Birds Investments Ltd. vs Commissioner of Income-Tax on 23 July, 1963

Calcutta High CourtBirds Investments Ltd. vs Commissioner Of Income-Tax on 23 July, 1963Equivalent citations: 1965 35 CompCas 143 Cal, 1965 55 ITR 284 CalAuthor: SenBench: S Mitra, K Sen

JUDGMENT Sen, J.

1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, hereinafter described asthe " Act", the following questions have been raised for the opinion of this court:

"(1) Whether the Income-tax Officer had jurisdiction to make a supplementary assessment for1946-47, under Section 34 by proceeding under that section as amended in 1948 ?

(2) Whether Section 31 of the Indian Income-tax (Amendment) Act (XXV of 1953) has the effect ofmaking Section 34 of the Indian Income-tax Act, 1922, as amended in 1948, retrospective ?

(3) Whether the supplementary assessment in this case is barred by limitation ?

(4) Whether, in the circumstances of this case, the submission by the assessee of the reconciliationof capital reserve account (annexure marked ' C'), amounted to a full and true disclosure of all thematerial facts necessary for his assessment within the meaning of Section 34(1) of the IndianIncome-tax Act, 1922, as amended in 1948 ?

(5) Whether, in the circumstances of this case, the information furnished to the Income-tax Officerby the letter dated 26th October, 1949 (annexure marked ' B '), can be held to be information such aswould entitle the Income-tax Officer to initiate proceedings under Section 34(1)(b) as amended in1948 ?

(6) Whether, on the facts and in the circumstances of this case, the assessee-investment company'sholdings of stocks and shares partake of the nature of circulating capital, and whether anyrealisations of excess over cost on sales thereof are the company's business profits chargeable toIncome-tax ?"

2. The facts of the case as appearing from the statement of the case submitted by the Income-taxAppellate Tribunal, as also from other materials appearing in the paper-book, are stated as follows :

The applicant-assessee, Messrs. Birds Investments Limited, hereinafter described as the company,is, as its name indicates, an investment company. The main objects of the company as described inparagraph 3, Clauses (b) and (1) of its memorandum of association, are as follows :

" (b) To acquire and hold and otherwise deal with shares, stocks, debentures, debenture-stocks,bonds, obligations, and securities issued or guaranteed by any company constituted or carrying onbusiness in India, or in the United Kingdom, or in any colony, or dependency, or possession thereof

Birds Investments Ltd. vs Commissioner Of Income-Tax on 23 July, 1963

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or in any foreign country, and debentures, debenture-stocks, bonds, obligations and securitiesissued or guaranteed by any Government, sovereign, ruler, commissioners, public body, orauthority, supreme, municipal, local or otherwise, whether in India or elsewhere.

(1) To carry on the business of banking in all its branches and departments, including theborrowing, raising or taking up money, the lending or advancing money on securities and property,the discounting, buying, selling and dealing in bills of exchange, promissory notes, coupons, drafts,bills of lading, warrants, debentures, certificates, scrips and other instruments and securities,whether transferable or negotiable or not, the granting and issuing of letters of credit and circularnotes, the buying, selling and dealing with stocks, funds, shares, debentures, debenture-stocks,bonds, obligations and other securities. "

3. The reference arises out of a supplementary assessment for 1946-47 made under Section 34 of theAct. The original assessment for 1946-47 was made on the 19th April, 1949, without including theprofits on purchases and sales of shares. The Income-tax Officer, who made the assessment for1949-50 received the letter dated 26th October, 1949, from the assessee and it was on the basis ofthe information contained therein that he initiated the proceedings under Section 34, for makingsupplementary assessment for 1946-47, out of which the present reference arises. One of theobjections taken by the company was that there was no fresh material in possession of theIncome-tax Officer, in consequence of which he had reason to believe that profits chargeable toincome-tax had escaped assessment. According to the Tribunal, the reason for the assessee sayingthis is that along with his return of income for the year 1946-47 submitted in October, 1946, theassessee had filed statements headed " Reconciliation of Investments at September, 1945, " and "Reconciliation of Capital Reserve Account",--the latter account showing the profit made on sale ofTitagarh Paper and Kurnardhubi Engineering shares, less losses incurred on redemption of certaindebentures. According to the Tribunal, although the words " profit " and " loss " are found in thisReconciliation Account, the heading being " Reconciliation of Capital Reserve Account", theIncome-tax Officer was not necessarily put on notice that the profit and loss arose on what may becalled trading transactions. There was, according to the Tribunal, no indication, however, on therecord that the Income-tax Officer who made the original assessment considered this aspect of thematter. After the proceedings under Section 34 of the Act was started, the company in its letterdated 26th October, 1949, addressed to the Income-tax Officer (annexure " B") described itself aspurely an investment company. It will appear from the statement of the case that this company isnot one of those companies formed for the sole purpose of holding all or most of the shares of theother companies actively carrying on trades such as are referred to in Sub-section (2) of Section 2 ofthe Indian Companies Act, 1913, and section 132A(i), second proviso, of the same Act, distinguishingbetween a holding company and an investment company. In other words, the assessee does not fallwithin the category of purely holding companies. On an examination of the accounts of theassessee-company, the Tribunal came to the conclusion that the company did not carry on an activetrade in buying and selling shares, having regard to the volume or magnitude and frequency of thetransaction. The sale in each year is only to the tune of Rs. 1,00,000 to Rs. 4,00,000 or Rs. 5,00,000out of the total holdings in the neighbourhood of RS. 40,00,000. Some of the shares were held bythe assessee-company for quite a number of years. Therefore, the Tribunal concluded that theassessee-company was not a dealer in shares in the ordinary sense. The real question that the



