1. ABDUL KADIR SHAIKH, J.--Appellant was incorporated as a private limited company by the members of the Dinshaw family with the main object to acquire the immovable properties belonging to the family members and derive income therefrom by letting these out on rent or otherwise developing the family property. It is said to be a family Company and a property holding Company, and the income always being rental income from holding of the immovable properties and taxable under section 9 of the Income-tax Act, 1922. The following objects mentioned in the Memorandum of Association of the Company being relevant may be reproduced hereunder:-- " No. III (3) to acquire the immovable properties belonging to Messrs Eduljee Dinshaw and others of Pakistan and with a view thereto enter into the agreement mentioned in clause 3 of the Articles of Association of Company and to carry the same into effect with or without modification.
(4) to purchase, develop and turn to account any property acquired by the company or in which the company is interested and in particular by letting out properties on rents or leasing them out on profitable terms, preparing building sites, constructing, reconstructing, altering, improving, decorating, furnishing and maintaining of assets, flats, houses, factories, warehouses and conveniences of all kinds and by consolidating or connecting or subdividing properties and generally to act as holders of buildings, theatres and other properties of all kinds."
2. However, the crucial object No.111 (7) is as under:--
(7) to dispose of any property by sale or exchange or other means as may be profitable from time- to time and likewise other immovable properties, but not to car on business of but in and selling in an immovable properties or other Shares, Debentures, Stocks, Bonds or Securities: "Action under section 65 of Finance Ordinance, 1979 has been taken as you have concealed your income from sale purchase of properties. This entailed:
(1) purchase of plots, subdivisions thereof and sales;
(2) construction of new buildings and sales;
(3) acquiring lands for conversion into Sikni Abadis with the sole intent of subdividing and selling at the proper time.
3. You have very cleverly concealed the facts from the department that you were a company engaged in purchasing, developing, preparing building sites, construction, subdividing plots etc."
4. It is the case of appellant that "the absurdity of these notices is revealed by the fact that for the entire period of 10 years for which the notices were issued appellant had not purchased a single plot of land. It had-also not constructed any new building nor it got converted any agricultural land into Sikni." The grievance of the appellant is that since all the transactions to which objection was taken relate to recorded facts, there can he no conceivable controversy. All the transactions relating to properties belonging to appellant and referred to by the Income-tax Officer, respondent herein, were already borne on the record of the Income-tax Department pertaining to appellant- company, and on the basis of the material on record all the previous Income-tax Officers had acted on the basis that the amounts accruing from the sales of all the properties were capital gains, and not taxable income.
5. It is also the case of the appellant that the issuance of notices under section 65 of the Ordinance was mala fide. In this behalf, it was stated that despite the fact that the Income-tax Officer was seeking to reopen assessm ent for the past 9 years, he allowed only a few days' time to appellant for filing the revised Returns, although it was well within his knowledge that in order to trace out the old record substantial time was required. Accordingly appellant requested the Inspecting Assistant Commissioner and the Commissioner of Income-tax for extension of time. At a meeting held in the office of the Commissioner of Income-tax on 26-5-1982 at which the representatives of appellant- company and a Chartered Accountant were present, the Commissioner of Income-tax indicated his willingness to extend time by a period of 11 days i.e. Up to 11-6-1982, but even this was strenuously opposed by the Income-tax Officer who stated that in case time was extended his plans would be frustrated. It is alleged that he further stated that it takes 14 days to attach the properties of an assessee and that he wanted to attach appellant's property prior to 30-6-1982 i.e., the close of the financial year. According to appellant-company no conceivable doubt could be left that the Income-tax Officer had already pre-determined the entire issue. In the circumstances according to appellant, no hope of any redress from the higher authorities in the department could be foreseen, therefore appellant had no alternative but to file the Constitution Petition in Sindh High Court seeking to challenge the legality of the aforesaid notices.
6. The High Court admitted the petition to a regular hearing and granted an interim relief by which while permitting the Income-tax Officer to carry on full investigation into the matter, directed him not to pass the final orders till the disposal of the petition. By the time petition came up for regular hearing on 8-12-1982, the Income-tax Officer had already carried out all the investigations and the orders of assessm ents were awaiting to be signed by him.
