Calcutta High Court
Commissioner Of Income Tax vs Hindusthan Welfare Trusts. on 25 September, 1991
Equivalent citations: (1993)111CTR(CAL)284
JUDGMENT
AJIT K. SENGUPTA, J. :
In this reference under s. 256(1) of the IT Act, 1961, the following question of law has been referred to this Court at the instance of the Revenue for the asst. yr. 1981-82 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that investment in fixed deposit made in previous year relevant to the asst. yr. 1981-82 out of sale proceeds of shares of companies, amounted to acquiring of "another capital asset" in terms of s. 11(1A) of the IT Act, 1961 ?"
2. The brief facts giving rise to this reference are that the assessee trust is a public charitable trust whose income is entitled to exemption under s. 11 of the Act. During the previous year ending 31st March, 1981, corresponding to the asst. yr. 1981-82, the assessee trust held shares in 14 limited companies and it sold the same during the said previous year for a total sum of Rs. 63,52,565. The cost of the said shares sold during the previous year was Rs. 23,25,466 and the capital gain arising on the sale of the said shares amounted to Rs. 40,27,099. Within said previous year itself, the assessee trust made a fixed deposit of Rs. 31,75,000 with scheduled banks for a period of 60 days. During the next previous year ending on 31st March, 1982 the assessee trust gave loans to private parties after encashment of the said fixed deposits of Rs. 31,75,000 made during the previous year under reference. The assessee trust did not received the entire sale proceeds of the said shares during the previous year involved herein and a sum of Rs. 16,19,700.00 was received in the next previous year. The assessee trust exercised the option of applying a part of the capital gains in the following previous year as provided in Explanation 2 to s. 11(1) of the Act.
3. In the course of the assessment proceedings, the assessee trust submitted before the ITO that no tax could be charged on the capital gains arising on the sale of the said shares since it had acquired another capital asset, viz., the fixed deposits for Rs. 31,75,000 during the relevant previous year and for the balance sum it had exercised its option to utilise the same in the following previous year. The ITO rejected the contention of the trust and levied tax on the entire amount of the capital gains. He held that the fixed deposit with the banks did not constitute a capital asset and the benefit under s. 11(1A) of the Act could not be claimed by the trust. He further rejected its claim of having exercised the option to invest the remaining sum in the next succeeding previous year.
4. On the assessees appeal the CIT(A) upheld the order of the ITO and observed that the investment in the said fixed deposits did not amount to acquisition of capital assets and, therefore, the benefit of s. 11(1A) of the Act could not avail to the assessee trust. He further held that no option could not avail to the assessee trust. He further held that no option could be said to have been exercised by the assessee for investing the balance sales proceeds in the previous year next succeeding.
5. Against the said order of the CIT(A), both the ITO and the assessee trust preferred appeals before the Tribunal. A Special Bench of the Tribunal heard the said appeals. The Tribunal held that the investment in the said fixed deposits amounted to acquisition of a capital asset within the meaning of s. 11(1A) of the Act and that the trust had also exercised the option to invest the balance capital gains in the next succeeding previous year. It accordingly held that capital gains could not be assessed in the hands of the trust. The two issues decided by the Tribunal were -
(1) that the making of the fixed deposits with banks for 60 days amounted to acquisition of capital assets within the meaning of s. 11(1A) of the Act; and (2) that a valid option was exercised by the trust for investing the balance capital gains in the following previous year.
6. The Tribunal, however, did not go further and left undecided the question as to effect of the loans given to the private parties in the next succeeding previous year after encashment of the said fixed deposits for Rs. 31,75,000 that being an issue to be decided in accordance with the law by the IT authorities in the following assessment year.
