1973 (10) TMI 8 - HC - Income Tax

Banking Regulation Act 1949 - Whether on the facts and in the circumstances of the case the Tribunal was correct in holding that the assessee-company s claim for deduction of a sum of Rs. 55, 545 being the difference between the book value of the Government securities held by the assessee and the value at which they were taken over by Lord Krishna Bank Ltd. on the amalgamation of the assessee with the said bank has been rightly rejected by the Income-tax Officer ? - The fact that the assessee practically ceased to do business simultaneously does not alter the character or the nature of the transaction. The sum of Rs. 55, 544.05 therefore should have been deducted from the other business income of the assessee computed by the authorities. - We answer the question referred to us in the negative that is in favour of the assessee and against the department.

Summary

Issues Involved:
1. Whether the Government securities held by the assessee-bank were stock-in-trade.
2. Whether the profits or losses from the realization of such securities can be considered as business profits or losses.
3. Whether the profits or losses arising from the transfer of securities under an amalgamation scheme can be considered business income or loss.

Detailed Analysis:

1. Whether the Government securities held by the assessee-bank were stock-in-trade:
The court examined whether the Government securities held by the assessee-bank could be considered stock-in-trade. The Tribunal had concluded that merely because securities are held by a banking company, it cannot be said that they are ipso facto its stock-in-trade. The court referred to the statutory provisions of the Banking Regulation Act, 1949, which mandates the holding of securities by banking companies. Section 6(1)(a) and Section 24 of the Act were particularly noted, showing that dealing in securities is part of the banking business. The court concluded that the securities held by the bank must be treated, prima facie, as stock-in-trade of the assessee.

2. Whether the profits or losses from the realization of such securities can be considered as business profits or losses:
The court referred to various decisions and legal commentaries to determine whether the realization of securities by a banking company could be considered a business transaction. It cited the Supreme Court's observation in Bihar State Co-operative Bank Ltd. v. Commissioner of Income-tax, which stated that investing money in readily available securities is a normal mode of carrying on banking business. The court also referred to Kanga and Palkhivala's commentary on the Income-tax Act, which supports the view that a banker's dealings in securities are in the course of his business. Consequently, the court held that the loss suffered by the assessee from the sale of its securities to Lord Krishna Bank Ltd. must be reflected in the accounts of the company for computing its income.

3. Whether the profits or losses arising from the transfer of securities under an amalgamation scheme can be considered business income or loss:
This issue was more complex. The court examined whether the transfer of securities to Lord Krishna Bank Ltd. under the amalgamation scheme was a business transaction. The revenue argued that it was not a business transaction but a transaction of self-annihilation. The court referred to the Judicial Committee's decision in William Richard Doughty v. Commissioner of Taxes and the concept of a "slump transaction." The court found that the sale of securities was not a slump transaction, as separate values were fixed for the securities at the market rate. The court concluded that the sale of securities was a business transaction aimed at discharging the liabilities of the assessee-bank. The transaction was considered a business transaction in the course of business, and the sum of Rs. 55,544.05 should have been deducted from the other business income of the assessee.

Conclusion:
The court answered the question referred to it in the negative, in favor of the assessee and against the department. The sum of Rs. 55,544.05 should have been deducted from the other business income of the assessee. The judgment emphasized that the realization of securities by a banking company under statutory obligations is a business transaction, and the resulting profits or losses must be treated as business income or loss.