1.14 Query: Accounting treatment of interest wrongly received.
1. The querist has informed that during the course of carrying on of its banking business, a private sector bank entered into a transaction on 16.06.90 for purchase of a security, viz., 11.5% Government of India Loan 2007, for face value of Rs. 5 crores with one of the Nationalised Banks, Mumbai. The transaction was cancelled on that day and subsequently put through on 18.06.90. The Mumbai branch of the querist’s bank received two Subsidiary General Ledger transfer forms for face value of Rs. 5 crores each on both the occasions. But, due to inadvertance, both the Subsidiary General Ledger transfer forms were lodged with the Public Debt Office of the Reserve Bank of India, Mumbai. The bank in question did not record any entry for the transaction of purchase of securities for Rs. 5 crores on 16.06.90, as the transaction was cancelled on the very same day. However, for the subsequent similar transaction on 18.06.90, the bank had accounted for the transaction debiting ‘Investments’ and crediting ‘Current Account’ of Reserve Bank of India. Thus, there is an excess credit for the face value of Rs. 5 crores in the Bank’s Subsidiary General Ledger Account with the Public Debt Office of the Reserve Bank of India, Mumbai, in 11.5% Government of India Loan 2007, since June 1990.
2. The statement of account rendered by the Public Debt Office, Mumbai, shows an excess credit of Rs. 5 crores in favour of the bank. The bank sent several reminders to the Nationalised Bank who had sold the securities requesting them to reconcile the transactions and send their claim, if any, so that the bank in question could issue a Subsidiary General Ledger transfer form and square-up the account. Till date, the bank in question did not hear anything in response to several letters sent in the last almost 6 years. It is presumed that the concerned Nationalised Bank is not in a position to prefer any claim since this transaction may not be reflected in their accounts.
3. The bank has also been receiving half-yearly gross interest on 11.5% Government of India Loan 2007, of Rs.28,75,000/- every half year, viz., on 5th October and 4th April. The half-yearly interest net-of-tax is being credited to its current account with Reserve Bank of India. The interest received upto 4.10.95 aggregating to Rs.3,16,25,000/- has been credited to suspense account under Sundry Creditors.
4. The bank had also included this interest received in its respective returns of income for income-tax for the assessment years 1991-92 to 1995-96 and had also claimed credit for income-tax deducted at source. In the return, the bank had also claimed, as interest payable, an amount equivalent to interest received. The assessments have been completed accepting this.
5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) What is the course of action to settle the unclaimed balance of Rs.3,16,25,000/-?
(ii) Whether the action of the bank will be in order in case this amount is appropriated to profit and loss account?
(iii) How the interest received in future will have to be treated?
(iv) How the proceeds received on redemption of security have to be accounted for?
(v) In case the appropriation of unclaimed amount is credited to profit and loss account, whether it should be disclosed under “Interest earned” or under “Other Income”?
(vi) If it is considered as other income, whether separate disclosure by way of a note is required since the same will exceed one per cent of total income (Refer Para 15-23, Page 124- Guidance Note on Audit of Banks)?
(vii) If the opinion of the Expert Advisory Committee is that the interest received cannot be appropriated now, what is the treatment in accounts when the security is redeemed?
Opinion September 24, 1996
1. The Committee notes from the facts of the query that the bank’s SGL with PDO (of RBI) continues to show an excess credit of Rs. 5 crores on account of a transaction involving purchase of an investment, which was cancelled on that day itself. However, the RBI has been wrongly crediting the current account of the bank in question with the interest on the investment even though it was cancelled by the bank.
2. On the basis of the above, the Committee is of the view that the bank does not have any right to receive the interest on cancelled investment. Therefore, efforts should be made by the bank in question to settle the matter with the appropriate authorities of RBI and the nationalised bank. Till the mistake is rectified, the amount being credited to the current account of the bank in question on account of interest continues to be its liability and hence should be disclosed as such. Accordingly, in the view of the Committee, this interest should be shown in the balance sheet under the head ‘Other Liabilities and Provisions’ as a separate Item. The nature of this liability may be explained by way of a note to the accounts.
3. On the basis of the above, the Committee is of the following opinion in respect of the issues raised in para 6 of the query:
(i) Kindly see para 2 above.
(ii) No.
(iii) Kindly see para 2 above.
(iv) In case the proceeds are received on redemption of security this will also be the liability of the bank and should be treated as explained in para 2 above.
(v) Since the answer to (ii) above is in the negative, this question does not arise.
(vi) Same as (v) above.
(vii) Kindly see para 2 and para 3 (iv) above. ________________________
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