INDIAN BANK LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(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.) 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.