2020 (10) TMI 1391 - HC - Income Tax

Tax liability on Amount from lapsed Demand Drafts, Gift Cheques etc., credited to P L account - cessation of liability of the assessee to pay the amount in question or not? - HELD THAT - 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. Substantial questions of law framed by this court are answered against the revenue and in favour of the assessee.

Summary

Issues:
1. Interpretation of tax liability on amounts from lapsed Demand Drafts and Gift Cheques credited to P & L account.
2. Correctness of Commissioner's exercise of power under Section 263 regarding the deduction claim on lapsed Demand Drafts and Gift Cheques.

Analysis:
1. The appeal involved the interpretation of tax liability on amounts credited to the profit and loss account by the assessee, pertaining to lapsed Demand Drafts and Gift Cheques for the Assessment Year 2007-08. The Commissioner of Income Tax invoked powers under Section 263, holding that such receipts are taxable as they were credited by the assessee to the profit and loss account. The Commissioner directed the Assessing Officer to withdraw the deduction claimed. The Tribunal, however, quashed the Commissioner's order, citing Reserve Bank of India's instructions that the amounts were to be kept in a general reserve account and not treated as income. The Tribunal ruled in favor of the assessee, leading to the revenue's appeal.

2. The second issue revolved around the correctness of the Commissioner's exercise of power under Section 263 regarding the deduction claim on lapsed Demand Drafts and Gift Cheques. The Commissioner held that the amounts accrued to the assessee were to be treated as receipts from business and were taxable. However, the Tribunal, relying on RBI instructions, ruled that the amounts did not partake the character of income in the hands of the assessee and could not be subjected to tax. The Tribunal partially allowed the assessee's appeal, prompting the revenue to challenge the decision.

3. The High Court analyzed previous judgments, including 'CIT VS. T.V. SUNDARAM IYYENGER AND SONS' and 'COMMISSIONER OF INCOME-TAX VS. KARAM CHAND THAPAR,' to determine the taxability of the amounts in question. The Court also referred to instructions issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act, which directed the treatment of such amounts. The Court held that the statutory instructions bound the assessee to maintain the amounts in a general reserve account, indicating no cessation of liability to pay the said amounts. Consequently, the Court ruled in favor of the assessee, dismissing the revenue's appeal.

4. The judgment emphasized that the amounts in question did not change their character to income in the hands of the assessee due to the RBI instructions. The Court's decision was based on the binding nature of the statutory instructions and the continuous liability of the assessee to meet future claims from the general reserve account. As a result, the substantial questions of law were answered against the revenue and in favor of the assessee, leading to the dismissal of the appeal.