Tribunal had to decide was whether that being an investment-company, its holdings of stocks andshares partook of the nature of circulating capital with the result that any realisation of excess overcost on sales thereof was its business profit chargeable to tax.

4. It has already been stated that the company took exception to the initiation of proceedings underSection 34 of the Act. It appears from the statement of the case that the notice under Section 34 wasissued on the 28th March, 1951, and was served on the assessee on the same day. Thesupplementary assessment was completed on the 30th August, 1951, i.e., more than 4 years after theend of the relevant assessment year, although within a year of the date of the issue of the noticeunder Section 34. The assessee contended that Section 34 as amended in 1948 was not applicable tothe company's case, as under Section 34, as it stoood before the amendment in 1948, asupplementary assessment could be made only within 4 years of the end of the assessment year,unless the assessee had concealed the particulars of its income or deliberately furnished inaccurateparticulars thereof. The present supplementary assessment was therefore barred. If, however,Section 34, as amended, be applicable, the supplementary assessment would be in time by reason ofthe first proviso to the present Section 34(3), but it was contended that Section 34 as amended in1948 was not retrospective and could not apply to a supplementary assessment for 1946-47. TheTribunal overruled this contention for the reasons given in paragraph 2 of its order.

5. The Income-tax Officer came to the conclusion that the information contained in the company'sletter dated 26th October, 1949, was not before the Income-tax Officer when he had made theoriginal assessment. In the case of investment companies the profits on realization of shares andsecurities must be treated to be revenue profits as sale of securities and shares formed an essentialfeature of the normal activities of such a company. The assessee itself admitted that the sale ofinvestment is a normal feature of the activity of the company. Under the circumstances the newinformation contained in the letter dated 26th October, 1949, makes it reasonable to believe thatprofits from sale of investments are assessable but had originally escaped assessment. Thecomputation of profits on realisation of shares and securities as made by the company had beenshown at Rs. 1,08,962. The total income was computed by the Income-tax Officer as under :

Rs. As. Ps.

I.

Interest on securities 5,453--0--0 II.

Business as per original assessment -- Rs. 83,430 Add Profits on realisation of shares andsecurities -- Rs. 1,08,962 1,92,392--0--0 O. S.

III.



(a) Dividends 3,23,719--0--0

(b) Remittances 1,665--0--0 Total income 5,23,229--0--0 I.T. @ 5 annas 1,63,509--1--0 Lesspaid as per original assessment 1,29,458--7--0 Tax now payable 34,050--10--0 C.T. @ 1 anna --Rs. 32,701--13--0 Less paid as per original assessment-- Rs. 25,891--11--0 6,810--2--0 Total taxpayable 40,860--12--0

6. On appeal by the company the Appellate Assistant Income-tax Commissioner, Calcutta, " A "Range, confirmed the assessment by his order dated September 28, 1951, as made by the Income-taxOfficer. The Income-tax Appellate Tribunal also by its order dated September 29, 1953, affirmed theorder passed by the department and the appeal by the company was dismissed. The reasons fordismissal of the appeal will be dealt with later.

7. In this reference Mr. Sukumar Mitra, the learned counsel appearing for the company, has urgedthe following points: (1) Neither Section 34(1)(a) nor Section 34(1)(b) is attracted as all the factsrelating to sale of shares had been disclosed to the Income-tax Officer making the originalassessment and no new facts since then came into existence. It is urged that the reconciliationaccounts (vide page 29 of the paper-book), which were produced before the Income-tax Officer atthe time of the original assessment, are clear enough to show that full disclosure had been made. (2)On the facts found or admitted this is a clear case of surplus not being taxable to income. It is alsourged that all the findings of fact made by the Tribunal are in favour of the assessee. (3) Therealisation of excess over tax on sale of shares are not the company's business profits inasmuch asunder the provisions of the memorandum of association of the company, there is no power to turnthem into account. The accounts, as presented, clearly go to show that the excess realisations weretransferred to the capital reserve account under Article 76 of the articles of association. As therealization of the excess by sale of shares was not transferred to the revenue account and as thedirectors could not use it for declaring dividends, the realisation of the excess cannot be consideredas an income liable to tax.

