Jeevan Reddy, J.
1. The question referred for opinion under s. 256(1) of the I.T. Act, 1961, is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the surplus realised on the sale of securities partook the character of trading profits ?'
2. The assessee is the Andhra Pradesh State Financial Corporation Limited, Hyderabad, incorporated under s. 3 of the State Financial Corporations Act, 1951. According to s. 25 of the State Financial Corporations Act, 1951, one of its objects is :
'(g) Granting loans or advances to or subscribing to debentures of an industrial concern repayable within a period not exceeding 20 years from the date on which they are granted or subscribed to, as the case may be.'
3. The assessee held certain securities in the form of Andhra Pradesh State Development Loan in 1970 and 1980. These securities were purchased by the assessee for a sum of Rs. 30,51,784 in the year 1969. During the accounting year relevant to the assessment year 1974-75, the assessee required certain funds for meeting its obligations, viz., for advancing loans to industrial concerns. For that purpose, it sold the aforesaid securities, thereby making a profit of Rs. 2,54,466 (The securities were sold for a sum of Rs. 33,02,220). In its return submitted for the assessment year 1974-75, the assessee showed an amount of Rs. 2,54,466 as capital gains. The ITO was, however, of the opinion that the entire amount of Rs. 2,54,466 represents the income of the assessee from business and accordingly included the same in its taxable income. This was appealed against by the assessee. The AAC accepted the assessee's contention that, inasmuch as the assessee is not a dealer in securities and also because the purchase of the said securities was by way of investment, the assessee was right in showing the relevant amount as capital gains. The AAC also relied upon the fact that in the entire history of the assessee, there were only three instances of encashing securities, viz., on two occasions they were redeemed on their maturing, and on one occasion they were sold. This very limited number of encashment of securities was held to be indicative of the fact that the sale of the securities in question was not closely connected with the assessee's business, nor can it be regarded as a normal step in the carrying on of its business-as per the tests performed by the Supreme Court in its decision in Sardar Indra Singh and Sons Ltd. v. CIT : 24ITR415(SC) . The Revenue appealed to the Tribunal. The Tribunal mainly relied upon the decision of the Rajasthan High Court in Rajasthan Financial Corporation v. CIT and held that, inasmuch as one of the main objects of the assessee was advancing loans to companies upon which it earns interest and also because the sale of securities was effected for the purpose of carrying on its business, it must be held that the sale of securities was closely linked with the business of the assessee-Corporation; and if so, according to the principle enunciated by the Supreme Court in Sardar Indra Singh's case : 24ITR415(SC) the profit made must be treated as trading profit. On the above obtained the present reference to this court.
4. From the fact found in the orders of the Tribunal and the authorities below, it is evident that the assessee had certain funs available with it and meant for advancing loans to industries in the interest of industrial growth of the State. Because there were certain surplus funds after meeting its obligations, the assessee invested them in the aforesaid securities in the year 1969. During the accounting year 1973-74 relevant for the assessment year concerned herein, it encashed the securities. Based on the above facts, we have to decide whether the profit made by the assessee on the sale of the securities constitutes its trading receipt or capital gain. (It is not necessary for the purpose of this case to enquire further, whether the income so arising is income business or income form securities. The main question in this case being whether it constitutes a gain from the sale of a capital asset, i.e., whether it is constitutes a gain). It must be remembered that the assessee is a financial institution, one of its main purposes being lending of moneys to industries, no doubt in the interest of industrial progress of the State. At a certain point of time, it had certain moneys in the possession which were not lent for one or the other reason. Instead of keeping these moneys idle, the assessee invested them in securities which could be easily converted into cash, as and when the assessee required funds for carrying on its business, viz., lending moneys to industries. Reference may be made in this context to the letter of the assessee date January 7, 1975, stating that the securities were pledged with the Reserve Bank of India and that they were sold as the assessee was in need of funds for meeting its obligation. Can it be said, in such a situation, that the assessee wanted to create a capital asset; or should it be said that the assessee merely invested its surplus funds in easily convertible securities as an interim measure until such time as it required funds for lending moneys to industries The fact to be remembered in this connection is that in the case of financing and lending institutions, like the assessee herein, money itself constitutes it stock-in-trade, and that even if its surplus funds are kept in easily convertible securities, it is only one form of holding the cash. In such cases, it must be held that the investment in the securities is closely connected with the business of the assessee. Reference may be had, in this connection, to the decision of the Privy Council in Punjab Co-operative Bank Ltd. v. CIT  8 ITR 635. There the business of the bank consisted, in essence, of dealing in money and credits. It was obliged to keep enough cash or easily realizable securities to meet any probable demand by depositors. In such a situation, it was held that, if some securities are realized in order to meet withdrawals by depositors, it is a normal step in carrying on the banking business. It was held that it was an act done in, what is in truth, the carrying on of the banking business. This decision was affirmed by the Supreme Court in Sardar Indra Singh's case : 24ITR415(SC) . The following paragraph bring out the ratio of the decision (p. 418) :
'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 carrying on of the 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 it self it 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  8 ITR 635if the realisation of securities is a normal step in carrying on the assessee's business. Though that case arose out of the assessment of a banking business, the test is one of general application in determining whether the surplus arising out of such transactions is a capital receipt or a trading profit. The question is primarily one of fact and there are numerous case falling on either side of the line but illustrating the same principle. On the facts found in regard to the nature and course of the company's business, there can be no doubt that the present case fall on the revenue's side of the line.' Applying the aforesaid principles, it is evident that the essays in the present case, instead of keeping the moneys idle, invested the same in securities, which were easily convertible into cash, with the idea that as and when moneys are required for the purpose of lending, it could encash the securities and lend money. It cannot be said, in such a situation, that the investment in securities was intended to create a capital asset.
