Income-tax---

----Business---Business income ---Assessee carrying on banking business-- Amalgamation of another Bank with assessee---Immovable property acquired by amalgamating company from its debtors transferred to assessee-- Immovable property constituted stock-in-trade of assessee---Profits from sale of property assessable as business income---Indian Income Tax Act, 1961, S.28.

The assessee was a limited company carrying on the business of banking. In May, 1962, another bank was amalgamated with the assessee. This amalgamation took place in pursuance of the scheme sanctioned by the Reserve Bank of India. From the date of the amalgamation, all movable and immovable assets with liabilities of the bank stood transferred to the assessee. Immovable properties such as plots of land and buildings acquired by the bank froth its debtors in satisfaction of the debts owed to it were also transferred to the assessee. The assessee sold these properties in the accounting years relevant to the assessment years 1963-64 to 1967-58. The Income-tax Officer treated the surpluses as profits arising out of the banking business and taxed the surpluses as the assessee's business income by rejecting its contention that the surpluses represented capital gains. This was upheld by the Tribunal. On a reference:

Held, that in the present case, the bank acquired these properties from its debtors in satisfaction of debts owed to it. After the framing of the scheme of amalgamation the properties were transferred to the assessee. The assets and liabilities would not change their character after the amalgamation in the hands of the assessee. After amalgamation also the properties continued to be the stock-in-trade of the assessee's business. As these properties were acquired for satisfaction of the debt from the debtor by the bank doing money-lending business, profits/income earned from the sale of these properties must be treated as business income taxable under the Act.

Bareilly Corporation Bank Ltd. v. CIT (No.2) (1952) 22 ITR 528 (All.); Coimbatore Anupparpalayam Bank Ltd. v. CIT (1961) 42 ITR 576 (Mad.); Karumuru Venkata Ramanadham v. CIT (1964) 52 ITR 742 (AP); Manickam Chettiar (K.S.A.A.) v. CIT (1963) 50 ITR 716 (Mad.); Pulavarthi Venkata Subba Rao v. CIT (1967) 66 ITR 119 (AP); Sraswati Industrial Syndicate Ltd. v CIT (1990) 186 ITR 278 (SC); Subramanian Chettiar (M.R. RM. SP. L.) v. CIT (1968) 70' ITR 262 (Mad.); Vadlamani Kaneswara Rao v. CIT (1964) 51 ITR 304 (AP) and Vellayappa Chettiar (A. VR. V.) v. CIT (1952) 22 ITR 292 (Mad.) ref.

J.D. Mistry instructed by I. Dalal & Co. for the Assessee.

R.V. Desai with B.M. Chatterjee for the Commissioner.

JUDGMENT

A.Y. SAKHARE, J.---By this reference under section 256(1) of the Income Tax Act, 1961 (for short "the Act"), the Income-tax Appellate Tribunal at the instance of the assessee has referred the following question of law to this Court for opinion:

"Whether, on the facts and in the circumstances of the case, the excess realised on the sale of immovable properties is assessable as income from banking business carried on by the assessee?"

The assessee was a limited company carrying on the business of banking. This reference pertains to the assessment years 1963-64 to 1967-68. The accounting years for the assessment years 1963-64 to 1967-68 are calendar years 1962 to 1966, respectively.

In the assessment year 1963-64, on May 24, 1962, the Presidency Industrial Bank Ltd., Pune (for short, the bank), was amalgamated with the assessee. This amalgamation took place in pursuance of the scheme sanctioned by the Reserve Bank of India under section 44 A of the Banking Regulation Act, 1949 (fort short "the Regulation Act"). From the date of the amalgamation, all movable and immovable assets with liabilities of the bank stood transferred to the assessee. Immovable properties such as plots of land and buildings acquired by the bank from its debtors in satisfaction of the debts owed to it were also transferred to the assessee. The assessee sold these properties in the above assessment years and realised certain surplus.

The Income-tax Officer treated the surpluses as profits arising out of the banking business and taxed the surpluses as the assessee's business income by rejecting its contention that the surpluses represent capital gains. In the appeals before the Appellate Assistant Commissioner, the assessee contended that these properties were non-banking assets and the surpluses realised on their sale cannot constitute business income. It was further submitted that buildings were let out by the bank on rent and after the amalgamation the same tenants continued to reside therein and income from these buildings had been assessed as property income. The assessee further submitted that the acquisition and sale of these immovable properties did not amount to adventure in the nature of trade. The Appellate Assistant Commissioner dismissed the assessee's appeal by holding that the movable and immovable assets taken over by the assessee constitute business assets. Before the Income-tax Appellate Tribunal, the assessee submitted that as a result of amalgamation movable and immovable assets were taken over and the assessee sold vacant plots and buildings because of the restrictions imposed under section 9 of the regulation Act. The assessee further submitted that in view of section 9 of the Regulation Act, the assessee was under legal obligation to dispose of non-banking assets within the period of seven years from the acquisition thereof. As per the assessee, acquisition of the immovable properties due to amalgamation and disposal thereof were under compulsion of law, therefore, surpluses realised cannot be treated as business income. The Tribunal dismissed the appeals and upheld the assessment of the surplus on the realisation of the properties as business income.

