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TMI Blog1984 (7) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... whose activity is regulated, inter alia, by the Banking Regulation Act, 1949. Section 24 of the Banking Regulation Act, 1949, requires every banking company to " maintain in India in cash, gold or unencumbered approved securities, valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than 20 per cent. of the total of its time and demand liabilities in India. " In accordance with the said provision, the assessee has been investing various amounts in Government securities. It has been redeeming the same as and when they get matured, and the difference, if any, was being returned by it under the head " Capital gains ". The Revenue has been accepting this practice over certain years in the past. For the assessment year 1971-72, however, the Revenue took a different stand holding that the difference is liable to be taxed as income from the business of the assessee. This was disputed by the assessee and the matter came up to the Tribunal. The Tribunal held following its order in ITA No.1073 (Hyderabad) 74/75, dated April 12,1977, that the difference represents revenue and is taxable as the business income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade. Every prudent banker would necessarily keep certain portion of deposits in cash with him to enable him to honour any possible demands of depositors at any given point of time. Indeed, he is expected to do so. This normal prudent business principle has been given statutory recognition by s. 24 of the Banking Regulation Act, 1949, in the interest of the public and the larger interest of banking industry itself. The amount which is required to be kept in India in the form of cash, gold or unencumbered securities is part of the stock-in-trade of the assessee. Mr. Srinivasa Murthy, learned counsel for the assessee, could not dispute that, if the assessee had voluntarily kept a portion of its deposits in India (partly or wholly in the shape of unencumbered approved securities), any difference accruing on the maturing/redeeming of securities would have constituted its business income and not a capital gain; his whole emphasis is on, what he calls, the statutory compulsion imposed by s. 24(1). The submission is that, inasmuch as the assessee is obliged to keep a portion of stock-in-trade in India in the shape of cash or gold or securities by virtue of a statute and thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the securities are realised in order to meet withdrawal by depositors, it is a normal step in carrying on banking business ; and that, therefore, income arising from engagement (sic) of securities would be its income. It was observed that it is not necessary for this Purpose that the bank should be engaged in a separate business of buying or selling securities. It held that the purchase of securities in that case was so linked with the deposits and withdrawal by customers that it constituted a part of the assessee's income from banking, and hence, profits arising therefrom, were assessable to income-tax. The principle of this decision was reiterated by the Supreme Court in Sardar Indra Singh and Sons Ltd. v. CIT [1953] 24 ITR 415. That was, no doubt, not a case of a banking company, but the assessee there in was carrying on business, inter alia, of bankers and financiers. The assessee--a limited company-was empowered to purchase or otherwise acquire, and to sell stock, share, business concerns and undertakings and to invest and deal with the monies of the company not immediately required for its business upon such securities and in such manner as might from time to time be determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of carrying on of its business. It needs no reiteration that a banking company has to carry on its business in accordance with the provisions of the Banking Regulation Act, 1949; and the business so carried on is the normal and usual method of carrying on banking business. As we have pointed out above, s. 24 does not even compel a banking company to necessarily invest moneys in approved securities and that it is open to a banking company to keep the said amount in the shape of cash itself. However, if it chooses to put money in unencumbered approved securities, it is only one mode of keeping a portion of its deposits in ready cash or readily-convertible-into-cash securities. Any income arising from such securities must be held to be closely connected with the banking business so as to constitute its business income. It is brought to our notice that the Kerala High Court has taken an identical view in Malabar Co-operative Central Bank Ltd. v. CIT [1975] 101 ITR 87. Malabar Co-operative Central Bank Limited the assessee concerned therein-was also governed by the Banking Regulation Act, 1949. It was required to keep 1/5th of its assets in the form of securities on any given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk, AIR 1929 Mad 387 [FB], upon which strong reliance has been placed by the learned counsel for the assessee. In this case, a co-operative society carrying on banking business was required by law to keep fluid assets to the extent of 40 per cent. of its total liabilities in the form of Government securities. The question that arose was whether the income arising from the sale or enactment of securities constitutes its business income. The Madras High Court held that it does not, for the reason that it is not a part of the business of the co-operative society to invest in securities. While, this case undoubtedly tends to support the proposition urged by the assessee, we find it not possible to apply or follow its principle for it is directly in conflict with the principle of the decision of the Supreme Court in Sardar Indra Singh's case [1953] 24 ITR 415 as also the decision of the Privy Council in Punjab Co-operative Bank's case [1940] 8 ITR 635 (PC). We are of the opinion that the view taken by the Full Bench does not represent the correct view of law. A similar view has been taken by us in the case of A. P. State Financial Corporation, R.C. No. 230 of 1978 dated July 5, 1984 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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