MUHAMMAD ZAHOORUL HAQ, J.---The following question of law has been referred to us at the instance of Commissioner of Income-tax by the Income---tax Appellate Tribunal (Karachi Bench), Karachi under section 66(1) of the Income-tax Act; 1922 :- "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the not surplus of Rs. 16,74,788 arising from the difference in the face and purchase prices of compen--sation books and credited to the capital reserve account in balance sheet, was not chargeable to tax ?
2. The brief facts of the case are that the respondent Company in this case was carrying on the business of running hotels. The principal place eras at Karachi where the famous Beach Luxury Hotel is situated whereas a branch was started at Lahore under the style "Park Luxury Hotel". The dispute in the present reference centres round the Lahore business. What happened was that the Park Luxury Hotel is now working in the premises formerly known as Nedous Notel. These premises were purchased by the assessee in open auction of the evacuee property for the sum of Rs.
1,21,00,000. The assessee had the option of paying the amount either in cash or through surrender of displaced persons compensation claim books. It chose to adopt the second method and for that reason purchased claim compensation books from open market at rates ranging from 38 % to 45 %. Since the entire payments were to be spread over a period of three years the assessee during the year under consideration paid out a sum of Rs. 30,89,326 by surrender of com--pensation claim books of the face value of that amount. Since the same were purchased in the open market for Rs. 13,46,015 the assessee made a gain which was taken to the capital reserve account. The Income-tax Officer omitted to take notice of this fact in the original assessment but subsequently initiated action under section 34 to bring this surplus to tax and after adjusting the interest paid on the money borrowed for paying these compensation books to the tune of Rs. 68,509 he brought the next surplus of Rs. 16,74,784 to tax. In a direct appeal before the Tribunal the assessee contended that it was not a dealer in compensation books, its exclusive trade being that of running hotels and that the property of Nedous Hotel was purchased for doing the business of hoteliers. It was at the same time contended that the compensation books were purchased only to the extent necessary for meeting the auction price and were neither purchased before this necessity arose nor after the auction price had been settled. In a nutshell the assessee's contention was that the so-called gain arose as an appreciation of the capital investment in this business.
The Department---s contention was that these profits were of a revenue and in ae1y case partook of the nature of trade activities of the type of adventure in the nature of trade. These were, therefore, liable to tax as income accruing during the year under consideration. The Tribunal after considering the respective claims of the parties and going through various decisions relied upon bpi both the sides came to the following conclusion in its own words :-- "The surplus in the sense in which this terms is generally understood had occurred in this case. And then it is not every surplus which is taxable, and the one taxable must arise front a business activity while no such activity is involved before us as is clear from the facts and circumstances we have ventured to give in ail their details. In our clear view the purchase and surrender of compensation books was not a trading activity, and it was only incidental to the assessee's business of running hotels.
3. The Commissioner of Income-tax was aggrieved from that order and hence he requested the Income-tax Tribunal to refer the question of law as mentioned by us in the 1st paragraph of this judgment to the High Court and hence this reference.
4. We have heard Mr. Mansoor Ahmed Khan learned counsel for the appellant who has contended that the assessee respondent is private limited company doing hotel business and its method of accounting is mercantile and since they had shown themselves as debtors in their books' to the Settle: most Department to the extent of Rs. 1,21,00;000 and thereafter they had tried to meet that liability by indulging in the trade of buying compensation books at a discount and then surrendering them against thin face value to the settle--ment Department, therefore, they have made a not gain of Rs. 17,43,297 in the accounting year by the business activity and, therefore, it should be treated as income from business and the entry of the respondent where they have entered a said amount as a capital reserve should be discarded. Mr. Mansoor Ahmed Khan's train argument is based on the proposition that it is "money's worth" which the respondent had gained, which should be taken into consideration and since the respondent himself has admitted a gain of Rs. 17,43,297 by showing it as a capital reserve, therefore, it may be treated as income. He had contended that it was a very well-planned scheme by the respondent where they bad purchased books from more than 100 persons after having employed 15 brokers and having paid them Rs.
30,000 as brokerage.
5. Mr. A.I Athar, learned counsel for the respondent bad not disputed that the respondent maintains account in accordance with mercantile practice. He further admits that on the date of auction purchase of the property "Nedous Hotel" at Lahore, respondent become a debtor only respect of sale price of a capital assets and he submits that assessor had no option on that day to show himself as a: debtor to the Settlement Department to the extent of the purchase price which was - the-cost of the capital assets to be acquired. But he says that the whole pros of the purchase of the compensation book at a discount and, surrendering them at their' face value to the settlement Department was nothing but a device to pay the price of a capital assets in a manner which could allow the respondent to pay the said price in cheaper manner. He submits that in this process the assessee has saved his pocket to the extent of the difference in purchase price and face value of the com--pensation book but he emphatically contends that difference has not actually one into his pocket and it was a matter of mere cheaper arrangement of payment of the price. His argument is that he has merely paid the reduced purchase price and has not in fact gained anything out of such effect on its part. He further contended that he purchased the compensation books at a discount on their market value which was prevalent at that time and that he could use the same only for the purposes of adjustment of the price of this property otherwise they could not be sold in the market at a premium or --with some profits'.
6. "Learned counsel on both sides have relied on number of decisions, but we find 3 authorities cited by Mr. Mansoor Ahmed as relevant and one cited by Mr. A.I Ather was particularly more relevant to the circumstances of this case:
7. Mr. Mansoor Ahmed Khan cited Surangmali Punamchand Surana ((1960) 40 I T R 360) which is a judgment from Assam High Court where the assess which was a joint. Family concern carried ors business in potatoes, oilcakes etc. And it had 2, overdraft account with a bank. "When in May, 1948 the bank suspended operation and applied for a scheme of arrangement the amount outstanding on this amount was Rs. 35,912. The assesses obtained a concession from the bank whereunder it paid in cash Rs. 5,000 and purchased from several persons, who held deposits with 'the bank, their fixed and other deposits, tender them to the bank and obtained an adjustment for Rs. 23,866. As, however, the assessee had paid only Rs. 5,677 to purchase these deposits, the 1-aeometax Offer assessed the difference of Rs. 16,995 as business profits".
The Court held as under :- "That the purchase of the deposits with a view to derive the full benefit of the sums which the depositors held in the bank and deriving that benefit from the bank by adjustment amounted to "business" and the profit derived there from came within the scope ref profits or gains of business" within the meaning of section 10 of the income-tax Act; and being a receipt from business it was not a casual or non recurring receipt within the meaning of section 4(3) (vii)."
8. Mr. Mansoor Ahmed Khan argued that the activity of the present respondent was similar to the activity of the assesses before the Assam High Court where that assessee had tried to clear this overdraft liabilities by the method of purchasing the claim of the creditors of the banks at a discount and getting the same adjusted against his liabilities on their face value. Mr. A.I Athar bad tried to distinguish this case on the ground' that the overdraft of the firm must have been on the basis of its business activities and its business commitments and, therefore, the effort of the Assessee in the Assam's case to meet his business liabilities by the processor securing the claims of the creditors of the bank at a discount and getting the same adjusted at their face value was regarded as the business activity by the Assam High Court.
9. Mr. Mansoor Ahmed Khan also relied upon Jaldu Manikyala Row and others ((1964) 54 I T R 409) decided by Andhra Perdesh High Court, where it was decided that the question whether or not a given transaction is a venture in the nature of a trade, is, in most cases, a mixed question of fact or law. It was further held in that case that it is. Well-established that no general and universal test can be laid down for the purpose of determining whether a venture is in the nature of a trade. The facts of that case were as follows :- "The assessee, who was a prominent business man dealing in timber, tiles, ironware and various other goods, purchased for a sum of Rs. 62,500 a 25/56th share in a final mortgage decree, borrowing Rs. 50,000 for the purpose from money-lenders. In execution of the decree the assesses realised a sum of Rs. 1,51,540 towards his 25/56th share. After deducting expenses amounting to Rs.