7. The only question that falls for our consideration is whether making of the fixed deposits for a period of 60 days with the bank could be taken as acquisition of a new capital asset within the meaning of s. 11(1A) of the Act. The Revenue contends that the deposit of the sale proceeds with the bank is no conversion of the proceeds of sale into a new asset. The proceeds forming a cash fund continues to have the character of cash fund even when in deposit with the bank. Such deposit, according to the Revenue, not amounting to acquisition of any fresh capital asset, the trust is not entitled to the benefit of s. 11(1A) of the Act. The substance of the contention of the learned counsel for the Revenue is that the sale proceeds being a capital fund continues to be so even when in deposit with the bank. The import of the argument is that the transaction partakes of bailment by way of to catio et conductio i.e., the placing of the goods with the bailee (the banker) on hire, on new asset originating. Therefore, the sale proceeds did not take on a new character so as to be converted into a new asset.
8. It was submitted by Mr. Bajoria learned counsel for the assessee that the fixed deposits with the banks are capital assets distinct from liquid cash proceeds and by virtue of deposits in banks the sale proceeds gets transformed into a capital asset within the meaning of s. 11(1A) of the Act. It is argued that it is not that placing the money in a fixed deposit is as good as keeping the money in the till at home nor such deposit with the bank as in the nature of bailment so as to support the contention of the Revenue that despite deposit into bank the sales proceeds continue to retain its character as sale proceeds in the assessees till. According to Mr. Bajoria, the sale proceeds when put into fixed deposit result in the acquisition of a new asset as requisite for the exemption under s. 11(1A) of the Act. The fixed deposits are separate and distinct from the money represented by the sales proceeds of the old assets sold. He also referred to the various provisions of the general law and also drew support for his contentions from the other provisions of the IT act from the cognate legislation like the WT Act, 1957 wherein the deposits in bank have been statutorily acknowledged as asset distinct from money.
9. We have given our anxious consideration to the rival contentions.
10. Sec. 13(1)(d) of the Act which applies to the trust provides that the funds of the trust after 28th February, 1983 are to be invested or deposited in any of the forms or modes specified in s. 11(5) of the Act. Special significance may be attracted to the manner in which the words invested and deposited are juxta posed. The two words are meant to be interchangeable. They are completely equated.
11. Sec. 11(5) of the Act which also applies to the trust lays down the forms and modes of investments of the trust funds. Apart from the various other investments like -Unit Trust, securities of the Government, debentures, etc., in sub-cl. (iii) of s. 11(5) deposit in any schedule bank is also specified as a permissible mode of investment. This clearly establishes that bank deposits are one of the forms of investments for the trust like any other form of investment such as National Savings Certificates, Government securities, immovable properties, Unit Trust, etc. It would further be seen that in s. 11(5) similarly in sub-cl. (ii) deposit in post office savings account, in sub-cl. (vii) deposit in public sector companies and in sub-cl. (xi) deposits with Industrial Development Banks are specified modes of investments for the trust.
12. Sec. 54E of the Act exempts long-term capital gains from tax when the sale proceeds arising on transfer of long-term capital assets are invested in acquisition of specified new assets. One of the assets to specified in sub-cl. (vi) of cl. (a) of Explanation 1 to s. 54E(1) as investment for claiming the said exemption in respect of long-term capital gains is deposit for a period of not less than three years with State Bank of India or a nationalised bank or a co-operative society engaged in banking. In it inheres the statutory recognition of deposit in bank as an asset. Sec. 11(1A) of the Act is taking to s. 54E with a broader spectrum. Both the said sections grant exemption in respect of long-term capital gains when the sale proceeds are invested in another asset. If the bank deposits are assets in which the sale proceeds could be invested for claiming the exemption for the purposes of s. 54E there can be no reason or logic for not treating such bank deposits as a capital asset for the purposes of s. 11(1A) of the Act. Sec. 11(1A) of the Act unlike s. 54E or 54F does not even require that the new capital asset should be of any specified type.
13. The provisions of the WT Act are also significant. In the net wealth of an assessee all the assets are to be included and the bank deposits are treated as one of such assets. Sec. 5(1) of the WT Act grants exemption in respect of certain types of assets and one of such assets mentioned in sub-cl. (xxvi) is deposit with any banking company. Apart from the said sub-clause, in various other sub-clauses like (xvi), (xxviia), (xxviib), (xxviid), (xxix), (xxx) deposits made with post office savings bank, Industrial Development Bank, authority constituted for housing accommodation, National Housing Bank, co-operative society, co-operative housing society, etc., are treated as - separate and distinct assets held by an assessee. Sub-s. (3) of s. 5 requires that certain types of assets including bank deposits should be held or a minimum period of six months from the valuation date for claiming the exemption under the said section. The said sub-s. (3) also provides for including in any such period of six months, the period during which the earlier asset was held and later converted into the assets specified in the said sub-clauses. These provisions also clearly establish that bank deposits are distinct and separate assets from cash which are capable of being owned and held.
