' MUHAMMAD AKRAM, J.-The Income-tax Appellate Tribunal (Pakistan), Lahore has referred to the High Court the following two questions of law said to arise out of its appellate order dated 12th of October 1966 passed in Income-tax Appeal No, 159 of 1964-65 relating to the assessment year 1959-60, under section 66 (1) of the Income-tax Act, 1922 :
(1) Whether in the circumstances of the case the Tribunal was right in holding that the surplus arising on the sales of shares of Colony Sarhad Textile Mills acquired as right shares in 1958, constituted an adventure in the nature of trade resulting in revenue gain liable to tax under the Income-tax Act ?
(2) Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in treating part of the total profits, earned on sale of shares as capital gain on the original investments ?
2. Mr. Naseer A. Sheikh (hereinafter called the assessee) was assessed in his capacity as an individual. He derives income from different sources and was assessed to income under the heads 'Salaries', 'Property', 'Business' and 'Other Sources' for the assessment year 1959-60 in question. He filed his return declaring a total income of Rs, 4,22,721 from all these sources for the relevant previous sear ended 30-6-1959. The assessee earned surplus of Rs, 7,82,250 by the sale of his shares of the Colony Sarhad Textile Mills Limited, Noshehra, which he claimed as capital gain, not assessable to tax. But the Income-tax Officer (Investigation) Circle IV, Lahore in completing the assessm ent against him added this amount as chargeable to tax. He was of the opinion that this transaction was a venture in the nature of trade and the excess amount earned by the assessee was a revenue gain in his hands chargeable to tax. The assesses went up in appeal (I. T. A. No, 159 of l96445) against the order which was disposed of by the Income-tax Appellate Tribunal (Pak istan), Lahore on the 12th of October 1966. The Tribunal partly accepted the appeal of the assessee and rejected it in part. Both the parties felt aggrieved against this order. They moved their separate applications under section 66 (1) of the Income-tax Act before the Tribunal for reference to the High Court. In pursuance to them the Tribunal referred the above two questions one each at the instance of either party, to the High Court for its opinion.
3. Briefly, the material facts relevant for the disposal of this reference are these. He assessee, Mr. Nasir A. Shiekh and his three brothers, namely, Moghis A. Sheikh, Farooq A. Sheikh and Aziz A. Sheikh are in virtual control and Management of the Colony Group of Companies mainly formed by them.
They invested Rs, 20,41,500 by acquiring 39330 shares of different denominations of the Colony Sarhad Textile Mills Ltd., Nowshehra (hereinafter called the Nowshehra Mills), a private Company limited by shares, which was established in about the year 1952. In addition to this the Colony Textile Mills Ltd. And the Colony Woollen Mills Ltd., Multan two (public limited companies), which were mainly controlled by the four brothers, had shares in the Nowshehra Mills to the extent of Rs, 12,07,650. At the time the Company bad a total paid-up capital of Rs, 37,50,000 only. On the 28th of February 1958 the Company decided to increase its paid-up capital by Rs, 12,50,000 to raise it to Rs, 50,00,000 in all. Out of this increase in the share capital the assessee and his three brothers further subscribed for the purchase of the shares to the extent of Rs, 11,48,750. In this manner out of a total paid-up capital of Rs, 50,00,000 in this Company the share capital under the direct and indirect control of the four brothers stood at Rs, 43,97,900.
4. In September 1958 they resolved to make the Colony Sarhad Textile Mills, Nowshehra a subsidiary of the Colony Textile Mills Ltd., Multan by sale of their entire holdings in Nowshehra Mills to the Multan Mills. In pursuance thereto they sold their entire holdings in the Nowshehra Mills to the Colony Textile Mills Ltd., at double their face value for Rs, 63,19,35a in all. The net profit thus made by the four brothers on the sale of their shares amounted to Rs, 31,29,000, out of which the assessee's proportionate share of the surplus came to Rs, 7,82,250.
5. The Income-tax Officer, in completing assessment against the assessee, held that this transaction was a venture in the nature of trade and the excess income amounted to revenue gains chargeable to tax. He observed that the four directors (the assessee and his three brothers) had no surplus funds for the sake of investment. They were indebted to different banks to the tune of Rs, 23,77,693 as on 31st of March 1938. The Nowshehra Mills was incorporated as a Private Limited Company. In entering upon this venture. Their idea was to make profits by the ultimate sales of these shares.
