Sen, J.
1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, hereinafter described as the ' 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 for 1946-47, 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 of making 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 reconciliation of capital reserve account (annexure marked ' C'), amounted 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 (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-investment 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 ?'
2. 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, 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 on business in India, or in the United Kingdom, or in any colony, or dependency, or possession thereof or in any foreign country, and debentures, debenture-stocks, bonds, obligations and securities issued or guaranteed by any Government, sovereign, ruler, commissioners, public body, or authority, 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 the borrowing, 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 circular notes, 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 the Act. The original assessment for 1946-47 was made on the 19th April, 1949, without including the profits on purchases and sales of shares. The Income-tax Officer, who made the assessment for 1949-50 received the letter dated 26th October, 1949, from the assessee and it was on the basis of the information contained therein that he initiated the proceedings under Section 34, for making supplementary assessment for 1946-47, out of which the present reference arises. One of the objections taken by the company was that there was no fresh material in possession of the Income-tax Officer, in consequence of which he had reason to believe that profits chargeable to income-tax had escaped assessment. According to the Tribunal, the reason for the assessee saying this is that along with his return of income for the year 1946-47 submitted in October, 1946, the assessee 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 of Titagarh Paper and Kurnardhubi 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(i), second proviso, of the same Act, distinguishing between a holding company and an investment company. In other words, the assessee does not fall within the category of purely holding companies. On an examination of the accounts of the assessee-company, the Tribunal came to the conclusion that the company did not carry on an active trade in buying and selling shares, having regard to the volume or magnitude and frequency of the transaction. The sale in each year is only to the tune of Rs. 1,00,000 to Rs. 4,00,000 or Rs. 5,00,000 out of the total holdings in the neighbourhood of RS. 40,00,000. Some of the shares were held by the assessee-company for quite a number of years. Therefore, the Tribunal concluded that the assessee-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 and shares partook of the nature of circulating capital with the result that any realisation of excess over cost 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 under Section 34 of the Act. It appears from the statement of the case that the notice under Section 34 was issued on the 28th March, 1951, and was served on the assessee on the same day. The supplementary assessment was completed on the 30th August, 1951, i.e., more than 4 years after the end of the relevant assessment year, although within a year of the date of the issue of the notice under Section 34. The assessee contended that Section 34 as amended in 1948 was not applicable to the company's case, as under Section 34, as it stoood before the amendment in 1948, a supplementary 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 inaccurate particulars 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 of the first proviso to the present Section 34(3), but it was contended that Section 34 as amended in 1948 was not retrospective and could not apply to a supplementary assessment for 1946-47. The Tribunal 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'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. Ps.
I.Interest on securities 5,453--0--0II.Business as per original assessment -- Rs. 83,430 Add Profits on realisation of shares and securities -- Rs. 1,08,9621,92,392--0--0O. S. III.(a) Dividends3,23,719--0--0 (b) Remittances 1,665--0--0
Total income5,23,229--0--0 I.T. @ 5 annas1,63,509--1--0 Less paid as per original assessment1,29,458--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 tax payable 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-tax Officer. The Income-tax Appellate Tribunal also by its order dated September 29, 1953, affirmed the order passed by the department and the appeal by the company was dismissed. The reasons for dismissal of the appeal will be dealt with later.
7. In this reference Mr. Sukumar Mitra, the learned counsel appearing for the company, has urged the following points: (1) Neither Section 34(1)(a) nor Section 34(1)(b) is attracted as all the facts relating to sale of shares had been disclosed to the Income-tax Officer making the original assessment and no new facts since then came into existence. It is urged that the reconciliation accounts (vide page 29 of the paper-book), which were produced before the Income-tax Officer at the 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 also urged that all the findings of fact made by the Tribunal are in favour of the assessee. (3) The realisation of excess over tax on sale of shares are not the company's business profits inasmuch as under the provisions of the memorandum of association of the company, there is no power to turn them into account. The accounts, as presented, clearly go to show that the excess realisations were transferred to the capital reserve account under Article 76 of the articles of association. As the realization of the excess by sale of shares was not transferred to the revenue account and as the directors could not use it for declaring dividends, the realisation of the excess cannot be considered as an income liable to tax.
8. Mr. Pal, the learned counsel appearing for the respondent, urges that the contentions raised by Mr. 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 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, he 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.