14. The true nature of a bank deposit is that it is a debt receivable from the bank. When a person deposits money with the bank, the bank does not hold any specific coins or money in trust for the depositor. The relationship created between the bank and the depositor is that of a debtor and a creditor. The relationship is not that arising in a contract of bailment. The nature of the relationship between a bank and its depositor has been settled since the decision of the House of Lords in the case of Foley vs. Hill reported in (1984) 2 HLC 28. The said decision and its efficacy was considered by the Supreme Court in the case of Shanti Prasad Jain vs. Director of Enforecement reported in AIR 1962 SC 1764 at 1775, (Paragraph 37). It was held by the Supreme Court as under :
"Now the law is well settled that when moneys are deposited in a bank, the relationship that is constituted between the banker and the customer is one of the debtor and creditor and not trustee and beneficiary. The banker is entitled to use the monies without being called upon to account for such user, his only liability being to return the amount in accordance with the terms agreed between him and the customer. And it makes no difference in the jural relationship whether the deposits were made by the customer himself, or by some other persons, provided the customer accepts them. There might be special arrangement under which a banker might be constituted a trustee, but apart from such an arrangement, his position qua banker is that of a debtor and not trustee. The law was stated in those terms in the old and well-known decision of the House of Lords in Foley vs. Hill (1948) 2 HLC 28 : 9 RE 1002, and that was never been questioned."
15. The fact that the deposits are debts and are not equivalent to money would also be evident from the provisions of s. 3 of the Transfer of Property Act, 1982 which defines actionable claim to include debts. Sec. 130 of the Transfer of Property Act, 1982 provides how such debt can be transferred. In the circumstances, it is not correct to equate the bank deposits with money. In case the bank is unable to pay the amount of fixed deposit the depositor can only obtain a pro rata dividend declared on realisation of its assets like any other creditor and cannot claim any specific money to be paid out to him.
16. Depositing money with bank by way of fixed deposit or giving a loan cannot be equated with hiring out a car as contended on behalf of the Revenue. When a car is hired out, the ownership of the car remains with the owner of the vehicle and the hirer has merely the right to use whereas when money is lent or deposited in fixed deposit with the bank, the ownership in the money passes on to the bank or to the debtor who is free to use it in any manner he chooses. In the case of hiring out of the car it is a contract or bailment whereas the bank deposit is a case of a debt.
17. It has been contended on behalf of the assessee that the CBDT itself has issued a Circular dt. 24th September, 1975 declaring that deposits for a period of six months or more could be considered as capital assets for the purposes of s. 11(1A) of the Act. It is not understood how the nature and character of the deposit can undergo any change with reference to its period of maturity. The fixed deposits for a period less than six months would also have the same legal and commercial characteristics as one for a longer period. The said circular reads as follows :
"Instruction No. 883 - XX1/1/74-Sec. 11(1A) of the IT Act, 1961 -
"Another capital asset" - scope of the expression -
Sec. 11(1A) of the IT Act, 1961 provided that where a capital asset being property held under trust wholly for charitable or religious purpose is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purpose to the extent specified therein.
2. The Board had occasion to examine whether investment of the net consideration in fixed deposit with a bank would be regarded as utilisation of the account of the net consideration for acquiring "another capital asset" within the meaning of s. 11(1A) of the IT Act, 1961. The Board has been advised that investment of the net consideration in fixed deposit with a bank for a period of 6 months or above would be regarded as utilisation of the net consideration "another capital asset" within the meaning of s. 11(1A) of the IT Act, 1961".