14,000 the income-tax authorities assessed the balance of Rs. 75,040 .As profit of the assessee in an adventure in the nature of trade: Held, that the venture taken as a whole was an adventure in the nature of trade and the amount in question was assessable as business profits."
The High Court held as follows :- "In view of the following facts, viz. The thing acquired being a half share in a mortgage decree was in no sense an investment, it could not give the assessee pride of possession or aesthetic enjoyment and could not be turned to account except by a process of realisation, the decree was purchased with sole intention of making a profit out of it and on very favourable terms; and elaborate steps were taken for bringing the properties to sale, that the adventure constituted an adventure in the nature of trade ; the mere fact that the profit represented the fruits of an isolated transaction was immaterial for income-tax purposes since profit arisingfrom and isolated transaction is assessable to tax, provided an adventure in the nature of trade has been embarked upon;and the amount in question was properly assessed as business income under section 10 read with section 2(4) of the Income-tax Act."
10. Mr. Mansoor Ahmed Khan bad relied on this case and had stated that the cumulative effect of the nature of the venture before us was similar to the venture in the Andhra's case. Mr. A.I Athar on the other hand brought our attention to certain observation in that case where at page 416 the observation of the Supreme Court bad been reproduced when the Supreme Court had remanded that case for re-determination of the question whether the decree in that case had not been solely acquired with the idea of making profit find also with the object of preventing the lands acquired by the appellant's brother and his son-in-law from passing out of their hands. On the basis of those observations Mr. A.I Athar had contended that the basic question to be considered is as what ix the intention of the person at toe time of the start of the venture, and if the intention is not of making a grain by the sale of the property to be acquired then the mere fact that a profit has been made out of that would not bring snare within the purview of profit from trade. He says that if there is no intention to re-sell the property at a profit then it cannot be regarded as a business activity. He further says that the Andhra's case is different from the present case where the sole purpose of acquiring and surrendering the compensation book was with a view to acquire the capital assets of Nedous Hotel which was intended to be retained and not to be resold with a profit.
11. Mr. Mansoor Ahmed Khan bad relied upon Karwerlal Man--charwal ((1975) 101 I T R 439) a case from? Madras High Court which was decided as under. The facts of that case were as follows:- "The assessee, a pawn-broker, obtained an assignment of a decree for Rs. 8,000 for a consideration of Rs. 4,000. Thereafter, be purchased a house property from the judgment-debtor for a consideration of Rs. 21,500 and adjusted the sum of Rs. 8,000 due under the decree in part payment of the consideration for the sale. The Income-tax Officer assessed the profit of Rs. 4,000 made by the assessee in the transaction relating to the assignment of the decree as business profit. This was confirmed by the Appellate Assistant Commissioner and the Tribunal. On a reference to the High Court at the instance of the assessee:- The High Court held as follows :- "that when the assessee purchased the decree on payment of Rs. 4,000 be should have intended to execute the decree and realise the amount due thereunder and the fact that without the necessity of executing the decree the assessee was able to realise the money by adjustment it the purchase consideration made no difference. Accordingly, the sum of Rs. 4,000 was rightly assessable as business profit. The absence of any prior or subsequent dealings of purchase of decree by the assessee had no significance because, even a first venture could be an adventure in the nature of trade."
12. Mr. Mansoor Ahmed Khan has argued that as in the Madras High Court the purchase of a decree of. Rs. 8,000 for consideration of Rs. 4,000 was treated as a business activity in spite of the fact that the property acquired by adjustment of the sum of Rs. 8,000 under the decree was not eventually sold, therefore, in the present case also. It should be held that the respondent has made profit by purchasing compensation book at a lesser price and surrendering the same for their face value and thus acquiring the property at an advantage or so to say at a lesser price. Even though they did not tend to sell away that property at a profit. Mr. A.I Athar's reply to this ruling was that the original intention of purchase of the decree of Rs. 8,000 for Rs. 4,000 with the motive of making a profit out of it, and therefore, the same cannot be equated with the present case where the original purchase of the compensation book by tie respondent was merely with the idea of getting the same adjusted against the price of a capital assets without any actual benefit coming to the assessee and without there being any intention of making a profit by mere sale of the compensation book at higher price.
