TMI Blog1966 (8) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... year being the financial year 1958-59. The facts of the matter were as follows : The corporation was established by the State Government in exercise of its power under section 3 of the State Financial Corporations Act, 1951, hereinafter to be referred as the "Act ", in the year 1955. In accordance with the provisions of the Act, the corporation was a body corporate and it had an authorised capital of rupees two crores and its subscribed capital was rupees one crore. 95.45 per cent. of the issued capital has been subscribed by the State Government, the Reserve Bank and the scheduled banks, while the balance 4.55 per cent. of the issued shares have been subscribed by private persons. Thus the corporation is a public undertaking in every sense of the term. The corporation commenced advancing loans in the financial year 1955-56 and the position of the advances made by it up to the end of the assessment year was as per sub-joined statement: -------------------------------------------------------------------------------------------------------------------------------------------------- Assessment Previous Loans Proposals Year advanced received sanctioned rejected ------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt loans to the industrial undertakings. Hence, the loss claimed is disallowed, being a capital loss. The corporation then went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner noted that the corporation was brought into being as a part of the scheme to establish financial corporations in different States for advancing or guaranteeing loans to industries and the nature of the business was analogous to that of a banking concern and it had to keep its funds in easily realisable securities and he observed that the corporation had to dispose of the securities as it was necessary for meeting its obligations. The Appellate Assistant Commissioner took note of what was laid down in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, and came to the conclusion that, having regard to the nature of the corporation's business, the loss in question deserved to be allowed as revenue loss in spite of the fact that in the balance-sheet of the corporation it has not been shown as stock-in-trade, but only as an investment. In the result, the Appellate Assistant Commissioner accepted the appeal and ordered that the total income of the corporation b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevance of the dicta laid down in Punjab Co-operative Bank's case as affirmed by the Supreme Court in Sardar Indra Singh's case, in its view the necessary conditions for their application were not satisfied by the facts disclosed in the present case. According to the Tribunal, (i) the investment in securities was in respect of the unutilised excess capital not immediately needed by the corporation ; (ii) the investment could have been avoided and instead capital could have been called as reasonably needed ; and (iii) the immediate cause for the sale of the securities was not to meet any business liability, but only to avert further loss in the value of the securities and to earn higher interest. In a nutshell, according to the Tribunal, neither the initial investment in securities nor their subsequent sale could be said to have been actuated by the exigencies of business. In the result, the Tribunal held that the loss claimed by the corporation was not a trading loss but a capital loss and consequently it set aside the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. Mr. M. D. Bhargava, appearing for the corporation, has strongly cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) of the Banking Companies Act, 1949, defines " banking " as " accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheques, draft or otherwise. " We are, therefore, unable to hold that the corporation was doing a banking business as commonly understood. At best, it may be regarded as doing business analogous to that of a banker in some particulars. However, this is immaterial for the purposes of the present reference, as the Tribunal has itself recognised that the true test was to find out whether the sales of securities were connected with the assessee's business so that the same could be regarded as a trading loss. In Punjab Co-operative Bank Limited v. Commissioner of Income-tax, the Punjab-Co-operative Bank Limited had made certain profits on the sales of investment. The bank contended that the profits it had derived were not in the nature of income, but in the nature of capital gain and thus were not taxable. The income-tax department, on the other hand, contended that the investments were intimately connected with the running of banking business and thus the profits earned as a resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year in which the securities were sold, the corporation had only rupees two lakhs in deposit with the banks and only Rs. 25,000 in cash. At the same time, it had to grant substantial loans during that year and, therefore, if with a view to discharge its primary functions of advancing loans to industrial concerns it had to sell its securities, then such a sale was closely related to the carrying on of the business of the corporation. Mr. Bhargava points out that the Tribunal has not properly appreciated the letter of the managing director dated May 25, 1957, inasmuch as it has completely overlooked what was mentioned in the opening paragraph of the letter. He has also invited us to go through the annual reports of the corporation for the relevant years and he submits that these reports had not been considered at all by the Tribunal. Mr. Chandmal Lodba for the income-tax department, on the other hand, submits that the securities were sold as their value was going down and the corporation wanted to earn more interest as the new loans would carry higher rate of interest. He also submits that when the investments were made in the beginning, it was out of the surplus capital of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the financial corporation may invest its funds in the securities of the Central Government or of any State Government. It appears that in order to ensure that the corporation works on sound business principles as contemplated by section 24 of the Act, the Government issued a directive to it by its order dated July 15, 1957, available at page 52 of the record. This was done by the Government in exercise of its powers under section 39 of the Act. It was directed that the corporation should so arrange their investment of surplus funds that they may not have to sell their investments or to borrow frequently against them. it was further noted that the loans from the Reserve Bank were to be repaid within 90 days and the corporation, in the nature of things, may have to sell securities which, under the existing market conditions, may cause capital loss to them. It was, therefore, desired that a working balance in such short term deposits with banks up to about a year's requirement of funds by the corporation would be desirable. Accordingly, it was stresssed that investments in Government securities should be made with due care to avert capital depreciation and, in view of the typ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregated to Rs. 46, 74,000 out of which Rs. 30, 07,000 had to be disbursed. It was further anticipated that loans worth Rs. 25,00,000 might be sanctioned during the current year (viz., 1957-58). As such, the total loans to be advanced were to amount to Rs. 70 lakhs. As against these sanctioned loans, it was expected that about Rs. 38 lakhs were likely to be disbursed during the current financial year. At the time Rs. 18 lakhs were in deposit with the banks and, therefore, the corporation required Rs. 20 lakhs more for disbursement during the year. It was in this background that it was proposed that the corporation should sell its securities. Out of the several securities, those bearing lowest interest were chosen, namely, National Bonds Second Series (1965), which carry 3 1/2 per cent. interest. It was, after noting these facts, that it was observed as follows: " We, therefore, propose that the bonds may be sold gradually and the proceeds may be invested by us in short term deposits with banks for the time being and when new loans are floated, we may invest Rs. 10 lakhs in such loans, as we hope the new loans may carry higher rate of interest. Formerly our short deposits wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but this again is nothing but a proposal for utilisation of money if it ever were to remain unutilized after disbursement of the sanctioned loans. In dealing with the case of the corporation, one cannot legitimately ignore the statutory functions that it has to discharge, that is, of helping industrial concerns and in doing so it has to have due regard to the interest of the industry, commerce and the general public. It has not been provided that the avowed object of the corporation was money-making as such, though in trying to advance loans to the industries it would certainly earn interest. This is an important activity that the State has undertaken to help industrial growth in the State and, therefore, we cannot impute such motives to it as animate a private financier or a money-lender. Functions envisaged under section 25 of the Act are nothing but the activities of a Welfare State and, therefore, the corporation could not put off the question of disbursing sanctioned loans by waiting for the investment in securities to mature. In this context we are satisfied that the sale of the securities was closely linked up with the business of the corporation, so that, according to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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