The judgment of the court was delvered by
SRINIVASAN, J. - The facts leadng to the questin that has been referred to us are brifly these :
The assessee is a public limited company carrying on the business of banking snce its incorporation in 1918. It appears to have taken over in some cases properties of its debtors in discharge of the loans advanced to them in the course of its banking business. Eventually, the assessee sold those properties. In the assessment year 1951-52, the department found that four items of properties had been disposed of by the bank, the assessee, on October 23, 1949, yielding a profit of Rs. 27,694-6-9. Rejecting the contention of the assessee that all these four items of properties had been acquired and held as investments and that it was compelled to sell the properties because of the amendment of the Banking Companies Act, the Income-tax Officer took the view that the assessee purchased the properties in realisation of dues owing to it, with a view also to convert the properties into cash when a suitable opportunity arose. The Income-tax Officer also relied upon earlier and similar transactions where properties were taken in lieu of debts and subsequently sold, the difference between the purchase and the sale price of the properties being also brought into the profit account. In the view, that these transactions were treated by the assessee-bank itself as incidental to its banking or money-lending business, the Income-tax Officer brought the above amount to tax as its income. The appeals to the Assistant Commissioner and the Tribunal failed. It may be stated that the Tribunal took the view that the assessee was in fact also a dealer in real property and that the profits from the sales during the year were assessable on that basis and in the normal course. The Tribunal was also inclined to hold that the method of disposal of its stock-in-trade, either in a forced sale or otherwise, could have no bearing on the assessability of the profits therefrom. It is not, however, quite clear from the appellate order of the Tribunal whether all these four items of properties were considered to be the stock-in-trade of the assessee as a dealer in properties or the stock-in-trade of its moneylending business.
Under section 66(2) of the Act, the Tribunal referred the following question :
'Whether on the facts and in the circumstances of the case, the Tribunal was justified in treating the sum of Rs. 27,694 as income assessanle to tax ?
In the order on the application preferred to this court under section 66(2) of the Act to direct the Tribunal to state a case, this court observed that of the four items in question, one appeared to stand on a special footing and was properly distinguishable as an acquisition of a capital asset. The Tribunal was instructed to consider the extent to which such distinction could be made in respect of that item of property. In its statement of the case, the Tribunal did not deal specifically with the matter in the light in which it was directed to be considered, but it contented itself with recording :
'It is humbly submitted and with respect that the length of the holding of the property in question from 1931 onwards nor the other features claimed for it in paragraph 7(a) supra would have affected the decision of the Tribunal as it had held that all the four properties in question formed part of its stock-in-trade.'
Once again we have to point out it is not clear whether the stock-in-trade referred to was the stock-in-trade of the alleged business in real property or the stock-in-trade of the admitted money-lending business.
That the bank was doing money-lending business was beyond dispute. It was also not in dispute, that on four prior occasions in 1940-41, the bank did take over certain properties in discharge of amounts due to it from its constituent debtors and that subsequently the bank sold those properties and realised the cash. It is also conceded by the assessee that the surplus or loss arising out of those sales was brought to account in computing the taxable income of its banking or money-lending business.
In respect of the four items of properties which are in question now, the assessee seeks to make a distinction. Leaving out the special feature attendant upon one of those items of properties, it is the case of the assessee that these properties had been purchased, one in 1931, two in 1934 and the last in 1940. The properties had been either improved or built upon, and but for the fact that the Banking Companies Act was amended in 1949, the bank contends it would not have sold those properties at all. The obvious suggestion was that these properties ceased to be the stock-in-trade of its money-lending business. According to the assessee, therefore, the sale of these properties and the realisation of profits by such sales cannot be regarded as income from its banking business.
We may even at the outset express our view that it has not been established that the bank was also a dealer in real property. Such a view was not taken by the Department, either by the Income-tax Officer or by the Appellate Assistant Commissioner. If regard is had to the fact that the four sales on the prior occasion in 1940-41 had been treated by the bank itself and by the Department as having been effected in the course of its money-lending activities, there seems to be no reason why a different conclusion should be drawn in the case of the sales on October 23, 1949. It does not appear to us that there was any material before the Appellate Tribunal which could have logically led it to conclude that the bank was also a dealer in properties. It was brought to our notice that the memorandum and articles of the bank did not permit it to carry on any trade in immovable property. Having regard to all these circumstances, we record our disagreement with the view of the Tribunal that the assessee bank was also a dealer in properties. There was no material for its finding that, in addition to its money-lending business, the assessee carried on trade in buying and selling real property.
The circumstance that the bank was compelled to sell all the four items of properties by reason of the amendment of the banking Companies Act has no real relevancy to the question we have to determine, which is, whether the acquisition and sale of all or any of these properties was in performance of the banks functions as money-lender.
