It And Loss Account, The v. The Assessee Thereupon Approached Theincome Tax Appellate Tribunal (Hereinafter Referred To.as The Tribunal For Snort) By Filing An Appeal. Tne

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 20 DAY OF OCTOBER 272020PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASADLT.A. NO. 419 OF 2012 BETWEEN: 1.|THE COMMISSIONER Of INCOME TAX. LTU JSS TOWERS| BSK III STAGE BANGALORE. 2.|THE JOINT COMMISSIONER OF INCOME TAX. LIU JSS TOWERS| BSK III STAGE BANGALORE. (BY Mr.K.V.ARAVING, ADV.,) .., APPELLANTS. AND" M/S CANARA BANKNO.112, JC ROAD,OPPOSITE TO TOWN HALLBANGALORE - 560 OOL1 ~. RESPONDENT (BY Mr.T.SURYANARAYANA A/W MS.MAHIMA GOUD, ADVSs.) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961 ARISING OUT OF ORDER DATED 08.06.2012 PASSED IN ITA. NO.390/BANG/2011 FOR THE ASSESSMENT YEAR 2007-2008,PRAYING THAT THIS HON’ BLE COURT MAY BE PLEASED TO:(1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (11) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE ITAT, BANGALORE IN ITA NO.390/BANG/2011—DATED 08.06.2012 AND CONFIRM THE ORDER PASSED BY THE.JOINT COMMISSIIONER OF INCOME TAX, LTU. THIS ITA COMING ON FOR HEARING, THIS DAY,ALOKARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (hereinafter referred to as the Act for short) nas been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 200/72008. The appeal was admitted by a bench of this Courtvide order dated 23.01.2013 on the following substantialquestion of law: (i) Whether the Tribunal was correct in-holding that the amount from lapsed Demand|Drafts, Gift Cheques etc., credited to P & L.account is not liable to tax In the hands of the|assessee, though no claims were made in.respect of such Drafts and cheques and.recorded a perverse finding? (ii) Whether the Tribunal was correct in-holding that the Commissioner was not.correct in exercising his power U/Ss.26.5 of tnAct in respect of lapsed Demand Drafts, Gift.Cheques etc., credited to P & L account and.directing the Assessing Officer to disallow theclaim of deduction2 2 |Facts giving rise to filing of this appeal brieflystated are that the assessee is a banking company. The.assessee filed return of Income for Assessment Year|2007-08 on 29.10.2007 declaring total income of|Rs.593,48,/70,1/78/-. The return was processed undeSection 143(1) of the Act on 30.08.2008 and the case ofthe assessee was selected for scrutiny. Thereafter,notices were issued on 05.09.2008. The Assessing.Officer by an order dated 26.11.2009 concluded theassessment under Section 143(3) of the Act anddetermined the taxable income at Rs.1/7/2,81,/8,854/-as against the income of Rs.593,48,/70,178/- declaredby the assessee. In the profit and loss account, the assessee had credited a sum of Rs.52,/7,81,540/-.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 Isno provision to exclude the receipts from taxable incomewhen the same have been credited by the assessee to.the profit and loss account to his income. It was furtherheld that the order passed by the Assessing Officer is erroneous and is prejudicial to the interest of therevenue. | 3. The Commissioner of Income Tax by an orderdated 07.03.2011 inter alia held that under the Act!there is no provision to allow any deduction from theprofit of business in respect of the amount accrued tothe assessee on account of demand drafts and giftcheques, which Nave lost its validity. It is further heldthat since, the aforesaid amount has been credited in. 3. The Commissioner of Income Tax by an orderdated 07.03.2011 inter alia held that under the Act!there is no provision to allow any deduction from theprofit of business in respect of the amount accrued tothe assessee on account of demand drafts and giftcheques, which Nave lost its validity. It is further heldthat since, the aforesaid amount has been credited in. the books of accounts, therefore, it is a receipt frombusiness. 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 thepoint of time when it was received, by efflux of time, theSame became assessee’'s own money. It was alsoobserved that the assessee himself treated the moneyas his own and taken the amount in the profit and lossaccount. By placing reliance on decision of the SupremeCourt 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 receiptand 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/-. 4The assessee thereupon approached theIncome Tax Appellate Tribunal (hereinafter referred to.as the tribunal for snort) by filing an appeal. Tne tribunal by an order dated 08.06.2012 inter alia held.that Reserve Bank of India vide its tnstruction 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 socreated. It was furtner neld tnat tne Instruction issued|by Reserve Bank of India under Section 35A of theBanking Regulation Act, 1949 are binding on theassessee and even though, the same is routed through|profit and loss account, it does not par take thecharacter of Income in the hands of the assessee and|cannot be subjected to tax. Accordingly, the orderpassed by the Commissioner of Income Tax directing theAssessingOfficer.tO.aSS@SSan)amountOf Rs.52,/77,81,539/- is quashed and the appeal preferredby the assessee was partly allowed. In the aforesaid factual background, the revenue has filed this appealbefore us. 5.|Learned counsel for the revenue submitted.that directions issued by the Reserve Bank of Indiawould 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 operatein different fields. It is also urged that directions have.been issued by the Reserve Bank of India formaintaining books of accounts and cannot alter the issueof taxability of the amount under the Act. In support ofaforesaid submissions, reliance has been placed on.decisions in-‘COMMISSIONER OF INCOME-TAX VS.|T.V.SUNDARAM IYENGAR & SONS LTD.', (1996) 88TAXMAN 492 (SC), ‘COMMISSIONER OF INCOME-TAX VS. KARAM CHAND THAPAR, (1996) 8&TAXMAN 40 (SC), ‘SOLID CONTAINERS LTD. VS.|DEPUTY COMMISSIONER OF INCOME-TAX, SPL.RANGE-1, MUMBAI, (2009) 178 TAXMAN 192 (BOMBAY), ‘COMMISSIONER OF INCOME-TAX VS.|ARIESADVERTISING(P.)|LTD.(, (2002)1275TAXMAN969(MADRAS),‘SOUTHERNTECHNOLOGIES LTD, VS, JOINT COMMISSIONER|OFINCOME-TAX,COIMBATORE,,(2010)187TAXMAN 346 (SC). 6.