JUDGMENT
Harries, C.J.
1 This is a reference under Section 66, Income-tax Act, made by the Income-tax Appellate Tribunal at the instance of the assessees. The following question has been formulated for the opinion of the Ct. : "In the facts and circumstances of the case, is the surplus realised by the Co. on the sales of shares & Securities a taxable income ?" 2. The assessees Messrs Indra Singh & Sons Ltd. are a private limited Co. incorporated under the Companies Act. It was incorporated in the year 1935 & sometime later it took over from Sardar Sir Indra Singh & Sons the Managing Agency of a Co. known as the Indian Steel and Wire Products Ltd. The memorandum of association of this Co. contained among others the following objects : To carry on & undertake any business, transaction operation or work commonly carried on or undertaken by bankers, capitalists, promoters, financiers, concessioners, contractors, merchants, managers, managing agents, secretaries & treasurers. To purchase or otherwise acquire, & to sell ....... ......stocks, shares.........business concerns and undertakings. To invest & deal with the moneys of the Co. not immediately required for the Co.'s business upon such securities & in such manner as may from time to time be determined.
3. The Appellate Tribunal have found that during all material times the Company carried on inter alia the following businesses : (1) Managing Agents of the Indian Steel & Wire Products Ltd. (2) Managers of the Assam Bengal Cement Co. Ltd., as the controlling shareholder of the Eastern Corporation Ltd. who were the Managing Agents of the Assam Bengal Co. Ltd. (3) Secretaries & Treasurers of the Khandesh Spinning & Weaving Mills Ltd. (4) Financiers of the Jamshedpur Engineering & Machine Manufacturing Co. Ltd., a Co. in which Sir Indra Singh & his sons have a controlling interest. (5) The Aira Sugar Factory owned by the Co. The Co. acquired by transfer from Sir Indra Singh various shares & securities in the Indian Steel & Wire Products Ltd., the Indian Iron & Steel Co., the Tata Iron & Steel Co. Ltd. & the Tata Power Supply Co. Ltd. In the year 1937-38 the assessee Co. as share-holder of the Indian Iron & Steel Co. Ltd., acquired a large number of right, shares & debentures in the Steel Corporation of Bengal Ltd. In the years 1937-38 & 1938-39 the assessee Co. acquired principally by allotment the following shares : 1937-38 : 83,000 ordinary shares valued at Rs. 1,24,500. 1,38,000 deferred shares valued at Rs. 1,58,000 of the Assam Bengal Cement Co. Ltd. 22 shares of the Eastern Corporation Ltd., the managing agents of the Assam Bengal Cement. Co. Ltd., valued at Rs. 2,200. 1938-39 : 50,000 ordinary shares valued at Rs. 2,72,500 of the Assam Bengal Cement Co. Ltd., 1,000 shares of the New Standard Bank Ltd., valued at Rs. 10,000. In the accounting year 1936-37 the assessee Co. sold 1,940 ordinary shares & 4,785 deferred shares of the Indian Steel & Wire Products Ltd.
4. In the accounting year 1938-39 the assessee Co. sold all its holdings in the Indian Iron & Steel Co. Ltd. except 520 shares, at a loss of Rs. 3,22,221. The sale realised the sum of Rs. 2,75,505 & the assessee Co. paid Rs. 2,82,500 for the first instalment of the above mentioned shares of the Assam Bengal Cement Co. Ltd.
5. From the findings of the Appellate Tribunal it is clear that the whole of the proceeds of the sale of the Indian Iron & Steel Co. Ltd.’s share was utilised for payment of the first instalment of the shares taken up by the assessees in the Assam Bengal Cement Co. Ltd. During the accounting year 1939-40 the assessee Co. sold 3,500 ordinary shares & 750 deferred shares of the Steel Corporation of Bengal & realised a profit of Rs. 17,173-12-0. It also sold 10,000 ordinary shares & 850 deferred shares in the Indian Steel & Wire Products Ltd. & made a profit of Rs. 4,11,225. The total proceeds of these sales amounted to Rs. 7,67,224. During the same period the assessee Co. paid Rs. 6,23,000 for the shares of the Assam Bengal Cement Co. Ltd. acquired by it. The Co. from time to time, made considerable advances of money to the Indian Steel & Wire Products Ltd. & the Assam Bengal Cement Co. Ltd. & other allied concerns.
