NASIM HASAN SHAH, J.--This is a reference under section 66(1) of the Income-tax Act, 1922, made by the Income-tax Appellate Tribunal, Lahore, for our opinion on the following question of law framed by it :- "Whether in the facts and circumstances of the case, the Tribunal was right in holding that the surplus of Rs, 53,537 was the assessee's income liable to be assessed to tax?
2. The facts forming the background have been set out in the statement of the case prepared by the Tribunal and may be summarised as follows. Messrs The Batala Engineering Co. (Pakistan) Ltd., Lahore is the assessee. The assessee had a branch in London. It had two current accounts at that place, with the Grindlays' Bank. It had also a current account with Grindlays' Bank at Bombay. The credit balances on the 31st July 1955 stood as under :--
(i) Grindlay's Bank, BombayRs,.61,786 (in Pak. currency)
(ii) Grindlay's Bank, London (in both the accounts).Rs, 1,31,475 Later on, there was revaluation of the Pakistan currency with the result that there was a total gain of Rs, 53,537 in the three accounts taken together. As regards the two accounts in London moneys were transferred from one account to the other account for maintenance of a branch office as well as for defraying the cost of preparation of various designs. Money was transmitted to London to meet such expenses by the permission of the State Bank of Pakistan. So far as the Bombay account was concerned, money was transmitted in like manner for the purpose of meeting expenses on account of journals, magazines etc. in connection with the assessee's business. There was only one remittance to India in the year 1950 with the permission of the State Bank of Pakistan and no further remittance was made thereafter.
3. The assessee's business consists in the manufacture and sale of foundry products, agricultural implements, tools, diesel engines, fabricated steel goods and rolling mill products. The balance in the three accounts appeared regularly on the credit side of the balance-sheet every year. The assessee debited the aforesaid sum of Rs, 53,537 to his bankers and credited the "Difference in Exch Inge" account with a like sum. The Income-tax Officer brought the surplus under assessment and the appeal to the Appellate Assistant Commissioner in this behalf failed.
4. The assessee appealed to the Income-tax Appellate Tribunal. The assessee's first contention before the Tribunal was that the gain on account of fluctuation in foreign exchange constituted capital gain or an appreciation of the assessee's capital but did not constitute income so as to attract income-tax. Reliance was placed on section 2 (4-A) of the Income-tax Act which defines the term "Capital Asset". The definition of Capital Asset at the relevant time was as follows :- "'Capital Asset' means property of any kind held by an assessee, whether or not connected with his business, profession or vocation but does not include :-- (i)any stock-in-trade, consumable stores or raw materials held for the purposes of his business profession or vocation ; (ii)personal effects, that is to say movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him ;
(iii) any land from which the income derived by the assessee is agricultural income."
5. It was argued that the working capital lying with the banks abroad constituted the assessee's "capital asset" and that any surplus arising from fluctuation in exchange was an accretion to the "capital asset", therefore, capital gain. The Tribunal repelled the assessee's contention and came to the conclusion that "Money earmarked by an assessee for meeting business expenses constitutes circulating or floating capital" and that it could not be treated as a capital asset. The Tribunal further observed that the definition of "capital asset" was introduced simultaneously with the introduction of section 12-B which made capital gain assessable to tax ; neither section affects the connotation of circulating or floating capital.
6. The next argument of the assessee was that in any case, the surplus was just a notional income as in point of fact not a penny was brought back to Pakistan and so far as the foreign countries were concerned, there was no appreciation at all. This contention was repelled by the Tribunal with the following observations :-- "It may, however, be pointed out that salaries paid to the staff in England after revaluation were converted into Pakistan currency on receipt of account statements at the new rate of exchange.
These expenses so converted were claimed, allowed against the assessee's income it would thus appear that the surplus was utilised effectively and the assessee got the benefit of such utilisation by getting an allowance of an increased amount on the basis of the new rate of exchange."