8. Mr. Pal, the learned counsel appearing for the respondent, urges that the contentions raised byMr. Mitra are not based on reasons as the asses-see's case can be repelled on two reasons, viz.,firstly, the assessee is an investment company. It holds shares, earns dividends and distributes themamongst its shareholders. It also changes the investments from time to time in its own interests. Thechange of investments is a part of its business and therefore the profit that it earns in changinginvestment is taxable. Secondly, he memorandum of association of the company clearly goes toshow that one of the independent objects of the company is to sell, manage, exchange, dispose of,turn to account or otherwise deal with, all or any part of the property and rights of the company. Ifby virture of this object the company earns a profit by sale of shares, it should be taxable.

9. These contentions raised by the parties will be discussed seriatim.

10. Mr. Sukumar Mitra, the learned counsel appearing for the applicant, does not press questionsNos. 1, 2 and 3 in view of the Supreme Court decision in Calcutta Discount Co. Ltd. v. Income-taxOfficer, District I, . Accordingly these questions need not be answered.



11. Question No. 4 deserves consideration with reference to the first argument of Mr. Mitra. It washis contention that neither Section 34(1)(a) nor Section 34(1)(b) is attracted as the facts relating tosale of shares had been disclosed to the Income-tax Officer making the original assessment and nonew facts since then came into existence. In this connection it has to be considered whether thereconciliation of capital reseive account submitted by the assessee with its return (vide annexure " C", page 29 of the paper-book) really disclosed the profits and gains derived from the sale of shares. Itmay be noted that the heading of the statement is " Reconciliation of Capital Reserve Account."Furthermore, it appears that an account as to reconciliation of investment at soth September, 1945,was placed before the Income-tax Officer, together with the original return for 1946-47. A copy ofthis document has been placed before us at the time of the hearing of arguments. The Tribunal wasof opinion that the manner in which the accounts were kept was such that an ordinary Income-taxOfficer would well be excused if it did not strike him to initiate such an enquiry. In the saiddocuments, the assessee did not disclose the profits in the profit and loss accounts. It was explainedby the company that it credited the whole of the sale proceeds to the investment account and whenthe whole holding (in that class of shares) was realised, it was transferred to capital reserve account.On these materials the Tribunal came to the conclusion that one result of this method was that theprofit transferred to capital reserve account was not necessarily the profit realisation of that year.Now, the Income-tax Officer, at the time of making assessment for 1949-50, was addressed a letterby the company on the 26th October, 1949. This letter according to the income-tax authorities wasan information on which the reopening of the assessment proceeding for 1946-47 could be done, asbeing an information received by the Income-tax Officer within the meaning of Section 34(1)(b). Therelevant portion of the letter runs as follows :

" Although the company does not deal in shares or securities, it is necessary and in fact essential thatchanges in investment be made from time to time. Shares which when purchased are regarded assound investments may in course of time or even in a comparatively short period cease to be soundinvestments for a company such as this or even if the investments are still attractive from the pointof view of security and yield, it may be considered desirable to change to some other investmentwhich is more attractive, or again it may be necessary to realise certain investments to provide fundsfor other requirements of the company. Thus, although the company does not deal in investments,realisations of investments are necessary from time to time......"

12. According to the income-tax authorities, the information contained in the above letter was notbefore the Income-tax Officer when he had made the original assessment. According to Mr. Mitrathe information contained in this letter was not required to be resorted to as full assessment mightbe made at the time of original assessment on the basis of the two documents stated above. In myopinion, these two documents do not prima facie go to show that there was any clear disclosure as toprofits made by the sale of shares. Clause (b) of sub-section (1) of Section 34, as amended in 1948,requires that the Income-tax Officer must have in possession information and in consequence ofsuch information he must have reason to believe that income has escaped assessment. This clausealso requires that the Income-tax Officer must have reason to believe in consequence of informationin his possession that income wholly or partially escaped assessment. The expression "if theIncome-tax Officer has reason to believe" suggests that the belief must be that of an honest andreasonable man based upon reasonable grounds and that the Income-tax Officer may act on direct



or circumstantial evidence but not on mere suspicion, gossip or rumour. It has been decided by theSupreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, . that twoconditions must be satisfied before the Income-tax Officer can act under Section 34(1)(b): he musthave information which comes to his possession subsequent to the making of the originalassessment order and that information must lead to his belief that income chargeable to tax hasescaped assessment, has been under-assessed or assessed at too low a rate and has been made thesubject of excessive relief. In a case arising out of the Agricultural Income-tax Act of Bihar, theirLordships of the Supreme Court, in Makarajadhiraj Sir Kameshwar Singh v. State of Bihar, , dealtwith the scope of Section 34 of the Income-tax Act which is similar to the appropriate provision inthe Agricultural Income-tax Act of Bihar and have approved of the previous decision of the.Supreme Court on this point. In Bhimraj Panna Lal v. Commissioner of Income-tax, [1957] 32 I.T.R.289, the Patna High Court decided, amongst others, that in order to enable an Income-tax Officer toinitiate proceedings under Section 34, it is enough that he, on the information which he has withhim and in good faith, considers that he has a good ground for believing that the assessee's profitshas for some reason escaped assessment or been assessed at too low a rate, so that a notice can beserved if the Income-tax Officer is bona fide of opinion that the income has escaped assessment.This decision of the Patna High Court was affirmed by the Supreme Court: vide Bhimraj Panna Lalv. Commissioner of Income-tax, .