6. It is found that during the accounting year 1938-39 the Co. made a loss of Rs. 3,22,221 on the sale of Indian Iron & Steel Co. Ltd., shares acquired in the two immediately preceding years. But in the following two accounting years the Co. made profits on the sale of certain shares & such profits amounted to Rs. 4,28,398 in the accounting year 1939-40 & Rs. 4,63,225 in the accounting year 1940-41. These amounts were made the subject of assessment of tax for the years 1940-41 & 1941-42 respectively. They were taxed as profits and gains of the Company from their business of dealing in shares.
7. The Tribunal after considering all the facts came to the following conclusions : (a) That the Co. 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 Co. 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 Co. were taxable as profits of the business carried on by the assessees. In that view the Tribunal thought it was unnecessary to decide whether the profits were taxable as profits and gains of the Co. from a business of dealing in shares.
8. Mr. Mitter who has argued this case ably and fully on behalf of the assessees, has contended that the profits from the sale of the shares held by the assessees could not be taxed. His contention was that these transactions referred to by the Appellate Tribunal were nothing more than changes of investments and if any profit was made by the sale of investments with a view to changing the nature thereof such would not be taxable because the profit from such sales was not made by the assessees in carrying out their business. On the other hand, it was contended by Dr. Gupta on behalf of the Income-tax authorities that the profits made by the sales of these investments were profits made in the course of the business of the assessees and therefore were taxable.
9. It appears that both the Income-tax Officer and the Appellate Assist. Commr. were of opinion that the assessee Co. carried on a business in purchasing and selling shares and that the profits now sought to be taxed were profits resulting from the carrying on such business.
10. The Appellate Tribunal, however, did not find that the profits were made from carrying on a separate business of buying and selling shares. The Tribunal, however, was of opinion that the assessees carried on the business of financiers which was one of the objects mentioned in Clause 3 (1) of the Memorandum of Association, & as the profits realised on investments were directly referable to carrying on this business of financing the assessees were liable to pay tax on these profits. The Tribunal relied upon an observation of Lord Maugham in the case of the Punjab Co-operative Bank Ltd., Amritsar v. Commr. of Income-tax, Punjab and the case of Dalmia Cement, Ltd. v. Commr. of Income-tax Bihar & Orissa . There can be no doubt that if these profits were realised merely by a sale of shares in order to effect a change of investments the profits would not be taxable as they were not the profits and gains of a business.
11. In the Scottish Investment Trust Co. v. Forbes, (1891-98) 3 Tax Cas. 231, it was held that in the case of an Investment Trust Co. which by its Memorandum of Association had powers 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 p. 234 the Lord President observed :
“As its name indicates, this is an Investment Co., 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 articles 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 the varying the investments and turning them to account are not contemplated merely as proceedings incidentally necessary, for they take their place among what are the essential features of the business. In my view, such speculations are among the appointed means of this Company’s gains. Accordingly, I should consider it legitimate for the directors to divide profits so made, although in determining the amount divisible they would necessarily have regard, not alone to the individual transaction yielding profit, but to the general results of their changes of investments.”
12. It will be seen from this case that the Lord President held that the profits were taxable because the selling of the investments concerned were not acts merely incidental to the administration of the Co. The selling of investments formed an essential feature of the business or in short, it was part of the business which they carried on & the profits made by such sales were, therefore, taxable.
13. The point was again considered in another Scotch case, Assets Co. Ltd. v. Forbes, (1891-98) 3 Tax Cas. 542. At p. 548, Lord Young observed :
“I should say that I have really no doubt that any person, or any Co. making a trade of purchasing & selling investments, will be liable in income-tax upon any profit which is made by that trade. It is quite an intelligible business, just as intelligible as a trade consisting in the purchase & sale of goods in ordinary trade of a merchant or shopkeeper. The trade is good or bad according as it is carried on profitably or not, in purchasing goods at the trader’s price & in selling them at a retail price, or wholesale price, or larger price than that which he paid for them ; & the profit or loss on his business consists in selling them at a profit or not. But it is another proposition altogether that, where that is not a trade, a gain or loss upon the purchase & re-sale of property comes within the meaning of the Income-tax Acts. Take even proper traders ; if proper traders sell their old premises & buy new ones, & sell the old premises at a higher price than they paid for them, investing in the purchase of the site & the erection of new premises the price which they got, I should say it was a totally untenable proposition that anything in excess of what they had paid for the old premises, perhaps 20 years before, and which they got at a better time, that any excess upon 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 had 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 & selling of houses, who made it a trade, would then come within the region of income-tax.”
14. 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 Co. selling its old premises at a profit and buying a new site and building new buildings with the proceeds.