7. The Tribunal has referred to a precedent. In 1949, the Indian currency and pound sterling were devalued, whereas Pakistan currency was not devalued. In Grindlays Bank in India there was a debit balance in the assessee's account to the tune of Rs, 32,258. After devaluation the assessee made a gain of Rs, 9,857 in Pakistan currency. On the other hand, there was a loss of Rs, 3,770 in Pakistan currency so far as credit balances in the London accounts were concerned. The loss was claimed by the assessee and allowed in the assessment year 1951-52, thus reducing the net gain to Rs, 6,087, which was brought under assessment. The assessee took advantage of the reduction of gain without demur. The Tribunal has commented on these facts as follows :- "It. would thus appear that the issue relating to the assess ability of the surplus arising as a result of fluctuation in the exchange ratio so far as the balances in the respective accounts were concerned, should be taken to have been decided in the assessment for 1951-52. It was conceded that there were no new facts obtaining in the year under review. The assessee cannot be allowed to approbate and reprobate at the same time. Having had the benefit of allowance of loss, it cannot now turn round and say that the surplus cannot be assessed to tax."
In the result the Tribunal held that the amount in question was rightly brought under assessment and accordingly dismissed the appeal by its order dated the 6th of April 1963.
8. The assessee submitted an application under section 66(1) of the Income-tax Act that a statement of the case be drawn up and six questions of law, allegedly arising out of the order, be referred to the High Court. The Tribunal observed that the alleged questions were framed in an argumentative form. In its opinion, only the following question of law arose out of the Tribunal's order, namely, "whether in the facts and circumstances of the case, the Tribunal was right in holding that the surplus of Rs, 53,537 was the assessee's income liable to be assessed to tax?" This question was referred for the opinion of this Court under section 66(1) of the Income-tax Act.
9. Two contentions have been raised before us by Mr. Muhammad Amin Butt, Advocate, on behalf of the assessee. He argued in the first place that under the Income-tax Act only "income" can be brought under assessm ent. The definition of the word "income" given in section 2 (6-C) of the Act is, he submitted, not exhaustive but that the meaning of this word has been explained by the Privy Council in a judgment delivered by it to be "a periodical monetary return 'coming in' with some sort of regularity or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall" (vide Commissioner, Income- tax, Bengal v. Shaw Wallace & Co. . This meaning of the word "income" he pointed out, has been adopted by our own Supreme Court in Cement Agencies Ltd. v. The Income-tax Officer, Central Circle II, Karachi . Under section 4 of the Income-tax Act, income, profits and gains which are received by a person or "accrue" or "arise" to a person are taxable. According to learned counsel, the recorded gain of Rs, 53,537 was only a notional gain and not "income" which was subject to tax, under the Income-tax Act, because no amount actually "came in" to the assessee, nor did any income "accrue" or "arise" in favour of the assessee. In the second place, he argued that the bank balances in London and Bombay constituted "capital asset" within the meaning of section 2 (4-A) of the Act, and that the gain of Rs, 53,537 on account of fluctuation in rates of foreign exchange constituted capital gain. This gain not being profit or gain arising from the sale, exchange or transfer of a capital asset did not fall within the mischief of section 12-B of the Act and hence was not chargeable to tax.
10.Both these contentions are inter-connected ; therefore, we would deal with them together. We find that under the Act the total income of a person in any previous year is taxable under section 4 of the Act. The expression "total income" includes_ all "income", "profits" and "gains" from whatever source derived. We, therefore, asked counsel to explain the significance of the words "profit" and "gain" which follow the word "income" in section 4 of the Act. According to the learned counsel the words "profit" and "gain" were a surplusage because they did not add anything to the meaning of the word "income". In support of this submission, he drew our attention to the already mentioned judgment of the Privy Council in the case of Commissioner, Income-tax, Bengal v. Shaw Wallace & Co., wherein it was observed that "the object of the Indian Act is to tax income, a term which it does not define. It is expanded, no doubt, into income, profits and gains, but the expansion is more a matter of words than of substance". Counsel stated that this observation has been cited with approval by the Privy Council in the subsequent case of Commissioner, Income-tax, Bengal v.
Mercantile Bank of India etc. . He, therefore, urged that the gain recorded in the books of the assessee, in the instant case, is not a gain in the sense of "income" but only an appreciation in the value of capital asset, which is not liable to tax.
11.Thus the first question which requires consideration is whether the cash balances lying in the banks at London and Bombay were "capital asset" of the assessee and whether the gain arising1 2 3 from it was only capital gain. According to learned counsel for the assessee "capital asset" means a property of any kind held by an assessee whether or not connected with his business, profession or vocation, subject to three exceptions laid down in subsection (4-A) of section 2 of the Act, which according to counsel do not apply in the present case and, therefore, the gain made by the assessee is a gain from a capital asset and as such, is exempt from tax. He points out that capital gains are taxable under section 12-B of the Act only in respect of profits or gains arising from the sale, exchange or transfer of a capital asset which is not the case here. He also pointed out that even this provision of law, which was introduced by Act XXII of 1947 with effect from 31-3-1946, remained in force until the 1st of April 1949, but its operation remained suspended until the 6th of June 1963, and was revived with effect from 7th June 1963, by Act XVI of 1963 ; therefore, at the relevant time, which is relevant in this case, even the provisions of section 12-B were not in force.
12.As against the above point of view the stand of the learned counsel for the Department was that the cash balances in question were not "capital asset" of the assessee but its "stock-intrade" and, therefore, on account of the first exception contained in the definition of the expression "capital asset" in subsection (4-A) of section 2 did not fall in the category of "capital asset". In support of his submission that the cash balances in question were the "stock in-trade" of the assessee, counsel invited our attention to the definition of the expression "stock-intrade" given in Burrows "Words and Phrases: Judicially Defined", (1945 Edn.) at page 145 wherein a passage from the case of Seymour v. Rapier is reproduced as follows :- "Nothing shall be deemed stock-in-trade but the shop goods and utensils in trade, though I think the ready money in the till might come within that construction."
13.Generally speaking, income cannot accrue from the appreciation of fixed capital and accrues from the appreciation of floating or circulating capital or stock-in-trade. There is no recognised definition of fixed or floating capital. Mr. Justice M. Yaqub All explains the concepts thus : "Fixed capital represents the amount spent on setting up structure of the business, e.g land and machinery for acquiring a concern and the amount spent on purchase of stock and securities etc. Appreciation of their value is not a trading receipt and their depreciation not a trading expense to be incorporated in the profit and loss account. Circulating or floating capital is the amount spent on running the concern, in `carrying on' and 'carrying out' an operation of business for profit making ; for example purchase of raw material, pay-roll, Directors' fee, etc.' Literally, it is that capital which keeps circulating and floating in the course of business and does not constitute its outer framework. The amount spent in this account is a trading expense and an increase on it a trading receipt to be incorporated in the profit and loss account. The notion of fixed capital and circulating capital is, however, not inflexible e.g. land and machinery will be circulating capital in the hands of a real estate dealer and manufacturer of machinery, respectively, but fixed capital in the hands of a manufacturer of goods. (Messrs Gillanders Arbuthnot & Co. v. Commissioner of Income-tax PLD 1966 Lah. 223)."
14.The observation of the Lord President in I. D. Laird v. C. I. R. , namely, "whether something is income or not is prima facie a question of fact and not of law, for after all, the B distinction between income and capital is one of convenience and there is no real substance in it appears to sum up the situation aptly. It seems, therefore, necessary to examine the facts of the present case more close so that the distinction may be discussed as a matter of fact.
15.In the statement of the case submitted by the assessee along with the application made to the Tribunal asking it to refer the case to this Court under subsection (1) of section 66 of the Act, it is mentioned that "the London Branch of the assessee Company supervises the purchases of raw material made abroad". It is also mentioned that "the London Bank Account was reimbursed from time to time for the Expenses, Established Designing Charges for diesel engine and other Expenses".4 5 As for the account at Bombay it is stated that "the account with Grindlays Bank Ltd. Bombay was opened on 30th September 1950, when Company transmitted Rs, 1,18,312 equivalent to Rs, 1,70,000 Indian to Bombay". It was added that there was no other remittance from Pakistan to the Bombay Bank Account. The purpose of the funds was explained thus : "The balances were used for meeting lawyers' fee, advertisement and trade expenses". On the basis of the above facts it was contended one behalf of the assessee that the amounts in these accounts constituted fixed capital and not the stock-in-trade or floating or circulating capital of the assessee ; therefore, the gain derived from it was capital gain and not income.
16.We cannot persuade ourselves to agree to this view of the assessee's counsel, because it is not disputable nor has counsel disputed it that "money earmarked by an assessee for meeting business expenses constitutes circulating or floating capital." The Tribunal has also taken this view and supported it by citing in the Rees Ruturbo Development Syndicate Ltd. v. The Commissioner of Ireland Revenue . In that judgment Rowlatt, J. has observed that :-- "In one sense the words 'capital asset' are words of art, because you do not have one set of assets representing capital and another set of assets representing income ; but what is meant by the phrase 'capital asset' is that this is an asset which represents fixed capital as opposed to circulating capital that is to say, that this is an article which is possessed by the individual in question, not that he may turn it over and make a profit by the sale of it to his advantage, but that he may keep it and use it and make a profit by its use."
In this case, the assessee has utilised the Bank accounts for defraying the cost of preparation of designs of the goods which were manufactured by it, the cost of advertisement and other trade expenses. The money which was in the Bank accounts was, therefore, undoubtedly circulating or floating capital.
17.In the above view of the matter the money is assessable to income-tax, but counsel for the assessee tried to get out of this dicult corner by arguing that property of any kind which falls within the meaning of "capital asset", as defined in section 2(4-A) irrespective of whether or not it is connected with business, profession or vocation ; and that any property which is "capital asset" can be subjected to tax only if it falls within the purview of section 12-B of the Income-tax Act, 1922. The logic which counsel adopted was that it was immaterial that the money lying in the Banks was connected with the business of the assessee or not, because if it was "capital asset", then it could be assessed to income-tax only if it was sold, exchanged or transferred in terms of section 12-B and in the process yielded profits or gains. In order to understand his argument it is necessary to refer to section 2 (4-A) and section 12-B of the said Act. Section 2 (4-A) has already been reproduced above. The relevant part of section 12-B is as follows :- "12-B.--(1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March 1946 (and before the 1st day of April 1949 and after the seventh day of June 1963) and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, or transfer took place.
18. On the basis of section 2 (4-A) counsel for the assessee argued that property of any kind held by an assessee is "capital asset" with three exceptions only, that is to say, when it is stock-in-trade, personal effects or land from which the assessee derives agricultural income. The Bank Accounts of the assessee, according to counsel, could not fall within any of the three exceptions, therefore, they were "capital asset" as well exempt from income-tax unless there was sale, exchange or transfer of the asset, profits or gains accrued in consequence of such sale exchange or transfer. If this argument of counsel was correct, then he had a simple and sound case, but the difficulty in his way was that the definition of "capital asset" and section 12-B were enacted with the object of subjecting to income-tax "capital gains" which were not subject to such tax before the enactment6 of these two provisions. The reason for enacting these provisions in 1947, as explained by counsel for the assessee, was that prices of "capital asset" had shot up after the Second World War and people were selling, exchanging or transferring them with the intention of making profits or gains. In other words "capital assets" had ceased to be utilised as such and were being utilised as stock-in- trade. The situation was, therefore, met by the Legislature by defining the expressiou "capital asset" very widely, but limiting its taxability by restricting it to such sale, exchange or transfer as yielded profits or gains. Counsel for the assessee conceded and to our mind rightly so, that the definition of "capital asset" contained in section 2 (4-A) is so wide that it includes floating capital and circulating capital. This definition was adopted by the Legislature deliberately so as to exclude the chances of any assessee escaping from income-tax if he used his "capital asset" for making gain or profit by selling, exchanging or transferring it. The scope of section 2 (4-A) therefore, is consistently wide with the object of the Legislature and the assess ability of such capital to income-tax is limited by the terms of section 12-B. These two provisions are complementary to each other and should be used for giving effect to the combined object of the two provisions.
