Commissioner of Income Tax vs Indian Overseas Bank and Another

Ratnam, J.—At the instance of the Revenue, u/s 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 :

Whether, on the facts and in the circumstances of the case, the income for the period January 1, 1969, to July 18, 1969, was not taxable in the

hands of the nationalised banks, the Indian Overseas Bank and the Indian Bank, for the assessment year 1970-71 ?

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. u/s 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, u/s 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.

Likewise, in respect of the assessment year 1970-71, the Indian Bank filed two separate returns of income, one for the period January 1, 1969,

to July 18, 1969, and another for the period July 19, 1969, to December 31, 1969, and claimed that the assessee did not carry on any banking

business prior to July 19, 1969, and the profit earned by the Indian Bank Limited. Which existed earlier, did not form part of the income of the

assessee. This was rejected by the Income Tax Officer as well as by the Appellate Assistant Commissioner and the Indian Bank also preferred an

appeal before the Tribunal.

Since, in the appeals so preferred by the Indian Overseas Bank and the Indian Bank, common questions arose for decision, they were dealt

with together and disposed of by a common order of the Tribunal. Before the Tribunal, on behalf of the assessees, it was contended that in view of

the circumstances under which the Indian Overseas Bank and the Indian bank took over the establishment, business, etc., of the Indian Overseas

Bank Ltd. and the Indian Bank Ltd., the income for the period up to July 18, 1969, was not taxable in their hands. Considering the stand so taken

by the assessees, the Tribunal pointed out that the assessees came into being only on July 19, 1969, and were not in existence on July 18, 1969,

and even, theoretically, such a non-existing assessee cannot earn income prior to its coming into existence nor can any income accrue to it or be

received by it prior to its coming into existence and that the receipt by the assessee or the other person of that income does not make the latter

assessable, unless, in the hands of the assessee, it partakes of the character of income. It was also pointed out by the Tribunal that the mere

assignment of income which has accrued to a person cannot be deemed to be the income of the assignee unless, by some specific provisions of the

Income Tax Act, that income is deemed to be the latter''s income and that the income for the period January 1, 1969, to July 18, 1969, accrued to

the Indian Overseas Bank Ltd, and the Indian Bank Ltd. and was their income and also factually got converted in the balance-sheet as on July 18,

1969, as part of their assets. In that view, the Tribunal found that the income for the period January 1, 1969 to July 18, 1969, became part of the

assets of the assesses and that was not taxable in the hands of the assessees as their income. In a separate but concurring order, the Judicial

Member of the Tribunal, applying section 170 of the Act, held that the income derived from the banking business carried on by the Indian

Overseas Bank Ltd. and the Indian Bank Ltd., for the period January 1, 1969, to July 18, 1969, cannot be considered to be income of the

assessee-banks and cannot, therefore, be subjected to tax in their hands for the assessment year 1970-71. That is how the question of law,

referred to earlier, has arisen.

Learned counsel for the Revenue contended that the business of banking carried on by the Indian Overseas Bank Ltd. and the Indian Bank Ltd.

had been continued by the nationalised banks viz., the assessees, and in respect of the profits accrued to the nationalised banks at the end of the

accounting year, they cannot be heard to dispute their liability to be assessed in respect thereof. Referring to the provisions of the banking

Companies Act and relying upon the decisions reported in E.D. Sassoon and Company Ltd. Vs. The Commissioner of Income Tax, Bombay City,

and Commissioner of Income Tax, Gujarat Vs. Ashokbhai Chimanbhai, , learned counsel submitted that, in the light of the provisions of the

Banking Companies Act and the principles laid down in the decisions relied on, the assessee-banks would be liable to tax in respect of the income

for the period January 1, 1969, to July 18, 1969, also.

On the other hand, learned counsel for the assessees submitted that, having regard to the provisions of the Banking Companies Act vesting and

transferring the undertaking of every existing bank in the corresponding new bank, the income for the period January 1, 1969, to July 18, 1969,

cannot be considered to have arisen or accrued or even received by the assessees as the assessees came into being as such only on July 19, 1969.

It was also further pointed out that there is no provision either in the Banking Companies Act or in the Act, specifically or even by implication,

providing that any income earned by the existing bank during the period prior to the date on which the new bank came into existence, would be

deemed to be the income of the corresponding new bank and that when the existing bank had already earned income or income had accrued to it,

it became part of the assets of the existing bank and in the corresponding new bank, such assets alone have been vested by reason of the

provisions of the Banking Companies Act and payment of compensation had also been provided for in respect of the deprivation of the assets of

the existing bank and that clearly indicated that the income from the banking business carried on by the erstwhile bank could not be regarded as the

income of the corresponding new bank. Learned counsel strongly relied upon the decisions reported in CIT v. Agarwal and Co. [1954] 21 ITR

293 ; E.D. Sassoon and Company Ltd. Vs. The Commissioner of Income Tax, Bombay City, and Commissioner of Income Tax, Mysore Vs.