13. On the other hand Mr. A.I Athar has placed reliance upon a case decided by the Supreme Court of India (1961) 41 I T R 534. The facts of that case were following :- "The appellant Company was a dealer in shares and securities and also carried on business as managing agents of other companies. In order to acquire the managing agency of a textile mill, the appellant Company purchased from Sassoon David & Co., whom were the managing agents thereof, 1,507 shares of the mill at Rs. 2,321-8-0 per share at a time when the market price of the shares was Rs. 1,610. The remaining Rs. 1,000 shares of the mill held by Sassoon David & Co., were acquired by the directors of the appellant-Company. Two months later the appellant Company sold 400 of those shares at loss of Rs. 1,78,438 and this loss was claimed as a trading loss." in those circumstances it was held in that case :-- "that by purchasing the shares for is excess of their mark price to facilitate the acquisition of the managing agency, a capital asset was acquired by the appellant-Company. The intention in purchasing the shares was not to acquire them as part of the stock-in-trade of its business in shares. The loss incurred by the sale of the 400 shares was, therefore, loss of a capital nature.
Neither the circumstance that the appellant Company borrowed money art interest to purchase the shares nor the fact that it was a dealer in shares and was authorised by its memorandum of, association to deal in shares, was of any effect. Nor could the appellant Company by entering the shares of the mills in its statement of shares in which trading transactions were tarried on alter the real character of the acquisition. The subsequent disposal of some out of the shares by the appellant Company could not also convert what was a capital acquisition in the nature of trade.
14. Mr. A.I Athar argued that the problem hat therefore to be approached in the light of the intention which the present respondent had when they started purchasing the compensation books and their intention was only that they were acquiring the books for the purpose of surrendering them towards the price of Nedous Hotel and there was never any idea of making any profit of out of those books. He further submitted that the capital assets of Nedous Hotel had been acquired by the respondent at the price of Rs. 1,21,00,000 only with the background of their knowledge that they could pay that price by purchasing the compensation book at about 40% of their face value and they could surrender those books to the Settlement Department at their face value, therefore, the whole idea was that it Would be in fact a lesser payment that they will have to make to the Settlement Department the method of purchase and surrender of the purchase book. There no intention on their part to enter into any venture of purchasing and sale of the compensation book as such. He further stated that in fact those compensation books could not be sold in the market that a higher price as the respondent itself purchased those compensation boors at their prevalent price in the market and; therefore, nothing had come into the pocket of the respondent but they have merely saved their pocket from being over-burdened with the entire price of Rs. 1,21,00,000.
15. 1n the facts and circumstances of the case before us, we are of the view that the case of (1961)
41 I T R 534 is most helpful in the decision of the present case and it has laid down that the basic question to be considered is the intention at the time of the transaction. In the present case before us we find that the respondent which is doing business in Hotel had intended to acquire "Nedous Hotel Lahore which was a capital asset and in order to acquire that capital asset they had already resolved before the auction that they will pay the price by purchase and surrender of compensation book, and therefore, they had considered it feasible to offer a price of the same concern up to a maximum of Rs. 1,25,00,000. This fact is clearly disclosed in the order of the Income-tax Officer. We also find that although the assessee had adopted an elaborate method of acquiring the compensation book but still the, whole object was not trading in the compensation books, but with a view to secure a cheaper mode of payment of the price of a capital asset.
16. In these circumstances, it is difficult to divorce the acquisition of compensation books from the acquisition of Nedous Hotel and the 2 are almost' integrated with each other and we have no doubt in our mind that the whole activity was aimed at acquiring the capital asset in a cheaper manner and not in order to make a profit out of it and in fact there was no actual profit in terms of money's worth which had come into the pocket of the assessee or which the assessee had realised but it was in fact nominal game which they bad made in terms of book adjustment. Consequently, we give our answer to the question of law referred to us in the affirmative, Reference answered in affirmative.