Https://Hcservices.ecourts.gov.in/Hcservices v. The Lakshmi Vilas Bank Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 13.02.2007 CORAM: THE HONOURABLE MR.JUSTICE P.D.DINAKARANand THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN Tax Case (Appeal) Nos.7 and 8 of 2004 Commissioner of Income TaxTiruchirapalli. .. Appellant in both appeals versusThe Lakshmi Vilas Bank Ltd.Karur... Respondent in both appeals PRAYER: Tax Case Appeals filed under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal, Madras 'C'Bench dated 17.2.2003 made in ITA Nos.1292 & 1293 (Mds)/94 (Asst. Year1987-88 & 1988-89) against the order of Commissioner of Income Tax (V)Madras - 34 dated 11.03.1994 in C.No.2035 (12 & 13)/93-94 against theassessment orders of Deputy Commissioner of Income Tax - Special Range,Tiruchirapalli - 1, dated 16.08.94 in No:CQ-0362/1987-88 respectively. For applicant :Mr.K.SubramanianFor respondent :Mr.R.Vijayaraghavanfor M/s.Subbaraya Aiyar ORDER (Order of the Court was made by CHITRA VENKATARAMAN,J.) The appeals are filed by the Revenue for the Assessment Years 1987-88and 1988-89. The following substantial question of law is raised in theseappeals: " Whether in the facts and circumstances of the case, theTribunal was right in holding that the income of theassessee bank is assessable at the rate of 55% asagainst 60%? " 2. The assessee is a banking company. The Commissioner, invokingSection 263 of the Income Tax Act, assessed the Bank at the rate of 60% onthe ground that the assessee company is an investment company, mainlyearning interest from securities, which was to be taxed as income fromother sources. Aggrieved, the assessee filed an appeal before theTribunal. By order dated 17.2.2003, the Tribunal allowed the appeal,referring to the decision of the Supreme Court reported in 255 ITR 423(CIT Vs. RAMANATHAPURAM DISTRICT COOPERATIVE CENTRAL BANK LTD.) that inthe case of banking business, interest on securities, dividend etc., wouldbe business income. The Tribunal observed that the Banking Regulation Acthas to be complied with by the banks. In the circumstances, the Tribunalfound that there was close nexus between the business of the company,namely banking, and placing of the funds of the Bank in Governmentsecurities. In the circumstances, such conduct arising out of compulsionof its business, the interest earned thereon would have to be treated asincome from business. Thus, the Tribunal accepted the plea of theassessee and allowed the appeals. Aggrieved, the Revenue has preferredthese appeals. 3. Learned standing counsel appearing for the Revenue submitted thatthe assessee was an investment company and hence, the Tribunal committedan error in treating the income as income from business. Learned standingcounsel referred to the decision reported in 262 ITR 497 (CIT Vs. SREEANNAPOORNA GOWRISHANKAR HOTELS P. LTD.). He referred to the definitionunder the Finance Act and submitted that the "investment company", isdefined as a company whose gross total income consists mainly of theincome from house property, capital gains and income from other sources byway of interest on securities. Considering the fact that the assessee'sincome consisting of interest on securities was more than the income fromthe banking business, higher rate of tax applicable for investment companywas rightly invoked in the case of the assessee. In this regard, heplaced reliance on the decision reported in 255 ITR 423 (CIT Vs.RAMANATHAPURAM DISTRICT COOPERATIVE CENTRAL BANK LTD.). 4. Learned counsel for the respondent placed reliance on the decisionof this Court reported in 284 ITR 93 (LAKSHMI VILAS BANK LTD. Vs. CIT), towhich one of us is a party (P.D.Dinakaran,J.), wherein this Court,following the decision of the Supreme Court reported in 240 ITR 355(UNITED COMMERCIAL BANK Vs. CIT) and 273 ITR 510 (CIT Vs. KARUR VYSYA BANKLTD.), held that the Government securities held by the bank are to betreated as stock in trade and not investment. Further, in the casereported in 240 ITR 355 (UNITED COMMERCIAL BANK Vs. CIT), the Apex Courtpointed out that the bank, governed by the Banking Regulation Act, 1949,regulated the business of banking. It further held that the preparationof balance sheet in accordance with the statutory provisions would notdisentitle the assessee in submitting the tax Returns on the real taxable income in accordance with the method of accounting adopted by theassessee. In the circumstances, the Apex Court held that the method ofaccounting followed and the preparation of balance sheet in accordancewith the requirement of the Banking Regulation Act could not be ignoredfor the purpose of valuation of stock. It may further be noted that inthe decision reported in 273 ITR 510 (CIT Vs. KARUR VYSYA BANK LTD.), thisCourt applied the decision of the Apex Court reported in 240 ITR 355(UNITED COMMERCIAL BANK Vs. CIT). Learned