Taxability of interest on Government securities: temporary liquidity investments were held outside banking business profits.

Interest earned on Government securities purchased from a bank's liquid assets to satisfy a statutory liquidity requirement was treated as assessable interest on securities, not as banking business profits. The framework under the Income-tax Act, 1922 distinguished income from securities from business income, and the investment was found to be only a temporary parking of liquid funds rather than an integral part of banking operations. Authorities relied on for a different result were distinguished because, in those cases, the investments were inseparable from the business activity. The assessment in favour of Revenue was therefore upheld.

---

---

Issues: Whether interest earned on Government securities purchased out of the bank's liquid assets to meet a statutory liquidity requirement was taxable as interest on securities or formed part of the profits of the banking business.

Analysis: The relevant framework under the Income-tax Act, 1922 treated interest on Government securities as a separate head of income, while business income was chargeable only where the receipt arose from the profits or gains of a business carried on by the assessee. The investment was made to keep a portion of the bank's liabilities in a readily realizable form, but the Court found no sufficient basis to hold that such investment was an integral part of the banking business itself. The English and Scottish authorities relied on were distinguished on the footing that, in those cases, the investments were inseparable from the relevant business operations, whereas here the securities were only a means of temporarily parking liquid funds.

Conclusion: The interest on Government securities was not part of the bank's business profits and was assessable as interest on securities. The decision of the Commissioner was upheld, in favour of Revenue.

Ratio Decidendi: Temporary investment of surplus liquid funds, even when kept to satisfy a liquidity requirement, does not become an integral part of a banking business unless the investment itself is shown to be part of the business operations.

---