B.K. Mehta, J.
1. The following four questions have been referred to us for our opinion :
'1. Whether, on the facts and in the circumstnces of the case, the Tribunal was justified in holding that there was no bar of res judicata or estoppel under the Income-tax Act and that the revenue authorities were not bound by the previous ordrs while assessing the interest in come from the fixed deposits as income from other sources for the assessment year 1969
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest on fixed deposits was taxable as 'income from other ssosurces' and not as business income'
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest oof Rs. 20,826 under the decree passed by the Supreme Court of India was liable to be taxed as revenue receipti
4. Whether, on the facts and in the circumstances or the case, the Tribunal was right in holding that the interest of Rs. 8,800.90 on Rs. 15,000 alleged to be payable to M/s. Harshadrai & Co., was also liable to be taxed as revenue receipt in the hands of the assessee company ?'
2. A few facts need be noticed in order to appreciate question No. 2 only since questions Noos. 1, 3 and 4 have not been pressed by the learned advocate appearing on behalf of the assessee at whose instance this reference has been sought.
3. The assessee-company, the Morvi Mercantile Bannk Limited (in liquidation), was originally incorporated in about the year 1944 under the Companie Act, 1913, a was in force in the erstwhile State of Morvin in Saurahtra. After the merger of the State of Morvi into Saurashtra, the ex-State of Morvi into Saurashtra, the ex-State of Saurahtra filed a winding up petition in the High Court of Saurashtra on July 1, 1955. It appears that on Jully 15, 1955, the High Court of Saurashtra appointed a provisional liquidator. The official liquidator of the High Court was appointed as the proviional liquidator. It appear further that on Augut 27, 1955, the High Court made an oorder of winding up and the official lliquidator was appointed ass the liquidator and he was entrusted with all the powerss mentioned in section 179 of the Companies Act, 1913, except in the matter of sale of immovable pproperties.
4. For the assessment year 1956-57, the relevant accounting year being calendar year 31st December, 1955, the Income-tax Officer treated the income realised by the liquidator of the assessee-company from short-term investments as income from other sources. Simillarly, for assessment years 1957-58 to 1959-60, the Income-tax Officer concerned held that since the business had ended on July 15, 1955, when the High Court of Saurashtra appointed the provisional liquidator in the matter of winding up of the company, the business had come to an end and, therefore, income which the liquidator had derived was not the business income. These assessment orders were challenged before the Appellate Assistant Commissioner, Ahmedabad, who, by his order of August 24, 1966, allowed all the appeals and held that the income should be treated as a business income since in his opinion the liquidator was carry on the business for beneficial winding up of the company. It is common ground that from assessment years 1960-61 to 1968-69, the income realised by the liquidator was treated as business income. However, for the assessment year 1969-70 with which we are conerned in this reference, the Income-tax Officer concerned was of the openion that since there was no business transacted in the year in question the interest income could not be treated as a business income. Consequently, therefore, he did noot allow set-off of the earlier losses. He, therefore, treated the amount of Rs. 57, 392 which the liquiidator has carned as interest on fixed deposits as 'income from other sources.' The assessee-company, therefore, carried the matter in appeal before the Appellate Assistant Commissioner. He was of the opinion that with regard to the interest received from the fixed deposits, the income should not be assessed under the head 'business.' There were other contentions in the appeal with which we are not concerned as regards the present reference. The resullt was that he dismissed the appeal and confirmed the order of the Income-tax Officer so far as he treated this fixed depoosits' interest income as income from other sources and disallowed the carry-forward of losses.
