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TMI Blog1963 (7) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... to a full and true disclosure of all the material facts necessary for his assessment within the meaning of section 34(1) of the Indian Income-tax Act, 1922, as amended in 1948 ? (5) Whether, in the circumstances of this case, the information furnished to the Income-tax Officer by the letter dated 26th October, 1949 If annexure marked ' B'), can be held to be information such as would entitle the Income-tax Officer to initiate proceedings under section 34(1)(b) as amended in 1948 ? (6) Whether, on the facts and in the circumstances of this case, the assessee-in vestment company's holdings of stocks and shares partake of the nature of circulating capital, and whether any realisations of excess over cost on sales thereof are the company's business profits chargeable to Income-tax ?" The facts of the case as appearing from the statement of the case submitted by the Income-tax Appellate 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 in paragraph 3, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t made on sale of Titagarh Paper and Kumardhubi Engineering shares, less losses incurred on redemption of certain debentures. According to the Tribunal, although the words " profit " and " loss " are found in this Reconciliation Account, the heading being " Reconciliation of Capital Reserve Account", the Income-tax Officer was not necessarily put on notice that the profit and loss arose on what may be called trading transactions. There was, according to the Tribunal, no indication, however, on the record that the Income-tax Officer who made the original assessment considered this aspect of the matter. After the proceedings under section 34 of the Act was started, the company in its letter dated 26th October, 1949, addressed to the Income-tax Officer (annexure "B") described itself as purely an investment company. It will appear from the statement of the case that this company is not one of those companies formed for the sole purpose of holding all or most of the shares of the other companies actively carrying on trades such as are referred to in sub-section (2) of section 2 of the Indian Companies Act, 1913, and section 132A(1), second proviso, of the same Act, distinguishing betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion that the information contained in the company's letter dated 26th October, 1949, was not before the Income-tax Officer when he had made the original assessment. In the case of investment companies the profits on realization of shares and securities must be treated to be revenue profits as sale of securities and shares formed an essential feature of the normal activities of such a company. The assessee itself admitted that the sale of investment is a normal feature of the activity of the company. Under the circumstances the new information contained in the letter dated 26th October, 1949, makes it reasonable to believe that profits from sale of investments are assessable but had originally escaped assessment. The computation of profits on realisation of shares and securities as made by the company had been shown at Rs. 1,08,962. The total income was computed by the Income-tax Officer as under : Rs. As. Pa. I.Interest on securities 5,453-o-o II.Business as per original assessment-Rs. 83,430 Add Profits on realisation of shares and securities -Rs. 1,08,962 1,92,392-o-o O. S. III.(a) Dividends 3,23,719-o-o (b ) Remittances 1,665-o-o T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributes them amongst its shareholders. It also changes the investments from time to time in its own interests. The change of investments is a part of its business and therefore the profit that it earns in changing investment is taxable. Secondly, the memorandum of association of the company clearly goes to show 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. If by virture of this object the company earns a profit by sale of shares, it should be taxable. These contentions raised by the parties will be discussed seriatim. Mr. Sukumar Mitra, the learned counsel appearing for the applicant, does not press questions Nos. 1, 2 and 3 in view of the Supreme Court decision in Calcutta Discount Co. Ltd. v. Income-tax Officer, District I [1961] 41 ITR. 191 ; [1961] 2 SCR. 241. Accordingly these questions need not be answered. Question No. 4 deserves consideration with reference to the first argument of Mr. Mitra. It was his contention that neither section 34(1)(a) nor section 34(1)(b) is attracted as the facts relating to sale of shares had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 necessary from time to time............." According to the income-tax authorities, the information contained in the above letter was not before the Income-tax Officer when he had made the original assessment. According to Mr. Mitra the information contained in this letter was not required to be resorted to as full assessment might be made at the time of original assessment on the basis of the two documents stated above. In my opinion, these two documents do not prima facie go to show that there was any clear disclosure as to profits 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 of such information he must have reason to believe that income has escaped assessment. This clause also requires that the Income-tax Officer must have reason to believe in consequence of information in his possession that income wholly or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer at the time of original assessment for an overall consideration as to profits from the sale of shares. Accordingly the finding of fact based on materials on record made by the Tribunal in this regard cannot be disturbed. Mr. Mitra contends that the decision made in the reported cases stated above are entirely dissimilar to the facts of the present case and, therefore, the principles of law enunciated therein cannot be invoked in aid of the department. It may be true that the facts are dissimilar but it goes without saying that the principles of law as appearing therein were enunciated as to the true scope of section 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 Calcutta Discount Co, Ltd. v. Income-tax Officer, Companies District I, Calcutta [1961] 41 ITR 191, 201 ; [1961] 2 SCR. 241, may be quoted. It runs as follows : " . . . if there was in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of 'under assessment1, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or be applied in paying dividends on any shares in the company's capital. " The income-tax authorities as also the Tribunal were of the view that the company's letter dated 26th October, 1949, was a clear pointer to the fact that the selling of shares was a part of the business of the com pany. The company submitted to the income-tax authorities that it does not deal in shares but as a matter of fact deal with the shares and that the business of the company is to invest the capital of the company in different bonds and stocks with the object of averaging risk and to divide the dividends and interest received. The income of the company is derived from dividend and interest of the company's investment and the company does not consider it a part of the business to buy and sell stocks and shares with a view to make a profit and has never divided such profits amongst its share