Skip to content


Indian Bank Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectCompany;Direct Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 626 of 1977 and 857 and 858 of 1979
Judge
Reported in[1985]153ITR282(Mad)
ActsBanking Companies (Acquisition and Transfer of Undertakings) Act, 1970; Income Tax Act, 1961 - Sections 43(6)
AppellantIndian Bank Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateS.V. Subramaniam, Adv.
Respondent AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Cases ReferredR.C. Cooper v. Union
Excerpt:
.....the fact that the assessee has not given itemised particulars regarding the written down value of malaysian assets as contemplated by section 34 which lays down the condition for depreciation ? 10. originally, parliament passed the banking companies (acquisition and transfer of undertakings) act, 1969 (act 22 of 1969), which provided for the acquisition and transfer of the undertakings of certain banking compa 14. coming to the question as to whether the assessee is entitled to depreciation in respect of the malaysian assets for the years 1970-71 and 1972-73, it is seen that the assessing authority has directed the withdrawal of the depreciation given earlier only because no item-wise particulars have been furnished as required by section 32. as already stated, the aac as well..........since the assessee has not given particulars regarding the written down value of the malaysian assets,. depreciation will be given in relation to those assets only after furnishing the particulars by the assessee and that the depreciation given in the earlier years have also to be withdrawn since no particulars have been furnished in those years as required under section 32. thus, on the facts stated above, three questions arise for consideration: (1) whether the ito was justified in reducing the cost of the undertaking by rs. 2,66,099 by way of adjustment on account of adopting the book value of the fixed assets instead of the written down value as on december 31, 1968, in the original assessment for the year 1970-71 (2) whether the written down value as on july 18, 1969, should be.....
Judgment:

Ramanujam, J.

1. Since the assessee in all these cases is the same, they are dealt with together.

2. The assessee is M/s. Indian Bank Ltd., which is one of the banks taken over as a result of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, as and from July 19, 1969, and the assessee was paid a total compensation under the provisions of the said Act of Rs. 2,30,00,000. For the assessment year 1970-71 corresponding to the previous year ending December 31, 1969, the ITO determined the netcapital gains arising out of the taking over of the bank at Rs. 55,166 after determining the cost of the banking undertaking at Its. 2,29,44,834, The order of the ITO computing the net capital gains at Rs. 55,166 for the assessment year 1970-71 was questioned before the AAC who took the view that the total cost of the undertaking at the time of the taking over was Rs. 2,36,61,702 as against Rs. 2,30,00,000 being the compensation received for the taking over of the undertaking and, therefore, there was no capital gains at all. Aggrieved by the order of the AAC, the Revenue filed an appeal before the Income-tax Appellate Tribunal. The Tribunal allowed the said appeal and upheld the order of the ITO computing the capital gains at Rs. 55,166.

3. Aggrieved by the order of the Income-tax Appellate Tribunal, the assessee has sought and obtained a reference to this court on the following two questions of law :

' (a) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that on a true interpretation of the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, the Malaysian branches were not vested and, hence, the compensation relates only to Indian assets ?

(a) Whether, on the facts 'and in the circumstances of the case, the Tribunal was right in holding that the written down value of the asset as on July 18, 1969, should be considered as the cost of acquisition for the purpose o-f determining capital gains ?'

4. The ITO, on the basis of certain audit reports, reopened the assessment for the assessment year 1970-71 and recomputed the capital gains by adopting the written down value of the depreciable assets as on the date of acquisition, i.e., July 18, 1969, thereby increasing the capital gains. The ITO, in his reassessment order, for 1970-71, also withdrew the depreciation allowance of Rs. 38,750 given earlier for Malaysian assets in the original assessment. On the same basis, for the assessment year 1972-73, the ITO did not allow depreciation in respect of Malaysian assets stating that it will be given on the furnishing of requisite particulars. The assessee took the reassessment order for 1970-71. and the original order for 1972-73 in appealto the AAC.

5. The AAC held that there was no warrant for adopting the written down value as on July 18, 1969, because when the undertaking had been nationalised on July 18, 1969, the assessee was not entitled to any depreciation in the previous year relevant to the assessment year, in question and, therefore, the written down value in terms of the provisions of Section 43(6) would be only the figures as arrived at on December 31, 1968,and this has to be taken as cost of the assets in view of the provisions of Section 50(1). He also held that the ITO was not justified in withdrawing the depreciation on Malaysian assets in relation to the assessment year 1970-71 on the ground that the required particulars have not been given. In the appeal relating to the Malaysian assets, the AAC held that since the assets in Malaysian Branch have been found to be used for business purposes, they are entitled to depreciation and, therefore, the assessee cannot be held to be disentitled to the depreciation merely because the item-wise particulars regarding the written down value are not available. He, therefore, held that in the absence of itemised particulars, the ITO's order allowing the depreciation on Malaysian assets on proportionate basis in the original assessment was quite reasonable and justified. In this view, he directed the ITO to allow depreciation at suitable rates on the proportionate written down value of the Malaysian assets.

