COMMISSIONER OF INCOME TAX Vs. INDIAN OVERSEAS BANK

JUDGEMENT

(1.) AT the instance of the Revenue, under section 256(1) of the Income-tax Act, 1961, (hereinafter referred to as "the Act"), the following common question of law has been referred to this court for its opinion :

(2.) THE assessees in these references are the Indian Overseas bank and the Indian Bank - two out of the 14 corresponding new banks under the First Schedule to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (Act 5 of 1970) (hereinafter referred to as the "Banking Companies Act" for short). THE Indian Overseas Bank Limited and the Indian Bank Limited were carrying on the business of baking under the Banking Regulation Act (Act 10 of 1949). THEse two banks, along with others, were nationalised with effect from July 19, 1969, under the Banking Companies Act. Under section 6 of that Act, the two banks were given compensation of Rs. 250 lakhs and Rs. 230 lakhs, respectively. For the assessment year 1970-71, the Indian Overseas bank filed two separate returns for the periods January 1, 1969, to July 18, 1969 and July 19, 1969, to December 31, 1969. Before the Income-tax Officer, the Indian Overseas Bank claimed that the income, which has accrued during the period January 1, 1969, to July 18, 1969, was in the nature of a capital receipt in the hands of the assessee and was exempt from income-tax. It was further claimed that the income for this period was not liable to be taxed, since section 5(5) of the Banking Companies Act was inapplicable to the assessee-bank. As directed by the Income-tax Officer, the Indian Overseas Bank also furnished a combined return for both the periods, disclosing the entire income from January 1, 1969, to December 31, 1969. THE Income-tax Officer took the view that the entire undertaking of the Indian Overseas Bank Limited including all interests in or arising out of its properties immediately before the commencement of the Banking Companies Act, had vested in the corresponding new bank, the Indian Overseas Bank, and the profit earned during the period January 1, 1969, to July 18, 1969, accrued to the corresponding new bank, viz., the Indian Overseas Bank, under section 5(1) of the Banking Companies Act, and the tax liability in respect of the banking business done for the period prior to July 19, 1969, should also be met by the corresponding new ban, viz, the Indian Overseas Bank. From the details and the audited statements furnished by the Indian Overseas Bank, the Income-tax Officer worked out the income for the periods January 1, 1969, to July 18, 1969, and July 19, 1969, to December 31, 1969, separately, and consolidate the same and arrived at a total income of Rs. 68,81,650, on which the Indian Overseas Bank was assessed. On appeal by the Indian Overseas Bank before the Appellate Assistant Commissioner, contending that the income for the period January 1, 1969, to July 18, 1969, ought not to have been included in the total income of the assessee, the Appellate Assistant Commissioner rejected the same on the ground that the profit earned for the period January 1, 1969, to July 18, 1969, has been transferred to, and received by, the assessee and such profit earned in the normal course of business carried on in the accounting year relevant to the assessment year 1970-71 will have to be included while computing the total income of the assessee and the profit cannot be taken as a capital receipt in the hands of the assessee. Against this, the Indian Overseas Bank preferred an appeal before the Tribunal.

(3.) WE may now notice briefly the provisions in the Banking Companies Act to the extent they are relevant for our purpose. Section 2(c) states that the "commencement of this Act', means "19th day of July, 1969". the vesting section viz section 4 provides that on July 19, 1969, the undertaking of every existing bank shall be transferred to, and shall vest in, the corresponding new bank. Section 5(1) enumerates the different constituents forming part of the general vesting and they include all assets, rights, powers, authorities and privileges and all property, movable and immovable, cash balances, reserve funds, investments and all other rights and interests in or arising out of such property as were immediately before the commencement of the Act in the ownership, possession, power or control of the existing bank in relation to the undertaking, whether within or without India, and all books of account, registers, records and all other documents of whatever nature relating thereto and shall also be deemed to include all borrowings, liabilities and obligations of whatever kind then subsisting of the existing bank in relation to the undertaking. Section 5(5) saves pending proceedings against existing banks and provides that such proceedings may be continued, prosecuted and enforced by or against the corresponding new bank. Section 6(1) states that every existing bank shall be given compensation in respect of the transfer, under section 4, to the corresponding new bank of the undertaking of the existing bank as specified against each such bank of the undertaking of the existing bank as specified against each such bank in the Second Schedule. A perusal of the Second Schedule shows that payment of compensation to the Indian Overseas bank Ltd. and the Indian Bank Ltd. has been provided in a sum of Rs. 250 lakhs and Rs. 230 lakhs, respectively. The assessee-banks have also drawn up a profit and loss account for the period January 1, 1969, to July 18, 1969, and another profit and loss account for the period July 19, 1969, to December 31, 1969. They have also drawn up a balance-sheet as on July 18, 1969, and from these, the income earned by the erstwhile banks, which carried on the business of banking up to July 18, 1969, and the income earned subsequent to that date by the assessee-banks, had been computed. It is in the background of the aforesaid provisions and the drawing up of the accounts that the liability of the assessees for tax on the income earned by the erstwhile banks between January 1, 1969, and July 18, 1969, has to be considered.