Trading loss on sale of securities arises where disposal is driven by immediate business funding needs, not capital investment purposes.

Sale of Government securities by a State financial corporation was treated as part of its business operations because the securities were realised to meet immediate loan commitments and maintain working liquidity for its statutory lending activities. Although the securities had been acquired from surplus funds and were sold when market conditions were adverse, the dominant purpose remained raising funds for disbursement of loans, not investment disposal as capital accretion. The resulting loss was therefore a trading loss and not a capital loss, and the reference was answered in favour of the assessee.

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Issues: Whether the loss suffered on sale of Government securities by a State financial corporation was a trading loss or a capital loss.

Analysis: The corporation's statutory functions under the State Financial Corporations Act, 1951 were to assist industrial concerns by granting and underwriting loans and by doing acts incidental to that object. The securities had been purchased out of surplus funds, but their sale was driven by the immediate need to meet substantial sanctioned loan commitments and to maintain working liquidity for the corporation's business. The sale of the lowest-yielding securities, even with awareness of market decline and possible higher returns elsewhere, did not change the dominant business purpose of raising funds for disbursement of loans. Applying the principle that a gain or loss on realisation of securities is business income or loss where the transaction is part of the carrying on of the business, the sale was held to be sufficiently connected with the corporation's business operations.

Conclusion: The loss on sale of the securities was a trading loss and not a capital loss, and the answer to the reference was in the negative in favour of the assessee.

Ratio Decidendi: Where the sale of securities is undertaken as a normal step in meeting the immediate business requirements of the assessee and is closely linked with the carrying on of its statutory business, the resulting loss is a trading loss and not a capital loss.

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