P L D 1971 Lahore 619 (PLP)

15. In the statement of the case submitted by the assessee along with the application made to the Tribunal asking it to refer the case to this Court under subsection ((1718) Dunb, 28 per Price, B. 28) of section 66 of the Act, it is mentioned that "the London Branch of the assessee Company supervises the purchases of raw material made abroad". It is also mentioned that "the London Bank Account was reimbursed from time to time for the Expenses, Established Designing Charges for diesel engine and other Expenses". As for the account at Bombay it is stated that "the account with Grindlays Bank Ltd. Bombay was opened on 30th September 1950, when Company transmitted Rs. 1,18,312 equivalent to Rs. 1,70,000 Indian to Bombay". It was added that there was no other remittance from Pakistan to the Bombay Bank Account. The purpose of the funds was explained thus: "The balances were used for meeting lawyers fee, advertisement and trade expenses". On the basis of the above facts it was contended on behalf of the assessee that the amounts in these accounts constituted fixed capital and not the stock‑in‑trade or floating or circulating capital of the assessee; therefore, the gain derived from it was capital gain and not income.

16. We cannot persuade ourselves to agree to this view of the assessee's counsel, because it is not disputable nor has counsel disputed it that "money earmarked by an assessee for meeting business expenses constitutes circulating or floating capital." The Tribunal has also taken this view and supported it by citing in the Rees Ruturbo Development Syndicate Ltd. v. The Commissioner of Ireland Revenue (13 T C 366). In that judgment Rowlatt, J. has observed that :‑ "In one sense the words `capital asset' are words of art, because you do not have one set of assets representing capital and another set of assets representing income . . . . . . . ; but what is meant by the phrase `capital asset' is that this is an asset which represents fixed capital as opposed to circulating capital that is to say, that this is an article which is possessed by the individual in question, not that he may turn it over and make a profit by the sale of it to his advantage, but that he may keep it and use it and make a profit by its use." In this case, the assessee has utilised the Bank accounts for defraying the cost of preparation of designs of the goods which were manufactured by it, the cost of advertisement and other trade expenses. The money which was in the Bank accounts was, therefore, undoubtedly circulating or floating capital.

17. In the above view of the matter the money is assessable to income‑tax, but counsel for the assessee tried to get out of this difficult corner by arguing that property of any kind which falls within the meaning of "capital asset", as defined in section 2(4‑A) irrespective of whether or not it is connected with business, profession or vocation ; and that any property which is "capital asset" can be subjected to tax only if it falls within the purview of section 12‑B of the Income‑tax Act, 1922. The logic which counsel adopted was that it was immaterial that the money lying in the Banks was connected with the business of the assessee or not, because if it was "capital asset", then it could be assessed to income‑tax only if it was sold, exchanged or transferred in terms of section 12‑B and in the process yielded profits or gains. In order to understand his argument it is necessary to refer to section 2 (4‑A) and section 12‑B of the said Act. Section 2 (4‑A) has already been reproduced above. The relevant part of section 12‑B is as follows :‑ "12‑B.‑(1) The tax shall be payable by an assessee under the head Capital gains in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March 1946 (and before the 1st day of April 1949 and after the seventh day of June 1963) and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, or transfer took place . . . . . . . . .

18. On the basis of section 2 (4‑A) counsel for the assessee argued that property of any kind held by an assessee is "capital asset" with three exceptions only, that is to say, when it is stock- in‑trade, personal effects or land from which the assessee derives agricultural income. The Bank Accounts of the assessee, according to counsel, could not fall within any of the three exceptions, therefore, they were "capital asset" as well exempt from income‑tax unless there was sale, exchange or transfer of the asset, profits or gains accrued in consequence of such sale, exchange or transfer. If this argument of counsel was correct, then he had a simple and sound case, but the difficulty in his way was that the definition of "capital asset" and section 12‑B were enacted with the object of subjecting to income‑tax, "capital gains" which were not subject to such tax before the enactment of these two provisions. The reason for enacting these provisions in 1947, as explained by counsel for the assessee, was that prices of "capital asset" had shot up after the. Second World War and people were selling, exchanging r transferring them with the intention of making profits or gains. In other words "capital assets" had ceased to be utilised as such and were being utilised as stock‑in‑trade. The situation was, therefore, met by the Legislature by defining the expression "capital asset" very widely, but limiting its taxability by restricting it to such sale, exchange or transfer as yielded profits or gains. Counsel for the assessee conceded and to our mind rightly so, that the definition of "capital asset" contained in section 2 (4‑A) is so wide that includes floating capital and circulating capital. This definition was adopted by the Legislature deliberately so as to exclude the chances of any assessee escaping from income‑tax if he used his "capital asset" for making gain or profit by selling, exchanging or transferring it. The scope of section 2 (4‑A) therefore, is consistently wide with the object of the Legislature and the assess ability of such capital to income‑tax is limited by the terms of section 12‑B. These two provisions are complementary to each other and should be used for giving effect to the combined object of the two provisions. Outside the combined scope of the two provisions there can be such floating capital and circulating capital as would be subject to income‑tax if it fell within the mischief of other provisions of the Act. Counsel for the assessee did not agree, because he could not save his argument from being destroyed without contending that floating capital and circulating capital had become merged in the definition of "capital asset" and could be subjected to tax only in terms of section 12‑B.

