Punjab Co-operative Bank Ltd, Amritsar v Commissioner of Income Tax, Lahore

[1940] A.C. 1055

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(Judgment by: Viscount Maugham, Lord Russell of Killowen, Lord Wright, Sir George Rankin, Mr M R Jayakar)

Between: Punjab Co-operative Bank Ltd, Amritsar - Appellant
And: Commissioner of Income Tax, Lahore - Respondent

Court:

Judges:
Viscount Maugham
Lord Russell of Killowen
Lord Wright
Sir George Rankin
Mr M R Jayakar

Subject References:
INDIA
Appeal to Privy Council
Competency
Construction
BANK
SALE OF SECURITY
To meet withdrawals
Act done in carrying on the banking business
Profit on sale of securities taxable

Legislative References:
Government of India Act, 1935 (25 & 26 Geo. 5, c. 42) - s. 205
Indian Income-tax Act (XI. of 1922) - s. 10

Judgment date: 22 July 1940

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Judgment by:
Viscount Maugham
Lord Russell of Killowen
Lord Wright
Sir George Rankin
Mr M R Jayakar

Sect. 205, sub-s. 1, of the Government of India Act, 1935, provides that:

"An appeal shall lie to the Federal Court from any judgment, decree or final order of a High Court in British India, if the High Court certifies that the case involves a substantial question of law as to the interpretation of this Act or any Order in Council made thereunder, and it shall be the duty of every High Court in British India to consider in every case whether or not any such question is involved and of its own motion to give or withhold a certificate accordingly":-

Held, first, that the section does not provide for a case where no certificate has been given, and that in such a case there is no provision, express or implied, taking away from His Majesty in Council the right to entertain a direct appeal. If, however, it becomes manifest that the High Court, by some mischance or inadvertence or forgetfulness, has neglected its duty to give a certificate in a case where a substantial question of law as to the interpretation of the Act or any Order in Council made thereunder was, or might reasonably be, involved, the Board ought to decline to hear the appeal until the High Court have had an opportunity of giving or withholding a certificate.

Held, secondly, that the requirement in the section that it shall be the duty of every High Court in British India to consider in every case whether or not a substantial question of law as to the interpretation of the Act or any Order in Council made thereunder is involved, and of its own motion to give or withhold a certificate accordingly, is directory, and not mandatory, and that that duty is only imposed on judges of the High Court in cases where there is a reasonable possibility that such a question may arise.

Where, therefore, there was no possible ground for thinking that any such question could be involved in the appeal, and there was no certificate by the High Court, His Majesty in Council had jurisdiction to hear the appeal.

Errol Mackay v. Oswald Forbes (1940) L. R. 67 I. A. 64 examined and explained.

The realization by a bank of some of its securities in order to meet withdrawals by depositors is a normal step in carrying on the banking business, and the amount realized on the sale of the securities over their cost price is taxable as part of the profits of the business of the bank.

Principle in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 Tax Cas. 159, applied.

Dicta in Inland Revenue Commissioners v. Scottish Automobile and General Insurance Co. (1931) 16 Tax Cas. 381, at pp. 388-9, disapproved.

Judgment of the High Court affirmed.

Appeal (No. 71 of 1939) from a judgment of the High Court (February 3, 1938) on a reference by the Commissioner of Income-tax, Punjab, North-West Frontier and Delhi Provinces, under s. 66, sub-s. 2, of the Indian Income-tax Act, 1922.

The question raised by this appeal was whether or not the profit realized by the appellant, the Punjab Co-operative Bank, Ld., Amritsar, on the sale of certain securities was a profit liable to income-tax under the Indian Income-tax Act, 1922.

The facts appear from the judgment of the Judicial Committee, and the questions referred by the Commissioner were:

(1.)

"Whether in the circumstances of the case the amount of Rs.1,42,588 realised by the assessee on the sale of securities and shares over their cost price is taxable"; and

(2.)

"Whether under the circumstances of the case the net interest amounting to Rs.2764 received from vendees of securities on de die in diem basis is taxable."

The High Court (Addison and Din Mohammed JJ.) answered both questions in the affirmative.

On the hearing of the present appeal a preliminary objection was taken by the respondent as to the jurisdiction of His Majesty in Council, by reason of the provisions of s. 205 of the Government of India Act, 1935, to hear the appeal. The terms of s. 205 appear from the judgment of the Judicial Committee. In the present case the High Court had certified under s. 66A of the Indian Income-tax Act, on the petition of the Appellant Bank, that the case was a fit one for appeal to His Majesty in Council.

1940. June 25, 26, 27. J. M. Tucker K.C. and W. Wallach for the respondent. The preliminary objection to the jurisdiction of His Majesty in Council to hear this appeal arises out of the decision of the Board in Errol Mackay v. Oswald Forbes ^[F1] as to the effect of s. 205 of the Government of India Act, 1935. [The section was read.] If there is a case which does involve a substantial question of law as to the interpretation of the Act of 1935 or any Order in Council made under it, and the High Court certifies that such a question is involved, then no appeal lies to His Majesty in Council either with or without special leave.

It is not suggested that any such question is involved in the present case. The burden of the decision in the Errol Mackay case, ^[F1] however, is wide enough to make it necessary for the High Court in every case where there is a judgment, decree or final order to consider whether or not there is a question in the case which involves the interpretation of the Government of India Act. The Errol Mackay case ^[F1] did involve the interpretation of a section of an Act as amended by an Order in Council made under the Government of India Act, and therefore came within the words of s. 205. In every case where there is a judgment, decree or final order the duty of the High Court is to consider whether any question in that judgment raises a question of the interpretation of the Government of India Act or any Order in Council made thereunder, and they must then certify one way or the other - the High Court is required of its own motion "to give or withhold a certificate accordingly."

The decision in Errol Mackay's case ^[F1] requires the High Court to state definitely that a certificate is being withheld. If a certificate is given, then this Board has no jurisdiction. In the present case it is not known whether it has been affirmatively withheld, and that is why the Board has said that it must be stated one way or the other, because until that is known there is a doubt as to the jurisdiction of the Board. If the High Court have considered the question, and have withheld a certificate, then the matter is at large, and is to be decided according to the ordinary rules governing appeals.

The certificate in this case is clearly not one under s. 205. It has been held by the Federal Court in India that the words "judgment, decree or final order" in s. 205 include judgments or orders or convictions in criminal cases, and therefore if the Errol Mackay case ^[F2] is of application the same procedure will have to be gone through in every criminal case. It may be that this Board will say that although the words in the Errol Mackay case, ^[F2] "in every case," were very wide, what was meant was in every case like the one with which the Board was then dealing: Ramsumran Prasad v. Shyam Kumari, ^[F3] where it was said:

"If the language in the sentence quoted is rather wide, no-one referring to the case could be misled by it." ^[F4]

It is submitted, however, that the decision in Errol Mackay's case ^[F2] is clear and unequivocal, and that it follows the words of the section. The contents of s. 205 are the pivot on which the right of appeal of the litigant turns, and therefore the duty is put on the High Court to give or withhold a certificate of its own motion, and if it fails to do so, the matter is left in the air at that stage. This preliminary objection will of course fall altogether if a judgment of the High Court on a reference under the Indian Income-tax Act is not a "judgment" within the meaning of s. 205. It is submitted that the decision of the High Court on such a reference is a "judgment": Tata Iron and Steel Co. v. Chief Revenue Authority, Bombay; ^[F5] Bulaqi Shah v. Collector of Lahore; ^[F6] Prabhat Chandra Barua v. Emperor; ^[F7] Shahzadi Begam v. Alakh Nath; ^[F8] and In re Dayabhai Jiwandas v. A. M. M. Murugappa Chettiar. ^[F9]

There is a further difficulty - whether s. 205 can be said impliedly to have repealed s. 66A, sub-s. 2, of the Indian Income-tax Act, under which the High Court certified that the present case was a fit one for appeal to this Board. If an income-tax case involved a substantial question of law as to the interpretation of the Government of India Act or any Order in Council under it, and a certificate was given, then the Board could not hear the appeal notwithstanding s. 66A, sub-s. 2, and the case could not come before the Board at all. The respondent must contend that s. 66A, sub-s. 2, has been repealed by implication.

The words of s. 205 are "where such a certificate is given .... no direct appeal shall lie to His Majesty in Council." There is an indirect appeal given by s. 208 of the Government of India Act. The appeal, therefore, would have to go through the Federal Court, who would then decide the question of construction of the Act or Order in Council, and then the matter could come before this Board if the Federal Court give leave or if the Board give leave.

Raymond Needham K.C. and N. E. Mustoe for the appellant. In the Errol Mackay case ^[F10] there was a point standing out which involved the Government of India Act. It was an obvious point in the case; a question might arise for this Board whether it was a substantial point or not, because it has to be a substantial point in order to come within the scope of s. 205; hence the remission of the case for the Board to be informed as to the opinion of the High Court. Anything that was said by this Board in Errol Mackay's case ^[F10] must be read, and very closely read, in the light of the very special facts of that case which, by its very nature, was one which came within the range of the Government of India Act. In the present case there is no such question. The High Court knows the Government of India Act, knows the Indian Income-tax Act, and knows that there is nothing in the Government of India Act about income-tax. The position, then, has to be looked at on those facts in relation to s. 205, and what is there in this case to show that that knowledge has not been used by the High Court in this case? They have not certified that this is a substantial question, and therefore up to that point the right of appeal to this Board remains. There is nothing to show that the High Court has not considered the point, and it is submitted that in such an obvious case as this the presumption is that the point was before the High Court.

[Viscount Maugham. Their Lordships are satisfied that they have jurisdiction to hear the appeal, and will give the reasons for their decision later.]

The hearing of the appeal was then continued.

Raymond Needham K.C. The profit on the sales of the securities was Rs.1,42,588. The main contention is that these securities were not bought by the appellant bank for the purposes of resale, but for the purpose of reinvestment, and for keeping to meet exceptional calls on the bank's resources, and the profit on that sale was not a profit arising in the course of the bank's trade. The securities were bought at various dates, and the sales were made in exceptional circumstances. The only point is whether or not this was a trading profit of the bank.

Dealing in Indian Government securities formed no part of the business of the appellant bank, and no securities were purchased for the purpose of being sold at a profit. The judgment of the High Court is right in that it asserts that it is a question of fact in each case whether or not the investment was a part of the ordinary business of the bank. They are wrong, however, in the view that there was evidence upon which the Commissioner could take the view which he did. It is submitted that there was evidence upon which the Commissioner could find that it was not a trading profit if the right principle had been applied. [Reference was made to Inland Revenue Commissioners v. Scottish Automobile and General Insurance Co., Ld.; ^[F11] Northern Assurance Co. v. Russell; ^[F12] Liverpool and London and Globe Insurance Co. v. Bennett; ^[F13] and Westminster Bank, Ld. v. Osler (H.M. Inspector of Taxes). ^[F14] ]

There must be a finding that the purchase was made with the intention of selling at a profit - in other words, of initiating a trade: Devon Mutual Steamship Insurance Association v. Ogg. ^[F15] There must be a profit-making intention when the thing is bought; when one gets into the region of investment, even by a banker, the precise business involved must be looked at. No facts were found upon which the conclusion can properly be drawn that the sales in question were trading transactions; and the judgment of the High Court was wrong in their view that there was such a finding.

J. M. Tucker K.C. The assessability or otherwise of the profits arising from the sales of the securities and shares in question depends upon whether the bank was carrying on a business; whether such business was of such a nature as to involve the purchase and sale from time to time of securities and shares, and whether the purchases and sales in question were transactions effected by the bank in the ordinary course of carrying on that business.

All such questions are wholly or mainly questions of fact, and were answered by the Assistant Commissioner in the affirmative, and there was ample evidence to support his findings. The original investment was a transaction made in the ordinary course of the banking business; when the investment is sold and turned back into money, that is also a transaction in the ordinary course of the banking business, and if two transactions in the ordinary course of the business produce a profit, then that is a profit from the business, and is taxable under the Act - it falls under s. 10. This is part of its ordinary floating capital, in which it deals. The making of the investments and the sale of them were transactions linked up with the acceptance of the deposits and the repayment of the deposits. In J. Gliksten & Son v. Green ^[F16] it was held that a sum received from fire insurance in respect of timber lost by fire was a receipt in the course of the business and had to be brought in, despite the submission that it was no part of a timber merchant's business to trade in fires.

This Board has also held that where loss of profits has been insured against the amount recovered is to be brought in as a trade receipt: Rex v. B. C. Fir and Cedar Lumber Co. ^[F17] The present matter comes within the principle in Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes) ^[F18] that "enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business." ^[F19] [Reference was also made to Scottish Investment Trust Co. v. Forbes (Surveyor of Taxes). ^[F20] ] The question on the present facts is purely one of fact - in these circumstances and facts were these sums taxable? The finding of the Assistant Commissioner that they were taxable is unassailable.

