V. Balakrishna Eradi, C.J:— I.T.R No. 156 of 1977 is a reference made by the Income-tax Appellate Tribunal, Cochin Bench (hereinafter called “the Tribunal”), under s. 256(2) of the I.T Act, 1961 (for short “the Act”), pursuant to a direction issued by this court as per the judgment dated August 16, 1977, in O.P No. 820 of 1977. The questions referred are:

“(1) Whether, on the facts and in the circumstances of the case, disallowance of Rs. 54,206 including interest of Rs. 48,374 paid to the Canara Bank on the borrowings from them from the income of the firm was correct and whether at least to the extent of the income earned, the expenditure including interest should not have been allowed?

(2) Whether, on the facts and in the circumstances of the case, the bank was not carrying on business and whether it was not entitled to carry forward the loss?”

2. The assessee—The S.P.V Bank Ltd.—was carrying on business in banking till April 27, 1963, on which date the banking business of the assessee was taken over by M/s. Canara Bank Ltd. All the business assets and liabilities of the assessee were not taken over but only certain selected assets and liabilities were taken over by the Canara Bank. Under the said arrangement, the Canara Bank took over liabilities in excess of assets to the tune of Rs. 28 lakhs and this amount was shown as due from the assessee to the Canara Bank in the books of the assessee as well as in the books of the Canara Bank. After the take over of the banking business the assessee could not and did not make any fresh advances or receive deposits which are the normal activities in the business of banking. The only activity performed by the assessee-company thereafter was to take steps for the realisation of the amounts outstanding by way of advances made by them to various parties prior to the take over and to utilise the amounts so collected to reduce the liability due to the Canara Bank. During the accounting period relevant for the assessment year 1974-75, with which this reference case is concerned, the assessee had received income amounting to Rs. 320 by way of interest on advances that had been made by it prior to the date of take over. As against the said income, the assessee claimed a deduction of expenditure amounting to Rs. 54,206, out of which Rs. 48,374 represented the interest due to the Canara Bank and the balance amount consisted of other sundry expenses. The assessee's claim was that the entire expenses should be treated as business expenditure. The ITO rejected the said claim put forward by the assessee. On appeal filed by the assessee, the AAC, Trivandrum, took the view that the assessee was entitled to have the interest payment made to the Canara Bank allowed in full and it was also entitled to the benefit of carrying forward the consequential loss. The assessee's appeal was accordingly allowed by the AAC. The department took up the matter in further appeal before the Tribunal. The Tribunal held that in merely taking steps to collect the outstanding arrears of advances the assessee was not carrying on any business activity and hence the assessee was not eligible for the deduction claimed by way of business expenditure. In this view, the Tribunal allowed the department's appeal and restored the order of the ITO.

I.T.R No. 20 of 1978

3. For the succeeding assessment year, 1975-76 the assessee put forward an identical claim for deduction in respect of Rs. 28,793 representing interest due to the Canara Bank Ltd. The said claim was disallowed by the ITO and that was confirmed by the AAC since by that time the Tribunal had already rendered its decision on the point in respect of the earlier assessment year (1974-75). Though the assessee took up the matter in second appeal before the Tribunal that appeal was dismissed by the Tribunal following the decision already rendered by it in respect of the prior assessment year. At the instance of the assessee, the Tribunal has referred to this court the following question of law under s. 256(1) of the Act:

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the assessee was not carrying on banking business and hence not entitled to the deduction of Rs. 28,793 being interest due to Canara Bank Ltd.?”

4. The assessee was carrying on only the business of banking. The clear finding of fact entered by the Tribunal is that the entirety of the banking business of the assessee was taken over by M/s. Canara Bank on April 27, 1963, and after the said date the assessee could not and did not make any fresh advances or receive deposits which are the normal activities in banking business. It is further found by the Tribunal that after the date of take over the only activity of the assessee-company was to take steps for the realisation of amounts outstanding from parties in repayment of advances made to them during the period when the assessee was carrying on the business of banking prior to the date of take over and to utilise the amounts so collected to reduce the liability due to the Canara Bank.