19. The last‑mentioned stand of counsel for the assessee cannot be accepted as sound, because the expression "capital asset" has been defined in section 2 (4‑A) only for the purpose of section 12‑B and owing to its vast scope, subjectivity to income tax has been curtailed by limiting it in terms of section 12‑B to those sales, exchanges and transfers which yielded profits and gains. In other words, the Bank accounts of the assessee cannot escape being assessed to income‑tax merely because they were not sold, exchanged or transferred nor yielded profits and gains, because by not becoming subject to income‑tax under section 12‑B they do not cease to be floating or circulating capital for purposes of other provisions of the Income‑tax Act. They attract the provisions of section 4 which is a charging section.

20. Counsel for the assessee contended that section 4 was not attracted by them ;therefore, it is proper to reproduce the relevant part of that section here. It is as follows :‑ "4.‑(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which‑ (a) are received or are deemed to be received in Pakistan in such year by or on behalf of such person ; or (b) if such person is resident in Pakistan during such year,‑ (i) accrue or arise or are deemed to accrue or arise to him in Pakistan during such year, or (ii) accrue or arise to him without Pakistan during such year, or (c) if such person is not resident in Pakistan during such year, accrue or arise or are deemed to accrue or arise to him in Pakistan during such year. According to the above provision all income, profits and gains are subject to income‑tax and are to be treated as a part of the total income of the assessee. The expression "total income" is defined in section 2 (15) 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 and total world income includes all income, profits and gains wherever accruing or arising except income to which, under the provisions of sub section (3) of section 4, this Act (does not apply and except any capital gain which is not includable in the total income of an assessee)." The words "profits and gains" which occur in the above defini tion should be noted and the repetition of references to profits and gains which is to be found in section 4 (1) should be kept in mind, because a question arises as to whether or not these words enlarge the meaning of the word "income". If we were free to form our own opinion and not bound by authority, we would have no hesitation in saying that on a plain reading of section 4(1) and section 2 (15) the words "profits and gains" which have been used in addition to the word "income" could be said to enlarge the meaning of "income", but their Lordships of the Privy Council have while explaining the meaning of the word "income" observed in Commissioner, Income‑tax, Bengal v. Shaw Wallace & Co. and Commissioner, Income‑tax, Bengal v. Mercantile Bank of India etc. that: "the expansion is more a matter of words than of substance." We wish to emphasise the word "expansion" used by the Privy Council, because at least this much is undeniable. What remains to see is whether it has become substantial or not as a result of important amendments which have been made after the said pronouncements of the Privy Council.

