1985 PLP 329 (PTD)

"Whether in the facts and circumstances of the case and having regard to the fact that the applicant‑Company is admittedly carrying on banking business was the Tribunal right in holding that the losses suffered on redemption of Government loans was a capital loss and not deductible from the profits?" The assessee is a banking company incorporated in the United Kingdom with its registered office at London. It carries on banking business in Pakistan, and is assessed under the Income‑tax Act, 1922. The assessee held 2/3‑4% Government Loan for the year 1955‑56 which became due for redemption on 18‑8‑1956. The difference between the book value and the fact value came to Rs.71,030 which was claimed as loss on redemption. The assessee filed its return for the assessment year 1957‑

58. The assessee claimed loss of Rs.71,030 in the said assessment. The Income‑tax officer disallowed the loss and held that the investment in those securities did not represent the assessee's stock‑in‑trade and as such it was not a capital loss. On appeal filed by the assessee before the Income‑tax Appellate Tribunal, the Tribunal set aside the order of the Income‑tax Officer and observed that in Banking concern dealing in securities in both for the sake of investment as well as for carrying on its normal business activities, the assessee holds certain Government securities and earns interest thereon. It has also been effecting purchases and sales in securities and has been showing trading profits thereon. When the department had taxed those gains as revenue income it cannot contend in the same breath that any loss in the redemption of the securities that necessarily relate to the investment above and as such of a capital nature. The Tribunal remanded the case to Income‑tax Officer to examine the true character of the securities on which loss has been claimed were held as capital nature. After remand, the Income‑tax Officer disallowed the loss and found: "The assessee failed to produce any evidence to the effect that securities were held by him as stock‑in‑trade. The balance sheet of the period under reference also did not indicate that such securities were held stock‑in‑trade. In such circumstances the findings given in original assessment stands good. The loss of Rs.71,030 was, therefore, rightly disallowed in the original assessments as loss of the capital nature ." The assessee's representative in this behalf in these circumstances contended before the Tribunal that, as a matter of fact, the assessee being a Banking concern, there is a presumption that the securities held by it were stock‑in‑trade. It was also argued before the Tribunal that in view of the past treatment wherein profits from the realisation of the securities have been treated as revenue profits the losses on the assumption thereof should also be considered as trading losses. The departmental representative on the other hand contended that the investments in securities in the case of the assessee are capital investment, which yield regular return of interest. As such purchases and sales of those securities cannot be termed as done in the normal course of business. The loss on redemption of the securities is of a capital nature". The finding of the Income‑tax Officer has been affirmed by the Tribunal by observing that "the Tribunal had clearly directed the Income‑tax Officer to treat the loss as of a capital nature in case it was found arisen of the securities held purely as capital investment in case any of 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". The assessee filed this direct reference and sought our opinion on the above question said to have arisen from the order of the Tribunal. Mr. Ali Athar has contended that in a banking concern purchase and sale of shares and securities, subscribing to the Government loans and redeeming them is in normal course of carrying on and carrying out of the business. He placed reliance on the case of Punjab Co‑operative Bank Limited v. C. I. T., Punjab reported in (1940) 101 TR

635. In the case of Punjab Cooperative Bank Limited 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 the securities held by it was income earned in the course of its business or not dealing with the said question, the Privy Council observed as follows: "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 realizable 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 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, it the more appropriate and satisfactory ground for dealing with the question arising in the present case." 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 assessee were business profits. On behalf of the assessee it was urged that the Income‑tax Authorities concluded that government securities held by the assessee bank were in 'the nature of investment. The Tribunal also noticed the fact that no evidence was adduced by the assessee bank to show that the securities under reference were held by the assessee as stock‑in- trade It was, therefore, urged by Mr. Ali Athar on behalf of the assessee that in all cases where bank invest their money in government securities, it can be inferred as a matter of course that the banks have done so far the purposes of maintaining liquid capital to meet with the demands of the customers of those banks. According to Mr. All Athar the very fact that the value of the securities. On which losses have been claimed were held as stock‑in‑trade and the losses relating thereto will be losses of revenue nature. That clearly indicates they were, for all intents and purposes, stock‑in‑trade rather than part of their investment. We are not inclined to accept this submission of Mr. Ali Athar. The assessee bank held it as an investor and it did not form its stock‑in‑trade. It can hardly be disputed that bank purchases and sales government securities. Before the Income‑tax Officer and the Tribunal it was open to the assessee that even on the assumption that Bank purchases, and sales government securities but the particular securities, which had been redeemed and the loss incurred in redeeming had been treated by it as part of the stock‑in‑trade. But then the matter does not rest purely on the technical question of onus which undoubtedly is initially on the revenue to prove that a particular item of receipt is taxable whether a particular holding of securities by way of investment or forms part of stock‑in‑trade is a matter which is within the knowledge of the assessee who holds securities and it should in normal circumstances, be in position to produce evidence from its records as to whether it has maintained any distinction between those securities which are its stock‑in‑trade and those which held by way of investment. The Tribunal remanded the case to the Income‑tax Officer and directed him to investigate these facts and decide the issue accordingly. On remand the Income‑tax Officer found that the assessee failed to produce any evidence to the effect that securities were held by it as stock‑in‑trade. The Income‑tax Officer also observed that even the balance‑sheet of the relevant period did not indicate that such securities were held in stock‑in‑trade. The assessee, in the present case, made no attempt whatsoever to make out a case that the securities, which had been redeemed were a part of stock‑in‑trade. Nor did it place any material from which it could be established that those securities had been treated in its books in the same way as other securities and shares held by it. Mr. Ali Athar has cited case of Malabar Cooperative Central Bank Limited v. Commissioner of Income‑tax, Kerala 1975 (101) I T R 87 in which the Tribunal held that the burden of proving that the securities were held a stocks‑in‑trade would be discharged only if the bank established that it had been buying and selling securities or dealing with them. On these facts the question was referred to the Kerala High Court was whether the interest on securities received by the assessee's Cooperative Society Bank is exempted from tax. In view of the finding of fact by the Tribunal that in the instant case securities held by the assessee bank were easily realizable securities, the learned Judges were of the opinion that they cannot be treated as otherwise than as stock‑in‑trade. In those facts, the High Court held that it appears to the learned Judges that the Tribunal proceeded under a misconception of the nature of the business of a Banking Institute. The case is distinguishable as, in that case the Tribunal held that the assessee not having discharged the burden of showing that the securities did represent its stock‑in‑trade. In the present case the Tribunal had clearly observed that the assessee was holding securities and earning interest thereon. In addition it was effecting purchase and sale of securities and was showing trading profits therein. It was in the context of those two different types of dealings in the securities the Tribunal vacated the order of the Income‑tax Officer and remanded the case to the Income‑tax Officer by its order, dated 13‑9‑1966. On the basis of the Tribunal's order, dated 13‑9‑1966 the onus of proving that the loss arose from securities held as stock‑in‑trade purely lay on the; assessee. Admittedly the assessee had failed to produce any such evidence. The decision of the Tribunal amounts to a finding that the Income tax Officer had to investigate whether the securities held by the assessee as stock‑in‑trade or a capital investment. It shows that the burden was on the assessee of showing that the securities did represent its stock‑in‑trade. We are of view that the onus of proof on the assessee was attained finality as the assessee accepted the decision of the Tribunal as he did not file any reference application as provided by section 66(1) of the Act. From the material on record, it is clear that the Tribunal had proceeded on the basis that the securities were held by way of invest ment. We are of 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. In the result the question is, therefore answered in the affirmative. The parties have to bear their own costs. M. B. A. Reference answered in affirmative