MESSRS PAKISTAN INDUSTRIAL, CREDIT AND INVESTMENT CORPORATION LTD. Versus COMMISSIONER OF INCOME-TAX (EAST), KARACHI

1. FAKHRUDDIN G. EBRAHIM, J. This Judgment will dispose of I.T.R. No. 1 of 1971 and I.T.C. Nos. 82, 83, 84 and 85 of 1971. In each case the applicant is Pakistan Industrial Credit and Investment Corporation Karachi, shortly known as PICK I. T. R. 1 of 1071 relates to assessment years 1963‑64 and the question referred to the High Court under section 66(1) of the Income‑tax Act, 1922 reads as follows: -

2. "Whether on the facts and in the circumstances of the case the surplus derived by the assessee in the sale of shares arid securities in the relevant previous years was a revenue receipt and as such taxable under the Income‑tax Act?"

2. It. would appear from the reference order made by the Tribunal that PICIC, the assessee, bad required the Tribunal to refer, for assessment year 1963‑64, on more question as follows:‑

3. "Whether in the facts and circumstances of the Case the Tribunal is right in holding that the applicant company was not merely an investment company and that purchase and sale of shares by it was in the nature of trade?"

3. The Tribunal refused to refer the above question for the; assessment years 1963‑64 on the ground that it raised a question of fact. PICK has filed an application under section 66(2) of the; Income‑tax Act, 1922, being I. T. C. No: 83 of 19 71, praying that this Court may direct the Tribunal to refer the above question also. It would further appear that in relation to the assessment year 1964‑65, PICIC had required the Tribunal to refer two more questions, in addition to the question which the Tribunal bad agreed to refer, being subject‑matter of I. T. R. No.1 of 1971, which two questions read as follows:‑

4. "Whether on the facts and in the circumstances of this case, the Tribunal was right in holding that the applicant Company was riot merely an investment holding company but one dealing in investment and that purchase and sale of shares, by it was in the nature of trade?

5. Whether in view of the amendment to section 12‑B of the Income tax Act, the surplus derived by the assessee in the sale of shares and securities on or after 8th June, 1963, was capital gain liable to tax at the rates provided in subsection (5) of section 17 of the Income‑tax Act specially in view of the fact that 'dealer' has been defined in Explanation (1) to section 17 of the Income‑tax Act as a member of a recognized Stock Exchange in Pakistan?"

4. The Tribunal refused to refer the above two questions firstly oh the ground that it is a question of fact and secondly that it does not arise out of the Tribunal's order. The PICK has, therefore, filed an application, being I. T. C. No. 84 of 1971, under section 66(2) of the Income‑tax Act, 1922 for the assessment year 1964‑65 praying that this Court may direct the Tribunal to refer the aforesaid two questions.

5. For the assessment years 1965‑66, 1966‑67 the Tribunal has not referred to the Court any question. The assessee has filed two applications, being I. T. C. No. 84 of 1971 and 85 of 1971 under section 66(2) of the Income‑tax Act, 1922 requiring this Court to direct the Tribunal to refer two questions including the one which is subject‑matter of I. T. R. No. I of 1971.

6. Having heard all the aforesaid cases together we have come to the conclusion that the only question that arises for our determination in respect of all the assessment years in dispute is one referred to by the Tribunal which is subject‑matter of J. T. R. No. I of 1971, reproduced hereinabove. It will, therefore, follow that I. T. Cs. Nos. 83 and 84 of 1971 are dismissed and in I. T. Cs. 82 and 85 of 1971 we frame the same question for our answer as has been referred to in I. T. R. Nos. I of 1971, and there fore, the answer in I. T. R. No. 1 of 1971 will also dispose of I. T. Cs. Nos. 82 to 85 of 1971.

7. Mr. Ali Athar, the learned counsel for the assessee contended that having regard to the words used in sections 10, 2(4) and 4(3) (vii) of the Income‑tax act, 1992", a receipt to be taken income must have its source at by this Court is that the sale of shares by PICIC for the years in question was in its line of business in other words the conclusion arrived at is that PICIC was trading in shares, then the profit, made on the sale of shares would be income, assessable to income‑tax. To put it in the oft‑quoted words of Lord Justice Clark in the California Copper Syndicate v. Harris (1904) 5 Tax Cas. 159: if the owner of an ordinary investment chooses to realize it and obtain a greater price for it than that for which he originally acquired it, the enhanced price is not taxable profit. But it is equally well settled that the enhanced value obtained from realisation or conversion of securities may be so assessable when 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."

6. Whether or not a transaction or transaction are in the 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 circumstances 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 shares speculatively in order to make gain, the shares will become stock‑in‑trade and dealing in such investments, a business, making the profits a revenue receipt. Such dealing would amount to commercial disposal of shares. The latte will be profit income and the former accretion to capital. It may also be added that if the purpose is investment, the fact that in varying the investment, sale of shares results in profits will not make such profit revenue income unless it is shown that variation amounts to dealing in investments. If it is a case of numerous purchases and sales and the sales being within short time of the 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 although a number of purchases and when sales are made at long intervals after the purchase, the conclusion more appropriately will be investment, notwithstanding the fact that there was no intention of holding over the shares purchased and the purchase was in expectation of being able to sell it off at profit when the shares appreciate in value. The burden will be on the Revenue to show that gain made is a revenue receipt for it is the Revenue which must not the assessee within the taxing provisions of the statute. If the facts are equivocal the benefit must go to the assessee. During the four years in question the particulars of sale and purchase of shares by PICIC and the profit derived therefrom were as follows:‑‑

7. 1963‑64

8. 1964‑65

9. Rs.

10. Rs.

11. Sale of shares

12. 7,77,503

13. Sale of shares

14. 6,15,480

15. Profit on sale of shares

16. 1,48,236

17. Profit on sale of shares

18. 1,29,800

19. Purchase of shares

20. 46,23,644

21. Sale of securities profit on sale of securities

22. 3,500

23. Purchase of shares

24. 45,11,036

25. HOLDINGS:

26. Purchase of securities

27. 53,54,500

28. Shares

29. 1,39,17,423

30. Securities

31. 2,24,37,500

32. HOLDINGS:

33. U. K. Securities

34. 53,52,445

35. Shares

36. 179,42,779

37. Securities

38. 228,42,005

39. U. K. Securities

40. 43,60,639

41. 1965‑66

42. 1966‑67

43. Rs.

44. Rs.

45. Sale of shares

46. 13,81,074

47. Sale of shares

48. 10,45,350

49. Profit on sale of shares

50. 4,74,482

51. Profit on sale of shares

52. 2,09,189

53. Sale of securities

54. 99,53,111

55. Sale of securities

56. 49,79000

57. Profit on sale of securities

58. 15,611

59. Profit on sale of securities.

60. 4,750

61. Purchase of shares

62. 1,01,27,309

63. Sale of N. I. T.

64. 7,63,975

65. Purchase of securities

66. 66,32,750

67. Profit on sate of N. I. T.

68. 38,975

69. Purchase of shares

70. 87,94,295

71. HOLDINGS:

72. Purchase of shares

73. 43,98,549

74. Shares

75. 2,71,63,486

76. Securities

77. 1,95,37,250

78. HOLDINGS:

79. Shares

80. 351,21,620

81. Securities

82. 182,36,549

8. It will thus be seen that in each year the shares old represented not more than 15% of the total shares purchased in each year. This fact alone is decisive for the conclusion that PICIC was acquiring shares for investment year after year represented change in h, investment made. This is not a picture of a person dealing or trading in shares. What makes the difference is the intent with which the shares were purchased by PICIC and the Revenue has not been able to show that the interest was speculative which would make the difference. It is not the case of Revenue either that changes in investment made by PICIC were necessary for the purpose of carrying on its appointed business or a step in that direction and, therefore 'r‑c sales were conducted in carrying on its business.

83. 9, Mr. Mansoor Ahmed Khan, the learned counsel for the Revenue firstly contended that the whether a transaction is in the line assessee s business is a question of fact and there will be therefore, no occasion for this Court to proceed to answer it under section 66(l) of the Income‑tax Act, 1922. Secondly, it was contended that even a single transaction of sale if effected in pursuance of the object for which the assessee was formed and incorporated would amount to a sale in line of business making the gain a revenue receipt. The first contention need no detain us for we have the jurisdiction to entertain the question of law which is whether the Tribunal was justified on the evidence in determining the profit as assessable to tax. Coming to the object for which PICIC has been formed, Mr. Mansoor Ahmed Khan invited our attention to the following objects enumerated in the Memorandum of Association of the P I C I C:‑

84. "The objects for which the company is established are:‑‑

1. To carry on the business of assisting industrial enterprises within the private sector of industry in Pakistan in general by‑

(iv) creating, expanding and stimulating investment in share and security markets;

(d) making funds available for re‑investment by causing the transfer of shares and securities, and by revolving investments, as rapidly as prudent;

2. (i) To buy underwrite, invest in and acquire and hold shares, stocks, debentures, debenture stock, bonds, obligations and securities issued or guaranteed by any company or body, corporate or unincorporated, or by a person or association.

18. To carry on the business of an investment company and to buy, underwrite invest in and acquire and hold shares, stocks, debentures, debenture stock, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in Pakistan and debentures, debenture stock, bounds, obligations and securities issued or guaranteed by any Government, State, Dominion, Sovereign, Ruler, Commissioners, Public Body or Authority, Supreme Municipal, Local or otherwise firm or person and to deal with and turn to account the same provided always that no investment imposing unlimited liability or the company shall be made."

10. Now as I see it, the Memorandum gives scope of the activities of a company. It authorises the company to embark upon one or severs businesses. It tells us the object or objects for which a company has come into existence. But whether or not a. specified activity becomes business of the company depends upon its working. On entering upon an activity the Company will be in that business. A subsidiary activity may be connected with its main business as to become in line of business of the Company. A company may be authorised to deal in shares and securities. If, therefore, the Company buys and sells hares it may amount to carrying on the business in shares and securities. But if the Company is authorised to invest in shares and securities and therefore, act as an investment in addition to investment dealing company, it will have to be shown that its activity amounted to dealing commercially in share before profit made therefrom is made taxable. If shares and securities were purchased as investment and at time sold and further purchases made to augment the investment it will, notwithstanding the memorandum that it may deal in shares, will not amount to trading in shares. If on the other hand buying and selling of shares is incidental to the business which is carried on by a Company‑much as a bank selling shares to raise money to pay its depositors, it will be sale in line of business.

11. The Supreme Court of India in the case of Sardar Indra Singh Sons v. Commissioner of Income‑tax (1951) 24 I T R 416 observed as follows:‑

85. "Before it can be held that a profit arises from a transaction which forms part of a company s business it must be shown that the company was not only entitled to enter that transaction under its Memorandum of Association but the transaction was part of the business which it cirri; on or was an essential or normal step in conducting its business. The objects stated in the Memorandum of Association are not con clusive. Essential features of the business actually carried on by the Company must be regarded and distinguished from what may be called incidental acts of administration."

12. In the case of the Commissioner of Inland Revenue v. Scottish Automobile & General Insurance Co. Ltd. (1929) 16 Tax Cas. 381. Lord President observed:‑ the question is not whether the company might possibly have traded as an investment company, but whether it was in fact trading as such, and whether this particular transaction was part of that trading."

13. In the Dunn Trust Ltd, v. Williams (1950) 31 Tax Cas. 477, shares were purchased by a money‑lending company from its Managing Director which wire later sold at a profit after the company had commenced dealing in shares and the profit was held not assessable to, tax notwithstanding the fact that 0ne of the objects of the company was - "to issue on commission, subscribe for, take, acquire and hold, sell, exchange and deal in shares, stocks bonds, obligations or securities of any government authority or company."

14. It must, therefore, follow that it is not sufficient for the Revenue to rest its case on one of the objects of the PICIC which enables it, to deal in shares for it is also the object of the company to invest in shares and in the absence of evidence that PICIC was actually trading in shares, the profits made on sale of shares will not by taxable.

15. Our answer to the question referred to us is, therefore, in the negative.

16. The applicants will also be entitled to costs:‑

86. Reference answered in the negative.