Commissioner of Income Tax vs United Commercial Bank Ltd.

Rule was issued on the following question:

Whether, on the facts and in the circumstances of the case, and in view of sections 36 and 37 of the income tax Act, 1961, the Tribunal was justified in holding that a sum of Rs. 16,36,398 representing provision for bad and doubtful debts, provision for supervision charges, provision for gratuity, provision for bonus and provision for additional interest accrued during the relevant year was allowable in computation of the income of the assessee for the assessment year 1971-72 and in that view was justified in not confirming the order of the CIT ?

The facts relating to this application are that the assessee, United Commercial Bank Ltd. (in Members'' Voluntary Liquidation) was doing banking business being incorporated under the Companies Act, 1956 as a public limited company in India as well as outside India. It had three branches in Malaysia. The assessee-company was nationalised and its business was taken over by the Government of India on 19-7-1969. The business in Malaysia was allowed to continue and the foreign business was taken over by the Government on 1-1-1971. The ITO made an assessment on 23-8-1978, but that order was set aside by the Commissioner (Appeals)-II on 13-11-1979 with a direction to make fresh assessment after allowing the assessee a fair opportunity. Accordingly, the ITO Special Asstt, Range-1, Calcutta passed an order on 15-3-1982. The assessee preferred an appeal from that order before the Commissioner (Appeals-II), who passed an order on 28-8-1983.

Being aggrieved by the said order of the Commissioner (Appeals), the assessee filed an appeal before the Tribunal. The Tribunal observed that the fact stated by the Commissioner (Appeals) was not in accordance with the direction of the RBI. According to the Tribunal, the RBI allowed further deduction for certain amounts which were incurred by the assessee while the business was not finally taken over by the Government of India. The Tribunal held that the items for Rs. 16,36,398 are in accordance with the direction of the RBI contained in its letter dated 11-3-1971. The assessee ultimately received compensation of M 4,99,455 which was equivalent to Rs. 12,24,165. According to the Tribunal that showed that the RBI was satisfied with the claim of the assessee and it was satisfied on the merit that the expenses had been incurred and provisions under the different heads had become liabilities. The Tribunal, therefore, held that the assessee was entitled to Rs. 16,36,398. The revenue, being aggrieved by the said order, made an application before the Tribunal for referring certain questions of law to this Court for opinion. The Tribunal by its order dated 4-3-1986 rejected the said application on the ground that from the finding of the Tribunal no question of law did arise and as such the said reference application was rejected. Thereafter the assessee moved this application u/s 256(2) of the income tax Act, 1961 (''the Act''), and obtained a rule on the question mentioned hereinbefore.

It appears that the RBI wrote a letter to the Chairman, United Commercial Bank Ltd. on 11-3-1971 which reads as follows:

Future set up of the Malaysian branches. We refer to our letter of 1st February 1971 regarding the "future of the Malaysian branches of your bank. As the preparatory steps for the formation of a new Malaysia company to take over the business of the branches of the Indian banks in Malaysia have already been taken and as it is the intention to incorporate this new company without any further delay, we discussed with Shri S.T. Sadasivan, the procedure to be followed for the transfer of the undertaking and business including the assets and liabilities of your Malaysian branches, to the proposed new company and also details of the compensation payable by the said new company to your bank.

After giving to the existing company full credit for the profits from 1-1-1959 of all your Malaysian branches (the profits up to 31-12-1968 having been already transferred to India and having been paid for as part of the compensation for the acquisition of the non-Malaysian business), the amount retained in sundry creditors account as a contingency reserve being the capitalised profit arising out of the devaluation of the Indian Rupee), the provision for bad and doubtful debts made in the books of Malaysian branches (which has been treated as an internal reserve of your bank reverting to your share holders) and the appreciation in the value of your immovable proper ties and buildings in Malaysia) (in the light of information which is locally available) and after making provision for certain debts on account of accrued gratuity liability to the local staff (in accordance with the provisions of the relevant agreement in this behalf, advances which are treated as bad or doubtful debts of recovery (according to a recent evaluation based on the books of your Malaysian branches) certain other minor items, debitable to the profit and loss account (bonus to India-based officers, interest payable to the corresponding new bank, development tax and legal expenses and item in suspense) and charges payable to the corresponding new bank for the management and administration of the Malaysian branches (at a nominal) amount of two lakhs of Malaysian dollars the new surplus of your Malaysian branches amounts rounded to MS 4 lakh or Indian Rs. 9.80 lakhs at the current parity rate of exchange.