18. Our attention has also be drawn to the decision of the Gujarat High Court in CIT vs. Ambalal Sarabhai Trust No. 3, reported in (1988) 173 ITR 683 (Guj). In that case, the trust sold the shares and allowed 90% of the sale proceeds of the shares to remain with the buyer as a fixed deposit carrying interest and it invested 10% in fixed deposit with the bank. The Gujarat High Court held that the said fixed deposits with the buyer of the shares and the bank were acquisition of capital asset for the purposes of s. 11(1A) of the Act and the trust was not liable to be taxed on the capital gains accruing on the sale of the said shares. The special leave petition filed by the Department against the said decision of the Gujarat High Court was dismissed by the Supreme Court in the case of the same assessee [see (1989) 176 ITR (St.) 236].
19. In CIT vs. Trustees of H. E. H. The Nizams Charitable Trust (1981) 131 ITR 497 (AP) the sale proceeds of certain shares belonging to the trust were invested in the shape of deposits in bank. It was held that the net consideration of the shares had been utilised for acquiring another capital asset within the meaning of s. 11(1A).
20. The learned counsel for the assessee is correct in emphasising that the relation of banker and customer is not that of a bailee and bailor. It is primarily that of debtor and creditor. The money deposited with the banker becomes the bankers property absolutely as its disposal. The banker receives from or an account of customer the money merely as the debtor of the customer with the superadded obligation to honour his customers cheques drawn upon his balance to the extent of funds available to customers credit.
21. Sir John Pagets observation which was quoted by the Learned Single Judge of the Kerala High Court in Shah Jahan vs. ITO (1976) 104 ITR 265 (Ker) bears repetition "When moneys are deposited in a bank, the ownership of the money passes to the bank and right of the bank over the moneys lodged with it cannot be a lien at all ..... The mere fact that a banker invites deposits and is prepared to pay interest on them, is proof enough of his intention to make use of it as he likes and earn interest therefrom so as to not only to enable him to pay interest to his depositor but also to earn profits for himself. But even if the banker pays no interest on the money deposited, he is his customers debtor and not a bailee because he undertakes to repay on demand a sum, equivalent to the amount deposited with him and the customer has no right whatsoever to claim the identical coins or notes deposited by him with his banker. The latter can pay the amount in any kind of legal tender. This passage occurs in Tannans Banking Laws and Practice in India, 11th Edition, page 79.
22. This is not only true of the relation between a banker and his customer in India which takes after English Banking Law. The same is the concept in American Jurisprudence as well.
23. The following passages from paragraphs 339 and 390 at pages 301 to 304 of Volume 10, American Jurisprudence, Second Edition bear out this position :
"Although money on deposit in a bank is commonly considered to the property of the depositor, the relationship in fact between him and the bank is that of debtor and creditor; the amount on deposit represents merely an indebtedness by the bank to the depositor. It is therefore a fundamental rule of banking law that in the case of a general deposit of money in a bank, the moment the money is deposited it actually becomes the property of the bank and the bank and the depositor assume the legal relation of debtor and creditor. The legal effect of the transaction is that of a loan to the bank upon the promise and obligation, usually implied by law, to pay or repay the amount deposited, usually upon demand, there is nothing of a trust or fiduciary nature in the transaction, nor anything in the nature of a bailment in the transaction or relationship or in the nature of any right to the specific moneys deposited. Rather, the funds thus received are commingled with other funds of the bank and may be loaned or otherwise deposed of by the bank, indeed if the funds are lost, destroyed, or stolen, or become worthless the loss must be borne by the bank, even though it is free from negligence or fault."
"The relationship of a depositor in a saving bank account or a depositor having a savings account, to the bank is dependent upon the nature of the banks business or corporate make-up and upon the way and for whose ultimate benefit the business of the bank is conducted. If the deposit is in a savings bank which has a capital stock and stock-holders the relationship is practically the same as that existing between the depositor of a commercial account and the bank which carries the account, viz., that of debtor and creditor. However, where a savings bank is conducted solely for the benefit of the depositor the deposits constituting its only capital, and the income from interest, etc., after deducting expenses, is divided among the depositors, the relationship between them and the bank is not that of the ordinary debtor and creditor but is more merely that of trustee and ceatui que trust or quasi-stock-holder and corporation."