5. The short point to be decided is whether in taking such steps for collection of old outstandings the assessee could be said to have been carrying on business so as to be entitled to claim a deduction of the amounts paid by way of interest to the Canara Bank Ltd. as expenditure laid out or expended wholly and exclusively for the purpose of the business and to carry forward the resultant loss. In order to sustain a claim for deduction by way of business expenditure the expenditure must have been incurred for the purpose of a business which was in existence in the year of account, the profits of which are under assessment. If during the relevant period there was, in fact, no business, no question of computation of its income after deduction of expenses can possibly arise. In the case before us the only business that the asssssee-company had been carrying on was that of banking and the Tribunal has found it as a fact that after April 27, 1963, on which date the banking business of the assessee was taken over by M/s. Canara Bank Ltd., the assessee did not carry on the business of banking. Counsel appearing for the assessee relied strongly on certain observations of Lord Sumner in South Behar Railway Co. Ltd. v. IRC, [1925] AC 476 : 12 TC 657 (HL) as supporting his contention that the assessee-company must be legally held to have continued to carry on business as long as it is engaged in collecting debts periodically falling due to it in the course of its former business.

6. In CIT v. Lahore Electric Supply Co. Ltd., [1966] 60 ITR 1, an identical contention was put forward before the Supreme Court and it was rejected by Sarkar J. with the following observations (p. 6.):

“Some reliance was placed in this connection on an observation of Lord Sumner in Commissioners of Inland Revenue v. South Behar Railway Co., [1925] 12 TC 657, 712 (HL). There Lord Sumner observed: ‘If, as was held in In re Dagnall, [1896] 2 QB 407 (QB), a married woman continues to carry on business for the purpose of 45 and 46 Vict., c. 75, section 1(5), as long as her trade debts remain undischarged, there would seem to be a presumption that a company continues to carry on business as long as it is engaged in collecting debts periodically falling due to it in the course of its former business'. We are unable to hold that Lord. Sumner intended to lay down that a business which is closed down is deemed to be carried on so long as its outstandings are being collected. South Behar Railway's case, [1925] 12 TC 657 (HL), was concerned with a financing compay whose only activity after the finances had been furnished was to receive from the Government by way of profits of the financing activity, earlier a certain proportion of the net earnings of the undertaking financed which was being managed by the Government and later a fixed sum and to receive from the Government the finance supplied when the Government acquired the undertaking as it intended to do. All that Lord Sumner intended to say was that the receipt of the moneys was the business of the company and its only business after the financing had been completed. He was not concerned with the case of a closed businees whose outstandings were being collected.”

7. It is thus clear that the observations of Lord Sumner relied on by the counsel for the assesse can have no application to a case like the present one where the assessee-company was engaged only in the activity of realisation of certain outstandings which pertained to the banking business that had been already discontinued by it. In our opinion, the aforesaid pronouncement of the Supreme Court is clear authority for the position that by merely taking steps for the realisation of old outstandings or for payment of the liabilities of a closed business it cannot be said that the assessee-company was carrying on business. It is settled law that when a liquidator of a company is merely realising the assets of the company he cannot be said to be carrying on any business [See Liquidators of Pursa Ltd. v. CIT, [1954] 25 ITR 265 (SC) and CIT v. West Coast Chemicals and Industries Ltd., [1962] 46 ITR 135 (SC)]. The following observations of the Lahore High Court made in a very early case reported in Executors of the Estate of Lala Shankar Shah v. CIT, [1945] 13 ITR 500, 509 may also be usefully extracted:

“Counsel for the department has further urged that inasmuch as outstandings of the money-lending business were realised by the executors, they should be taken to have carried on the business of money-lending too. It is, however, conceded by him that beyond realising the outstanding debts, nothing further was done by the executors and no new loans were advanced. In these circumstances, we do not consider that it can be reasonably argued that in merely collecting the outstanding dues, any business on money-lending was being carried on by the executors.”

8. The conclusion that emerges from the foregoing discussion is that the Tribunal was perfectly right in holding that during the accounting periods relevant for the two assessment years the assessee had not carried on any business activity and as a consequence the assessee was not entitled to any deduction by way of business expenditure or to carry forward the loss. We, accordingly, answer question No. 1 referred in I.T.R No. 156 of 1977 in the affirmative and question No. 2 in the negative, both the questions being answered against the assessee and in favour of the department. The question referred in I.T.R No. 20 of 1978 is answered in the affirmative, that is, against the assessee and in favour of the department. The parties will bear their respective costs.

9. A copy of this judgment under the seal of the court and the signature of the Registrar will be forwarded to the Tribunal as required by law.