Business income treatment applies to surplus on conversion of Government securities into fresh loan stock.

Surplus arising on conversion of Government securities into fresh Government loan stock was treated as assessable income, not capital gain, because the securities formed part of the bank's ordinary banking business. The surrounding transactions showed that the securities were bought, sold and reinvested in the normal course of business, so the conversion was an exchange of one investment for another rather than passive appreciation of capital. The court applied the principle that a gain is taxable where it arises from a transaction connected with the business and undertaken in its ordinary course. A compulsory conversion did not prevent the old holding from being treated as realised for tax purposes.

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Issues: Whether the surplus arising on conversion of Government securities into fresh Government loan stock was assessable as income or was a capital gain.

Analysis: The bank's holding of Government securities formed part of its banking business and was incidental to the conduct of that business. The surrounding transactions showed that the securities were bought, sold, and reinvested as part of the normal course of banking operations, and the final conversion of the securities was an exchange of one investment for another rather than a mere passive appreciation of capital. In such a case, the true test is whether the gain arises from a transaction connected with the business and undertaken in its ordinary course. An exchange need not be for cash, and a compulsory conversion does not prevent the old holding from being treated as realised for tax purposes.

Conclusion: The surplus was assessable income and not capital gain; the answer was against the assessee and in favour of the Revenue.

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