15. In the Californian Copper Syndicate v. Harris, (1904) 5 Tax Cas. 159:(6 F. 894), the facts were that a Co. formed for the purpose, inter alia, of acquiring & re-selling mining property, acquired & worked various property and resold the whole to a second Co. receiving payment in fully paid shares of the latter Co. A Scottish Court held that the difference between the purchase price & the value of the shares for which the property was exchanged was a profit assessable to income-tax. At p. 165 Clerk L. J. observed :
“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, & obtains a greater price for it than he originally acquired it, at the enhanced price is not profit in the sense of Schedule D, Income-tax Act of 1842 assessable to income-tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an Act done in what is truly the carrying on or carrying out of a business. The simplest case is that of a person or association of persons buying & selling lands or securities speculatively, in order to make gain dealing in such investments as a business, and thereby seeking to make profits. There are many Cos. which in their very inception are formed for such a purpose, & 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.”
16. Mr. Mitter also relied on this case and contended that the facts of the case now before us merely showed that the assessees who held shares merely sold them to change their investments. He urged that it could not possibly be held that it was any part of the business of the assessees to sell shares & that the sale of such shares was in no way part of their business.
17. In the case of The Hudson’s Ray Co., Ltd. v. Stevens, (1909) 5 Tax Cas. 424, the Ct. of App. in England considered the question now before us. In that case the appellants were a Co. established by Charter, who prior to 1869 were the owners of large territories in Rupert’s Land, North America. In 1869 they surrendered to the Crown their territory & rights of Govt. in exchange, inter alia, for a money payment & for a right to claim, within fifty years, a 20th share in certain lands in the territory as from time to time the lands were settled. The lands granted to the Co. in pursuance of this agreement were sold by the Co. from time to time, & the proceeds applied partly in payment of dividends and partly in reduction of capital. The Ct. of Appeal held that the proceeds of the sales of the lands so granted were not profits or gains derived by the Co. from carrying on a trade of dealing in land, & were not assessable to income-tax. At p. 437, Farewell L. J. observed :
“The question in this case therefore is : Do the Hudson’s Ray Co. carry on a trade in buying & selling land by which they have made a profit ? The Comrs. 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 & is appealable. A landowner in England may establish a game farm on part of his estate & make profits thereby which would be liable to
income-tax & 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 Co.”
18. The profits realised from the sales of the assessees’ properties were held in this case not liable to tax because the sale of property formed no part of the business of the assessees.
19. Another ease in which it was held that the profit from a sale of assets was not assessable to income-tax, but was an appreciation of capital is the case of Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer, (1910) 5 Tax Cas. 658. The grounds for that decision are similar to the grounds for the decision in the Hudson’s Ray case, (1909) 5 Tax Cas. 424, namely, that sale of assets was no part of the business of the assessee Co.
20. Counsel for the assessees further relied on the case of The Rees Roturbo Development Syndicate Ltd. v. Ducker, (1928) 13 Tax Cas. 366 which is a decision of the House of Lords in England. In that case the assessee Co. was formed for the purpose, inter alia, of acquiring patents, inventions & the like, & of using them, granting licences in respect of them, selling them or otherwise turning them to account. Throughout the Co.’s existence their only assets had been one particular group of patents & the receipts brought into their profit & loss account had been made up of royalties for the use of these patents, interest, etc. It was shown that the Co. had never originated an offer to sell foreign patent rights but that foreign manufacturers usually required to be given an option to purchase as a condition of agreeing to take a licence to manufacture. In 1917 the Applt. Co. granted a licence, with option to purchase, So a foreign Company who exercised the option. The Special Comrs. decided, on appeal, that the profits on sale of Patents arose in the course of the Applt. Co.’s business. The House of Lords held that there was evidence upon which the Comrs. could come to the (Conclusion.
21. In this case again the question whether “the profits were liable to tax depended on the question whether the sales of the securities formed part of the business of the assessee Co.
22. Another case giving rise to the question which we have to decide is the case of the Comr. of Inland Revenue v. Scottish Automobile and General Insurance Co. Ltd., (1931) 16 Tax Cas. 381. In that case the resp. Co. which carried on insurance business of various kinds other than life insurance, had, under its Memorandum & Articles of Association, wide powers with regard to the investment & management of its surplus funds. Those funds were, in fact, invested only in British Govt. securities, the holdings of which were varied from time to time. During the years 1921 and 1923 profits arising to the Co. 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 profits on realisation of investments, were made to the general reserve account. The profit arising from the realisation of investments was taxed & on appeal the Comrs, held, that the profit in question was not a trading profit. A Scottish Court held that there was evidence upon which the Comrs. could arrive at the conclusion of fact that the profit was not a trading profit.
