COMMISSIONER OF INCOME TAX, COMPANIES-I, KARACHI VS Messrs NATIONAL BANK OF PAKISTAN, KARACHI, 2007 PTD-KARACHI-HIGH-COURT-SINDH 1670 (2006)

(a) Income Tax Ordinance (XXXI of 1979)---

----S. 27---Banking Companies Ordinance (LVII of 1962), S.29---Investment by Bank in Government securities and treasury bills---Securities and treasury bills, sale of---Profits earned on such sale claimed by Bank to be capital gain not liable to tax---Validity---Such investment would necessitate fulfilment of statutory obligations being necessary for carrying on business operations---Such investment would remain part of circulating capital of Bank, thus, would not be excluded from floating capital and would not become its capital investment---Nature of such investment would be stock-in-trade and not long term investment---Profits earned on such sale, would amount to revenue gain/income chargeable to tax and would not be a capital gain.

Messrs Citibank N.A., Karachi v. Commissioner of Income Tax 1994 PTD 1271; Commissioner of Income Tax v. Emirates Bank International ?'?; Punjab Cooperative Bank Ltd. v. C.I.T. (1983) 6 ITR 355; (1940) 8 ITR 635; Bihar Cooperative Bank Ltd. v. C.I.T. (1960) 39 ITR 114 and Malabar Cooperative Bank Limited v. C.I.T. (1975) ITR 87 ref.

Grindlays Bank Ltd.', Karachi v. Commissioner of Income Tax (1985) 51 Tax 102 distinguished.

(b) Banking Companies Ordinance (LVII of 1962)---

---S. 29---Provision of S.29 of Banking Companies Ordinance, 1962---Purpose of such provision was to maintain liquidity of funds for meeting time and demand liabilities.

Jawaid Farooqi holding brief for Aqeel Ahmed Abbasi for Applicant.

Iqbal Salman Pasha for Respondent.

Date of heating: 5th May, 2006.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---This reference application was admitted to consider the following questions of law:--

"(1) Whether on the facts and circumstances of the case, the learned Income Tax Appellate Tribunal was justified in treating the receipts on sale of Government Securities as capital gain.

(2) Whether on the facts and circumstances of the case; the trading i.e. regular purchase and sale of Government Securities as a part of business, constitute its stock-in-trade distinguishable from capital assets and as such the gain thereon is liable to tax being revenue income?"

2. The relevant facts giving rise to the above questions are that the respondent-Bank declared profits on disposal of Government Securities to the tune of Rs.33,450 and claimed the same to be "Capital Gain" not chargeable to tax. Thee Assessing Officer did not agree with this claim and added the same to the total income of assessee.

3. The assessee/respondent feeling aggrieved preferred appeal with the CIT(A) Karachi, who allowed assessee's claim treating the profit on sale of Government Securities as capital gain not liable to tax.

4. The Department being dissatisfied preferred appeal before the learned ITAT who vide its order, dated 12-1-1992 in I.T.A. No.1245/HQ of 1990-91 upheld the finding of CIT(A) placing reliance on the judgment of Sindh High Court in the case of Grindlays Bank Ltd., Karachi v. Commissioner of Income Tax (1985) 51 Tax 102.

5. The Department submitted reference application before the Tribunal, which was rejected for the reason that the point in issue already stands decided by the High Court in the case of Grindlays Bank Ltd., referred to above.

6. The Department thereafter submitted reference application before this Court under section 136(2) of the Income Tax Ordinance, 1979, which was admitted to regular hearing to consider the question of law referred to above.

7. Mr. Jawaid Farooqi, Advocate holding brief for Mr. Aqeel Ahmed Abbasi, learned counsel for the applicant submitted that the tribunal has observed in its order that, admittedly a profit of Rs.33,450 was earned on sale of Government Securities. It was contended on behalf of assessee before the Tribunal that all the investments were made by Assessee/Bank in Government Securities under statutory obligations and that the assessee invested the amount as long term investment. However, no evidence was produced before the Assessing Officer in support of the contention that the Government Securities were purchased as long term investment and even otherwise the contention was contradictory in the sense that on one hand the plea was taken that the securities were purchased under statutory obligations and on the other hand it was contended that it was on account of long term investment. He has further submitted that the learned Tribunal did not consider the issue in the right perspective and decided the appeal by placing reliance on the judgment of High Court in the case of Grindlays Bank Ltd., (supra). He has pointed out that the learned Members of the Tribunal cited the following extract from the judgment of High Court, which is the result of mistake, as the above finding does not find place in the judgment of High Court:--

"In respect of the case before us, it has been noted that the ITO on page 2 of the assessment order had concluded that the assessee had made investments in treasury bills based on a statutory obligation in order to carry on its business operations. As a necessary corollary to it, we have no hesitation in stating that investments in treasury bills were not in the nature of stock in trade but long term investments on which accrued profit to the extent of Rs._____ could not be stated to be anything else but capital gain...."

9. He has further submitted that the Government Securities are mainly loans carrying fixed rate of interest and the Securities are purchased by the bank in pursuance of the provisions contained in Banking Companies Ordinance, 1962. The Banks have generally to deal in it regularly and the regularity and frequency of the dealings make it stock in trade for banks, distinguishable from capital assets, or long term investment, and consequently the profits on sale of Securities is revenue receipts and liable to tax.

10. On the other hand, Mr. Iqbal Salman Pasha reiterated that point in issue already stands decided by this Court in the case of Grindlays Bank Ltd., on which the learned Members of the Tribunal have placed reliance.

11. Mr. Pasha was asked to show that the passage reproduced in the order of Tribunal purportedly contained in the judgment of this Courts, in the case of Grindlays Bank is actually contained in the judgment. Mr. Pasha after reading the entire judgment very minutely stated that the passage on which the learned Members of the Tribunal have placed reliance does not find place in the judgment of the High Court.

12. In addition to his verbal arguments Mr. Iqbal Salman Pasha has submitted written arguments as well. He has submitted that as per record, the respondent had made long term investment in order to fulfil the requirement of section 29 of Banking Companies Ordinance, 1962 under which the bank has to maintain particular level of investment but such long term investment in approved Government Securities etc., are not trading assets of the Bank. He has further contended that under subsection (1) of section 7 road with section 9 of Banking Companies Ordinance, 1962, all commercial Banks are barred from trading in Government Securities. The investment in Government Securities are retained for a period of 2 or 3 years, but the investment in Government Securities are never held as "Stock in Trade". He has further submitted that the interest earned on the Government Securities is offered for tax under section 17 of income Tax Ordinance, 1979. He has reiterated that in the assessment year 1989-90 the respondent declared capital gain of Rs.33450 as exempt receipt from the provision of Income Tax Ordinance, 1979. This exempt receipt was realized on sale of long term investment made in Government Securities. He has further argued that the Assessing Officer has not given any finding whether the investment in Government Securities was held as Stock in Trade or as Investment. According to him the case of respondent was all along that the investment in Securities were made in order to comply with statutory requirement and hence whenever such Securities were disposed of, the resultant gain or loss therefrom were computed as capital gain or loss in accordance with section 27 of the Income Tax Ordinance, 1979, and the investment made by the Banking Company also satisfies the definition of capital assets as defined in section 2(12) of Income Tax Ordinance, 1979.

13. He has next contended that the finding whether investment in Securities is a long term investment or is a stock in trade is a question of fact and similar finding was given by this Court in the case of Grindlays Bank Ltd., v. Commissioner of Income Tax (1985) 51 Tax 102. He has referred to the concluding para. of the above judgment which reads as follows:--

"From the material on record it is clear that the Tribunal has proceeded on the basis that the Securities were held by way of investment. 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. We are of the view that it was for the Tribunal to give its decision on facts".

14. At this stage it would be appropriate to observe that in the Grindlays Bank case the plea taken by the assessee was that the loss sustained by them was of revenue nature and thus was allowable expenditure. The contention of Department was that it was a capital investment and therefore the loss sustained was not admissible expenditure. In this case both the parties have taken absolutely opposite pleas. The contention of assessee is that the investment made in Securities is capital investment and income is capital gain, while the view taken by the department is that the investment made in Government Securities in pursuance of statutory provisions is stock in trade and the profit earned is revenue income to be taxed as business income.

15. Mr. Iqbal Salman Pasha has submitted that like Grindlays Bank case, a finding of fact has been given by the Tribunal in the case of present respondent also, therefore, this Court should not give any opinion as the Tribunal is the final fact finding authority and the High Court shall give its opinion on the point of law only. He has stressed that the respondent has all along explained that the Government Securities held by them were not only in pursuance of the statutory requirements under the Banking Companies Ordinance, 1962 but were also for the. purpose of long term investment.

16. In support of his contention that following the judgment in Grindlays Bank case, no finding should be given by this Court on the point of law, he has placed reliance on two judgments by this Court.

17. The first judgment is in the case of Messrs Citibank N.A. Karachi v. The Commissioner of the Income Tax 1994 PTD 1271 and second is unreported judgment, in the case of Commissioner of Income Tax v. Emirates Bank International.

18. We have carefully considered the contentions raised by the learned Advocates for the parties and have perused the order of the Tribunal as well as the judgment referred to by Mr. Iqbal Salman Pasha.