5. The assessee-company, therefore, carried the matter in further appeal before the Appellant Tribunal. Before the Tribunal three-fold contentions were raised on behalf of the assessee-company. In the first instance, it was urged that having regard to the past conduct of the revenue authorities in treating the interest income as business income, it was not open to them to reopen the question and treat the interest income as income from other sources and deprive the assessee-company of the right of setting off the earlier losses without change of any material circumstances. It was contended in the second place that the effect of the winding up order was not that the business of the company came to an end and the liqidator was entitled to carry on the business in course of the winding up. Thirdly, it was contended that under section 28(4) of the Income-tax Act, 1961, interest income must be treated as business income under the said clause since it was the value of the benefit arising from the business carried on by the lliquidator. None of the contentions found favour with the Tribunal as the real question to be considered, according to the Tribunal, was whether in fact the official liqidator carried on any business. According to the Tribunal, once the winding up order was made, the substratum of the banking business had come to a close and since there was no dispute between the parties that thiis part of the business has ceased, there was no question of accepting deposits from public or withdrawals by cheques, drafts, orders or otherwise. The Tribunal considered the activities of the liquidator and found on a perusal of the said activities that no business activity was done by the liquidator at all. The Tribunal further found that all that happened in the case was that as a part of the winding uup process the liquidator started realising the outstanding and also declared dividends partly. The Tribunal was of the opinion that these activities of the liquidator were more in the nature of investment of surplus funds as and when the occasion arose pending distribusion of realisatioon of the assets. The Tribunal on a consideration of these relevant circumstances held as under :
'The entire structure of the assessee's business has been knocked down. Practically nothing was left to be done except to realise the out-standing] and distribution of moneys to the shareholders. In the course of carrying out] these activities if any surplus remains, the duty of the liquidator is to deposit it inn some banks in order that interest may be obtained which will ultimately to to the benefit of the shareholders for distribution. Investment of surplue moneys in the various bank will not amount to carrying on business by the lliquidators in the facts and circumstances of this case.'
6. The Tribunal, therefore, dismised the appeal of the assessee-company. The assessee-company, therefore, sught this reference, inter alia, on the question which is now pressed before us in this reference.
7. At the time of hearing of this reference, Mr. K. C. Patel, learned advocate appearing for the assessee-company, contended in the first instance that the effect of winding up order is not ipso facto to bring the company's business to an end and the order of winding up merely operates as a discharge of thee directors. All that occurs, according to Mr. Patel, is that on such an order being made, the liquidator assumes all the functions of the directors. It was urged by Mr. Patel that the status of the official liquidator in compulsory winding up is deemed to be that of an agent as he enters in the shoes of the directors and he has to act after considering the wishes of thee members as well as creditors (vide Company Law by Pennington 2nd edition, page 282, and Modern Company Law by L.C.B. Gower, 2nd edition, page 578). If this is the legal status of a liquidator in a compulsory winding up by the court, which Mr. Patel asserts, undoubtedly, the official liquidator can carry in the business which the company is authorised to carry on either under its memorandum or the statute governing the company for the time being. In other words, the argument is that the assessee-company, being a banking company, was entitiled to engage itself in and carry on besides business of banking other forms of business including investment and acquisition, management, sale and realisation of properties which may come in its posession as security in satisfaction of its claim as specified in section 6(1)(a), (f) and (g) of the Banking Regulation Act, 1949.
8. We are afraid we cannot accede to this broad submmission. 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 specined 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 compulsore winding up order had been pased by the High Court of Saurashtra. It is also common ground that there is nno 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 asesssssee-company, so far ass carrying on the bussinessss of banking iss concerned, through we have not come acrosss any such finding in the order of the Tribunal. The net effect would be, therefore, that the assessee-company ceassed to be competent to carry on banking business. If, therefore, it ceased to be competentto 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. Mr. Patel for the assessee-company made a strenuous effort to impress upon us that though as a result of compulsory winding up order made by the High Court, the main banking business might have come to an end, the assessee-company still continues to be a banking company and is, therefore, entitled to carry on all additional business as provided in section 6 of the Banking Regulation Act. In support of his contention, Mr. Patel has relied on the decision of the Supreme Court in Official Liquidator, Supreme Bank Ltd. v. P. A. Tendolkar, where the court was concerned with the question of limitation for initiating misfeasance proceedings against the directors. The company judge had held that the nature of the claims in the misfeasance proceedings against the directors in the case fell under the category of 'all other claims' mentioned in section 45-O(ii) for which the period of limitation was wither twelve years from the date of 'accrual of claims' or five years from the date of the first appointment of the liquidator whichever is longer. The company judge held that the first clause of section 45-O of the Banking Companies Act, 1949, did not apply to a case in which the period of limitation had not begun to run before the filing of the winding up petition and that the misfeasance proceedings against directors, having started on August 27, 1960, were clearly within time. In that context Mr. Justice Beg, speaking for the court, observed at page 391 as under :
'Incidentally, the finding that limitation did not begin running before filing the misfeasance application implied that this was not a case in which a claim had 'accrued' before the filing of the application. The objection that section 45-O of the Act would apply to claims made by the company itself and not to those by a liquidator was rightly overruled on the ground that the liquidator really represented the company and that a claim made by the liquidator was, therefore, a claim 'by the banking company', as was held in Jwala Prasad v. Official Liquidator within the meaning of this expression used in section 45-O of the Act.'
