1965-VIL-196-P&H-DT

Equivalent Citation: [1966] 60 ITR 520

PUNJAB AND HARYANA HIGH COURT

Income-tax Reference No 23 of 1960

Date: 25.01.1965

COMMISSIONER OF INCOME-TAX, DELHI AND RAJASTHAN

Vs

BHARAT NIDHI LTD.

For the Petitioner : H. Hardy. D. K. Kapur, S. P. Aggarwal
For the Respondent : S. T. Desai, K. K. jain, Bishamber Dayal

BENCH

D. Falshaw (CJ) And Mehar Singh, JJ.

JUDGMENT

Mehar Singh, J.

This reference under section 66(1) of the Indian Income-tax Act, 1922 (Act 11 of 1922), arises in these facts and circumstances.

The assessee was incorporated as a public limited company under the Indian Companies Act, 1913, on September 21, 1942, with the name Bharat Bank Limited. In paragraph 3 of its memorandum of association items (a) and (b) concern banking business alone and so does the beginning sentence of item (c) which reads--" to carry on the business of banking in all its branches and departments--". The rest of the items (c) and all the remaining items down to item (s) substantially correspond to items 1 to 17 in section 277F of the Indian Companies Act, 1913. Those are such items of business which may be carried on by any person or company not carrying on the business of banking. Even in section 277F of the above Act it is clearly stated that a banking company, apart from its principal business, may engage in addition in one or more of the 17 items of business which then follow. At the end of paragraph 3 it is declared that the company undertook to restrict its activities only to such banking business as specified in that paragraph or to such others as may be allowed under any Act relating to banking or otherwise or those as may be allowed by the Governor-General-in-Council by notification in the Gazette of India. This obviously is confined to such of the items in paragraph 3 as deal with the business of banking and does not restrict the remaining part of item (c) and items (d) to (s) in it. It is then stated that the objects specified in the several paragraphs of the memorandum of association shall be regarded as independent objects and accordingly shall be in no way limited or restricted in their application (except when otherwise expressed in such paragraphs) by reference to the objects in any other paragraph or the name of the company but may be carried out in as full and ample a manner and construed and applied in as wide a sense as if each of the said paragraphs defines the object of a separate, distinct and independent company.

On March 10, 1949, was enacted the Banking Companies Act, 1949 (Act 10 of 1949), which by section 5(1)(c) of it defines "banking company" to mean "any company which transacts the business of banking in India", and the expression "banking" is defined in section 5(1)(b) of the same to mean "the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise". Sub-section (1) of section 6 of this Act reproduces practically all the items of business in section 277F of the Indian Companies Act, 1913, and sub-section (2) of this section provides that "no banking company shall engage in any form of business other than those referred to in sub-section (1)". But even section 6 of Act 10 of 1949 describes those items of business as items in addition to the business of banking by a banking company. Section 7 of this Act provides that no company shall carry on the business of banking, unless it uses as part of its name at least one of the words "bank", "banker" or "banking", and that no other company than a banking company can use those words after the expiry of two years from the commencement of that Act. A banking company is required to take a licence from the Reserve Bank to carry on business as a banking company and in the case of an existing banking company an application for such a licence is to be made within six months of the commencement of the Act, but such a company may carry on the banking business until licence is granted to it or a notice is given to it that the licence cannot be granted to it, with this that in the latter case the Reserve Bank is not to give notice in that respect to such an existing banking company before the expiry of three years referred to in sub-section (1) of section 11 or of such further period as the Reserve Bank may under that sub-section think it fit to allow. It is apparent that the business of banking has in substance been statutorily separated from other business and it can only be carried on subject to the statutory restrictions as in Act 10 of 1949.

