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TMI Blog1973 (10) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the Reserve Bank of India under section 45 of the Banking Companies Act, 1949. A scheme of amalgamation of the assessee-bank with Lord Krishna Bank Ltd. was prepared by the Reserve Bank under sub-section (4) of section 45 of the Banking Regulation Act, 1949, and after observing the formalities required by the section it was ultimately sanctioned by the Central Government under sub-section (7) of section 45 by order dated 7th October, 1965. A copy of this scheme is annexure " A ". By another order dated 7th October, 1965, the Central Government specified 13th October, 1965, as the prescribed date in relation to the aforesaid scheme for the amalgamation of the assessee-bank with Lord Krishna Bank Ltd. That order is annexure " B ". Under the scheme of amalgamation Lord Krishna Bank Ltd. was to take over the " selective assets " of the assessee-bank and undertake the discharge of its liabilities. Lord Krishna Bank Ltd. was also to take over the investments of the assessee-bank inclusive of Government securities. Sub-clause (a) of clause 4 of the scheme provided for the valuation of such investments at the market value prevailing on the day immediately preceding the prescribed dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claims exemption from taxation for its income by way of interest on securities as business profits or any loss on sale of such securities as business loss the burden would be on it to establish that such securities are its stock-in-trade, that the purchases and sales of such securities are effected as a normal step in carrying on the banking business, as for example, where securities are sold to meet withdrawals by depositors ; and (iv) in the absence of such evidence, the presumption is that such securities are held as investments." Counsel for the assessee has also taken us through a number of decisions and various aspects have been elaborately placed before us. As a result of the discussions at the Bar we think three questions arise for consideration before us and they are : (1) whether a banking company holding Government securities or other valuable securities considering the nature of its business, and the obligations cast on such an institution by the Banking Regulation Act, 1949, and by virtue of the definition of the term " banking " in the Act can be said prima facie to hold those securities as stock-in-trade ? (2) whether when such securities are realised the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or not. Even in the absence of any such statutory provisions the Judicial Committee of the Privy Council had no duty in coming to the conclusion that such transactions by banking institutions will be in the nature of business. We may extract a passage from the decision of the Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax: " In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If, as in the present case, some of the securities of the bank are realised in order to meet withdrawals by depositors, it seems to their Lordships to be quite clear that this is a normal step in carrying on the bankin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see by the sale of its securities to Lord Krishna Bank Ltd. must be reflected in the accounts of the company for computing its income. Now we turn to the third and the last point which raises a more difficult question. It is argued by counsel for the revenue that the scheme as a result of which the securities were transferred to Lord Krishna Bank Ltd. is not a business transaction, that it was not a transaction in the course of trade, that it was a transaction of self annihilation, a transaction which cannot give rise to any profit or loss in business. There is a passage in the judgment of Lord Phillimore in William Richard Doughty v. Commissioner of Taxes, which reads as follows : " Income-tax being a tax upon income, it is established that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books, does not give rise to a profit taxable to income-tax. It is easy enough to follow out this doctrine where the business is one wholly or largely of production. In a dairy farming business or a sheep-rearing business where the principal objects are the production of milk and calves or wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m rise of prices are to be included in valuation at end of period. (4) Where the rights of third parties do not intervene, considerable latitude is allowed. "Hence the strict meaning of the word 'profits' is rarely observed in drawing up the accounts of firms or companies. " (per Fletcher Moulton L.J. at page 99). (5) Profits exist in kind as well as in cash. (6) Realisation is only the conversion of profits in kind into profits in cash. Ronan L.J. made the following observations in J. &. R. O'Kane & Co. v. Commissioners of Inland Revenue : " A man not in business buys a library for his own use. One year afterwards he sells it at an enormous profit, owing to increase of prices. This is plainly not within the Acts. A picture dealer shuts up his shop. He has a valuable stock of pictures. He sells most by auction, but keeps some of great value for himself. The value of the whole at the end of a period while the shop is open, less the value at the beginning and less deductions, is a profit arising from the business. Prices go up when he is no longer in business. After some time he sells those he has kept at a great profit. This is not profit arising from a trade or business. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As a result of the amalgamation the ultimate realisation of the securities would be by Lord Krishna Bank if it becomes necessary and the discharges of the liabilities of the assessee-bank would also be by Lord Krishna Bank. But, by the conversion of the securities for a fixed value the bank was making available to the transferee-bank, Lord Krishna Bank, money to the extent of the value of the securities, to the transferee-bank to discharge the liabilities of the assessee-bank. This spells two things : (1) the realisation of the securities by the assessee-bank, and (2) a business transaction to tide over a difficulty arising out of the business of the assessee and the utilisation of the securities by the assessee-bank for the purpose for which they were intended and intended by the Act as well in the interests of the general public ; in cases of dire need such as that was faced by the assessee-bank when it asked for a moratorium to convert the securities into cash for meeting the liability. We hold that the transaction is a business transaction in the course of business. The fact that the assessee practically ceased to do business simultaneously does not alter the character or the n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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