Income Tax Ordinance (XXXI of 1979)---

----Ss. 9 & 22---Banking Companies Ordinance (LVII of 1962), S.29---Revenue gain---Banking company---Profit earned on sale of securities and treasury bills purchased in pursuance of compulsory statutory obligation under S. 29, Banking Companies Ordinance, 1962 being a part of normal banking business, investment made therein remained part of the circulating capital of the Bank-- Such investments were not excluded from the floating capital and would not become part of the fixed asset of the Bank and profits earned thereon amounted to revenue gain and was liable to be subjected to tax.

The purpose of section 29 of the Banking Companies Ordinance, 1962 is to maintain the liquidity of funds from meeting the time and demand liabilities. It is, therefore, incorrect to contend that the investment in securities were not in the nature of stock-in-trade but long term investments.

The profit earned on sale of securities and treasury bills purchased in pursuance of compulsory statutory obligation under section 29 of the Banking Companies Ordinance, 1962, is a part of normal banking business. The investment made in such securities and treasury bills remains part of the circulating capital of the bank. Such investments are not excluded from the floating capital and does not become part of the fixed assets of the bank. The profits earned-thereon therefore, amount to revenue gain and is liable to be subjected to tax.

Malabar Cooperative Bank Limited v. CIT (1975) 101 ITR 87 fol.

I TAs. Nos. 1036, 1037, 926, 927, 872, 873 and 895 to 898/KB of 1981 82; Grindlays Bank Limited v. CIT 1985 PTD 329; Punjab Cooperative Bank Limited v. CIT (1938) 6 ITR 355; (1940) 8 ITR 635 and Bihar Cooperative Bank Ltd. v. CTT (1960) 39 ITR 114 ref.

Ali Athar for Appellant.

A.R. Memon, D.R. for Respondent.

Date of hearing: 25^th October, 1989.

ORDER

The appellant is a non-resident banking company having its registered head office in the U.K. and operating in Pakistan through its branches. The common objection pressed in all the appeals before us is that the learned two officers below have erred in holding that the profit on sale of investments (Government securities) amount to revenue gain instead of capital gain as claimed by the appellant and is thereby liable to be subjected to tax

2. Briefly stated the common facts in all the appeals are that the appellant in all the assessment years under appeal declared profit on sale of securities claiming that the profit being capital gain enjoyed exemption from tax and, therefore, it was not liable to be subjected to tax. It was contended on behalf of the appellant that it is holding the securities as part of its investment and not as trading assets. The securities are purchased specifically for the purpose of maintaining liquid assets as required under section 29 of the Banking Companies Ordinance, 1962. According to the appellants it was the requirement of law that the liquid assets including securities were to be kept at all times generally in line with actual requirement, i.e. 20% of the total time and demand liabilities in Pakistan. It was pleaded that they were not trading in securities otherwise the bank securities together with other liquid assets like cash would have been far in excess of the liquidity requirements. In nutshell the contention of appellant was that they purchased securities in compliance of the compulsory and mandatory requirement under section 29 of the Banking Companies Ordinance, 1962 and the securities were not held with the object of being dealt in day to day in the ordinary course of business and, therefore, they have shown securities under the head investment, therefore, it does not form part of its floating capital but of fixed capital. The assessing officer did not accept the contention raised by the appellant and held the profit on sale of investment in securities as revenue gain and subjected the same to tax. The appellant preferred first appeals for the assessment years 1976-77 to 1981-82 which were decided vide order, dated 2-2-1984 by the learned C.I.T.(A) Zone-6, Karachi. The learned CIT(A) while placing reliance on the orders of this Tribunal in TTA No. 1036, 1037, 926, 927, 872, 873 and 895 to 898/KB of 1981-82 maintained the finding of I.T.O. as follows:

"The learned ITAT has dealt with the nature of stock and shares and Government securities at a very great length and thrashed out the issue crystal clear. It has been held:

We have given our earnest consideration to the argument given by the income-tax Officer in his order and the submission made by the learned Departmental Representative to establish that securities are different from `stock and shares' and that the same fall outside the scope of the definition of capital assets given in the repealed Income tax Act and the Income Tax Ordinance, 1979. The I.T.O. has also brought on record material to distinguish Government securities from `stock' by reproducing in extenso from the book "Company Law and Practice in Pakistan" by Khawaja Amjad Saeed, to prove that `stock' is nothing but a part of the capital of a company but unlike shares it is divisible into any number of portions and that the company law has provided a procedure for conversion or fully paid shares of a company into stock and thus the word `stocks' in section 2(12), is used in relation to the word `shares' to emphasise similarity inasmuch as both `stocks and shares' carry dividends as fruit of investments whereas Government Securities stand on a different footing from `stocks and shares'. Through a reference made to the provisions contained in sections 13(3) and 29 of the Banking Companies Ordinance, 1962, it is suggested that these provisions cannot change the complexion and the nature of income earned on the sale or conversion of such investment and in this context a reference is also made to one of the most extensively quoted decision on the issue reported as (1963) 50 ITR 258, wherein it was held that the holding of securities by the bank and their sale/realisation was incidental to the carrying on its banking business and that the surplus realised on coversine of the securities was assessable income of the bank and not capital."

3.The appellant preferred appeals for the assessment years 1982-83 to 1984-85 as well which were disposed of by a separate order, dated 25-2-1986 by the learned C.I.T. (A). The finding of the I.T.O. that surplus on sale of investment is a revenue gain was again maintained by placing reliance on the same judgments of this Tribunal which were relied upon by the learned C.I.T.(A) while deciding appeal for the previous years.

4. We have heard Mr. Ali Athar, learned counsel for the appellant and Mr. A.R. Memon, learned D.R. for the Department. Mr. Ali Athar learned counsel for the appellant has contended that the point in issue already stands decided by Sindh High Court in the case of Grindlays Bank Limited v. CIT 1985 PTD 329. On the other hand, the learned D.R. has submitted that the judgment of Sindh High Court in Grindlays Bank Ltd. relied upon by Mr. Ali Athar is mainly based on the facts of that particular case and, therefore, the ratio of that case cannot be applied to every case as a principle of law. We have gone through the judgment of Sindh High Court in the case of Grindlays Bank Limited and we find that the contention of learned D.R. is correct. In this case there was a specific finding of fact that the securities held by the Grindlays Bank Limited in the particular year under consideration were not held as stock-in-trade. The finding of the Tribunal which was maintained by the Honourable High Court was as follows:

"The Tribunal had clearly directed the I.T.O. to treat the loss as of a capital nature in case it was found arising on the securities held purely as capital investment, in case the securities were held as stock-in-trade the loss relating thereto will be loss of revenue nature. On the basis of Tribunal's decision, therefore, the onus of proving the loss arose from securities held as stock-in-trade purely lay on the assessee."

5. The Honourable High Court confirmed the finding of Tribunal in the case of Grindlays Bank Limited for the reason that the assessee in that case failed to discharge the burden that the securities did represent its stock-in -trade as alleged. The findings of Honourable Sindh High Court in the case of Grindlays Bank Limited, therefore, revolved round its own facts and it was not to be applied as a rule to every case.

6. The learned D.R. has contended that in the present case the appellant has throughout pleaded that they have earned profit on sale of securities, which were purchased as a matter of statutory obligation in order to carry on its business operations. According to the learned D.R. the very contention that the investment in treasury bills was necessary for carrying on its business operations was sufficient to show that the profit earned was the result of normal business activity. The learned D.R. has further submitted that the point in issue was settled as far back as 1938 by the Honourable Lahore High Court in the case of Punjab Cooperative Bank Limited v. C.I.T. (1938) 6 ITR 355, wherein the principle was laid down that it is to be determined on its own facts in every case whether the investment was a part of ordinary business of an investor or otherwise and for that purpose it has to be seen whether the investment is a part of fixed capital or circulating capital. This judgment of Punjab High Court was approved by Privy Council in the case reported as (1940) 8 ITR C 35. It was held by the Privy Council that in the ordinary case of a bank the business consists in its essence of dealing with money and credit. The banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors and if some of the securities are realised in order to meet withdrawals by depositors, this is clearly a normal step in carrying on the banking business. It is an act done in what is truly the carrying on the banking business. The appellants have contended that they purchased securities in question in compliance of their statutory obligation under section 29 of the Banking Companies Ordinance, 1962 which reads as follows:

"29.Maintenance of liquid assets.------

-----(l) Every banking company shall maintain in Pakistan 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 twenty per cent. of the total of its time and demand liabilities in Pakistan:

Provided that the requirements of subsection (1) as to the maintenance in Pakistan of cash, gold or unencumbered approved securities may from time to time, by notification in the official Gazette, be varied by the Federal Government.

Explanation.--For the purposes of this section, `unencumbered approved securities' of a banking company shall include its approved securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of.