Of the four items of properties in question, three were admittedly purchased in court sales in execution of decrees held by the bank against its debtors. One of those three items was a vacant site. The other two were houses. In the case of the vacant site, the bank seems to have thought it could be built upon to its advantage and upon a resolution of the board of directors a sum of money was spent thereupon in the construction of a house. The other two houses also seem to have been improved at some expenditure. The bank was in receipt of the rental income from all these three houses. It finally sold them on October 23, 1949. All the properties appear to have been sold on the same day at an auction. The question in so far as these three items are concerned could accordingly be, whether the retention of these properties as such for long periods is sufficient to justify the inference, that they ceased to be the stock-in-trade of the banking business of the assessee.
In the case of the other item of property, it was purchased in 1931 for Rs. 3,555. On the date of its sale on October 23, 1949, the book value was shown as Rs. 5,663-13-1 or Rs. 5,664. The sale price was Rs. 19,000. The difference constituted a profit of Rs. 13,336. On the facts that have been placed before us, supported by the resolutions of the board of directors, it seems clear that this item of property was not purchased in lieu of any debts due to the bank from its owner, Narayanaswami. It appears that one Rajarajeswari Nidhi Ltd. obtained a mortgage over these properties from Narayanaswami. The property was brought to sale by the decree-holder. The house was adjacent to the bank on its southern side, and the directors thought that it could be usefully acquired for the purposes of the bank. It must be emphasised that the bank itself did not hold any decree against the mortgagor, Narayanaswami, in execution of which decree the property was brought to sale or was bid for and purchased by the bank. Narayanaswami was no doubt indebted to the bank also, but the purchase of the property in auction was not in discharge of that liability. That fact is made clear by the resolution of the board of directors placed before us. How the liability of Narayanaswami to the bank was discharged is not in evidence before us, nor is it necessary for purposes of the present reference to enquire into that matter. It is abundantly clear that the purchase of this property was not in lieu of any debt due to the assessee bank. What the board of directors proceeded to do was to acquire an item of property which adjoined the banks premises with a view to make use of that building for the purposes of the bank. It should follow as a necessary consequence that the acquisition of this property did not by itself make it part of the stock-in-trade of the money-lending business of the bank. There was no evidence that subsequent to the purchase this house was treated by the bank as part of its stock-in-trade of its banking or money-lending business. It was this aspect of the matter that the Tribunal was directed to investigate when this court directed a reference under section 66(2) of the Act and which, as we have pointed out, the Tribunal failed to do. Whatever, therefore, may be the conclusion with regard to the other three items of properties, the acquisition of which was for the reason that the bank held decrees against the owners of those properties and purchased those properties in execution of those decrees, the case of this itemstands on a wholly different footing. When the bank purchased this property for its own use it constituted an investment, a capital investment. We are accordingly of the view that any profit made by the transaction of sale of this house was not incidental to the money-lending business of the bank. In other words it was not a profit made by the sale of any stock-in-trade of the money-lending business of the assessee.
The principal point that has been urged in so far as the remaining three items of properties are concerned, in respect of which the taxable profit on resale has to be taken as Rs. 27,694-6-9 minus Rs. 13,336-11-6, i.e., Rs. 14,357-11-9, is that these purchases were firstly not in the course of the money-lending transactions of the bank and secondly, even if it is regarded in that sense at the time when the purchases took place, the subsequent conduct of the bank in retaining these properties for a long time must be regarded as having taken them out of the money-lending business. It is, therefore, claimed that they can at the best be regarded as investments. These arguments appear to be against the evidence in this case and against the weight of authority. It is true that if a money-lender, who has, say, a capital of rupees two lakhs invested in his money-lending business, withdraws a part of that circulating capital, say, a lakh of rupees and purchases a house for his own residence, and utilises that house for his residence or other purpose unconnected with the money-lending business, it would follow that that sum was no longer part of the money-lending business. The present case is certainly not similar to the illustration that we have given. It is admitted that the assessee is a banking institution earning its profits by money-lending. Having acquired the properties in realisation of moneys which it had lent, the properties were kept on for various periods ranging from 9 to 15 years, during which time the income therefrom was brought into the account of the bank and dealt with in the course of its banking business. The properties at the time they were purchased undoubtedly represented the converted form of the stock-in-trade of the banking business, viz., money, and when they were reconverted into money, it must, in our opinion, represent the assets of the bank which formed its money-lending assets. Unless there is clear and irrefutable evidence that the bank intended to take away the equivalent of the value of its properties out of its money-lending business, the profit made on the transaction by the resale of the properties must necessarily be regarded in the light of the profits of the money-lending business.
