1969 PLP 317 (PTD)

DORAB PATEL, J.‑This is a reference by the Income‑tax Appellate Tribunal, Karachi under section 66(1) of the Income‑tax Act, 1922.

2. The assessee is the Habib Insurance Company Limited (hereafter called the Company). The Company was incorporated in Bombay as a public limited company in 1943, with an authorised capital of Rs. 1 crore, and a paid‑up capital of Rs. 25 lakhs. The purposes for which the company was incorporated are set out in clause 3 of the Memorandum of Association of the Company. The following are the clauses of the Memorandum, which have been cited as relevant to this reference : "(r) To purchase, take on lease or in exchange, hire, or otherwise acquire, any real and personal property, and any rights or privileges which the Company may think necessary or convenient for the purposes of its business. (s) To construct, maintain and alter any buildings or works, necessary or convenient for the purposes of the Company. (t) To appropriate any party or parts of the property of the Company for the purposes of and to build and let or sell shops, offices and other places of business. (u) To sell, improve, manage, develop, exchange, lease, mortgage, dispose of, turn to account or otherwise deal with all or any part of the property and rights of the Company. (v) To invest and deal with the moneys of the Company not immediately required in such manner as may from time to time be determined. * * * * * * * * * * * (aa) To promote any company or companies for the purpose of acquiring all or any of the property, rights, and liabilities of this Company or for any other purpose which may seem directly or indirectly calculated to benefit this Company. (bb) To sell or dispose of the undertaking of the Company or any part thereof for such consideration as the Company may think fit, and in, particular for shares, debentures or securities of any other company having objects altogether or in part similar to those of this Company. (cc) To carry on any other business which may seem to the Company capable of being conveniently carried on in connection with the above, or calculated directly or indirectly to enhance the value of or render profitable any of the Company's property or rights or be conducive to its interests." The primary object of the Company was to carry on the business of insurance. Immediately on incorporation the Company commenced fire insurance, and a few months thereafter, it began life and other insurance businesses.

3. The questions which are to be determined in this reference arise out of certain investments made by the Company in 1943 and 1944. In 1943, the Company purchased 8 immovable properties in Bombay for a sum of Rs. 10,47,100 and 10,000 Preference Shares and 461 Ordinary Shares from the Habib Bank Ltd. (a sister concern of the Company) at a total cost of Rs. 5,37,250 in round figures. In 1944, it purchased another immovable property in Bombay, thereby increasing its investments in immovable property to Rs. 11,99,

652. As a result of the conversion of the Preference Shares of the Habib Bank into Ordinary Shares, the Company's investment in Habib Bank shares was increased in 1946 by Rs. 2 lakhs to Rs. 7,37,

250. In the year 1949, the book value of two of the said immovable properties was shown to have appreciated by Rs. 1,59,954, and one immovable property was sold with an additional profit of Rs. 76,

462. In 1950, another immovable property was sold at a profit of Rs. 10,360, and the remaining immovable properties were shown in the books as having appreciated in value by Rs. 5 lakhs. The value of the shares of the Habib Bank had appreciated by Rs. 32,85,

000. Thus the appreciation and surplus realisation in 1949 was Rs. 2,36,416, and the book appreciation in 1950 was Rs. 37,85,

000. These amounts were shown in the Company's balance‑sheet of 1949 and 1950 respectively.

4. Consequently, the Income‑tax Officer treated the said amount of Rs. 2,36,416 vide his order dated the 14th of March 1955 for the assessment year 1950‑51, as income of the Company's insurance business under the provisions of rules 3 and 6 of the Schedule to the Income‑tax Act. Similarly, he treated the book appreciation of Rs. 37,85,000 as income of the Company's insurance business for the assessment year 1951‑52, vide his order dated the 29th of March 1956. The Company disputed its liability to tax on the said amounts. The contention of the Company throughout has been that these investments were made directly out of the share capital of the Company, and that they were not shown in the revenue accounts of its insurance business. Moreover, it was argued, since the investments were made in the course of investment business of the Company, it was not liable to be taxed on the said accounts, as income of insurance business. The Income‑tax Officer rejected the contentions of the Company. According to him, the entry of the aforesaid amounts of Rs. 2,36,416 and of Rs. 37,85,000 in the balance‑sheet of the Company amounted to appropriation of the said amounts to non‑life insurance business of the Company within the meaning of rule 3 of the First Schedule of the Act, therefore taxable as such.

5. The Company appealed against the said orders to the Appellate Assistant Commissioner, who by a single order dated the 16th November 1957 rejected them. Thereafter, the Company filed an appeal before the Income‑tax Tribunal, which was dismissed by the order of the Tribunal dated the 4th November 1958. Finally, the Company asked for a reference of the case to this Court, and the present reference has been made to this Court.

6. The question framed by Tribunal under section 66(1) of the Income‑tax Act is as follows `Whether, in the facts and circumstances of the case, the Tribunal is correct in holding that (a) the appreciation in the book value of the investments and (b) realisations in respect of properties sold during the relevant years of accounts, were chargeable to tax under the provisions of section 10(7) of the Income‑tax Act, read with rules 3 and 6 of the rules set out in the First Schedule to the said Act ?" The question thus formulated holds good with respect to both the assessment years 1950‑51 and 1951‑52, and is of general, importance to Insurance Companies.

7. Mr. Brohi submitted that, although the primary object of the Company is to carry on the business of insurance, it was entitled under its Memorandum of Association to carry on the business of investment, and that the above‑mentioned surplus realisation and book appreciation (hereafter called the said credits) arose out of investments made by the Company in the course of its business of investment and not of insurance. Thus, he argued, the Tribunal has erred in taxing the said credits as income from the insurance business of the Company merely on the ground that the Company has shown the said credits in its balance‑sheet. In order to appreciate this contention, it is necessary to examine the relevant provision of the Income‑tax Act, 1922.