|On the other hand, learned counsel for theassessee submitted that in T.V.Sundaram Iyengar andSons 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 assesseedoes not cease to exist on account of the circular issuedby the Reserve Bank of India, which prescribes that theassessee has the liability to refund the amount on.demand. Therefore, the decision of the Supreme Courtin T.V.Sundaram Iyengar and Sons Ltd., supra is of no.assistance to the revenue. It is pointed out that inKaramachand Thaper supra, the Supreme Court was 6.|On the other hand, learned counsel for theassessee submitted that in T.V.Sundaram Iyengar andSons 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 assesseedoes not cease to exist on account of the circular issuedby the Reserve Bank of India, which prescribes that theassessee has the liability to refund the amount on.demand. Therefore, the decision of the Supreme Courtin T.V.Sundaram Iyengar and Sons Ltd., supra is of no.assistance to the revenue. It is pointed out that inKaramachand Thaper supra, the Supreme Court was dealing with a case of trading liability and therefore, on|the same analogy the aforesaid decision is of noassistance to the revenue. It is argued that in fact thedecision 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. Itis also argued that the issue involved in this appeal issquarelycoveredDY|decisions.oftnis|courtIn|'COMMISSIONER|OFINCOME-TAX|VS,RADDTSAHAKARABANKNIYAMITHA',(2017)88TAXMANN,.COM560(KARNATAKA)and‘COMMISSIONEROF|INCOME-TAX,HUBLIVS.KARNATAKA VIKAS GRAMEEN BANK’, (2017) 79TAXMANN.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 incomesought to be taxed is not otherwise in the nature of business income and therefore, in view of aforesaid|division bench decisions of this court, the issue deservesto be answered in favour of the assessee. 7By way of rejoinder reply, learned counsel for.the revenue submitted that the judgment relied by thecounsel for the assessee in the case ofRADDISAHAKARA BANK NIYAMITHAand|KARNATAKAVIKAS GRAMEEN BANK|Supra Nave no application tothe fact situation of the case as they have beenrendered 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 therecord. In T.V.Sundaram Iyengar and Sons Ltd., supra,the assessee had received certain deposits in the courseof 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 andtherefore, the assessee transferred the amounts to its. profit and loss account and the assessee did not includethe amounts in its total income. The Assessing Officer.held that since, the surplus income has arisen as aresult of fake trade transactions, the amount had ascharacter of income and accordingly the same weretreated as income. The Commissioner of Income Tax!(Appeals) allowed the appeal preferred by the assesseeand 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 theCommissioner of Income Tax (Appeals). In para 18 ofthe 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| CIT(A) found that the assessee wrote Dack.the amounts to its profit and loss account.because tne 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 Decause theassessee's liability to pay back the amounts to its customers had not ceased. The tribunal|agreed with this view. CIT(A) found that the assessee wrote Dack.the amounts to its profit and loss account.because tne 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 Decause theassessee's liability to pay back the amounts to its customers had not ceased. The tribunal|agreed with this view. oiThe Supreme Court in the aforesaid factualbackground, 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 asbeing of revenue character, if the amount changes its character when the amount becomes the assessee's ownmoney because of limitation or by any other statutory or.contractual right, the amount should be treated as' income of the assessee. 10. A adivision DpDenchn of tnis court in KarnatVikas Grameen Bank supra after taking note of Section|41(1) of the Act, has held that Section 41(1) of the Actcan be made applicable when an allowance or deductionis 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. Theaforesaid decision was followed by another division.bench of this court in Raddi Sahakara Bank Niyamitha_SUPIad. 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| relevant extract of instructions, read as under: (i) The amount should first be credited to|the profit and loss account and shown under|ItemVln(Miscellaneousincome)UnderSchedule 14 (other income). (ii) Thereafter, it should be appropriated|to the General Reserve to be uti/ized to meet|the future claims, if any, such appropriation|snould be Delow tne line (Net of taxes, if any.and net of transfer to statutory reserve) as.applicable to the above amount. (ill) Any claim in respect of these entries,|in future, should be honoured by debit to the same head of profit and loss account viz.,|MiscellaneousIncome.andal)equivalentamount (net of tax benefit, if any, and net of.subsequent reduction in the’ transfer toStatutory reserves) shall be transferred from.the ‘General Reserve’ to the profit and loss.account. (vil) The net amount credit to the profit|and loss account will not be aveailable for declaration of dividend. 12. In the instant case, in the light of statutoryinstructions issued by Reserve Bank of India, the|amounts in question were kept by the assessee in.general reserve account though routed through profitand loss account. The assessee is under an obligation to meet tne future claims out of general reserve socreated. Tne amounts in question cannot be used by theassessee in the form of distribution of dividends and|therefore, the income does not par take the cnaracter ofthe income in the hands of the assessee and cannot be|subjected to tax. Thus, it is evident that in the instant|case, tnere is no cessation of liability of the assessee to.pay the amount In question. Tnerefore, the same cannot.be treated to the income of the assessee. In view of preceding analysis, tne substantialquestions of law framed by this court are answered.aginst the revenue and in favour of the assessee. In the| ����"�!�#����������������%��������������������"!�������������"��������������%������������ �������������������������