Raymond Needham K.C. replied. The argument of the respondent gives the go-by to Liverpool and London and Globe Insurance Co. v. Bennett ^[F21] and Inland Revenue Commissioners v. Scottish Automobile and General Insurance Co., Ld. ^[F22] Those two cases are authority to show that the sale of investments necessarily made by the company in the course of its business, the sale of which was contemplated by its memorandum, and the investments being necessary to meet the company's liabilities, was not a sale producing a taxable profit.

1940. July 22. The judgment of their Lordships was delivered by Viscount Maugham -

This is an appeal from a judgment of the High Court of Judicature at Lahore, dated February 3, 1938, delivered on a reference under s. 66, sub-s. 2, of the Indian Income-tax Act (XI. of 1922) by the Commissioner of Income-tax, Punjab, North-West Frontier and Delhi Provinces.

The appellant (hereinafter referred to as the bank) is a joint stock company, incorporated in the year 1905, carrying on the business of banking. The objects for which the bank was established are set out in para. 3 of its memorandum of association, and include:

"(A)

To carry on in India and elsewhere the trade or business of banking in all its branches, and to transact and do all matters and things incidental thereto, or which may at any time hereafter be usual in connection with the business of banking or dealing in money or securities for money."

Paragraph 82 (i.) of the articles of association provides that the directors "may invest funds of the Company upon such securities or investments as they may think advisable; from time to time, vary such securities and investments, and convert the same, as occasion may require or as they may deem expedient, but they shall not invest or employ any part of the funds of the Company in the purchase of its own shares."

The profits of the Bank derived from its business during the year 1935 were assessable to income-tax in the year 1936-37, which is the year of assessment involved in this appeal.

The High Court, on February 3, 1938, decided that on the facts stated in the statement of the case drawn up by the Commissioner of Income-tax under s. 66, sub-s. 2, of the Income-tax Act, a question propounded by the Commissioner must be answered in the affirmative, with the result that the amount of Rs.1,42,588 realized by the bank on the sale in 1935 of certain securities and shares over their cost price is taxable as part of the profits or gains of the business of the bank which arose in 1935 (see s. 10 of the Income-tax Act).

On June 17, 1938, the High Court certified under s. 66A of the Income-tax Act, on the petition of the bank, that the case was a fit case for appeal to His Majesty in Council. As it happened, the two learned judges who gave this certificate were those who heard and decided the case on February 3, 1938.

On the appeal coming on for hearing before their Lordships, a preliminary objection to the appeal was taken, which has been elaborately argued, and it seems desirable in the first place to deal with this objection. It is based on the contention that no direct appeal now lies to His Majesty in Council from any judgment, decree or final order made by any High Court in British India unless that Court has recorded that it withholds the giving of a certificate that a substantial question of law as to the interpretation of the Government of India Act, 1935, is involved. That is said to be the effect of s. 205 of the Act, and reliance is placed on a decision of their Lordships in a recent case, which must be considered later. Sect. 205 is in the following terms:-

"(1.)

An appeal shall lie to the Federal Court from any judgment, decree or final order of a High Court in British India, if the High Court certifies that the case involves a substantial question of law as to the interpretation of this Act or any Order in Council made thereunder, and it shall be the duty of every High Court in British India to consider in every case whether or not any such question is involved and of its own motion to give or withhold a certificate accordingly.

"(2.)

Where such a certificate is given, any party in the case may appeal to the Federal Court on the ground that any such question as aforesaid has been wrongly decided, and on any ground on which that party could have appealed without special leave to His Majesty in Council if no such certificate had been given, and, with the leave of the Federal Court, on any other ground, and no direct appeal shall lie to His Majesty in Council, either with or without special leave."

The object of this section is plain. It is to ensure that in every proceeding where a judgment, decree or final order is made by any High Court in British India which involves a substantial question of law as to the interpretation of the Act or any Order in Council made thereunder (which, for brevity, will be referred to hereafter as the "specified question of law"), the appeal, if any, that is, the direct appeal, shall lie to the Federal Court. The word "direct" is used because s. 208 makes provision for an appeal in such a case on certain conditions from a decision of the Federal Court to His Majesty in Council; but nothing turns on this for the present purpose.

The means adopted in the section to carry out the above object are these:

(1.)

The appeal is stated to lie to the Federal Court if the High Court certifies that the specified question of law is involved, and is a substantial question.