7. On behalf of the appellant it was submitted before the High Court that the respondent was not able to produce any evidence of any transaction which did not find place in the tax returns already filed by appellant-company. It was pointed out that on the basis of the material on record all the previous Income --tax officers had proceeded on the express basis that appellant-company was not carrying on the business of buying and selling properties, and accordingly the amounts accruing from the sales of the properties which were already disclosed in the tax record of the company were treated as capital gains, and not taxable income. In this behalf, it was further pointed out that full disclosures had been made in the Income-tax Returns filed from 1972-73 onwards, and reliance was placed on the assessment orders in which all the sales of the properties made by the company were treated as capital gains. It was therefore pleaded that the perusal of the relevant record establishes the fact that there was no conceivable justification for treating the amounts in question as income. Moreover, appellant company was specifically barred under its Memorandum of Association from carrying on the business of buying and selling properties and it had faithfully adhered to this mandate and not violated the embargo.
8. It was accordingly contended that contrary to the allegations made by the Income-tax Officer, the actual facts as disclosed from the record already available with the Income-tax department was that it was a case of change of opinion and not a case of suppression of facts so as to justify the issuance of notices under Section 65 of the Ordinance.
9. It was however a common ground before the High Court that an Income-tax Officer is not entitled to reopen an assessm ent merely on the basis of a change of opinion .
10. The case made out by the respondent to justify his reopening of the past transactions was that while examining the case of another assessee (whose name he contended could not be disclosed to the Court for reasons of confidentiality), he had discovered that it was a case where the appellant-company "had failed to or did not declare profits and gains accrued to them by dealing immovable properties". It was further contended on behalf of the respondent that appellant -- company could dispose of any property by sale or exchange or other means as may be profitable from time to time as there was no embargo in the Memorandum of Association on purchasing, developing, selling and turning to account any properties. It was further asserted that certain properties had been purchased from outsiders and sold thereafter and according to respondent's information at least two immovable properties were acquired by the appellant --company out of which one was converted into plots for construction of residential houses or colonies.
11. On the conflicting submissions made by the learned counsel for the parties the principal question that arose for consideration before the High Court was as to the validity of the impugned notices under section 65 of the Ordinance particularly whether the impugned action of the Income-tax Officer was due to a change of opinion by him or whether his contention that appellant-company had suppressed/concealed the fact that it was acquiring/selling immovable properties and now on discovery of this fact for the first time he was entitled to reopen the past assessments was valid.
12. Learned Judges in the High Court however took the view as under: "It is well-settled that the intention of the assessee has to be considered in each case of sale of immovable property and several principles have to be borne in mind and in deciding whether the transaction of purchase and sale amounts to adventure in the nature of trade or otherwise ............
13. Each individual transaction has to be considered after going into the full facts of the case. In exercise of constitutional jurisdiction this Court does not usually go into-the facts .....--- The very provision of section 65 of the income-tax Ordinance, 1979 for additional assessment is sufficient to show that the respondent had authority to look into the matter. The point with regard to jurisdiction has been satisfactorily explained in the comments. It has also been explained in the aforesaid comments that the petitioner has plausible opportunity to put their case before the respondent during the inquiry as prescribed by section 65 of the Ordinance and if they have plausible explanation, the same would be considered."
14. Learned Judges also favoured the argument advanced on behalf of the respondent that the Income-tax Ordinance provides the ordinary remedy for obtaining relief in respect of improper or illegal order passed by the respondent and unless such order is without jurisdiction or in excess of jurisdiction, the constitutional jurisdiction of this Court cannot be invoked as the petitioner has adequate remedy open to him under the Ordinance.
15. On this view of the case learned Judges dismissed the Constitution Petition by the impugned judgment dated 19-12-1982 on the ground that it was premature.
16. Within a week of the judgment of the High Court the Income-tax Officer who was authorised by the interim order of the High Court that he may proceed with the investigations of the case, but was prohibited from making the final orders, passed assessment orders on 26-11-1982 in respect of the appellant --company for the year 1971-72 onwards and issued Demand Notices and also notices under section 116 of the Ordinance to appellant to show cause why penal action under sections 111 and 116 for concealment of income etc. Should not be taken. However, in the meanwhile appellant- company had filed the petition for special leave to appeal from the impugned judgment of the High Court and an interim order was passed by this Court on 23-12-1982 directing stay of the proceedings by the Income-tax Officer till the petition was decided by this Court. These assessm ent orders were called in question and a Miscellaneous Application was filed in Court in which following allegations were made: "That by means of the said stay order the operation of the impugned notices in terms whereof the respondent Income-tax Officer was proposing to reassess the income of the petitioner was stayed.
17. That service of the above stay order was effected on December 26, 1982 since December 24 and 25, 1982 were public holidays.
18. That about one hour after the Income-tax Officer had been served with the certified copy of the stay order he despatched through a messenger the assessment orders for the years in question despite the fact of the stay.
19. That, however, since the respondent Income-tax Officer has ex facie disregarded the orders of this Honourable Court it has become necessary to file the present application.
20. That the mala fides of the Income-tax Officer is also revealed by the fact that the assessment orders have been passed without giving the petitioner a proper hearing contrary to the principles of natural justice. The respondent Income-tax Officer had merely issued notices under section 61 requiring the production of some documents/records which was duly done by the petitioner's representatives personally several months earlier and carried out investigations on the factual side for the past six months in connection with which there was an exchange of correspondence but he did not hear legal arguments in the case. The petitioner was, at the very least, entitled to be given an opportunity to advance legal arguments since a voluminous case law exists on the points at issue, which needs to be cited. The so-called assessment orders were passed with indecent haste in a few days in order to try and render the appeal to this Honourable Court infructuous."
21. 1974 SCMR 5(9), Leave to appeal was however granted earlier by the order-dated 5-1-1983 so as to consider the following submissions, amongst others:
(i) That the Income-tax Officer in seeking to reopen the past assessments for the last 9 years under section 65 of the Income-tax Ordinance, 1979 acted beyond his jurisdiction because all material facts were already on the record' of the Income-tax Department on the basis of which his predecessors had held that the petitioner was liable to be assessed as a property holding company i.e. a Company not carrying on the business of buying and selling properties. There was no suppression or concealment of any facts but merely a change of opinion by the respondent, Income-tax Officer, as to the inference to be drawn from the same facts. There was, thus, no legal basis for proceeding under section 65 of the A Income-tax Ordinance.
(ii) That the High Court erred in law in considering that the petitioner had an adequate remedy under the Income-tax Act against the proceedings initiated against it. There is, in fact, no remedy in the Income-tax Act against the issuance of a wrongful notice. The Constitutional Petition could not, therefore, have been dismissed as premature but deserved to be decided on merits.
(iii) That the assessm ent orders passed by the Income-tax Officer on 26-12---1982 are not valid and legal, because they were passed after the issuance of the stay order by this Court (on 23-12- 1982). In so far as a stay order is operative and takes effect as soon as it is passed, vide 1974 SC M R 509, the circumstance that it might have been communicated to the respondent Income-tax Officer after he had passed his assessment orders on 26-12-1982, would not make any difference because this Court had fixedpassed the order of stay three days earlier on 23-12-1982."
22. At the hearing of the appeal several arguments were addressed by the learned counsel for the parties. On behalf of the appellant-company it: was emphasised that it is a family Company incorporated by the members of Dinshaw family only, with the sole object to acquire the immovable properties belonging to the family members and derive income therefrom by letting these on rent and under clause (III)(7) appellant-company is authorised to sell any of its own properties but not to carry on the business of buying and selling properties to which restriction it has all along adhered. In this behalf it was pointed out that the Supreme Court of India in the case of Lakshminarayan Ram Gopal & Son Ltd., v. Government of Hyderabad (1954 Vol. 25 ITR 449 at page 460) held as under: "When a partnership firm comes into existence it can be predicated of it that it carries on a business, because partnership according to Section 4 of the Indian Partnership Act is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. (See Indershand Hari Ram v. Commissioner of Income-- tax, U.P. & C.P.) But when a company is incorporated it may not necessarily come into existence for the purpose of carrying on a business. According to section 5 of the Indian Companies Act any seven or more persons (or, where the company to be formed will be a private company, any two or more persons) associated for any lawful purpose may, by subscribing their names to a memorandum of association form an incorporated company, and the lawful purpose for which the persons became associated might not necessarily be the carrying on of business. When a company is incorporated for carrying out certain activities it would be relevant to enquire what are the objects for which it has been incorporated. As was observed by Lord Sterndale, M.R., in Commissioners of Inland Revenue v. The Korean Syndicate Limited:-- If you once get the individual and the company spending exactly on the same basis, then there would be no difference between them at all. But the fact that the limited company comes into existence in a different way is a matter to be considered. An individual comes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose, and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not.
23. Justice Rowlatt followed the above view of Lord Sterndale, M.R., in Commissioners of Inland Revenue v. Birmingham Theatre Royal Estate Co. Limited and held that "when you are considering whether a certain form of enterprise is carrying on business or not, it is material to look and see whether it is a company that is doing it." The objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business. (See Commercial Properties Ltd., In the and East India Prospecting Syndicate v. Commissioner, of Excess Profits Tax, Calcutta). But they are relevant for the purpose of determining the nature and scope of such activities.
24. Mr. Khalid Anwar, learned counsel for the appellant-company pointed out from the record before this Court that after its incorporation in 1952 appellant-company has been consistently assessed by the Income-tax Department on the basis of its income as a property holding company, and it was for the first time after 30 years that the Income-tax Officer issued notices on 11-5-1982 under section 65 of the Income-tax Ordinance, 1979 contending that the company had concealed the fact that it was carrying on business of buying and selling properties and it was therefore proposed to reopen the assessm ents for the years 1971-72 to 1980-81 (excluding the assessment year 1979- 80), the Company was however given 7 days' time to file revised returns for the entire period.
25. According to appellant the case of the appellant-company however was that it was simply a case of change of opinion, which is not permissible under the law. The allegation of concealment was controverted by the appellant-company relying upon the following facts and circumstances:--
(a) Appellant filed Income-tax Return every year alongwith balance-sheets, which is an integral part of the return under the provisions of Income-tax Manual. The sales of the properties made in each year were specifically shown therein. Thus there was no question of concealment.
(b) Since no "sale of immovable property can be carried out except after obtaining prior permission of the Income-tax/Wealth-tax Officer, appellant applied for and obtained the requisite permission. This fact is itself decisive to dislodge the assertion of the Income-tax Officer that the sales were made secretly.
(c) A perusal of the original assessm ent order for each year reveals the fact the assessments were made under section 9 of the Income-tax Act, 1922, and not under section 10 which deals with business. Thus it is clear that the successive Income-tax Officers after considering the returns filed by appellant-company accepted the fact that the income which had accrued was from income from property and not income from business.
(d) Several letters on record exchanged between the appellant- company and the Income-tax Officer also proved that the income from the sales of the property was treated as income under section 9 of the Income-tax Act, 1922.
26. It was pointed out that one of the properties in question consisted of 184 acres of agricultural land situated in Deh Safooran, bulk of which was acquired by the Government and the single largest item in question pertains to Rs. 60 lac which was paid by way of compensation. A part of this land measuring 8.06 acres was sold to private parties. 1t was contended that the compulsory acquisition of land by no imagination constitutes a business transaction; nevertheless, the Income-tax Officer has treated the compensation as income of the appellant --company. When the compensation received from the Government for the acquisition of the aforesaid agricultural land was distributed by the Company to its share-holders, the Department claimed that the amount was exempt m their hands just as it was exempt in the hands of appellant-company as being capital and not income. It was however specifically contended by the Income-tax Authorities in the tax proceedings as well as in the High Court of Sindh in the affidavit filed in Constitution Petition No. 1043 of 1981 that although the amount was capital in the hands of the appellant- company, it was not necessarily so in the hands of the share-holders.
27. With reference to the argument advanced on behalf of the respondent before the High Court that appellant should have disclosed transactions in question under section "C" of Part-I of the Return, Mr. Khalid Anwar pointed out that this section relates to income, profit or gains which the assessee claims as not taxable, for any reason. Since the stand taken by the appellant is that the amounts in question were not income, these could not and ought not to have been disclosed in section "C", otherwise the Income-tax Officer would have immediately treated this as an admission that the amounts were income from business, and not capital gains. Learned counsel further pointed out that all these transactions were however a part of the Income-tax Returns filed by the appellant and therefore no question of concealment arises or any other mischief so as to attract action under section 65 of the Ordinance.
(i) the information, particulars, details and statements recorded under section 148 in the case, GIR No. 09-20-2210878;
(ii) the salary which the petitioners were giving, as their accountant, to the said assessee in the said GIR No. 09-20-2210878;
(iii) the brokerage and commission on sale and purchase of properties which the petitioners were giving or had given in the past to the said assessee GIR No. 09-20-2210878;
(iv) proceedings in the matter of final determination of the acquisition price in High Court of Sind, Reference No. 2 of 1974, in the matter of D.C. v. Ahmad Gabol & others;
(v) certified copies of certain sale and purchase documents relating to properties sold or purchased by the petitioners;
(vi) while the petitioners, in all the nine years, according to the said prima facie definite/positive information, earned or made substantial profits and gains (aggregating to a sum exceeding Rs.
28. 1.50 crore) on sale and purchase transactions of immovable properties, the transactions ex-facie exceeding 100 in number, yet the petitioners had not declared such profits and gains in their return(s) of income in any of the said nine years either in section A or in Section C, and had thereby wholly and totally, as would apparently appear, concealed and suppressed the income, profits or gains."
29. According to respondent, therefore, an ex-facie definite/positive information was available upon which he could have issued notices for reopening of the assessment.
30. It was further submitted that since the controversy before the High Court required investigation into disputed facts, the High Court rightly refused to rant the relief prayed for and dismissed the petition on the ground that it was premature. It was therefore submitted that it is also well-settled position in law that the discretionary relief under Article 199 of the Constitution is not to be granted if petitioner has approached the Court with un-cleaned hands and was guilty of ill-gotten gains, and m any case the remedies under the law under which action is taken against him are available to him.
31. Both the learned counsel addressed lengthy arguments at the bar and also filed written arguments in details. These have been already stated above and need not be repeated.
32. Before we embark on the resolution of the controversy, it is useful to examine certain principles of law.
33. Our attention was drawn to several reported decisions from Indian Jurisdiction as well as our own High Courts in which the superior Courts have interfered in exercise of Constitutional Jurisdiction in actions of Income-tax Officers at preliminary stage of the issuance of notices under section 34 of the Income-tax Act, 1922 as well as section 65 of Income-tax Ordinance, 1979.
34. The High Court dismissed the petition since it had been filed against the mere issuance of notice.
35. However the Supreme Court allowed the appeal and quashed the notices on the ground that the Income-tax Officer was not entitled to reopen the case merely on the basis of a change of opinion and to allow him to do so would subject the assessee to lengthy proceedings and unnecessary harassm ent.
36. "While making a best judgment assessment the Income-tax Officer had discovered certain transactions evidenced by the drafts which the assessee had not disclosed. In spite of this discovery and knowledge of all the material facts the Income-tax Officer did not make any necessary enquiries and draw proper inferences as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year."
37. On the above facts it was held that the Income-tax officer was not authorised to issue a fresh notice of re-assessm ent and the notice was quashed accordingly. In Parashuram Pottery Works v.
38. Income-tax Officer (AIR 1977 SC 429), the notice seeking to reopen the assessment order was quashed by the Supreme Court which held as under:-- "At the same time, it must be borne in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity."
39. "That the respondent had produced in the original assessment proceedings all the Hundis on the strength of which it had obtained loans from creditors as also entries in the books of account showing payment of interest and it was for the Income-tax Officer to investigate and determine whether these documents were genuine or not; the respondent could not be said to have failed to make a true and full discovery of the material facts .By not confessing before the Income-tax Officer that the Hundis and the entries in the books of account produced by it were bogus".
40. "This is a simple case where, on a re-appraisal of the very same material, which he had earlier obtained, the Income-tax Officer thought of taking a different view and initiated the proceedings.
41. The action of the Income --tax Officer was clearly without legal warrant in view of the well-settled position regarding action under section 147 (b)".
42. "The papers produced by the petitioner reflected the true state of affairs. It would not be correct to say that the assessee had either omitted or failed to make a full and true disclosure of material facts. All the materials were before the revenue authorities and, with reference to them, investigation had once been made and, on the assessee's explanation, assessment was completed. This was a case where, on change of opinion, the Income-tax Officer tries to reopen the assessm ent. It was not a case of any new material, which was not before the Income --tax Officer on the earlier occasion. The Court will not permit second thoughts on the same material for initiation of an action under section 147 of the Act. It must therefore, be held that the notice under section 148 was bad. The contention for the revenue was that the writ petition was not maintainable as the petitioner had an alternative remedy by way of appeal and reference could not be accepted in this case. The question of alternative remedy has to be examined with reference to the present dispute. If there is any remedy provided under the Income-tax Act, where the assessee can have the notice under section 148 vacated, that alone would constitute alternative forum for the reliefs claimed in this petition."
43. 1983 PTD 317) the Bombay High Court held that the notice which had been issued under section 147 and 148 was to be quashed on the ground that it merely represented a change of opinion.
44. The superior Courts in Pakistan have also frequently intervened in writ proceedings in relation to fiscal disputes. Reference may be made to the following: 1972 SCMR 257) it was held by the Lahore High Court as under:-- "In the case of the Premier Cloth Mills Ltd. v. Sales-tax Officer the remaining contentions raised in the petition are the subject matter of an Appeal before the Income-tax Authority. It will therefore amount to usurpation of the jurisdiction of the Special Tribunal if we adjudicate upon the subject- matter of the Appeal."
45. This finding was however set aside by the Supreme Court which directed the High Court to decide the case on the merits.
46. PLD 1971 SC 205), it was held by the Supreme Court that in cases involving fiscal rights a Writ Petition was the appropriate remedy.
47. PLD 1963 SC 322) the assessm ent orders passed by the Income-tax Officer were quashed by the Supreme Court despite the existence of an alternate remedy.
48. The principles laid down above reflect the correct position in law but it may now be at once stated that the position of the case before us is quite different from the one before the High Court, for, not only the entire record pertaining to tax returns filed by the appellant-company has been produced before us, but even the final assessm ent orders passed pursuant to notices under section 65 of the Ordinance have been produced before us. In view of the fact that all that can be said on behalf of the appellant-company as well as for the respondent is a matter of record before us, we proceeded to hear the case on merits.
49. The primary question that was debated before us is whether appellant-- company had concealed the fact that it was carrying on business of buying and selling the properties for the relevant years 1971-72 to 1980-81, and further whether the income from the sales of the property was capital gain, and not income from business. In this behalf, appellant has brought on record all the relevant documents including the chart showing the particulars of the properties sold and disclosed in tax return from year to year. It is char from the documents on record that appellant-company did not purchase any property whatsoever from any outsider and the sales were in respect of only those properties which were acquired by the appellant-company from the family members and which form part of Schedule of the Properties attached to the Articles of Association.
50. The crucial question therefore is whether the sales of the property by the appellant-company constituted the carrying on of a business. For the answer to this question, we may usefully refer to certain reported cases to which our attention was drawn. The first case in series that we may reproduce is the case of K.M.O. Chettiyar Firm v. Commissioner of Income-tax (1934 I.T.R. 155) in which the following apt illustration is given. It was observed that the intention of the assessee has to be considered in each case. To quote from the judgment: "A man may either buy shares or securities with the object and intention of making a gain from the sale when these shares or securities have risen to a higher price, or he may purchase the shares or securities with the intention of keeping his capital safe and receiving meanwhile a certain amount of dividend or interest. The intention must be deduced from the facts and from the circumstances of the case. Where a man makes a business of speculating this will be deduced by the Court from the fact that he makes numerous purchases and sales, the sales being within a short time of the purchase.
51. On the other hand where a man makes a few sales, although he may make a number of purchases, and where the sales are made at long intervals after the purchases, the conclusion to be drawn is that he is not, indulging in the business of speculating in these stocks and shares, but that he is investing his capital in these stocks and shares."
52. The Supreme Court of India in the case reported in 1966 (Vo1.60) ITR 65 considered the case of a company, which had acquired large rubber plantations, houses and plots etc., and from time to time sold some of the plots. It was held that the primary object of the company was to carry on the business of planters, and the acquisition of the assets was not for the purposes of carrying on business in real estate. Even the admitted fact that the company had the power under its Memorandum of Association to sell or turn to account or dispose of its property was not decisive.
53. The Indian Supreme Court in the case reported in AIR 1959 SC 1252 considered the circumstances in which it is to be decided whether the amount in question is `income' or `capital gains'. In this case the assessee who was carrying on business purchased a plot of land and made a profit. The Income-tax Department held that it was taxable and that the purchase had been made because the assessee had realised that it was a valuable plot on which he should make a handsome profit.
54. However, the Supreme Court struck down this finding and pointed out that the mere fact that the assessee had realised that the property was valuable and would increase in price was no reason to hold that it should be treated as income and reliance was placed on a decision of the House of Lords in which it was held: "An accretion of capital does not become `income' merely because original capital was invested in the hope and expectation that it would rise in value: if it does so rise its realisation does not make it `income'."
55. "It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances".
56. The distinction was also pointed out between sales and purchases of commercial commodities and land. It was specifically held that "a transaction of purchase of land cannot be assumed without more to he venture in the nature of trade".
57. "The following principles have to be borne in mind in deciding whether a transaction of purchase and sale amounts to an adventure in the nature of trade: (1) The commodity purchased plays an important role in deciding whether a person was indulging in an adventure in the nature of trade or was making an investment. (2) Whether' the transaction was an isolated one or formed part of a series of transactions showing a tendency to indulge in trade is another important factor. (3) The fact that the property bought was sold within a short time does not by itself indicate the transaction was in the nature of trade. (4) If land has been purchased or a commodity which normally is not treated as stock-in --trade has been purchased the presumption is that the intention was to make an investment and not to indulge in an adventure in the nature of trade. (4)
58. If the property purchased was capable of yielding income then again the inference is that an investment was intended and not an adventure. It is not a matter of merely counting the number of facts and circumstances pro and con. What is important is to consider their distinctive character.
59. In each case it is the total effect of all relevant factors and circumstances that determines the character of the transaction. The onus of proof in cases of transactions of this kind to establish that they were in the nature of trade is entirely on the department and that onus cannot be satisfied by merely surmises."
60. "But the Income-tax Act does not say that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden is upon the revenue to prove that it is within the taxing provision."
61. "Whether or not a transaction or transactions are in line of assessee's trade is not capable of an easy answer. The answer to be given cannot be promised on a single criterion. In each case regard must be had to the character and circumstance of the transaction. If what is purchased is something, which is itself an ordinary investment, such as shares, a potential source of revenue the transaction, in the absence of evidence to the contrary, will not be in the line of business. On the other hand, buying and selling of shares speculatively in order to make gain, the share will become stock-in-trade, and dealing in such investments is a business; making the profits a revenue receipt. If it is a case of numerous purchases and sales and the sales being within a short time of purchase, the conclusion may be that it was a case of trading, for, then the inference would be that the purchases were made with the sole object of turning it over and selling it at a profit. If on the other hand, there are a few sales, the conclusion more appropriately will be investment."
62. A question arose before this Court in Commissioner of Income-tax v. Habib Bank (1985 SCMR 284) whether the profits by sale of shares by the assessee, a public limited liability company, were capital gains or revenue receipts. The assessee claimed that the purchase of shares was an investment of surplus funds and never formed part of the stock-in-trade. In the previous assessm ent year, the assessee suffered a loss which was shown as trading loss but was converted by the Assessing Authority into a capital loss and the assessee had accepted that treatment. In the following year, the assessee itself claimed the profits out of sales of the shares as capital gains, but the Income-tax Officer rejected this claim and held it to be a revenue receipt. An appeal filed by the assessee was rejected. But on second appeal the Income-tax Appellate Tribunal held that the profits were to be treated as capital gains. The dispute then came up before Sindh High Court on an application under section 66(1) of the Income-tax Act and the question of law referred was whether on the facts and in the circumstances the profit by sale of shares was a revenue receipt.
