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Josna Bank Limited Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 173 of 1979
Judge
Reported in(1985)46CTR(Ker)136; [1985]151ITR473(Ker)
ActsIncome Tax Act, 1961 - Sections 37; Banking Regulation Act, 1949 - Sections 5 and 6(1)(1); Companies Act, 1956 - Sections 159, 218, 285 and 516
AppellantJosna Bank Limited
RespondentCommissioner of Income-tax
Appellant Advocate V. Rama Shenoi and; R. Raya Shenoi, Advs.
Respondent Advocate P.K.R. Menon, Adv.
Cases ReferredDelta Plantation Co. Ltd. v. State of Madras
Excerpt:
.....in accordance with scheme of amalgamation - after amalgamation of assessee bank with lord krishna bank assessee bank was not carrying on banking business - deduction of bad debt while computing assessable income cannot be claimed - question referred answered in negative. - - 34,01,542.39. the assets taken over were all good and readily realisable assets. so far as 'advances considered as not readily realisable and/or bad or doubtful of recovery 'the transferee-bank was authorised to take steps to recover the same in terms of the scheme of amalgamation as notified. 58,560 representing bad debts, as deduction. 23,098. 4. the assessment was reopened on the basis of an audit note which had pointed out that inasmuch as the assessee-bank had discontinued its business since 1965, the.....radhakrishna menon, j. 1. the assessee is before us. it was carrying on banking business. by virtue of the notification issued under section 45 of the banking regulation act, 1949 (for short 'the act') the assessee-bank got amalgamated with the lord krishna bank ltd., cranganore. the notification is dated october 7, 1965. it contains the scheme of amalgamation. it came into force on october 13, 1965. as per the said scheme the assets and liabilities of the assessee-bank shall be and shall become, the assets and liabilities of lord krishna bank. the assessee-bank under the scheme of amalgamation is the transferor and the lord krishna bank ltd. is the transferee.2. the assets immediately taken over were of the value of rs. 36,47,559.57 and the liabilities as it stood then came to rs......
Judgment:

Radhakrishna Menon, J.

1. The assessee is before us. It was carrying on banking business. By virtue of the notification issued under Section 45 of the Banking Regulation Act, 1949 (for short 'the Act') the assessee-bank got amalgamated with the Lord Krishna Bank Ltd., Cranganore. The notification is dated October 7, 1965. It contains the scheme of amalgamation. It came into force on October 13, 1965. As per the said scheme the assets and liabilities of the assessee-bank shall be and shall become, the assets and liabilities of Lord Krishna Bank. The assessee-bank under the scheme of amalgamation is the transferor and the Lord Krishna Bank Ltd. is the transferee.

2. The assets immediately taken over were of the value of Rs. 36,47,559.57 and the liabilities as it stood then came to Rs. 34,01,542.39. The assets taken over were all good and readily realisable assets. So far as ' advances considered as not readily realisable and/or bad or doubtful of recovery ', the transferee-bank was authorised to take steps to recover the same in terms of the scheme of amalgamation as notified. The value of such assets was found to be Rs. 7,72,439.70. As per the scheme, if any amounts are to be realised by the transferee, the same were to be distributed to the shareholders of the assessee-bank.

3. During the previous year ending December 31, 1970, the year of assessment being 1971-72, the assessee-bank had realised a sum of Rs. 44,714.68 as interest on moneys deposited for short periods. The moneys in such short-term deposits represented the amounts realised by the transferee-bank from those assets which were not readily realisable. In the return for the relevant year, the assessee had shown a loss of Rs. 23,098 and in doing so it had claimed a sum of Rs. 58,560 representing bad debts, as deduction. The, assessing authority accepted the return and completed the assessment on January 7, 1972, determining the loss at Rs. 23,098.

4. The assessment was reopened on the basis of an audit note which had pointed out that inasmuch as the assessee-bank had discontinued its business since 1965, the assessee-bank was not eligible for the deduction of the bad debt while computing the income of the year. The assessee opposed the reopening on two grounds : (1) the reopening is based on a change of opinion and, hence, not sustainable in law, and (2) it is incorrect to say that it ceased to carry on business after the amalgamation. The assessing authority rejected both the contentions and made an assessment as per the order of assessment dated December 8, 1976. The appeal filed against this order of assessment was allowed by the AAC, Trivandrum. It is, however, seen from the said order of the AAC that he had rejected the contention of the assessee-bank that the reopening was bad in law. The assessing authority thereupon filed a second appeal before the I.T. Appellate Tribunal, Cochin Bench. The Appellate Tribunal accepted the arguments of the assessing authority that the assessee ceased to carry on business since the date of amalgamation with Lord Krishna Bank and, hence, it was not eligible for the deduction it had claimed while computing the assessable income. Accordingly, it allowed the appeal.

5. The assessee thereupon filed a petition under Section 256(1) of the I.T. Act and sought reference of certain questions, said to be questions of law arising out of the order of the Tribunal, to this court. The Appellate Tribunal held that the following question of law arose out of its order and, accordingly, referred it to ns for our opinion :

'Whether, on the facts and in the circumstances of the case, the assessee could be said to have carried on business in the relevant previous year and, if so, whether the bad debt of Rs. 58,560 is to be allowed in computing its income for the assessment year 1971-72 ?'