(2.)

A duty is imposed on the High Court of its own motion to give or to withhold a certificate that the specified question of law, being a substantial question, is involved. This part of sub-s. 1 contains some other important words which will be considered later.

(3.)

Where such a certificate is given, any party in the case may appeal to the Federal Court on defined grounds (sub-s. 2).

(4.)

Where such a certificate is given no (direct) appeal shall lie to His Majesty in Council, even with special leave (sub-s. 2).

It is clear that the section does not provide for a case where no such certificate is given, however plain it may be that it ought to have been given. There is no provision, express or implied, taking away from His Majesty in Council the right to entertain a direct appeal in such case, and a fortiori there is nothing taking away the right of direct appeal to His Majesty in Council in a case where no substantial question of law of the specified character could by any reasonable possibility arise.

What, then, is the position if it becomes manifest to the Board that, by some mischance, or inadvertence or forgetfulness, the High Court has neglected its duty under the latter part of sub-s. 1 to give a certificate in a case where the specified question of law is, or may reasonably be, involved? It is plain that it is for the High Court, not this Board, to determine whether the question is involved, and, if so, whether it is substantial. In such an event, although the jurisdiction of His Majesty in Council has not been affected, since there has been no certificate, nevertheless there has been a dereliction of duty by the High Court, and the Board, in accordance with the principles on which it is accustomed to act in tendering advice to His Majesty, would not think it right to hear the appeal until a proper certificate has been obtained, or it is on record that a certificate has been withheld.

The precise event in fact happened in the recent case of Errol Mackay v. Oswald Forbes. ^[F23] It seemed to the Board that a question of interpretation arose under an Order in Council made by virtue of s. 293 of the Government of India Act, 1935. There was no certificate by the High Court. It was suggested by counsel for the appellants that the Court might have considered s. 205, and might have decided to withhold a certificate, though that decision was not expressed. Their Lordships expressed the view that this was unlikely in that case, and in the absence of a certificate they thought that the appeal should be dismissed with costs. They added, however, that if the High Court should thereafter make an order withholding a certificate under s. 205, the appellants were to be at liberty to apply to His Majesty in Council to have the appeal restored.

Their Lordships are of opinion that this order was perfectly correct, not because s. 205 took away the jurisdiction in a strict sense of His Majesty in Council, but for the more general reason indicated above. They will add that the course taken of dismissing the appeal was, no doubt, to some extent due to the circumstance that the Board entertained little doubt that the certificate would be given. If the case had been one in which there was a real doubt whether the certificate would be given or withheld, a more lenient course might have been taken, and the appeal might have been directed to stand over until the High Court had either given a certificate or decided to withhold it.

It remains to consider what the position is, and what course should be taken by the Board, when the appeal is from the High Court and no such specified question of law can with any reasonable probability be thought to be involved, and where, not unnaturally, the High Court have neither granted a certificate nor recorded that a certificate is withheld. The first question here is whether in such a case s. 205 applies at all, and at this point it is necessary to examine the language in the latter part of sub-s. 1 in order to determine the nature of the duty imposed upon the High Court.

The language is of a very comprehensive kind. The duty is to be that of "every High Court in British India." It is to consider "in every case" whether or not the specified question is involved. And, finally, the Court is "of its own motion" to give or to withhold a certificate accordingly. Their Lordships, however, are of opinion that this part of sub-s. 1 is directory, in the sense in which that word is used in the well known distinction between enactments, or phrases in them, which are mandatory or absolute and those which are merely directory.

There are several reasons for this conclusion: first, the object of s. 205 is as above stated; secondly, the circumstance that the duty is imposed on the judges of the High Court, persons occupying positions of great importance and dignity, to whom mandatory clauses would not be addressed without strong reason; thirdly, that, in fact, there is no provision whatever for imposing any penalty or deprivation of right on a litigant, if the High Court should neglect to comply with its judicial duty as laid down in the section. In other words, the duty is imposed on the judges for the purpose of ensuring that, if the case involves the specified question of law, the High Court will carry out the intention of the section by giving a certificate which will ensure that the appeal, if any, shall be to the Federal Court; but there is no condition precedent imposed on an appeal to His Majesty in Council in the absence of a certificate. The responsible persons - in this case the judges of the High Court - may be "blameable" - as Lord Blackburn observed in the instructive case of Justices of Middlesex v. The Queen ^[F24] - but third parties have nothing to do with that.