8. Under section 3 of the Income‑tax Act, 1922, income‑tax is payable by an assessee on its income for the previous year. Section 10 enacts that tax shall be payable by an assessee on the profits and gains on any business, profession or vocation carried on by him. But subsection (7) of section 10 provides as follows : "Notwithstanding anything to the contrary contained in section 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with rules contained in the First Schedule of this Act." Rule 1 of the First Schedule enacts that when any person carries on life insurance business, the profits and gains of such person from that business shall be computed separately from his income, profits or gains accrued from any other business. Rule 2 prescribes the manner of determining the profits and gains of life insurance business and is not relevant because in this case, the Department has held that the surplus realisation and book appreciation of the investments were appropriated by the Company to non‑life insurance business. Rule 3 is mentioned in rule 6, which is relevant, but rules 4 and 5 are irrelevant to the present inquiry. Rule 6 runs as follows :‑ "6(1). The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 to be furnished to the Controller of Insurance after adjusting such balance so as to exclude from it any expenditure, other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business. Profits and losses on the realisation of the investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance." The relevant part of rule 3 is as follows : "* * * * * * * * In computing the surplus for the purpose of rule 2 :‑ (b) any amount either written off or reserved in the accounts or through the actuarial valuation balance‑sheet to meet depreciation of or loss on the realisation of securities or other assets, shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance‑sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus."

9. The rules have created a special definition of income in order to meet the exigencies of the business of insurance. Although no profits may be earned by an insurer, if he appropriates an investment made by him and credits appreciation in his accounts, tax becomes payable on such appreciation.

10. The contention of the Attorney‑General has been that if an insurer credits in his balance‑sheet the appreciation that is accrued on such investment tax is attracted on such appreciation, irrespective of the source of the investment. We are not able to accept this contention, because section 10(7) of the Income‑tax Act clearly states that it is only the profits and gains of the business of insurance which are taxable in the manner provided in the First Schedule ; therefore we have to determine the meaning of the expression "business of insurance", but before doing this, we have to decide whether the Insurance Act, 1938 permits an insurer to carry on non‑insurance business, because Mr. Brohi submitted that an insurer was free under the Insurance Act, 1938, to carry on non‑insurance business, but the Attorney‑General submitted that an insurer could carry on insurance business only. Both counsel have addressed us at great length on this aspect of the case.

11. The Attorney‑General advanced five arguments in support of his submission. Firstly, according to him, the provisions of section 11 and section 14 of the Insurance Act, 1938 eliminate the possibility of an insurer keeping any accounts or account books except those of the business of insurance. Secondly, since the provisions of section 33 of this Act empower the Controller of Insurance to issue orders and directions to an insurer, the Controller was empowered to prohibit non‑insurance business. Thirdly, he submitted that section 58 of the Act empowers the Controller of Insurance to order partial winding up of the business of the insurer. The Companies Act does not contain any provision empowering any authority to give directions to a Company as to how the business of the Company is to be run. In view of this inconsistency between the Companies Act, 1913 and the Insurance Act, 1938, the Attorney‑General submitted, the relevant provisions of the Companies Act had beet repeated for purposes of the business of insurance. Fourthly, he submitted that if an insurer was allowed to carry on non‑insurance business, this could endanger the safety of the policy holders and thus defeat the provisions of the Insurance Act. Finally, he argued that it was an admitted fact that no other company in Pakistan had combined non‑insurance business with insurance business, which fact proved that no insurer could carry on non‑insurance business under the Insurance Act, 1938.

12. On the other hand, Mr. Brohi submitted that an insurer is required to show his non‑insurance business in Forms A and B, which he is required to prepare under section 11 of the Insurance Act. Secondly, Mr. Brohi pointed out that in subsection (2) of section 8 of the Companies Act, 1913 an insurer is defined as "any person who carried on the business of insurance with any other business". and argued that this definition recognises the right of an insurer to carry on non‑insurance business, although subsection (9)(b) of section 2 of the Insurance Act defines an insurer as "any individual or body corporate .carrying on the business of insurance". Counsel submitted that the definition of insurance given in the Companies Act, 1913 was not affected by the definition of an insurer given in the Insurance Act, nor did the said Act anywhere prohibit an insurer from doing non‑insurance business, therefore, according to counsel, the Insurance Act permitted an insurer to carry on non‑insurance business. Thirdly, as to the contention of the Attorney General that the interest of policy holders would be endangered if an insurer was allowed to carry on non‑insurance business, Mr. Brohi pointed out that since the Controller of Insurance was entitled under section 33 of the Insurance Act to investigate the affairs of an insurer and to give such directions and orders to the insurer as he thought fit, the Controller had sufficient powers under the Act to protect the interest of policy holders against any danger caused by non‑insurance business of the insurer. Fourthly, Mr. Brohi relied on the judgment of the Allahabad High Court in the Swadeshi Bima Company v. The Commissioner of Income‑tax (26 I T R 530) in which that Court held that under the Insurance Act, 1938 an insurer could carry on non‑insurance business along with his insurance business. Lastly, Mr. Brohi pointed out that the Insurance Act, 1938 had been amended in India, so as to empower the Controller of Insurance to prohibit an insurer from carrying on insurance business. This amendment, Mr. Brohi argued, proved that before the amendment an insurer was entitled under the Insurance Act, 1938 to carry on non‑insurance business.

