Assessment of existing banks and their shareholders and corresponding new banks in the context of nationalisation and payment of compensation - Guidelines therefor - Income Tax - 63/1971

Circular 63 Dated 16/8/1971 Assessment of existing banks and their shareholders and corresponding new banks in the context of nationalisation and payment of compensation - Guidelines therefor 1. The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (hereinafter referred to as the 1970 Act), was enacted by Parliament with a view to nationalising the undertakings of 14 commercial banks on payment of compensation aggregating to Rs. 87.40 crores. In terms of section 4 of the 1970 Act, the undertaking of every "existing bank" ( i.e., the old bank) stands transferred to and vests in the "corresponding new bank" ( i.e., the nationalised bank), on the commencement of the 1970 Act, namely, July 19, 1969. Under section 5(1) of the 1970 Act, the "undertaking" of each existing bank includes all assets, rights, powers, authorities and privileges and all movable and immovable property, cash balances, reserve funds, investments and all other rights and interests in, or arising out of, such property as were, immediately before July 19, 1969, in the ownership, possession, power or control of the existing bank in relation to the undertaking, whether within or without India, and is also deemed to include all borrowings, liabilities and obligations of whatever kind then subsisting of the existing bank in relation to the undertaking. 2. The following questions arise for consideration in regard to the taxation of the income of the existing banks and their shareholders and the corresponding new banks in the context of nationalisation and payment of compensation as stated in the preceding paragraph : ( 1 ) What is the position regarding continuance of assessment and other proceedings in the case of the existing banks for assessment year up to and including the assessment year 1969-70 ? ( 2 ) How and against whom are the proceedings for the assessment year 1970-71 in respect of the income of the existing bank for the calendar year 1969 to be initiated and completed ? ( 3 ) What is the scope of the income liable to tax for the assessment year 1970-71 in the case of— ( a ) the existing bank, ( b ) the corresponding new bank ? In particular, will the income of the part of the calendar year 1969 up to July 18, 1969 ( i.e., prior to the transfer of the undertaking to the new bank) be chargeable to tax as the income of— ( a ) the existing bank, or ( b ) the corresponding new bank, or ( c ) not at all ? What is the position regarding the taxability of the income of a foreign branch of an existing bank which falls within the scope of section 5(6) of the 1970 Act? Will such income be chargeable to tax as the income of— ( a ) the existing bank, or ( b ) the corresponding new bank? ( 4 ) Does any capital gain arise on the transfer of the undertaking of the existing bank to the corresponding new bank? If so, how is such gain to be computed, and will such gain be assessable to tax as income of the existing bank for the assessment year 1970-71 ? ( 5 ) Will there be any income liable to tax as "balancing charge" under section 41(2) of the Income-tax Act, in relation to transfer of assets on which depreciation has been allowed to the existing bank in past years? ( 6 ) What are the tax liabilities of the existing bank which stand transferred to the corresponding new bank by virtue of the provisions in section 5(1) of the 1970 Act? In particular, are the tax liabilities in relation to the following incomes, if any, of the existing bank required to be met by the corresponding new bank : ( i ) incomes assessable for the assessment years up to and including the assessment year 1969-70, to the extent these had not been discharged by the existing bank before July 19, 1969 ; ( ii ) incomes assessable for the assessment year 1970-71 : ( a ) income of the period January 1, 1969 to July 18, 1969, ( b ) other income, if any, of the year 1969, ( c ) capital gains arising on the transfer, ( d ) income of foreign branches for the year 1969 where section 5(6) of the 1970 Act applies, ( e ) balancing charge under section 41(2) of the Income-tax Act. ( 7 ) If any existing bank distributes to its shareholders the compensation received by it, either in cash or in the form of promissory notes or stock certificates, will such distribution be liable to tax as dividends and, if so, to what extent and under what circumstances ? ( 8 ) If any refund of tax falls due to any existing bank in respect of any year, should such refund be granted to the existing bank or to the corresponding new bank ? ( 9 ) If any assessment for a past year is required to be reopened for any reason, or if any penalty proceedings are to be taken in respect of past years, should the proceedings be initiated and completed against— ( a ) the existing bank, or ( b ) the corresponding new bank? These issues are dealt with in the following paragraphs : 3. Assessment and other proceedings in the case of the existing banks for assessment years up to and including the assessment year 1969-70 - According to the scheme of the 1970 Act, there is succession to the business of the existing bank by the corresponding new bank and where any proceeding was pending on the appointed day, which has been defined in section 2( a ) of the 1970 Act to mean February 14, 1970, these may, under the specific provisions of section 5(5) of the 1970 Act be continued against the corresponding new bank. Section 17 of the 1970 Act also lays down that any reference to any existing bank in any law or in any contract or other instrument is to be construed as a reference to the undertaking referred to in section 4 of the 1970 Act. It follows that all proceedings relating to assessment years up to and including the assessment year 1969-70 which were pending on February 14, 1970 in respect of the existing bank will have to be continued and completed against the corresponding new bank. 4. Assessment of the existing bank for the assessment year 1970-71 - As the assessment proceedings for the assessment year 1970-71 were not pending on February 14, 1970, section 5(5) of the 1970 Act has no application to such proceedings, and, accordingly, these have to be initiated and completed against the existing bank itself. The existing bank will be assessed to tax for the assessment year 1970-71 on the following items of income : ( a ) capital gains arising as a result of the transfer of the undertaking to the corresponding new bank; ( b ) profits of foreign branches, if any, which fall within the scope of section 5(6) of the 1970 Act, for the whole of the calendar year 1969 ; and ( c ) other income, if any, for the whole of the calendar year 1969. 