the liability of the assessee does not cease to exist on account of the circular issued by the Reserve Bank of India, which prescribes that the assessee has the liability to refund the amount on demand. Therefore, the decision of the Supreme Court in T.V.Sundaram Iyengar and Sons Ltd., supra is of no assistance to the revenue. It is pointed out that in Karamachand Thaper supra, the Supreme Court was

9 dealing with a case of trading liability and therefore, on the same analogy the aforesaid decision is of no assistance to the revenue. It is argued that in fact the decision of the Supreme Court in Southern Technologies supra supports the case of the assessee as the credit in the profit and loss account was made by the assessee on the instructions issued by the Reserve Bank of India. It is also argued that the issue involved in this appeal is squarely covered by decisions of this court in 'COMMISSIONER OF INCOME-TAX VS. RADDI SAHAKARA BANK NIYAMITHA', (2017) 88 TAXMANN.COM 560 (KARNATAKA) and 'COMMISSIONER OF INCOME-TAX, HUBLI VS. KARNATAKA VIKAS GRAMEEN BANK', (2017) 79 TAXMANN.COM 359 (KARNATAKA). It is also urged that when any liability ceases and the same is sought to be treated as income, it can only be under Section 41 and Section 28 has no application because income sought to be taxed is not otherwise in the nature of

10 business income and therefore, in view of aforesaid division bench decisions of this court, the issue deserves to be answered in favour of the assessee. 7. By way of rejoinder reply, learned counsel for the revenue submitted that the judgment relied by the counsel for the assessee in the case of RADDI SAHAKARA BANK NIYAMITHA and KARNATAKA VIKAS GRAMEEN BANK supra have no application to the fact situation of the case as they have been rendered in context of Section 41(1) of the Act. 8. We have considered the submissions made by learned counsel for the parties and have perused the record. In T.V.Sundaram Iyengar and Sons Ltd., supra, the assessee had received certain deposits in the course of its business, which were treated as capital receipts. The aforesaid credit balances in favour of the customers of the assessee were not claimed by them and therefore, the assessee transferred the amounts to its

11 profit and loss account and the assessee did not include the amounts in its total income. The Assessing Officer held that since, the surplus income has arisen as a result of fake trade transactions, the amount had a character of income and accordingly the same were treated as income. The Commissioner of Income Tax (Appeals) allowed the appeal preferred by the assessee and held that such amount cannot be treated as income under Section 41(1) and Section 28, since, there were excess trading advances given by the clients to the assessee. The tribunal upheld the order passed by the Commissioner of Income Tax (Appeals). In para 18 of the aforesaid decision, it was held as under: 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

12 CIT(A) found that the assessee wrote back the amounts to its profit and loss account because the credit balances I the name of the trading parties did not claim these amounts for a long tie. The amounts represented credit balances in the name of the trading parties and was taken to its profit and loss account. The CIT(A) held that these amounts were not revenue receipts but were of capital nature. The 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. 9. The Supreme Court in the aforesaid factual background, held that principle appears to be that if an amount is received in the course of trading transaction, even though is not taxable in the year of receipt as being of revenue character, if 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, the amount should be treated as

13 income of the assessee. 10. A division bench of this court in Karnataka Vikas Grameen Bank supra after taking note of Section 41(1) of the Act, has held that Section 41(1) of the Act can be made applicable when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. A bench of this Court by placing reliance on paragraph 18 of T.V.Sundaram Iyengar and Sons Ltd.'s case upheld the order of the tribunal directing deletion of the sum towards unclaimed stale profits and pay orders. The aforesaid decision was followed by another division bench of this court in Raddi Sahakara Bank Niyamitha supra. 11. Now we may advert to the facts of the case. The Reserve Bank of India has issued instructions under Section 35A of the Banking Regulation Act, which are statutory in nature and are binding on the assessee. The

14 relevant extract of instructions, read as under: (i) The amount should first be credited to the 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 the transfer to statutory reserves) shall be transferred from the 'General Reserve' to the profit and loss account. (vii) The net amount credit to the profit and loss account will not be available for

15 declaration of dividend. 12. In the instant case, in the light of statutory instructions issued by Reserve Bank of India, the amounts in question were kept by the assessee in general reserve account though routed through profit and loss account. The assessee is under an obligation to meet the future claims out of general reserve so created. The amounts in question cannot be used by the assessee in the form of distribution of dividends and therefore, the income does not par take the character of the income in the hands of the assessee and cannot be subjected to tax. Thus, it is evident that in the instant case, there is no cessation of liability of the assessee to pay the amount in question. Therefore, the same cannot be treated to the income of the assessee. In view of preceding analysis, the substantial questions of law framed by this court are answered aginst the revenue and in favour of the assessee. In the

16 result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss