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1940 Supreme(SC) 44
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
VISCOUNT MAUGHAM, LORD RUSSELL OF KILLOWEN, LORD WRIGHT, SIR GEORGE RANKIN, AND MR. M. R. JAYAKAR.
PUNJAB CO-OPERATIVE BANK, LIMITED, AMRITSAR - Appellant
Versus
COMMISSIONER OF INCOME-TAX, LAHORE - Respondents
On appeal from the High Court at Lahore.
Decided On : July. 22. 1940.
Solicitors for appellant:Douglas Grant & Dold. Solicitor for respondent: Solicitor, India Office.
Profits from the sale of securities by a bank are taxable as business profits if the realization is part of the normal carrying on of the banking business, such as managing liquidity to meet depositor demands, regardless of whether a separate trading business in securities exists.
Headnote:(A) Government of India Act, 1935 - Section 205 - Jurisdiction of the appellate court - Duty of the High Court to certify substantial questions of law - The duty imposed on the High Court to give or withhold a certificate regarding whether a case involves a substantial question of law as to the interpretation of the Act is directory, not mandatory - Such a duty arises only in cases where there is a reasonable possibility that the specified question may be involved - In the absence of such a possibility, the failure of the High Court to record a determination does not divest the appellate court of jurisdiction. (Paras 203-206)
(B) Indian Income-tax Act, 1922 - Section 10 - Taxability of profits from sale of securities - Banking business - Whether profits realized from the sale of securities held as reserves are taxable as business profits - Enhanced values obtained from the realization or conversion of securities are assessable where the act is done in the carrying on or carrying out of a business - In the banking business, the purchase and sale of securities to meet depositor demands or manage liquidity are normal steps in carrying on the business - Such profits are therefore taxable as business profits. (Paras 207-208)
Facts of the case:
A banking company realized profits from the sale of certain securities and shares. The company contended that these investments were held as reserves for emergencies and not for the purpose of trade, and that the sales were necessitated by heavy withdrawals of deposits and compulsory statutory deposits. The tax authorities found that the sales were made to take advantage of high prevailing market prices and that the profits were utilized to increase the company's reserves.
Findings of Court:
The court found that the purchase and sale of shares and securities are closely linked with the deposits and withdrawals of clients. Realizing securities to meet the demands of depositors is a normal step in carrying on a banking business. Therefore, the profits arising from such transactions are business profits.
Issues: (1) Whether the appeal was maintainable in the absence of a certificate from the High Court under the Government of India Act, 1935. (2) Whether profits realized from the sale of securities by a bank are taxable as business profits under the Indian Income-tax Act, 1922.
Ratio Decidendi: The court held that the duty of the High Court to certify substantial questions of law under the Government of India Act is directory and applies only when such a question is reasonably possible. Regarding taxability, it ruled that profits from the conversion of securities are assessable if the act is part of the carrying on of a business; for banks, managing securities to ensure liquidity is an integral part of their business operations, making such profits taxable.
Result: Appeal dismissed, with costs.
Legal Category Hierarchy
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taxation
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income tax
- business profits
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income tax
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practice and procedure
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jurisdiction
- appellate jurisdiction
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jurisdiction
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banking law
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banking operations
- liquidity management
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banking operations
Judgement
Appeal (No. 71 of 1939) from a judgment of the High Court (February 3, 1938) on a reference by the Commissioner of Income-tax, Punjab, North-West Frontier and Delhi Provinces, under s. 66, sub-s.2, of the Indian Income-tax Act, 1922.
The question raised by this appeal was whether or not the profit realized by the appellant, the Punjab Co-operative Bank, Ld., Amritsar, on the sale of certain securities was a profit liable to income-tax under the Indian Income-tax Act, 1922.
The facts appear from the judgment of the Judicial Committee, and the questions referred by the Commissioner were (1.) "Whether in the circumstances of the case the amount of Rs.1,42,588 realised by the assessee on the sale of securities and shares over their cost price is taxable; and (2.) " Whether under the circumstances of the case the net interest amounting to Rs.2764 received from vendees of securities on de die in diem basis is taxable."
The High Court (Addison and Din Mohammed JJ.) answered both questions in the affirmative.
On the hearing of the present appeal a preliminary objection was taken by the respondent as to the jurisdiction of His Majesty in Council, by reason of the provisions of s. 205 of the Government of India Act, 1935, to hear the appeal. The terms of s. 205 appear from the judgment of the Judicial Committee. In the present case the High Court had certified under s. 66a of the Indian Income-tax Act, on the petition of the Appellant Bank, that the case was a fit one for appeal to His Majesty in Council.
1940. June 25, 26, 27. J. M. Tucker K.C. and W. Wallach for the respondent. The preliminary objection to the jurisdiction of His Majesty in Council to hear this appeal arises out of the decision of the Board in Errol Mackay v. Oswald Forbes (1) as to the effect of s. 205 of the Government of India Act, 1935. [The section was read.] If there is a case which does involve a substantial question of law as to the interpretation of the Act of 1935 or any Order in Council made under it, and the High Court certifies that such a question is involved, then no appeal lies to His Majesty in Council either with or
98 Law. Rep. 67 Ind. App. 464 ( 1939- 1940) Punjab Co-Operative Bank v. C ommissioner of Income-Tax 200
without special leave. It is not suggested that any such question is involved in the present case. The burden of the decision in the Errol Mackay case (1), however, is wide enough to make it necessary for the High Court in every case where there is a judgment, decree or final order to consider whether or not there is a question in the case which involves the interpretation of the Government of India Act. The Errol Mackay case (1) did involve the interpretation of a section of an Act as amended by an Order in Council made under the Government of India Act, and therefore came within the words of s. 205. In every case where there is a judgment, decree or final order the duty of the High Court is to consider whether any question in that judgment raises a question of the interpretation of the Government of India Act or any Order in Council made thereunder, and they must then certify one way or the other—the High Court is required of its own motion " to give or withhold a certificate "accordingly." The decision in Errol Mackays case (( 1940) L. R. 67 I. A. 64.) requires the High Court to state definitely that a certificate is being withheld. If a certificate is given, then this Board has no jurisdiction. In the present case it is not known whether it has been affirmatively withheld, and that is why the Board has said that it must be stated one way or the other, because until that is known there is a doubt as to the jurisdiction of the Board. If the High Court have considered the question, and have withheld a certificate, then the matter is at large, and is to be decided according to the ordinary rules governing appeals. The certificate in this case is clearly not one under s. 205. It has been held by the Federal Court in India tha
