Govindan Nair, C.J.
1. The Income-tax Appellate Tribunal, Cochin Bench, has referred the following question of law for our opinion :
' 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 '
2. The assessee, the Josna Bank Ltd., was a banking company which carried on business till the 12th October, 1965. On account of financial difficulties, it was given the benefit of moratorium on and from June 12, 1965, by the Central Government on the recommendation made by the Reserve Bank of India under Section 45 of the Banking Companies Act, 1949. A scheme of amalgamation of the assessee-bank with Lord Krishna Bank Ltd. was prepared by the Reserve Bank under Sub-section (4) of Section 45 of the Banking Regulation Act, 1949, and after observing the formalities required by the section it was ultimately sanctioned by the Central Government under Sub-section (7) of Section 45 by order dated 7th October, 1965. A copy of this scheme is annexure 'A'. By another order dated 7th October, 1965, the Central Government specified 13th October, 1965, as the prescribed date in relation to the aforesaid scheme for the amalgamation of the assessee-bank with Lord Krishna Bank Ltd. That order is annexure ' B'. Under the scheme of amalgamation Lord Krishna Bank Ltd. was to take over the ' selective assets ' of the assessee-bank and undertake the discharge of its liabilities. Lord Krishna Bank Ltd. was also to take over the investments of the assessee-bank inclusive of Government securities. Sub-clause (a) of clause 4 of the scheme provided for the valuation of such investments at the market value prevailing on the day immediately preceding the prescribed date. Accordingly, the Government securities held by the assessee of the book value of Rs. 12,35,241.70 were taken over by Lord Krishna Bank Ltd. at a market value of Rs. 11,79,697.65. The difference between the book value and the market value was Rs. 55,544.05. In the return filed by the assessee for the assessment year 1966-67, along with the profit and loss account for the year ending December 31, 1965, a loss of Rs. 20,611 was shown. The assessee's claim before the assessing authority was that the sum of Rs. 55,544.05 being the difference between the book value of the Government securities and the market value at which they were taken over by Lord Krishna Bank Ltd. should also be added to its loss. The Income-tax Officer determined the total income of the assessee from business as Rs. 70,560 and he rejected the claim of the assessee for deduction of the sum of Rs. 55,544.05. In appeal before the Appellate Assistant Commissioner the rejection of the claim for deduction of a sum of Rs. 55,544.05 was upheld. In further appeal by the assessee the Tribunal too upheld the decisions of the Income-tax Officer and the Appellate Assistant Commissioner.
3. The assessee had claimed that the question whether there was any evidence in the case to establish that the assessee was dealing in Government securities as part of its business must also be referred along with the question that has been referred. The Tribunal observed that the question was covered by the question referred.
4. There is no scope for the argument in the circumstances that the question whether the Government securities held by the assessee-bank were stock-in-trade, cannot be considered by this court. The question referred in the light of what has been stated by the Tribunal in the statement of the case covers the aspect whether the securities were held as stock-in-trade. In other words whether the securities are stock-in-trade is an aspect of the question referred to us.
5. The Tribunal after referring to a number of decisions formulated its conclusions in paragraph 11 of its order thus :
'11. From the above decisions, the following principles appear to emerge :
(i) merely because securities are held by a banking company, it cannot be said that ipso facto they are its stock-in-trade ;
(ii) securities may be held by a banking company either as investments or as stock-in-trade ;
(iii) Where a banking company claims exemption from taxation for its income by way of interest on securities as business profits or any loss on sale of such securities as business loss the burden would be on it to establish that such securities are its stock-in-trade, that the purchases and sales of such securities are effected as a normal step in carrying on the banking business; as for example, where securities are sold to meet withdrawals by depositors; and
(iv) in the absence of such evidence, the presumption is that such securities are held as investments.'
6. Counsel for the assessee has also taken us through a number of decisions and various aspects have been elaborately placed before us. As a result of the discussions at the Bar we think three questions arise for consideration before us and they are : (1) whether a banking company holding Government securities or other valuable securities considering the nature of its business, and the obligations cast on such an institution by the Banking Regulation Act, 1949, and by virtue of the definition of the term ' banking ' in the Act can be said prima facie to hold those securities as stock-in-trade (2) whether when such securities are realised the profits or losses arising from the transaction can be said to be profits or losses of business of the banking institution and (3) whether such profits and losses--we are using the expression profits and losses, though it will be begging the question, to mean the increased value received or the lesser value received--arising from a transfer involved in an amalgamation under a scheme prepared by the Reserve Bank of India as envisaged by Section 43 of the Act, can be said to be a business income or loss ?
7. We shall deal with these questions seriatim.
8. The assessee of course is a banking institution governed by the Banking Regulation Act, 1949, for short the Act. Banking has been defined in Section 5(b) of the Act in this manner:
' 5. Interpretation,--In this Act, unless there is anything repugnant in the subject or context,-- ....