Bangalore Transport Company Ltd. (In Liquidation), . Learned counsel further submitted, in support of the conclusion of the Tribunal that, u/s 170

of the Act, the predecessors would be liable to pay the tax up to the date of the takeover and the assessees, as successors, could be subjected to

tax in respect of their income on and from July 19, 1969, to December 31, 1969, in respect of the assessment year 1970-71.

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, u/s 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.

The assessees were not in existence prior to July 19, 1969. We are, therefore, unable to appreciate how any income as such could have been

earned or accrued or even arisen with reference to the assessees. There is no dispute that between January 1, 1969, and July 18, 1969, the

erstwhile banks had carried on the business of banking and properly, therefore, the income should be regarded as having accrued or arisen or

received only by the erstwhile banks during that period and not by the assessees, for, the same income cannot during the same period be stated to

have been earned by the assessees. The accrual or arising of income, being anterior to its receipt, would be the appropriate point of its

chargeability to tax. It may also be that receipt of income may operate as the point of chargeability, in which case, the first receipt becomes the

point of chargeability. Thus, the income, whether it had accrued or had arisen or been received, has to be subjected to tax treatment in the hands

of the person to whom it accrues or in whose favour it arises or by whom it is received in the first instance. The subsequent application of the

income is not a matter with which the Revenue is concerned. It may be that a person who is in receipt of income makes it over to another, either

voluntarily or otherwise; but unless such receipt in the hands of the other person also partakes of the character of income, the receipt cannot be

assessed as income in the hands of the latter. By reason of the operation of the provisions of the Banking Companies Act, the income of the

erstwhile banks stood transferred and vested in the corresponding new banks viz., the assessees and that, at best, would be an incidence of

assignment by operation of the provision s of the legislation and in the absence of any provision either in that legislation or in the Act, deeming it as

the income of the assignee, it follows that the amounts vested cannot be regarded as the income of the corresponding banks, viz., the assessees.

We may point out that our attention was not drawn to any provision in the Banking Companies Act or the Act to the effect that the income of the

erstwhile banks for the period January 1, 1969, to July 18, 1969, though vested in, and transferred to, the corresponding new banks, would still

retains the character of income in the hands of the assessees, as it was in the hands of the erstwhile banks. We may also point out that even on the

footing that there was a transfer and vesting of the income of the erstwhile banks in the assessees by reason of the provisions of the Banking

Companies Act, at best it may be regarded as a statutory assignment of whatever income was earned by the erstwhile banks to the assessees and

after the income was earned by the erstwhile banks, and it is this that has been transferred and vested in the assessees and, therefore, it cannot be

subjected to tax treatment in the hands of the assessee-banks. We may also refer in this connection to the circular of the Reserve Bank of India

No. L/6/469/ (F) dated October 24, 1970, referred to in the order of the Judicial Member to the effect that the profit relating to the per-

nationalisation period was capitalised as a capital reserve not available for distribution. Payment of compensation to the erstwhile banks, as per the

Second Schedule and also the circular referred to above, clearly establish that the income earned by the erstwhile banks between January 1, 1969,

and July 18, 1969, was treated as part of the assets of the erstwhile banks and compensation had been provided to the erstwhile banks in respect

of the deprivation of their assets, inclusive of the income earned up to July 18, 1969, was treated as part of the assets of the erstwhile banks and

compensation had been provided to the erstwhile banks in respect of the deprivation of their assets, inclusive of the income earned up to July 18,

1969. We may usefully refer in this connection to the decision reported in Commissioner of Income Tax, Mysore Vs. Bangalore Transport

Company Ltd. (In Liquidation), , which, in our view, is squarely applicable to this case. In that case, a public motor transport service had been

operating in the City of Bangalore by the Bangalore Transport Co, Ltd., and by reason of the provisions of the Bangalore Road Transport Service

Act, 1956, the undertaking of that company was paid vested in the Government of Mysore on October 1, 1956, and the company was paid

compensation for loss of its undertaking, assets and documents. The company, in respect of the previous year ending March 31, 1957, submitted a

return claiming that it had earned no income from its business, as its undertaking had been taken over on October 1, 1956. However, the Income

Tax Officer brought to tax amounts disclosed by the audited accounts of the company, as its taxable business income, which has also affirmed in

appeal. The Tribunal however, modified the order of assessment, allowing development rebate and after making certain other adjustments, brought

to tax an amount of Rs. 3,16,439 alone and on a reference at the instance of the assessee, whether Rs. 3,16,439 was income and liable to tax, the

