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TMI Blog1950 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... peration or work commonly carried on or undertaken by bankers, capitalists, promoters, financiers, concessionaires, contractors, merchants, managers, managing agents, secretaries and treasurers. To purchase or otherwise acquire, and to sell... stock, share.............business concerns and undertakings. To invest and deal with the moneys of the company not immediately required for the company's business upon such securities and in such manner as may from time to time be determined. 4. The Tribunal have found that during all material times the company carried on inter alia the following business :- (1) Managing agents of the Indian Steel and Wire Products, Ltd. (2) Managers of the Assam Bengal Cement Co., Ltd., as the con trolling shareholder of the Eastern Corporation, Ltd., who were the managing agents of the Assam Bengal Co., Ltd. (3) Secretaries and treasurers of the Khandesh Spinning and Weaving Mills, Ltd. (4) Financiers of the Jamshedpur Engineering and Machine Manufacturing Co., Ltd., a company in which Sir Indra Singh and his sons have a controlling interest. (5) The Aira Sugar Factory owned by the company. The company acquired by tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Wire Products Limited and the Assam Bengal Cement Co., Ltd., and other allied concerns. 10. It is found that during the accounting year 1938-39 the company made a loss of ₹ 3,22,221 on the sale of Indian Iron and Steel Company Limited shares acquired in the two immediately preceding years. But in the following two accounting years the company made profits on the sale of certain shares and such profits amounted to ₹ 4,28,398 in the accounting year 1939-40 and ₹ 4,63,255 in the accounting year 1940-41. These amounts were made the subject of an assessment of tax for the years 1940-41 and 1941-42 respectively. They were taxed as profits and gains of the company from their business of dealing in shares. 11. The Tribunal after considering all the facts came to the following conclusions : - (a)That the company had been financing and promoting the business of other companies and for this purpose it had to vary its holdings from time to time. (b)That the company carried on the business of financiers which was one of the objects mentioned in the memorandum of association. (c)That the above profits realised by the company were taxable as profits of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion had power to vary its investments and generally to sell or exchange any of its assets, the net gain by realising investments at larger prices than were paid for them constituted profits chargeable with income-tax. At page 234, the Lord President observed :- As its name indicates, this is an investment company, and the memorandum makes it plain that its profits are to be derived from various operations relating to the investments. The third head of the memorandum professes to state the objects of the company, and in head (6) of this enumeration occur the words' to vary the investments of the company, and generally to sell exchange or otherwise 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 the business of any company. It is also true that this memorandum states in the latter heads of the same article several things which are less property described as objects of a company than as incidental acts of administration. But from the structure of the memorandum it appears that the varying the investments and turning them to account are not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price which they paid at the better time is income within the meaning of the Act. I do not think it is at all. It is no more so in the case of a trader's income than in the case of a private individual selling his house at more than he had paid for it, or selling his carriage or pictures at more than he paid for them. That is not income in any sense; while a dealer in pictures, like a dealer in goods or a dealer in the buying and selling of houses, who made it a trade, would then come within the region of income-tax . 17. Mr. Mitter strongly relied on the observations which I have cited and contended that it was no part of the business of the assessees to buy or sell shares and that the present case was similar to that envisaged by Lord Young of a company selling its old premises at a profit and buying a new site and building new buildings with the proceeds. 18. In Californian Copper Syndicate v. Harris [1904] 5 Tax Cas. 159 the facts were that a company formed for the purpose, inter alia, of acquiring and reselling mining property, acquired and worked various property and resold the whole to a second company receiving payment in fully paid shares of the latter comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artly in payment of dividends and partly in reduction of capital. The Court of Appeal held that the proceeds of the sales of the lands so granted were not profits or gains derived by the company from carrying on a trade of dealing in land, and were not assessable to income-tax. At page 437, Farwell, L. J., observed : - The question in this case, therefore, is : Do the Hudson's Bay Company carry on a trade in buying and selling land by which they have made a profit ? The Commissioners have found the facts, and have drawn the inference negativing this question. In my opinion the point whether they were right or wrong in drawing this inference is one of law and is appealable................... A landowner in England may establish a game farm on part of his estate and make profits thereby which would be liable to income-tax, and he may also sell parts of his estate for building purposes, but his trade as a game farmer does not bring his sales as a landowner within the Income Tax Acts ; and I see no difference in this respect between his position and that of the company. The profits realised from the sales of the assessees' properties were held in this case not l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement of its surplus funds. Those funds were, in fact, invested only in British Government securities, the holdings of which were varied from time to time. During the years 1921 to 1923 profits arising to the company on the sale of investments were carried to investment reserve account. After 1924 the investment reserve account became merged in a general reserve account; profits from sales of investments were carried to revenue account, and allocations out of revenue account exceeding the profit on realisation of investments were made to the general account. The profit arising from the realisation of investments was taxed and on appeal the Commissioners held that the profit in question was not a trading profit. A Scottish Court held that there was evidence upon which the Commissioners could arrive at the conclusion of fact that the profit was not a trading profit. 