13. Now, having considered the decisions set forth above it appears to me that reassessmentproceeding had to be resorted to under the provision of Section 34 on the basis of the informationcontained in the company's letter dated October 26, 1949, as the reconciliation of capital reserveaccount and the reconciliation of investments at soth September, 1945, were not sufficiently clear tothe Income-tax Officer at the time of original assessment for an overall consideration as to profitsfrom the sale of shares. Accordingly, the finding of fact based on materials on record made by theTribunal in this regard cannot be disturbed.

14. Mr. Mitra contends that the decision made in the reported cases stated above are entirelydissimilar to the facts of the present case and, therefore, the principles of law enunciated thereincannot be invoked in aid of the department. It may be true that the facts are dissimilar but it goeswithout saying that the principles of law as appearing therein were enunciated as to the true scope ofSection 34 of the Act and may suitably be applied to the present case. Before parting with this topic,an observation made by their lordships of the Supreme Court in Calcutta Discount Co. Ltd. v.Income-tax Officer, Companies District I, Calcutta, , may be quoted. It runs as follows:

"... if there was in fact some reasonable grounds for the Income-tax Officer to believe that there hadbeen any non-disclosure as regards any primary fact, which could have a material bearing on thequestion of 'underassessment', that would be sufficient to give jurisdiction to the Income-tax Officerto issue the notices under Section 34. Whether these grounds were adequate or not for arriving atthe conclusion that there was a non-disclosure of material facts was not open for the court'sinvestigation. In other words, all that was necessary to give this special jurisdiction was that theIncome-tax Officer had, when he assumed jurisdiction, some prima facie grounds for thinking thatthere had been some non-disclosure of material facts. It was the duty of the assessee, who wantedthe court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no



material at all before him for believing that there had been such nondisclosure. "

15. For these reasons questions Nos. 4 and 5 should be answered against the company.

16. The most important of the questions is question No. 6 and this need be considered in, its properperspective with reference to the facts as appearing in the paper-book and the law on the subject.

17. It has been indicated briefly before that the company is primarily an investment company andaccording to it the surplus of Rs. 1,08,963 arising out of the realisation of and/or change and/orconversion of investment is not income, taxable under the Act. In support of its contention thecompany referred to Article 76 of the articles of association of the company. The question whetherthe provision of the article should override the memorandum of association or should be treated asthe sheet-anchor of the company's case will be dealt with later. It runs as follows :

" All capital appreciations realised upon any sales or transpositions of the company's investments orrealisation of other capital assets shall be applied to capital purposes only, and may be appropriatedto meeting realised losses on sales or transpositions of or writing down investments or other capitalassets (either individually or in the aggregate) or be carried by the directors to a separate reserve tobe called the capital reserve. Sums carried and standing to capital reserve may be applied for any ofthe purposes to which sums standing to any reserve under the provisions of the last preceding articleare applicable, except and provided that no part of the capital reserve shall in any event betransferred to revenue account or regarded or treated as profits of the company available fordividend or be applied in paying dividends on any shares in the company's capital. "

18. The income-tax authorities as also the Tribunal were of the view that the company's letter dated26th October, 1949, was a clear pointer to the fact that the selling of shares was a part of thebusiness of the company. The company submitted to the income-tax authorities that it does not dealin shares but as a matter of fact deal with the shares and that the business of the company is toinvest the capital of the company in different bonds and stocks with the object of averaging risk andto divide the dividends and interest received. The income of the company is derived from dividendand interest of the company's investment and the company does not consider it a part of thebusiness to buy and sell stocks and shares with a view to make a profit and has never divided suchprofits amongst its shareholders. Such a stand was negatived by the income-tax authorities, as it wasstated in the letter dated 26th October, 1949, that although the company does not deal in shares orsecurities, it is necessary and in fact essential that changes in investments be made from time totime. According to the Tribunal the necessity is a business necessity for the company and not merelythe prudent man's motive to change an investment, if to hold on to it is likely to land him in loss.The following extract from the letter on which reliance has been placed by the Tribunal should bequoted in this connection as well:

" Shares which when purchased are regarded as a sound investment may in the course of time oreven in a comparatively short period cease to be a sound investment for a company such as this oreven if the investments are still attractive from the point of view of security and yield it may beconsidered desirable to change to some other investment which is more attractive or again it may be



necessary to realise certain investments to provide funds for other requirements of the company.Thus although the company does not deal in investments realisations of investments are neces saryfrom time to time. "

19. After discussing the case-laws, the Tribunal, however, came to a finding of fact, on whichreliance has been placed by Mr. Mitra, that the company did not carry on active trade in buying andselling shares, having regard to the volume or magnitude and frequency of the transactions. Thesales in each year were only to the tune of Rs. 1,00,000 to Rs. 4,00,000 or Rs. 5,00,000 out of thetotal holdings in the neighbourhood of Rs. 40,00,000. Some of the shares were held by theassessee-company for quite a number of years. Mr. Mitra contends that after making a finding offact like this the Tribunal ought not to have come to a conclusion that it was part of the duty of aninvestment company to its shareholders to watch and nurse its holdings in shares, to buy and sellthem so as to spread out risk in fluctuations of their prices and to ensure a steady and if possible anadequate return of its own shareholders and, therefore, the operations of buying and selling sharesare a necessary, essential and integral part of an investment company's business, if indeed, it is notits main business.

