TMI Blog1962 (8) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities: Year Holding Sale Rs. Rs. 1933 2,62,375 84,668 1934 3,85,012 72,052 1935 6,45,951 95,213 1936 9,56,935 ... 1937 16,20,718 ... 1938 25,21,278 ... 1939 31,91,375 ... 1940 34,53,785 ... 1941 69,75,176 ... 1942 1,05,56,825 23,484-6-0 1943 2,01,75,130 2,46,732-4-8 1944 3,06,99,956 1,97,205-11-0 1945 5,04,55,271 1,43,517-11-4 1946 6,22,89,842 25, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. Therefore, the bank did not actually earn any profit, and in any event the book entry made in that behalf can only be treated as capital gain. In other words, it is urged that the bank had certain surplus funds which it invested and there has been an appreciation of the investment but no actual receipt of profit. It is, therefore, argued that there has been no income which can be the subject-matter of an assessment. As was stated by Rowlatt J. in Royal Insurance Co. Ltd. v. Stephen[1928] 14 Tax Cas. 22, 28], a case where the facts were similar, that a nice question has been raised and that the argument that there was no income but merely a capital gain, is rather attractive at first sight. I shall presently deal with the decision of Rowlatt J. in that case. The first case which is to be considered is a decision of the Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax[1940] 8 I.T.R. 635 (P.C.)]. The facts in that case were as follows: The Punjab Co-operative Bank invested large amounts, mainly in India Government securities. Up to 1933, there was no sale of these securities. From 1934, the securities began to be sold. During the year 1935, the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but an act done in what is truly the carrying on, or carrying out, of a business. 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 banking business, or, in other words that it is an act done in 'what is truly the carrying on' of the banking business. Mr. Mitra has argued that in the present case there has been no withdrawal for the purpose of paying the depositors or for any purpose linked with the carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt company in that case held large investments, including a variety of British railway stocks. Under the Railways Act, 1921, the company was compelled to accept new stocks in the amalgamated companies in exchange for the stocks previously held in the companies which under the Act were either amalgamated or absorbed. The assessee had, therefore, to exchange certain British railway stocks for stocks in the amalgamated companies, with the result that at the date of exchange the market value of the shares received in exchange was less than the original cost. The company claimed that the difference should be allowed as a deduction in computing its profits. The Crown contended that the company had not actually suffered any loss and that it was merely a claim to write down the book value of investments still held. Rowlatt J. said as follows: It is said for the appellants that that is really nothing more nor less than a barter on a money basis or a barter for something which is money's worth of the old investments. That it is compulsory does not matter--numerous cases of the compulsory sales that arose in connection with the War were cited and I think that is so. That money' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there had been a realisation of the securities. The case of Californian Copper Syndicate v. Harris[1904] 5 Tax Cas. 159 and Royal Insurance Co. v. Stephen[1928] 14 Tax Cas. 22 were followed. I now come to a decision of the Supreme Court, Sardar Indra Singh Sons Ltd. v. Commissioner of Income-tax[1953] 24 I.T.R. 415 ; [1954] S.C.R. 167. The facts in that case were as follows: The appellant was a private limited company, authorised, inter alia, to carry on business undertaken by bankers, etc. The company held large number of shares in other incorporated companies and was realising some of its holdings and acquiring large blocks of shares in other companies. In the return for the assessment year 1938-39, the company showed a loss, as a result of such transactions, and this was allowed as a business loss. In the assessment year 1941-42, the company claimed that the surplus resulting from similar transactions was not taxable as it amounted to a mere change of investment and was therefore a capital gain. This contention was rejected by the income-tax authorities, which held this was assessable as profits and gains of the company's business in dealing in shares. This was uphel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y compulsion. In the matter of such exchange, where one share or security is exchanged for another, then it must be considered as a new adventure. In other words, the old holding must be deemed to have been realised, and the appreciation and the depreciation, as the case may be, can be at once quantified and must be considered as profit or loss liable to assessment. Coming now to the facts of the present case, we find from the table given above, that the bank held certain securities and from time to time sold and invested the proceeds. The fact that there was no sale between 1936-1941 when the market was low is counter-balanced by the large scale transactions between 1942-1946 when the market was high. The Tribunal held as a fact that the holding of securities by the assessee was incidental to the carrying on of its banking business. As stated by the Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax[1940] 8 I.T.R. 635 (P.C.)., the holding of securities is a normal step in carrying on the business of a bank. Banking concerns always hold easily realisable securities so as to meet probable demands of depositors. It is not at all necessary that this should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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