9. We have not been able to appreciate how this observation of the Supreme Court can be of any assistance to the case of the assessee-company. The question before us is whether the assessee-company having ceased to be question before us is whether the assessee-company did not cease to be a banking company and, therefore, it was perfectly competent to carry on the additional business under section 6. In support of his contention he relied on the decision in K. V. S. Vassan Bros. v. Official Liquidator, Associated Banking Corporation of India Ltd. While negativing the contention urged on behalf of the appellants that the provisions contained in Act 20 of 1950 did not apply to the respondent-bank as it ceased to be a banking company within the meaning of hte Banking Companies Act, the court observed that the bank was formed as a banking company and it functioned as such until the proceeding for liquidation was started in the High Court of Cochin, and merely because there were winding up proceedings against such a company, it would not cease to be a banking company. A company continues to exist even after the proceedings are started for its liquidation until it is dissolved by the order of the court under section 194 of the Indian Companies Act and so long as it existed it retained its original character. Mr. Patel has invited our attention to the observation made in paragraph 18 of the judgment in the aforesaid case of K. V. S. Vassan Bros., where the court has observed as under :
'A company comes into existence on its formation, i.e., on its registration under the Indian Companies Act. It then gets its character, whether as an investment company, insurance company or other, which depends upon and has to be determined by reference to the memorandum of association. It retains that character until it is changed by alternation of the memorandum, by amalgamation or otherwise as provided by the Act, and it exists until it is dissolved under section 194 or struck off the register under section 247, Indian Companies Act, which is subject to restoration by order of court.'
10. On the basis of the above observation, it was urged that in the present case before us though the assessee-company ceased to be competent to carry on the business of banking, it none the less continued to be competent to carry on the investment business or the business of realising the assets which might have come in its possession either as security or satisfaction of its claims. We do not think that the observations which have been relied upon from the decision in K. V. S. Vassan Bros., can carry the matter in support of the broad contention which has been urged by Mr. Patel. The contention that in spite of the assessee-company ceasing to be a banking company it retained its original character or incidental character of investment company cannot be accepted, obviously for two reasons; in the first instance, there is no finding of fact on this question that the assessee-company was an investment company since the necessary evidence in the nature of memorandum of association or any other document has not been produced before the Tribunal, and, secondly, in any case it was merely realisation of assets and investment pending distribution by the liquidator in discharge of usual functions for winding up. The question which we have to answer is whether it was competent to carry on additional business under section 6, even though it ceased to be a competent company entitled to carry on the business of banking. Section 6 of the Banking Regulation Act, 1949, which permits a banking company to engage itself in any one or more of the specified forms of business, presupposes that the company must be a banking company. The banking company having been defined in section 5(c) means any company which transacts the business of banking in India. Now, therefore, on the plain reading of this section, we are not inclined to agree with Mr. Patel. However, the real question, which arises, even if we assume in favour of Mr. Patel, that the assessee-company continued to be a banking company and, therefore, entitled to engage itself in additional business specified in section 6, is whether the liquidator, when