5. Capital gains - The existing banks will be liable to tax on the capital gains arising to them as a result of the transfer of their "undertakings" to the corresponding new banks in pursuance of the 1970 Act. For this purpose, the capital asset which has been transferred is the entire undertaking of the existing bank and not the individual assets comprising that undertaking. The amount of the capital gain will be ascertained by deducting from the amount of the compensation, the aggregate of the cost of acquisition of the undertaking and the cost of any improvements thereto. 6. Where the existing bank has been in existence from a date prior to January 1, 1954, it has the option, under section 55(2)( i ) of the Income-tax Act, of substituting the market value of the capital asset as on January 1, 1954, for the cost of acquisition. 7. Liability to balancing charge under section 41(2) of the Income-tax Act - There will be no liability to tax on the existing bank in respect of the "balancing charge" under section 41(2) of the Income-tax Act. 8. Taxation liabilities of the existing bank which stand transferred to the corresponding new bank - The effect of the provision in section 5(1) of the 1970 act is that the liabilities and obligations of whatever kind of the existing bank subsisting on the commencement of the Act, i.e., July 19, 1969, are comprised within the meaning of "undertaking" and by virtue of section 4, all such liabilities and obligations stand transferred to, and vest in, the corresponding new bank. On the basis of this test, the position in regard to the various items of tax liabilities will be as under: 1. Tax liabilities for assessment years up to and including the assessment year 1969-70 : All these liabilities [barring those relating to the income of foreign branches referred to in section 5(6) of the 1970 Act] stand transferred to the corresponding new bank and will have to be met by it. 2. Tax liability in respect of income assessable for the assessment year 1970-71: l Income of the period from January 1, 1969 to July 18, 1969 - As the accounts of the existing bank in respect of the "undertaking" were closed and a profit and loss account and balance sheet drawn up as at the close of business on July 18, 1969, the tax liability on the profits for the period January 1, 1969 to July 18, 1969, arose on the closure of such books on July 18, 1969. Accordingly, in terms of section 5(1), this liability will have to be discharged by the corresponding new bank. l Capital gains on the transfer - As the gains arose only on and as a result of the transfer, the tax liability relating to such gains did not subsist at the commencement of the Act. Accordingly, such tax liability will be the liability of the existing bank. l Income of foreign branches to which section 5(6) applies - This liability also continues to be that of the existing bank. l Other income, if any, of the existing bank for the whole of 1969 - This continues to be the liability of the existing bank. l Balancing charge under section 41(2) - As there can be no balancing charge, as stated in para 7 above, there can be no tax liability in relation to it. 9. Distribution to shareholders - Any distribution by the existing bank to its shareholders out of the compensation moneys received by it would ordinarily constitute dividends under the Companies Act and will be chargeable to tax as the income of the shareholders. Even a distribution of securities received as compensation will be liable to be treated as dividend under the special definition of this term in section 2( 22 ) of the Income-tax Act, as such distribution would entail release of assets by the company to its shareholders. If the existing bank goes into liquidation, the distribution made by the liquidator will rank as dividend to the extent to which it is attributable to the accumulated profits (whether capitalised or not) of the existing bank immediately before the liquidation. Such accumulated profits will include capital gains arising in consequence of the transfer of the undertaking and receipt of compensation in pursuance of nationalisation. If the liquidation of the existing bank is "consequential" to the compulsory acquisition of its undertaking, then, any profits which arose prior to a period of three accounting years of the existing bank immediately preceding the accounting year in which the compulsory acquisition took place will be excluded from the pool of accumulated profit for the purpose of this provision. 10. If the existing bank effects a reduction of its capital, then also the distribution made to the shareholders will be treated as dividends to the extent to which the existing bank possesses accumulated profits which arose after the end of the previous year relevant to the assessment year 1953-54. 11. Refunds falling due to the existing bank - Under the definition of "undertaking" in section 5(1) of the 1970 Act, this term includes, inter alia, all rights in the ownership, possession, power or control of the existing bank in relation to the undertaking. Accordingly, if the existing bank becomes entitled to a refund in relation to the undertaking for the period up to July 18, 1969, such refund becomes the property of the corresponding new bank. However, any refund arising to the existing bank in relation to its income from a source which is outside the scope of the term "undertaking", such refund will continue to be granted to the existing bank. This applies also to any refund arising in relation to the income of a foreign branch of the existing bank which falls within the purview of section 5(6) of the Act. 12. Reopening of assessments for past years - In view of the wide scope of section 5(5) of the Act, any proceedings to be commenced in regard to the existing bank for a past period, by way of reopening of assessments, will have to be taken against the corresponding new bank. This is because the liability to tax on the income of past years has already accrued and proceedings are designed only to quantify these liabilities. Circular : No. 63 [F.No. 207/6/70-IT(A-II)], dated 16-8-1971 .