13. We have examined the provisions of sections 10, 11 and 14 of the Insurance Act, 1938. The contention of the Attorney‑General that the provisions of sections 10 and 11 relate to the maintenance by an insured of accounts of various classes of insurance business only is obviously correct. The provisions of section 14 do require an insurer to keep registers of all of his business, but these registers relate only to the business of insurance. But merely from these provisions it is not possible to infer that the Insurance Act, 1938 has taken away the right of an insurer to carry on non‑insurance business. The definition of an insurer under the Companies Act, 1913, which we have quoted above, clearly recognises the right of an insurer to carry on non‑insurance business. This definition has not been altered or modified by the definition of an insurer in section 2(9) (b) of the Insurance Act, 1938, nor is there any provision in the Insurance Act prohibiting an insurer from carrying on non‑insurance business. We have also referred to the Manual prepared by the Income‑tax Department and found at page 249 that this Manual also recognises the right of an insurer to carry on non‑insurance business. We, therefore, agree with the finding of the Tribunal that the Insurance Act, 1938 does not prohibit an insurer from carrying on non‑insurance business.

14. But absence of prohibition does not mean that the Insurance Act has provided any practical method for keeping the accounts of the non‑insurance business of an insurer. An examination of the account forms set out in the Schedules of the Insurance Act, 1938, which an insurer is required to prepare under section 11 of the said Act, shows that the accounts required to be kept under the Act relate only to the business of insurance.

15. Section 11 of the Insurance Act requires an insurer to prepare a balance‑sheet according to the above‑mentioned Form A, a profit and loss account according to the above mentioned Form B, except when the insurer carries on only one class of insurance business. In respect of each class of insurance business, the insurer has to keep a separate account of receipts and payments, and has also to prepare a revenue account for each class of business in accordance with the forms set forth in the Third Schedule of the Act applicable to the class of business carried on. Form D is the form of revenue account for life insurance business, and Form F is the form of revenue account for all, fire, marine and all other class of insurance business. The insurer has also to prepare other forms, which need not be considered here.

16. Let us now consider whether, as contended by Mr. Brohi, an insurer can declare the profits of his non‑insurance business in From B. Form B is as follows Form B Form of Profit and Loss Account. Rs. A. P. Rs. A. P. Central Taxes on the insurer's Profits (not applicable to any particular Fund or Account) Interest, Dividends and Rents(not applicable to any particular Fund or Account) ... Rs. Less ..Income‑tax thereon Rs. Expenses of Manage ment (not applicable to any particular Fund or Account)* Profit on realisation of Investments (not credited to Reserves or any particular Fund or Account). Loss on Realisation of investments (not charged Reserves or any particular Fund or Account) ... Appreciation of Investments to (not credited to Reserves or any particular Fund or Account ... Depreciation of Investments (not charged Reserves or any particular Fund or Account) Profit transferred from to Revenue Accounts (details to be given) ... Loss transferred from Revenue Accounts (details to be given). Transfer Fees ... Other expenditure (to be specified) Other Income (to be specified) ... Balance for the year Carried to Appropriation Account ... Balance being loss for the year carried to Appropriation Account ... *If any sum has been deducted from this item and entered on the assets side of the balance‑sheet, the amount must be shown separately. An insurer is required to prepare Form B only if he carries on more than one class of insurance business. If he carries on only one class of insurance business, the revenue form account enables him to supply all the information appertaining to that class of insurance business. Thus if he is carrying on life insurance business, Form D will enable him to show all the claims under life insurance policies, the liabilities thereon, all expenses of management, including commission to agents, salaries, director's fees, etc. The form will also enable him to show the balance of the life insurance fund, the premiums earned, "interest, dividend and rents," all other income, and finally the amount of profit or loss transferred from that revenue account to the profit and loss account. Similarly, Form F enables the insurer to supply the same information for other classes of insurance business. We may note here that this form requires that "interest, dividends and rents," reserves for unexpired risks, other reserves, and the amount of profits or loss transferred from the said revenue account to the profit and loss account be shown in it. Now the fourth entry in the right hand column of the Form B refers to "profits transferred from revenue account". It refers to the profits transferred from the revenue accounts D and F of the various classes of insurance business carried on by an insurer. This Form does not contain any other entry for declaring profits by the insurer. Since the revenue accounts relate only to the business of insurance, it is impossible for an insurer to declare the profits of the non‑insurance business in Form B.

18. But Mr. Brohi argued that certain entries in Form B support his contention that in this form an insurer can declare the profits of his non‑insurance business. He referred to the entries which relate to assets "not credited to reserves or to any particular fund or account." For instance the first entry in the right hand column of Form B states "Interest, dividend and rents (not applicable to any particular Fund or Account)." Counsel contended that this entry relates to income derived from the non‑insurance business of an insurer. Similarly, the second and third entries in the right hand column of Form B, are as follows "Profits on realisation of investment (not credited to reserves or any particular Fund or Account). Appreciation of investments (not credited to any reserves or any particular Fund or Account)." Mr. Brohi contended that they relate to investments of the non‑insurance business of an insurer. We do not think that the words "not credited to reserves or any particular fund or account" bear this meaning. These forms have been prescribed under section 11 of the Insurance Act, which refers only to accounts of the business of insurance. It is not possible that a form which is prescribed under this section should relate to non‑insurance business. Such a provision in the form will be ultra vires of section

11. Additionally, Form B is required to be filled in only when an insurer carries on more than one class of insurance business, and is to be submitted with the revenue account Form D or F. Both of those Forms contain an entry "interest, dividend and rents", therefore, in our opinion, the words "interest, dividend and rents not applicable to any particular fund or account" in Form B refer to those assets of an insurer which he did not appropriate to any specific class of insurance business under Form D or F. Further, Form D refers to a life insurance fund, whilst Form F refers to reserves, therefore whenever Form B refers to investments not credited to reserves or any particular fund or account, in our opinion, it means those investments which an insurer did not appropriate to any class of insurance business, but kept as a standby to meet the liabilities of any class of insurance business as and when they arise. Accordingly, we hold that it is not possible for an insurer to submit accounts of his non‑insurance business in Form B.