The assessee did not wish to continue its banking business under the restrictions of Act 10 of 1949. On March 10, 1951, it transferred its banking business to the Punjab National Bank Limited. In consequence of that liabilities in the amount of Rs. 10,35,19,147-15-0 were transferred to the Punjab National Bank with assets in the amount of Rs. 6,00,78,584-7-0 in Government securities, cash in hand and cash with other bankers and the like and loans and outstandings due to it amounting to Rs. 3,35,32,418. The assets being thus short of the liabilities in the amount of Rs. 84,73,699-3-9, this sum was considered as a loan by the transferee bank to the assessee under clause 7 of the agreement of transfer between them. The transferee bank was given an option to refuse to take over any loan or outstanding out of the list of the same if it considered the same of a doubtful nature within a period of six months. A cash credit account was opened by the assessee with the transferee bank in the amount considered as loan to it as explained and this was under a contemporaneous agreement. This was secured by certain loans not transferred to the transferee bank. The assessee decided not to accept deposits withdrawable by cheques, thus stopping banking business under Act 10 of 1949, though continuing to do the business of financing in general as before. It returned for the assessment year 1952-53, the whole of the income received by it in a consolidated profit and loss account for the calendar year 1951. On the demand of the Income-tax Officer it split that account into two periods, one between January 1 and March 10, 1951, and the other between March 11 and December 31, 1951. The second obviously related to the period after the transfer of the assessee's banking business to the transferee bank.

The shareholders of the assessee in an extraordinary general meeting on December 27, 1951, resolved to change its name from Bharat Bank Limited to Bharat Nidhi Limited, with certain alterations in respect of the objects of the company. Certificate of incorporation in the new name was issued on February 27, 1952, by the Registrar of Joint Stock Companies, Delhi, and the alteration in the objects clause of the memorandum of association was confirmed by this court on August 22.

In substance the alteration was to delete the objects relating to banking business.

The Income-tax Officer had before him the assessee's balance-sheet for the year ending December 31, 1951. It showed on the side of the capital and liabilities, the details of the same including its capital of a little over twenty-two crores of rupees and reserve for bad and doubtful debts, something over twenty-two lakhs of rupees. Contingent liabilities of something more than thirteen lakhs of rupees were also shown. On the side of properties and assets of the assessee were given the details of the same including immovable property of the value of a little over two-and-a-half lakhs of rupees, loans outstanding of something over one crore and ninety lakhs of rupees and investments of over sixty-eight lakhs of rupees. In the expenditure and income account, expenditure covered, among other matters, salaries and allowances of the staff of the assessee, with contribution to employees' provident fund, loss on disposal of Government securities, law charges, directors' fees and auditors' fee. All this was before the Income-tax Officer. After March 10, 1951, the assessee did not actually do any transaction in the nature of financing until some time in September, 1952, it made the first advance of money to a borrower.

The Income-tax Officer computed a loss of Rs. 6,19,690 for the first period between January 1 and March 10, 1951, and an income of Rs. 7,48,295 for the second period between March 11 and December 31, 1951.

The loss of the first period was set off against the income of the second period under section 24(1) of the Income-tax Act, 1922. There was loss with the assessee of earlier years and it sought to have that carried forward and set off against profits, but this was disallowed on the ground that the banking business of the assessee terminated on March 10, 1951, and as the loss in immediately preceding years was from business, it could not be set off as carry-forward loss against income after March 10, 1951, because such income did not arise from business, profession or vocation. The Income-tax Officer treated the income between March 11 and December 31, 1951, not from business, profession or vocation but income from other sources. He was of the opinion that as the assessee did not accept deposits after March 10, 1951, and it changed its memorandum of association converting itself into an investment company primarily that disproved that the assessee carried on no banking business or for that matter any business. The Income-tax Officer pointed out that the primary and the only purpose of the assessee was "to establish and carry on the business of a bank" and that the other objects in the memorandum of association were mere amplifications of the various activities which a bank carried on in the course of its banking business. But dealing with the situation after the assessee changed its name, the Income-tax Officer said that then it could not function as a bank and was merely empowered to undertake those business activities which any common money-lender or investment company could do on his or its own without reference to Act 10 of 1949. This seems to be somewhat inconsistent because substantially what the assessee carried on under the changed name was what was left to it after it dropped its banking business in the wake of the provisions of Act 10 of 1949, with effect from March 10, 1951, when it was still Bharat Bank Limited. After March 10, 1951, the assessee as Bharat Bank Limited continued substantially with the same objects in its memorandum of association as it adopted after the change of its name to Bharat Nidhi Limited with certain additions. He was further of the opinion that, as the assessee closed down its banking business, it would no longer continue to retain the same objects or have the word "bank" added to its name. He was also of the opinion that the succeeding business of the assessee did not come into being until February, 1952. So he came to the conclusion that after March 10, 1951, the assessee carried on no business whatever. In the wake of this he disallowed the assessee not only carry-forwards of loss of the previous years and set it off against the income after March 10, 1951, but also disallowed certain other claims which will become apparent presently when the questions referred to this court are stated. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer substantially for the same reasons being of the opinion that up to March 10, 1951, the only business done by the assessee was the banking business, which having been dropped, there remained no business with it, that it did not perform any activities in the nature of trade or in the nature of banking after that, its only activity during the period being of realisation of interest or payment of interest on certain assets and liabilities; that the business carried on by it till March 10, 1951, was not a business of finance which included banking and also money-lending, that with the dropping of the banking business by the assessee, the restrictive clause in the memorandum of association came into operation and the company could not carry on any other business, and that the realisation of interest on its assets and payment of interest on its loans by the assessee could not be called money-lending business.