24. Our attention has been drawn to an unreported decision of a Division Bench of this Court dt. 22nd March, 1989, in IT Ref. No. 101 of 1983 (CIT vs. Damodar Kalyani Memorial Trust). It has been held therein that where the proceeds of sale of a capital asset are advanced as loan to a third party as debtor on interest such transaction does not divest the lender-creditor of its ownership of the proceeds. In that case such advance of loan out of the consideration of sale of a capital asset has been held to constitute continuing ownership of the proceeds as money advanced. A simile has been drawn between the lending of the money and the letting out on hire any asset on hire charge. In other words, the money lent remains the property of the lender, the person to whose order the money lent is subject, whose right thereto is beyond dispute by the borrower. But the facts of that case are different. There the money was advanced as an accommodation loan to a party not operating as a banker. No case was brought out that the borrower invited the loan in the course of his banking operation. Moreover, in that case the borrowing was not in the shape of a deposit but as loan simpliciter. It is well established that despite the fundamental character of loan and deposit being that of lending, there is a vital difference between the two. The loan is recoverable the minute it is advanced while the deposit is not. It is only upon the expiration of the term that a deposit falls repayable by the depositee. (See Abdul Hamid vs. Rahamat Bi AIR 1965 Mad 427). Therefore, the two distinguishing factors (1) lending to a person not a banker and (2) lending by way of loan repayable the minute it is advanced distinguish the facts of that case.
25. The circular of the Board as referred to earlier accepts the fundamentals of the relation between a banker and his customer as that of creditor and debtor and the bankers property in the money of the depositor. But we find it difficult to reconcile why the Board felt called upon to impose a minimum period of six months for a deposit to qualify as an asset. Deposit is in law either an asset or not an asset. But there is no point in fixing a minimum time frame. If a deposit for a team of six months or more is a new capital asset for the purpose of sub-s. (1A) of s. 11 when made out of the proceeds of sale of an existing capital asset, we perceive no reason why a deposit for a lesser term should not likewise be an asset different from the proceeds deposited. How the duration of the term of the deposit can be the test of its being as asset or not is apparently not intelligible. To out mind, the fixing of an arbitrary time-frame for a deposit to qualify as an asset does not stand to reason and does not accord with the fundamentals of the law and practice relating to banking. Once a deposit is accepted to be an asset, the larger or lesser duration of the term is immaterial consideration. The circular of the Board that is not consonant with the general principles of law cannot held away. The restrictive stipulation of the minimum period of six months has the effect of mutilating the concept of asset as obtaining under the IT Act and its cognate Act, viz., the WT Act. What in the said circular can be called into aid is its acknowledgement of a deposit in bank as a capital asset for the purpose of sub-s. (1A) of s. 11.
26. The Division Bench of this Court in CIT vs. Damodar Kalyanji Memorial Trust (supra) had also occasion to comment incidentally on the intent underlying the direction of the CBDT to treat investment of sale proceeds in bank deposit for at least six months duration as acquisition of another capital asset. A tentative view was expressed in the said decision by way of obiter that the said circular is a concession and the concession might be to keep the trust funds safely in bank and to encourage trusts to keep their money deposited in banks. But the said expression of opinion was not meant to be any pronouncement on the intent and purpose of the circular. That issue was not before the Division Bench for decision.
27. It is in the present case that the Boards circular permitting bank deposits with a stipulated minimum of duration assumes particular importance. On circumspection of the law and practice of banking in India and abroad, we are of the view that no minimum duration of the deposit can be set forth as the determinative criterion to decide whether a deposit in bank takes on the colour of an asset of a specie separate from cash fund from the sale of an asset.
In the preview the conclusion is intercapable (sic) that the net consideration of sale of any capital asset results in the conversion of the consideration into an asset when deposited in bank and a new asset at that, within the meaning of s. 11(1A) of the IT Act, 1961.
We, therefore, answer the questions in this reference in the affirmative and in favour of the Revenue.
There will be no order as to costs.
SHYAMAL KUMAR SEN, J. :
I agree.