23. 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 P. C. in the Punjab Co-operative Bank Ltd., Amritsar v. Comr. of Income-tax, Lahore, . However the basis of the decision in the Scottish Automobile and General Insurance Company’s case, (1931-16 Tax Cas. 381) cannot be questioned, namely, that if it is no part of the business of an assessee Co. to deal. in securities then any profit from realisation of securities cannot be made the subject of an assessment to income-tax.
24. In the case of the Punjab Co-operative Bank Ltd., Amritsar v. Comr. of Income-tax, Lahore their Lordships of the P. C. were called upon to consider when the profit on sales of investments held by a Co. would be liable to tax. In that case the Bank realised some of its securities in order to meet withdrawals by depositors & this was a normal step in carrying on the banking business. Their Lordships held that the amount realised on the sale of the securities over their cost price was taxable as part of the profits of the business of the bank. Certain dicta in the Comr. of Inland Revenue v. Scottish Automobile and General Insurance Co. Ltd., (1931) 16 Tax Cas. 381 were expressly disapproved of.
25. In the Punjab Co-operative Bank case it had been contended that it was no part of the business of a bank to sell shares & make a profit thereby. The sale of investments was merely incidental to the administration of the company & any profit made by such sales was no more assessable than if the profit had been made by the sale of investments held by a private individual.
26. Their Lordships however came to the conclusion that such sales by a bank which resulted in a profit were sales conducted in carrying on their business. It is true that the function of the bank is not to buy and sell shares. But in their Lordships’ view the sale of shares was an essential part of the business of banking. At p. 481 Viscount Maugham who delivered the judgment of the Board observed :
“In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank, often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds, at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realizable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be 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 realized 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.”
27. The profit from the sale of securities therefore may be taxable though the assessee is not carrying on the business of buying & 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 13 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 ease were sales which were normal steps in carrying on the business of this Co. But Mr. Mitter on behalf of the assessees has strenuously contended that it was no part of the business of the assessees to buy & sell shares or securities and further that the sale of such securities was not an integral part of their business or a necessary step in carrying on their business.
29. According to counsel for the assessees the business of the assessees was that of managing agents of the Indian Steel & Wire Products Ltd. The Co. has been formed to carry out the business & had taken over the assets of a previous firm & all that the Co. did in the present case was to realise its assets from time to time and reinvest the proceeds. In short, nothing occurred but a mere change of investments which were acts purely incidental to carrying on the business of the assessees & therefore it was contended that the principle enunciated by Viscount Maugham in the Punjab Co-operative Bank case had no application to the present case.
30. As I have already stated the objects of the assessee Co. were stated in the widest terms. It could carry on or undertake the business of capitalists, promoters, financiers, managers, managing agents, secretaries & treasurers. In the Memorandum no mention is made of the particular managing agency, that is, the managing agency of the Indian Steel & Wire Products Ltd. There the assessees were empowered to carry on the business of managing agents generally & also were empowered to carry on the business of Co. promoting and financing.
31. It is quite clear from the facts which were placed before the Appellate Tribunal that carrying on the business of managing agents of the Indian Steel & Wire Products was by no means the whole of the business of the assessee Co. The Co. held large holdings in various Cos. and it utilised the proceeds of the sale of such holdings in furthering its business interests as managing agents and financiers. It acquired the controlling interest in the Assam Bengal Co. Ltd., and eventually the interest of the managing agents of that Co., namely, the Eastern Corporation Ltd. by the purchase of shares from the proceeds of the sale of other shares held by the Co. The shares which it purchased in the Assam Bengal Company were unissued shares. By taking up the shares it provided that Co. with finance, gave itself a controlling interest & by acquiring an interest in the managing agency of that Co. it acquired the managing agency but in another name. It seems to me that this transaction was far more than 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 Co. In my view it was an instance of providing capital for that Co. by taking up a large block of unissued shares and further it was done with the purpose of obtaining such an interest in that Co. 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 Co. and to obtaining the work of managing agents of that Co. 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, & that the change was made with the object that the new investment would bring greater benefits to the assessees. All that the assessees did was to buy a new security which gave them certain advantages such as a controlling interest in the Co. and the managing agency. They acquired in short the shares & the managing agency with funds realised from the sale of other securities and that being so, the transaction can be regarded as nothing more than a mere change of investment. Mr. Mitter hotly contended that it was no part of the business of the assessees to advance money with any object at all.