(b) 'banking' means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.'
9. Section 6 stipulates the forms of business in which banking companies may engage and dealing in stock, funds, shares, debentures, debenture stock bonds, obligations, securities and investments of all kinds have been referred to in Section 6(1)(a) of the Act and Section 6(1 )(1) specifically authorises the banking company to deal with all or any part of the property and rights of the company. Section 24 enjoins that:
' 24. (1) After the expiry of two years from the commencement of this Act, every banking company shall 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.'
10. These statutory provisions indicate that holding of securities is obligatory and that a substantial portion of the assets of the banking company must be held in securities and further that the business of a banking institution will include dealings in such securities. We need hardly emphasise that by virtue of Section 6(1)(1) the banking institutions have been conferred unlimited power to deal with the securities. These statutory provisions have simplified the process of deciding whether a banking company, when it realises securities, it does so as an act of business or not. Even in the absence of any such statutory provisions the Judicial Committee of the Privy Council had no difficulty in coming to the conclusion that such transactions by banking institutions will be in the nature of business. We may extract a passage from the decision of the Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, , [1940] 8 I.T.R. 635, 645 (P.C.)
' 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 undoubtedsolvency 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.'
11. The Supreme Court in Bihar State Co-operative Bank Ltd. v. Commissioner of Income-tax, , [1960] 39 I.T.R. 114, 122 (S.C.) observed as follows :
'. . .. It is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out, in the form of deposits as in the instant case, would not cease to be a part of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business.'
12. The Supreme Court was dealing with the question whether the interest earned by a co-operative society doing banking business from the deposits made by that society with another bank could be said to be income of the banking society arising out of its business. The decision was that the interest earned was income.
13. We have had occasion recently to deal with similar questions and we held in Bank of Cochin Ltd. v. Commissioner of Income-tax, [1974] 94 I.T.R. 93 (Ker) that the Government securities held by the assessee really constitute stock-in-trade. The securities held by the assessee-bank must, therefore, be treated, prima facie as stock-in-trade of the assessee. This disposes of the first point which we have formulated.
14. Turning now to the second point formulated we shall extract a passage from the commentary by Kanga and Palkhivala to the Income-tax Act, 1961, 6th edition, volume 1, from page 107:
' If a transaction is in the assessee's ordinary line of business, there can be no difficulty in holding that it is in the nature of trade. A banker's or financier's dealings in foreign exchange or his sales of securities and shares are, as a general rule, in the course of his business.'
15. Among the decisions referred to are those in Sardar Indra Singh and Sons Ltd. v. Commissioner of Income-tax, , [1953] 24 I.T.R. 415 (S.C.). Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, [1940] 8 I.T.R. 635 (P.C.) which we have already referred to and Westminster Bank Ltd. v. Osler (Inspector of Taxes), , [1932] 17 T.C. 381, (H.L.). We have, therefore, no hesitation in holding that the loss suffered by the assessee by the sale of its securities to Lord Krishna Bank Ltd. must be reflected in the accounts of the company for computing its income.
16. Now we turn to the third and the last point which raises a more difficult question. It is argued by counsel for the revenue that the scheme as a result of which the securities were transferred to Lord Krishna Bank Ltd. is not a business transaction, that it was not a transaction in the course of trade, that it was a transaction of self annihilation, a transaction which cannot give rise to any profit or loss in business. There is a passage in the judgment of Lord Phillimore in William Richard Doughty v. Commissioner of Taxes, , A.I.R. 1927 P.C. 76, which reads as follows :
' Income-tax being a tax upon income, it is established that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books, does not give rise to a profit taxable to income-tax.
It is easy enough to follow out this doctrine where the business is one wholly or largely of production. In a dairy farming business or a sheep-rearing business where the principal objects are the production of milk and calves or wool and lambs, though there are also sales from time to time of the parent stock, a clearance or realization sale of all the stock in connection with the sale and winding-up of the business gives no indication of the profit (if any) arising from income ; and the same might be said of a manufacturing business which was sold with the leaseholds and plant, even if there were added to the sale the piecegoods in stock, and even if those piecegoods formed a very substantial part of the aggregate sold.
Where, however, a business consists, as in the present case, entirely in buying and selling, it is more difficult to distinguish between an ordinary and a realization sale, the object in either case being to disppse of goods at a higher price than that given for them, and thus to make a profit out of the business. The fact that large blocks of stock are sold does not render the profit obtained anything different in kind from the profit obtained by a series of gradual and smaller sales. This might even be the case if the whole stock was sold out in one sale. Even in the case of a realization sale, if there were an item which could be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with a sale of a whole concern, might conceivably be treated as taxable income.' and at page 80 there is the following passage :
'Their Lordships would repeat that if a business be one of purelybuying and selling, like the present, a profit made by the sale of the whole ofthe stock, if it stood by itself, might well be assessable to income-tax; buttheir view of the facts (if it be open to them to consider the facts) is the same as that of Stout C.J.--that is, that this was a slump transaction. '
17. Before we advert to the expression ' slump transaction ' we would like to extract a passage from another English decision in J. & R. O'Kane & Co. v. Commissioners of Inland Revenue, , [1922] 12 T.C. 303, 343 (H.L.). There are copious extracts in the judgment in the case from the judgment of Fletcher Moulton L.J. in In re Spanish Prospecting Co. Ltd. [1911] 1 Cb. 92 (C.A.). We shall extract a part of the passage from the judgment of Fletcher Moulton L.J. :
(1) The fundamental meaning of profits is the amount of gain made by the business during the year.
