P L D 1976 Karachi 358 (PLP)

AGHA ALI HYDER, J.-The Income-tax Appellate Tribunal, as directed on an application of the Income-tax Commissioner, Karachi, under section 66(2) of the Income-tax Act, has, alongwith the statement of case, referred the following question for the decision of this Court :

"Whether on looking to the facts and circumstances of the case, the said profit of Rs. 5,48,240 (Rs. 93,337) profit in the sale of shares and Rs. 4,54,903 profit in the sale of Bonus shares) was revenue profit." It has arisen in the following circumstances.

1. The assessee respondent is a public limited company, set up in August 1952, to carry on the business of banking in foreign countries and/or any where in Pakistan. However, the respondent had not been granted license by the State Bank of Pakistan, under section 3(l) of the Banking Companies (Restriction of Branches) Act of 1946, to carry on banking business in Pakistan, or to open a branch in Pakistan, and therefore no banking business was done here. It purchased some shares of Habib Bank Ltd. and Habib Insurance Company Ltd. in 1952 and 1953 out of its paid up capital. Its return for the assessment year 1958-59, corresponding to the accounting year ending on 31-12-1957, showed a sale of these shares including 10,000 bonus shares of the value of Rs. 10 each, for a sum of Rs. 15,00,000 odd. The necessity arose, as there was a debit balance of Rs. 50,000 in the respondent's current account. There were sundry other obligations, and the payment of the final dividend. The remaining Rs. 10,00,000 were invested in Government securities. The Income-tax Officer found the sale of shares as a scheme of `profit making' and a sum of Rs. 5,48,240 was brought to charge.

2. The respondent preferred an appeal, which came to be dismissed by the Appellate Assistant Commissioner of Income-tax, by his order dated 18-5-1959. A further appeal before the Income-tax Appellate Tribunal, Karachi Branch, was however allowed vide order dated 5-5-1961. The applicant then filed an application under section 66(1) of the Income-tax Act, before the said Tribunal, praying that 3 questions of law, arising out of its order alongwith the statement of the case; be referred to this Court. The Tribunal, for the reasons given by it, refused to do so, with the result that the applicant filed an application under section 66(2) of the Income-tax Act, in this Court. Out of the three questions of law raised, two were found to be without any substance, and the Income-tax Appellate Tribunal, was directed to refer only one question, as referred to earlier.

3. At the outset it might be mentioned, that on 1-1-1974, the respondent-Bank, as a result of the promulgation of the Banks (Nationalization) Ordinance, 1974 (I of 1974), with all its assets and liabilities was taken over by the Federal Government. When the matter came up for hearing on 8-2-1974, the learned Judges posed the following question for consideration ; "One of the possible consequences of this Ordinance may be that the claim of the Federal Government for income-tax or arrears of income-tax became extinguished by reason of merger of this claim in the property, which now vests in the Government itself. In this very connection, the definition of the word `person' ilk section 2(9) would suggest that the Federal Government is not included in the expression `person' and since income-tax is payable by a person, and if it is held that the Federal Government is not a person within the meaning of the Income-tax Act, 1922, then perhaps no tax, whether present or arrears, may be payable by the Federal Government on its property. In some jurisdictions, it has been held that the Income-tax Acts do not bind the Government. We would in this case, refer to an English case 35 Tax Cas.

311. Since this is a new situation, which has developed after nationalization of the Banks, it is fair that Mr. S. A. Nusrat should be given time to consider the legal position." Later on, a notice was issued to the learned Attorney-General and we had the benefit of his address. It might as well be added, that on the 11th of March 1974, the aforesaid Ordinance was repealed, by Banks (Nationalization) Act, 1973, which "shall be deemed to have taken effect on the 1st day of January 1974".