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 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]41ITR191(SC) . Accordingly these questions need not be answered.
11. 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 been disclosed to the Income-tax Officer making the original assessment and no new facts since then came into existence. In this connection it has to be considered whether the reconciliation 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. It may 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 of this document has been placed before us at the time of the hearing of arguments. The Tribunal was of opinion that the manner in which the accounts were kept was such that an ordinary Income-tax Officer would well be excused if it did not strike him to initiate such an enquiry. In the said documents, the assessee did not disclose the profits in the profit and loss accounts. It was explained by the company that it credited the whole of the sale proceeds to the investment account and when the 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 the profit 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 letter by the company on the 26th October, 1949. This letter according to the income-tax authorities was an information on which the reopening of the assessment proceeding for 1946-47 could be done, as being an information received by the Income-tax Officer within the meaning of Section 34(1)(b). The relevant portion of the letter runs as follows :
' Although the company does not deal in shares or securities, it is necessary and in fact essential that changes in investment be made from time to time. Shares which when purchased are regarded as sound investments may in course of time or even in a comparatively short period cease to be sound investments 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 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......'
12. 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 partially escaped assessment. The expression 'if the Income-tax Officer has reason to believe' suggests that the belief must be that of an honest and reasonable 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 the Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, : [1959]35ITR1(SC) . that two conditions must be satisfied before the Income-tax Officer can act under Section 34(1)(b): he must have information which comes to his possession subsequent to the making of the original assessment order and that information must lead to his belief that income chargeable to tax has escaped assessment, has been under-assessed or assessed at too low a rate and has been made the subject of excessive relief. In a case arising out of the Agricultural Income-tax Act of Bihar, their Lordships of the Supreme Court, in Makarajadhiraj Sir Kameshwar Singh v. State of Bihar, : [1959]37ITR388(SC) , dealt with the scope of Section 34 of the Income-tax Act which is similar to the appropriate provision in the 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 to initiate proceedings under Section 34, it is enough that he, on the information which he has with him and in good faith, considers that he has a good ground for believing that the assessee's profits has for some reason escaped assessment or been assessed at too low a rate, so that a notice can be served 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 Lal v. Commissioner of Income-tax, : [1961]41ITR221(SC) .
13. Now, having considered the decisions set forth above it appears to me that reassessment proceeding had to be resorted to under the provision of Section 34 on the basis of the information contained in the company's letter dated October 26, 1949, as the reconciliation of capital reserve account and the reconciliation of investments at soth September, 1945, were not sufficiently clear to the 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.
14. 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 in Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta, : [1961]41ITR191(SC) , 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 'underassessment', that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under Section 34. Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts was not open for the court's investigation. In other words, all that was necessary to give this special jurisdiction was that the Income-tax Officer had, when he assumed jurisdiction, some prima facie grounds for thinking that there had been some non-disclosure of material facts. It was the duty of the assessee, who wanted the 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 proper perspective 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 and according to it the surplus of Rs. 1,08,963 arising out of the realisation of and/or change and/or conversion of investment is not income, taxable under the Act. In support of its contention the company referred to Article 76 of the articles of association of the company. The question whether the provision of the article should override the memorandum of association or should be treated as the 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 or realisation of other capital assets shall be applied to capital purposes only, and may be appropriated to meeting realised losses on sales or transpositions of or writing down investments or other capital assets (either individually or in the aggregate) or be carried by the directors to a separate reserve to be called the capital reserve. Sums carried and standing to capital reserve may be applied for any of the purposes to which sums standing to any reserve under the provisions of the last preceding article are applicable, except and provided 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 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 dated 26th October, 1949, was a clear pointer to the fact that the selling of shares was a part of the business of the company. 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 shareholders. 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 necessity is a business necessity for the company and not merely the 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 be quoted in this connection as well:
' Shares which when purchased are regarded as a sound investmentmay in the course of time or even in a comparatively short period cease tobe a sound investment for a company such as this or even if the investmentsare still attractive from the point of view of security and yield it may beconsidered desirable to change to some other investment which is moreattractive or again it may be necessary to realise certain investments toprovide funds for other requirements of the company. Thus although thecompany does not deal in investments realisations of investments are necessary from time to time. '
19. After discussing the case-laws, the Tribunal, however, came to a finding of fact, on which reliance has been placed by Mr. Mitra, that the company did not carry on active trade in buying and selling shares, having regard to the volume or magnitude and frequency of the transactions. The sales 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 the total holdings in the neighbourhood of Rs. 40,00,000. Some of the shares were held by the assessee-company for quite a number of years. Mr. Mitra contends that after making a finding of fact like this the Tribunal ought not to have come to a conclusion that it was part of the duty of an investment company to its shareholders to watch and nurse its holdings in shares, to buy and sell them so as to spread out risk in fluctuations of their prices and to ensure a steady and if possible an adequate return of its own shareholders and, therefore, the operations of buying and selling shares are a necessary, essential and integral part of an investment company's business, if indeed, it is not its main business.
