D.N.SINHA, J. - (1.) THIS is a reference under s. 66(2) of the Indian IT Act. The facts are as follows : The assessee in this case is the Comilla Banking Corporation Ltd., Calcutta (United Bank of India Ltd.). The said Comilla Banking Corporation Ltd., (hereinafter referred to as the "bank") was incorporated under the Indian Companies Act, 1913, in the year 1914. In December, 1950, it was amalgamated with the United Bank of India Ltd. under s. 44A of the Banking Companies Act, 1949. The bank invested its surplus funds in Government securities. The bank sold securities and shares held by it and made new investments. In order to get a proper picture of the transactions, I set out below a table, being annexure "A" to the statement of the case.
(2.) STATEMENT of Holding and Sale of Securities : In the course of these transactions, the said bank acquired from time to time certain 3 1/2per cent Government Promissory Notes of the face value of Rs. 1,88,37,300 at a cost price of Rs. 1,82,27,887. In the year 1946, the Government of India converted certain 3 1/2per cent Government Promissory Notes, including those held by the said bank as aforesaid, into 3per cent Government Promissory Notes styled as "3per cent Government Conversion Loan of 1946". This was effected under notification No. D/4767/- B/46 dated the 24th May, 1946. The holders of the five kinds of 3 1/2per cent loan mentioned therein were given the option of converting their holdings either into 3per cent Conversion Loan of 1946 redeemable at par on 16th Sept., 1986, or in 2 3/4per cent loan 1976 issued at Rs. 99per cent and redeemable at par on 16th Sept., 1976. The bank thereupon surrendered the said 3 1/2per cent Government Promissory Notes of the face value of Rs. 1,88,37,300 and secured from the Government a fresh set of promissory notes of the same face value, bearing interest at 3per cent. In their account books, the bank showed the transactions in the following manner. They showed the 3per cent Conversion Loan of 1946 at its 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 23,484-06-0 1943 2,01,75,130 2,46,732-04-8 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 25,438-00-0 face value of Rs. 1,88,37,300 instead of the cost value of Rs. 1,82,27,887 and the balance of Rs. 6,09,413 was transferred to reserve. In making assessment of the income-tax in respect of the year 1947-48, the ITO treated the said amount of Rs. 6,09,413 as the business income of the assessee. The assessee contended that the amount was not taxable under the Indian IT Act, being capital gains in the hands of the company. This contention was rejected. The view of the ITO was upheld by the AAC and also by the Tribunal. Ultimately, the following question has been referred : "Is the sum of Rs. 6,09,412-10-3 representing the difference between 3per cent Government Conversion Loan of 1946 at par and the cost of Government securities held by the assessee and so converted in 1946 assessable income of the assessee or a capital gain ?" The argument on behalf of the assessee is quite simple. It is argued that the bank did not deal in securities and, in any event, there was no sale of securities but the appellant was compelled to give up the securities held previously and to accept the new securities issued by the Government. 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. vs. Stephen (1928) 14 Tax Cases 22, 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. vs. CIT (1940) 8 ITR 635 (PC). 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 company took advantage of the high prices prevailing and some 10 lakhs of Government securities were sold. The difference between the cost price of the investment and the price at which they were sold amounted to Rs. 1,42,588. The bank contended that this profit did not form a part of the profits of business because the securities were considered as a reserve for emergencies and in 1935, a portion of it was sold to meet heavy withdrawals of deposits and to deposit Rs. 2,66,000 with the Reserve Bank of India under the provisions of s. 42(1) of the Reserve Bank of India Act, 1934. It was contended that the bank did not deal in shares and securities and that the profit was capital gains and as such not taxable. The CIT held that the bank was liable to assessment for the profit which it made in 1934. The Judicial Committee stated as follows : "This may well be the correct view and a sufficient ground for dismissing this appeal; but their Lordships do not wish to give any support to the contention that in order to render taxable profits realised on sales of investments in such a case as that before them it is necessary to establish that the taxpayer has been carrying on what may be called a separate business either of buying or selling investments or of merely realising them.
(3.) THE principle to be applied in such a case is now well settled. It was admirably stated in a Scottish case, Californian Copper Syndicate vs. Harris (1904) 5 Tax Cases 159, and the statement has been more than once approved both in the House of Lords and in the Judicial Committee : see, for example, Commissioners of Taxes vs. Melbourne Trust Ltd. (1914) AC 1001, Some dicta which appear to support the view that it is necessary to prove that the taxpayer has carried on a separate or severable business of buying and selling investments with a view to profit in order to establish that profits made on the sale of investments are taxable, for example, the dicta in the case of IRC vs. Scottish Automobile and General Insurance Co. (1931) 16 Tax Cases 381. cannot now be relied on. It is well established to cite the exact words used in Californian Copper Syndicate vs. Harris (supra), that enhanced values obtained from realisations or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, 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." ;