1962 (8) TMI 107 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 6,09,412-10-3, representing the difference between the 3% Government Conversion Loan of 1946 at par and the cost of Government securities held by the assessee and converted in 1946, is assessable income or a capital gain.

Issue-wise Detailed Analysis:

1. Nature of the Transaction:
The primary issue is whether the difference of Rs. 6,09,412-10-3, arising from the conversion of 3 1/2 % Government Promissory Notes to 3% Government Conversion Loan of 1946, constitutes assessable income or capital gain. The assessee, a banking corporation, argued that this amount should be considered a capital gain, as the bank did not deal in securities and was compelled to accept the new securities issued by the Government, thus not earning any profit.

2. Judicial Precedents:
The judgment referenced several key cases to determine the nature of the transaction:
- Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax: Established that profits realized from the sale of investments could be taxable if done in the course of carrying on a business.
- Californian Copper Syndicate v. Harris: Held that enhanced values from the realization or conversion of securities are assessable if done in the course of business.
- Royal Insurance Company Ltd. v. Stephen: Determined that compulsory exchanges of securities are considered a realization of the original holdings, thus assessable as income.
- Westminster Bank Ltd. v. Osler: Affirmed that the exchange of securities constitutes a realization of profits, making the gains assessable.
- Sardar Indra Singh & Sons Ltd. v. Commissioner of Income-tax: Emphasized that profits from sales connected with the business are assessable as income, regardless of whether a separate business of dealing in investments exists.

3. Application of Principles:
The court applied the principles from these precedents to the facts of the case:
- The bank's transactions in securities were incidental to the carrying on of its banking business.
- Holding and selling securities is a normal step in banking, as banks need to maintain easily realizable assets to meet probable demands from depositors.
- The Tribunal found that the bank's holding of securities was consistent with normal banking operations and varied from year to year.

4. Conclusion:
Based on these principles and the facts, the court concluded that the holding, selling, and reinvestment of securities by the bank were all done in the ordinary course of business. Therefore, the appreciation in value must be considered as profit, which is assessable as income.

Final Judgment:
The sum of Rs. 6,09,412-10-3, representing the difference between the 3% Government Conversion Loan of 1946 at par and the cost of Government securities held by the assessee and converted in 1946, is assessable income of the assessee and not a capital gain. The assessee was ordered to pay the costs of the Commissioner of Income-tax, certified for two counsel.

Agreement:
The judgment was agreed upon without separate opinions from the judges involved.