2020 (3) TMI 475 - HC - Income Tax

Addition u/s 41 - Addition of amount of stale drafts not claimed for more than three years and the claim for which had become barred by limitation - HELD THAT - As decided in THE RADDI SAHAKARA BANK NIYAMITHA BANK ROAD, DHARWAD 2017 (2) TMI 734 - KARNATAKA HIGH COURT Addition cannot be made under Section 41(1) of the Act, since the liability of the assessee Bank to pay back the amounts to the customers in respect of such stale Demand Drafts and Pay Orders does not cease in law. See KARNATAKA VIKAS GRAMEEN BANK 2015 (12) TMI 1420 - KARNATAKA HIGH COURT - Decided in favour of assessee

Summary

Issues:
1. Treatment of stale Demand Drafts as income of the Assessee Bank.
2. Application of Supreme Court's decision in a similar case.
3. Interpretation of Section 41(1) of the Income Tax Act.

Analysis:
1. The primary issue in this case was whether the amount of stale Demand Drafts not claimed by customers, which had become time-barred, could be treated as income of the Assessee Bank. The Income Tax Appellate Tribunal held in favor of the Assessee, stating that in banking business, RBI guidelines are to be followed, and the nature of banking transactions differs from regular trade transactions. The Tribunal emphasized that unless the draft amount becomes truly unclaimable, it cannot be treated as the bank's income. The Tribunal set aside the addition made by the Assessing Officer, as there was no clear finding on how the amount had become unclaimable.

2. The second issue involved the application of a Supreme Court decision in a similar case to the present scenario. The Division Bench of the Karnataka High Court referred to the Supreme Court's decision in the case of T.V. Sundaram Iyengar and Sons Ltd., emphasizing that the liability of the assessee-bank to pay back amounts to customers in respect of stale demand drafts does not cease in law. The Division Bench held that such additions cannot be made under Section 41(1) of the Income Tax Act, as the amount remaining with the assessee due to non-encashment by payees cannot be construed as a loss, expenditure, or trading liability incurred by the assessee.

3. The final issue revolved around the interpretation of Section 41(1) of the Income Tax Act. The Division Bench of the Karnataka High Court clarified that Section 41(1) can be invoked when an allowance or deduction is sought in relation to loss, expenditure, or trading liability incurred by the assessee. In the case of unclaimed amounts such as stale demand drafts, the court held that the provision of Section 41(1) was not applicable as the liability of the assessee-bank to pay back the amounts to customers had not ceased.

In conclusion, the High Court upheld the decisions of the Tribunal and the Karnataka High Court, ruling in favor of the Assessee Bank. The Court found no substantial question of law arising in the case and dismissed the Revenue's appeal, affirming that the stale Demand Drafts could not be treated as income of the Assessee Bank.