Tax treatment of liquidation interest and brought forward losses: income character and set-off allowed on the facts.
Interest earned on fixed deposits by a co-operative bank in liquidation was examined in light of the cessation of normal banking operations. As the banking licence had been cancelled and the liquidator was only realising and deploying funds pending distribution, the Tribunal treated the activity as not amounting to active business and did not regard the interest as business income on that footing. The Tribunal also accepted the claim for set-off of brought forward business loss against the income for the year and allowed the set-off. The appeal therefore succeeded, with relief granted on the principal monetary issue.
Issues: (i) Whether the interest earned on fixed deposits by a co-operative bank in liquidation was assessable as business income or as income from other sources. (ii) Whether the brought forward business loss of earlier years could be set off against such income.
Issue (i): Whether the interest earned on fixed deposits by a co-operative bank in liquidation was assessable as business income or as income from other sources.
Analysis: The banking licence had been cancelled and the assessee was not carrying on normal banking operations. The record showed that the assessee was in liquidation and the income in question arose from deposits with banks. The decision relied upon the principle that where a banking company has ceased to carry on banking business and the liquidator merely realises and deploys funds pending distribution, the activity is not business activity.
Conclusion: The income was not treated as business income on the footing of active banking operations.
Issue (ii): Whether the brought forward business loss of earlier years could be set off against such income.
Analysis: The assessee claimed that the earlier business losses were eligible for set-off against the income for the year. The Tribunal accepted the claim in the final operative part of the order and directed allowance of the set-off.
Conclusion: The set-off of brought forward business loss was allowed in favour of the assessee.
Final Conclusion: The appeal succeeded and the assessee obtained relief on the principal monetary issue before the Tribunal.
Ratio Decidendi: Income arising after cessation of banking operations and during liquidation is to be examined on the basis of the real nature of the activity, and brought forward business loss may be allowed where the Tribunal concludes the claim is admissible on the facts of the case.
TaxTMI 
AI Drafter ✕
TaxTMI 
