- (1.) RULE was issued on the following question: " Whether, on the facts and in the circumstances of the case and in view of ss. 36 and 37 of the IT Act, 1961, the Tribunal was justified in holding that a sum of Rs. 16,36,398 representing provision for bad and doubtful debts, provision for supervision charges; provision for gratuity, provision for bonus and provision for additional interest accrued during the relevant year was allowable in the computation of income of the assessee for the asst. yr. 1971-72 and in that view was justified in not confirming the order of the CIT ?"
(2.) THE facts relating to this application are that the assessee, the United, Commercial Bank Ltd. (in Members' Voluntary Liquidation), was doing banking business being incorporated under the Companies Act, as a public limited company in India as well as outside India. It had three branches in Malaysia. The assessee-company was nationalised and its business was taken over by the Government of India on July 19, 1969. The business in Malaysia was allowed to continue and the foreign business was taken over by the Government on January 1, 1971. The ITO made an assessment on August 23, 1978, but that order was set aside by the CIT (A) on November 13, 1979, with a direction to make a fresh assessment after allowing the assessee a fair opportunity. Accordingly, the ITO, Special Assessment Range-1, Calcutta, passed an order on March 15, 1982. The assessee preferred an appeal from that order before the CIT (A), who passed an order on August 28, 1983. Being aggrieved by the said order of the CIT (A), the assessee filed an appeal before the Tribunal. The Tribunal observed that the fact stated by the CIT (A) was not in accordance with the directions of the Re serve Bank of India According to the Tribunal, the Reserve Bank allowed further deduction for certain expenses which were incurred by the assessee while the business was not finally taken over by the Government of India. The Tribunal held that the items for Rs. 16,36,398 are in accordance with the directions of the Reserve Bank contained in its letter dated March 11, 1971. The assessee, ultimately, received compensation of M$. 4,99,455 which was equivalent to Rs. 12,24,165. According to the Tribunal, that showed that the Reserve Bank was satisfied with the claim of the assessee and it was satisfied on merits that the expenses had been incurred and the provisions under the different heads had become liabilities. The Tribunal, therefore, held that the assessee was entitled to deduction of Rs. 16,36,398. The Revenue, being aggrieved by the said order, made an application before the Tribunal for referring certain questions of law to this Court for opinion. The Tribunal, by its order dated March 4, 1986, rejected the said application on the ground that from the finding of the Tribunal, no question of law did arise and as such the said reference application was rejected. Thereafter, the assessee moved this application under S. 256(2) of the IT Act, 1961, and obtained a rule on the question mentioned hereinbefore.
(3.) IT appears that the Reserve Bank of India wrote a letter to the Chairman, United Commercial Bank Ltd., on March 11, 1971, which reads as follows: " Future set up of the Malaysian branches : We refer to our letter of February 1, 1971, regarding the future of the Malaysian branches of your bank. As the preparatory steps for the formation of a new Malaysia company to take over the business of the branches of the Indian banks in Malaysia have already been taken and as it is the intention to incorporate this new company without any further delay, we discussed with Shri S. T. Sadasivan, the procedure to be followed for the transfer of the undertaking and business including the assets and liabilities of your Malaysian branches to the proposed new company and also details of the compensation payable by the said new company to your bank. 2. After giving to the existing company full credit for the profits from January 1, 1959, of all your Malaysian branches (the profits up to the 31st December 1968, having been already transferred to India and having been paid for as part of the compensation for the acquisition of the non-Malaysian business), the amount retained in sundry creditors account as a contingency reserve being the capitalised profit arising out of the devaluation of the Indian Rupee, the provision for bad and doubtful debts made in the books of the Malaysian branches (which has been treated as an internal reserve of your bank reverting to your share-holders and the appreciation in the value of your immovable properties and buildings in Malaysia) (in the light of information which is locally available) and after making provision for certain debts on account of accrued gratuity liability to the local staff in accordance with the provisions of the relevant agreement in this behalf, advances which are treated as bad or doubtful of recovery (according to a recent evaluation based on the books of your Malaysian branches), certain other minor items debitable to the profit and loss account (bonus to India based officers, interest payable to the corresponding new bank, development tax and legal expenses and item in suspense) and charges payable to the corresponding new bank for the management and administration of the Malaysian branches (at a nominal) amount of two lakhs of Malaysian dollars, the revised surplus of your Malaysian branches amounts is rounded off to M$ 4 lakhs or Indian Rs. 9.80 lakhs at the current parity rate of exchange. 3. We shall be prepared to arrange for the payment of the said sum of Rs. 9.80 lakhs to your company in India on the conditions hereinafter specified: (a) Your company shall cease to have any claim against the United Commercial Bank, being the corresponding new bank as defined in S. 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or anyone else in respect of the business of your Malaysian branches; (b) the undertaking, business, assets and liabilities of the Malaysian branches shall continue to be managed or dealt with by the corresponding new bank; (c) the corresponding new bank may either transfer or dispose of in such manner or on such person as the corresponding new bank may deem fit, the undertaking, business and liabilities of the Malaysian branches; (d) your company will, on being required so to do by the corresponding new bank, enter into an agreement with that bank or its nominee to transfer and vest in the corresponding new bank or its nominee as may be required, the entire undertaking, business, assets and liabilities of all the Malaysian branches of your company as on the date from which the payment aforesaid is made ; and (e) your company shall agree to execute all such documents and deeds and to do all such acts and things as may be considered by the corresponding new bank or its nominee as from the aforesaid date the undertaking, business, assets and liabilities of the Malaysian branches of your company. 4. We now suggest that in order to enable us to proceed further with the formation of a new Malaysian company and the transfer of the business of your Malaysian branches to that company, your board of directors may pass a resolution on the lines of the draft which is forwarded herewith. 5. We shall be glad if you could kindly arrange for a meeting of your board of directors as soon as possible and let us have a copy of the resolution as passed. We shall then arrange in order to simplify the procedure from your point of view for the corresponding new bank to make a formal offer in these forms to your bank." ;