On further appeal, the Income-tax Appellate Tribunal (Delhi Bench) reversed the concurrent conclusions of the Income-tax Officer and the Appellate Assistant Commissioner. It was of the opinion that the assessee carried on the business of financing and money-lending as a bank and that the business of banking in the strict sense of the term was one of the types of financing carried on by it. The fact that the assessee dropped its banking business did not mean that it had ceased or was incapacitated to accept withdrawals which could be withdrawn otherwise than by cheque or draft or order, etc. The business of money-lending had remained intact, which was within the scope of the assessee's activity under section 277F of the Indian Companies Act, 1913. It further came to the conclusion that the assessee carried on the business of financing, that is, of accepting money as deposits for interest, lending money on interest and purchase and sale of securities. It pointed out that it was significant to note that in the subsequent years, the profit and loss on the sale of securities has been considered by the income-tax authorities themselves as profit or loss on the sale of stock-in-trade. In the result the Tribunal accepted the claims of the assessee giving it relief in the manner claimed by it.

On an application by the Commissioner of Income-tax under sub-section (1) of section 66 of Act 11 of 1922, the Tribunal has referred these questions to this court:

"(1) Whether there was material on which the Tribunal could hold that the assessee had carried on the business of financing and money- lending after March 10, 1951?"

If the finding on this question is in the affirmative,--

"(2) Whether, on the facts and in the circumstances of this case, the business carried on by the assessee since March 10, 1951, was the same as the business it had carried on before that date?

(3) Whether the Tribunal could in law allow the loss of Rs. 5,93,944 suffered by the assessee on the sale of Government securities and also the following payments:--

(a) Rs. 20,000 paid to Shri R.S. Bahl,

(b) Rs. 24,694 paid to Shri R.K. Jain,

(c) Rs. 6,181 as house rent pertaining to the second period,

(d) Rs. 15,000 as travelling expenses for the first period,

(e) Rs. 10,000 as travelling expenses for the second period,

(f) Rs. 4,000 as miscellaneous expenses for the second period,

(g) Rs. 14,560 as agency service expenses, and

(h) Rs. 29,680 on account of expenses of stamps, registration and drafting charges."

At the hearing of this reference it has been accepted on both sides that if the answers to questions Nos. (1) and (2) are in the affirmative, it would follow that the Tribunal could in law allow to the assessee the amounts as referred to in question No. (3).