4. The learned Attorney-General inter alia argued that though the ownership, management and control of all banks stood transferred to, and vested in, the Federal Government on the commencing day, and according to section 5, subsection (2) of the Act "all the shares in the capital of a bank, held by persons, other than the Federal Government, a Provincial Govern ment, a Corporation owned by the Federal Government or the State Bank, shall stand transferred to, and vest in, the Federal Government on the commencing day, free of all trusts, liabilities and encumbrances", yet the corporate character of the Banks was maintained in the Ordinance and also in the Act which replaced it. Reference was made to section 16 of the Act, which reads as under; "

16. Removal of doubts.-For the removal of doubts, it is hereby declared that

(a) all assets, rights, powers, authorities and privileges and all property, movable or immovable, cash balances, reserve funds, investments and all other rights and interests arising out of such property as were immediately before the commencing day in the ownership, possession, power or control of a bank, whether within or outside Pakistan, shall, unless other "provisions are made for their re-disposition in accordance with a scheme prepared under subsection (1) of section 15, continue to vest in that bank, and all borrowings, liabilities, including contingent liabilities, and obligations of a bank of whatever kind subsisting immediately before the commencing day shall, unless other provisions as aforesaid are made for their discharge or performance, continue to be the borrowings, liabilities and obligations of that bank ; (b) all contracts, deeds. agreements, powers of attorney, other than those in favour of a person vacating his office under this Act, grant of legal representation and other instruments of whatever kind subsisting or having effect immediate before the commencing day to which a bank is a party or which are in favour of a bank shall be of as full force and effect against or in favour of a bank as they were immediately before the commencing day ; and (c) if, on the commencing day, any suit, appeal or other legal proceeding of whatever nature which is by or against the bank or to which the bank is a party is pending in any Court or before a tribunal or other authority, the same shall not abate, be discontinued or be, in any way, prejudicially affected by any Pro vision of this Act." He also contended that in view of subsection (5) of section 5 of the Act, a provision, which was not to be found in the repealed Ordinance, the banks were a body corporate as distinct from the executive Government of the Federation. It reads as under; "The provisions of this Act and the vesting of the shares of the banks in the Federal Government thereunder shall not in any way affect the status of the banks as bodies corporate under the Companies Act, 1913 (VII of 1913)." He urged that as the corporate character of the banks had not been lost, and the Federal Government had taken over shares, and not all of the for the matter of that, it will be idle to examine the definition of person, as given in section 2(9) of the Income-tax Act. He maintained, that neither an immunity from the payment of income-tax on this score could be claimed nor was being claimed by the Government. That would conclude the matter. Mr. Ali Athar did not join issues, and Mr. S. A. Nusrat, learned counsel for the applicant gave no signs of relenting.

5. It is to be seen, and it has been so found by the assessing authorities, that no banking business was being carried on by the respondent in Pakistan. It is not denied that the shares had been purchased with the paid-up capital of the respondent, even before some restricted permission to carry on any business in Pakistan had been granted. It also appears from the record that the only shares sold by the respondent, were in the preceding year, which had resulted in an assessment of Rs. 138 which eventually came to be knocked down by the Appellate Tribunal. It is also not denied that the shares were sold to meet certain obligations. It was however found by the Income-tax Officer, that the sale of the shares of Habib Bank Ltd. and Habib Insurance Co. Ltd., which were "as sound as investment in Government securities" was for profit making as the same "had considerably appreciated in value since their purchase". He also found, that as the respondent had already invested the money in Govern ment securities, which they were bound to do under the law, "any excess investment in Government securities must have been made with the ulterior object of making gain". These findings were affirmed by the Appellate Assistant Commissioner.

6. It was contended by Mr. S. A. Nusrat, that since the purchase and sale of shares was authorized in the articles of association of the assessee respondent and the sale of the shares was overtly outside the requirements, it was a commercial proposition, with an eye on profit taking, and thus an adventure in the nature of trade. Reliance was placed on the case of Punjab Co-operative Bank'v. Commissioner of Income-tax, Punjab ((1940) 8 I T R 635 ), which was a Privy Council decision. In that case, the Bank had sold securities to meet heavy withdrawal of deposits and to deposit some monies in the Reserve Bank of India, and it was found by the authorities that the sale was partly to increase the reserve. Viscount Maugham observed therein : "In the ordinary course of a bank, the business consists in its essence of dealing with monies and credits . . . . . . . . If; as in the present case, some of the securities of the bank are realised in order to meet withdrawals by depositors, fit seems to their Lordships to be quite clear, that this is a normal step in carrying on the banking business or in other words that is an act done "in what is truly the carrying on of the banking business". Their Lordship also made a reference to California Copper Syndicate v. Harris (5 Tax Cas. 159). In the latter case, the test laid down by Lord Justice Clerk was "is the sum of gain that has been made, a mere enhancement of value, by realising a security, or is it a gain made in the operation of business in carrying out a scheme of profit making?" and found that it fell within the latter category. Lord Trayner went on to add "My reading of the appellant-Company's articles of associa tion alongwith the other statement in the case, satisfy me that the sale on which the advantage was gained, in respect of which income-tax is said to be payable, was a proper trading transaction, one within the Company's power under the articles, and contemplated as well as authorised by their articles".