6. Counsel for the Revenue submitted that the point arising for consideration was no more res Integra in view of the decision of the Supreme Court in CIT v. Lahore Electric Supply Co. Ltd. : [1966]60ITR1(SC) , as also the decision of this court in S.P.V. Bank Ltd. v. CIT : [1980]126ITR773(Ker) . We are convinced that it is so.

7. Shri Rama Shenoi, learned counsel for the assessee, though tacitly conceded that the point is covered by the said decisions, however, wanted us to consider certain arguments which, according to him, were not dealt with in the said decisions. These aspects, if considered in the right perspective, he submitted, would establish that the order of the Tribunal is ernoneous. We propose to deal with them.

8. Shri Rama Shenoi did concede that after the amalgamation, the assessee-bank was not carrying on the banking business as denned in Section 5(b) of the Banking Regulation Act. However, according to him, the assessee-bank,with reference to the 'advances considered not readily realisable and/or bad or doubtful of recovery' must be held to be carrying on the banking business as envisaged under Section 6(1)(a) of the Banking Regulation Act, 1949. Section 6(1)(a) reads :

' (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely :--

(1) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning to account or otherwise dealing with all or any part of the property and rights of the company.'

9. With regard to the assets aforesaid, the counsel submitted that the assessee-bank had taken steps, through the agency of the Lord Krishna Bank Ltd., for recovery of them and 'turning them to account'. The assessee-bank was thus carrying on the business falling under Section 6(1)(a) of the Banking Regulation Act and, hence, from out of the income thus realised, the assessee was entitled to deduct the bad debt of Rs. 58,560 in computing the assessable income. In support of this contention, he cited the following decisions: IRC v. Korean Syndicate Ltd. [1921] 12 TC 181, South Behar Railway Company Limited v. IRC [1925] AC 476 ; 12 TC 657, Theophile v. Solicitor-General (on behalf of His Majesty) [1950] AC 186 (HL) and Barendra Prasad Ray v. ITO [1981] 128 ITR 295.

10. Counsel for the Revenue, however, contended that the submissions made by the counsel for the assessee in this regard are not sustainable. He submitted that no bank can carry on the ancillary business envisaged under Section 6 of the Banking Regulation Act, unless it be that the main business of banking is not suspended. He submitted that so far as the assessee-bank is concerned, after the amalgamation, it was not carrying on any banking business as defined under s. 5(b) of the Banking Regulation Act. In support of his contention, he cited two decisions, (1) of the Allahabad High Court, viz., Vijay Laxmi Sugar Mills Ltd. v. CIT : [1972]86ITR402(All) , and (2) the decision of the Gujarat High Court in Morvi Mercantile Bank Ltd. v. CIT : [1976]104ITR568(Guj) . In the Allahabad High Court, the question that arose for consideration was whether the liquidator of a company engaged in merely realising the assets of the company in the course of the winding-up business can be said to be carrying on business. The Allahabad High Court held as follows (p. 404):

' It is settled law that when the liquidator of a company is engaged in merely realising the assets of the company, he cannot be said to be carrying on any business : Liquidators of Pursa Ltd. v. Commissioner of Income-tax : [1954]25ITR265(SC) and Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. : [1962]46ITR135(SC) . If, however, for the purpose of facilitating the winding-up, the liquidator carries on the company'sbusiness and realises the assets of the company in such a way that what he does bears the characteristics of a continuing trading activity, it is possible to infer that the business of the company is being carried on : Commissioner of Income-tax v. National Mills Co. Ltd. : [1958]34ITR155(Bom) and Liquidator, Delta Plantation Co. Ltd. v. State of Madras : [1965]56ITR428(Mad) . In other words, if the liquidator considers it necessary for a proper and effective realisation of the company's assets to continue the business of the company, the business of the company must be treated, although in a limited sense, as being carried on. But, if all that the liquidator does is to realise the assets, there is no carrying on of the company's business. '

11. We are of the view that this decision has no application here. In the Gujarat High Court decision, the question considered was whether after the suspension of the licence, a banking company can be said to carry on any business activity within the meaning of Section 6 of the Banking Regulation Act, when admittedly it was not carrying on the banking business as denned under Section 5(b) of the Act. The Gujarat High Court held (p. 572) :

' We are afraid we cannot accede to this broad submission. There appears to us an apparent fallacy in this argument. No company can carry on banking business without licence issued by the Reserve Bank of India save as otherwise provided in Section 22 of the Banking Regulation Act, 1949, and it is only such banking company which can carry on additional business as specified in Section 6 of the aforesaid Act. It is common ground, as noted by the Tribunal, that the main business of the assessee-company had come to an end as the compulsory winding up order had been passed by the High Court of Saurashtra. It is also common ground that there is no question of accepting deposits from public or withdrawals by cheques, drafts, orders or otherwise. We have been told at the bar that the Reserve Bank of India has suspended the licence of the assessee-company, so far as carrying on the business of banking is concerned, though we have not come across any such finding in the order of the Tribunal. The net effect would be, therefore, that the assessee-company ceased to be competent to carry on banking business. If, therefore, it ceased to be competent to carry on banking business, as undoubtedly it did, we have not been able to appreciate how it can be still said to be legally competent to carry on the additional business under Section 6.'

