P L D 1967 Karachi 521 (PLP)

KHAMISANI, J.-The following question has been referred to this Court for opinion on an application for a reference under section 66 (1) of the Income-tax Act, 1922, made by the Commissioner of Income-tax, Central, Karachi. "Whether on the facts and in the circumstances of the case Rs. 1,65,860, profit in sale of shares, was a revenue profit? " It has arisen out of the following facts:-

2. The assessee is a public limited company carrying on business as trustees and executors, On the 15th of December 1953, it had purchased 39166 shares of the Habib Bank Ltd. and 11,000 shares of the Habib Insurance Co. Ltd. It bad also received 4,000 bonus shares in the year 1956. During the account ing year 1958-59 ending on the 31st of December 1947, it sold 2,500 shares out of the shares purchased froth the Habib Bank Ltd. and 4,000 shares out of the shares received from the Habib Insurance Co. Ltd. and made a profit of 86,900 and Rs. 78,960 respectively. The total profit thus made by the assessee came to Rs. 1,65,

860. In the Income-tax return filed by the assessee for the accounting year 1958-59 it claimed this amount as capital gain but the Income tax Officer rejected their claim and held this amount to be a revenue receipt. He consequently brought it to charge by an order dated the 2nd September 1958. The appeal filed before the Appellate Assistant Commissioner by the assessee was dismissed on the 13th of December 1958. Second Appeal before the Income tax Appellate Tribunal was all-wed on the 13th of August 1961. An application was thereafter moved before the Income-tax Appellate Tribunal under section 66 (1) of the Income-tax Act on which the question mentioned above has been referred to us on the 21st of May 1962.

3. The learned counsel for the Department has contended that the profit made by the assessee of Rs. 1,65,860 on the sale of shares was a revenue profit and was, therefore, rightly brought to charge by the Income-tax Officer. His contention is that the question whether the money earned as profit is to be treated as capital gain or revenue receipt, is dependent primarily upon the fact whether the transaction out of which the amount has been earned has been made on account of carrying on or carrying out the objects of the business of the assessee and that Rs. 1,65,860 has been earned in the instant case by sale of shares which falls within the objects of the assessee's business. In order therefore to appreciate the argument of the learned counsel for the Depart ment, it is necessary to refer to what the objects of the assessee company are. The objects for which the company was constituted are set out in Article 3 of the Memorandum of Association of Messrs Habib Bank Executors and Trustees Co. Ltd. The learned counsel reading through these objects relied particularly upon the two objects mentioned in clauses (b) and (1) of Article

3. They are reproduced as under: "3 (b) To carry on any other business which may seem to the company capable of being conveniently carried on to connection wish any of the above business or calculated directly or indirectly to enhance the value or render profitable any of the company's properties and rights. 3 (1) To sell lease and in any other manner deal with or dis pose of the undertaking. Property assets, rights and effects of the company or any part thereof for such considerations as may be thought fit and in particular for stocks, shares (whether or not fully paid) or securities of any other company." The above two clauses will indicate that purchasing and selling of the shares does not fall directly within the objects of the company, it having been formed primarily to function as Executors and Trustees. There is thus no clause in the objects of the company on which the learned counsel for the Department can place reliance and point nut to us that the business of purchasing and felling the shares fells directly within the objects of the company. He, however, wanted us to interpret the two clauses from amongst the objects of the company mentioned above to mean that the business of purchasing and selling the shares was indirectly within the objects of the company. In other words, the learned counsel for the Department wanted us to hold that in view of the objects of the company mentioned in its Memorandum of Association, pur chasing and selling of the shares would not be outside the scope or the activities of the company. The learned counsel in view of his submissions pressed into service an argument that purchasing and selling of the shares being not prohibited under the objects of the company, profits made by it even on this solitary transaction would amount to revenue receipt and therefore chargeable to tax. The question whether profit has been made on one transac tion or several transactions will not determine the issue if the transaction out of which money has been earned falls within the objects of the business of the company. In support if his argu ments, he has referred us first to the case of Punjab Co-operative Bank v. Commissioner of Income-tax ((1940) 8 I T R 635). In this case the test laid down by their Lordships of the Privy Council is as under:- "In order to render taxable profits realised on sales of invest ments it is not necessary to establish that the tax payer has been carrying on what may be called a separate business either of buying or selling investments or of merely realising them. The true principle to be applied to such cases is that enhanced values obtained from realisation of conversion or 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 carry ing on, or the carrying out, of a business. In the ordinary case of a Bank the business consists in its essence of dealing with money and credit. The Banker has always to keep enough cash or easily realisable securities to meet any probable demand by depositors, and if some of the securities are realised in order to meet withdrawals by deposi tors, this is clearly a mural' step in carrying on the banking business, in other words, that it is an act done in what is truly the carrying on of the banking business." It was thus held by their Lordship's that the purchase and sale of the shares and securities by the Punjab Co-operative Bank Ltd. were "so much linked with the deposits and withdrawals of clients that they were part of the assessee's business of banking and the profits arising therefrom were assessable to income-tax".