' In forming this opinion the Income-tax Officer observed that : "In the case under consideration the sale of share was carried out under a define scheme of profit making as is clear from the following facts : The intrinsic value of the share sold out was hardly more than their face value as the past three working years had not resulted in any worth the name profits. Up to 1958-59 completed assessment an unabsorbed depreciation of Rs, 28,00,000 odd had to be carried forward. The shares were sold in September 1958 I e. Before the Company got going and the last balance-sheet as on 30-9-1957 was available which showed a general reserve of Rs, 5,00,010 only. Thus the market value could not be more than the face value of shares. The position of the Company slightly improved after 30-9-58 when a profit of Rs, 22,05,201 was made (without B/F losses and depreciation). In all these succeeding four years profits of the Company were made to accumulate so as to improve the position of the vendor-Company. Total profits earned in these four years aggregated to Rs, 38,00,000 odd and general reserve was increased to Rs, 52,80,168 by 30-9-57 so to facilitate the vendee-Company to unload the shares at Rs, 90 per share at the time of desubsidizing. No dividend was declared in all these four years. The acquisition of shares by Colony Textile Mills Ltd., Lahore cannot be considered in any way compulsory as the vendor and the vendee-Company were one and the same and vendors ano the vendees are closely associated.
The four brothers had complete control over the purchaser Company. In fact the Directors of the purchaser Company were also controlling the Company whose shares were sold. They were in privileged position to devise ways and means best suited to their requirements.
' The motive of the Directors in that transaction was to make as much profit as possible even by manipulation. The shares sold at double the face value enabled them to get right shares of the like amount of the Colony Textile Mills Ltd., Lahore, which were themselves marketable at 100% above the face value. The time gap between the date of investment i,e, February 1958 and the date of sale i,e, September 1958 which covered few months clearly indicates that the motive of the assessee was not to hold shares as investment but to dispose them of at profit. The decisions quoted by the assessee do not have much relevancy to the facts of this case. In Beharilal Jhandamal, the question that arose for the determination of the Court was whether profit resulting from the sale of previous metals fell within the scope of revenue gain or not. Their Lordships observed that profit could be assessable only if the original investment has been made with the sole purpose of reselling the same at profit. This case goes in favour of the Department rather than the assessee.
This I a not the only transaction carried out by the assessee but there are many others as detailed in notice under section 23 (3) reproduced in the foregoing. The assessee has relied upon the case of one Fida Hussain recently decided by the Tribunal in which share of profit on the sale of his shares held in the Colony Sarhad Textile Mills has been held to be a capital gain. The case cited by the assessee is quite distinguishable inasmuch as the shares in that case were acquired by his father which were later on distributed to his six sons. The question of intention of making profit in that case did not arise as it was the shareholder's father who had initially purchased shares in the Company. The case cited by the assessee has thus no relevancy. A part from that had no say in the parent Company for the acquisition of shares or fixation of their purchase price."
' In conclusion the Income-tax Officer held that in the circumstances of this case the sale of the shares was an adventure in the nature of trade and he, therefore, added Rs, 7,82,250 in computing the income of the assessee.
6. In appeal before the Income-tax Appellate Tribunal, on behalf of the assessee, it was contended that the investment in Nowshehra Mills was sever motivated by any consideration other than acquisition of shares in the firm as an investment. Besides, dealing in shares has never been in the Jim of his business. The sale was effected as a mere change in the mode of investment and what actually happened was that the assessee got shares for shares. With the sale proceeds of his shares in the Nowshehra Mills he got shares in the Multan Mills. It was further contended that the notional gain thus made was nothing but a capital gain not taxable under the law. Nor was there any intention at the time of acquiring those shares to sell them on profit. It was further contended on behalf of the assessee that at the same time the sale of the shares was not intentional but under the circumstances over which the assessee had no exclusive control. The assessee had sufficient surplus funds of his own, but as they were employed in various other businesses, the income from which was also being taxed, it was not found feasible to withdraw those amounts from the running business. The assessee, therefore, borrowed money to avail of the good investment opportunity: The money was not borrowed with a view to earn profits or make gains.
But the Tribunal repelled all these contentions and in that connection observed : "After giving our anxious consideration to the facts of the case as a whole and as viewed and stressed by the contesting parties we are of the opinion that there was such a close relationship between Nowshehra Mills and Multan Mills that any apparent arrangement between the two cannot be taken at its face value. Admittedly the appellant and his brothers and their controlled corporations were incomplete command of the situation so as to direct such a course of action as was most suited and beneficial to them all, and it was in the background of this commanding position of their's and with a view to exploit this position as best as they could that they got the capital of the Nowshehra Mills increased by Rs, 12,50,000 just before its conversion as a subsidiary of Multan Mills, and as the ultimate object was the disputed sale they took a lion's share out of freshly issued capital, and at a time when their own surplus capital was blocked, elsewhere, yet another factor that looms large is that the letters of allotment were not exchanged with regular scrips and no satisfatetory explanation for this action has been offered. We at the same time find that there was not a long interval 1etween the acquisition of the subsequent lot of shares and their sale to the Multan Mills. It also does not stand to reason to change an investment by acquiring the shares of a losing concern as the Nowshehra Mills was before it merged into Multan Mills. This cart he done only if the investor has access to and has knowledge of some inner happenings ultimately to be beneficial to him. Therefore, the second investment in the Nowshehra Mills made by the appellant with the full background and knowledge of the subsequent plans can lead to no other conclusion except that the intention was to make profit by acquiring additional shares with a view to sell them at double the price. We also cannot accept the appellant's explanation that the sale of shares was made under compelling circumstances. At least there was no compulsion for making an investment in rather paid-up shares and then disinvesting the same for the advantage of their own allied concern. This was clearly done under a set scheme of making a gain which could ordinarily be passed on a capital gain. The subsequent unloading of these shares also shows that there was no compelling circumstances under which the shares being acquired for Colony Textile Mills Ltd. In these circumstances we see no hesitation in holding that in respect of the subsequent investment in the shares the appellant's sole intention was to make as much gain as possible through a well calculate plan, in other words the acquisition of these additional shares was with the sole object and, intention to sell them at profit. We, however, find that these various factors were non-existing when the original shares ere acquired. Then a new will was set at a place where the Government was providing the maximum facilities, and the gap of time bet seen the original purchase of shares in 1952 and their sale in 1958 also nullifies the departments stand that they were also purchased to be sold for profit. There is no doubt that the appellant had a clear making motive at the time when the subsequent shares were being acquired but at the time when original shares were acquired, the idea was only to make investment as any wise industrialist would do. In these circumstances, the gain made by the appellant by the sale of original acquisition cannot be termed as revenue gain. At the time of acquiring these shares there could posibly be no inkling of the state of affairs to happen. But in respect of subsequent lot of shares acquired dominant if not the only consideration was to purchase them with a view to sell them for profit. On this view of the matter the entire profit made needs to be bifurcated. The part of the profit accruing on the sale of original acquisition we hold to be capital gain, whereas that arising from the subsequent acquisition is definitely a revenue gain."
' In this manner the Tribunal made a distinction in the two lots of shares held by the assessee in the Nowshehra Mills-those acquired by the assesse at or near about the time of the formation of the Company with the idea only to make investment, as any wise industrialist would do and those subsequently acquired in the year 1958 under a set and preconceived plan to sell them at profit.
The Tribunal, therefore, partly accepted the assessee's appeal and directed the Income-tax Officer to revise the computation of the taxable profit accordingly.
7. We have heard the learned counsel for the parties on the two questions referred to the High Court by the Tribunal. Under section 3 of the Income-tax Act the total income of the assessee for the relevant assessm ent yeas is brought to charge. According to section 4 of the Act the total income includes all income, profits and gains from whatever sources derived. It may be seen that the tax is on "income, profits and gains" and not on "capital" section 6 lays down the different heads of income, profit or gain chargeable' to income-tax. It may be clarified at the outset, that under section 12-B of the Act the tax is also payable under the head "Capital gains". But that section in terms is not applicable to the assessment year 1959-60 in question. As such the distinction between capital sales and sales producing incom acquires added importance for the purposes of this case. It Eis not always possible to draw hard line of distinction between what constitutes "capital" and "income". In this connection Pulloc, M. R. In Atherton v. British Insulate & Helsby Cables Ltd. (1) said: "What is capital and what is attributable to revenue account ? I suppose is a puzzling question to many accountants and I do not suppose that, it is possible to lay down any satisfactory definition."
8. Section 10 (1) of the Income-tax Act lays down that the tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation", in respect of the profits or gains of any business, profession or vocation carried on by him. Section 4 (3) (vii) expressly lays down that any 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 person receiving them. The business income of an assessee is chargeable, to tax.
(1) 10 Tax Cas, 155
9. The term "business" is defined in section 2 (4) of the Income-tax Act to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. This definition is not exhaustive,- it has extending force and not a limiting connotation. What actually constitutes a venture in the nature of trade is difficult to define and will depend on the circumstances of each case, Jesse!, M. R. Brickson v. Lost (1) observed : "There are a multitude of things which together make up the carrying on of trade but I know of no one distinguishing incident which makes a practice a carrying on of trade and another practice not carrying on a trade. If I may use the expression it is a compound fact made up of a variety of incidents."
10. In the Californian Copper Syndicate v. Harris (2) Lord Justice Clerk drew the line between "Capital Sales and Sales Producing Income" in the following passage which has assumed classical importance : "it is a quite well-settled principle in dealing with the questions of assessment of income-tax that where the owner of an ordinary invest ment chooses to realise it and obtains a greater price for it than he originally acquired it at the enhanced price is not profit assessable to income-tax. But it is equally well-established that enhanced value obtained from realization or conversion of securities may be so assessable where what is done is not merely a realization or change of investment but an act done in what is truly the carrying on or carrying out of a business what is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts ; the question to be determined being-Is the sum of gain that have been made a mere enhancement of value by realising a security or is it a gain made in an operation of business in carrying out a scheme for profit-making?"
' The above citation was quoted with approval by the Privy Council in Commissioner of Taxes v.
Melborne Trust Ltd. (3) and Cammissioner of Taxes v. British Australian Wool Realization Association
(4) and by the House of Lords in Rees Roturbo Syndicate v. Ducker (5). Rowlatt, J. In drawing the line of distinction in Thew v. South West Africa Co. (6) observed that the simple question always is Is the article acquired for the purpo Ee of trade? If it is, the profits arising from its sale must be brought into revenue account." Thus a person, who having a collection of pictures for personal use, sells one of them, is not taxable on the profits of the sale. But a picture dealer would be assessable to tax on the profits of sale of pictures. In determinin whether a case is one of trade all the relevant facts must be considered. The nature of the assets bought and sold, the circumstances of the sale and purchase, the duration for which the assets were held by the assessee and hi vocation, are some of the relevant considerations to be borne in mind Sometimes even a single and isolated transaction may constitute and adventur in the nature of trade. In that connection Clyde, L. P , in Balyomnic Land Trust Ltd. v. I. R. (7) has said that : "A single plunge may be enough, provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade ; but
(1) 4 Tax Cas. 422 (2) 5 Tax Cas. 159
(3) 1914 A C 101 (4) 1931 A C 224
(5) 13 Tax Cas. 366 (6) 9 Tax Cas. 141
(7) 14 Tax Cas. 684 ' the sale of the piece of property-if that is all that is involved in the plunge-may easily fall short of anything in the nature of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it ; much depends on the circumstances."
11. Having laid down these guidelines, with which there can be no quarrel, let us now revert to the facts of this case before us. As already observed above the Tribunal was of the considered opinion that the investment made by the assessee by the purchase of second lot of additional shares in the Nowshehra Mills was made by him with the full background knowledge and under a preconceived plan with the intention to sell them at profit. It was clearly done under a set scheme of making as much gains as possible through a well calculated plan. The acquisition of the additional shares was with the sole object and intention to sell them on profit. But all these considerations were not there when he acquired the first lot of shares in the Company at the time of its formation in the year 1952. This, in the opinion of the Tribunal was done with the only idea to make investment as any wise industrialist would do.