12. The Gujarat High Court thus is of the view that suspension of the main business involves automatic suspension of the entire business. It is, however, unnecessary for us to go into this aspect, because in the present case, the notification aforesaid warranted a closure of the entire business as from the prescribed date. Clause 3 reads thus :

'The books of the transferor-bank shall be closed and balanced and balance-sheets prepared in the first instance as at the close of business on June 12, 1965, and thereafter as at the close of business on the date immediately preceding the prescribed date and the balance-sheets shall be got audited and certified by a chartered accountant or a firm of chartered accountants approved or nominated by the Reserve Bank of India for the purpose.

A copy each of the balance-sheets of the transferor-bank prepared in accordance with the provisions of the foregoing paragraph, shall be filed by the transferor-bank with the Registrar of Companies as soon as possible after it has been received and thereafter the transferor-bank shall not be required to prepare balance-sheets or profit and loss accounts, or to lay the same before its members or file copies thereof with the Registrar of Companies or to hold any annual general meeting for the purpose of considering the balance-sheet and accounts or for any other purpose or to comply with the provisions of Section 159 of the Companies Act, 1956, and it shall not thereafter be necessary for the board of directors of the transferor-bank to meet as required by Section 285 of that Act.'

13. Here we may also refer to the provisions contained in Sub-sections (8), (9) and (14) of Section 45 of the Banking Regulation Act. Sub-section (8) of section 45 provides that the scheme of amalgamation shall be binding not only on the transferee and the transferor banks but also on all the members, depositors and other creditors and employees of each of the banking companies and on any other person having any right or liability in relation to any of the transferor and the transferee banks. Sub-section (9) of Section 45 provides that on and from such date as may be specified by the Central Government in this behalf, the properties and assets of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and vest in, and the liabilities of the transferor-bank shall, by virtue of and to the extent provided in the scheme, stand transferred to, and become the liabilities of, the transferee-bank. Section 45(14) provides that the provisions of this section and of any scheme made under it shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act or in any other law or any agreement, award or other instrument for the time being in force. From the various provisions in the scheme of amalgamation (annexure A), as stated above, it can be seen that the business carried on by the assessee-bank came to a halt on and from the prescribed date, i.e., October 13, 1965, and only the transferee-bank is in the picture. From the discussions above, the following inferences flow :

(i) It cannot be disputed that realisation of debts and 'turning them to account' is business within the meaning of Section 6(1)(a).

(ii) After the notification issued under s. 45(1) of the Banking Regulation Act, the rights and liabilities of the transferor and the transferee banks are to be determined only in accordance with the provisions contained in the scheme of amalgamation read along with the provisions contained in Sub-sections (8), (9) and (14) of Section 45 of the Banking Regulation Act.

14. The learned counsel for the assessee, however, asserted that the assessee-bank is entitled to rely on Section 6 of the Banking Regulation Act to sustain his plea that it was carrying on the ancillary business of investing the amounts, representing the realisation of bad debts in short-term deposits and making income therefrom which it is entitled to treat as business income for the purpose of claiming deductions of bad debts, for another reason. According to the learned counsel for the assessee, the income from which the bad debts could be deducted in computing the assessable income is derived to the assessee-bank while carrying on the business of recovering bad debts and 'turning them to account' through the Lord Krishna Bank, It is admitted that the assessee-bank was not carrying on the said business directly. Learned counsel submits that Lord Krishna Bank was carrying on this business as agent of the assessee-bank. In other words, Lord Krishna Bank is the agent of the assessee-bank in regard to the assets not readily recoverable. We see no substance in this contention of agency ; for, in the first place, there is no evidence to support it and, secondly, and more significantly, such relationship is totally inconsistent with and repugnant to the terms of the notified scheme of amalgamation.

15. The argument of the learned counsel for the assessee based on the scheme of amalgamation that the assessee carried on its ancillary business of realising bad debts and 'turning term to account' through the Lord Krishna Bank thus is liable to be rejected.

16. In view of our above conclusion, the submission of the learned counsel for the assessee that the decision of this court in S.P.V. Bank Ltd. v. CIT [1980] 326 ITR 773, requires reconsideration, cannot be countenanced.

17. According to us, the Tribunal has correctly held that after the amalgamation of the assessee-bank with the Lord Krishna Bank, the assessee-bank was not carrying on any banking business and as such it was not eligible for claiming deduction of the bad debt of Rs. 58,560 while computing the assessable income. Merely because the assessee, a company incorporated under the Companies Act, has not so far been liquidated either voluntarily or by order of the court or by action under Section 516 of the Companies Act, it cannot be said that the assessee-bank continues to carry on its business.

18. We are satisfied that, on the facts, the Tribunal has come to the correct conclusion. The question referred to us, accordingly, is answered in the negative and against the assessee. No costs.

19. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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