2013 (4) TMI 578 - AT - Income Tax

Order of CIT u/s. 263 - as per CIT Settlement of inter branch accounts was not in order - An amount credited P&L Account on account of settlement of inter branch accounts and the same was reduced while computing the income claiming it to be exempt from tax - the assessee, a banking company and subsidiary of the State Bank of India - Held that - Respectfully following the consistent view taken by various benches of the Tribunal in M/s. Punjab National Bank, New Delhi V/s. Addl. CIT 2012 (5) TMI 437 - ITAT, New Delhi on the issue of income attributable to inter- branch transactions in respect as of a banking company the said income is not liable to tax and in any event, the Commissioner of Income-tax is not justified in invoking the revisionary powers under S.263 of the Act in relation to that issue.In favour of assessee. Non-existent set off of losses - as per CIT AO while computing the income non-existent set off of losses were allowed - Held that - Not convinced with the observation of the CIT that the brought forward loss of assessment year 2005-06, sought to be set off by the assessee from the income of the year under appeal, was a non-existent one, in view of income determined on assessment, or re-determined based on subsequent appellate orders of that years. As whatever loss of the earlier year has been brought forward by the assessee, as per its books of account, has to be set off against the income determined for the year under appeal. Thus AO was correct in accepting the claim of the assessee for set off of brought forward loss of assessment year 2005-06. In favour of assessee.

Issues Involved:

1. Taxability of inter-branch account settlements.
2. Set off of brought forward losses from the previous assessment year.

Detailed Analysis:

1. Taxability of Inter-Branch Account Settlements:

The primary issue in this case revolves around the taxability of an amount of Rs. 140,72,57,682 credited to the Profit & Loss Account due to the settlement of inter-branch accounts, which the assessee claimed as exempt from tax. The Commissioner of Income-tax (CIT) found this exemption erroneous and prejudicial to the interests of the Revenue, leading to the issuance of a show cause notice under Section 263 of the Income-tax Act, 1961. The CIT's position was that the impugned credit balances represented a cessation of liability and constituted income for the assessee.

The assessee contended that these balances were not income but represented customers' money held in a fiduciary capacity. They argued that these amounts were not taxable as they were not the bank's income and cited several Tribunal decisions supporting their stance, including cases involving Punjab National Bank, Canara Bank, and Vijaya Bank.

The Tribunal, after reviewing the facts and relevant case laws, including the Supreme Court's decision in T.V. Sundaram Iyengar & Sons Ltd., concluded that the inter-branch transactions did not give rise to taxable income. The Tribunal noted that these transactions were mere accounting entries and not income. The Reserve Bank of India (RBI) had permitted the closure of these differences to the Profit & Loss Account but mandated that these amounts could not be used for dividend distribution and had to be available to discharge liabilities. Thus, the Tribunal held that the amounts in question did not bear the character of income and quashed the CIT's order under Section 263 regarding this issue.

2. Set Off of Brought Forward Losses from the Previous Assessment Year:

The second issue was the set off of brought forward losses amounting to Rs. 124.45 crores from the assessment year 2005-06. The CIT observed that the Assessing Officer (AO) had erroneously allowed this set off, as the total income for the assessment year 2005-06 had been determined at Rs. 99,18,16,799, which was later reduced. The CIT considered the brought forward loss to be non-existent and thus prejudicial to the interests of the Revenue.

The Tribunal, however, disagreed with the CIT's observation. It held that the AO was correct in accepting the assessee's claim for set off of the brought forward loss as per the assessee's books of account. The Tribunal emphasized that the loss brought forward by the assessee should be set off against the income determined for the year under appeal. Consequently, the Tribunal canceled the CIT's order on this issue as well.

Conclusion:

The Tribunal allowed the assessee's appeal, holding that:

1. The settlement of inter-branch accounts did not constitute taxable income, and the CIT was not justified in invoking Section 263 of the Act.
2. The set off of brought forward losses from the previous assessment year was correctly allowed by the AO, and the CIT's order on this issue was also canceled.

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