20. In the first instance it is necessary for us to examine a good number of case-laws cited by thelearned counsel for both the parties for a conclusion whether the findings arrived at by the Tribunalare sustainable in law. It has already been stated that the company has in support of this contentionrelied upon the provisions of Article 76 of the articles of association referred to above. The companyhas laid stress upon the fact that in terms of this article, all capital appreciations realised upon anysales or transpositions of the company's investments or realisations of other capital assets shall beapplied to capital purposes only, and that no part of the capital reserve shall in any event betransferred to revenue account or regarded or treated as profits of the company available fordividend. The crux of the whole case is whether excess realisation on the sale of shares should betreated as profits earned in the course of the company's business. Mr. Mitra contends in thisconnection that there is no clause that the profits earned by sale of shares can be turned intoaccount. If there was a clause that the profits should be transferred to the revenue account, directorscould use it for declaring dividends. In the absence of such a provision and on the specific provisionsas stated before, the profits cannot be appropriated towards dividends as it goes to the capitalreserve account. In order to appreciate Mr. Mitra's contention in this regard, let us in the firstinstance refer to Scottish Investment Trust Co. v. Forbes, (1893) 3 Tax Cas. 231, 234, 235. In thiscase the Lord President observed as follows:

" As its name indicates, this is an investment company, and the memorandum makes it plain that itsprofits are to be derived from various operations relating to the investments. The third head of thememorandum professes to state the objects of the company, and in head (6) of this enumerationoccur the words ' to vary the investments of the company, and generally to sell, exchange, orotherwise dispose of, deal with, or turn to account any of the assets of the company'."

" It is true that the doing of any of these things might be incidentally necessary in the conduct of thebusiness of any company. It is also true that this memorandum states in the latter heads of the samearticles several things which are less properly described as objects of a company than as incidental



acts of administration. But from the structure of the memorandum it appears that varying theinvestments and turning them to account are not contemplated merely as proceedings incidentallynecessary, for they take their place among what are the essential features of the business. In my viewsuch speculations are among the appointed means of this company's gains. Accordingly, I shouldconsider it legitimate for the directors to divide profits so made, although in determining theamount divisible they would necessarily have regard, not alone to the individual transaction yieldingprofit, but to the general results of their changes of investments . . . My view of this company is,therefore, that its position in the present question is entirely distinguished from that of a privateindividual or an ordinary trader. Accordingly, I think that it is wrong in its contention that increaseson realisation of stocks of the company are capital sums, and therefore not liable to assessment forincome tax."

21. Mr. Pal appearing for the respondent, Commissioner of Income-tax, has submitted that theabove reported decision may be invoked in aid of the respondent as there are certain provisions inthe memorandum of association of the assessee-company to the effect that the profits derived byrealisation of excess price might be turned into account. It will be discussed later on whether thesubmission made by Mr. Pal is correct. At the next place, it is necessary to refer to other decisionsplaced before us. In the oft-quoted case of Californian Copper Syndicate v. Harris, (1904) 5 Tax Cas.159, 165-166, it was decided that the difference between the purchase price and the value of theshares for which the property was exchanged is a profit assessable to income-tax. The facts are that acompany formed for the purpose, inter alia, of acquiring and reselling mining property, afteracquiring and working various properties, resells the whole to a second company, receiving paymentin fully paid shares of the latter company. Lord Justice Clerk observed that:

" It is quite a well-settled principle in dealing with questions of assessment of income tax, that wherethe owner of an ordinary investment chooses to realise it, and obtains a greater price for it than heoriginally acquired it at, the enhanced price is not profit in the sense of Schedule D of the IncomeTax Act, 1842, assessable to income tax. But it is equally well established that enhanced valuesobtained from realisation or conversion of securities may be so assessable, where what is done is notmerely a realisation or change of investment, but an act done in what is truly the carrying on, orcarrying out, of a business. The simplest case is that of a person or association of persons buying andselling lands or securities specula-tively, in order to make gain, dealing in such investments as abusiness, and thereby seeking to make profits. There are many companies which in their veryinception are formed for such a purpose, and in these cases it is not doubtful that, where they makea gain by a realisation, the gain they make is liable to be assessed for income tax.

