1. If Bank is following the RBI circular on this then you will have to follow the said rules/ guidelines.

2. Yes , you have to disclose this amount as inheritance. 

1. query 1 is something which the bank is best to answer. If it is the bank's policy then nothing can be done. And such policy is not in public domain. Every bank has its own policy. 

2. ofcourse you will have to report and declare this amount in your IT returns. The deceased was not related to you and there is no written Will also left by him in your favour by which the amount lying in the account was bequeathed to you. So in absence of a Will and being unrelated to the deceased, the amount will be taxable in your hands u/s 56 of Income tax act

You can declare in your income tax returns that you have inherited said amount 

2) you have to pay tax on interest earned on said 40 lakhs 

3) you can ask bank for copy of the policy documents 

Dear client, after the primary account holder dies, the secondary holder retain ownership of the money in the account. The surviving account holder can continue using the account, and the money in it, without any interruptions based on right to survivorship. 

Some banks may also have specific policies regarding how they should treat joint accounts upon death of any holder depending on terms of agreements between the bank and the holders. 

As the issue here if the bank has the policy which doesn't let you use the account after primary holder's death then it is feasible to open a new account. But at first verify the said policy which was stated by the bank. If there is policy then you can use the account lawfully under right to survivorship.

On the 2nd question you have to report the amount to Income tax dept. or you'll face penalities. Even if you have not informed the department, the bank will report the large amounts to the department. Then you'll face the penality and charges if any. 

1) It is the established policy. After the death of a joint-holder in an account operated with 'either OR survivor' clause, the survivor has to open and operate a separate account in his/her own name.

2) Only the interest is taxable. Please consult a competent CA and file your return.

1. If the account is in the name of two individuals says, A & B, the final balance along with interest, if applicable, will be paid to either of account holders i.e. A or B, on date of maturity or to the survivor on death of any one of the account holders.

In the case of Current Account/ Savings Bank Account, the survivor(s) are required to transfer the balance to another account in their own name(s). If the survivor (s) do not have any other account, a new account may be opened after completion of the relevant formalities.

When a joint account holder dies, in the absence of a clause like Either or Survivor ( E or S), Former or Survivor (F or S), Latter or Survivor (L or S), the balance can be paid jointly to the survivors and the legal heirs of the deceased.

Example: If an account in the joint name of A and B, and if A dies, the balance will not be paid to B alone. It has to be paid jointly to B and to the legal heirs of A. The settlement can be made to the legal heirs of A either through legal representation or without legal representation as the case may be.

Therefore you may not be able to dispute the rules that has been informed to you by bank on this subject matter.

2. As per the Income Tax Act of 1961, no tax is levied on the inherited assets, whether movable or immovable, as such. However, the tax will be levied on the interest portion of this amount.

You can declare it as inheritance 

Dear client, as per the income tax act, no tax can be levied if the property (movable or immovable) if it is inherited. You cant be taxed if you inherited the said money.

Since this amount was inherited by you through a joint bank account, it can be treated as inheritance.

hence you may proceed after consulting your auditor for filing the tax returns according

It cannot be inheritance 

The deceased added you as a joint account holder when he was alive 

Inheritance applies when a person receives something on the death of someone 

In the alternative to the above - 

you can declare the money in this account as inheritance

you have to show that the deceased joint account holder had added you as a joint a/c holder in his lifetime so that after him you would get the benefit of the money lying in the account 

during the lifetime of the deceased joint a/c holder, you had no access whatsoever to the account and you were not even using the funds from this account

it is only after the demise of your GF's friend, that you have claimed the money in this account

so if you can convince your assessing officer to the above effect then well and good

He can inherit the same if there are class one heirs or class 2 heirs in existence 

Please consult a competent CA specializing in taxation matters and act accordingly.