1. SHAFIUR RAHMAN, J.--The Commissioner of Income-tax (C) Karachi has filed this certificated appeal against the judgment of Sind High Court, dated the 23rd of November, 1966 whereby the question of law referred to it under section 65(1) of the Income-Tax Act, 1922 was answered in the negative.
2. The following statement of facts provides the background to the reference-- The assessee in this case is the Habib Bank Executors and Trustees Company, a public limited company incorporated on 6th July, 1953 with a paid-up capital of rupees ten lacs. In the very year of its incorporation on 15th December, 1953 it purchased 39,166 shares of Habib Bank Limited and 11,000 shares of Habib Insurance Company Limited. These to companies were allied concerns of the assessee. The shares of the Habib Bank Limited were initially of the value of Rs.20 each while those of the Habib Insurance Company were initially of the value of Rs.10 each and were subsequently divided into 5-rupee shares each. In 1956 the assessee received four thousand bonus shares.
3. During the assessm ent year 1958-59 ending on the 31st of December, 1957 the assessee sold to thousand five hundred shares out of the shares obtained from the Habib Bank Limited and four thousand shares out of the shares received from the Habib Insurance Company and made a profit of Rs.86,900 in the former transaction and of Rs.78,960 in the latter making total of Rs.1,65,860.
4. In the previous assessm ent year the assessee had sold certain shares and suffered a loss which was shown by the assessee as trading loss but was converted by the assessing authority into a capital loss and the assessee had accepted that treatment. In the year 1958-59 the assessee itself claimed the profits out of sales of such shares as capital gains but the Income-tax Officer rejected this claim and held it to be a revenue receipt and brought it to tax as such. The assessee filed an appeal against such a treatment but the same was dismissed on 13th of December, 1958. The second appeal before the Income-tax Appellate Tribunal was, however, allowed on 13th of August, 1961 and the profits were treated as Capital gains.
5. On an application of the appellant the following question of law was referred to the High Court under section 66(i) of the Income-tax Act.
6. "Whether on the facts and in the circumstances of the case Rs.1,65,860 profit by sale of shares was a revenue receipt."
7. The High Court examined the case in detail in the background of law and precedent on the subject and came to the conclusion that the normal business of the Company was not to purchase and sell the shares in the market and make a profit on them. According to the High Court object of the Company left no room for doubt that the purchasing and selling of the shares "was not directly within its objects". Further, the Income-tax Officer had, in the immediately preceding year, dealt with the loss incurred on the sale of shares by this very Company as capital loss by holding that it was not a part of the trading activity of the assessee. The High Court answered the question of law referred to it as follows:- "Our considered view on the facts and circumstances of this case is that the selling and the purchasing of the shares was not within the objects of Messrs Habib Bank Executors and Trustees Co. Nor were the shares sold by them to carry on or carry out their business and as such the profit earned by them of Rs.1,65,860 out of the sale of shares was not a revenue receipt. The question mentioned above, which has been referred to us, is consequently answered in the negative."
8. The High Court certified the case under section 66(2) of the Income-tax Act read with section 109 of the C . P . C . As a fit one for appeal to the Supreme Court. Hence this appeal.
9. The learned counsel for the appellant has contended before us that all the authorities dealing with the case, as well as the High Court, have in unmistakable terms held, by reference to the memorandum of association of the assessee that dealing in shares, or investments was a lawful object for the company inasmuch as it was authorised to invest money and to deal with such investments. The activity being within the permissible field and the assessee having indulged in it and the motivation being one of making profit it cannot be said to be not doing the business which it actually did. The treatment of the loss in the immediately preceding year would not, according to the learned counsel for the appellant, on any principle, bind the department on a question of law.
10. The treatment given to the assessee in the disputed accounting year was in accordance with the law and could not be objected to.
11. The learned counsel for the respondent on the other hand contended that the purchase of shares of allied concerns in the year of its incorporation was in fact an investment of surplus funds of the Company. It never formed part of the stock in trade. It was kept intact rather long. Except for occasional sale of such shares as were initially purchased there was no instance of business dealing in shares. The assessing authority to in the immediately preceding year treated the loss on this account not as a trading loss but capital loss. The assessee had submitted to that treatment as it was in accord with law. The assessee in the disputed year of assessment sought a similar treatment under the same law in the matter of profits earned. If the assessing authority took a different view of the law or sought to treat it differently it was for that authority to bring on record the factors, which could account for or justify the change in treatment. No such factor having been pointed out and none being discernible the department could not resale from its earlier practice and view of the law, in respect of the same assessee. The learned counsel for the respondent relied heavily- on decisions given in Californian Copper Syndicate v Harris (1903-1911) 5 T C 159; The Dunn Trust Ltd. v. Williams (1946-50) 31 Tax Cases 477; Indian Nut Co. Ltd v. C.I.T. (1960) 39 1 T R 234 and has distinguished the decisions in Rellim Ltd. v Vise (H . M . Inspector of Taxes) 22 (Suppl.) 1952 I T R 51, Punjab Co-operative Bank Ltd v. Commissioner of Income-tax, Punjab (1940) 8 I T R 635, Balgownie Land Trust v. The Commissioner of Inland Revenue 14 Tax Cases 648; V.S.R.M. Firm v.