33. It appears to me from the facts as found by the Appellate Tribunal that the assessees were not only managing agents of the Indian Steel & Wire Products Ltd., but were carrying on a business of financing Cos. with the object of obtaining control over such Cos. and further benefits to themselves. The acquisition of shares in the Assam Bengal Cement Co. Ltd. was the direct result of sale of other securities and it appears to me that those other securities were sold to provide funds for the purchase of new shares. The sale of the old securities was an essential part of the business of financing & the sale of the securities was a normal step in the conduct of such business. It was, to use the words of Lord Maugham, “an act done in what was truly the carrying on of the business” of the assessees. That being so, the profits made on the sales of investments were liable to assessment under the Income-tax Act.
34. The appellate Tribunal relied strongly upon the case of Dalmia Cement Ltd. v. Comr. of Income-tax, Bihar & Orissa, 22 Pat. 742 : (A. I. R. (31) 1944 Pat. 102) in which it was held that where an assessee Co. in accordance with the terms of its Articles of Association invested certain money out of its surplus share capital in the shares of another Co. and thus promoted and advanced its own interest, it was a business transaction within the meaning of the Income-tax Act and that it was not an investment transaction, & that the profits made by the sale of such purchased shares were liable to be taxed.
35. In delivering the judgment of the Bench Manohar Lall J., relied upon the Punjab Cooperative Bank case and an English case The Comrs. of Inland Revenue v. Dale Steamship Co. Ltd., (1924) 12 Tax Cas. 712.
36. Mr. Mitter contended that 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 assessees & 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 their 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 Co. empowered it to carry on the business of promoters, financiers & to sell stocks & shares & to invest the money of the Co. 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 Co. is entitled to do something under its Memorandum of Association & does it, such would necessarily be an act in the conduct of its business. Before it can be held that a profit arises from a transaction which forms part of the Co.’s business it must be shown that the Co. was not only entitled to enter into that transaction but that the transaction Was part of the business which it carried on or was an essential or normal step in conducting its business. This matter was considered by a Bench of the Bombay H. C. in the case of Sekseria Biswan Sugar Factory Ltd. v. Comr. of Income-tax (Central) Bombay, . In that case the assessee Co. incorporated for the manufacture & sale of sugar advanced on a demand promissory note a sum of rupees 5 lacs to a firm in which its managing agents were partners. It had not in the past advanced any such sum in similar circumstances to any other person. One of the objects of the assessee Co. as stated in its Memorandum of Association was to lend money with or without security. The Tribunal held that the business of the assessee Co. was not moneylending business & therefore the advance made by it was not in the course of its business & therefore was not a debt contemplated by Rule 1 (1) (b) of Schedule II, Excess Profits-tax Act, 1940. On a reference H. C. held that every act which is intra vires of a Co. is not necessarily done in the course of its business. Whether a particular act done is in the course of business or not is really a question of fact & that fact must be determined according to the evidence led and the circumstances of the case. It must be found as to whether the particular act has any connection with the normal business that the Co. is carrying on and whether it is so related to the business of the Co. that it can be considered to be performed in the ordinary course of the business of that Co. Ultimately the Bench held that the view of the Tribunal that the money was not advanced as part of the business of the Co. was right.
38. With great respect I agree with this Bombay decision. It cannot be held in this case that the assessees in selling their shares & buying other shares with the proceeds were conducting their business merely because such powers to sell & invest & purchase new securities are given to the Co. by the Memorandum of Association. However 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 Co. The Tribunal has held that the assessees were dealing with the securities which they possessed in order to promote other Cos. 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 Co. 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 para. 10 of the case stated and between 1935 & 1939 the Loan & Overdraft Account fluctuated between Rs. 9,83,000 & Rs. 80,55,700, The Co. also was accumulating large sums by way of profits & its accumulated profits between 1935 & 1939 rose from Rs. 1,39,075 to Rs. 17,04,013-1-9. Further the Co. was holding a large number of shares & I think there can be no doubt that this Co. was employing the money obtained by way of loans, overdrafts, its accumulated profits, & shares which it held, in order to acquire new interests & thus extend its business activities. The acquisition of new interests was not a mere investment of funds acquired either by borrowing or using accumulated profits or using the proceeds of sales of other securities, but was an essential act in conducting the business of the assessees. Though the assessee Co. may have come into existence for the purpose of managing the Indian Steel & Wire Products Ltd. as managing agents, the scope of its business was greatly enlarged and it undoubtedly became financiers and Co. promoters. The shares held by the assessee Co. were out of all proportion to the number of shares which would normally be held by a Co. which was merely acting as managing agents for another Co. and these shares were undoubtedly held to further its business of promoting or securing controlling interests in other Cos. & generally enlarging their activities. In my view there was ample material upon which the Appellate Tribunal could arrive at the conclusion which it did & that being so I would answer the question formulated in the case in the affirmative.