counsel for the assessee alsoreferred to the decision of the Bombay High Court reported in 212 ITR 540(CIT Vs. AMRITLAL AND CO. LTD.) to impress on the fact that the activitiesof the company are mainly on investment on securities which could betermed as an investment company. Interpreting the word "mainly" assomewhat akin to "wholly", the Bombay High Court held that it could not beheld as "not less than fifty-one per cent", in order to treat the companyas "investment company". In the said decision the Bombay High Courtobserved as follows: " From the definition of investment company set outabove, it is evident that a company can be held to bean investment company only if its gross total incomeconsists mainly of income which is chargeable under theheads specified therein. It is not the actual incomearising in a particular year under those heads vis-a-vis income falling under other heads that isdeterminative of the real character of a company. Thedecisive factor is the nature of the activities of thecompany which give rise to the income. A companyengaged mainly in business or industrial activitiescannot be held to be an investment company merelybecause in a particular year its income from suchbusiness or industrial activity is insignificant or anegative figure and most of the income of that yearturns out to be income from investment, income fromsecurities, capital gains, etc. The definition nowheresays that if "in any assessment year" the income of theassessee which is chargeable under any of the headsspecified in clause (ii) is not less than 51 per centof the amount of its gross total income, it will haveto be treated as "investment company" for thatassessment year. Had that been the intent, theLegislature would have said so in specific terms as hasbeen done in the Explanation to sub-section (4) ofsection 104 of the Act (as it stood at the materialtime) which provides that for the purposes of clause(a) thereof, "the business of a company shall be deemedto consist mainly in the construction of ships or inthe manufacture or processing of goods, etc., if theincome attributable to any of these activities includedin the gross total income of the relevant previous year is not less than fifty-one per cent of such income."There is no such deeming provision in the definition ofinvestment company. " is not less than fifty-one per cent of such income."There is no such deeming provision in the definition ofinvestment company. " As rightly observed by the Tribunal, the conduct arising out of compulsionof law under the provisions of the Banking Regulation Act cannot be viewedto make a company as an investment company, so long as the principalbusiness continued as a banking company. The fact that the income fromsecurities crossed 51% does not, per se, make the assessee an investmentcompany. Admittedly, the income of the assessee is mainly from bankingbusiness. If that be so, it cannot be held to be an investment companymerely because for some reason or the other the income from businesshappened to be falling short of the income from securities. The status ofthe assessee has to be looked at from the true nature of activity of theassessee. In the circumstances, we fail to see any substance in theRevenue's contention in this regard. 5. In a recent decision of the Supreme Court reported in 289 ITR 6(S.C.) (CIT Vs. NAWANSHAHAR CENTRAL CO-OPERATIVE BANK LTD.), following theearlier decision in relation to Section 80P(2)(a)(i), the Supreme Courtheld that the income from investments made by a banking company as part ofthe business of banking business is attributable to the business ofbanking falling under the head "profits and gains of business" and hence,deductible. The said decision will have a bearing to the case on hand. In the context of the decision of the Supreme Court and this Courtthat income from securities has to be assessed as income from business andhaving regard to the admitted position that the true business of theassessee is only banking business, the income from securities, by the merepercentage, could not make it an investment company for a higher levy. Inthe circumstances stated above, we reject the appeal and answer thequestion against the Revenue and thereby confirm the order of theTribunal. There will, however, be no order as to costs. Sd/ Asst.Registrar /true copy/ Sub Asst.Registrar ksv To: 1. The Commissioner of Income TaxTiruchirapalli. 2. The Commissioner of Income Tax,121, Uthamar Gandhi Salai,Madras - 34. 3. The Deputy Commissioner of Income Tax,Special Range, Tiruchirapalli - 1. 4. The Assistant Registrar,Income-Tax Appellate TribunalBench 'B' Rajaji Bhavan, III Floor,Besant Nagar, Chennai – 90. 5. The Secretary,Central Board of Direct Taxes,New Delhi. 1 cc To Mr.R.Vijayaraghavan, Advocate, SR.8753.1 cc To Mr.N.Muralikumaran, Advocate, SR.9147. Tax Case (Appeal) Nos.7 and 8 of 2004 GK(CO) RVL 16.03.2007