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Issues: (i) Whether surplus arising on maturity or redemption of securities maintained by a banking company under section 24 of the Banking Regulation Act, 1949, is business income or capital gain; (ii) Whether the amount of gratuity of Rs. 9,95,621 is allowable as a deduction.
Issue (i): Whether surplus arising on maturity or redemption of securities maintained by a banking company under section 24 of the Banking Regulation Act, 1949, is business income or capital gain.
Analysis: The statutory requirement under section 24 does not convert a bank's circulating funds into a capital asset. A banking company carries on business with money as its stock-in-trade, and maintaining liquid resources in cash, gold, or approved securities is part of the ordinary and prudent conduct of that business. The fact that the securities were held to satisfy a statutory liquidity requirement did not break the nexus with the banking business. The realisation of such securities was treated as a normal incident of carrying on banking operations and not as a capital transaction.
Conclusion: The surplus was held to be business income and not capital gain, in favour of the Revenue and against the assessee.
Issue (ii): Whether the amount of gratuity of Rs. 9,95,621 is allowable as a deduction.
Analysis: The question was concluded by earlier binding authority, and the principle governing deduction of the gratuity amount had already been settled in favour of the assessee. No fresh controversy survived on this issue.
Conclusion: The deduction was held allowable, in favour of the assessee and against the Revenue.
Final Conclusion: The reference was answered partly for the Revenue and partly for the assessee, with the first question decided in favour of the Revenue and the second question decided in favour of the assessee.
Ratio Decidendi: Where a banking company holds securities as part of the statutory or prudent deployment of its circulating funds, the surplus arising on their realisation is a trading receipt closely connected with the banking business and is taxable as business income rather than capital gain.
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