JUDGMENT: NAIMUDDIN, J.--1. By this reference under section 66 (1) of the Income-tax Act, 1922, the Income- tax Appellate Tribunal, Karachi Bench, Karachi, on the application of Messrs Raleigh Investment Co.
Ltd.. Karachi (hereinafter called the applicant) has referred the following question of law arising out of their order in I.T.A. No, 3198 of 1966-67, decided on 11-6-1970, for our opinion: "Whether under the facts and circumstances of the case the Income-tax Appellate Tribunal was justified in finding that the surplus on sale of shares is not exempt from Pakistan tax?"
2. The facts giving rise to the above question are that the applicant, a company incorporated in the United Kingdom, disposed of 49,00,000 shares of Pakistan Tobacco Company Limited, held by it, in March, 1964. These shares were acquired by the applicant during 18 years prior to their sale. There shares were sold at prices higher than the purchase price resulting in a surplus amount of Rs, 83,75,486.
3. It was contended before the Income-tax Officer that since the sale was effected in the United Kingdom and consideration also passed there, the surplus was not taxable in Pakistan. It was further contended that even if it was held that the surplus arose in Pakistan and that it was not a casual gain it was still exempted from Pakistan tax by virtue of the Agreement for the Avoidance of Double Taxation dated 19-1-1962 (hereinafter called for the sake of convenience 'the agreement', between Pakistan and the United Kingdom.
4. The Income-tax Officer did not accept any of the contentions on the grounds that the shares were held in Pakistan and were declared as assets in Pakistan in Wealth Tax Returns.
5. The surplus was, therefore, held as capital gain which accrued or arose in Pakistan. It was also held that-the gain was not of casual nature because it was neither accidental nor fortuitous. The Income-tax Officer also held that the surplus was not also exempted under Article Ill of the Agreement as the exemption under the Agreement was available to the Commercial or Industrial profits and not to capital gains. The same was accordingly assessed under section 12-B read with section 17(5) of the Income-tax Act, 1922.
6. In a direct appeal to the Income-tax Appellate Tribunal the exemption from taxation of the surplus amount of Rs, 83,75,486 was claimed only on the basis of exemption provided in Article III of the Agreement.
7. The Tribunal held that the surplus was not commercial or industrial profits and the Agreement did not cover capital gains. The precise reasons for arriving at the decision are contained in paragraph 12 of the Tribunal's order and are reproduced hereinbelow: "12. This brings us to the question as to whether the surplus which is a capital gains falls within the scope of Article III of the Agreement for Avoidance of Double Taxation in Pakistan and the United Kingdom. Apart from the logic and arguments of the Income-tax Officer and the Departmental Representative we find that the Double Income Tax Avoidance Agreement was concluded on the 9th January, 1962 when there was no tax on capital gains in Pakistan or the United Kingdom. This Agreement as per Article I applied to taxes of the following nature in the two countries. In the United Kingdom of Great Britain and North Ireland the Income-tax (including Super Tax) and the profits tax. In Pakistan it applied to income-tax and super tax. At the date on which the agreement was concluded these were taxes which wire brought within the scope of this agreement. As already stated there was no tax on capital gains in Pakistan at that time nor was it there in the United Kingdom. In Pakistan tax was payable under the head 'capital gains' in respect of profits or gains arising from the sale, exchange or transfer of a capital assets effected after the 7th June, 1963.
There was of course capital gain taxation for a very short period from the 31st day of March. 1946 and upto the 30th March, 1949 but there was no capital gains from 1st April, 1949 to the 7th June, 1963. The material fact is that there was no tax on capital gains in Pakistan at the time when this agreement was being concluded. We understand that capital gains taxation in the United Kingdom was introduced only in 1965. Unlike Pakistan. capital gains in United Kingdom is administered under a separate Act and not as a part of the Income-tax Act as in Pakistan. From these historical facts we must now try to understand the meaning of the term industrial or commercial profits in Article III and II(k) of the Agreement. A tax which did not exist cannot be a matter for consideration by the Governments for the purposes of agreement, of course Article I(ii) of the Agreement provides for the extension of the agreement to new taxes. That article provides that the present agreement shall also apply to any identical or substantially similar taxes subsequently imposed in addition to or in place of, the taxes specified in paragraph I of this Article by either contracting Government or by the Government of any territory to which the present agreement is extended under Article XVII. It is a Common ground that the Agreement has not been extended to tax on capital gains by Article XVII. We must, therefore, hold that the exemption contemplated in Article 111 of the Agreement does not cover capital gains. The Income-tax Officer was accordingly justified in subjecting the above surplus to tax as capital gains under the rates provided in section 17 of the Income-tax Act."
8. The decision has, therefore, led to the filing of an application under section 66(1) of the Act before the Tribunal for reference of the question now under consideration, to this Court.
9. We have heard Mr. Ali Athar learned counsel for the applicant and Mr. Nasarullah Awan learned counsel for the respondent.
10.It is submitted by Mr. Ali Athar that the surplus amount of Rs, 83,75,486 was in the nature of commercial profits and was therefore, exempted under Article III of the Agreement.
11. In our opinion the decision of the question referred to this Court turns to the consideration of the provisions of Article I of the Agreement and the definition of the term 'industrial or commercial profits' contained in article II(I)(k) of the Agreement. We may for the sake of convenience reproduce hereinbelow the provisions of Article I and the definition of the term contained in Article ll(I)(k).
Article I reads--
(1) The taxes which are the subject of the present Agreement are:-- (a)In the United Kingdom of Great Britain and North Ireland: The income-tax (including super (tax) and the profits tax (hereinafter referred to as 'United Kingdom Tax').
(b)In Pakistan: The Income and super-tax (hereinafter referred to as 'Pakistan tax').
(2) The present Agreement shall also apply to any identical or substantially similar taxes subsequently imposed in addition to, or in place of, the taxes specified in paragraph (1) of this Article by either Contracting Government or by the Government of any territory to which the present Agreement is extended under Article XVII."
12.The term 'Industrial or Commercial profits' as defined in Article II(l)(k) reads: "The term 'industrial or commercial profits' includes rents or royalties in respect of motion picture films and films for use in connection with television but does not include income in the form of dividends, interest, or royalties, or a fee or other remuneration derived by an enterprise from the management, control or supervision of the trade, business or other activity of another enterprise or concern, or income from the operation of ships or aircraft."
13. We would first consider the meaning of the word 'commercial'. According to Ballentine's Law Dictionary, 3rd Edition, page 222, it means: "Pertaining to the purchase and sale or exchange of goods and commodities and connoting as well forms of, and occupations in, business enterprises not involved in trading, in merchandise; in a broad sense, embracing every phase of commercial and business activity and intercourse (Jordan vs. Tashiro, 278 U.S. 123, 73 L. Ed. 214, 49 S. Ct. 47)."
14.According to Black's Law Dictionary, 4th Edition, page 336, the word 'commerce' is defined as 'the exchange of goods, productions, or property of any kind (emphasis supplied). Reference is made to Jeu Jo Wan vs. Nagle C.C.A. Cal. 9 F. 2d, 309, 310. It also means 'intercourse by way of trade and traffic between different peoples or states and the citizens or inhabitants thereof, including not only the purchase, sale and exchange of commodities, but also In relation to the expression 'commercial matter' used in a Canadian case (25 Geo. 3, c. 2), it was held that a contract with the Government Commercial in Canada to supply stone for making a canal was not a mere building contract, but was a commercial matter. Buying and selling shares by stock-brokers for a client who is not himself a dealer were held to be 'commercial-matters' provable by testimony, under the Quebec Civil Code Forget vs. Baxter (1900) A.C. 467.
15. Examined in the light of the above meanings of the words and expression, "commerce", "commercial", "commercial matter", we are of the opinion that the surplus derived from the sale of the shares by the applicant is a 'commercial profit' and is, therefore, covered by the definition given in Article II(1)(k) and would be exempted from taxation under Article 111(1; of the Agreement, for, it is common ground that the applicant has no permanent establishment in Pakistan. Article III(I) of the Agreement reads as follows:--
(1) The industrial or commercial profits of a United Kingdom enterprise shall not be subject to Pakistan tax unless the enterprise is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by Pakistan, but only on so much of them as is attributable in that permanent establishment."
However, it was contended by Mr. Awan that the taxes to which Article I clause (1) applies and which were exempted in Pakistan were the income-tax and super tax and the surplus was capital gain which does not find place in clause (1) and, therefore, it was argued that the same was not exempted. In our opinion the contention is not well-founded for the definition of income given in section 2(6-C) as it stood in 1964 includes capital gains and we may reproduce the definition hereinbelow:-- "(6-C) 'income' includes anything included in 'dividend' as defined in. clause (A), perquisites (whether convertible into money or not) which under sub-section (1) of section 7, are due or are paid to an assessee in lieu of, or in addition to any salary or wages and anything, which under Explanation 2 to sub-section (1) of the said section 7 is a profit received in lieu of salary for the purposes of that sub-section and any sum deemed to be profits under clause (vii) or sub-section
(2) of section 10 and any capital gain chargeable according to the provisions of section 126 and, in the case of a company having its registered office in Pakistan, the amount of bonus or bonus shares, declared, issued 'or paid by it to its shareholders and the profits of any business of Insurance carried on by a mutual insurance association computed in accordance with Rule 9 in the First Schedule';"
16. Further, section 6 of the Act contains the heads of income chargeable to tax and clause (vi) mentions capital gains. We may reproduce hereinbelow section 6. It reads:-- "6. Heads of income chargeable to income-tax.--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."
17. It is, therefore, obvious that when the Agreement was entered into exemption of capital gains must be within the contemplation of the parties to the Agreement. We may here refer to the case of Navinchandra Maratlal Bombay vs. Commissioner of Income-tax, Bombay City 1-(1954) 26 ITR 758], decided by the Supreme Court of India, wherein the word 'income' came up under discussion in relation to Entry Nos, 54 and 55 in List I in the Seventh Schedule to the Government of India Act,1935, which were; 54.Taxes on income other than agricultural income, and 55.Taxes on capital value of the assets, exclusive of the agricultural land of individuals and companies, and taxes on the capital of companies.
18.In this case it was contended that section 128 of the Income-tax Act, 1922 authorising levy of tax on capital gains was ultra vires the Central Legislature. Rejecting these contention that the word 'income' has acquired a particularly restricted meaning, the learned Judges after reviewing various cases and referring to the observation of Lord Wright in Kamakshva Narain Singh vs. Commissioner of Income-tax ((1943) 2 ITR 513] that "Income" it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation, "stated the cardinal rule of interpretation that the words should be read in their ordinary, natural and grammatical meaning subject to this rider that in construing words in a constitutional enactment conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude. The learned Judges further observed at page 764 of the report as follows:-- "What, then, is the ordinary, natural and grammatical meaning of the word "income"? According to the dictionary it means 'a thing that come' in'. (See: Oxford Dictionary, Vol. V., page 162; Stroud, Vol. II, page 14-16). In the United States of America and in Australia both of which also are English speaking countries the word 'income' is understood in a wide sense so as to include a capital gain.
Reference may be made to Eisner vs. Macomber 252 USR 189, 64, L.Ed. 521, Merchants' Loan & Trust Co. vs. Smietanka 255 USR 509: 65 L.Ed. 751, United States of America vs. Stewart 311 USR 60; 85 L.Ed.
40 and Resch vs. Federal Commissioner of Taxation 66 CLR 198. In each of these cases very wide meaning was ascribed to the word "income" as its natural meaning. The relevant observation of learned Judges deciding those cases which have been quoted in the Judgment of Tendolkar, J. quite clearly indicate that such wide meaning was put upon the word "income" not because of any particular legislative practice either in the United States or in the Common Wealth Australia but because such was the normal concept and connotation of the ordinary English word "income". Its natural' meaning embraces any profit or gain which is actually received. This is in consonance with the observations of Lord Wright to which reference has already been made. Mr. Kolah concedes that the word "income" is understood in the United States and Australia in the wide sense contended for by the learned Attorney-General but he maintains that the law in England is different and, therefore, entry 54 which occurs in a Parliamentary statute should be construed according to the law of England. We are again brought back to the same argument as to the word having acquired a restricted. meaning by reason of which has been called the legislative partition in England an argument which we have already discarded. The argument founded on an assumed legislative practice being thus out of the way, there can be no difficulty in applying its natural and grammatical meaning to the ordinary English word "income". As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power."
The same rule of interpretation may be applied in interpreting deeds, agreements and contracts.
19.It was then contended by Mr. Awan that since capital gains were not actually taxable under the provisions of section 17 of the Act when the agreement was entered into, therefore, the same could not be in contemplation of the parties to the agreement. This was also one of the grounds on which the Tribunal had decided against the applicant for it was argued before the Tribunal that if paragraph (1) of the Article I does not cover the capital gains for the reasons the same were not then taxable then the same were covered by paragraph (2) of Article I of the Agreement which we have already quoted and which provides that the Agreement shall also apply to any identical or substantially similar taxes subsequently imposed in addition to, or in place of the taxes specified in paragraph (1) of this Article by either contracting Government or by the Government of any territory to which the Agreement is extended under Article XVII of the Agreement. We may here quote the relevant observation of the Tribunal which are as follows:-- "The Article provides that the present agreement shall also apply to any identical or substantially similar tax subsequently imposed in addition to or in place of, the taxes specified in paragraph (1) of this Article by either contracting Government or by the Government of any territory to which the present agreement is extended under Article XVII. It is a common ground that the agreement has not been extended to tax on capital gains by Article XVII. We must, therefore, hold that the exemption contemplated in Article III of the Agreement does not cover capital gains".
20.It will be seen that the Tribunal in making the above-quoted observations have clearly misapprehended the provisions and misdirected themselves as they rejected the arguments for the reason that there was no extension of the Agreement to capital gains. But a perusal of paragraph (2) of Article I shows that the extension of the Agreement contemplated in paragraph
(2) is in regard to a territory as provided in Article XVII and to not a tax by the Government. The error would become more apparent, if we here quote article XVII of the Agreement which reads as follows:-- "(1) The present Agreement may be extended, either in its entirely or with modifications, to any territory to which this Article applies and which imposes taxes substantially similar in character to those which are the subject of the present Agreement and any such extension shall take effect from such date and subject to such modifications and conditions including conditions as to termination as may be specified and agreed between the Contracting Governments in notes to be exchanged for this purpose.
(2) ...................................
(3) The territories to which this Article applies are-- (a)In relation to the United Kingdom.--Any territory other than the United Kingdom for whose international relations the United Kingdom is responsible; (b)In relation of Pakistan.--Any territory other than Pakistan for whose international relations Pakistan is responsible."
We have already found that capital gains tax is covered by paragraph (1) of the Agreement, and, even if we for the sake of argument accept that it is not covered by paragraph (1) of Article I of the Agreement we are clearly of the opinion that it is covered by paragraph (2), for capital gain tax is identical or substantially similar tax.
21. We, therefore, hold that under the facts and circumstances of the case the Income-tax Tribunal was not justified in finding that the surplus of sale of the shares is not exempted from Pakistan tax. Accordingly, we answer the question in negative.