12. Commissioner of Income-Tax, Madras (1963) 47 ITR 720; M.CT. Muthiah Chettiar Family Trust v. 4th Income-Tax Officer, City Circle VI, Madras 34 and others (1972) 85 I T R 282; Oriental Investment Co.
13. Ltd. v. Commissioner of Income-Tax, Bombay (1957) 32 I T R 664 and Ramnarain Sons (PR) Ltd v.
14. Commissioner of Income-tax, Bombay (1961) 4 I T R 534.
15. In order to understand the nature of the controversy on the legal plane it is necessary to note certain facts and also the law applicable to the case. The assessee in this case being a public limited Company had a charter of its own showing the objects and purposes of its incorporation in the articles and memorandum of association. The object of the company was to at and to carry on the business of trustees and executors. It was incorporated on the 6th of July, 1953. It had, therefore, a dual purpose--one to at on behalf of the trusts and the other to handle its own property. As regards the first function, we find in the articles of the association of the company clause (a) providing as follows:- "To at as executors, Administrators, and trustees and to undertake and execute trusts of all kinds whether private or public including religious and charitable Trusts and generally to carry on what is usually known as Trustees and Executor business and in particular and without limiting the generality of the above, to at as Judicial and Custodian trustees for the holders of debenture and debenture stock and to at as receivers, Managers, Liquidators, Agents, Guardians of property, Committees of the property of - the incompetents, depositaries and treasurers and generally to transact all kinds of trust or agency of managing or fiduciary business."
16. Ancillary to clause (a-) was the function as given to clause (b). In respect of the first function it had also the function as given in clause (c):- "(c) To hold, administer, sell, realise, invest, dispose of, deal with the moneys and property both real and personal, and to carry on and manage, sell, realise, dispose of and deal with any business comprised or included in any estate of which the company are executors or administrators or in any trust of which the company are trustees, receivers, manager, liquidators, treasurers or agents."
17. Finally in clause (t) it had generally the object and purpose described as follows:- "To invest the moneys of the company not for the the being required for the general purposes of the company in such investments (other than shares in the company) as may be thought proper and to hold, sell or otherwise deal with such investments."
18. The dealing in the shares related, on the strength of this clause (t), to such moneys as were not for the the being required for the general purposes of the company. These were capital or reserve or outside the stock in trade.
19. Section 10 of the Income-tax Act provides that the tax shall be payable by an assessee under the head, 'profits and gains of business .... In respect of the profits or gains of any business... Carried on by him'. Section 2(4) declares what business is by stating that it includes a trade or manufacture or any adventure in the nature of trade and manufacture. Section 4(3) deals with the total income of an assessee and enumerates the items to be included or excluded and one of the exceptions contained in clause (7) of subsection (3) is receipts not being receipts arising from business which are of a casual and non--recurring nature shall not be included in the total income of the person receiving them. The clause also while excluding such receipts provided -an exception to it where such receipts be receipts from business in which case they will be treated as taxable income. All the authorities have held that the normal trading activity of the assessee did not include dealing in shares. The object of the company was also not to deal in shares. It was only a permissible activity for the company confined to utilization of capital or reserve assets. The very first assessment order, dated 2nd September 1958 bears this out. When the assessee was asked to explain why the profits gained by sale of shares be not treated as business profit and brought to tax the assessee gave the following three reasons:- "(i)That the company is primarily established as Executors and Trustees and that' the surplus funds are invested in shares etc., and that they are nowhere empowered by the Articles of Association to deal in shares.
20. (ii)That the shares sold by them were held for a considerable the and that the sale was only a change of investment since they wanted to purchase Government securities etc. (i.e)That in the preceding investment year, there was a loss in sale of shares which was accepted by the Department as a capital loss."
21. The assessing authority dealt with it in the following words:- "I do not agree with the arguments of the company since the transactions clearly indicate a scheme of profit making. The reasons are as under: It is not correct that the company is not authorised by its Memorandum of Association to deal in shares. Article 3(b) read as follows:- "To carry on any other business which may seem to the company capable of being conveniently carried on in connection with any of the above business or calculated directly or indirectly to enhance the value or render profitable any of the Company's properties and rights."
