COMMISSIONER OF INCOME TAX Vs. SALEM BANK LIMITED

JUDGEMENT

(1.) THE assessee, a banking company, transferred its banking business with its assets and liabilities to the Indian Bank Ltd. in pursuance of an agreement entered into between them on December 12, 1966. THE assessee-bank had its own retiring gratuity benefit rules and these rules provided for the benefit of gratuity to its employees on retirement after attaining the age of 55 or service of 30 years, or death or abolition of the post or on account of retrenchment or on proof of permanent incapacity to work. THE said rules also provided for the quantum of gratuity to be paid to the employees in the various contingencies set out therein. Even before the actual transfer of the banking business by the assessee-company to the Indian Bank on December 12, 1966, there was a negotiation between the assessee-company and the Indian Bank as regards the payment of gratuity to the employees who are to be taken over by the transferee-company. THEre was also tripartite discussion between the assessee-company, its employees' union and the transferee-company. As a result of the discussion, it was agreed with the consent of the employees' union that in respect of 27 members of the staff who will not be in a position to put in a service of 10 years in the transferee-bank, the assessee-company will pay gratuity and in respect of the rest of the staff, the transferee-company had to pay gratuity. This arrangement is contained in the letter dated January 31, 1966, sent by the assessee-bank to the Indian Bank in which it is stated that the amount of gratuity to those 27 persons might be kept as a deposit in the Indian Bank so that it may be paid to them at the time of their retirement or early. Subsequent to this letter, the board of directors of the assessee-bank, by a resolution dated June 7, 1967, resolved to take over the liability for payment of gratuity to the 27 persons. In pursuance of this resolution, a sum of Rs. 37,560 came to be deposited with the Indian Bank on June 16, 1967, for the purpose of ultimate disbursement to the 27 employees at the time of their retirement or earlier as per the provisions of the said gratuity scheme. THE said sum of Rs. 37.560 had been calculated on the basis of the gratuity scheme which was applicable to the employees of the assessee-bank. Subsequently, by a resolution dated August 3, 1968, the assessee-bank resolved to wind up.

(2.) IN the assessment proceedings for the assessment year 1968-69, the assessee claimed the said sum of Rs. 37,560 as allowable expenditure under Section 36(1)(ii) or under Section 37(1) of the I.T. Act, 1961. The ITO, however, disallowed the claim on the ground that the said sum of Rs. 37,560 represented the compensation paid to the staff for loss of employment as contemplated in Section 25FF of the INdustrial Disputes Act in the course of winding up of the company and, therefore, the said amount cannot be allowed as business expenditure in view of the decision of the Supreme Court in the case of Gemini Cashew Sales Corporation, 1967 65 ITR 643.

(3.) IN this case, the assessee-company has been incorporated for the purpose of carrying on a banking business and it was carrying on that business till the business was transferred to the INdian Bank. It is true that after the transfer of its business, it had certain assets such as house property, securities, fixed deposits in banks, and shares in certain companies and these assets have brought in income by way of rents from house properties, interest from fixed deposits and securities, and dividends from the shareholdings. As a matter of fact, in the assessment year in question, the assessee had received a sum of Rs. 599 as income from house property, Rs. 8,187 as interest income, and a sum of Rs. 1,500 as dividend income. The question is whether the receipt of income from certain assets retained by the assessee-company can lead to an inference that the assessee-company is carrying on its usual business which is a banking business.