If the sentence imposing the duty is only directory, as their Lordships think is clear for the reasons stated, an important consequence follows. It is a well settled general rule that "an absolute enactment must be obeyed or fulfilled exactly, but it is sufficient if a directory enactment be obeyed or fulfilled substantially": Woodward v. Sarsons; ^[F25] see also Earl of Mountcashell v. Viscount O'Neill. ^[F26] It is sufficient if the plain object of the directory provision is carried out: Walter v. Rumbal; ^[F27] Jarvis v. Hemmings. ^[F28]

If these principles are applied in the present case, it will be apparent that the following alternative view arises: either s. 205, in imposing on the High Court the duty of giving or withholding a certificate, is doing so only in cases where there is a reasonable possibility that the specified question arises or may arise, or, alternatively, the duty is one which need only be complied with in such a case. It is plain that in the vast majority of cases no such question can arise. It seems to their Lordships most difficult to believe that the Legislature was intending to lay on the judges of every High Court an obligation as part of their judicial duties to record their intention to "withhold" a certificate in such cases as an ordinary judgment on a criminal trial, or in a libel action, or a decree or judgment in an every-day case for the recovery of a trifling sum of money, for example, in a normal action for a debt. Their first duty is "to consider"; but only, it would seem, when there is in fact something to consider. Their Lordships have come to the conclusion that the duty imposed on the judges by words of a directory character is one which arises only in a case where there is some reasonable ground for thinking that the specified question may be involved.

The conclusions on this matter of the construction of s. 205 are accordingly these: First, no question of the jurisdiction of His Majesty in Council can arise unless there is a certificate, in which case the direct appeal lies to the Federal Court. Secondly, if in the absence of a certificate it appears to the Board on an appeal that there is ground for thinking that there is a matter for the consideration of the High Court, and that they ought to have given or to have withheld a certificate, the Board ought to decline to hear the appeal until the High Court have had an opportunity of doing one or the other. Thirdly, the section, on its true construction, is dealing only with cases where there is a reasonable possibility that the specified question may arise, and the duty is imposed on the judges of the High Court only in those cases.

Their Lordships desire to add that the case of Errol Mackay v. Oswald Forbes ^[F29] related to a case within the second of these propositions. The remarks of the Board as regards the duties of the judges of the High Court must be read as confined to cases of the nature which arose in that case; and in that connection reference may be made to the remarks of Lord Halsbury in Quinn v. Leathem ^[F30] that every judgment must be read as applicable to

"the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found." ^[F31]

It may be well to add that their Lordships do not differ from the opinion expressed in that case as to the duty of the judges of the High Court in a case to which the section is applicable to record a determination to withhold a certificate if they think that is the right course. Preferably that should be done by the judges who have heard the case; but it is not essential in every case, and may sometimes be impossible, for example, when there are two judges and they differ on the question whether the certificate should be given or withheld. It may be noted that in the Errol Mackay case ^[F29] their Lordships provided for the event of the High Court making an order at some later date withholding the certificate in question, and that order, doubtless, could be made by judges other than those who delivered the original judgment.

It follows from the above observations that the preliminary objection fails, since in the present case there is no possible ground for thinking that any question, still less a substantial one, as to the interpretation of the Government of India Act, 1935, can be involved.

Two other matters were argued on the preliminary objection, first, whether a decision on a reference under s. 66, sub-s. 2, of the Income-tax Act is "a judgment, decree, or final order" within the meaning of those words in s. 205; secondly, whether the certificate given as above mentioned on June 17, 1935, under s. 66A of the Income-tax Act is not a sufficient proof that the certificate under s. 205 of the Government of India Act (if the section was applicable) had been withheld. On these two questions their Lordships do not think it necessary to express any opinion.

Coming now to the appeal by the bank, it may, be observed that the High Court rightly appreciated that the question was ultimately one of fact, to be decided on the findings of the Commissioner under s. 66, sub-s. 2, of the Income-tax Act, and that the appellant bank had to establish either that the Commissioner had misdirected himself on some question of law, or that there was no sufficient evidence to justify his findings. Their Lordships note that the High Court, in deciding that neither of these points had been made good, examined and considered a number of cases, most of which related to insurance companies and banks. Their Lordships do not propose to attempt to reconcile all these decisions and the various dicta which are to be found in the reports of them, which might indeed prove to be an impossible task; and they will add that the cases relating to insurance companies largely turn on the nature of the insurance business actually carried on and the way in which reserve funds have been set aside and dealt with.