21. It is necessary, therefore, to understand the thinking of their Lordships of the Privy Council as disclosed in the basic judgment given in the case of Shaw Wallace & Co. so that it may be possible to see whether that line of reasoning can outlast the amendments that have been made since then. The discussion is to be found in the judgment at page 140 and can be summarised as follows "The object of the Indian Act is to tax income, a term which it does not define. It is expanded, no doubt, into income, profits and gains, but the expansion is more a matter of words than of substance (because) income, their Lordships think, in this Act connotes a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive. . . . . . . .The sources from which the taxable income under the Act are to be derived are enumerated in section 6, which runs as follows :‑ Save as otherwise provided by this Act the following heads of income, profits and gains, shall be chargeable to income‑tax in the manner hereinafter appearing namely:‑ (i) Salary. (ii) Interest on securities. (iii) Property. (iv) Business. (v) Professional earnings. (vi) Other sources. The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under section 10 the tax is to be payable by an assessee under the head business 'in respect of the profits or gains of any business carried on by them . . . . . . . . Some reliance has been placed in argument upon section 4 (3)(v) which appears to suggest that the word income in this Act may have a wider significance than would ordinarily be attributed to it. . . . . . . (But) they think that the clause must be due to the over anxiety of the draftsman to make this clear beyond possibility of doubt." We may note here that as observed by their Lordships there was no definition of income in the Statute at the time at which the judgment was written. Moreover, their Lordships have inferred from the categories of the sources of income enumerated in section 6, the characteristics of "income". There is no doubt that the six sources of income which are mentioned in section 6, lead to the conclusion that the expressions "salaries", "interest", "property", "business" and "professional earnings" are categories of "income", which include the profits and gains of business and professional earnings; therefore, in a secondary sense included in the concept of income. This point becomes clearer if we look at the use of the words "salaries", "interest", "income" and "profits and gains" in section 6 as it stands today. The section runs today as follows:

"

6. Save as otherwise provided by this Act, the following heads of income, profits and gains shall be chargeable to income‑tax fn the manner hereinafter appearing, namely :‑ (i) Salaries. (ii) Interest on securities. (iii) Income from property. (iv) Profits and gains of business, profession or vocation. (v) Income from other sources. (vi) Capital gains."

22. The above being the way of thinking of their Lordships, which was of course in accordance with the Act as it was at that time, they found ample justification for attributing the rather jarring expansiveness of section 4(3)(v) to the over‑anxiety of the draftsman to make the central idea clear. We think that the significance that was attached by their Lordships to the sources of income was statutorily justifiable, because section 4 as it then was, contained a reference in it to section

6. This reference was significant because section 4 is a charging section. Subsection (1) of section 4 was as follows: -- "Save as hereinafter provided, this Act shall apply to all income, profits or gains as pescribed and comprised in section 6 from whatever source derived."

23. With utmost respect, we venture to think that the situation has changed from 1939 for more reasons than one. Firstly, reference to section 6 has been omitted from sub section (i) of section 4 in Act VII of 1939. Secondly, a definition of "income" was also introduced in 1939. It is not an exhaustive definition but does make the situation different from what it was when there was no definition at all. Moreover, the words "profits and gains" have been included in the definition of the expression "total income" and a reference is also made in it to subsection (1) of section 4 in which subsection the words "profits and gains" appear again. This emphasis on the words "profits and gains" in subsection (1) of section 4, which is a charging section, does make an important difference. Thirdly, the concept of income formed by their Lordships of the Privy Council on the reasoning reproduced above and attributed to the object of the Act does not hold good after the insertion in the Act. of section 12‑B by which "capital gain" has been subjected to income tax. This expansion of the meaning of income has made the former restricted concept inconsistent and inapplicable now.

24. We accordingly conclude that in the new context the expansion of the word "income" by the addition of the words "profits and gains" has become substantial.

25. We may here refer to the contention of counsel for the assessee that the following opinion expressed by the Tribunal in their order of the 6th of April 1963, was not sustainable : ‑ "In our opinion, circulating or floating capital cannot be treated as a capital asset. The acceptance of the assessee's contention would lead to absurd results. If circulating capital is to be treated as a capital asset, then there would be no income at all which can be assessed to tax." Counsel urged that according to the Tribunal circulating or floating capital did not fall within the ambit of the definition of "capital asset", although neither counsel nor we agreed with that view, therefore, according to counsel, the apprehensions which were apparently the motive force of the Tribunal's thoughts were illusory. We agree with counsel to this extent that circulat ing and Boating capital does fall within the definition of "capital asset" as given in section 2 (4‑A) of the Act, but agree with the Tribunal that if circulating and floating capital is not subjected to income‑tax, then the greater part of income would escape taxation, because the major part of income in our country is covered by the concept of circulating or floating capital. We think that the Tribunal also was following the same line of thought, but their expression is open to the attack which counsel has made on it, because they have presumed that circulating or floating capital cannot be treated as "capital asset" for purposes of section 2 (4‑A). If a reference to section 12‑B is inserted in the opinion of the Tribunal and the provisions of section 4 kept in view then the idea which is expressed will be complete.

26. We conclude for the foregoing reasons that Rs. 53,537.00 were rightly assessed to income‑tax and answer the reference in the affirmative. The assessee will pay the costs of these proceedings. K. B. A. Reference answered in affirmative.