High Court answered the question in the negative in the view that there was no material on record to hold that any portion of the compensation

paid represented replacement of profits earned between April 1, 1956, and September 30, 1956. On further appeal at the instance of the Revenue

before the Supreme Court, the Supreme Court pointed out that, under the scheme of the Act, whenever an assessee receives in the course of his

business money or money''s worth, income embedded therein accrued or arises to him and becomes subject to an ambulatory charge and if, at the

end of the previous year, on making up accounts there is no over all income, the charge does not crystallize, because there is no income on which

the charge of tax may settle, but that, when the undertaking and assets were taken over by the Government, the assessee was still liable to be taxed

in respect of its profits, which accrued or were received by the company prior to the date of the closure of its business. In this connection, the

Supreme Court referred to Commissioner of Income Tax, Gujarat Vs. Ashokbhai Chimanbhai, relied on by learned counsel for the Revenue in this

case, and pointed out that if before the date when a right to a share in the profits arose that right was divested, no income accrued or arose, but if

the profits arose directly to the company de die in diem and could be ascertained by the method of accounting adopted by the company at the end

of the year or when the business was closed, the company would be liable to pay tax on its profits from April 1 to September 30, 1956. We are of

the view that the decision of the Supreme Court in Commissioner of Income Tax, Mysore Vs. Bangalore Transport Company Ltd. (In

Liquidation), , would, on the facts and in the circumstances, govern this case. We may make a brief reference to E.D. Sassoon and Company Ltd.

Vs. The Commissioner of Income Tax, Bombay City, relied on by learned counsel for the Revenue. Therein, the assignee of rights under contract

of service was held liable to pay tax on the whole of the commission inclusive of the period when the transferor had rendered service to the mill on

the ground that the contract of service was entire and indivisible and the remuneration became due only on completion of a definite period of

service and at stated periods and only at the end of each such period of service, the remuneration became payable as a debt and, therefore, no

remuneration was payable to the managing agents for the broken periods. It was further held that the assignee obtained under the deed of

assignment only an expectancy of earning a commission in the event of the condition precedent by way of complete performance of the obligation

of the managing agents and the managing agency agreement being fulfilled and a debt arose in favour of the managing agents only at the end of the

stated period of service contingent on the ascertainment of net profits and, therefore, the assignee was liable to pay the tax on the entire amount of

commission for the period, inclusive of the period during which service was rendered by the assignor. Such is not the situation in the present case

and, therefore, this decision would both be of any assistance to the Revenue. Earlier, reference to the decision in Commissioner of Income Tax,

Gujarat Vs. Ashokbhai Chimanbhai, , relied on by learned counsel for the Revenue in Commissioner of Income Tax, Mysore Vs. Bangalore

Transport Company Ltd. (In Liquidation), has been noticed and we have carefully considered the decision in Commissioner of Income Tax,

Gujarat Vs. Ashokbhai Chimanbhai, , and we are unable to find any support therein for the stand taken by learned counsel for the Revenue. We,

therefore, hold that on the authority of the decision of the Supreme Court in Commissioner of Income Tax, Mysore Vs. Bangalore Transport

Company Ltd. (In Liquidation), , the income earned by the erstwhile banks between January 1, 1969, and July 18, 1969, is assessable in their

hands and that when that income stood transferred to the corresponding new banks, viz., the assessees, it did not retain the character of income

with reference to the assessees, but had been transferred to them only as assets of the erstwhile banks in respect of which the erstwhile banks had

also been paid compensation, as provided in the Second Schedule to the Banking Companies Act.

That leaves for consideration the applicability of section 170 of the Act. Under sub-section (1) of section 170 of the Act, where a person

carrying on any business (referred to therein as the predecessor) has been succeeded therein by another person (referred to as the successor) and

such successor continues to carry on the business, the predecessor shall be assessed in respect of the income of the previous year in which the

succession took place up to the date of succession and the successor shall be assessed in respect of the income of the previous year after the date

of succession. Sub-section (2) and (3) of section 170 of the Act provide for the assessment of the entire income in the hands of the successor in

certain contingencies and they are not very relevant for our purpose. In the present case, the two assessee-banks succeeded to the business which

had been carried on earlier by the Indian Overseas Bank Limited and the Indian Bank Limited, respectively, up to July 18, 1969. Prima facie, only

in respect of the income for the period from July 19, 1969 to December 31, 1969, the assessee-banks could be assessed and there is no question

of the income of the erstwhile banks being considered as the income of the assessees and subjected to assessment. Such income, in accordance

with clause (a) of sub-section (1) of section 170 of the Act, has to be assessed as the income of the Indian Overseas Bank Ltd,. respectively. Our

attention has not been drawn to any provision in the Banking Companies Act or the Act rendering inapplicable the provisions of section 170 of the

Act to a case like this and we hold that u/s 170(1) of the Act, the erstwhile banks would be liable to respect of the income of the previous year in

which the succession took place up to the date of succession and the assessee-banks would be liable to be assessed in respect of the income of

the previous year after the date of succession. We, therefore, answer the question referred to us in the affirmative and against the Revenue. We,

however, do not make any order as to costs.