[The judgment of the Court was delivered by I. Mahmud J.]-The following question of law has been referred to the High Court for opinion under Section 66 (1) of Income-tax Act 1922 by the Income- tax Appellate Tribunal (Karachi Bench), Karachi on the consolidated applications of the Commissioner of Income tax, Central, Karachi in respect of the charge years 1961-62 and 1963-64:- "Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the surplus of Rs. 4,044,703.00 (for the year 1961-62 and Rs. 20,296.00 for the year 1963-64) arising from the sale of shares was not Revenue income of the assessee and accordingly not liable to tax under the Income-tax Act?"
2. The respondent A. Razak H. K. Dada of Karachi, an individual, disclosed a surplus of Rs. 4,04,703- 00 for the charge year 1961-62 on the sale of shares of Kohinoor Industries Ltd. And a surplus of Rs.
20.296-00 on the sale of shares Ahmed Bawani Textile Mills Ltd. for the charge year 1963-64, respectively. These surpluses were claimed by him as appreciation of capital or realisation of assets and hence not taxable, but the Income Tax Officer rejected the respondent's claim and held that these surpluses were income and had been earned by the respondent in the course of respondent's activity in the nature of trade and, accordingly, he brought them to tax. The respondent thereupon filed two direct appeals to the Appellate Tribunal challenging this finding of the Income Tax Officer. By its consolidated order, the Appellate Tribunal allowed the respondent's appeals holding that there was no positive material to support the I. T. O's, finding that the surpluses were profits realised by the respondent from dealing in shares as an adventure in the nature of trade. According to the Appellate Tribunal, the surpluses earned by the respondent were appreciation of capital or realisation of assesse in both the years. The Commissioner thereupon applied to the Appellate Tribunal for referring the question to the High Court under Section 66 (1) of the Act. Accordingly, the question above reproduced, has been referred to the High Court for its opinion.
3. As rightly observed by the learned Appellate Tribunal in the referring order, the question relating to the chargeability of the surpluses to income tax is a mixed question of fact and law Therefore, the main question for consideration by the High Court in this reference is whether the Appellate Tribunal was right in holding that there was no positive material before the I. T. O. to justify him to infer as a matter of law, that the purchase and resale of the shares in each of the two account years, were taxable profits earned from an adventure in the nature of trade.
4. The Income Tax Officer relied on the following three facts and circumstances, which according to him showed that the purchase and re-sale of the shares by the respondent was an activity in the nature of trade:-
(1) The past activities of the respondent in the years previous to the assessment year 1961-62, as well as in the subsequent years, showed frequency of dealing in shares, which raised the presumption of trading rather than of investment.
(2) That shares are normally the subject of trading and that only in exceptional circumstances, they are the subject of investment by the business class, to which the respondent belonged, more so by a person who was an expert, with vast experience and means of knowledge of shares business.
(3) That the respondent was one of the Directors of Dada Ltd., whose authorised business was dealing in shares on a large scale and as such, he as Director occupied a special position of vantage and had special knowledge, which enabled him to manipulate his own shares holding with an eye to make profits. This, according to I. T. O. was a very important factor bearing on the issue which according to him, suggested the existence of a systematic, habitual and organized effort on the part of the respondent to obtain profits in shares dealing.
5. On the first fact found by the I. T. O. Mr. Mansoor Ahmad Khan, learned counsel for the Commissioner, supported the order of the I. T. O. And submitted that the frequency of purchase and sale of shares by the respondent in the past years and subsequent years in a large way resulting any substantial profits, raises a strong presumption that the respondent was engaged in trading in shares. The fact that in each of the two assessment years in question, the transaction resulting in surplus was an isolated transaction, made no difference as were part of a systematic, habitual and organized trading in shares over the past years. Counsel relied on a judgment of a Division Bench of the High Court (of which one of us was member) reported, Industrial Management Ltd. Karachi v. Commissioner of Income tax, Karachi (1978) 38, Taxation 5, that even a single venture could be held to be an adventure of trade if it is connected with the assessee's ordinary line of business or the intention of venture in the trade is manifest. Counsel also referred to Edwards (H. M. Inspector of Taxes) v. Bairstow and Harrison 36 T. C. 207 in support of the proposition that an isolated transaction may be an adventure in the nature of trade, if the intention at the time of purchase was to re-sell for a profit. The proposition submitted by the counsel is no doubt correct.
But the submission of Mr. Ali Athar, learned counsel for the respondent, is that from the very inception of his business in Pakistan, the respondent had purchased shares of various companies from time to time only with a view to make investment of his capital, as shown in the first and early balance sheet for the years 1948-49 to 1950-51. Moreover, in the past assessment years upto 1960- 61, the sales were consistently treated by the Department of realisation of investment and the surpluses were not treated as taxable profits. Even the respondent did not claim losses for one such past year. Therefore, we think that the Tribunal was right in holding that there was no force in the argument that the past history created the alleged presumption. In the absence of evidence of the assessee's intention to make profits at the time of purchase of the shares, the mere purchase and sale of shares by themselves would not be sufficient to constitute an adventure in the nature of trade. We are inclined to agree with this submission. No evidence of any such intention other than the purchase and sale of the share was produced by the Department to show the change of con duct of the respondent. The burden was on the Department to show that the motive of the respondent in purchasing the shares was to make profits, which the Department had failed to discharge. Counsel referred to Lalit Ram Mangi Lai of Cawnpore v. Commissioner of Income tax, U.
P. Lucknow 18 I. T. R. 286 in support of the submission.
6. On the second fact found by the I. T. O. Mr. Mansoor Ahmed Khan relied as the finding by the I T.
O. that the nature of the subject matter being shares, were normally the subject of trading. This submission in our view has no force. It cannot be denied that shares of public companies are also purchased by the public for purposes of making an investment in the hope of capital appreciation and possible gain on resale as also for the purpose of claiming the investment allowance under Section 15-C of the Income Tax Act. In the instant case, the shares were purchased against ready delivery and were also sold in ready delivery in one lot and in a single transaction in cash. Dividend income frome the shares which were held for sometime, were also offered for assessment. There is no material to convert the statement of the respondent that the sale of the shares in question was merely a change of investment under the apprehension that prices may go down in! future, which in fact they did.
7. With regard to the third fact found by the I. T. O. we agree with the finding of the Appellate Tribunal that the I. T. O. was not justified in drawing an inference against the respondent that he was trading in shares merely from the fact that he was a Director of Dada Ltd. And had occupied a unique position with specialised knowledge and experience of shares business. At any rate, we agree that the special position enjoyed by the respondent, was equivocal and consistent either way. It is well-settled that in the absence of positive evidence, the benefit must go to the assessee.
8. For the foregoing reasons, we agree with the finding of the Appellate Tribunal that the respective surpluses arising from the sale of shares, were not revenue income of the respondent and were not liable to income tax. We would accordingly answer the question in the affirmative.
Question answered in the affirmative. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.