1. The assessee was carrying on banking business in India and abroad. With effect from July 18, 1969, the banking business carried on by the assessee and others was acquired under the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the assessee was later compensated by bonds of the value of 2.3 crores of rupees. In respect of the assessment year 1971-72 (for the accounting year ending on December 31, 1970), in the course of the assessment proceedings, the ITO found that the assessee had not done any business in India, but had earned interest on the bonds and proceeded to determine the income of the assessee under the head 'Other sources' and brought to tax an amount of Rs. 18,07,868 under that head. Deducting a sum of Rs. 3,000 under s. 80L of the I.T.Act, 1961 (hereinafter referred to as 'the Act'), and after set off the business loss arising from Malaysian business, the income was determined at Rs. 11,65,820. In the assessment order, the ITO stated that the loss carried forward for the assessment year 1970-71, after revision of that assessment giving effect to the order of the AAC, will be set off against this income and that appropriate depreciation in respect of the Malaysian branch will be allowed when the assessee furnished complete particulars consequent to the revision of the assessment for the assessment year 1970-71, on the basis of the AAC's order. Subsequently, by another order under s. 154 of the Act, the ITO revised the assessment and redetermined the income at Rs. 5,54,930 and in this order no mention was made about the carrying forward of the loss or allowance of depreciation.
2. In its appeal before the AAC, the assessee challenged the assessment order, inter alia, on two principle grounds. They were (i) the unabsorbed depreciation of Rs. 38,750 determined in the assessment order for 1970-71 should be set off against the business income for the year 1971-72, and (ii) the tax treatment of the income of the assessee should have been under the head 'Business' instead of 'Other sources'. The AAC concluded that as there was only a loss for the year 1971-72, the sum of Rs. 38,750, being the unabsorbed depreciation, could not be set off in 1971-72. Further, the AAC found that owing to the nationalisation of the business of banking, which was carried on by the assessee in India, the assessee was not allowed to do banking business from July 18, 1969, and the interest received by the assessee came out of the compensation in the shape of bonds given to the assessee on the nationalisation of its business and not earned by the assessee in the course of any business and, in this view, rejected the claim of the assessee that the interest income should be assessed under the head 'Business'.
3. On further appeal by the assessee to the Tribunal, contending that the assessee was carrying on business which was compulsorily acquired and the income which arose to the assessee should, therefore, be dealt with under the head 'Business income' and not 'Other sources' and, therefore, the loss in the assessment year 1970-71 should be brought forward and set off against this income and that the unabsorbed depreciation for the year 1970-71 should also be set off as a consequence in the assessment year 1971-72, the Tribunal held that the compensation given to the assessee in the shape of stock certificates of the Central Government was for the cessation of its banking business activity and acquisition of its undertaking and that the source for the interest income was only the compensation awarded to the company and, as such, the interest cannot be considered as the business income of the assessee. Relying upon the published balance-sheet of the assessee for the year 1970-71, which did not include the assets and liabilities of the Malaysian bank, the Tribunal concluded that the compensation bonds did not form part of the Malaysian assets and were also not utilised at all in the Malaysian business and, therefore, the compensation amount did not form part of the business assets of the assessee. It was also the further finding of the Tribunal that the bonds given to the assessee did not form part of its business assets and as the assets as well as income arising out of the bonds and did not form part of the business assets or business income of the assessee, there was no question of carry forward of any loss of business or depreciation in an earlier year, which could be set off against the interest income. On these conclusions, the Tribunal dismissed the appeal.
4. Thereupon, the assessee secured a reference under s. 256(1) of the Act on the following question of law :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to carry forward and set off the loss of the business and/or unabsorbed depreciation of 1970-71, against the interest income from compensation bonds earned in the year 1971-72 ?'
5. The learned counsel for the assessee argued that the assessee had been carrying on business in banking all these years and though its banking business was nationalised with effect from July 18, 1969, yet there was no resolution to the effect that the banking business carried on by the assessee should be stopped and, in its absence, the assets in the shape of bonds continued to be its trading assets and, therefore, the income referable to such assets ought to be dealt with under the head 'Business income'. Strong reliance in this connection was placed by the learned counsel on the decision in CIT v. Cocanada Radhaswami Bank Ltd. : 57ITR306(SC) .