20. In the first instance it is necessary for us to examine a good number of case-laws cited by the learned counsel for both the parties for a conclusion whether the findings arrived at by the Tribunal are sustainable in law. It has already been stated that the company has in support of this contention relied upon the provisions of Article 76 of the articles of association referred to above. 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 case the Lord President observed as follows:
' 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 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 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 . . . My view of this company is, therefore, that its position in the present question is entirely distinguished from that of a private individual or an ordinary trader. Accordingly, I think that it is wrong in its contention that increases on realisation of stocks of the company are capital sums, and therefore not liable to assessment for income tax.'
21. Mr. Pal appearing for the respondent, Commissioner of Income-tax, has submitted that the above reported decision may be invoked in aid of the respondent as there are certain provisions in the memorandum of association of the assessee-company to the effect that the profits derived by realisation of excess price might be turned into account. It will be discussed later on whether the submission made by Mr. Pal is correct. At the next place, it is necessary to refer to other decisions placed 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 the shares for which the property was exchanged is a profit assessable to income-tax. The facts are 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 buying and selling lands or securities specula-tively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and 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.
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts ; the question to be determined being--Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation 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 Inland Revenue, (1943) 25 Tax Cas. 292, has also been referred to us by the learned counsel. The Imperial Tobacco 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 company maintained a large buying organisation. To finance the purchases and the expenses of this organisation the company bought dollars in the United Kingdom through its bankers who remitted them to banking accounts of the company in the United States, and it was the practice of the company to accumulate large holding of dollars each year before the leaf season commenced. The company never paid dollars for the purpose of resale as a speculation. On the outbreak of war, in September, 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. The company was compelled to sell its surplus dollars to the treasury and the sale resulted in a profit for the company. This profit was included in assessment upon the company to income-tax. On such facts, it was held that the profit made by the company on the compulsory sale of surplus dollars to the treasury must be included in the computation of the profits of its trade for income-tax and national defence contribution purposes. The facts as stated in this case are dissimilar to those of the instant case and Mr. Mitter contends that the sale of dollars by compulsion stands on a different 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 I.T.R. 635 (P.C.), 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 investment held by a private individual. Their Lordships of the Privy Council negatived this contention and came to the conclusion that such sales by a bank, which resulted in a profit, were sales conducted in carrying on their business. The facts appearing in this reported decision are not however similar to the facts of the present case, but the principle of law decided by the Privy Council should 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 by the Supreme Court in Sardar Indra Singh & Sons Ltd. v. Commissioner of Income-tax, : [1953]24ITR415(SC) . appears to be 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 the sale of securities are taxable if the sale of such securities is a normal step in carrying on the business of 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 of investment was necessary and was in fact made for the purpose of and was an act done in normally carrying 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's business it must be shown that the company was not only entitled to enter into that transaction under its memorandum of association but the transaction was part of the business which it carried on or was an essential or normal step in conducting its business. The objects stated in the memorandum of association are not conclusive. Essential features of the business actually carried on by the company must be regarded and distinguished from what may be called incidental acts of administration. '
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 known as 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 unnecessary to deal with these decisions for avoidance of repetition of the analogous principles of law stated in the foregoing paragraphs.
25. Mr. Pal has also referred to us the Supreme Court case (Karanpura Development Co. Ltd. v. Commissioner of Income-tax, : [1962]44ITR362(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, cannot be said to treat them as land-owner, but as trader. In deciding whether a company dealt with its properties as owner, one must see not to the form 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 Australia and 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 of the company was to hold and nurse the securities it held and to sell them at a profit when convenient occasions present itself. In making this decision their Lordships of the Privy Council found that there was ample evidence that the company is a trading company and that the surplus realised 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. 6 on the following points:
(1) Whether the transaction of sale was a part of the business which the company carried on or was an essential or normal step in conducting this business
(2) Whether the essential transactions actually carried on by the company in the matter of sale of shares 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 to refer to the observations of Lord Justice Clerk in Californian Copper Syndicate case quoted in the foregoing paragraphs. It seems to be clear that where the property sold is a capital investment or a capital 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 revenue account.
