1984 (7) TMI 64 - HC - Income Tax

Summary

Issues Involved:

1. Whether the reopening of the assessment based on an audit note was legally valid.
2. Whether the assessee-bank was carrying on business in the relevant previous year post-amalgamation.
3. Eligibility of the assessee-bank to claim deduction of bad debts in computing the assessable income for the assessment year 1971-72.

Issue-wise Detailed Analysis:

P 1. Legality of Reopening the Assessment:
The assessee-bank contested the reopening of the assessment on two grounds: (1) the reopening was based on a change of opinion and hence not sustainable in law, and (2) it was incorrect to say that it ceased to carry on business after the amalgamation. The assessing authority rejected both contentions. The AAC, Trivandrum, allowed the appeal against the order of assessment but rejected the contention that the reopening was bad in law. The Tribunal upheld the assessing authority's decision that the reopening was valid.

P 2. Continuation of Business Post-Amalgamation:
The primary contention was whether the assessee-bank continued to carry on business after its amalgamation with Lord Krishna Bank Ltd. The assessee argued that it was still engaged in the business of recovering advances considered not readily realizable and/or bad or doubtful of recovery through the agency of Lord Krishna Bank Ltd., thus falling under the business activities defined in s. 6(1)(1) of the Banking Regulation Act, 1949. However, the Tribunal and the High Court found that the assessee-bank was not carrying on any banking business as defined under s. 5(b) of the Banking Regulation Act post-amalgamation. The High Court referenced the Supreme Court's decisions in CIT v. Lahore Electric Supply Co. Ltd. and S.P.V. Bank Ltd. v. CIT to support this conclusion.

P 3. Eligibility for Deduction of Bad Debts:
The assessee-bank claimed a deduction of Rs. 58,560 representing bad debts while computing the assessable income. The Tribunal concluded that since the assessee-bank had ceased to carry on any business post-amalgamation, it was not eligible for the deduction. The High Court upheld this decision, noting that the realization of debts and turning them to account did not qualify as carrying on business under s. 6(1)(1) of the Banking Regulation Act. The High Court also dismissed the argument that Lord Krishna Bank Ltd. acted as an agent for the assessee-bank in recovering the bad debts, stating that such a relationship was inconsistent with the terms of the amalgamation scheme.

Conclusion:
The High Court affirmed the Tribunal's decision that the assessee-bank was not carrying on any business post-amalgamation and therefore was not eligible for the deduction of bad debts. The reopening of the assessment was deemed legally valid. The question referred to the High Court was answered in the negative and against the assessee, with no costs awarded. A copy of the judgment was to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.