TMI Blog1965 (1) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss to the Punjab National Bank Limited. In consequence of that liabilities in the amount of ₹ 10,35,19,147-15-0 were transferred to the Punjab National Bank with assets in the amount of ₹ 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 ₹ 3,35,32,418. The assets being thus short of the liabilities in the amount of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch 10, 1951, and an income of ₹ 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 ₹ 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 ₹ 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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