5. The same principle underlies the decision of the Rajasthan High Court in Rajasthan Financial Corporation's case which has been followed by the Tribunal. There, the Rajasthan Financial Corporation established under the Financial Corporations Act, and for the very same purpose as the assessee herein, had invested its surplus funds in Government securities. In May, 1958, it sold those securities in order to meet certain financial commitments and thereby incurred a loss of Rs. 21,770. It claimed the said loss as a business deduction. But, the ITO disallowed the same treating it as a capital gain. When the matter came to the High Court of Rajasthan, it held that, inasmuch as the main function of the Corporation was to help industrial concerns in various ways including by way of advancing loans, and also because the sale of securities was mainly to find necessary funds for meeting its financial commitments, the sale of securities was closely linked with the business of the Corporation and, accordingly, the loss suffered on that count must be allowed as a trading loss. We are in complete agreement with the ratio of the judgment. It must, therefore, be held in this case as well that ratio of judgment. It must, therefore, be held in this case as well that the profit made by the assessee by the sale of the securities was a trading receipt and constituted its revenue but not a capital receipt.
6. Before concluding, it is necessary to deal with certain decisions cited by Mr. Y. Sivarama Sastry. The first decision cited is in M.P. Financial Corporation v. CIT : 132ITR884(MP) . Though the said decision relates to the financial corporation of Madhya Pradesh, we find that the Department conceded there that the surplus realised by the sale of bonds was a capital receipt. In view of the said concession, there was no occasion for the High Court to consider the question on merits. It answered the question relying upon the concession to the effect that it was capital receipt. The other decisions cited are in CIT v. Guest Keen & Nettlefold Ltd. : 115ITR205(Cal) , Raja Bahadur Kamakhya Narain Singh v. CIT : 77ITR253(SC) , Rameshwar Prasad Bagla v. CIT : 87ITR421(SC) and CIT v. Associated Industrial Development Co. P. Ltd.  82 ITR 587. All these case deal with the question whether a particular transaction is an adventure in the nature of trade or not. Here it is not the case of the Department that the transaction in question constituted an adventure in the nature of trade, nor is it the case of the Department that the assessee is engaged in sale and purchase of securities. It is, therefore, unnecessary to deal with the facts or the principles of the said decisions at any length. We must, however, deal specifically with one decision, viz., CIT v. Guest Keen & Nettlefold Ltd.'s case : 115ITR205(Cal) . The assessee was carrying on business as an investment company and the transaction involved was one of sale of share effected by the assessee to the extent of less than 10 per cent. of the total holding of the shares. It was found that prior to their sale, the shares were held by the assessee for a fairly long period. On these facts, was held that the assessee was not engaged in the purchase and sale of shares and that its main business being only an investment company, the profit made by the sale of shares is a capital gain and not a business profit. It is significant to notice that, in this case, the Tribunal found on the material before it that the surplus in the hands of the assessee by reason of the transaction was capital gain and not a business profit; and the High Court merely held that the said finding cannot be said to be one not based on any material, or as perverse.
7. For the above reasons, we answer the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. However, in the circumstances of the case, we direct the parties to bear their own costs.