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Karnataka Bank Ltd. Vs. Commissioner of Income-tax, Karnataka-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Referred Case No. 14 of 1975
Judge
Reported inILR1979KAR170; [1978]114ITR421(KAR); [1978]114ITR421(Karn)
ActsIncome Tax Act, 1961 - Sections 28
AppellantKarnataka Bank Ltd.
RespondentCommissioner of Income-tax, Karnataka-i
Appellant AdvocateS.B. Bhat, Adv.
Respondent AdvocateS.R. Rajasekharamurthy, Adv.
Excerpt:
......the supreme court observed :the principle applicable in all such cases is well settled and the question always is whether the sales which produced the surplus were so connected with the carrying on of assessee's business that it could fairly be said that the surplus is the profits and gains of such business......manner than 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 hundis 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 a 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. in a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. it cannot be said that the funds of the bank which were not.....
Judgment:

Venkataramaiah, J.

1. This reference is made by the Income-tax Appellate Tribunal, Bangalore, under section 256(1) of the Income-tax Act, 1961, (hereinafter referred to as 'the Act' :). The question referred to us reads as follows :

'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that a sum of Rs. 82,305 representing the interest on securities is taxable in the hands of the assesses bank ?'

2. The Karnataka Bank Ltd, which is carrying on the business of banking, is the assessee in this case. During the accounting year corresponding to the assessment year 1969-70, the assessee had realised certain amount on the sale of its securities. Out of the sale proceeds of the said securities, a sum of Rs. 82,305, was treated by the assessee as interest realised by it in respect of the broken period up to the date of sale, although, in fact, the interest in respect of these securities had been realised by the renders when they became due and payable. Before the Income-tax Officer, the assessee claimed that under section 18 of the Act, a sum of Rs. 82,305 which represented the interest on the securities sold by it could not be taxed as the interest had, in fact, been realised by the purchaser after the sale. It also claimed that the said sum was not taxable under any other provision of the Act. The Income-tax Officer rejected the claim of the assesses holding that the said sum was part of the profits of the banking business carried on by the assessee and it was taxable under section 28 of the Act. The appeal filed by the assessee against the order of the Income-tax Officer before the Appellate Assistant Commissioner of Income-tax was allowed in the first instance, but, on further appeal, the Income-tax Appellate Tribunal set aside the order of the Appellate Assistant Commissioner and remanded the case to examine the true character of the receipt in question, whether it was interest or whether it was profits realised on sale of securities. After remand, the Appellate Assistant Commissioner rejected the claim of the assessee and dismissed the appeal. The appeal filed by the assessee against the order of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal also ended in dismissed. Hence, this reference.

3. Before the Appellate Assistant Commissioner, after remand, the representative of the assessee stated that the sale of securities would not have been effected if the purchasers had refused to pay interest till the date of the sale to the assessee and the interest had been calculated and determined at the time of the sale. He also stated that the sale price of the securities had been fixed at the rate prevalent plus the interest. The Appellate Assistant Commissioner found :

'In my opinion, although the nomenclature given is interest, it is not interest, but part of the sale consideration worked out and determined on the basis of the interest receivable up to the date of sale.

4. This finding has been affirmed by the Tribunal by observing that what the assessee had received was, strictly speaking, not interest but it was the price of the expectancy of interest. From the material on record, it is clear that the Tribunal has proceeded on the basis that section 18 of the Act was inapplicable to the case on hand since there was no realisation of interest as such by the assessee on the securities and that the receipt was part of its business income. We are of the opinion that the above conclusion of the Tribunal, on the facts and in the circumstances of the case, has got to be sustained.

5. It is not is dispute that the securities in question had been held by the assessee as part of its circulating capital in the course of its banking business. Any profits derived by it on the sale of such securities has got to be treated as income from business falling under section 28 of the Act in view of the decision of the Privy Council in Punjab Co-operative Bank Ltd, v. Commissioner of Income-tax [1940] 8 ITR 635 and the decisions of the Supreme Court in Sardar Indra Singh and Sons Ltd. v. Commissioner of Income-tax : [1953]24ITR415(SC) and Bihar State Co-operative Bank Ltd. v. Commissioner of Income-tax : [1960]39ITR114(SC) .

6. In the case of Punjab Co-operative Bank Ltd. [1940] 8 ITR 635 in which the assessee was carrying on business in banking, the question which arose for consideration before the Privy Council was, whether the income earned by the assessee on the sale of its business or not. Dealing with the said question, the Privy Council as follows (page 645) :

'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. This, it appears to their Lordships, is the more appropriate satisfactory ground for dealing with the question arising in the present case.'

7. Accordingly, the Privy Council upheld the finding of the Lahore High Court that the profits which arose on the sale of the securities by the assessees were business profits.

8. The above decision of the Privy Council has been followed by the Supreme Court in the case of Sardar Indra Singh and Sons Ltd. : [1953]24ITR415(SC) . The Supreme Court observed :

'The principle applicable in all such cases is well settled and the question always is whether the sales which produced the surplus were so connected with the carrying on of assessee's business that it could fairly be said that the surplus is the profits and gains of such business. It is not necessary that the surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of a business of buying and selling securities. It would be enough if such sales were effected in the usual course of carrying on the business or, in the words used by the Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax [1940] 8 ITR 635, if the realisation of securities is a normal step in carrying on the business on the assessee's business.

9. In the case of Bihar State Co-Operative Bank Ltd. : [1960]39ITR114(SC) , the Supreme Court has reaffirmed the above view as follows (page 122) :

'As we have pointed out above, it is a normal mode of carrying on banking business to invest moneys in a manner than 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 hundis 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 a 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. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the bank which were not lent to borrowers but were laid out in the form of deposits in another bank to add to the profit instead of lying of idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits.

10. From the foregoing, it is clear that the income of Rs. 82,305, which had been shown by the assessee in its books as interest, has been rightly held as income from its business. The question referred to us is, therefore, answered in the affirmative. The department is entitled to costs. Advocate's fee Rs. 200.


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