he was realising the assets of the company in liquidation, was engaging himself on behalf of the company in business That was the real question to be answered and that question has been attempted and answered by the Tribunal. Mr. Patel, therefore, made an effort to urge that the official liquidator was at least entitled to carry on, with the sanction of the court, business incidental to its banking business as a mercantile necessity for beneficial winding up of the assessee-company. In support of his contention, he relied on the decision in In re Great Eastern Electric Co., Ltd. In that case the company made a declaration of solvency under the Companies Act, 1929, and a resolution was passed whereby it was resolved that the company should go into voluntary liquidation by way of members' voluntarily winding up and the respondent, Houston, who was a director and a professional accountant was appointed as liquidator. The liquidator carried on the business of the company until April 21, 1939, when a petition was presented to the court for compulsory liquidation one Bendall was appointed as liquidator. A question arose whether the creditors whose obligations were incurred by the liquidator, Houston, were entitled to have preference over pre-liquidation creditors. It was urged that the post-liquidation creditors cannot claim to be paid out of the assets of the company in priority to pre-liquidation creditors since the liquidator, Houston, was not properly exercising his statutory powers. Simonds J., while examining whether the liquidator was properly exercising his statutory powers, found guidance in the words of Sir George Jessel M.R. in In re Wreck Recovery & Salvage Co., where it has been observed :
'Now the word 'necessary' means that it must not be merely beneficial but something more, though the necessity must be determined by the court having regard to all the circumstances of the case. It does not, of course, mean that no other course would be possible. Then it must be for the 'beneficial winding up' of the business of the company..... not with a view to its continuance.'
11. Simonds J., however, found from the affidavit of the liquidator, Houston, where the liquidator had sworn that the business was for a mercantile necessity and that it was carried on with a view to the winding up of the affairs of the company, and held that there was no apparent urgency to affairs of the company, and held that there was no apparent urgency to realise the company's assets, and in his judgment, the liquidator could not be blameworthy for thinking, as he said he did think that the continuance of the business was necessary to its beneficial winding up. Mr. Patel, therefore, urged that if the liquidator here for the mercantile necessity invested the amounts realised from the sale of the assets till the distribution is made amongst the creditors, it must be held that the assessee-company was carrying on its business. In this connection, he has invited our attention to the applications which have been filed by the liquidator from time to time before the company judge concerned of this court for permitting the official liquidator to invest the realisations in short-term deposits of a bank. Mr. Patel, learned advocate of the assessee-company, made a great effort by taking us through each of these various applications to impress upon us that the liquidator had sought this permission from the court in the interest of the estate and this must be considered to be equivalent to mercantile necessity, which required the Liquidator to invest the realisations in short-term deposits with the permission of the court. In the submission of Mr. Patel though this contention was raised before the Tribunal, in terms, its approach was clouded by a fact, namely, that the main banking business of the company has come to an end, which, according to Mr. Patel, would not have a conclusive bearing on the question. We are of the opinion that the ratio in In re Great Eastern Electric Co., cannot advance the cause of the assessee-company any further for the simple reason that in the ultimate analysis it is always a question of fact as to whether a company is carrying on business or not.