4. The second case on which reliance was placed is of Radha Debi Jalan v. Commissioner of Income-tax, Calcutta ((1951) 20 I T R 176). In this case also the view taken by their Lordships of the Calcutta High Court was as under: "Having regard to the words used in sections 10, 2 (4) and 4 (3) (vii) of the Income-tax Act, 1922, the element of trade or trading cannot be excluded from the source of a receipt, if it is to be income even if it be a casual receipt from an isolated transaction. It is true that the source need not be trade, but it must nevertheless be an adventure in the nature of a trade and if trade connotes or implies some continuous activity aimed at producing the profits; such activity must be found even in a case of adventure, if the resultant profit is to be treated as taxable business income."

5. The third case relied upon was Balgownie Land Trust Ltd. v. The Commissioner of Inland Revenue (14 T C 684). The relevant observations are as under:-- This is so notwithstanding the definition of `trade' in section 237 of the Income-tax Act, 1.918, as including `every adventure . . . . . in the nature of trade'. And yet that defini tion makes it plain that even the profit of an isolated transac tion--if it constitutes an adventure in the nature of trade-may be brought within Case I of Schedule D of the Income-tax Act Martin v. Lowry 11 T C 297, 1921 A C 312, Inland Revenue v. Livingston 11 T C 538, 1927 S C

251. A single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is spade in the waters of trade; but the sale of a piece of property-if that is all that is involved in the plunge- may easily fall short of anything id the nature of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it; much depends on the circumstances."

6. The next case relied upon is Gajalakshmi Ginning Factory v. Commissioner of Income-tax ((1952) 22 I T R 502). In this case -ginning factories which included a plot of land had been sold off. The plot of land consisting of 5 acres, however, was sub-divided into several small plots which were sold at a considerable profit, some by a public auction. The question for adjudication that arose in this case was whether the amount of profit on account of the sale of the plots could be treated as capital gain or revenue receipt. The view taken by their Lordships of the Madras High Court was that the amount of profit made on the sale of the plots should be treated as a capital receipt. It was consequently held to be exempt from tax. The reasoning adopted by their Lordships was that the sale of plots did not fall within the business of the persons selling property and as such the profit made on that sale could not be treated as revenue receipt.

7. The next case relied upon is of Seth Ganga Sagar ((1934) 2 I T R 155) decided by the Allahabad High Court. In this case also similar principle was laid down on the basis of which the gain accruing to assessee was treated as capital gain.

8. The last case cited is Commissioners of Inland Revenue v. Reinhold (34 T C 389). The view taken in this case was:- "that the fact that the property was purchased with a view to resale did not of itself establish that the transaction was an adventure in the nature of trade, and that the Commissioners were justified in treating the profit in question as not assessable to Income-tax."

