Liquidation interest taxed as other sources, while disputed interest addition was remanded for verification of possible double counting.
Interest earned on deposits during liquidation of a co-operative bank, after cancellation of its banking licence, was held not to constitute business income because the entity was only realising assets and discharging winding-up obligations; it was assessable as income from other sources. The disputed interest addition was not finally sustained because the assessee claimed the amount had already been included in the profit and loss account, and the matter was restored to the Assessing Officer for verification to avoid double taxation if the reconciliation is proved.
Issues: (i) Whether the addition of interest of Rs. 31,73,391 was sustainable when the assessee claimed that the amount had already been included in the profit and loss account and its taxation would amount to double addition; (ii) Whether interest earned on deposits during liquidation of a co-operative bank, whose banking licence had been cancelled, was assessable as business income or as income from other sources.
Issue (i): Whether the addition of interest of Rs. 31,73,391 was sustainable when the assessee claimed that the amount had already been included in the profit and loss account and its taxation would amount to double addition.
Analysis: The assessee asserted that the disputed interest from Oriental Bank of Commerce had already formed part of the total interest credited in the profit and loss account, and that the same income could not be taxed again. The lower authorities had rejected the claim for want of supporting evidence. Before the Tribunal, the assessee sought one more to establish reconciliation of the interest receipts and to prove that the amount had already been offered to tax. In these circumstances, the Tribunal considered it appropriate to allow the assessee an opportunity to substantiate the claim and directed verification by the Assessing Officer.
Conclusion: The issue was restored to the Assessing Officer for verification, and the addition was not finally sustained at this stage.
Issue (ii): Whether interest earned on deposits during liquidation of a co-operative bank, whose banking licence had been cancelled, was assessable as business income or as income from other sources.
Analysis: The Tribunal noted that the assessee's banking licence had been cancelled and that the bank was under liquidation with an official liquidator administering its affairs. The assessee was only recovering dues, repaying depositors and carrying out activities incidental to winding up. On those facts, the activity of earning interest on deposits during liquidation could not be treated as carrying on banking business. The Tribunal relied on the settled principle that realisation of assets and interim deployment of funds during winding up does not amount to carrying on business.
Conclusion: The interest income was correctly assessed as income from other sources, and the assessee failed on this issue.
Final Conclusion: The appeal succeeded only in part, with one issue remanded for verification and the classification of interest income as income from other sources upheld.
Ratio Decidendi: Income earned by a liquidating entity from temporary deployment of funds after cancellation of its banking licence is not business income, while a disputed addition may be remitted where the assessee is given an opportunity to prove that the income was already included and tax has not been levied twice.
TaxTMI 
AI Drafter ✕
TaxTMI 