We shall be prepared to arrange for the payment of the said sum of Rs. 9.80 lakhs to your company in India on the conditions hereinafter specified.

(a) Your company shall cease to have any claim against United Commercial Bank, being the corresponding new bank as defined in section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or anyone else in respect of the business of your Malaysian branches.

(b) The undertaking, business, assets and liabilities of the Malaysian branches shall continue to be managed or dealt with by the corresponding new bank.

(c) The corresponding bank may transfer or otherwise dispose of in such manner or to such person as the corresponding new bank may deem fit, the undertaking, business and liabilities of the Malaysian branches.

(d) Your company will, on being required so to do by the corresponding new bank, enter into an agreement with that bank, or its nominee to transfer and vest in the corresponding new bank of its nominee as may be required, the entire undertaking, business, assets and liabilities of all the Malaysian branches of your company as on the date from which the payment aforesaid is made, and

(e) Your company shall agree to execute all such documents and deeds and to do all such acts and things as may be considered by the corresponding new bank or its nominee as from the aforesaid date the undertaking, business, assets and liabilities of the Malaysian branches of your company.

We now suggest that in order to enable us to proceed further with the formation of new Malaysian company and the transfer of the business of your Malaysian branches to that company, your board of directors may pass a resolution on the lines of the draft which is forwarded herewith.

We shall be glad if you could kindly arrange for a meeting of your board of directors as soon as possible and let us have a copy of the resolution as passed. We shall then arrange in order to simplify the procedure from your point of view, for the corresponding new bank to make a formal offer in these terms to your bank.

On 18-5-1971 the United Commercial Bank wrote after nationalisation to Kuala Lumpur branch as follows:

Further to my discussion with you when you were in Calcutta last and the talk you had with me over the telephones, I send herewith particulars of entries to be passed as on 31-12-1970 in the books of Kuala Lumpur branch and of Penang branch. After the entries as given in the statement are passed, the position of profit/loss of all the three branches in Malaysia for the years 1969 and 1970 is indicated in the enclosed statements. The net position of profits of all the three branches for the period 1-1-1969 to 31-12-1970 would be MS 4,00,000.

Please pass the entries in the books of Kuala Lumpur and Penang branches immediately on receipt of this letter and transfer the balance of profit, viz., MS 4,00,000 to the account of United Commercial Bank, Calcutta under a cable advice to the branch as well as to me.

You may tell Mr. Murthy that after taking all factors into consideration relating to remittance of profit, position of taxation, etc., we have decided to pass the entries as indicated herein. We have been advised by the Reserve Bank of India that we must get the sum of MS 4,00,000 transferred immediately so that payment of the business of the Malaysian branches in the first instance to United Commercial Bank which will ultimately take steps to transfer the assets and liabilities to the new company in Malaysia which will take over the business. Please treat this as most urgent.

As stated, you will have to send me revised balance sheets and profit and loss accounts and other statements duly audited of all three branches in Malaysia and also a consolidated balance sheet and profit and loss account to enable the United Commercial Bank Ltd. to prepare its accounts up to 31-12-1970 and submit them to the Registrar and place the accounts and Directors'' Report before the shareholders'' meeting which is scheduled to be called in the last week of June, 1971.

In the said letter the details have been given regarding the entries to be passed in the books of Penang branch, Kuala Lumpur branch and what will be the position after passing the above entries in the profit and loss accounts of Kuala Lumpur, Penang and Keland branches.

In our view, the Tribunal on the facts of this case came to correct finding. The deduction which was claimed by the assessee was in accordance with the direction of the RBI as contained in the said letter and the bank acted on the basis of the said direction. For the reasons aforesaid, this application fails. The rule is discharged. The application is dismissed. There will be no order as to costs.