TMI Blog1975 (8) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... that the interest of Rs. 20,826 under the decree passed by the Supreme Court of India was liable to be taxed as revenue receipt ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest of Rs. 8,800.90 on Rs. 15,000 alleged to be payable to M/s. Harshadrai Mohanlal Co. was also liable to be taxed as revenue receipt in the hands of the assessee cotnpany ? A few facts need be noticed in order to appreciate question No. 2 only since questions Nos. 13 and 4 have not been pressed by the learned advocate appearing on behalf of the assessee at whose instance this reference has been sought. The assessee-company, the Morvi Mercantile Bank limited (in liquidation), was originally incorporated in about the year 1944 limited the Companies Act, 1913, as was in force in the erstwhile State of Morvi in Saurashtra. After the merger of the State of Morvi into Saurashtra, the ex-State of Saurashtra filed a winding up petition in the High Court of Saurashtra on July 1, 1955. It appears that on July 15, 1955, the High Court of Saurashtra appointed a provisional liquidator. The official liquidator of the High Court was appointed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed deposits' interest income as income from other sources and disallowed the carry-forward of losses. The assessee-company, therefore, carried the matter in further appeal before the Appellate Tribunal. Before the Tribunal three-fold contentions were raised on behalf of the assessee-company. In the first instance, it was urged that having regard to the past conduct of the revenue authorities in treating the interest income as business income, it was not open to them to reopen the question and treat the interest income as income from other sources and deprive the assessee-company of the right of setting off the earlier losses without change of any material circumstances. It was contended in the second place that the effect of the winding up order was not that the business of the company came to an end and the liquidator was entitled to carry on the business in course of the winding up. Thirdly, it as contended that under section 28(4) of the Income-tax Act, 1961, interest income must be treated as business income under the said clause since it was the value of the benefit arising from the business carried on by the liquidator. None of the contentions found favour with the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the status of the official liquidator in compulsory winding up is deemed to be that of an agent as he enters in the shoes of the directors and he has to act after considering the wishes of the members as well as creditors. If this is the legal status of a liquidator in a compulsory winding up by the court, which Mr. Patel asserts, undoubtedly, the official liquidator can carry on the business which the company is authorised to carry on either under its memorandum or the statute governing the company for the time being. In other words, the argument is that the assessee-company, begin a banking company, was entitled to engage itself in and carry on besides business of banking other forms of business including investment and acquisition, management, sale and realisation of properties which may come in its possession as security or in satisfaction of its claim as specified in section 6(1)(a), (f) and (g) of the Banking Regulation Act, 1949. We are afraid we cannot accede to this broad submission. There appears to us an apparent fallacy in this argument. No company can carry on banking business without licence issued by the Reserve Bank of India save as otherwise provided in sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings against directors, having started on August 27, 1960, were clearly within time. In that context Mr. justice Beg, speaking for the court, observed at page 391 as under : " Incidentally, the finding that limitation did not begin running before filing the misfeasance application implied that this was not a case in which a claim had " accrued " before the filing of the application. The objection that section 45-O of the Act would apply to claims made by the company itself and not to those by a liquidator was rightly overruled on the ground that the liquidator really represented the company and that a claim made by the liquidator was, therefore, a claim ' by the banking company ', as was held in Jwala Prasad v. Official Liquidator within the meaning of this expression used in section 45-O of the Act. " We have not been able to appreciate how this observation of the Supreme Court can be of any assistance to the case of the assessee-company. The question before us is whether the assessee-company having ceased to be competent to do banking business was still competent to carry on the additional business under section 6 of the Banking Regulation Act merely because it cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in K. V. S. Vassan Bros. can carry the matter in support of the broad contention which has been urged by Mr.Patel. The contention that inspite of the assessee-company ceasing to be a banking company it retained its orginal character or incidental character of investment company cannot be accepted, obviously for two reasons; in the first instance, there is no finding of fact on this question that the assessee-company was an investment, company since the necessary evidence in the nature of memorandum of association or any other document has not been produced before the Tribunal, and, secondly, in any case it was no business of investment that was carried on but there was merely realisation of assets and investment pending distribution by the liquidator in discharge of usual functions for winding up. The question which we have to answer is whether it was competent to carry on additional business under section 6, even though it ceased to be a competent company entitled to carry on the business of banking. Section 6 of the Banking Regulation Act, 1949, which permits a banking company to engage itself in any one or more of the specified forms of business, presupposes that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be determined by the court having regard to all the circumstances of the case. It does not, of course, mean that no other course would be posssible. Then it must be for the ' beneficial winding up' of the business of the company ...... not with a view to its continuance." Simonds J., however, found from the affidavit of the liquidator, Houston, where the liquidator had sworn that the business was for a mercantile necessity and that it was carried on with a view to the winding up of the affairs of the company, and held that there was no apparent urgency to realise the company's assets, and in his judgment, the liquidator could not be blameworthy for thinking, as he said he did think that the continuance of the business was necessary to its beneficial winding up. Mr. Patel, therefore, urged that if the liquidator here for the mercantile necessity invested the amounts realised from the sale of the assets till the distribution is made amongst the creditors, it must be held that the assessee company was carrying on its business. In this connection, he has invited our attention to the applications which have been filed by the liquidator from time to time before the company judge c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and the expenses which they incurred were not solely and exclusively for the purpose of their business. The company carried the matter in appeal before the Tribunal which upheld the assessee's contention and granted deduction of various amounts under section 10(2)(xv) of the Indian Income-tax Act, 1922. At the instance of the revenue a reference was made to the High Court of Punjab and the relevant question was whether the conclusion of the Appellate Tribunal that the assessee-company had not ceased to carry on its business during the relevant accounting period was in the facts and circumstances correct in law. The High Court answered the question in the affirmative and in favour of the assessee-company. The matter was taken to the Supreme Court and Mr. Justice Sarkar, speaking for the majority, observed as under: " It would be laying down strange law to hold that where a business has in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. The question whether the company was carrying on business arises only because, if it was, it would be entitled under section 10 to deductions from its bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g collected." The real question, therefore, is whether the liquidator when he was realising the assets and investing the realisations in short-term deposits with the permission of the court pending distribution amongst the creditors was really carrying on business or was merely trying to wind up the affairs of the company. Mr. Patel urged that having regard to the nature of the business of the company, namely, banking and investment, it must be held that though the main business of banking had come to an end, the investment part of the business continued. We do not find any support for this contention either from the facts or from law. In our opinion, when the liquidator realised the assets and invested the money in short-term deposits pending distribution he was not embarking upon any business. The realisation and distribution of assets cannot, in our opinion, be said to be carrying on business. It is obligatory upon the liquidator to realise the assets and to distribute the money amongst the creditors, and if pending distribution he invested the amount, it cannot be said that he was carrying on the business of investment merely because it may be one of the objects either under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose assets the assessee is not carrying on any business, but qua those assets the assessee has become their owner. As an owner the assessee may also exploit those assets and receive income. But income which it receives is no longer business income because no business is being carried on and the assets are not business assets. In such a case, the income would be an income derived by the owner from his capital assets, and the head of income under which such income would fall for the purpose of Income-tax Act would be section 12 and not section 10. Whether a business is carried on or not and whether assets of an assessee are business assets or not are questions of fact, and they must be decided by the Tribunal on the evidence led before it. The only jurisdiction of the High Court is to consider whether there was any evidence for the Tribunal coming to a particular finding." We are, therefore, of the opinion that the assets of which the liquidator was seized and which he tried to realise for purposes of winding up were of capital nature and they cannot be said to be business assets, nor can it be said that merely because he was investing the realisations, assuming that that was per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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