holders. Such a stand was negatived by the income-tax authorities, as it was stated in the letter dated 26th October, 1949, that although the company does not deal in shares or securities, it is necessary and in fact essential that changes in investments be made from time to time. According to the Tribunal the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The company has laid stress upon the fact that in terms of this article, all capital appreciations realised upon any sales or transpositions of the company's investments or realisations of other capital assets shall be applied to capital purposes only, and that no part of the capital reserve shall in any event be transferred to revenue account or regarded or treated as profits of the company available for dividend. The crux of the whole case is whether excess realisation on the sale of shares should be treated as profits earned in the course of the company's business. Mr. Mitra contends in this connection that there is no clause that the profits earned by sale of shares can be turned into account. If there was a clause that the profits should be transferred to the revenue account, directors could use it for declaring dividends. In the absence of such a provision and on the specific provisions as stated before, the profits cannot be appropriated towards dividends as it goes to the capital reserve account. In order to appreciate Mr. Mitra's contention in this regard, let us in the first instance refer to Scottish Investment Trust Co. v. Forbes [1893] 3 Tax Cas. 231, 234, 235. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e v. Harris [1904] 5 Tax Cas 159, 165-166 it was decided that the difference between the purchase price and the value of the shares for which the property was exchanged is a profit assessable to income-tax. The facts axe that a company formed for the purpose, inter alia, of acquiring and reselling mining property, after acquiring and working various properties, resells the whole to a second company, receiving payment in 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 where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act, 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t footing altogether. Mr. Mitter also contends that the facts of the Privy Council case, Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax [1940] 8 ITR 635 (PC), relied upon by the respondent, are also dissimilar to the facts of the instant case and, therefore, the principle of law enunciated there cannot also be resorted to for the purpose of deciding this case. In this case their Lordships of the Privy Council were called upon to consider whether the profits and sales of investment held by a company would be liable to tax. In this case the bank realised some of its securities in order to make withdrawals by depositors and that 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 a part of the profits of the business of the bank. It was contended before their Lordships that the selling of securities was not part of the business of the bank and to make a profit thereby. The sale of investment was merely incidental to the administration of the company and any profit made by such sales was no more assessable than if the profit had been made by sale or investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 477 ( c) Henry Briggs Son & Co. Ltd. v. Commissioners of Inland Revenue [1961] 1 All ER. 220 ; Tax Cas 410. It is unnecessary to deal with these decisions for avoidance of repetition of the analogous principles of law stated in the foregoing paragraphs. Mr. Pal has also referred to us the Supreme Court case (Karanpura Development Co. Ltd. v. Commissioner of Income-tax [1962] 44 ITR. 362 (SC)). Their Lordships were dealing with the question whether ownership of 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 object with which the act is done. It is not that no company can own property, and enjoy it as a property whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property", even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with a view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y enhanced the value by realising the securities or it was treated as a gain made in an operation of business in carrying out a scheme for profit-making, the relevant provisions of the memorandum of association delineating, the objects of the company should also be looked into. The company has taken its stand on article 76 of the articles of association quoted before. It has been argued on behalf of the company that by virtue of this article all capital appreciations realised upon any sales or transpositions of the company's investments or realisations of other capital assets shall be applied to capital purposes only. 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 cannot be treated or construed to be an object of the company inasmuch as the articles of association are drawn up for the guidance of the company and for carrying on its internal administration. This cannot in any way supersede the memorandum of association which actually deals with the objects of the company. Accordingly, in the first instance, the provisions of the memorandum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e application of the, rule of construction 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 opinion that the decision in Scottish Investment Trust Co. v. Forbes [1893] 3 Tax Cas. 231 quoted before may have application to the instant case. In that case also it appears that in the memorandum there was a provision 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. Such a provision in the instant case may be found in sub-clauses (b) and (ff) quoted above. As regards the interpretation of the sub-clauses in the memorandum of association, Mr. Pal has referred us to Palmer's Company Law, 20th edition, at page 88. In the instant case it has already been pointed out what the memorandum declared in clause 3. Accordingly,(whether any given transaction is or is not within the powers of a company is a question of law depending on the instruction to be placed on the objects clause of the memorandum of association. If a question arises whether a transaction is or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion are drawn up for the purpose of internal administration of the business and cannot supersede the objects as set out in the memorandum of association. Article 76 relates to capital appreciation, only and does not in anyway restrict the operation of the object clauses given in the memorandum of association. Accordingly, the contention of the company that this article is operative, in so far as this case is concerned, cannot be accepted. After considering all the matters placed before us and hearing the learned counsel of both the sides it appears that the contention as raised by Mr. Pal, that the profits by sale of shares for two alternative reasons given by him are taxable, must prevail. 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 a sound investment, may in the course of time or even in a comparatively short period cease to be a sound investment for a company such as this or even if the investments are still attractive from the point of view of security and yield, it may be considered desirable to change to some other investment which is more attractive or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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