Heard Mr. J.D. Mistry, learned counsel for the assessee, and Mr. RN. Desai, learned counsel for the Revenue. The bank acquired these immovable properties from its debtors in satisfaction of debts owed to it. These assets were retained by the bank and income thereof was assessed as the property income. Due to mismanagement, the Reserve Bank of India amalgamated the bank with the assessee by an amalgamation scheme with effect from the appointed date being May 24, 1962. On this appointed date, all movable and immovable assets with liabilities of the bank stood transferred to the assessee. Between the assessment years 1963-64 to 1967 68, the assessee sold these immovable properties. It was submitted on behalf of the assessee that by the amalgamation scheme approved by the Reserve Bank of India all the movable and immovable assets with liabilities of the bank were transferred to the assessee. In the amalgamation scheme a provision was made for valuation of these properties and reckoning of the liabilities of the bank. As per the assessee, the bank premises, and all other immovable properties of the bank were valued at their market value, the assessee acquired these immovable properties at market value, consequently, the character of these immovable properties changed in the hands of the assessee. These immovable properties do not retain the character of the properties being acquired from he debtors of the bank in satisfaction of its debts. It was further submitted that in view of the restrictions imposed by section 9, of the Regulation Act, the assessee was under legal obligation to dispose of the non-banking assets within a period of seven years of its acquisition. Thus, according to the assessee, the transfer of these immovable properties in its favour and disposal thereof were under the compulsion of law, the first being the amalgamation scheme passed by the Reserve Bank of India under section 44-A and the disposal of the non-banking assets as per section 9 of the Regulation Act. As per the assessee the surplus realised from the transfer of the immovable assets cannot be treated as its business income.

On behalf of the Revenue, it was submitted that the immovable properties were acquired in satisfaction of debts owed to the bank. So, it constituted stock-in-trade of the money-lending business carried on by the bank. Any/amount realised in excess of the amount due must be treated as income arising from the money-lending business. The Revenue submitted that these properties represent the converted form of stock-in-trade in the banking business of the assessee, viz., the money and, therefore, profits made from the resale of these properties must be treated as the profits of the money-lending business. The Revenue further submitted that even though the amalgamation took place as per section 44-A or the assessee was under compulsion to dispose of all the non-banking assets under section 9 of the Regulation Act, income earned by the assessee must be treated as profits made from the resale of the stock-in-trade and must be treated as the profits of the money-lending business. The Revenue further submitted that due to the amalgamation the character of the properties did not change, and it remained that of stock-in-trade. Even though the assessee has paid the full market value of these immovable assets at the time of the amalgamation, these properties will continue to represent the converted form of stock-in -trade of the assessee's banking business and the profits made from the sale of these properties will have to be treated as the profits of the money-lending business. Both-learned counsel have relied upon various decisions in support of their respective submissions.

The bank was doing banking business, which means it had engaged itself in the money-lending business. Certain immovable properties were acquired by the bank from its debtors in satisfaction of the debts owed to it.

In view of the amalgamation scheme sanctioned under section 44-A of the Regulation Act, all these assets stood transferred to the assessee on the appointed date. Even though the amalgamation has taken place in pursuance of the scheme under the Regulation Act and the assessee paid the market value for these properties, the character of these properties did not change. These properties continued to represent stock-in-trade of the banking business of the assessee. The bank was engaged in money-lending business, so also the assessee was engaged in the money-lending business. Though the assessee was under legal obligation to dispose of the non-banking assets as per section 9 of the Regulation Act, the character of the properties continued to be the same and, therefore, the assessee's claim that these properties were acquired and sold under the compulsion of law and, therefore, the income earned from the sale of these properties cannot be treated as business income, cannot be accepted. The provisions of the Act or the Regulation Act, do not support the assessee's claim that the income earned from the sale of these properties cannot be treated as banking business. Transfer of these properties to the assessee and sale then of though under compulsion of law, cannot diminish the liability of the assessee and after sale of these properties, if the assessee realises surplus, the same will have to be treated as business income. The submission of the assessee that the character of these properties has changed from that of stock-in-trade to non-banking assets and, therefore, surplus realised by sale of these properties cannot be treated as income, cannot be accepted. The bank acquired these properties in satisfaction of the debts owed to it. These properties were transferred to the assessee in amalgamation scheme and, therefore, these properties continue as stock-in -trade of the assessee. Payment by the assessee at the market value will not change the character of these properties in the assessee's hands.