What is the line which separates the two classes of cases may be difficult to define, and each casemust be considered according to its facts ; the question to be determined being--Is the sum of gainthat has been made a mere enhancement of value by realising a security, or is it a gain made in anoperation of business in carrying out a scheme for profit-making ? "

22. The case of Imperial Tobacco Co. (Great Britain and Ireland) Ltd. v. Commissioners of InlandRevenue, (1943) 25 Tax Cas. 292, has also been referred to us by the learned counsel. The ImperialTobacco Company, as appearing in this case, carried on the business of tobacco manufacture, for



which large quantities of tobacco leaf were purchased in the United States, where the companymaintained a large buying organisation. To finance the purchases and the expenses of thisorganisation the company bought dollars in the United Kingdom through its bankers who remittedthem to banking accounts of the company in the United States, and it was the practice of thecompany to accumulate large holding of dollars each year before the leaf season commenced. Thecompany never paid dollars for the purpose of resale as a speculation. On the outbreak of war, inSeptember, 1939, the company stopped all further purchases of tobacco leaf in the United States,with the result that it had on hand a holding of dollars which had accumulated in the meantime. Thecompany was compelled to sell its surplus dollars to the treasury and the sale resulted in a profit forthe company. This profit was included in assessment upon the company to income-tax. On suchfacts, it was held that the profit made by the company on the compulsory sale of surplus dollars tothe treasury must be included in the computation of the profits of its trade for income-tax andnational defence contribution purposes. The facts as stated in this case are dissimilar to those of theinstant case and Mr. Mitter contends that the sale of dollars by compulsion stands on a differentfooting altogether. Mr. Mitter also contends that the facts of the Privy Council case, PunjabCo-operative Bank Ltd. v. Commissioner of Income-tax, [1940] 8 I.T.R. 635 (P.C.), relied upon bythe respondent, are also dissimilar to the facts of the instant case and, therefore, the principle of lawenunciated there cannot also be resorted to for the purpose of deciding this case. In this case theirLordships of the Privy Council were called upon to consider whether the profits and sales ofinvestment held by a company would be liable to tax. In this case the bank realised some of itssecurities in order to make withdrawals by depositors and that was a normal step in carrying on thebanking business, Their Lordships held that the amount realised on the sale of the securities overtheir cost price was taxable as a part of the profits of the business of the bank. It was contendedbefore their Lordships that the selling of securities was not part of the business of the bank and tomake a profit thereby. The sale of investment was merely incidental to the administration of thecompany and any profit made by such sales was no more assessable than if the profit had been madeby sale or investment held by a private individual. Their Lordships of the Privy Council negativedthis contention and came to the conclusion that such sales by a bank, which resulted in a profit, weresales conducted in carrying on their business. The facts appearing in this reported decision are nothowever similar to the facts of the present case, but the principle of law decided by the Privy Councilshould be carefully considered in deciding this case.

23. Most of the aforesaid decisions were considered by our court in Sardar Indra Singh & Sons Ltd.v. Commissioner of Income-tax, [1951] 19 I.T.R. 1. The decision in this case which was affirmed bythe Supreme Court in Sardar Indra Singh & Sons Ltd. v. Commissioner of Income-tax, . appears tobe a guiding principle for deciding the instant case. The head-note runs as follows :

" Even if a company is not carrying on the business of buying and selling securities, profits from thesale of securities are taxable if the sale of such securities is a normal step in carrying on the businessof the company or is an act done in what is truly the carrying on of such business.

Profits realised on a change of investment simpliciter are not taxable. But if the change ofinvestment was necessary and was in fact made for the purpose of and was an act done in normallycarrying on the business of the company, then 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.

Before it can be held that a profit arises from a transaction which forms part of a company'sbusiness it must be shown that the company was not only entitled to enter into that transactionunder its memorandum of association but the transaction was part of the business which it carriedon or was an essential or normal step in conducting its business. The objects stated in thememorandum of association are not conclusive. Essential features of the business actually carriedon by the company must be regarded and distinguished from what may be called incidental acts ofadministration. "

24. Various other cases have deen cited before us by the learned counsel for both the parties, viz., (a)Radio Pictures Lid. v. Commissioners of Inland Revenue, (1938) 22 Tax Cas. 106 (commonly knownas Dollar case ); (b) Dunn Trust Ltd. v. Williams, (1950) 31 Tax Cas. 477; (c) Henry Briggs Son & Co.Ltd. v. Commissioners of Inland Revenue, [1961] 1 All E.R. 220 ; 39 Tax Cas. 410. It is unnecessaryto deal with these decisions for avoidance of repetition of the analogous principles of law stated inthe foregoing paragraphs.

25. Mr. Pal has also referred to us the Supreme Court case (Karanpura Development Co. Ltd. v.Commissioner of Income-tax, ). Their Lordships were dealing with the question whether ownershipof property and leasing it out may be done as a part of a business, or it may be done as land-owner.Their Lordships found whether it is the one or the other must necessarily depend upon the objectwith which the act is done. It is not that no company can own property, and enjoy it as a propertywhether by itself or by giving the use of it to another on rent. Where this happens, the appropriatehead to apply is " income from property", even though the company may be doing extensivebusiness otherwise. But a company formed with the specific object of acquiring properties not with aview to leasing them as property but to selling them or turning them to account even by way ofleasing them out as an integral part of its business, cannot be said to treat them as land-owner, butas trader. In deciding whether a company dealt with its properties as owner, one must see not to theform which it gave to the transaction but to the substance of the matter.

