1985 PLP 284 (SCMR)

Finally in clause (t) it had generally the object and purpose described as follows:- "To invest the moneys of the company not for the time being required for the general purposes of the company in such investments (other than shares in the company) as may be thought proper and to hold, sell or otherwise deal with such investments." The dealing in the shares related, on the strength of this clause (t), to such moneys as were not for the time being required for the general purposes of the company. These were capital or reserve or outside the stock in trade. Section 10 of the Income-tax Act provides that the tax shall be payable by an assessee under the head, 'profits and gains of business .... in respect of the profits or gains of any business... carried on by him'. Section 2(4) declares what business is by stating that it includes a trade or manufacture or any adventure in the nature of trade and manufacture. Section 4(3) deals with the total income of an assessee and enumerates the items to be included or excluded and one of the exceptions contained in clause (7) of subsection (3) is 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 the person receiving them. The clause also while excluding such receipts provided -an exception to it where such receipts be receipts from business in which case they will be treated as taxable income. All the authorities have held that the normal trading activity of the assessee did not include dealing in shares. The object of the company was also not to deal in shares. It was only a permissible activity for the company confined to utilization of capital or reserve assets. The very first assessment order, dated 2nd September 1958 bears this out. When the assessee was asked to explain why the profits gained by sale of shares be not treated as business profit and brought to tax the assessee gave the following three reasons:- "(i) That the company is primarily established as Executors and Trustees and that' the surplus funds are invested in shares etc., and that they are nowhere empowered by the Articles of Association to deal in shares. (ii) That the shares sold by them were held for a considerable time and that the sale was only a change of investment since they wanted to purchase Government securities etc. (iii) That in the preceding investment year, there was a loss in sale of shares which was accepted by the Department as a capital loss." The assessing authority dealt with it in the following words:- "I do not agree with the arguments of the company since the transactions clearly indicate a scheme of profit making. The reasons are as under: It is not correct that the company is not authorised by its Memorandum of Association to deal in shares. Article 3(b) read as follows:- "To carry on any other business which may seem to the company capable of being conveniently carried on in connection with 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." From the above it appears that the Memorandum of Association stipulates that the assessee can also conveniently carry on any other business, which may seem to the company to be profitable. In the circumstances of the case this other business is none other than sale of its investments at profit. Further, even according to sub-clause (1) of Article 3 of the Memorandum of Association the assessee is entitled to sell and deal in other manner with properties of the company. This Article also shows that the assessee is permitted by its Articles of Association to deal with its properties in a business-like manner. It has been held in the case of Rellim Limited v. Vice (Inspector of Taxes) (1952) 22 I T R (Supp.) 51 that where a company is empowered by its Articles to deal in property then even if the property were held as investment for many years, any profit resulting from subsequent sale of any part of this property would be a revenue profit.". The second contention was rejected by observing as follows:- "Regarding the second contention of the assessee, it may be stated that if the transactions of purchase and sales are judged as a whole, it would appear that it was not simply a change in investment but a change made for profit." The appellate Assistant Commissioner dealt with the same question in the following words:- "...the appellant was entitled to deal in shares and the profit in these shares was properly treated by the I. T .0. as a business profit. The clause 'calculated directly or indirectly to enhance the value or render profitable any of the company's properties and rights' has to be read separately and not in conjunction with the previous clause. There is no justification in connecting this clause with the previous clause as the conjunction used is 'or' and not 'and'. The said clause has not to be construed ejusdem generis. Moreover, apart from this authorisation by the Memorandum of Association the case of Rellim Limited v. Vise (Inspector of Taxes) clearly goes to support the point of view of the Department that even if the shares were held as investment for many years any profit resulting from subsequent sales of any part of this period would be a revenue profit. The action of the I.-T.O. was, therefore, perfectly correct in taxing this accretion as business profit. As the distinction between revenue and capital in the law of income-tax is fundamental, it is necessary to comprehend correctly the capital structure of the business of the assessee. The paid-up capital was Rupees ten lacs and in the very first year of its incorporation the company, it appears, out of its reverse purchased shares in two of its allied concerns and kept the same till we come to the assessing year and the year immediately preceding. From the facts stated or on record it also appears that in the interregnum the assessee had not been dealing, so far as its own property and reserves were concerned; in the business of purchasing and selling of shares. In other words, these shares purchased at the time of incorporation of the company were not being used as trading stock but were being kept as reserve capital. In the British Tax Encyclopaedia Vol. 5 (page 1013-1014) the following distinction between income and capital is helpful in under standing the subject under consideration:- "Underlying many of the decisions as to what is, and what is not, taxable income from property or profits is the broad concept that capital corresponds to the tree and income to the fruit. An accretion to capital is not income, although income does no: escape tax merely because it is used to increase or recoup capital; nor is it any the less 'income' because its production involves wastage of capital. Possibly the best definition of income from property comes from the Supreme Court of the United States: Here we have the essential matter; not a gain accruing the capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from (he property, severed from the capital, however invested or employed, and coming in, being derived, that is, received or drawn by the recipient (the tax-payer) for his separate use. benefit, and disposal; that is income derived from property Nothing else answers the description." At page 1244 (ibid) the same subject has been dealt with more specifically, observing as follows:- "A trader who has money in hand and temporarily invests it in shares is not regarded as performing a trading operation; if he later wants the money and realises his investment at a profit. such profit is not taxable. But if he carries on a trade in which investing money is a normal part of that trade, then any profits or losses he makes on investments will be brought into his tax Computation. Thus, an insurance company and a bank have been held taxable on profits made on realising investments as the buying of investments is part of insurance or banking business; conversely any loss may be deducted. Interest received, by a trading company from its bankers on its daily bank balance has been held to be part of its trading profits." The question in issue in this appeal was also raised and received pointed attention in Californian Copper Syndicate v. Harris (1903-1911) 5 T C 159 and the law on the subject was laid down in the following words:- "It is quite a well-settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income-tax Act of 1842 assessable to Income Tax. But it is equally well-established that enhanced values obtained from realisation or conversion of 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 carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income-Tax. " In the case before us regarding the assessment in dispute there is absolutely no material to hold and none of the authorities dealing with the case have held as a fact that the assessee was in the business as investor, or that it was dealing speculatively with the investments already made or that the investments formed the stock-in-trade. On the contrary, the record shows that these investments were of funds surplus to its need, were made in not the most lucrative stocks but in assessee's own allied concerns. Besides, disinvestments or change in investments did not take place too frequently to project a systematic planned commercial activity. The only fact that its memorandum permitted it to so invest the surplus fund is not on the facts and circumstances of this case sufficient to alter the character of a stray isolated investment into trade or business or an adventure in the nature of trade. We find, therefore, that there is no merit in this appeal and it is dismissed with costs. M . Z . M . Appeal dismissed.