19. We shall now examine Form A which is the form of the balance‑sheet. The relevant part of this Form is set out at the end of the judgment.

20. The heading of column 2 of the above Form was amended by the Insurance Amendment Act, 1940. By that amendment, the words "accident and", which had preceded the words, "other classes of business" were omitted. Mr. Brohi contended that the object of the amendment was to clarify that an insurer could carry on non‑insurance business, therefore, he argued that the words "other classes of business" mean non‑insurance business. On the other hand, the Attorney‑General submitted that the words "other classes of business" had to be construed ejusdem generis with the words "life and annuity business" in column 1 above, therefore "other classes" mean "other classes of insurance busi ness". The contention of the Attorney‑General is correct ; the more so because the entries in the said column before the said amendment admittedly referred to the business of insurance only, yet these entries were not altered by the amendment. It also appears to us that whilst the entries in this balance -sheet pertain to the business of insurance, the balance‑sheet does not contain any heads or sub‑heads under which an insurer, running a non‑insurance business can supply such important information about non‑insurance business, such as the value of machinery, equipment, goodwill, patents of such business, stock, book, debts, etc. Such information is essential for the balance‑sheet of any non‑insurance business. Since there is no provision in Form A for setting out such information, it follows that this Form was prescribed only for the insurance business of an insurer.

21. The result of the above discussion is that all the Forms which an insurer is required to prepare under the Schedules of the Insurance Act, 1938 relate only to the business of insurance. If an insurer carries on non‑insurance business, he has to prepare separate accounts for such business. We are fortified in this conclusion by the provisions of sections 15 and 17 of the Insurance Act. Section 15 requires the insurer to prepare his balance‑sheet and accounts in the said Forms and, after they are audited and duly signed, the insurer is required to forward copies of the said balance‑sheet and accounts to the Controller of Insurance. Section 17 of the Act states that when an insurer, which is a company incorporated under the Companies Act, 1913 has furnished "his balance‑sheet and accounts in accordance with the provisions of section 15, he may at the same time send to the Registrar of Companies copies of such balance‑sheet and accounts; and where such copies are so sent it shall not be necessary for the company to file copies of the balance‑sheet and accounts with the Registrar as required by subsection (1) of section 134 of the (Companies Act)". As the exemption from the requirement of sending accounts under section 134, subsection (1) of the Companies Act, 1913 is restricted to the accounts prepared under the Insurance Act, section 17 clearly implies that if an insurer carries on non‑insurance business, he must maintain separate accounts of such business as required by the Companies Act.

22. We shall now examine the contention of the company that it was carrying on a business of investment separate from its insurance business. In order to decide this question, it is necessary first to consider the meaning of the word "business". At page 31 of the 4th Edition of their well known Commentary on Income‑tax, Sir Jamshedjee Kanga and Mr. Palkhiwala have defined the expression "trade and business" which occurs in section 2 of the Income‑tax Act, 1922 as follows : "The words used in this clause are wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. In the words of S. R. Das, J., "The word `business' connotes some real, substantive and systematic or organised course of activity or conduct with a set purpose." The activities which amount to "business" have been considered in a case of the Allahabed High Court on which Mr. Brohi placed great reliance. That case is Swadeshi Bima Company v. Commissioner of Income‑tax (26 I T R 530). Its facts are that the Swadeshi Bima Company had been buying plots of land with the intention of developing them and selling them and had made profits by such sales. That Company had also made profit by purchasing and selling shares. The question for determination before the Court was whether these transactions amounted to "business". The Court held that the transactions of purchase and sale of land amounted to business, but the purchase and sale of shares did not constitute it, because it was an isolated transaction. In the instant case, the alleged business of investment also comprises the purchase and sale of real property and shares. The judgment of the Allahabad High Court in the Swadeshi Bima case is therefore relevant to the questions before us. In holding that the transactions in immovable property of that Company constituted business, the Court observed at page 562 as follows :‑ "We have next to consider income derived from the trans actions relating to lands and buildings, and the question which would ordinarily arise is whether the return on the money expended by the assessee‑company in these transactions was a business profit or investment income. The statement of the case indicates that the assessee‑company was engaged in the business of purchasing land, developing it and thereafter selling it at a profit ; and Sri Mittra conceded that this was so. He did not contend that the land and buildings were purchased as a mere investment. In our opinion, the assessee -company's activities in connection with the purchase and sale of land and buildings constituted a business. . . . . . ." Then the Court proceeded to consider whether the purchase and sale of shares by that Company constituted business and held that it did not amount to it. The Court observed :‑ "So far as the transaction of purchase and sale of shares of the Anjawar Spinning and Weaving Mills Ltd. is concerned, the position appears to be different. The facts found nowhere indicate that the assessee‑company was regularly carrying on the business of dealing in the shares by purchasing them and selling them at a profit. It appears that the directors of the company considered that an investment in the shares of the Anjawar Spinning and Weaving Mills Ltd. would be very profitable. The Income‑tax authorities have held that this transaction was a speculative one, but we think that it was speculative only in the sense that there was no certainty that these shares would yield a good income and would be safe investment. It is nowhere suggested in the facts found by the Income‑tax Appellate Tribunal that the purchase of the shares of this company was speculation in the sense of purchase of shares for the purpose of selling them at a profit in the course of a business of dealing in shares. Further, there is no finding that there were any other dealings in any other shares by the assessee‑company. We are therefore of opinion that the purchase and sale of the shares of the Anjawar Spinning and Weaving Mills Ltd. must be held to be an investment . . . ." Accordingly, the Court rejected the contention of the Department that the profit of sale of shares arose out of a business. The ratio decidendi of the case, therefore, is that the purchase of immovable property and shares constitute business of investment only if the purchases are made in the course of a business of buying and selling for profit.