26. Lastly, in this connection, the case of Commissioner of Taxes v. Melbourne Trust Ltd., [1914]A.C. 1001 (P.C.), may also be referred to as pointed out by Mr. Pal. The appeal arises from Australiaand in this case, the decision made in Californian Copper Syndicate Ltd. v. Harris, (1904) 5 Tax Cas.159, was followed. Their Lordships decided, inter alia, that in the present case the whole object ofthe company was to hold and nurse the securities it held and to sell them at a profit whenconvenient occasions present itself. In making this decision their Lordships of the Privy Councilfound that there was ample evidence that the company is a trading company and that the surplusrealised by it by selling the assets at enhanced price is a surplus, which is taxable as profits.

27. Having considered the decisions discussed above it is necessary for us to answer question No. 6on the following points:

(1) Whether the transaction of sale was a part of the business which the company carried on or wasan essential or normal step in conducting this business ?



(2) Whether the essential transactions actually carried on by the company in the matter of sale ofshares should be considered as incidental acts of administration ?

(3) Whether the profits arising from the sale of shares should be brought into revenue account ?

28. All these points should be dealt with together. Before dealing with the matters, it is profitable torefer to the observations of Lord Justice Clerk in Californian Copper Syndicate case quoted in theforegoing paragraphs. It seems to be clear that where the property sold is a capital investment or acapital asset, there is an accretion of capital, for the sale proceeds represent capital in another form;where, on the other hand, the sale is in the course of business or trade the profit is on the revenueaccount.

29. On a consideration of the decisions and the materials placed before us we are of opinion that theTribunal arrived at a correct decision that the sale of shares was effected in the course of businessand, therefore, the profits earned thereby was liable to tax.

30. In deciding as to whether the company in the present case has merely enhanced the value byrealising the securities or it was treated as a gain made in an operation of business in carrying out ascheme for profit-making, the relevant provisions of the memorandum of association delineatingthe objects of the company should also be looked into. The company has taken its stand on Article76 of the articles of association quoted before. It has been argued on behalf of the company that byvirtue of this article all capital appreciations realised upon any sales or transpositions of thecompany's investments or realisations of other capital assets shall be applied to capital purposesonly. If this article prima facie be treated to be one of the objects of the company there is, however,much force in the contention raised by Mr. Mitra. Mr. Pal, however, argues that this article cannotbe treated or construed to be an object of the company inasmuch as the articles of association aredrawn up for the guidance of the company and for carrying on its internal administration. Thiscannot in any way supersede the memorandum of association which actually deals with the objectsof the company. Accordingly, in the first instance, the provisions of the memorandum of associationshould be examined.

31. Clause 3 of the memorandum of association runs as follows:

" The objects for which the company is established are (and it is expressly declared that the severalsub-clauses of this clause and all the powers thereof are to be cumulative and in no case is thegenerality of any one sub-clause to be narrowed or restricted by any particularity of any othersub-clause, nor is any general expression in any sub-clause to be narrowed or restricted by anyparticularity of expression in the same sub-clause or by the application of any rule of constructionejusdem generis or otherwise) . . . ."

32. It has been argued that the words in the parenthesis in this clause cannot be treated to be theguiding factor in understanding the main objects of the company, as the main objects have beendescribed in Sub-clause (b) which should govern the subsequent sub-clauses. On a scrutiny of thewords in the parenthesis it appears that the sub-clauses in the memorandum are cumulative, i.e.,



composed of parts each being unrestricted or narrowed by the other and the rule of construction ofejusdem generis is barred. As the memorandum of association of the company sets out its objects indifferent sub-clauses untrammelled by each other, it seems to us that each of the sub-clauses has tobe independently considered for understanding the several objects of the company. It has alreadybeen stated that the company took the stand that it never dealt in shares but in terms of Clause (b)of the memorandum of association, which is attempted to be interpreted as the main clause, thecompany is to acquire and hold and otherwise deal with shares, etc. From Clause (b) it undoubtedlyappears clear that one of the objects of the company was such, but in this connection the followingimportant sub-clauses may also be quoted as pointed out by Mr. Pal;

" (ff) To sell, manage, exchange, dispose of, turn to account, or otherwise deal with, all or any part ofthe property and rights of the company.

(jj) To do all such other things as are incidental or conducive to the attainment of the above objects."

33. The provision in Sub-clause (ff) is clear enough to show that one of the objects of the companywas to sell and turn into account property, which, in the instant case, includes shares. It has alreadybeen stated that in terms of the words in the parenthesis of clause 3, the application of the rule ofconstruction of ejusdem generis has been barred and, therefore, it is clear that Sub-clause (ff)cannot be read subject to the provision contained in Sub-clause (b). Accordingly, we are of opinionthat the decision in Scottish Investment Trust Co. v. Forbes, (1893) 3 Tax Cas. 231, quoted beforemay have application to the instant case. In that case also it appears that in the memorandum therewas a provision to vary the investments of the company and generally to sell, exchange or otherwisedispose of, deal with or turn to account, any of the assets of the company. Such a provision in theinstant case may be found in Sub-clauses (b) and (ff) quoted above. As regards the interpretation ofthe sub-clauses in the memorandum of association, Mr. Pal has referred us to Palmer's CompanyLaw, 20th edition, at page 88. In the instant case it has already been pointed out what thememorandum declared in Clause 3. Accordingly, whether any given transaction is or is not withinthe powers of a company is a question of law depending on the construction to be placed on theobjects clause of the memorandum of association. If a question arises whether a transaction is or isnot within the powers of the company, it has to be inferred from its objects and the objects of theclauses should be scrutinised for finding out the meaning thereof. One of the conditions ofinterpretation of the memorandum of association is that the ejusdem generis rule and the maximexpressio unique est exclusio alterius are also at times applicable. The relevant extract fromPalmer's Company Law is as follows (vide page 88):