(2) In computing the amount provided for in subsection (1), any deposit required under the proviso to subsection (3) of section 13 to be made with the State Bank by a banking company incorporated outside Pakistan and any balances maintained in Pakistan by a banking company in current account with the State Bank or its agent or both, including in the case of a scheduled bank the balance required to be so maintained under subsection (1) of section 36 of the State Bank of Pakistan Act, 1956 (XXXIII of 1956), shall be deemed to be cash maintained.

(3) Every banking company shall, before the close of the month succeeding the month to which the return relates, furnish to the State Bank a monthly return in the prescribed form and manner showing particulars of the company's assets maintained in accordance with this section and its time and demand liabilities in Pakistan at the close of business on each Thursday during the month, or if any Thursday is a public holiday under the Negotiable Instruments Act, 1881 (XXVI of 1881), at the close of business on the preceding working day."

7. The purpose of the above provision is to maintain the liquidity of funds for meeting the time and demand liabilities. It is, therefore, incorrect to contend that the investment in securities, were not in the nature of stock-in-trade but long term investments. It has been held by Supreme Court of India in the case of Bihar Cooperative Bank Ltd. v. CIT (1960) 39 ITR 114, that the interest from short term deposits made with the Imperial Bank of India was income from normal banking business as money laid out in form of deposits with the Imperial Bank of India did not cease to be part of bank's circulating capital. A provision analogous to section 29 of the Banking Companies Ordinance, 1962 is on the Statute book in India also which is contained in section 24 of the Banking Regulation Act, 1949 which requires the banks to invest in securities or keep cash or gold to the extent of 20% of its time and demand liabilities. The said provision came for consideration before Kerala High Court in the case of Malabar Cooperative Bank Limited v. CIT (1975) 101 ITR 87 and it was held as follows:

"A banking institution, as we understand it, as a part of its business activity will have to have ready resources to meet its liabilities the extent of which can never be foreseen. It must, therefore, have liquid resources which of course will normally be cash, and, secondly, easily realisable securities. This is in the interest of the -banking institution and it is in the interest of the public that deal with the bank. Taking the latter aspect into consideration the legislature has stepped in and has made it obligatory that the banking institutions must maintain a certain percentage, one-fifth of its assets, in the form of securities at any given day. This is one of the legislative restrictions, on the otherwise unlimited freedom of a banking institution to conduct its business in any manner it liked. Any prudent banking institution will so invest in securities even without legislative compulsion. If it did, holding of securities cannot be presumed to be not a part of its business, nor can it be said that the securities held are not part of its stock-in-trade. The fact that law now insists that the business must be run in a prudent manner by holding a specified part of its readily realisable resources in securities does not detract from the provision that in so holding securities the bank is carrying on its business and securities so held are stock-in-trade. Further, we do not think that the securities so held by a banking institution must be dealt with daily or often in order that those securities might become stock-in-trade. Supposing the institution kept a few lakhs of rupees either in its safe to meet emergent calls on the banks by the depositors or it maintained in the form of short-term deposits cash in other banking institutions, can it be said that it was not doing its business, that the cash was actually not in circulation, and, therefore, it did not form circulating capital and was, therefore, not part of its stock-in-trade? Certainly not; and we have the authority of the Supreme Court itself that cash kept by a banking institution in other banking institutions in the form of short term deposits was maintained by the banking institution as a part of its business and that the income that accrued to the bank in the form of interest from deposits so held is income from business of the banking institution. We may read the relevant passage from the decision of the Supreme Court in Bihar State Cooperative Bank Ltd. v. Commissioner of Income-tax:

"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. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest stead 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 idle necessarily ceased to be apart of the stock ing-trade of the bank, or that the interest arising there-from did not form part of its business profits."

8. We respectfully agree with the above findings and while following the same hold that the profit earned on sale of securities and treasury bills purchased in pursuance of compulsory statutory obligation under section 29 of the Banking Companies Ordinance, 1962, is a part of normal banking business. The investment made in such securities and treasury bills remains part of the circulating capital of the bank. Such investments are not excluded from the floating capital and does not become part of the fixed assets of the bank. The profits earned thereon therefore, amount to revenue gain and is liable to be subjected to tax. The learned two officers below have, therefore, rightly held the profit earned from sale of Government securities as revenue gain and have rightly subjected them to tax to which no exception can be taken. The impugned findings of the learned two officers below are, therefore, maintained and the appeals stand dismissed.

M.BA./88/TAppeal dismissed.