23. Let us now examine the meaning of the word "business" as interpreted by English Courts. In Grainger & Son v. Willing Lane Gough (1896 L R A C 325) Lord Morris observed : "There can be no definition of the words `exercising a trade'. It is only another mode of expressing `carrying on a business' ; but it certainly carries with it the meaning that the business or trade must be habitually or systematically exercised, and that it cannot apply to isolated transaction." Mr. Brohi has referred to the definition of "business" given by Lord Justice Clerk in Californian Copper Syndicate v. Harris (5 Tax Cas. 159). That definition has always been followed in English Courts, therefore we would like to quote the discussion at length. At page 165 Lord Justice Clerk has observed as follows :‑ "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 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 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, and thereby seeking to make profit. There are many companies 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." The question as to when the purchase and sale of shares constitute business has been considered by the Court of Appeal in Re : A. Debtor ((1936) 1 Ch. 237). A married woman had indulged in transactions on the stock exchange, and the question was whether those transactions amounted to a "business" Lord Wright M. R. stated as follows at page 240 :‑ "It is true that an occasional speculation, even if such a transaction, is repeated at intervals over a period, may not amount to a carrying on of business for the purposes of the section, but if over a considerable period, such dealings are repeatedly carried on in order to make a profit and are as frequent and systematic as in this case, they may properly be held to constitute a carrying on of business by the married woman."

24. The principle underlying the above definitions is that in order to constitute a business, there must be a continuous exercise of activity for the purpose of gain. This element of continuity is essential to constitute a business of investment. The reason for this condition is that in modern society people no longer hold their savings in gold or cash but are encouraged to invest their savings in property and securities, yet a man who invests his savings in buying a property would not be said to be carrying on a business if he lets out the property on rent, nor would a person who has purchased shares out of his savings be said to carry on business merely because he derives income from his investments. If, however, he regularly buys and sells property or shares, so as to make profit out of the fluctuations in the prices of property or shares, then it would be said that he was carrying on the business of investment ; there is thus a fundamental distinction between the business of investment, and the purchase and sale of investments by a person. As pointed out by Lord Wright, in the definition quoted, even occasional speculation in shares does not amount to carrying on a business ; therefore, a person, who buys property or shares and retains them for a long period of time, would not be considered to be carrying on the business of investment.

25. We shall now apply the above principles to find out whether in this case the company has been carrying on a business of investment. Mr. Brohi said that the company was incorporated in 1943 and in the same year it purchased 8 immovable properties in Bombay and shares in Habib Bank out of its share capital ; then in 1944, it purchased another immovable property in Bombay. Out of these investments, the company sold away only one property in 1949, and one in 1950. Do these facts show that the company was buying and selling properties or shares in order to make a gain by speculative purchases and sales through fluctuations in prices 7 The period between 1943 and 1950 saw great fluctuations in prices of property and shares on account of the extension of the Second World War to the sub‑continent and its aftermath. It was for the company to explain why, if it was really running an investment business and the transactions constituting the alleged business were so infrequent. Not only is there no explanation, but to our surprise, Mr. Brohi argued that the disputed investments related to the Company's investment business, precisely because the paramount feature of these investments was that they were of a permanent nature. We have pointed out that a person who buys property or shares with the intention of keeping them as a permanent investment cannot be said to be carrying on business in investment, because the word "business" implies a systematised course of activity in the pursuit of gain. This has been the view that was expressed in all the judgments we have considered, including the judgments in Swadeshi Bima Company v. Commissioner of Income‑tax and Californian Copper Syndicate v. Harris which were cited by Mr. Brohi.

26. As we have pointed out, the investment business was said to comprise 9 immovable properties and shares of the Habib Bank. In 1949 two of these properties were transferred to the life business account of the company, and in 1950 two other properties were transferred to the life business account of the Company. Further, in 1949 the company sold one property at profit, and in 1950 it sold another property at profit. There is no evidence on the record to show that the sale proceeds of the said properties were re‑invested, as would have been the case, if the assets had belonged to the investment business of the company. In these circumstances, the company had to explain why it transferred four of these properties to its life insurance account in 1949 and 1950 and why it did not re‑invest the sale proceeds of the properties sold in 1949‑50 in its alleged investment business, it has not given any explanation. The absence of an explanation irresistably leads to the inference that the only business carried on by the company was the business of insurance. It is true that the company did not immediately appropriate all its investments to any of the classes of business it carried on because it wished to retain them as a standby for meeting the liabilities of any class of its insurance business as and when they might arise. We enquired from Mr. Brohi whether the company filed separate returns for its alleged investment business. He admitted that the company had always filed a single return for its income as an insurer and that it had never declared the income of its alleged business separately from its insurance business: Thus the conduct of the company is completely inconsistent with. its plea that it was carrying on a business in investment separately from its insurance business.

