Conversion of government securities treated as realisation; resulting gain held taxable as business income rather than capital gain.

Conversion of government securities effected a realisation rather than mere capital appreciation; the court applied authorities treating compulsory exchange/conversion as starting a new venture and used a factual test whether holding, selling and reinvesting securities were normal steps of the taxpayer's business. The statutory requirement to hold government securities under the Reserve Bank Act reinforced that the transactions were incidental to banking operations. On those grounds the quantifiable difference arising on the 1946 conversion was held taxable as business income and not as a capital gain, decision favouring revenue.

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Issues: Whether the sum of Rs. 6,09,412-10-3 representing the difference between the 3% Government Conversion Loan of 1946 at par and the cost of the Government securities held by the assessee and converted in 1946 is assessable income of the assessee or a capital gain.

Analysis: The Court analysed whether the transactions amounted to mere appreciation of an investment or to a realisation connected with the carrying on of the assessee's business. Precedents considered include Punjabi Co-operative Bank Ltd. v. Commissioner of Income-tax establishing that sales or realisations of securities may be assessable where done in the course of the taxpayer's business; Californian Copper Syndicate v. Harris and Royal Insurance Co. Ltd. v. Stephen holding that exchange or compulsory conversion of securities effects a realisation and starts a new venture; Westminster Bank Ltd. v. Osler applying the same principle to government bond conversions; and Sardar Indra Singh & Sons Ltd. v. Commissioner of Income-tax confirming the factual test whether sales are normal steps in carrying on the business. The Tribunal found, on the facts, that holding, selling and reinvesting of securities by the bank were incidental to and in the usual course of its banking business, and statutory requirement to hold government securities under Section 42 of the Reserve Bank of India Act, 1934 supported that finding. Applying the stated tests, the Court treated the conversion as a realisation and the quantifiable difference as profit assessable as business income.

Conclusion: The sum of Rs. 6,09,412-10-3 is assessable as the assessee's income and not a capital gain; decision is against the assessee and in favour of the Revenue.

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