7. As held in Leeming v. Jones (15 Tax Cas. 333) "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". It was further observed that "an accretion of 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 rise, its realisation does not make it income". As held in Bologownie Land Trust Ltd. v. The Com missioner of inland Revenue (14 Tax Cas. 684) "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 the trade", but it has to be inter-linked with the carrying out of the business. Then and then alone it will become income gain and liable to income-tax.

8. An occasional transaction with profit but not directly connected with the trade or business, will however not convert the proceeds into revenue receipts, unless the nature of the transaction, with reference to the commodity so warrants, as found in the Commissioner of Inland Revenue v. Fraser (1942 S C 493), As observed by the Lord President (Clyde) in the Commissioner of Inland Revenue v. The Scotch Automobile and General Insurance Co. (16 Tax Cas. 381) "It does no necessarily follow from the circumstances, that the company sees fit to sell a block of its Government securities whether the purchase be to get a better return, or whether the purpose be to increase the reserve fund by taking profit the realisation of a particular block, that the company is trading on, purchase and sale of securities, forming its reserve fund. Occasional transac tions of that kind are not necessarily trading at all, whether in the case of a private individual, a trust or an insurance company".

9. In Commissioner of Inland Revenue v. Reinhold (34 Tax Cas. 389) the respondent, a director of a limited company, carrying the business of warehouses, bought four houses and sold these three years later. Even at the time of purchase, the respondent's agents were instructed to sell, whenever a higher price could be had. It was never meant for the respondent's residence. It also appeared, that some ten years earlier he had purchased a hotel, which he had sold at a profit before he completed the purchase. He was assessed to income-tax. The General Commissioners discharged the assessment and the matter came up before the First Division of the Court of Sessions, consisting of Lord Carmont, Lord Russel and Lord Keith.

10. Lord Carmont observed "If, however, the subject of the transaction is normally used for investment-lands, houses, stocks and shares the inference is not so really to be drawn from an admitted intention in regard to a single transaction to sell on the arrival of a suitable pre-selected time or circumstance and does not warrant the same definite conclusion as regards trading or even that the transaction is in the nature of trade". Lord Russel observed "The learned Advocate contended that if a person buys anything with the view to sell that is a transaction in the nature of trade . . . . . .In my opinion that argument, so formulated, is too absolute and is not supported by the judicial pronouncement on which it was sought to be based. It takes no account of a variety of circumstances which are or may be relevant to the determination of such a question. Among such features adverted to in previous cases, reference may be made to such matters as these viz., whether the article purchased in kind and in quantity is capable only of commercial disposal and not of retention as an investment or of use by the purchaser personally e.g., aero plane linen, toilet paper, whisky ; whether the transaction is in the line of business or trade carried on by the purchaser; whether the purchaser before re-sale has caused expenses to be incurred in making the commodity more readily saleable, e.g., a ship converted before re-sale into a trawler ; whether the transaction is exactly of the kind that takes place in ordinary trade in which the re-sale requires a number of separate disposals. None of the above-mentioned features is an incident of the transaction under notice of this case". Lord Keith had the following to say : "It is not, in my opinion, enough for the Revenue to show that the subjects were purchased with the intention of realising them some day at a profit. This is the expectation of most, if not all, people who make investments".

11. Looking to the circumstances involved, it cannot therefore be said that the purchase of the shares was merely a commercial proposition or with the avowed object of selling them one day at profit. With the advantage of hindsight, it can be said that the management .of the respondent-Bank gauging the tempo of the time were astute enough to invest their securities in real gilt-edged securities and reaping some considerable profit in the bargain. But it was not in line with their business. It also appears that the respondents were not allowed to purchase shares from the deposits when even the restricted permission was accorded, and the shares had been purchased from the capital of the bank. The Appellate Tribunal found that the purchase and the sale were not in the course of their business, for it was not an adventure in the nature of trade, and the conclu sion arrived at by it, was absolutely in order. The answer to the reference therefore is in the negative. Reference answered.