Outside the combined scope of the two provisions there can be such floating capital and circulating capital as would be subject to income-tax if it fell within the mischief of other provisions of the Act. Counsel for the assessee did not agree, because he could not save his argument from being destroyed without contending that floating capital and circulating capital had become merged in the definition of "capital asset" and could be subjected to tax only in terms of section 12- B.
19. The last-mentioned stand of counsel for the assessee cannot be accepted as sound, because the expression "capital asset" has been defined in section 2 (4-A) only for the purpose of section 12-B and owing to its vast scope, subjectivity to income-tax has been curtailed by limiting it in terms of section 12-B those sales, exchanges and transfers which yielded profits and gains. In other words, the Bank accounts of the assessee cannot escape being assessed to income-tax merely because they were not sold, exchanged or transferred nor yielded profits and gains, because by not becoming subject to income-tax under section 12-B they do not cease to be floating or circulating capital for purposes of other provisions of the Income-tax Act. They attract the provisions of section 4 which is a charging section.
20. Counsel for the assessee contended that section 4 was not attracted by them ; therefore, it is proper to reproduce the relevant part of that section here. It is as follows :- "4.--(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which -- (a)are received or are deemed to be received in Pakistan in such year by or on behalf of such person ; or (b)if such person is resident in Pakistan during such year,-- (i)accrue or arise or are deemed to accrue or arise to him in Pakistan during such year, or (ii)accrue or arise to him without Pakistan during such year, or
(c) if such person is not resident in Pakistan during such year, accrue or arise or are deemed to accrue or arise to him in Pakistan during such year.
According to the above provision all income, profits and gains are subject to income-tax and are to be treated as a part of the total income of the assessee. The expression "total income" is defined in section 2 (15) as follows :- "'Total income' means total amount of income, profits and gains (referred to in subsection (1) of section 4) computed in the manner laid down in this Act and 'total world income' includes all income, profits and gains wherever accruing or arising except income to which, under the provisions of subsection (3) of section 4, this Act (does not apply and except any capital gain which is not includable in the total income of an assessee)."
The words "profits and gains" which occur in the above definition should be noted and the repetition of references to profits and gains which is to be found in section 4 (1) should be kept in mind, because a question arises as to whether or not these words enlarge the meaning of the word "income". If we were free to form our own opinion and not bound by authority, we would have no hesitation in saying that on a plain reading of section 4(1) and section 2 (15) the words "profits and gains" which have been used in addition to the word "income" could be said to enlarge the meaning of "income", but their Lordships of the Privy Council have while explaining the meaning of the word "income" observed in Commissioner, Income-tax, Bengal v. Shaw Wallace & Co. and Commissioner, Income-tax, Bengal v. Mercantile Bank of India etc. that : "the expansion is more a matter of words than of substance."
We wish to emphasise the word "expansion" used by the Privy Council, because at least this much is undeniable. What remains to see is whether it has become substantial or not as a result of important amendments which have been made after the said pronouncements of the Privy Council.
21. It is necessary, therefore, to understand the thinking of their Lordships of the Privy Council as disclosed in the basic judgment given in the case of Shaw Wallace & Co. so that it may be possible to see whether that line of reasoning can outlast the amendments that have been made since then. The discussion is to be found in the judgment at page 140 and can be summarised as follows :-- "The object of the Indian Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income, profits and gains', but the expansion is more a matter of words than of substance (because) income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive. The sources from which the taxable income under the Act are to be derived are enumerated in section 6, which runs as follows :- 'Save as otherwise provided by this Act the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing namely :-- (i)Salary.
(ii)Interest on securities.
(iii)Property.
(iv)Business.
(v)Professional earnings.
(vi)Other sources.'
The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under section 10 the tax is to be payable by an assessee under the head business 'in respect of the profits or gains of any business carried on by them Some reliance has been placed in argument upon section 4 (3)(v) which appears to suggest that the word 'income' in this Act may have a wider significance than would ordinarily be attributed to it
(But) they think that the clause must be due to the over anxiety of the draftsman to make this clear beyond possibility of doubt."
We may, note here that as observed by their Lordships there was no definition of 'income' in the Statute at the time at which the judgment was written. Moreover, their Lordships have inferred from the categories of the sources of income enumerated in section 6, the characteristics of "income".