6. Aggrieved by the order of the AAC, the Department filed two appeals to the Income-tax Appellate Tribunal, one in relation to the year 1970-71 and the other in relation to the year 1972-73 which related to the Malaysian assets. The Tribunal agreed with the view taken, by the AAC and held that the withdrawal of the depreciation of Rs. 38,750 allowed in the original assessment for the year 1970-71 was not justified and that the assessee is entitled to depreciation on the proportionate written down value of the Malaysian assets for the year 1972-73.

7. Aggrieved by the order of the Tribunal, the Revenue has sought and obtained a reference to this court on the following questions of law:

' (1) Whether, on the facts and in the circumstances of the case, it was rightly held that the written down value as on December 31, 1968, being the last day of the accounting year preceding the accounting year relevant to the assessment year 1970-71 and not as on the date of nationalisation, viz., July 18, 1969, should be taken for the computation of capital gains ?

(2) Whether, on the facts and in the circumstances of the case, it has been righlty held that the assessee would be entitled to depreciation in. respect of Malaysian assets for the assessment years 1970-71 and 1972-73 ?'

8. For a proper appreciation of the questions referred in these cases, it is necessary to refer to certain facts in detail. M/s. Indian Bank Ltd., was doing banking business, in India, Ceylon, Singapore and Malaysia. The Government of India nationalised 14 banks including the Indian Bank Ltd. with effect from July 18, 1969; as a result, the bank's business in India, Ceylon and Singapore was taken over by the Government of India. The bank's business in Malaysia was taken over at a later date. After July 18, 1969, the Indian Bank Ltd. did not do any banking business in India, Ceylon and Singapore. So far as the bank's businesswhich was taken over on July 18, 1969, the assessee was paid a compensation of Rs. 2,30,00,000 as per the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (Act V of 1970), in the form of 5 1/2% Banks (Acquisition and Transfer) Compensation Bonds, 1999. tor the assessment year 1970-71, the ITO originally passed an order computing the net capital gains resulting from the statutory transfer of the undertaking from the assessee to the Government at Rs. 55,166. The said capital gains was computed on the following basis:

Working oj capital gains Combined balance-sheet of Indian and Malaysian-business as at 18-7-1969

Rs.Excess of assets over liabilities2,05,65,870Less : Malaysia : Excess of assets over liabilities 49,50,769Less : Borrowed capital of the head office in the Malaysian Branch49,00,000

50,769

2,05,15,101

Less : Adjustments on account of adopting book value of the fixed assets instead of W.D.V.2,66,099

2,02,49,002Add : Secret revenue26,95,834

2,29,44,834

Compensation paid2,30,00,000Less : Cost of the undertaking2,29,44,834

Net capital gains55,166

9. The details given above would indicate that in computing the capital gains, adjustment on account of adopting book value of the fixed assets instead of the written down value, was taken at Rs. 2,66,099. The said figure of Rs. 2,66,099 represented the difference between the book value and the written down value of the assets as on December 31, 1968. But there was an audit report stating that actually the written down value of the assets as on July 18, 1969 (written down value as on December 31, 1968, less depreciation allowable for the period from January 1, 1969, to July 18, 1969), should have been considered instead of the written down value onDecember 31, 1968, and if so done, it will enhance the capital gains to Rs. 4,59,451. On the basis of the said audit re port, the assessment for the year 1970-71 was reopened under Section 147(b) of the I.T. Act, 1961, and a reassessment order was passed refixing the capital gains at Rs. 4,59,451. While making the original assessment for the year 1972-73, the assessing authority had held that since the assessee has not given particulars regarding the written down value of the Malaysian assets,. depreciation will be given in relation to those assets only after furnishing the particulars by the assessee and that the depreciation given in the earlier years have also to be withdrawn since no particulars have been furnished in those years as required under Section 32. Thus, on the facts stated above, three questions arise for consideration: (1) Whether the ITO was justified in reducing the cost of the undertaking by Rs. 2,66,099 by way of adjustment on account of adopting the book value of the fixed assets instead of the written down value as on December 31, 1968, in the original assessment for the year 1970-71 (2) Whether the written down value as on July 18, 1969, should be taken as the basis in working out the cost of the undertaking or the written down value as on December 31, 1968, should be taken as .the basis (3) Whether the assessee is entitled to depreciation in respect of the Malaysian assets for the assessment years 1970-71 and 1972-73 on a proportionate basis, notwithstanding the fact that the assessee has not given itemised particulars regarding the written down value of Malaysian assets as contemplated by Section 34 which lays down the condition for depreciation ?