27. Mr. Brohi further argued that the investments in dispute did not belong to the assets of the insurance business of the company, because they were made directly out of the share capital of the company. We do not think that the source of investment is at all material to the question whether the investments belonged to the business of insurance or not ; the real question is whether they were available to meet the liabilities of the insurance business of the company. Mr. Brohi was not able to refer us to any clauses in the Memorandum or Articles of the Company on the basis of which it could be contended that the investments were not available to meet the liabilities of the Insurance business of the company. Further, as we have observed, four out of the nine properties, which are claimed to be the assets of the investment business of the company, were transferred by the company to the life insurance fund. Thus the conduct of the Company shows that all of these investments were kept available by it, as a standby, to meet the liabilities of the various classes of insurance business it carried on. In the circumstances, the fact that these investments were made directly out of the share capital of the company does not help Mr. Brohi's argument that the investments were not a part of the insurance business of the company. Mr. Brohi admitted that the primary object of the company was insurance, and that the company was floated as an Insurance Company ; therefore, when the share capital of the company was subscribed, the shareholders did so on the assurance that the company was an insurance company. Mr. Brohi's argument that the share capital should be treated differently from other assets would amount to a breach of faith by that company to its share‑holders, because unlike the business of insurance, the business of investment is of a highly speculative nature, and shareholders who invested for insurance companies did not invest in a company carrying on an investment business. We accordingly find that there is no force in this argument of Mr. Brohi.

28. There is one more consideration relevant to the company's plea that it was carrying on the business of investment. The company being a limited liability company, its powers were restricted by its Memorandum of Association. Admittedly, the primary object of the company was insurance. But Mr. Brohi submitted that clauses (r), (s), (t), (u), (aa), (bb) and (cc) conferred a power on the company to carry on a separate business of investment. We have already set out these clauses in para

9. The question is whether the powers conferred by these clauses empowered the company to invest the funds of the insurance business of the company to carry on a separate business of investment. The cardinal rule for construing the Memorandum of limited liability companies is that when a company has a primary object, all other clauses in the memorandum are to be understood as ancillary to the main object of the company. In the 12th Edition of Palmer's Company Law the learned author writes at page 88 as follows : "A special rule of construction has in some cases been applied where the objects of a company are expressed in a series of paragraphs, and one paragraph (commonly the first) appears to embody the main or dominant object of the company, and all the other paragraphs have been treated as merely ancillary to this main object, and as limited and controlled thereby. Sometimes the memorandum declares the intention to be that the objects specified in each paragraph of the clause shall, except otherwise expressed in such paragraph, be in no wise limited or restricted by reference to or inference from the terms of any other paragraph or the name of the company. These words are obviously intended to exclude the application of any such rule of construction, and the Court is bound to give effect to the intention thus indicated ................... The existence of words which give a power to do anything are ineffective except in so far as incidental to the main object." In the instant case, the memorandum of the company does not state that each clause is to be treated independently of the other clauses and is not restricted by a reference to the main object of the company. Accordingly, on the basis of the principle laid down in the above passage, the power to purchase and sale immovable property, to invest the monies of the company, and to carry on any other business must be construed as ancillary to the business of insurance of the company, which was the main object of the company. The result of this discussion is that the company was not entitled under its memorandum to carry on independent business of investment. We, therefore, hold, in view of the circumstances discussed, that the company has failed to show that it was carrying on a separate business of investment.

29. Mr. Brohi contended that even if it be held that the company only carried on insurance business, it was still not liable to be taxed on the credits shown in the balance‑sheet Form A. He advanced several arguments in support of this contention, which we shall now consider.

30. Counsel contended that the credits taxed were not shown by the company in its revenue accounts but were shown directly in its balance‑sheet ; therefore he argued that under rule 3 (b) of the Schedule of the Income‑tax Act, 1922 those credits could be taxed only if they were shown in the revenue accounts. We have already quoted in paragraph 8, rule 3 (b) of the Schedule of the Income‑tax Act, which states that : "Any sums taken credit for in the account or balance‑sheets on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus." The surplus ascertained according to rule 3 (b) is taxable under rule

6. The word "accounts" has not been qualified or restricted in any particular form. The learned Attorney‑General, therefore, pointed out that, as the Legislature was aware of the distinction between the balance‑sheet (Form `A' of the Insurance Act), the profit and loss account (Form B of the Insurance Company) and Revenue Accounts (Forms D and F), prescribed under the Insurance Act, it would have restricted the application of the word to revenue account had it intended to tax only the appreciation for which credit is taken in the revenue Accounts (Forms D and F). In this connection, the learned Attorney -General referred us to a judgment of the Bombay High Court reported in Bombay Mutual Life Assurance Society Ltd. v. Commis sioner of Income‑tax (20 I T R 189). In the Bombay case, as in the instant case, the Insurer had credited the appreciation of his investment in the balance‑sheet but not in the revenue accounts and had, therefore, contended that the appreciation was not taxable. This contention was repelled by Chagla, J. who, after referring to the provisions of rule 3 (d) observed : "Now there is no warrant for qualifying the expression `accounts' used by the Legislature by characterising these accounts as revenue account. The only question is that if credit is taken by an assessee in his accounts for appreciation of securities then that credit must form part of the surplus and it cannot be disputed that the assessee has taken credit for appreciation of these securities. Whether that credit is taken in the balance‑sheet or the revenue account makes no difference. The balance‑sheet is as much a part of the accounts of the assessee as the revenue account and the Legislature has not chosen to indicate any particular account in which credit should be taken." We accordingly hold that when the Company showed the said credits in its balance‑sheet, it appropriated them to its non‑life insurance business as held by the Tribunal.

