Calcutta High Court
Commissioner Of Income-Tax vs Hindusthan Welfare Trust on 25 September, 1991
Equivalent citations: [1994]206ITR138(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961 ("the Act"), the following question of law has been referred to this court at the instance of the Revenue for the assessment year 1981-82 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law is holding that investment in fixed deposit made in the previous year relevant to the assessment year 1981-82 out of sale proceeds of shares of companies, amounted to acquiring of 'another capital asset' in terms of Section 11(1A) of the Income-tax 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 Section 11 of the Act. During the previous year ending March 31, 1981, corresponding to the assessment year 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 the said previous year itself, the assessee-trust made a fixed deposit of Rs. 31,75,000 with the scheduled banks for a period of 60 days. During the next previous year ending on March 31, 1982, the assessee-trust gave loans to private parties after encashment of the said fixed deposit of Rs. 31,75,000 made during the previous year under reference. The assessee-trust did not receive the entire sale proceeds of the said shares during the previous year involved herein and a sum of Rs. 16,19,700 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 Section 11(1).
3. In the course of the assessment proceedings, the assessee-trust submitted before the Income-tax Officer 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 deposit 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 Income-tax Officer rejected the contention of the trust and levied tax on the entire amount of the capital gains. He held that the fixed deposit with banks did not constitute a capital asset and the benefit under Section 11(1A) 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 assessee's appeal, the Commissioner (Appeals) upheld the order of the Income-tax Officer and observed that the investment in the said fixed deposit did not amount to acquisition of capital assets and, therefore, the benefit of Section 11(1A) could not be availed of by the assessee-trust. He further held that no option could be said to have been exercised by the assessee for investing the balance sale proceeds in the previous year next succeeding.
5. Against the said order of the Commissioner (Appeals), both the Income-tax Officer 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 deposit amounted to acquisition of a capital asset within the meaning of Section 11(1A) 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 Section 11(1A) ; and (2) that a valid option was exercised by the trust for investing the balance of capital gains in the following previous year.
6. The Tribunal, however, did not go further and left undecided the question as to the effect of the loans given to the private parties in the next succeeding previous year after encashment of the said fixed deposit for Rs. 31,75,000, that being an issue to be decided in accordance with the law by the income-tax authorities in the following assessment year.
7. The only question that falls for our consideration is as to whether making of the fixed deposit for a period of 60 days with the bank could be taken as acquisition of a new capital asset within the meaning of Section 11(1A). The Revenue contends that the deposit of the sale proceeds with the bank is not conversion of the proceeds of sale into a new asset. The proceeds forming a cash fund continue 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, does not entitle the trust to the benefit of Section 11(1A). The substance of the contention of learned counsel for the Revenue is that the sale proceeds being a capital fund continue 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 locatio et conductio, i.e., the placing of the goods with the bailee (the banker) on hire, no 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 get transformed into a capital asset within the meaning of Section 11(1A). 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 is in the nature of bailment so as to support the contention of the Revenue that, despite deposit into the bank the sale proceeds continue to retain its character as sale proceeds in the assessee's 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 Section 11(1A). The fixed deposits are separate and distinct from the money represented by the sale 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 Act, from the cognate legislation like the Wealth-tax Act, 1957, wherein the deposits in banks have been statutorily acknowledged as asset distinct from money.
9. We have given our anxious consideration to. the rival contentions.
10. Section 13(1)(d) of the Act which applies to the trust provides that the funds of the trust, after February 28, 1983, are to be invested or deposited in any of the forms or modes specified in Section 11(5). Special significance may be attached to the manner in which the words "invested" and "deposited" are juxtaposed. The two words are meant to be interchangeable. They are completely equated.
11. Section 11(5) 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 the Unit Trust, securities of the Government, debentures, etc., in Sub-clause (iii) of Section 11(5) deposit in any scheduled bank is also specified as a permissible mode of investment. This clearly establishes that bank deposits are one of the forms of investment 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 Section 11(5), similarly in Sub-clause (ii), deposit in post office savings account, in Sub-clause (vii) deposit in public sector companies and in Sub-clause (xi) deposits with the Industrial Development Banks are specified modes of investments for the trust.
12. Section 54E 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 so specified in Sub-clause (vi) of Clause (a) of Explanation 1 to Section 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 the 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. Section 11(1A) is akin to Section 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 bank deposits are assets in which the sale proceeds could be invested for claiming the exemption for the purposes of Section 54E, there can be no reason or logic for not treating such bank deposits as a capital asset for the purposes of Section 11(1A). Section 11(1A), unlike Section 54E or 54F of the Act, does not even require that the new capital asset should be of any specified type.
13. The provisions of the Wealth-tax Act, 1957, are also significant. In the net wealth of an assessee, all the assets are to be included and bank deposits are treated as one of such assets. Section 5(1) of the Wealth-tax Act grants exemption in respect of certain types of assets and one of such assets mentioned in Sub-clause (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 the post office savings bank, the Industrial Development Bank, the authority constituted for housing accommodation, the National Housing Bank, the Cooperative Society, the Co-operative Housing Society, etc., are treated as separate and distinct assets held by an assessee. Sub-section (3) of Section 5 requires that certain types of assets including bank deposits should be held for a minimum period of six months from the valuation date for claiming the exemption under the said section. The said Sub-section (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 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.