The broad approach of the Income-tax Officer and the Appellate Assistant Commissioner, which has not prevailed with the Tribunal, has been (a) that with the dropping of the banking business by the assessee, no other business remained with it for the business dealt with in the objects part of (c) and (d) to (s) in paragraph 3 of the memorandum of association was nothing more than part of its banking business, and (b) that after it dropped the banking business it could no longer either function as a bank or continue to use the word "bank" in its name. The first approach is obviously not correct for the memorandum of association says in so many words that each object is a separate object and is to be carried on by the assessee as if for each such object it was an independent company. The restrictive clause, as has already been stated, is confined to such of the items in paragraph 3 of the memorandum of association as deal with the business of banking and does not operate to restrict the remaining objects in that clause. It has further been pointed out that section 277F of the Indian Companies Act, 1913, as also section 6 of Act 10 of 1949 clearly describe that those objects are additional business that a banking company may carry on. But obviously a non-banking company can also carry on the business of those objects. So that it follows that when a banking company drops its banking business as the assessee, it is still left with the power to carry on the business under the remaining objects as detailed in section 277F of the Indian Companies Act, 1913, and section 6 of Act 10 of 1949. The business under those objects can be carried on by a non-banking company; there is no justification for the conclusion that when a banking company drops its banking business and retains the business of those objects, it ceases to do any business whatsoever. No doubt, the assessee in view of section 7 of Act 10 of 1949 could not use the word "Bank" in its name after March 10, 1951, but that did not stop it from continuing its financing business other than the banking business. Afterwards, it did for this reason change its name as has already been explained. The Tribunal had before it the balance-sheet of the assessee as on December 31, 1951. It showed that even after the assessee had dropped its banking business, it maintained its capital with its assets and not only did it continue to make realisations of income from those assets but it also continued to discharge liabilities. Apart from this, it maintained its own staff to which it made regular payments, it continued to incur legal expenses connected with its business and it continued to pay fees to its directors obviously for their work done in connection with the management of the company. All this material was before the Tribunal. On this material it could come to the conclusion as it has done in giving an affirmative answer to the first question. The only factor that has been taken against the assessee having continued its business of financing, other than banking, is the fact that it advanced no loan to anybody until some time in September, 1952, but mere inactivity for a period does not mean that its business ceased to exist or that it did not carry on business at all. A business may be inactive for a period and merely because of the dormancy of the business, the conclusion that it has ceased does not arise. This is the view that has prevailed in General Corporation Ltd. v. Commissioner of Incometax [1935] 3 I.T.R. 350, 355 and Inderchand Hari Ram v. Commissioner of Income-tax [1953] 23 I.T.R. 437, 442. Another matter that has been referred to in this connection is the resolution passed by the assessee on March 10, 1951--"Resolved that the company do continue and carry on such business for one or the other of its objects as mentioned in the memorandum of association of the company as may be decided upon by the board of directors, from time to time." The contention in this respect has been that the board of directors never took decision to continue the remaining part of the financing business by the assessee after it had dropped its banking business. The Tribunal rightly pointed out that the memorandum of association had many objects in it covering almost the whole of the field under section 277F of the Indian Companies Act, 1913, and, of course under section 6 of Act 10 of 1949. The assessee was not embarking on the business of all the objects at once. The resolution was meant to cover such of the objects with which the assessee was not immediately dealing so as to empower the directors to develop its business further with regard to those objects. This resolution cannot possibly be interpreted to mean that the assessee put a stop to its whole business on March 10, 1951, leaving it to a resolution of the directors to start it over again. The consequence is that the Tribunal had material before it on which it could hold that the assessee had carried on the business of financing and money-lending after March 10, 1951, and the answer to the first question is in the affirmative.

In so far as the second question is concerned, the business of the assessee initially was in two parts, (i) of banking, and (ii) of financing in general as described in the objects part of (c) and (d) to (s) in paragraph 3 of the memorandum of association. Before March 10, 1951, it carried on both aspects of the business. After that it dropped the first aspect, but continued the second aspect. It follows that when it continued the second aspect, it continued the same business as it had carried on before March 10, 1951. Of course, it was not the whole of the previous business that was carried on after that, the banking business having been dropped, but what remained with the assessee and was carried on by it was the business which it had also previously carried on before that date. This approach finds support from Commissioner of Income-tax v. Pfaff Sewing Machine Company (India) Ltd. [1956] 30 I.T.R. 518, in which the learned judges held that when a company which is dealing in a number of commodities discontinues its dealings in one commodity and concentrates its attention on dealings in another commodity, it cannot be said to carry on a different business. The case on facts, of course, is different but the basis upon which the decision proceeds applies to the facts of the present case. The answer to the second question, therefore, is that the assessee carried on since March 10, 1951, the same business as it did before that date.