9. Reliance was also placed on Messrs Hydri Construction Co. Ltd. v. Commissioner of Income-tax Reference Case No. 37 of 1961. Even this case is distinguishable on facts and the relevant part of the judgment which settled the controversy at rest is reproduced hereunder :- "In our opinion the main consideration in such cases ought to be whether the transaction involved in it was in the ordinary course of business of an assessee and was carried on in the same way as is usually done in the line of such business. In the present case it is in evidence that one of the objects of the business of the company is to buy and sell and deal in property and articles of all kinds and to purchase for investment or re-sale and to traffic in land and house or other property of any tenure and any interest therein and to create, sell and deal with the freehold and leasehold ground rents and to make advances upon the security of land or house or other properties or any interest therein and generally to deal in traffic by way of sale, lease, exchange or otherwise with land, house property and any other property whether immovable or movable. It, cannot, therefore, be said that the transaction in question was not in the line of the business of the assessee company. Besides, the transactions which are closely associated with each other. It is admitted that the directors of the assessee companies are also the directors of Messrs Habib Bank Ltd. The assessee-company has not placed on the record any resolution in support of their contention that the building in question was sold to Habib Bank Ltd. solely in order to provide them a permanent roof for their heed office In fact the assessee-company has not even produced the sale deed of the plot on which later on they raised construction. It cannot, however, to denied that the plot in question was developed by the assessee-company and by using their skill, they raised an attractive building, which within a very short period yielded enormous profit. The mere fact that at first it was let out to tenants does not lead one to the inference that it was not constructed for sale and making profit. Having regard to the fact that the sale and purchase is one of the objects of the company and there was a very little gap between the construction and the sale of the property, we are of the view that the Department was perfectly justified in coming to the conclusion that the transaction in question was an adventure in the nature of trade."

10. The consensus of opinion in all the cases mentioned above makes it abundantly clear that it is not every profit earned by an assessee that will necessarily become a revenue receipt The sina qua non of taking profit as revenue receipt is whether the profit has been made on a transaction which had been entered into for the purpose of carrying on or carrying out the business of the assessee. The quantum of transaction for the determination' of this issue is absolutely unnecessary. Even a solitary transac tion if it falls within the ambit of the objects of the company and is entered into for the purpose of carrying on or carrying out the trade, the profit made on such a transaction will convert it unmistakably into capital gain.

11. In the case under reference the admitted position on the record is that the company had been constituted to carry out the functions of` Executors and Trustees. The normal business of court a company will not be to purchase and sell the shares in the market and make profit on them. The objects of the company itself, as we have said above, leave no room for doubt that the purchasing and selling of the shares is not directly within its objects. Even the Income-tax Officer in the earlier accounting year had treated the loss on the sale of shares by the company as capital loss holding that the loss sustained by the company was not for the purpose of carrying on or carrying out of the trade. In the accounting year under reference, however, the Income-tax Officer has taken, in the case of the same company, a different view and treated the profits earned by it as revenue receipt. This attitude of the Income-tax Officer obviously cannot be explained as it is not open to the authorities to treat in one year the loss as capital loss and the profit in the succeeding year as revenue receipt. The safest guide to resolve the question in controversy is, as has been held by all the Courts, to find out whether the transaction out of which the profit has arisen can be inter-linked with the trade and directly connected with the carrying on or carrying out of the business. If a particular transaction can be shown to be indirectly connected with the objects of the company and can be represented to be one of the objects of the business g that could be carried on by the company that by itself will not be sufficient to treat the profit on the transaction as revenue receipt. It is the actual business done by the company which must be connected with the transaction. The transaction cannot be connected hypothetically with the business that could have been carried on. Our considered view on the facts and circumstance of this case is that the selling and the purchasing of the shares was not within the objects of Messrs Habib Bank Executors and Trustees Co nor were the shares sold by them to carry on or carry out their business and as such the profit earned by them of Rs. 1,65,860 out of the sale of shares was not a revenue receipt. The question mentioned above, which has been referred to us, is consequently answered in the negative. The Department will pay costs to the assessee. S. Q. Reference answered in the negative.