15. 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 v. Hill [1848] 2 HLC 28. The said decision and its efficacy were considered by the Supreme Court in the case of Shanti Prasad Jain v. Director of Enforcement . It was held by the Supreme Court as under (at page 250 of 33 Comp Cas) :
"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 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 to 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 v. Hill [1848] 2 HLC 28 ; 9 ER 1002, and that has never been questioned."
16. The fact that the deposits are debts and are not equivalent to money would also be evident from the provisions of Section 3 of the Transfer of Property Act, 1882, which defines "actionable claim" to include debts. Section 130 of the Transfer of Property Act, 1882, provides how such debts 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 his assets like any other creditor and cannot claim any specific money to be paid out to him.
17. Depositing money with a 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 of the money passes on to the bank or to the debtor who is free to use it in any manner it chooses. In the case of hiring out of the car, it is a contract of bailment whereas the bank deposit is a case of a debt.
18. It has been contended on behalf of the assessee that the Central Board of Direct Taxes itself has issued a circular dated September 24, 1975, declaring that deposits for a period of six months or more could be considered as capital assets for the purposes of Section 11(1A). 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 deposit for a period of 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. 883XXI/1/74--Section 11(1A) of the Income-tax Act, 1961--'Another capital asset'-Scope of the expression.--(1) Section 11(1A) of the Income-tax Act, 1961, provided that where a capital asset, being property held under trust wholly for charitable or religious purposes 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 purposes 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 amount of the net consideration for acquiring 'another capital asset' within the meaning of Section 11(1A) of the Income-tax Act, 1961. The Board has been advised that investment of the net consideration in fixed deposit with a bank for a period of six months or above would be regarded as utilisation of the net consideration for acquiring 'another capital asset' within the meaning of Section 11(1A) of the Income-tax Act, 1961."
19. Our attention has also been drawn to the decision of the Gujarat High Court in CIT v. Ambalal Sarabhai Trust (No. 3) [1988] 173 ITR 683. In that case, the trust sold the shares and allowed 90 per cent. of the sale proceeds of the shares to remain with the buyer as a fixed deposit carrying interest and it invested ten per cent. 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 a capital asset for the purposes of Section 11(1A) 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).
20. In CIT v. Trustees of H. E. H. the Nizam's Charitable Trust , the sale proceeds of certain shares belonging to the trust were invested in the shape of deposits in banks. It was held that the net consideration of the shares had been utilised for acquiring another capital asset within the meaning of Section 11(1A).
21. 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 banker's property absolutely at its disposal. The banker receives, from or on account of customer, the money merely as the debtor of the customer with the superadded obligation to honour his customer's cheques drawn upon his balance to the extent of funds available in the customer's credit.
22. Sir John Paget's observation which was quoted by the learned single judge of the Kerala High Court in Shajahan v. ITO [1976] 104 ITR 265, is worth repetition (at page 279) :
"... When moneys are deposited in a bank, the ownership of the money passes to the bank and the 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 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 customer's 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. . . ."
23. This passage occurs in Tannan--Banking Law and Practice in India, 11th edition (page 79).
24. This is not only true of the relation between a banker and its customer in India which takes after English banking law. The same is the concept in American jurisprudence as well.
25. The following passages from paragraphs 339 and 340 at pages 301 to 304 of volume 10, American Jurisprudence, Second edition, bear out this position (at page 280) :
"Although money on deposit in a bank is commonly considered to be 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 disposed 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 savings bank account or of a depositor having a savings account, to the bank is dependent upon the nature of the bank's 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 stockholders, the relationship is practically the same as that existing between the depositor of a commercial account and the bank which runs the account, viz., that of debtor and creditor. However, where a savings bank is conducted solely for the benefit of the depositors, 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 merely that of trustee and cestui que trust or quasi-stockholder and corporation."
26. Our attention has been drawn to an unreported decision of a Division Bench of this court in CIT v. Damodar Kalyanji Memorial Trust (Income-tax Reference No. 101 of 1983, dated March 22, 1989). 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 of 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 operations. 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 moment 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 Sahib v. Rahmat Bi, ). Therefore, the two distinguishing factors : (1) lending to a person not a banker, and (2) lending by way of loan repayable the moment it is advanced, distinguish the facts of that case.
27. The circular of the Board referred to earlier accepts the fundamentals of the relation between a banker and his customer as that of creditor and debtor and the banker's property in the shape of 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 term of six months or more is a new capital asset for the purpose of Sub-section (1A) of Section 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 an asset or not is apparently not intelligible. To our 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 an immaterial consideration. The circular of the Board that is not consonant with the general principles of law cannot hold sway. The restrictive stipulation of the minimum period of six months has the effect of mutilating the concept of asset as obtaining under the Act and its cognate Act, viz., the Wealth-tax Act. What in the said circular can be called into aid is its acknowledgment of a deposit in a bank as a capital asset for the purpose of Sub-section (1A) of Section 11.
28. The Division Bench of this court in Damodar Kalyanji Memorial Trust's case dated March 22, 1989, had also an occasion to comment incidentally on the intent underlying the direction of the Central Board of Direct Taxes 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 the 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.
29. In the present case, the Board's circular permitting bank deposits for 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.
30. In the purview, the conclusion is inescapable that the net consideration of sale of any capital asset results in the conversion of the consideration into an asset when deposited in a bank and a new asset at that, within the meaning of Section 11(1A).
31. We, therefore, answer the questions in this reference in the affirmative and in favour of the Revenue.
32. There will be no order as to costs.
Shyamal Kumar Sen, J.
33. I agree.