The basic judgment on which Mr. Pasha has placed reliance is in the case of Grindlays Bank. So far the Tribunals judgment in this case is concerned we find that it was contended on behalf of assessee before the Tribunal that all the investments which were made by the assessee in Government Securities were under statutory obligation and that the assessee invested the amount as long term investment. Thus so far the investment in Government Securities in order to comply with the statutory requirement is concerned it was undisputed fact, but no evidence was produced at any stage to prove that it was made by way of long term investment. The Tribunal gave no finding of fact and decided the point in issue under the impression that it is a question of law, which stands decided by this Court in the case of Grindlays Bank. This impression was not correct as Mr. Pasha has also argued with sufficient vehemence that in the Grindlays Bank case no finding was given on the point of law and it was merely held that the finding of fact given by Tribunal in that case was to sustain.

19. After coming to the conclusion that in this case the Tribunal has not decided the question of fact but has decided a question of law by following the judgment in the case of Grindlays Bank, under the wrong impression that it contains the opinion on the point of law, we have further found that the judgment of this Court in Grindlays Bank Ltd., is one of the most misinterpreted and misapplied judgment. We would therefore, like to examine the judgment of this Court in Grindlays Bank and the question of law whether the receipts on sale of Government Securities in which investment is made in compliance of the statutory provisions is a capital gain or revenue receipt.

20. As already observed earlier and conceded to by Mr. Iqbal Salman Pasha as well, in the Grindlays Bank a finding of fact given by the Tribunal was held to be sustainable and no opinion on the point of law was given. In the said judgment it was noted that in the first round of litigation the Tribunal had set aside the assessment order with the direction to decide the question of fact, by repelling the contention that assessee being a banking concern, there was a presumption that the Securities held by it were stock in trade. In second round of litigation the Tribunal affirmed the finding of fact given by Income Tax Officer 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 that the loss arose from securities held as stock in trade purely lay on the assessee."

21. The above passage shows that in the cited case the assessee failed to discharge the burden that the Securities did represent its stock in trade as alleged and therefore the observations that the finding of fact given by Tribunal is sustainable revolves round its own facts and is not to be followed as a finding on the point of law in every case.

22. On the other hand in this case the respondent-assessee 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. Along with this plea it was also contended that it was by way of long term investment. However, no evidence was furnished to establish the latter part of the contention. We find substance in the contention of Mr. Javaid Farooqi that the investment in the Government Securities was necessitated to fulfil the statutory requirement which was necessary for carrying on its business operations and therefore, it was sufficient to infer that the profit earned was result of normal business activity.

23. This point cane for consideration as far back as 1983 before the Lahore High Court in the case of Punjab Co-operative Bank Ltd. v. CIT '(1983) 6 ITR 355. A principle was laid down that it is to be determined on its own facts in every case whether the investment was 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 635. It was held by the Privy Council that in the ordinary case a banking business consists in its essence of dealing with money and credit. The banker has always to keep enough cash or easily realizable securities to meet any probable demand by the depositors and if some of the securities are realized 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.

24. The Respondent has 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:--

(1) Every banking company shall maintain 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 balance 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 sub-section (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, if any Thursday is a public holiday under the Negotiable Instruments Act, 1881 (XXXVI of 1881), at the close of business on the preceding working day."

25. The purpose of the above provisions is to maintain the liquidity of funds for meeting the time and demand liabilities. It is, therefore, incorrect to contend that the investments in securities were not in the nature of tock in trade but long term investments. It has been held by Supreme Court of India in the case of Bihar Co-operative 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) 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 realizable securities. This is in the interest of the banking institution and it is in the interest of the public that deals 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 not to be 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 realizable resource 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 books 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 cut, 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 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 idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising there from did not form part of its business profits."

26. We respectfully agree with the above findings and 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 investments made in such securities and treasury bills remain part of the circulating capital of the bank. Such investments are not excluded from the floating capital and do not become part of the capital investment of the bank. The profits earned thereon, therefore, amount to revenue gain and are liable to be subjected to tax.

27. Mr. Pasha has submitted that question No.2 does not arise out of the order of the Tribunal. We do not agree with the proposition as question No.2 is consequential in nature and arises out of the order of the Tribunal.

28. Consequent to the discussion above it is held that the receipts on

sale of Government Securities by the respondent-Bank under the statutory obligation is a revenue income chargeable to tax and is not a capital gain.

29. The question No.1 is answered in negative and the question No.2 is answered in affirmative.

A copy of this judgment under the seal of this Court and signature of the Registrar be sent to the ITAT Karachi for disposing of the appeal conformably to the findings contained in this judgment.

S.A.K./C-11/KOrder accordingly.