10. Originally, Parliament passed the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 (Act 22 of 1969), which provided for the acquisition and transfer of the undertakings of certain banking companies in order to serve better the needs of development of the economy in conformity with national policy. The said Act provided under Section 3 for the transfer of the undertakings of the existing banks to the corresponding new banks established under that Act. Section 6 provided for payment of compensation for the existing banks which had been taken over for acquisition. That section provided that the compensation shall be determined in accordance with the principles specified in the Second Schedule to the Act. The Second Schedule which had laid down the principles for determination of compensation stated in Clause 1 that the compensation to be paid by the Central Government to each existing bank in respect of the acquisition of the undertaking thereof shall be an amount equal to the sum total of the value of the assets of the existing bank as on the commencement of the Act less the sum total of the liabilities of the existing bank. Thus, under the provisions of the said Act, the compensation should be taken as the difference between1 the sum total of the value of each ofthe assets of the existing bank and the sum total of the liabilities and obligations of the existing bank. The said Act was challenged before the Supreme Court in R.C. Cooper v. Union, of India [1970] 40 Comp Cas 325 on the ground, inter alia, that the Act violated the guarantee of compensation under Article 31(2) of the Constitution of India. The Supreme Cour.t upheld.the said challenge arid held that the Act is violative of Article 31(2) and struck down the same. The reasons given by the Supreme Court for holding the Act to be violative of Article 31(2) are these. The-undertaking of a banking company having been taken .as a going concern would ordinarily include the goodwill and the value of long-term leases, if any, but the goodwill of the banks and the value of the unexpired period of leases have not been shown as one of the items in the Schedule to be valued and therefore, the compensation should be determined for the undertaking as a whole and not in respect of some of its assets alone. Taking note of the decision of the Supreme Court, Parliament enacted the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (Act 5 of 1970), laying down a different principle for payment of compensation. Section 6 of the Act provided that every existing bank shall be given by the Central Government such compensation in respect of the transfer as is specified against each such bank in the Second Schedule. The Second Schedule has provided for a lump sum compensation in respect of each of the existing banks taken over. In relation to the Indian Bank Ltd., a lump sum compensation of Rs. 2,30,00,000 was awarded for the entire undertaking taken over. That the said sum is the sale price of the undertaking for the purt pose of determining the capital gains is not in dispute. However, the dispute between the parties is as regards the determining of the cost of the undertaking which is the asset transferred for purposes of determination of the capital gains. The assessing authority in his original order of assessment for the year 1970-71 deducted a sum of Rs. 2,66,099 from the cost of the undertaking as worked out by the assessee on the ground that the cost of the undertaking has been worked out by adopting the book value of certain depreciable assets, instead of the written down value as on December 31, 1968. The undertaking taken over from the assessee included certain depreciable assets on which depreciation has been claimed by the assessee and the same has been given up to December 31, 1968. Since the book value ason December 31, 1968, has been taken as the basis for finding out the cost of the undertaking, the assessing authority felt that instead of the book value, the written down value as on December 31, 1968, should be taken as the basis and the said sum of Rs. 2,66,099 represents the difference 'between the book value of the depreciable assets and their written down value.