12. In Commissioner of Excess Profits Tax v. Shri lakshmi Silk Mills Ltd., the Supreme Court observed that in determining whether an asset was a commercial asset or not, there cannot be any general principle which is applicable to all cases and each case is to be decided on its own circumstances. We have, therefore, to determine whether the liquidator here ho was appointed for purposes of winding up of the assessee-company was engaging himself in business when he realised the assets and invested the realisations in short-term deposits pending distribution amongst the creditors. In Commissioner of Income-tax v. Lahore Electric Supply Co. Ltd., a similar question arose when the undertaking of the respondent-electric supply company was taken over by the Government and the electric supply company invested the compensation money received from the Government as well as its other considerable assets which did not pertain to the electric supply undertaking in Government or other securities and shares, and the sole income of the company after the electric supply undertaking was taken over by the Government was the income from those investments. In that context the Income-tax Officer and the Appellate Assistant Commissioner for the assessment years 1948-49 and 1949-50 held that the respondent-company was not carrying on business and the expenses which they incurred were not solely and exclusively for the purpose of their business. The company carried the matter in appeal before the Tribunal which upheld the assessee's contention and granted deduction of various amounts under section 10(2)(xv) of the Indian Income-tax Act, 1922. At the instance of the revenue a reference was made to the High Court of Punjab and the relevant question was whether the conclusion of the Appellate Tribunal that the assessee-company had not ceased to carry on its business during the relevant accounting period was in the facts and circumstances correct in law. The High Court answered the question in the affirmative and in favour of the assessee-company. The matter was taken to the Supreme Court and Mr. Justice Sarkar, speaking for the majority, observed as under :
'It would be laying down strange law to hold that where a business has in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. The question whether the company was carrying on business arises only because, if it was, it would be entitled under section 10 to deductions from its business income in regard to certain expenses incurred by it fir the purposes of that business. Businesses as contemplated by that section is an activity capable of producing a profit which can be taxed. Payment of outstanding liabilities is not an activity which can ever produce such a result. It cannot be said, therefore, that because liabilities of a closed business were outstanding, it has to be held that either the business was continuing or that an intention to resume business must be inferred : see Commissioners of Inland Revenue v. Anglo-brewing Co., Ltd.'
'If, as was held in In re Dagnall, a married woman continues to carry on business for the purpose of 45 and 46 Vict., c.75, section 1(5), as long as her trade debts remain undischarged, there would seem to be a presumption that a company continues to carry on business as long as it is engaged in collecting debts periodically falling due to it in the course of its former business.'
13. Sarkar J. did not agree with the revenue when it relied on this observation for purposes of urging that a company continues to carry on business as long as it is engaged in collecting debts periodically falling due to it in the course of its former business, and, therefore, Sarket J. observed as under in that context :
'We are unable to hold that Lord Summer intended to lay down that a business which is closed don is deemed to be carried on so long as its outstandings are being collected. South Behar Railway Co.'s case was concerned with a financing company whose only activity after the finances had been furnished activity, earlier a certain proportion of the net earnings of the undertaking financed which was being managed by the Government and later a fixed sum and to receive from the Government the finance supplied went the Government acquired the undertaking as it intended to do. All that Lord Summer intended to say was that the receipt of the moneys was the business of the company and its only business after the financing had been completed. He was not concerned with the case of a closed business whose outstandings were being collected.'
14. The real question, therefore, is whether the liquidator when he was realising the assets and investing the realisations in short-term deposits with the permission of the court pending distribution amongst the creditors was really carrying on business or was merely trying to wind up the affairs of the company. Mr. Patel urged that having regard to the nature of the business of the company, namely, banking and investment, it must be held that though the main business of banking had come to an end, the investment part of the business continued. We do not find any support for this contention either from the facts or from law. In our opinion, when the liquidator realised the assets and invested the money in short-term deposits pending distribution he was not embarking upon any business. The realisation and distribution of assets cannot, in our opinion, be said to be carrying on business. It is obligatory upon the liquidator to realise the assets and to distribute the money amongst the creditors, and if pending distribution he invested the amount, it cannot be said that he was carrying on the business of investment merely because it may be one of the objects either under the memorandum or under the statute. The contention that investment pending distribution makes the entire spectrum of the activities by the liquidator right from the realisation of the assets to distribution thereof, a business, is not worthy of acceptance. The investments, according to us, were permitted by the court only pending distribution amongst the creditors so as to have beneficial completion of the winding up.
