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Issues: Whether the surplus realised on sale of securities held by a financial corporation, purchased out of surplus funds and encashed when funds were required for lending operations, constituted trading profit or capital gain.
Analysis: The assessee was a financial institution whose business object was to advance loans to industrial concerns. Its surplus funds were invested in readily convertible securities and were later sold to meet business requirements. Applying the settled test that the real question is whether the sale of securities is so connected with the carrying on of the business that the surplus can fairly be regarded as business profits, the Court held that the securities were held only as an interim deployment of funds and not with the object of creating a capital asset. The Court treated money as the stock-in-trade of such a lending institution and relied on the principle that realisation of securities, when done to meet business needs, is a normal step in carrying on the business.
Conclusion: The surplus on sale of securities was a trading receipt and not a capital receipt; the question was answered in favour of the Revenue and against the assessee.
Ratio Decidendi: For a financing or lending institution, sale of easily realisable securities purchased out of surplus funds to meet business requirements is a normal step in carrying on business, and the resulting surplus is taxable as trading profit rather than capital gain.
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