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Issues Involved:
1. Whether the loss of Rs. 21,770 suffered by the corporation on the sale of securities was rightly treated as a capital loss. Issue-wise Detailed Analysis: 1. Nature of Loss: Trading Loss vs. Capital Loss The primary issue was whether the loss amounting to Rs. 21,770 sustained by the assessee (the Rajasthan Financial Corporation) as a result of the sale of certain Government securities between May 8, 1958, and May 25, 1958, could be treated as a trading loss or a capital loss. The Income-tax Officer initially disallowed the claim, observing that the corporation did not deal in securities and its primary objective was to grant loans to industrial undertakings. Hence, the loss was deemed a capital loss. The Appellate Assistant Commissioner, however, noted that the corporation's business was analogous to that of a banking concern and that it had to keep its funds in easily realisable securities. He concluded that the loss should be allowed as a revenue loss despite being shown as an investment in the balance sheet. The Income-tax Appellate Tribunal disagreed with the Appellate Assistant Commissioner, holding that the corporation could not be regarded as carrying on banking business. The Tribunal reasoned that the investment in securities was due to excess capital not immediately needed by the corporation and not because of the peculiar nature of its business. Consequently, the Tribunal held the loss to be a capital loss. 2. Arguments by the Corporation Mr. M. D. Bhargava, representing the corporation, argued that the corporation was engaged in a business analogous to banking, and thus its investments in securities should be regarded as stock-in-trade. He contended that the loss in the value of the stock-in-trade should be treated as a business loss. He further argued that the Tribunal's observations were more relevant to commercial banking than to development banking, which was the nature of the corporation's business. 3. Legal Precedents and Definitions The court referred to the characteristics of banking as laid down in United Dominions Trust Ltd. v. Kirkwood and the statutory definition of "banking" under section 5(1)(b) of the Banking Companies Act, 1949. The court concluded that the corporation was not conducting banking business as commonly understood. The court also considered the principles laid down in Punjab Co-operative Bank Limited v. Commissioner of Income-tax and Sardar Indra Singh & Sons Ltd. v. Commissioner of Income-tax. The test was whether the sale of securities was connected with the assessee's business, making the loss a trading loss. 4. Analysis of Facts and Circumstances The court examined the corporation's financial activities and obligations, noting that the corporation had substantial loan commitments and minimal cash on hand. The sale of securities was necessitated by the need to disburse sanctioned loans. The court reviewed the managing director's letter and annual reports, concluding that the sale of securities was closely linked to the corporation's business of advancing loans to industrial concerns. 5. Statutory Functions and Business Principles The court referred to the relevant provisions of the State Financial Corporations Act, 1951, emphasizing that the corporation's primary function was to support industrial concerns. The directive from the Government underscored the need to manage investments prudently to avoid frequent sales or borrowing against securities. Conclusion The court held that the sale of securities was necessitated by the corporation's business requirements and was not merely a change of investment. The loss incurred was, therefore, a trading loss. The court answered the question in the negative, indicating that the loss should not be treated as a capital loss. Question answered in the negative.
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