15. In Commissioner of Income-tax v. National Mills Co., Ltd., a company which was carrying on business of manufacturing textiles ceased manufacturing textiles on account of financial difficulties in April, 1949, and, therefore, was finally ordered to be wound up by the court in February, 1950. In October, 1950, the liquidator let the plant and machinery of the company at a monthly rent for a period for a period of three years, the lessees having an option to renew the lease for a further period of three years. The lessees had a further option to purchase the plant and machinery at a price fixed on the expiration of the lease. The lessors covenanted with the lessees to assist them in the running of the mills and securing quotas, licences, permits, etc., and to place at the disposal of the lessees such quotas, licencs and permits as could be legally transferred, and the lessees covenanted to provide and allow the lessors accommodation in the premises for their use as offices and records, free of rent. The Tribunal held that the income derived by the company from letting out the plant and machinery during the account year relevant to th assessment years 1951-52 and 1952-53 was income from business and could be set off against its losses of the preceding year brought forward. On a reference being made to the High Court of Bombay, the court held that the finding of the Tribunal being a question of fact cannot be disturbed. Chagla J., I as he then was, speaking for the court, observed in that case as under :
'So long as those assets are used as business assets, it is irrelevant whether the business assets are exploited and used by the assessee itself or someone else. It is true that you have a different situation under certain circumstances. The assessee may stop doing business altogether, and these assets may cease to have the character of business or commercial assets. Then, they take on an entirely different character. They become capital assets, and qua those assets the assessee is not on any business, but qua those assets the assessee has become their owner. As an owner the assessee may also exploit those assets and receive income. But income which it receives is no longer business income because no business is being carried on and the assets are not business assets. In such a case, the income would be an income derived by the owner from his capital assets, and the head of income under which such income would fall for the purpose of Income-tax Act would be section 12 and not section 10. Whether a business is carried on or not and whether assets of an assessee are business assets or not are questions of fact, and they must be decided by the Tribunal on the evidence led before it. The only jurisdiction of the High Court is to consider whether there was any evidence for the Tribunal coming to a particular finding.'
16. We are, therefore, of the opinion that the assets of which the liquidator was seized and which he tried to realise for purposes of winding up were of capital nature and they cannot be said to be business assets, nor can it be said that merely because he was investing the realisations, assuming that was permissible either under the memorandum or under the statute, the activities which he was carrying on as a liquidator were those of a businessman. In the circumstances, therefore, we cannot uphold the contention of Mr. Patel that the liquidator was making for mercantile necessity the investment of realisations as a business for beneficial winding up of the company. The tribunal has found as a fact that the main business of the assessee-company having gone as a result of the winding-up order, there did not remain any other activity which can be legitimately said to be a business activity and whatever the liquidator did was merely as a liquidator for purposes of liquidation of the company. We do not think that there are any justifying grounds for disturbing this finding of fact.
17. Our attention has been invited in this connection to one decision of the Allahabad High Court in Vijay Laxmi Sugar Mills Ltd. v. Commissioner of Income-tax, where a similar situation arose. The liquidator of Vijay Laxmi Sugar Mills Limited, a private limited company, was engaged merely for realising the assets of the company. For the assessment year 1962-63, the income form interest on the fixed deposits amounted to Rs. 13,965 and the company had incurred an expenditure on account of litigation expenses and also on account of travelling allowances, postage, salary, liquidation expenses etc. The company claimed that these expenses were liable to be set off against the income and filed a return accordingly. The Income-tax Officer rejected its claim and treated the entire sum as the company's assessable income. The appeals to the Appeal ate Assistant Commissioner and the Tribunal were dismissed. On reference, the Allahabad High Court held that where the liquidator of a company is engaging himself in merely realising the assets of the company he cannot be said to be carrying on the business of the company. The court found support for this settled position of law from two decisions of the Supreme Court, namely, Liquidators of Pursa Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. Mr. Justice Pathak, speaking for the court, observed that all that the liquidators were doing was to realise the assets of the company; and upon realising the assets, the money was put into fixed deposit with the banks and since the activity of investments on which reliance was placed before the High Court succeeded the completion of realisation, it cannot be said that the liquidators were carrying on business. We are taking the same view, however, for slightly different reason as given by the Bombay High Court in National Mills case.
18. In our opinion, therefore, the contention of Mr. Patel that the liquidator in the present case, in so far as he invested the realisations, was carrying on business for the beneficial winding up of the company cannot be accepted.
19. The result is that we answer question No. 2 in the affirmative and against the assessee. However, having regard to the facts and circumstances of the case, there should be no order as to costs in this reference.