29. On a consideration of the decisions and the materials placed before us we are of opinion that the Tribunal arrived at a correct decision that the sale of shares was effected in the course of business and, 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 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 of association should 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 several sub-clauses of this clause and all the powers thereof are to be cumulative and in no case is the generality of any one sub-clause to be narrowed or restricted by any particularity of any other sub-clause, nor is any general expression in any sub-clause to be narrowed or restricted by any particularity of expression in the same sub-clause or by the application of any rule of construction ejusdem generis or otherwise) . . . .'
32. It has been argued that the words in the parenthesis in this clause cannot be treated to be the guiding factor in understanding the main objects of the company, as the main objects have been described in Sub-clause (b) which should govern the subsequent sub-clauses. On a scrutiny of the words 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 of ejusdem generis is barred. As the memorandum of association of the company sets out its objects in different sub-clauses untrammelled by each other, it seems to us that each of the sub-clauses has to be independently considered for understanding the several objects of the company. It has already been 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, the company is to acquire and hold and otherwise deal with shares, etc. From Clause (b) it undoubtedly appears clear that one of the objects of the company was such, but in this connection the following important 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 of the 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 company was to sell and turn into account property, which, in the instant case, includes shares. It has already been stated that in terms of the words in the parenthesis of clause 3, the 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 construction to be placed on the objects clause of the memorandum of association. If a question arises whether a transaction is or is not within the powers of the company, it has to be inferred from its objects and the objects of the clauses should be scrutinised for finding out the meaning thereof. One of the conditions of interpretation of the memorandum of association is that the ejusdem generis rule and the maxim expressio unique est exclusio alterius are also at times applicable. The relevant extract from Palmer'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 are expressed in a series of paragraphs, and one paragraph (commonly the first) appears to embody the main or dominant object of the company, and all the other paragraphs have been treated as merely ancillary to this main object, and as limited and controlled thereby.
Sometimes the memorandum declares the intention to be that the objects specified in each paragraph of the clause shall, except where otherwise expressed in such paragraph, be in no wise limited 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 of construction, 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 as incidental to the main object. But an object showing the intention to operate in one place may not exclude the object of operating elsewhere;...'
34. By applying this principle of construction as appearing in the second paragraph of the quotation made above, it appears to us that Sub-clauses (b) and (ff) should be treated as envisaging independent objects of the company and Sub-clause (ff) should not be treated as being governed by Sub-clause (b) which specifically provides that the company has to deal with shares and not deal in shares, by virtue of the words in parenthesis in Clause (3) of the memorandum. To be more precise it may be said that each of the objects in the sub-clauses has to be read in isolation and not as ancillary 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 the company 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 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 any way restrict the operation of the objects 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.
36. 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.
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 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 again it may be necessary to realise certain investments to provide funds for other requirements of the company. This admission shows that the change of investment was necessary and was in fact made for the purpose of and was an act done in the normal carrying on of the business of the company. Accordingly, what was done by the assessee-company was not merely a realisation or change of investment, but an act done, in what is truly 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 carrying on 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 tax by 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 the memorandum of association is independent of and isolated from each other and, therefore, the Clause (ff) which provides for selling, managing, exchanging, disposing of, turning to account or otherwise dealing with all or any part of the property and rights of the company, is a clear pointer to the fact that selling of shares and turning to account is one of the objects of the company. When this clause is considered to be an independent one, it appears clear that selling of shares and turning to account is also an object of the firm for carrying on or carrying out the normal business as appearing from the facts and circumstances of the case and therefore the profits arising out of sale of shares under 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, it was urged that it should be treated as an incidental act of administration. In our opinion such a transfer does not in any way take the profits out of the ambit of the taxation laws as it is no business of the taxing authorities to consider how the profits were spent and how they were dealt with by the company.
39. In the result, our decision is that the company's holdings and stocks and shares partake of the nature of circulating capital and any realisation of excess over costs and sales thereon are the company'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.