" A special rule of construction has in some cases been applied where the objects of a company areexpressed in a series of paragraphs, and one paragraph (commonly the first) appears to embody themain or dominant object of the company, and all the other paragraphs have been treated as merelyancillary to this main object, and as limited and controlled thereby.

Sometimes the memorandum declares the intention to be that the objects specified in eachparagraph of the clause shall, except where otherwise expressed in such paragraph, be in no wiselimited 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 ofconstruction, 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 asincidental to the main object. But an object showing the intention to operate in one place may notexclude the object of operating elsewhere;..."

34. By applying this principle of construction as appearing in the second paragraph of the quotationmade above, it appears to us that Sub-clauses (b) and (ff) should be treated as envisagingindependent objects of the company and Sub-clause (ff) should not be treated as being governed bySub-clause (b) which specifically provides that the company has to deal with shares and not deal inshares, by virtue of the words in parenthesis in Clause (3) of the memorandum. To be more preciseit may be said that each of the objects in the sub-clauses has to be read in isolation and not asancillary to or limited or controlled by Sub-clause (b) and that, on that construction, Sub-clauses (ff)aud (jj) are wide enough to cover the transaction of sale of shares as one of the objects of thecompany and it cannot be considered as an incidental act of administration.

35. Articles of association are drawn up for the purpose of internal administration of the businessand cannot supersede the objects as set out in the memorandum of association. Article 76 relates tocapital appreciation only and does not in any way restrict the operation of the objects clauses givenin the memorandum of association. Accordingly, the contention of the company that this article isoperative, in so far as this case is concerned, cannot be accepted.

36. After considering all the matters placed before us and hearing the learned counsel of both thesides it appears that the contention as raised by Mr. Pal, that the profits by sale of shares for twoalternative reasons given by him are taxable, must prevail.

37. The result of the discussions made above may be summed up as follows;

(1) It is admitted by the assessee-company that shares, which, when purchased are regarded as asound investment, may in the course of time or even in a comparatively short period cease to be asound investment for a company such as this or even if the investments are still attractive from thepoint of view of security and yield, it may be considered desirable to change to some otherinvestment which is more attractive or again it may be necessary to realise certain investments toprovide funds for other requirements of the company. This admission shows that the change ofinvestment was necessary and was in fact made for the purpose of and was an act done in thenormal carrying on of the business of the company. Accordingly, what was done by theassessee-company was not merely a realisation or change of investment, but an act done, in what istruly the carrying on or carrying out of the normal business of the company. This being the position,it appears clear, as argued by Mr. Pal, that if profits really accrued in connection with the carryingon or carrying out of the said business that must be taxable under the appropriate law.

(2) Apart from the above consideration the profits made on account of sale of shares is liable to taxby virtue of the words used in the parenthesis in Clause (3) of the memorandum of association. The



words in the parenthesis expressly connote that each of the clauses as mentioned in thememorandum of association is independent of and isolated from each other and, therefore, theClause (ff) which provides for selling, managing, exchanging, disposing of, turning to account orotherwise dealing with all or any part of the property and rights of the company, is a clear pointer tothe fact that selling of shares and turning to account is one of the objects of the company. When thisclause is considered to be an independent one, it appears clear that selling of shares and turning toaccount is also an object of the firm for carrying on or carrying out the normal business as appearingfrom the facts and circumstances of the case and therefore the profits arising out of sale of sharesunder this clause also are liable to tax.

38. It will appear that the transfer of profits has been made to the capital account and, as such, itwas urged that it should be treated as an incidental act of administration. In our opinion such atransfer does not in any way take the profits out of the ambit of the taxation laws as it is no businessof the taxing authorities to consider how the profits were spent and how they were dealt with by thecompany.

39. In the result, our decision is that the company's holdings and stocks and shares partake of thenature of circulating capital and any realisation of excess over costs and sales thereon are thecompany's business profits chargeable to income-tax.

40. Our answers to the questions are as follows :

Questions Nos. 1, 2 and 3: They do not require any answer, the questions not having been pressed.

Question No. 4 : No. Question No. 5 : Yes.

Question No. 6 : Yes.

41. The applicant shall pay the costs to the respondent.

Sankar Prasad Mitra, J.

42. I agree.




Documents

Birds Investments Ltd. vs Commissioner of Income-Tax on 23 July, 1963