24. It might be suggested that this decision can no longer be regarded as good law by reason of the decision of their Lordships of the Privy Council in Punjab Co-operative Bank Limited, Amritsar v. Commissioner of Income-tax, Lahore [1940] LR 67 IA 464; 8 ITR 635. However, the basis of the decision in Scottish Auto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called in, but it may be very undesirable to use this second line of defence. If, as in the present case, some of the securities of the bank are realised in order to meet withdrawals by depositors, it seems to their Lordships to be quite clear that this is a normal step in carrying on the banking business, or, in other words that it is an act done in 'what is truly the carrying on' of the banking business. The profit from the sale of securities, therefore, may be taxable though the assessee is not carrying on the business of buying and selling such securities. If the sale of such securities is a normal step in carrying on the business of the assessee or is an act done in what is truly the carrying on of such business then the profits from such sales would be liable to tax. 28. As I have said earlier the Appellate Tribunal was of opinion that the sales of shares giving rise to the profit sought to be taxed in this case were sales which were normal steps in carrying on the business of this company. But Mr. Mitter on behalf of the assessee has strenuously contended that it was no part of the business of the assessees to buy and sell shares or securities and further th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely a change of investment. The assessees were clearly carrying out such transactions as part of their business and the shares or securities which they held were the means which enabled them to carry on such a business. The Appellate Tribunal was of opinion that the transaction in the sale and purchase of the shares in the Assam Bengal Co. Ltd. was an instance of financing or promoting that company. In my view it was an instance of providing capital for that company by taking up a large block of unissued shares and further it was done with the purpose of obtaining such an interest in that company as would further its business as managing agents and financiers. 32. Mr. Mitter on behalf of the assessees concedes that the purchase of the shares of the Bengal and Assam Cement Co. Ltd. was made with a view to obtaining control over that company and to obtaining the works of managing agents of the company. But he has contended that even if such was the case it was a purchase not made in the course of the assessees' business and as part of the assessees' business. It was nothing more, according to Mr. Mitter, than a change of investment, and that the change was made with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case was wrongly decided. It may be that all the reasons given by Manohar Lall, J., are not sound but the decision rests upon the finding that the sale of the securities was a part of the business of the assesses and was made with a view to increasing the profits of the assessees. It appears to me quite clear that if it was part of the business of the assessees to sell these securities then the profits on such sale would be taxable. Further, the profits would be taxable, even if the assessees did not carry on the business of buying and selling shares, if the sale of the shares was regarded as an essential step in carrying on the trade or business or a normal step in conducting their business. 37. The Income-tax authorities laid great stress on the fact that the memorandum of association of this company empowered it to carry on the business of promoters, financiers and to sell stocks and shares and to invest the money of the company in new securities. Though the existence of such powers in the memorandum of association is important it is not by any means conclusive. I do not think it can possibly be held that if a company is entitled to do something under its memorandum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the Tribunal has not based its finding on the existence of such powers in the memorandum. It has based its finding on the course of business of this company. The Tribunal has held that the assessees were dealing with the securities which they possessed in order to promote other companies and to further their interests as managing agents. They were selling their shares and buying new securities as a part of their business. What they were doing when they were selling shares was a normal part of their business and the selling of shares could, I think, be said truly to form part of their business. 39. It is pointed out by the Appellate Tribunal that the assessee company was borrowing on a large scale and advancing sums borrowed to other undertakings. The state of the loan and overdraft account is set out in paragraph 10 of the case stated and between 1935 and 1939 the loan and overdraft account fluctuated between ₹ 9,83,000 and ₹ 30,55,700. The company also was accumulating large sums by way of profits and its accumulated profits between 1935 and 1939 rose from ₹ 1,39,075 to ₹ 17,04,013-1-9. Further the company was holding a large number of shares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company. (iv)to deal in bills, notes and other negotiable or transferable securities or documents. 43. It is true that in order to ascertain the scope of the business the company was carrying on, the objects stated in the memorandum of association are not conclusive. Essential feature of the business actually carried on by the company must be regarded and distinguished from what may be called incidental acts of administration. 44. The profit which is sought to be taxed in this case was derived from sale of investments at a price in excess of the amount paid therefore. The question is whether the profit made on such realisation is taxable. 45. The Tribunal held on the facts that the company had been financing and promoting the business of other companies, and for this purpose, it had to vary its holdings from time to time. The Tribunal also held that there was ample evidence to show that the company had in fact carried on the business of financiers. They also found that the evidence pertaining to the financing transactions of the company during the relevant accounting years clearly established that the realisation of profits on investments was directly referable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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