There is no doubt that the six sources of income which are mentioned in section 6, lead to the conclusion that the expressions "salaries", "interest", "property", "business" and "professional earnings" are categories of "income", which include the profits and gains of business and professional earnings ; therefore, in a secondary sense included in the concept of income. This point becomes clearer if we look at the use of the words "salaries", "interest", "income" and "profits and gains" in section 6 as it stands today. The section runs today as follows:- "6. Save as otherwise provided by this Act, the following heads of income, profits and gains shall be chargeable to income-tax in the manner hereinafter appearing, namely :-- (i)Salaries.
(ii)Interest on securities.
(iii)Income from property.
(iv)Profits and gains of business, profession or vocation.
(v)Income from other sources.
(vi)Capital gains."
22.The above being the way of thinking of their Lordships, which was of course in accordance with the Act as it was at that time, they found ample justification for attributing the rather jarring expansiveness of section 4(3)(v) to the over-anxiety of the draftsman to make the central idea clear. We think that the significance that was attached by their Lordships to the sources of income was statutorily justifiable, because section 4 as it then was, contained a reference in it to section 6.
This reference was significant because section 4 is a charging section. Subsection (1) of section 4 was as follows :- "Save as hereinafter provided, this Act shall apply to all income, profits or gains as pescribed and comprised in section 6 from whatever source derived."
23.With utmost respect, we venture to think that the situation has changed from 1939 for more reasons than one. Firstly, reference to section 6 has been omitted from subsection (1) of section 4 in Act VII of 1939. Secondly, a definition of "income" was also introduced in 1939. It is not an exhaustive definition but does make the situation different from what it was when there was no definition at all. Moreover, the words "profits and gains" have been included in the definition of the expression "total income" and a reference is also made in it to subsection (1) of section 4 in which subsection the words "profits and gains" appear again. This emphasis on the words "profits and gains" in subsection (1) of section 4, which is a charging section, does make an important difference. Thirdly, the concept of income formed by their Lordships of the Privy Council on the reasoning reproduced above and attributed to the object of the Act does not hold good after the insertion in the Act of 'section 12-B by which "capital gain" has been subjected to income-tax. This expansion of the meaning of income has made the former restricted concept inconsistent and inapplicable now.
24.We accordingly conclude that in the new context the ,expansion of the word "income" by the addition of the words "profits and gains" has become substantial.
25.We may here refer to the contention of counsel for the assessee that the following opinion expressed by the Tribunal in their order of the 6th of April 1963, was not sustainable : - "In our opinion, circulating or floating capital cannot be treated as a capital asset. The acceptance of the assessee's contention would lead to absurd results. If circulating capital is to be treated as a capital asset, then there would be no income at all which can be assessed to tax."
'Counsel urged that according to the Tribunal circulating or floating capital did not fall within the ambit of the definition of "capital asset", although neither counsel nor we agreed with that view, therefore, according to counsel, the apprehensions which were apparently the motive force of the Tribunal's thoughts were illusory. We agree with counsel to this extent that circulating and floating capital does fall within the definition of "capital asset" as given in section 2 (4-A) of the Act, but agree with the Tribunal that if circulating and floating capital is not subjected -to income-tax, then the greater part of income would escape taxation, because the major part of income in our country is covered by the concept of circulating or floating capital.. We think that the Tribunal also was following the same line of thought, but their expression is open to the attack which counsel has made on it, because they have presumed that circulating or floating capital cannot be treated as "capital asset" for purposes of section 2 (4-A). If a reference to section 12-B is inserted in the opinion of the Tribunal and the provisions of section 4 kept in view then the idea which is expressed will be complete.
26.We conclude for the foregoing reasons that Rs, 53,537.00 were rightly assessed to income-tax and answer the reference in the affirmative. The assessee will pay the costs of these proceedings. AIR 1932 P C 138=136 I C 742 PLD 1969 SC 321 (1936) 4 I T R 239 (1718) Dunb, 28 per Price, B. 28 14 T C 395 13 T C 366