11. The learned counsel for the assessee contends that it is not open to the ITO to cut up the lump sum compensation given under Schedule II to Act V of 1970; as compensation for individual assets to determine the capital gain for each asset. It is no doubt true that the said Act provides for a lump sum of compensation for the entire undertaking and the compensation cannot l)e cut up and attributed to the cost of the various individual assets. However, in this case, the ITO has not done any such thing. If the Income-tax Officer has proceeded to determine the capital gains arising out of the transfer of each of the assets, then the complaint of the assessee can have some substance. But where the assessing authority has proceeded to determine the capital gains in respect of the entire undertaking as an asset transferred, he cannot be said to have cut up the sale price as referable to each individual asset. As the lump sum compensation has been determined as the difference between the book value of the assets and the liabilities as per the books of the assessee, he proceeded to determine the cost of the undertaking which has been transferred by taking the book value of the assets and deducting depreciation which had been allowed on the depreciable assets so as to arrive at the written down value as adjusted for purposes of Section 50. The learned counsel for the assessee would rely on Section 55(2) of the I.T. Act, 1961, and say that Section 55(2) can be invoked only when an individual capital asset is transferred and not when an undertaking as such is transferred. But we do not see any substance in the said contention as the expression ' capital asset ' will definitely include an undertaking. Therefore, the cost of acquisition of an undertaking can only be determined by applying the provisions of Section 55(2) read with Sections 48, 49 and 50. In this case, the cost of acquisition of the undertaking is taken by the assessing authority to include the depreciation which has been granted in relation to the depreciable assets up to December 31, 1968, and, therefore, that should be deducted to find out the written down value of those assets, for purposes of Section 50. Section 43(6) defines ' written down value ' in the case of assets acquired before the previous year as the actual cost to the assessee less all depreciation actually allowed to him under the Act. Therefore, the assessing authority appears to be quite justified in excluding the sum of Rs. 2,66,099 from the cost of the undertaking as returned by the assessee.

12. In this view of the matter, the second question referred in T.C.No. 626 of 1977 has to be answered 'in the affirmative and against, theassessee.

13. Coming to the question as to whether the ITO was justified in reopening the assessment for the year 1970-71, on the basis that the adjustments in the cost of the undertaking should be the written down value as on July 18, 1969, revising'his earlier opinion that the written down valuesas on December 31,1968, should be taken for adjustment, it is seen that the assessee did not and could not claim depreciation up to the period ending on July 18, 1969, and the depreciation was actually claimed and allowed only up to December 31, 1968. As a matter of fact, for purposes of determining the written down value under Section 43(6), it is only 'depreciation actually allowed' that can be taken into count and not the 'depreciation allowable'. The learned counsel for the Revenue does not dispute the fact that in this case depreciation has not been claimed and allowed for the period between December 31, 1968, and July 18, 1969. Only if depreciation has been allowed for that period, that can be deducted from the book value of the assets which stands included in the cost of the undertaking. In this view of the matter, the view taken by the ITO that a sum of Rs. 4,04,285 should also be added to the capital gains already determined in the original order of assessment cannot legally be sustained. Therefore, question No. 1 in T.C. Nos. 857 and 858 of 1979 should be answered in the affirmative and against the Revenue.

14. Coming to the question as to whether the assessee is entitled to depreciation in respect of the Malaysian assets for the years 1970-71 and 1972-73, it is seen that the assessing authority has directed the withdrawal of the depreciation given earlier only because no item-wise particulars have been furnished as required by Section 32. As already stated, the AAC as well as the Tribunal has held that the ITO should not have disturbed the depreciation allowed in the original assessments for 1970-71 and 1972-73. It is not in dispute that the assets in Malaysia have been actually used for business purposes. The only reasoning for the withdrawal of the depreciation already granted is that item-wise particulars regarding the written down value have not been given by the assessee. As a matter of fact, in the original assessment, the ITO allowed depreciation on Malaysian assets on a proportionate basis in the absence of particulars. It is true, the item-wise particulars of the written down value of each of the assets were not available with the assessee. But once it is conceded that the entire assets have been used only for business purposes, depreciation on Malaysian assets can be allowed on a proportionate basis as has been done by the ITO at the stage of the original assessment. It is no doubt true, Section 34 says that the deductions referred to in Section 32(1) shall be allowed only if the prescribed particulars have been furnished and, in this case, the assessee is not in a position to furnish the particulars. But having regard to the fact that the Malaysian assets have not been valued separately, depreciation can be given on a proportionate basis. Having given depreciation on the Malaysian assets on a proportionate basis, the assessing authority is not justified in withdrawing the benefit merely on the basis that item-wise particulars have not been furnished. We are inclined to agree with the viewtaken by the AAC and the Tribunal on this aspect of the case. Thus, the second question referred in T.C. Nos. 857 and 858 of 1979 is answered in the affirmative and against the Revenue.

15. The first question in T.C. No. 626 of 1977, as to whether the Malaysian branch had vested with the corresponding bank and whether the compensation awarded only relates to Indian assets does not arise for consideration now as it has been conceded by the learned counsel for the assessee that the Malaysian assets have also vested with the corresponding bank as a result of the acquisition. Therefore, it is unnecessary to answer the said question. This question is, therefore, unanswered.

16. The tax cases are ordered accordingly. There will, however, be noorder as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //