YOUSUF HAKIMUDDIN Versus COMMISSIONER OF INCOME-TAX

FAKHRUDDIN G. EBRAHIM, J .‑The short but .important question that arises for our consideration in this Tax Reference is whether the applicant is an investor in shares or a dealer in shares. The two assessment years in question are 1959‑60 and 1960-61. At the commencement of the assess ment year 1959‑60 the applicant held shares in various public limited companies of the total value of Rs. 4,26,230. During the year he purchased shares of the total value of Rs. 2,51,618. In this assessment year the assessee received income from the sale of 600 shares in five different companies resulting in gain of Rs. 1.990.10. The Income‑tax Officer held that the aforesaid income of Rs. 1,990.10 was a taxable income on the ground that the purchase and sale dates were very close to each other and the transactions were frequent, that the stock had not been transferred in the name of the assessee and that the assessee was a very rich man and there was no need in terms of money to sell the shares and realise cash. The finding was that profit‑making motive was patent and there was, therefore, no case for treating the said income other than taxable business income.

2. At the commencement of the succeeding assessment year 1960‑61, the applicant held stock of the total value of Rs. 6,24,181. During the year he acquired shares of the total value of Rs. 3,47,464. A part of the stock was sold and the assessee received Rs. 3,46,589 as price of shares sold on which he made a profit of Rs. 1,08,336. The Income‑tax Officer held that this was taxable income on the short ground that the profit‑making motive was patent and there was, therefore, no case for considering this income as other than taxable business income.

3. The Appellate/Assistant Commissioner, maintained the order made by the Income‑tax Officer and the same was the applicant's fate before the Income‑tax Appellate Tribunal. The Tribunal noticed the short intervals between the purchase and sales, mode of acquiring the shares by way of blank transfer and the fact that the applicant was an affluent person who was unable to show any necessity to disinvest as conclusive evidence of motive of the applicant at the time when the shares were acquired and when the same were sold. The Tribunal found that the only intention at both the points of purchase and sale was to make a gain.

4. In a recent case I. T. R. No. I of 1971 P. I. C. I. C. v. Commissioner of Income‑tax we had the occasion to examine this question in relation to shares purchased and sold by P. I. C. I. C. and we found the law to be as follows :‑---

"Mr. Ali Athar, the learned counsel for the assessee contended that having regard to the words used in section 10, 2(4) and 4(3)(vii) of the Income‑tax Act, 1922, a receipt to be taxable income must have its source trade or an adventure in the nature of trade and, therefore, if the conclusion arrived at by this Court is that the sale of shares by P. I. C.I. C. for the years in question was in its line of business, in other words the conclusion arrived at is that P. I. C. I. C. 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 off quoted words of Lord Justice Clerk in the California Copper Syndicate v. Harris (1904) 5 Tax Cas. 159.

If the owner of an ordinary investment chooses to realise it and obtain a greater price for it then 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.

Whether or not a transaction or transactions are in the line of assessee's trade is not capable of any 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 latter will be profit income and the former accretion to capital."

5. Since this is a case of an individual and shares are normally purchased for investment, being a commodity which form its nature can give annual returns. I may with advantage refer to two more cases on the subject.

6. In Tax Reference 73 of 1970 an individual assessee held a surplus of Rs. 4,04,703 for the year 1961‑62, and in the year 1963‑64 received Rs. 20,296 both arising from the sale of shares which the Tribunal found to a capital income of the assessee and accordingly not liable to tax under the Income‑tax Act. In the Tax Reference it was among other things contended that the past activities of the assessee in the year previous to the assessment year 1961‑62 as well as in the subsequent years show frequent dealing in shares which raise the presumption of trading rather than invest ment. This Court rejected this contention finding that from the very inception of the assessee's business in Pakistan he had purchased shares of various companies from time to time only with a view to make investment of his capital and in the past the Department had consistently treated the sales as realisation of investment and the surplus was not treated as taxable profits. This Court further observed as follows:‑---

"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 a short time of the purchase, the conclusion may be that it was 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 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 were 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 net the assessee within the taxing provisions of the statute. If the facts are equivocal the benefit must go to the assessee. "

7. In Jones v. Leeming 1980 A C 415 Lord Buckmaster at page 420 observed as follows :‑

"It is to my mind, in the circumstances, purely an affair of capital. I can see no difference between it and what might have happened had the respondent brought shares in two companies which were going to be amalgamated, and then sold equivalent share in the amalgamated company at a profit; an accretion to capital does not become income merely because the 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."

