1998 (9) TMI 80 - HC - Income Tax

Summary

Issues Involved:
1. Whether the excess realized on the sale of immovable properties is assessable as income from the banking business carried on by the assessee.

Issue-wise Detailed Analysis:

1. Assessability of Excess Realized on Sale of Immovable Properties:

The primary question referred to the court was whether the surplus realized from the sale of immovable properties by the assessee, a limited company engaged in the banking business, should be treated as business income or capital gains. This assessment pertains to the years 1963-64 to 1967-68, following the amalgamation of the Presidency Industrial Bank Ltd. with the assessee in 1962 under a scheme sanctioned by the Reserve Bank of India (RBI) pursuant to section 44A of the Banking Regulation Act, 1949.

Arguments by the Assessee:

- The assessee contended that the properties in question were non-banking assets acquired from debtors in satisfaction of debts and were let out on rent, with the rental income assessed as property income.
- It was argued that the acquisition and subsequent sale of these properties did not amount to an adventure in the nature of trade.
- The assessee emphasized the legal obligation under section 9 of the Banking Regulation Act to dispose of non-banking assets within seven years, asserting that the sales were compelled by law and thus the surplus should not be treated as business income.

Arguments by the Revenue:

- The Revenue maintained that the immovable properties were acquired in satisfaction of debts owed to the bank, thus constituting stock-in-trade of the money-lending business.
- The surplus realized from the sale of these properties should be treated as income arising from the banking business, as the properties represented converted stock-in-trade.
- The Revenue argued that the character of the properties did not change post-amalgamation, and profits from their sale should be assessed as business income.

Court's Analysis and Conclusion:

- The court noted that the properties were acquired by the bank in satisfaction of debts and retained as stock-in-trade of the banking business.
- Despite the amalgamation and the payment of market value for these properties, their character as stock-in-trade did not change in the hands of the assessee.
- The court referenced various precedents, including decisions from the Madras High Court, Andhra Pradesh High Court, and the Supreme Court, which supported the view that properties acquired in satisfaction of debts and later sold should be treated as stock-in-trade, with profits from such sales assessable as business income.
- The court rejected the assessee's argument that the legal compulsion to sell the properties under section 9 of the Banking Regulation Act altered their character, concluding that the surplus realized from the sale of these properties must be treated as business income.

Final Judgment:

The court answered the referred question in the negative, holding that the surplus realized from the sale of immovable properties is assessable as income from the banking business carried on by the assessee. The reference was disposed of with no order as to costs.