40. The Comr. of Income-tax is entitled to the costs of these proceedings. Certified for two counsel.
Sinha J.
41.I agree. The answer to the question referred to us, turns on the view taken of the assessee’s business & the purpose of realisation of the securities.
42. The objects of the Co. as appearing from the Memorandum of Association are, inter alia:
“(i) to carry on & undertake any business, transaction, operation or work commonly carried on & undertaken by bankers, Capitalists, promoters, financiers, managers, Managing Agents, Secretaries & Treasurers,
(ii) to subscribe for, take, hold, deal in & convert stocks, shares & securities of all kinds & to promote & aid in promoting & organize Cos. & syndicates for the purpose of advancing directly or indirectly the objects thereof or for any other which the Co. may deem expedient.
(iii) to acquire all or any part of the business property or undertaking of any other Co. and to pay for such business or undertaking in whole or in part, in cash or in shares, stocks and debentures of the Co.
(iv) to deal in bills, notes & other negotiable or transferable securities or documents.”
43. It is true that in order to ascertain the scope of the business the Co. was carrying on, the objects stated in the Memorandum of Association are not conclusive. Essential feature of the business actually carried on by the Co. 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 therefor. The question is whether the profit made on such realisation is taxable. The Tribunal held on the facts that the Co. has been financing and promoting the business of other Cos. & 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 Co. had in fact carried on the business of financiers. They also found that the evidence pertaining to the financing transactions of the Co. during the relevant accounting years, clearly established that the realisation of profits on investments was directly referable to the interest of the Co.’s business as financiers. They found it unnecessary to decide whether the profits were taxable as profits & gains of the Co. from the business of dealing in shares.
45. It seems to me there was evidence before the Tribunal on which they could come to the conclusion they did.
46. There can be no doubt that profits realised on a change of investment simpliciter are not taxable. It may be merely changing one fixed asset for another. The profit realised may be only appreciation of capital. On the other hand, if the change of investment was necessary & was in fact made for the purpose of & was an act done in normally carrying on the business of the Co., 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”: see Californian Copper Syndicate v. Harris, 5 Tax Cas. 159, Punjab Co-operative Bank Ltd., Amritsar v. Income-tax Comr., Lahore .
47. The assessee’s contentions before the Appellate Assistant Comr. were that the Indian Iron & Steel Shares were sold in 1938-39 for utilizing the money realised for paying instalments on the shares of Assam Bengal Cement Co. Ltd., that shares were sold in 1939/40 as more money was required for Assam Bengal Cement Co. & the money realised was put into this Co., that in 1940-41 investments were realised for the purpose of the payment to Mulji Jatia, Managing Agents of Khandesh Spinning & Weaving Mills Co. Ltd., for all their shares and interest, which Co. was now being managed by the assessee. The assessee’s contentions before the Appellate Assistant Comr. further were as follows :
“All that has been done is to sell the investments of the Co. in order to provide funds for its business as Co. promoters & financiers. There is no buying & selling of shares just for the purpose of buying & selling. When the Co. has funds it must invest. In these years it had sold them simply for the purpose of promotion of its own business.”
48. The purpose of realisation of investments was to advance money to these Cos. & to acquire a controlling interest therein & secure their Managing Agency. The Co. had to realise their securities in order to get money so that it could provide finance for the Cos. Financial assistance was to be provided to the Cos. by purchase of their unissued shares through the machinery of subscription and allotment. That was part of the business of the Co. The change of investments was made by the assessee not for changing one fixed asset for another but for the purpose of trade and as part of the profit making scheme of the Co. The investments were therefore realised really and substantially in the course of carrying on their business & for carrying out the objects of the Co. set out in the Memorandum. It is impossible to say in those circumstances that there was no evidence on which it was possible for the Tribunal to arrive at the findings they did. If the findings cannot be disturbed, it is clear that the profit made on the realisation of investments is a revenue profit & is taxable. I agree that the question referred should be answerable in the affirmative.