Taxability on succession of banking business: pre-nationalisation income stayed assessable in the hands of the erstwhile banks.

Income accrued before nationalisation remained taxable in the hands of the erstwhile banks because the corresponding new banks were not in existence when that income arose, and the statutory transfer of assets did not, without an express deeming provision, convert it into the successor banks' income. Section 170 of the Income-tax Act was applied in the ordinary way on succession of business: the predecessor remained assessable up to the date of succession, while the successor was assessable only for income arising thereafter. The note therefore states that pre-succession income stayed with the old banks and post-succession income with the new banks.

---

---

Issues: (i) Whether the income earned by the erstwhile banks for the period before nationalisation was taxable in the hands of the corresponding new banks; (ii) Whether, on succession of the banking business, section 170 of the Income-tax Act, 1961 applied so that the predecessor was assessable up to the date of succession and the successor thereafter.

Issue (i): Whether the income earned by the erstwhile banks for the period before nationalisation was taxable in the hands of the corresponding new banks.

Analysis: The undertaking of each existing bank vested in the corresponding new bank on the appointed date under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, but the assessees were not in existence during the earlier period when the business income accrued to the erstwhile banks. The income earned before the takeover had already arisen to the old banks and had become part of their assets. The statutory transfer of those assets to the new banks did not, by itself, convert the transferred amount into income of the successor banks, as no deeming provision treated it as such.

Conclusion: The pre-nationalisation income was not taxable in the hands of the corresponding new banks.

Issue (ii): Whether, on succession of the banking business, section 170 of the Income-tax Act, 1961 applied so that the predecessor was assessable up to the date of succession and the successor thereafter.

Analysis: Section 170(1) provides that when one person succeeds another in carrying on a business, the predecessor is assessed for the income up to the date of succession and the successor is assessed only for the income after that date. No provision in the banking statute displaced that rule. Accordingly, the income of the pre-succession period remained assessable in the hands of the erstwhile banks, while the assessees were liable only for the post-succession period.

Conclusion: Section 170 applied in the ordinary way, and the pre-succession income remained assessable in the hands of the predecessors.

Final Conclusion: The reference was answered in favour of the assessees, holding that the earlier period's income was assessable in the hands of the erstwhile banks and not in the hands of the nationalised banks.

Ratio Decidendi: Income accrued before succession remains taxable in the hands of the person to whom it first accrued, and a statutory transfer of that income as part of the successor's assets does not make it the successor's income in the absence of an express deeming provision; section 170 governs succession by allocating pre- and post-succession income to predecessor and successor respectively.

---