63. The High Court answered the question in the negative and this Court on appeal confirmed the view of the High Court. In this connection, the distinction between "revenue income" and "capital" under the Income-tax Law was examined and reference was made to the following passage from British Tax Encyclopaedia Vol. 5 (pages 1013-1014): "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 not 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 the 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."
64. The same subject is more specifically explained as under: "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:"
65. "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 act 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 arc 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 he assessed for income-tax."
66. Before any of these sales was completed the requisite permission from the Income-tax Officer concerned was obtained by appellant-company, and the proceeds received from the sales were shown in the return for each year. The proceeds of the sales of the properties and the compensation amounts received: from the Government for the acquisition of appellant's properties, were throughout treated as capital gains, and not income from business, and specific orders were passed under section 9, and not under section 10 which pertains to business income.
67. These sales cannot be said to be frequent so as an inference can be drawn that appellant was carrying on the business of buying and selling of the properties, which was in fact specifically barred under the Memorandum and Articles of Association. On the facts and circumstances proved on record, we are clearly of the view that the sale proceeds of the properties and the compensation amounts received from the Government in respect of the compulsory acquisition of the properties were indeed capital gains, and was not income from business, for, the appellant- company was not a dealer or engaged in the business of buying and selling of the properties. All the transactions or sales of the properties and the compulsory acquisition of land by the Government were fully disclosed by the appellant-company and after conscious consideration the Income-tax Officer had finalised the assessment orders. It has not been shown that appellant had purchased any property from any outsider and sold or disposed of during the assessment years in question. There is also force in the argument advanced on behalf of the appellant that since the case of the appellant throughout is that the sale proceeds of the properties and the compensation amounts received in respect of the compulsory acquisition of the properties by the Government were capital gains and not income, appellant could not, and ought not to, have disclosed these transactions under section "C", Part-I of the Income-tax Return. Once all the facts have been fully disclosed by the assessee and considered by the Income-tax Authorities and the assessments have been consciously completed, and no new fact has been discovered there can be no scope for interference with these concluded transactions under the provisions of section 65 of the Ordinance on the ground that the income chargeable to tax under the Ordinance has escaped assessm ent or has been under-assessed, etc., in the meaning of clause (a) or (b) of subsection(1) of section 65 of the Ordinance. On the glaring facts and circumstances of this case the mischief of section 65 of the Ordinance was not attracted at all so as to call for the issuance of the impugned notices against the appellant-company, not to speak of passing the assessment orders dated 26- 12-1982 which however have been already declared as nullity in law by the order of this Court dated 23-12-1982, for the reasons stated earlier.
68. It may be mentioned that the impugned notices under section 65 of the Ordinance were also challenged on the ground of mala fides on the part of the Income-tax Officer who had issued the notices, and serious allegations have been made which are sought to be supported by documents as well as circumstantial evidence. Since, this aspect of the case may be relevant to another proceeding initiated in the case, and we have also not fully heard arguments in this regard, we find it unnecessary to deal with this aspect of the case, specially when on the merits of the case, we have reached the conclusion that impugned notices under section 65 of the Ordinance and the consequential action of the Income-tax Officer in making the assessment orders are illegal and without jurisdiction.
69. For the reasons recorded above, this appeal is allowed with the result that the impugned judgment of the High Court dated 19-12-1982 is set aside and the Constitutional petition filed by the appellant is allowed with the result that the impugned notices under section 65 of the Income-tax Ordinance, 1979 for the Income-tax Assessm ent Years 1971-72 to 1980-81, and the assessment orders, dated 26-12-1982 are declared as illegal and without jurisdiction and the respondent by himself or through any agency is restrained from taking any action of any nature whatsoever against the appellant arising out of or in connection with the aforesaid notices. The appellant shall also be entitled to costs.
…and 26 more citing cases