In regard to the third question, it has already been stated that it has been accepted on both sides that if the answer to the first two questions is in the affirmative, the answer to the third question must be in the affirmative, that is to say, the Tribunal has rightly allowed the sums mentioned in the question in favour of the assessee. These may be briefly considered. The first is an amount of Rs. 5,83,944, the loss suffered by the assessee by the sale of securities at the time of transfer of its banking business to the transferee bank on March 10, 1951. This was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner on the ground that it was a capital loss because it was suffered in the course of the winding up of the assessee. The Tribunal rightly finds that this is not a fact. The assessee dropped a part of its business of banking, but it did not enter the stage of winding up nor did it enter the stage of putting a complete stoppage to its remaining financing business of money-lending and sale and purchase of securities. So this amount has rightly been allowed to the assessee by the Tribunal as a loss in its business. The second amount is of Rs. 20,000 paid by the assessee to its general manager for premature termination of his employment because of the shrinking of its business on account of transfer of the banking business to the transferee bank. The approach of the Tribunal is sound that the termination of the services of this officer was in the interest of the business of the assessee and compensation paid for premature termination of his service was for the purpose of its business and hence a permissible deduction. The third item is of Rs. 24,694 paid to a former managing director of the assessee, whose services had been terminated before the commencement of the previous year, but income-tax and super-tax deducted from his salary were wrongly computed in the amount as stated and this was discovered during the previous year. The liability arose at the time of the discovery and the approach of the Tribunal is, therefore, correct in allowing this amount as a deduction to the assessee. The fourth item is of Rs. 6,181 as house rent pertaining to the second period between March 11 and December 31, 1951, which was disallowed on the ground of the assessee's business having become defunct, but that not being so, the conclusion of the Tribunal is correct that this amount is allowable to the assessee as a deduction. The next two sums of Rs. 15,000 and Rs. 10,000 concern expenditure on travelling expense for the first period and for the second period respectively. The same argument applies to these two amounts because the business of the assessee had not come to an end on March 10, 1951, and so these two amounts have been rightly allowed. The seventh amount is of Rs. 4,000 made for miscellaneous expenses. A claim of Rs. 9,403 was made for miscellaneous expenses for the second period, out of which the Income-tax Officer disallowed Rs. 7,000 but the Appellate Assistant Commissioner reduced the add-back to Rs. 4,000. The authorities proceeded on the basis that the business of the assessee had become defunct but, as that finding does not hold good, the Tribunal was justified in not sustaining the add-back of Rs. 4,000 and in deleting the same. The eighth amount is of Rs. 14,560 as agency expenses and as this was disallowed on the same basis as the fourth amount, so the Tribunal was justified in allowing this amount on the same basis as it allowed the fourth amount. The last amount is of Rs. 29,680 on account of expenses of stamps, registration and drafting charges. This expenditure incurred at the time of the execution of the instrument of transfer by the assessee in favour of the transferee bank was disallowed by the income-tax authorities on the ground that in consequence of the transfer the business of the assessee had come to an end. The Tribunal found to the contrary and as that finding has been maintained in this reference, the allowance of this amount by the Tribunal to the assessee as legitimate expenditure is correct. So all the items have in law been rightly allowed by the Tribunal to the assessee. The broad basis for disallowing the same was that the business of the assessee had come to an end on March 10, 1951, when it transferred its banking business to the transferee bank, but that basis not being correct, the only approach that could be made to those amounts was the one adopted by the Tribunal in the facts and circumstances of the case. So the answer to the third question is also in the affirmative.

The three questions referred to this court have been answered in the affirmative. The Commissioner of Income-tax will bear the costs of the assessee in this reference.

FALSHAW C.J.--I agree.

Questions answered in the affirmative.

 

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