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Issues Involved:
1. Taxability of income for the period January 1, 1969, to July 18, 1969, in the hands of the nationalized banks (Indian Overseas Bank and Indian Bank) for the assessment year 1970-71. Detailed Analysis: Issue 1: Taxability of Income for the Period January 1, 1969, to July 18, 1969 Background and Arguments: The Indian Overseas Bank and Indian Bank were nationalized on July 19, 1969, under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. For the assessment year 1970-71, both banks filed separate returns for the periods January 1, 1969, to July 18, 1969, and July 19, 1969, to December 31, 1969. The banks contended that the income accrued during the earlier period was a capital receipt and not taxable, as it was not applicable under section 5(5) of the Banking Companies Act. The Income-tax Officer consolidated the income for both periods and assessed the total income. The appeals by the banks to the Appellate Assistant Commissioner were rejected, leading to further appeals before the Tribunal. Tribunal's Decision: The Tribunal held that the banks came into existence only on July 19, 1969, and thus could not have earned or accrued any income before that date. The income for the period January 1, 1969, to July 18, 1969, accrued to the erstwhile banks and was part of their assets, not taxable in the hands of the assessees. The Judicial Member concurred, applying section 170 of the Income-tax Act, stating that the income derived by the erstwhile banks could not be considered the income of the nationalized banks. Revenue's Argument: The Revenue argued that the nationalized banks continued the business of the erstwhile banks and should be liable for the profits accrued during the earlier period. They relied on the provisions of the Banking Companies Act and decisions such as E. D. Sassoon and Co. Ltd. v. CIT and CIT v. Ashokbhai Chimanbhai. Assessees' Argument: The assessees argued that the income earned before July 19, 1969, could not be considered their income as they came into existence only on that date. They cited the absence of any provision deeming the income of the erstwhile banks as their income and relied on decisions like CIT v. Agarwal and Co., E. D. Sassoon and Co. Ltd. v. CIT, and CIT v. Bangalore Transport Co. Ltd. Court's Analysis: The court examined the relevant provisions of the Banking Companies Act, noting that the vesting of the undertakings in the new banks occurred on July 19, 1969. The income earned by the erstwhile banks before this date was part of their assets and had been compensated for. The court emphasized that the income accrued or received by the erstwhile banks could not be taxed in the hands of the nationalized banks as it did not retain the character of income upon transfer. The court referred to the decision in CIT v. Bangalore Transport Co. Ltd., where the Supreme Court held that income earned by a predecessor before the transfer of an undertaking could not be taxed in the hands of the successor. The court found this decision applicable, concluding that the income earned by the erstwhile banks was assessable in their hands and not in the hands of the nationalized banks. Section 170 of the Income-tax Act: The court also considered the applicability of section 170, which provides for the assessment of income in the hands of the predecessor up to the date of succession and in the hands of the successor thereafter. The court held that the erstwhile banks were liable for the income earned up to July 18, 1969, and the nationalized banks for the income earned thereafter. Conclusion: The court answered the question in the affirmative, holding that the income for the period January 1, 1969, to July 18, 1969, was not taxable in the hands of the nationalized banks for the assessment year 1970-71. The decision was against the Revenue, with no order as to costs.
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