As we said, authority is not lacking. In the judgment of this court in R.C. No. 49 of 1946, a similar question arose. The assessee in that case was also a bank which advanced money to a debtor on the security of its merchandise. After realising the proceeds of the merchandise, there was still an amount due from the debtor. As a result of an agreement between all the creditors, including the assessee bank, the agricultural properties of the debtor were sold in auction. The bank bid for one item of the properties and purchased it in 1930. The bank continued to own and possess the lands and derived income from that property. In 1943, the bank sold the property and a surplus of Rs. 3,360 was realised over the amount at which it stood in the books of the bank. After allowing depreciation, a sum of Rs. 2,722 was included in the assessment for the relevant period, the Department taking the view that the purchase and the sale of the lands were made in the course of the business and were parts in the scheme of profit-making in the banks business. When the matter went to the Tribunal, the view was taken that the purchase was a pure accident and that there was no material to hold that the transaction arose in the course of the carrying on of the business of the appellant. In dealing with this matter, a Bench of this High Court held that the purchase was a process in the realisation of debt due to the bank and, therefore, it was in the course of the business of the bank. It was pointed out that no evidence had been adduced to show that there was any alteration in the nature of the transaction such as converting the property into an investment or making it a part of the fixed capital. The learned Chief Justice went on to state :
'In the absence of any evidence, it must be held that the property continued with the bank to be resold at an opportune moment which actually came in 1943, no doubt, after a long period after the purchase. But, in out opinion, lapse of time has no bearing on the legal position. The purchase and resale were, therefore, parts of the business transactions of the bank and the profits made by the bank by the resale was assessable.'
In another decision of this court in R.C. No. 64 of 1953, the case of a money-lender, who was also the owner of a large extent of agricultural lands, and who, in the course of his business of money-lending, acquired properties, was considered. In the course of realisation of money lent by him, he purchased three items of immovable properties which were houses and lands. These items were subsequently sold and the difference between the purchases and sale prices was brought to tax as income from the business. In the judgment of this court, reference was made to A. H. Wadia v. Commissioner of Income-tax, wherein Mahajan, J., observed :
'Mere ownership of properties even if purchased from a source which originally was employed in the money-lending business, does not automatically make such properties part of such business, in the absence of any finding that the income of these properties was being used in that business or that those properties were subsequently treated as stock-in-trade of that business except perhaps in the case of banking institutions.'
The last part of this extract is important in that it shows that in the case of banking institutions the normal view should be that the purchase of properties in realisation of debts due to the bank should be regarded as part of the money-lending transactions, whereby the properties themselves became part of the stock-in-trade of that business though, no doubt in the case of businesses other than that of banking institutions, a specific finding that the income of these properties was being used in that business and that those properties were subsequently treated as stock-in-trade of that business would be necessary. In R.C. No 64 of 1953, it was found that the assessee treated alike his income from money-lending business, his income from his lands and the house which he had taken in discharge of debts due to him and his income from his other lands. The loans realised in cash and the sale price of the lands he had owned also went into the same account. All of these constituted one fund available to him and he utilised those moneys for his money-lending operations also. On those facts, it was held that there was material furnished by the conduct of the assessee himself on which the conclusion could be founded that the assessee treated the items as assets of his money-lending business.
It does not seem to us that the present case is in any way different from the cases we have referred to.
On behalf of the assessee Alapati Ramaswami v. Commissioner of Income-tax has been relied upon. In this decision of the Andhra Pradesh High Court, the facts were that the assessee who was a money-lender had purchased some lands from certain debtors in discharge of loans from them which lands he sold about 10, 11, 16 and 22 years after the respective dates of purchase. The value of the properties purchased by him were not entered in the accounts of the business as part of its stock-in-trade and no part of the income derived therefrom was utilised for the purpose of the business and no part of the income from the business was utilised to meet any expenditure in respect thereof. On these facts, it was held that there was no evidence to prove that the properties ferment part of the money-lending business of the assessee, and that, therefore, the excess of the realisation by the sale of the properties over their cost was not income liable to tax. We are unable to see how this decision helps the assessee. Indeed, on the facts as stated, apart from any inference that could arise from the long periods during which the assessee kept the properties in his possession, there seems to have been clear proof that those properties did not form part of the stock-in-trade of the money-lending business and were not utilised by the assessee in that manner.
In the case before us, however, the assessee bank took over the three items of properties in discharge of the debts due to it. Even at that stage, they formed part of the stock-in-trade of the money-lending business of the bank. The income from these three items of properties were merged with the rest of the stock-in-trade of its money-lending business. The sums spent for the improvement and upkeep of these properties were treated as items of expenditure in the usual course of the banking business of the assessee. There was no indication available which showed that the assessee bank ever sought to treat the acquisition of any of these three items as investments. In other words, there was no indication that the amounts spent on the acquisition of these properties or even their improvement ceased to be part of the circulating capital of the assessee.
In the light of the foregoing, we are of the view that in so far as three items are concerned, the profit realised by their sale was income of the money-lending business assessable to tax.
Our answer to the question referred to us is that only a sum of Rs. 14, 357-11-9 out of the sum of Rs. 27,694 was assessable to tax.
Since neither party has wholly succeeded, we make no order as to costs.
Reference answered accordingly.