The Madras High Court in the case of A. VR. V. Vellayappa Chettiar v. CIT (1952) 22 ITR 292, was dealing with a case where the property was purchased not in lieu of discharge of debt of money-lending business but independently from the funds of the partnership and the assessee therein treated the said property as an investment and not as a stock-in-trade. The Madras High Court in the case of K.S.A.A. Manickam Chettiar v. CIT (1963) 50 ITR 716, was dealing with the case of a Hindu undivided family which was carrying on business of money-lending. One property was purchased in the year 1937. The money-lending business was stopped in the year 1942. The assessee therein spent considerable sums by way, of capital expenditure on the said property. The assessee sold the said property in the year 1951, and derived profit by the said sale. On these facts, it was held by the Madras High Court that the character of the property is determined by the mode of its treatment and on the facts it was held that the assessee had treated the said property as capital asset. The Madras High Court held that the property was not stock-in-trade of the assessee's business and the profit derived from its sale was not assessable under the Act. The Andhra PradeshHigh Court in the case of Vadlamani Kameswara Rao v. CIT (1964) 51 ITR 304, was considering the case of an assessee who was a money-lender and whose practice was to take over the lands in satisfaction of the debts owed to him. Luring the relevant assessment year, the assessee sold five pieces of land out of which four pieces of land were acquired by him during the course of money-lending business and the fifth was unconnected with the money lending business. On these facts the Andhra Pradesh High Court held that the fifth property acquired by the assessee was unconnected with the money lending business, the said transaction was not an adventure in the nature of trade and the sum realised by the sale of the said property was not assessable to tax. The Andhra Pradesh High Court was considering the case of property which was acquired in a Court auction and of a transaction which was unconnected with the money-lending business. The Supreme Court in the case of Saraswati Industrial Syndicate Ltd. v. CIT (1990) 186 ITR 278, was considering a case under section 4(l) of the Act. In the case before the Supreme Court, the appellant-company was the subsidiary of ISGEC, the holding company. In proceedings under the Companies Act, 1956, the two companies were amalgamated by the order of the High Court as a result of which ISGEC stood dissolved and ceased to exist. The appellant-company was to meet the liabilities of ISGEC. After the amalgamation, the appellant company derived benefits. and it claimed that it was not liable to be taxed thereon under section 41(l) of the Act, On these facts the supreme Court held that when two companies are merged or so joined as to form a third company or one is absorbed into the other or blended with the other, the amalgamation company loses its identity. By reversing the decision of the Punjab and Haryana High Court, the Supreme Court held that ISGEC ceased to exist in the eye of law and the appellant-company was a different entity to which deductions were allowable and the appellant-company was not liable to be taxed under section 41(1) of the Act on the benefit derived by it. The decision of the Supreme Court also does not support the case of the assessee.

The Allahabad High Court in the case of Bareilly Corporation Bank Ltd. v. CIT (No.2) (1952) 22 ITR 528, was considering the case of a bank in engaged in money-lending business acquiring property from its debtors in satisfaction of debts owed to it. The said property was sold by the assessee and certain surplus was raised. The Allahabad High Court held that the said realised surplus is income of the assessee, as the transaction of purchase of the assets and subsequent sale by the assessee was in the course of its money-lending business and, therefore, sums received by the assessee in excess of the cost price must be treated as business income and assessable to tax. The Madras High Court in the case of Coimbatore Anupparpalayam Bank Ltd. v. CIT (1961) 42 ITR 576, has held that if the bank engaged in money-lending business has purchased the property belonging to its debtor in Court sale at its instance then the said property at the time of its purchase will represent the converted form of stock-in-trade of the banking business of the assessee.

The Andhra Pradesh High Court in the case of Karumuru Venkata Ramandham v. CIT (1964) 52 ITR 742 has held that if the assessee money lending business acquires immovable property in satisfaction of the debt owed to it and on sale thereof a profit is derived, the said profits will have to be treated as business income and taxable under the Act. The Andhra Pradesh High Court held that the immovable property forms part of stock-in -trade of the business, and the profit realised on sale of the immovable property will be business income and liable to be taxed. Similar view has been expressed by the same Court in the case of Pulavarthi Venkata Subba Rao v. CIT (1967) 66 ITR 119 (AP). The Madras High Court in the case of M.R. RM. SP. L. Subramanian Chettiar v. CIT (1968170 ITR 262, has held that if during the money-lending business, properties are acquired by the assessee in discharge of debts owed to it, and on partition, if these properties are allotted to one of the members of the family, the properties continue to represent the character of stock-in-trade and profits earned from the sale of these properties is business income.

Considering the aforesaid decisions, the submissions advanced on behalf of the assessee cannot be accepted in the present case, the bank acquired these properties from its debtor in satisfaction of debts owed to it. After the framing of the scheme of amalgamation, the properties were transferred to the assessee. The assessee sold these properties and realised certain surpluses. Upon transfer of these properties .to the assessee the character of the properties did not change. The submission of the assessee that because of compulsion of law the amalgamation took place or the sale took place and, therefore, the income earned by the assessee cannot be treated as business income is without any merit. The assets and liabilities will not change their character after the amalgamation in the hands of the assessee. After the amalgamation also, the properties continue to be the stock-in-trade of the assessee's business. As these properties were acquired in satisfaction of the debt from the debtor by the bank doing money-lending business, profits/income earned from the sale of these properties must be treated as business income taxable under the Act.

In view of the aforesaid conclusion the question referred to this Court is answered in the negative, i.e., against the assessee and in favour of the Revenue.

This reference stands disposed of accordingly with no order as to costs.

M. B. A./4041/FCReference disposed of.