6. On the other hand, the learned counsel for the Revenue submitted that the question whether the bonds were held in the accounting year as trading assets of the assessee would be the criterion and as in this case the compensation bonds were made available to the assessee only on account of the taking over of the business undertaking of the assessee, the bonds which had yielded income were not in existence prior to the date of the nationalisation and, in any event, could not be termed as trading assets of the assessee. Besides, it was also pointed out that the assessee had not satisfactorily established the carrying on of the business and the employment of the bonds which were its assets as trading assets in such a business and, in its absence, the claim of the assessee was not sustainable. The learned counsel for the Revenue further contended that the decision in CIT v. Cocanada Radhaswami Bank Ltd. : 57ITR306(SC) , would be inapplicable to the present case, as that decision turned upon the factual conclusion arrived at with reference to the user of the assets as trading assets.
7. We have carefully considered the aforesaid submissions. The principal question is, whether the compensation bonds formed part of the trading assets of the business of the assessee and the income therefrom was, therefore, income from business. In other words, did not compensation bonds which yielded the interest income form part of the trading assets of the assessee If they did, the income therefrom would be income from business and the loss and depreciation could be set off against that income. But if they did not, then the income would not be business income, but would be properly subjected to tax treatment under the head 'Other sources', with the result that no question of carry forward and set off of a business loss or unabsorbed depreciation would arise. No doubt, originally, the assessee was carrying on business in banking in India and abroad. By virtue of the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the undertaking of certain banks including the assessee's stood transferred and vested with the corresponding new bank owned by the Government of India. Section 6 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, provided for payment of compensation and the banking companies including the assessee were given an option in the matter of compensation. One of the methods of compensating a taken-over bank was to make available to it saleable or otherwise transferable stock certificates of the Central Government maturing at the end of thirty years. The assessee opted for this and, therefore, was given five and a half per cent. Banks (Acquisition and Transfer) Compensation Bonds, 1999. The assessee, admittedly, had not done and indeed could not have done any banking business in India. It has also not been established that the assessee carried on any other business as provided in its memorandum of association. The interest earned by the assessee was not from any business activity, but its source was the bonds given to the assessee as compensation for the acquisition of its undertaking and the interest on such bonds cannot, therefore, be considered to be the business income of the assessee. Besides, there is no material to show that the bonds in question formed part of trading assets of the assessee. The only material relied upon by the assessee was the balance-sheet for the year 1970, which is the previous year for the assessment year in question and that contained only the compensation bonds and did not contain any business assets or liabilities. The assets and liabilities of the Malaysian business have not been included therein. Thus, it is manifest that the assessee had not carried on business in the Malaysian business, even on the assumption that banking business was carried on there by the assessee. Indeed, the compensation bonds were made available to the assessee owing to the acquisition of the banking business of the assessee and in that sense, it could not be trading asset of the assessee in its Indian business as it had no banking business in India after the nationalisation, nor did it have any other business in India or in Malaysia, in which business, the compensation bonds were employed or ploughed in as the trading assets of the assessee. The interest income on the bonds is thus not referable to the employment of the bonds as a trading asset either in India or in Malaysia and, therefore, that income of the assessee cannot be regarded as business income.
8. The reliance placed on the decision in CIT v. Cocanada Radhaswami Bank Ltd. : 57ITR306(SC) would not in any manner assist the assessee. In that case, on the evidence, the Tribunal rendered a finding that the assessee was investing its amounts in easily realisable securities and the said securities were part of the trading assets of the assessee's banking business and this finding was accepted by the High Court as well as the Supreme Court to hold that the income from the securities, which formed part of the assessee's trading assets was part of its income in the business and, therefore, the loss incurred in the business in the earlier year or the unabsorbed depreciation could be set off against that in the succeeding years. Such is not factual situation in this case and, therefore, that decision has no application to the instant case.
9. We are, therefore, of the opinion that the Tribunal was right in its conclusion that the assets, namely, the compensation bonds as well as the interest income thereon, did not form part of the business assets or business income of the assessee and that, therefore, there is no question of carry forward or set off of a loss in business or unabsorbed depreciation against the business income. We, therefore, answer the question referred to this court in the negative and against the assessee. The Revenue will be entitled to the costs of this reference. Counsel's fee Rs. 500.