12. In our considered opinion both these findings are basically and essentially pure findings of fact.
With what motive and intention the assessee acquired and sold those shares is a finding of fact.
The Tribunal arrived at these findings on the basis of sufficient material brought on the record. As D such the order passed by the Tribunal is concluded by these findings of fact and it does not give rise to any question of law for reference to the High Court. We, therefore, find that this reference at the instance of each of the contending parties is incompetent.
13. But before us the learned counsel for the assessee made bold to strenuousiy argue that the second lot of shares acquired by the assessee in the year 1958 was offered to him as right shares only under section 105-C of the Companies Act. He did not purchase them for business considerations. In his capacity and by virtue of his position as a member of the Company he was allowed pro rata shares in the increased capital issued by the Company. This increase in the capital was decided upon by the Company and the assessee as a member of the Company had no say in the matter. This sale of the additional shares to him was involuntary, and be did not acquire them out of any business considerations. In these circumstances, in the opinion of the learned counsel, it was impossible to hold that this deal on the part of the assessee was in the nature of trade.
14. In this connection the learned counsel cited before us the case of the Commissioner of Income- tax Bengle v. Mercantile Bank of India and others (1). In that case on general principles, where a Company capitalised its accumulated pot its and distributed bonus debentures among the shareholders, it was held that the debentures were not dividend or income the hands of the shareholders. In that case their Lordships of the Privy Council also remarked that the personal motives, or purpose of the individual shareholders even though they hold a controlling interest the Company was irrelevant as the Company had in fact capitalised the accumulated profits. From this the learned counsel wanted to conclude that in law a Company is a different person from its members who are not responsible for its acts of omissions and commission. Therefore, according to him the assessee cannot be held responsible for the resolutions passed by the Colony Sarhad Textile Mills Ltd., and the Colony Textile Mills Ltd., in this
(1) (1936) 4 I T R 239 case. The case before their Lordships of the Privy Council is clearly distinguishable and not relevant to the facts of this case before us. There is little doubt that an individual may control a Company but it does not necessarily follow from this that the business carried on by the Company is the business of the Controller. At the same time it cannot be denied that, as remarked in Stanhy Surveyor of Taxes v. The Gramophone and Type-Writer Limited (1), a person in that position may cause such an arrangement to be entered into between himself and the Ccmpany as will suffice to constitute the Company his agent for the purpose of carrying the business and thereupon the business will for all taxing purposes be his business. In this connection, we may also usefully refer to the authoritative pronouncement of the Supreme Court of Pakistan In re : The President v. Mr. Justice Shaukat (2).
In that case their Lordships observed that: "The trend of decisions since the above enunciation of the law in Salomens' case appears, however, to show that in a number of important respects both the Courts and the Legislatures have rent the veil which was recognised in the above-mentioned decision to be almost inviolable. The growing tendency appears to look at the substance and not to allow the vision to be clouded by the shadow of the corporate personality. Thus where the corporate perscnality is being used merely as a cloak for fraud or improper conduct or where it can be established that the corporate personality is merely acting as an agent or trustee for someone else, be he an individual or another subsidiary Company or where, it is necessary to determine the true character of the corporate personality for other purposes, such as to determine its tax liability or its quasi-criminal liability or as to whether the corporate body is an enemy concern or not, or a mere trustee for certain purposes, the Courts have not hesitated to look behind the vein of incorporation (vide Gower's Modern Company Law, 2nd Edn., pp. 183-209)."
It is, therefore, permissible to lift the veil of incorporation of a corpora personality in suitable cases to determine its tax liability. There is DO absolut bar against it in the instant case before us the Tribunal after having pierced into veil of incorporation of the two companies-the Colony Sarhad Textil Mills Ltd. And the Colony Textile Mills Ltd., was able to discover the real nature of the transaction in question. We have held above that the finding by the Tribunal in the case is concluded by the findings of fact and n question of law arises out of its order. Therefore, in our opinion this reference to the High Court is incompetent and is returned unanswered. But there is no order as to costs in the circumstances of this case.
(1) 5 Tax Cgs. 358 (2) PLD 1971 SC 585