31. Mr. Brohi also contended that the book appreciation of the immovable property of the Company could not be taxed as appreciation within the meaning of rules 3 and 6 of the Schedule, because the taxable appreciation had to be of "securities or other assets." He submitted that the words "other assets" have to be construed as similar to securities and cannot include immovable property, because whilst immovable property undergoes physical wear and tear, securities do not undergo such wear and tear. The fact that securities do not undergo physical wear and tear is obvious, but rules 3 and 6 allow the insurer to take credit for appreciation of his investments and to set off the losses on account of depreciation of his investments. Buildings can appreciate and depreciate in value in commercial towns as much as securities ; therefore, if the Legislature had intended to exclude immovable property from the ambit of rule 3, it would have used appropriate language to warrant such exclusion. The word "assets" is itself a very wide word, which has been deliberately used by the Legislature, therefore we cannot restrict its meaning as contended by Mr. Brohi. We hold that the words "other assets" include immovable property.

32. Mr. Brohi laid stress on his contention that book appreciation of securities is not subject to income‑tax in the case of Insurance Companies, which are not mutual associations. His argument was that by virtue of section 3 of the Income‑tax Act, tax can be imposed only on income as defined in the said Act, and that in the absence of any provision to the contrary, income means something received or coming in, according to its ordinary dictionary meaning. He submitted therefore that the method for computing income under rules 3 and 6 of the Schedule to the Act has created an artificial concept of income, and the only provision whereby the income, of an insurer is to be calculated according to the artificial definition is contained in section 2 (6) (c) of the Act. Section 2 (6) (c), in so far as it is relevant, is as follows : "Income" includes anything included in `dividend' as defined in clause (6‑A) . . . . . and the profits of any business of Insurance carried on by a mutual insurance association computed in accordance with rule 9 in the First Schedule." As the subsection quoted relates only to insurance business carried on by mutual insurance associations, Mr. Brohi submitted that the provisions of the Schedule do not relate to the company as it is not a mutual insurance association. Apart from the fact that this argument cannot be considered because it does not arise out of the order of the Tribunal, it is not correct because it ignores the provision of section 2, subsection (1?) of the Act. Section 2, subsection (15) defines "total income" as follows :‑ " `Total income' means total amount of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in this Act." Subsection (1) of section 4, in so far as it is relevant, lays down that the total income of any person "includes all income, profits and gains from whatever source derived" and whether received by him or deemed to be received by him. Subsection (7) of section 10 lays down that "the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the First Schedule of the Act." In consequence, the income of all insurers has to be calculated in accordance with the rules of the First Schedule, and as section 10 has not drawn any distinction between insurers, we cannot accept the argument of Mr. Brohi that it is only the income of mutual insurance associations that can be calculated according to the rules of the Schedule.

33. The next submission of Mr. Brohi was that the rules of taxation laid down in the Schedule of the Income‑tax Act are inconsistent with section 12 (B) of the Income‑tax Act; therefore, the said credits cannot be subjected to Income‑tax. Now under section 10, subsection (7), the income of an insurer is to be taxed according to the Schedule "notwithstanding anything to the contrary contained in sections 8, 9, 10 and 12." The provisions of section 12 (B) would, therefore, be applicable to insurers and Mr. Brohi's contention is that as section 12 (B) is inconsistent with the rules 3 and 6 of the Schedule, section 12 (B) supersedes the provisions of the Schedule. Section 12 (B) states :‑ "The tax shall be payable by an assessee under the head `capital gains' in respect of any profit or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March 1946 . . . and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place." In the first place, counsel's argument has no relevance whatso ever to the book appreciation of the company's investments, and is applicable, if at all, only to the profits realised by the Company from the sale of its properties in Bombay in 1949‑

50. However, as pointed out by the Attorney‑General, section 12 (B) was repealed with effect from the 1st day of April 1949, and the sales by the Company of its immovable properties took place after this date. It cannot, therefore, be said that the provisions for taxation in the Schedule are illegal because of their inconsistency with a law which was not in force at the time when the company became liable to tax. This contention of the company also fails.

34. Finally, Mr. Brohi, raised an objection relating to the interpretation of the Government of India Act, 1935, which was in force, at the relevant time. The argument of Mr. Brohi was that the Income‑tax Act, 1922 was an Act of the Central Govern ment and that the authority of the Central Government to levy taxes was limited to the subjects specified in the federal list which is set out in the VII Schedule of the Government of India Act. Counsel argued that the Central Government could only impose income‑tax as defined in the 1935‑Government of India Act and any other artificially defined income‑tax. The relevant entries (Nos. 54 and 55) of that federal list are : "

54. Taxation of income other than agricultural income.

55. Taxes of the capital of assets exclusive of agricultural land, taxation on the capital of companies." Mr. Brohi argued that the Government could only tax income in its ordinary dictionary meaning, that the book appreciation of investments was not income according to the ordinary dictionary meaning of income ; therefore the provisions of rules 3 and 6 were ultra vires of the powers of the Government under the Government of India Act and illegal. He admitted that this plea is not contained in the reference before us, that it was never raised before, not even in the reference application filed by him under section 66 (1) of the Income‑tax Act. However, he submitted that as the question of the vires of these rules was a pure question of law, he was entitled to raise it even at this stage, and in support of his submission he relied on a judgment of the Supreme Court reported in Sutlej Cotton Mills v. Commissioner of Income -tax (P L D 1965 S C 443) and a judgment of the Indian Supreme Court reported in The State of Utter Paradesh v. Lal (AIR 1957 S C 9l2).