In the present case, it appears that on December 31, 1934, the value of the investments of the bank amounted to Rs.50,88,550, mainly held in Indian Government securities which, being readily saleable, could, if necessary, be promptly realized in order to pay claims. During the year 1935 some 10 lacs of these Government securities and some shares were sold, and the profit made, taking the differences between the cost price of the investments and the prices at which they were sold, was Rs.1,42,588. The grounds on which the bank contends that the profit of Rs.1,42,588 made on the sale of some of its securities in the year 1935 does not form part of the profits of its business of banking are succinctly stated thus, in the statement of the case: That the bank had treated the investments in shares and securities as a reserve for emergencies, and had resorted to their sale in the accounting period 1935 because they had in that year to meet heavy withdrawals of deposits and to deposit Rs.2,66,000 with the Reserve Bank of India under the provisions of s. 42, sub-s. 1, of the Reserve of India Act, 1934 (No. 11 of 1934). The bank claimed also that it did not "deal in shares and securities," and that therefore the profit made by the sale of shares and securities was not taxable.

In the statement the Commissioner finds that up to 1933 there was no sale of securities. The first sale took place on November 30, 1934. On the other hand, he declines to accept the contention that the bank had to sell the securities in order to meet heavy withdrawals of deposits and to make the compulsory deposit with the Reserve Bank of India. He states from an examination of the books that it is clear that the profits realized by selling shares and securities were utilized in increasing the reserves. A general view of the financial position since 1932 as on December 31 of each year can be gathered from a table contained in the statement, which is as follows:-

It is apparent that the decrease of deposits in the year 1935 as compared with the previous year is roughly 5 per cent., while the decrease in investments as between the two years is more than 20 per cent. So far from there being a finding that the sales of shares and securities were due to any special emergency, the Commissioner says that it is apparent that the bank had been selling the shares and securities in order to take full advantage of the high prices prevailing in 1935. He was of opinion that the bank had been "carrying on business in shares and securities since the closing months of 1934." This may well be the correct view, and a sufficient ground for dismissing this appeal; but their Lordships do not wish to give any support to the contention that, in order to render taxable profits realized on sales of investments, in such a case as that before them, it is necessary to establish that the taxpayer has been carrying on what may be called a separate business either of buying or selling investments or of merely realizing them.

The principle to be applied in such a case is now well settled. It was admirably stated in a Scottish case, Californian Copper Syndicate (Limited and Reduced) v. Harris, ^[F32] and the statement has been more than once approved both in the House of Lords and in the Judicial Committee: see, for example, Commissioner of Taxes v. Melbourne Trust, Ld. ^[F33] Some dicta which appear to support the view that it is necessary to prove that the taxpayer has carried on a separate or severable business of buying and selling investments with a view to profit in order to establish that profits made on the sale of investments are taxable, for example, the dicta in the case of Inland Revenue Commissioners v. Scottish Automobile and General Insurance Co. ^[F34] cannot now be relied on. It is well established, to cite the exact words used in the Californian Copper case: ^[F32]

"that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business." ^[F35]

In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank, often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds, at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realizable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If, as in the present case, some of the securities of the bank are realized in order to meet withdrawals by depositors, it seems to their Lordships to be quite clear that this is a normal step in carrying on the banking business, or, in other words, that it is an act done in "what is truly the carrying on" of the banking business.

This, it appears to their Lordships, is the more appropriate and satisfactory ground for dealing with the question arising in the present case. It accords exactly with one of the findings in the statement of the Commissioner agreeing with the views both of the Income-tax Officer who first dealt with the case and of the Assistant Commissioner. He observed "that the purchase and sale of shares and securities are so much linked with the deposits and withdrawals of clients that, with the existing Articles of Association, the purchase and sale of shares and securities are as much part of the assessee's business as receiving deposits from clients and paying them off are, and that, therefore, the profits which arise from the former transactions are as much business profits as the profits arising from the latter transactions are."

There can be no doubt that there is ample evidence to justify this view, and in their Lordships' opinion, as in that of the High Court, it is sufficient to dispose of this appeal.

Their Lordships will accordingly humbly advise His Majesty that the appeal must be dismissed, with costs.

Solicitors for appellant: Douglas Grant & Dold.

Solicitor for respondent: Solicitor, India Office.