(2) This can only be ascertained by a comparison of the assets of the business at the two dates.
(3) Increases of value of identical articles from rise of prices are to be included in valuation at end of period.
(4) Where the rights of third parties do not intervene, considerable latitude is allowed.
' Hence the strict meaning of the word ' profits ' is rarely observed in drawing up the accounts of firms or companies. ' (per Fletcher Moulton L.J. at page 99).
(5) Profits exist in kind as well as in cash.
(6) Realisation is only the conversion of profits in kind into profits in cash.
18. Ronan L.J. made the following observations in J. &. R. O'Kane & Co. v. Commissioners of Inland Revenue:
' A man not in business buys a library for his own use. One year afterwards he sells it at an enormous profit, owing to increase of prices. This is plainly not within the Acts.
A picture dealer shuts up his shop. He has a valuable stock of pictures. He sells most by auction, but keeps some of great value for himself. The value of the whole at the end of a period while the shop is open, less the value at the beginning and less deductions, is a profit arising from the business. Prices go up when he is no longer in business. After some time he sells those he has kept at a great profit. This is not profit arising from a trade or business. If in the Spanish Prospecting Company's case , it had been shown that the price obtained by the liquidator partly arose from an increase in the value after the business had ceased by the winding-up order, in my opinion that part of the increase would not be profit arising from the business. '
19. So the question really is whether the sale transaction of the assessee-bank with Lord Krishna Bank Ltd. of its securities was a transaction afterthe assessee had closed his business or whether it was a part of the businesstransaction of the assessee. We must advert here to the terms of the scheme, annexure ' A ', and it can be seen from the clauses in that scheme that separate value had been fixed for the securities at the market rate prevailing on the 12th October, 1965. This was, therefore, not a slump transaction within the meaning of that expression used by the Judicial Committee in its decision in William Richard Doughty v. Commissioner of Taxes, A.I.R. 1927 P.C. 76. and explained by a later decision in Moore (Inspector of Taxes) v. R. J. Mackenzie & Sons Ltd., [1972] 1 W.L.R. 359 (Ch. D.) as a sale in lump. This expression has also been referred to by the Supreme Court in its decision in Commissioner of Income-tax v. Mugneeram Bangur and Co., [1965] 57 I.T.R. 299999 (S.C). The sale of the securities in the case in hand does not form part of the sale of the entire assets of the assessee-bank for a single consideration. This is a separate sale of the securities and the profits or loss arising from such transaction as has been pointed out by the Judicial Committee can be reflected in the trading accounts of the assessee. The only question then is whether by the sale of the assets of the banking institution it is possible to postulate the sale as a sale after the business was closed down. In this connection we must notice that the sale of the securities as is evident from the statement of the case was for the purpose of discharging the liabilities of the assessee-bank. If the bank had encountered difficulties we presume that they could have themselves sold the securities to clear off the liabilities. If such sales were effected by the assessee-bank for the purpose of discharging their liabilities and if they have suffered the losses as a result of such sale we have no doubt that such losses would have been reflected in the trading accounts and would have been taken into account by the income-tax authorities to compute the taxable income of the assessee-bank. As a result of the amalgamation the ultimate realisation of the securities would be by Lord Krishna Bank if it becomes necessary and the discharge of the liabilities of the assessee-bank would also be by Lord Krishna Bank. But, by the conversion of the securities for a fixed value the assessee-bank was making available to the transferee-bank, Lord Krishna Bank, money to the extent of the value of the securities, to enable the transferee-bank to discharge the liabilities of the assessee-bank. This spells two things : (1) the realisation of the securities by the assessee-bank, and (2) a business transaction to tide over a difficulty arising out of the business of the assessee and the utilisation of the securities by the assessee-bank for the purpose for which they were intended and intended by the Act as well in the interests of the general public; in cases of dire need such as that was faced by the assessee-bank when it asked for a moratorium to convert the securities into cash for meeting the liability. We hold that the transaction is a business transactionin the course of business. 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.
20. We answer the question referred to us in the negative that is in favour of the assessee and against the department. We direct the parties to bear their respective costs.
21. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by Sub-section (1) of Section 260 of the Income-tax Act, 1961.