35. In Sutlej Cotton v. Commissioner of Income‑tax the Supreme Court was considering section 34 of the Income‑tax Act. The Income‑tax Officer had re‑opened the assessment of the appellant and taxed the appellant for the assessment year 1949‑50 within four years thereof. Here we may observe that section 34 at the relevant time empowered the Income‑tax Officer to re‑open the assessment within four years, but in the event of fraud or concealment of income by the assessee, within a period of 8 years. The appellant filed an appeal against the order of re‑assessment and the Appellate Commissioner set aside the assessment order passed by the Income‑tax Officer under section 34 as the notice of re‑assessment was very short, and directed him to take fresh assessment proceedings. The appellant filed an appeal before the Tribunal which was allowed. The Tribunal held that the effect of the order directing a fresh assessment would enable the Income‑tax Officer to open assessment proceedings after four years and would thereby defeat the prescribed period of limitation of 4 years. Accordingly, the Tribunal annulled the order of the Appellate Commissioner and allowed the appeal. The Commis sioner of Income‑tax applied for and obtained a reference to the High Court as follows :‑ "Whether in the facts and circumstances of the case the Tribunal was right in holding that the assessment was liable to be annulled and not merely set aside." The High Court answered the reference in the negative and accordingly the appellant went in appeal to the Supreme Court. 'Throughout those proceedings, the appellant and the respondent had proceeded on the assumption that the proper period of limitation under section 34 was four years. But in its argument before the Supreme Court the Department contended for the first time that the appellant had concealed income, therefore the Department was entitled to re‑open his assessment for a period of 8 years. The appellant submitted that, as the Department had never relied on an 8 years period of limitation, the Department could not be allowed to argue that the proper period of limitation was 8 years. This contention was rejected by the Supreme Court. According to the record of the case, the Income‑tax Officer had held that the Appellant had concealed income, this finding attracted the 8 year period of limitation, and their Lordships of the Supreme Court held that, as the question framed was very wide, the respondent was entitled to rely on the correct period of limitation. According to Mr. Brohi, this judgment is an authority for the proposition that in a reference under the Income‑tax Act, the Court should allow any question of law to be argued even though it is not contained in the reference. This contention is not correct. The appeal before the Supreme Court turned on the interpretation of section 34, and in allowing the respondent to contend that the proper period of limitation was 8 years, the Court observed : "In arriving at this conclusion it has not been necessary in any way to go outside the four corners of the question referred or subject it to modification in any sense." In the instant case, the question as formulated presupposes the, valid existence of rules 3 and 6 whilst Mr. Brohi's argument is that these rules are illegal. It cannot therefore be said that this contention is within the ambit of the questions that have been referred to us. The judgment cited therefore is distinguishable and is not relevant to the plea raised before us.

36. The judgment of the Indian Supreme Court in the State of Utter Paradesh v. Lal is likewise distinguishable on facts. In that case the assessee was a bank and had contended at all stages that it was entitled to set off its business losses against the income derived by it from interest on securities. The reference under section 66 to the High Court specifically raised the point whether the assessee was entitled to set off a business loss against its income from interest on securities. In the arguments before the Supreme Court the assessee based its claim for the set off under section 24(2) of the Income‑tax Act, although reliance was earlier not placed on section 24(2) of the Act to allowing the appellant to raise this point the Supreme Court observed : "The question framed by the Tribunal is a general one and what is to be determined as whether the loss of the previous year can be set off against the income of the assessment year within the provisions of section 22 of the Act. The question is wide enough to cover the point raised before us." We have observed that the plea raised by Mr. Brohi challenges as illegal the very assumption on which the reference has been made to us. We do not think either of the judgments cited h support the claim of Mr. Brohi to raise a plea which is inconsistent with the question that has been referred to us. However, as we have heard arguments on this point, we shall consider this question.

37. At the outset we must point out that since the definition of `income' in the Income‑tax Act differs in several respects from what Mr. Brohi called the ordinary dictionary meaning of the word, we enquired from counsel whether he challenged the vires of the meaning of `income' as found in the Income‑tax Act. He did not do so, but submitted that book appreciation of investments does not amount to income within the meaning of entry 54 of the federal list of the Government of India Act as such appreciation was beyond the ordinary meaning of the word `income'. In support of his contention Mr. Brohi referred to the observation of the Indian Supreme Court is Navinchandra Mafar Lal v. Commissioner of Income‑tax (A I R 1955 S C 58) in which that Court observed that income must mean "a thing that comes in". The facts of the case were that the appellant was taxed under section 12 (B) of the Act in the sum of Rs. 9,38,011 for capital gain received by him on the sale of some immovable property, and the contention of the appellant was that, as those profits were realised on the sale of a capital asset, they did not constitute income, therefore the provisions of section 12 (B), taxing such gains, were ultra vires of the powers of the Government of India under the said entry No.

54. In support of this plea, the appellant had relied on the definition of income in the leading case of Californian Copper Syndicate v. Harris (to which we referred earlier) and submitted that the word `income' in entry 54 had the same meaning as in the Income‑tax Act. The Court repelled this contention and observed "In construing words in a constitutional document conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude." Having held that the word `income' in the Government of India Act, 1935 has to be given the widest possible meaning the Court observed that the gains taxed under section 12 (B) were profits that were received by the assessee. It was in this context that the Court went on to say that, according to its ordinary meaning, income means "a thing that comes in". The Court did not consider the question whether capital gains not realised by an assessee could be deemed to be income if so declared by a competent Legislature, therefore, the judgment cited has no relevance to the questions in this reference. We have to construe the word "income" in the widest possible manner and, in our opinion the word is wide enough to include capital gains on the appreciation of investment as provided in rules 3 and 6 even though such gains have not been realised.

38. No other point was raised by Mr. Brohi. We accord ingly answer the reference in the affirmative. Reference answered in the affirmative.