ANDHRA PRADESH STATE FINANCIAL CORPORATION LIMITED Vs. COMMISSIONER OF INCOME TAX ANDHRA PRADESH HYDERABAD

JUDGEMENT

(1.) The question referred for opinion under s. 256(1) of the I.T. Act, 1961, is :

(2.) The assessee is the Andhra Pradesh State Financial Corporation Limited, Hyderabad, incorporated under s. 3 of the State Financial Corporations Act, 1951. According to s. 25 of the State Financial Corporations Act, 1951, one of its objects is :

(3.) The assessee held certain securities in the form of Andhra Pradesh State Development Loan in 1970 and 1980. These securities were purchased by the assessee for a sum of Rs. 30,51,784 in the year 1969. During the accounting year relevant to the assessment year 1974-75, the assessee required certain funds for meeting its obligations, viz., for advancing loans to industrial concerns. For that purpose, it sold the aforesaid securities, thereby making a profit of Rs. 2,54,466 (The securities were sold for a sum of Rs. 33,02,220). In its return submitted for the assessment year 1974-75, the assessee showed an amount of Rs. 2,54,466 as capital gains. The ITO was, however, of the opinion that the entire amount of Rs. 2,54,466 represents the income of the assessee from business and accordingly included the same in its taxable income. This was appealed against by the assessee. The AAC accepted the assessees contention that, inasmuch as the assessee is not a dealer in securities and also because the purchase of the said securities was by way of investment, the assessee was right in showing the relevant amount as capital gains. The AAC also relied upon the fact that in the entire history of the assessee, there were only three instances of encashing securities, viz., on two occasions they were redeemed on their maturing, and on one occasion they were sold. This very limited number of encashment of securities was held to be indicative of the fact that the sale of the securities in question was not closely connected with the assessees business, nor can it be regarded as a normal step in the carrying on of its business-as per the tests performed by the Supreme Court in its decision in Sardar Indra Singh and Sons Ltd. v. CIT [1953] 24 ITR 415. The Revenue appealed to the Tribunal. The Tribunal mainly relied upon the decision of the Rajasthan High Court in Rajasthan Financial Corporation v. CIT [1967] 65 ITR 112, and held that, inasmuch as one of the main objects of the assessee was advancing loans to companies upon which it earns interest and also because the sale of securities was effected for the purpose of carrying on its business, it must be held that the sale of securities was closely linked with the business of the assessee-Corporation; and if so, according to the principle enunciated by the Supreme Court in Sardar Indra Singhs case [1953] 24 ITR 415, the profit made must be treated as trading profit. On the above obtained the present reference to this court.