22. From the above it appears that the Memorandum of Association stipulates that the assessee can also conveniently carry on any other business, which may seem to the company to be profitable. In the circumstances of the case this other business is none other than sale of its investments at profit. Further, even according to sub-clause (1) of Article 3 of the Memorandum of Association the assessee is entitled to sell and deal in other manner with properties of the company. This Article also shows that the assessee is permitted by its Articles of Association to deal with its properties in a business-like manner. It has been held in the case of Rellim Limited v. Vice (Inspector of Taxes)
23. (1952) 22 I T R (Supp.) 51 that where a company is empowered by its Articles to deal in property then even if the property were held as investment for many years, any profit resulting from subsequent sale of any part of this property would be a revenue profit.".
24. The second contention was rejected by observing as follows:- "Regarding the second contention of the assessee, it may be stated that if the transactions of purchase and sales are judged as a whole, it would appear that it was not simply a change in investment but a change made for profit."
25. The appellate Assistant Commissioner dealt with the same question in the following words:- "...The appellant was entitled to deal in shares and the profit in these shares was properly treated by the I. T .0. As a business profit. The clause 'calculated directly or indirectly to enhance the value or render profitable any of the company's properties and rights' has to be read separately and not in conjunction with the previous clause. There is no justification in connecting this clause with the previous clause as the conjunction used is 'or' and not 'and'. The said clause has not to be construed ejusdem generis. Moreover, apart from this authorisation by the Memorandum of Association the case of Rellim Limited v. Vise (Inspector of Taxes) clearly goes to support the point of view of the Department that even if the shares were held as investment for many years any profit resulting from subsequent sales of any part of this period would be a revenue profit. The action of the I.-T.O. Was, therefore, perfectly correct in taxing this accretion as business profit.--- As the distinction between revenue and capital in the law of income-tax is fundamental, it is necessary to comprehend correctly the capital structure of the business of the assessee. The paid- up capital was Rupees ten lacs and in the very first year of its incorporation the company, it appears, out of its reverse purchased shares in to of its allied concerns and kept the same till we come to the assessing year and the year immediately preceding. From the facts stated or on record it also appears that in the interregnum the assessee had not been dealing, so far as its own property and reserves were concerned; in the business of purchasing and selling of shares. In other words, these shares purchased at the the of incorporation of the company were not being used as trading stock but were being kept as reserve capital.
26. In the British Tax Encyclopaedia Vol. 5 (page 1013-1014) the following distinction between income and capital is helpful in under--standing the subject under consideration:- "Underlying many of the decisions as to what is, and what is not, taxable income from property or profits is the broad concept that capital corresponds to the tree and income to the fruit. An accretion to capital is not income, although income does no: escape tax merely because it is used to increase or recoup capital; nor is it any the less 'income' because its production involves wastage of capital. Possibly the best definition of income from property comes from the Supreme Court of the United States: Here we have the essential matter; not a gain accruing the capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from (he property, severed from the capital, however invested or employed, and coming in, being derived, that is, received or drawn by the recipient (the tax-payer) for his separate use. Benefit, and disposal; that is income derived from property Nothing else answers the description."
27. At page 1244 (ibid) the same subject has been dealt with more specifically, observing as follows:- "A trader who has money in hand and temporarily invests it in shares is not regarded as performing a trading operation; if he later wants the money and realises his investment at a profit. Such profit is not taxable. But if he carries on a trade in which investing money is a normal part of that trade, then any profits or losses he makes on investments will be brought into his tax Computation. Thus, an insurance company and a bank have been held taxable on profits made on realising investments as the buying of investments is part of insurance or banking business; conversely any loss may be deducted. Interest received, by a trading company from its bankers on its daily bank balance has been held to be part of its trading profits."
28. The question in issue in this appeal was also raised and received pointed attention in Californian Copper Syndicate v. Harris (1903-1911) 5 T C 159 and the law on the subject was laid down in the following words:- "It is quite a well-settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income-tax Act of 1842 assessable to Income Tax. But it is equally well-established 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 at done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income-Tax. "
29. In the case before us regarding the assessment in dispute there is absolutely no material to hold and none of the authorities dealing with the case have held as a fact that the assessee was in the business as investor, or that it was dealing speculatively with the investments already made or that the investments formed the stock-in-trade. On the contrary, the record shows that these investments were of funds surplus to its need, were made in not the most lucrative stocks but in assessee's own allied concerns. Besides, disinvestments or change in investments did not take place to frequently to project a systematic planned commercial activity. The only fact that its memorandum permitted it to so invest the surplus fund is not on the facts and circumstances of this case sufficient to alter the character of a stray isolated investment into trade or business or an adventure in the nature of trade.
30. We find, therefore, that there is no merit in this appeal and it is dismissed with costs.