Lord Viscount Dunedin in the same case observed at page 423 as follows :‑

"The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investment but per se it leads to no conclusion whatsoever."

8. As was observed by Lord Carmont in Commissioner of Land Revenue v. Rein 34 Tax Cas. 389, Lord Dunedin, to the passage quoted above, has to be understood in the context of purchase of something normally used to produce an annual return such as lands, houses or stocks and shares and that an evidential value to a man's intention not to hold an investment which tray justify the inference that the individual in question is engaged in a venture of the nature of trade, but such an item falls to be offset by the way the individual makes his living and the part which the transactory plays in his activities as a whole.

9. In the present case we find that the assessee is a man with substantial assets and his shareholding in the public limited companies represents a very small percentage of his total assets. The assessee makes his living by, carrying on business and the share transactions play a very small part in his activities as a whole. Mr. Mansoor Ahmed Khan, the learned counsel for the Department has filed the assessee's balance‑sheet as on 31st March, 1960 and also a statement showing the shareholding of the assessee beginning from the assessment year 1956‑57 ending with the assessment year 1960‑61 showing the purchases made, the sales effected and the gains made from shares. In the year 1956‑57 the opening stock of shares held by the assessee was Rs. 63,147 and there were no sales and purchases of shares during this year. In the next year there were purchases of the value of Rs. 42,300 and no sales. In 1958‑59 the opening of stock of shares was Rs. 105,447 the total purchases made were of the value of Rs. 158,770 and the shares worth Rs. 25,000 were sold at a long of Rs. 6,250. During the same year the assessee inherited shares of the value of Rs. 2,11,996 from his father. In the assessment year 1959‑60 the assessee purchases shares of Rs. 2,51,618 sold shares of the value of Rs. 53,650 making a negligible profit of Rs. 1,990.10. In the year 1960‑61, additional share purchases were made of Rs. 3,47,464 and the sales effected was of the value of Rs. 3,46,589 making a gain of Rs. 1,08,336. The view that prevailed with the Tribunal in relation to profit of Rs. 1 990.10 was that the assessee was a man of affluence and there was, therefore, no need for him to sell the shares and receive a negligible profit of Rs. 1,990.10 and he was, therefore, trading in shares. I would have thought that reverse ought to be the conclusion for a man of affluence would not be trading in share with a total holding of shares value at Rs. 6,24,181 for a gain of Rs. 1,990.10.

9‑A. Coming to the assessment year 1960‑61, we find that the assessee had purchased and sold shares in 14 different public companies. Out of this in 9 companies shares were purchased during the year but none of these were sold. Coming to the remaining five companies, total purchases made in three companies were all sold during the year and in one company half the number of shares were sold and it: the last one a little over 1 /4th out of the total purchase of the shares, were sold.

10. Considering the petitioner's entire holding during the year, the purchases made during the year and sales effected even on the assumption that the shares in the five companies referred to above were purchased with intent not to hold the same that by itself, as was observed by Lord Dunedin would lead to no conclusion whatsoever and when we examine the sales of the shares effected by the assessee in this year in the context of not only his total shareholding and purchases made, but also in relation to his other income, it cannot be said that the assessee was trading in shares so as to make the gains arising there from taxable income. This conclusion will be further reinforced by the assessee's conduct in the past years in relation to shares.

11. The result, therefore, is that our answer to the question:

"Whether in the facts and circumstances of the case, the Tribunal was justified in holding that the surplus arising from the sale of the shares made by the applicant was receipt in the nature of income‑tax payable under Income‑tax Act and was not receipt in the nature of capital?"

Referred to us under section 66(1) of the Income‑tax Act is in the negative.

Reference answered in negative.