MANOHAR LALL, J. - This is a reference by the Income Tax Appeal late Tribunal u/s 66(1) of the Indian Income Tax Act, for the opinion of the Court upon the question - "Is there any material in this case to come to a finding that the assessees transaction in purchase and sale of the Rohtas shares was a business transaction and not an investment transaction "

The facts are these : The assessee is a limited cement company which was assessed in the financial year 1939-40 for the previous year 1938 on an income of Rs. 2,94,225. This figure was arrived at by including a sum of Rs. 2,95,500 on account of profits made by the assessee as a result of sale of some shares. These were purchased by the assessee on the 31st October 1937 from the Rohtas Industries Ltd., Dalmianagar, a sister concern and one of the Dalmia group of companies which was working in co-operation with the assessee for marketing cement.

The assessee is a newly floated company and its prospectus shows that it was to have factories at Karachi, Dandot and Dalmia Puram. But the factories at Karachi, and Dalmia Puram were still under construction at the time of the assessment and while the Karachi factory was opened in June 1938, the actual manufacturing work of cement did not start till the 1st of October 1938. That is to say in the accounting period the assessee carried on its work for which it was principally formed for three months only. The assessee had received subscribed share capital worth Rs. 99 lacs but out of which it had spent only Rs. 86 lacs and odd for the purchase of machinery - the balance of about Rs. 13 lacs was thus a surplus share capital in its hands during the pre-manufacturing period. This was utilised in lending money on interest to Dalmia Jain & Co. Ltd., and so soon as the working began the investment with the Dalmia Jain Company was withdrawn and it was utilised in the business transactions (see page 13 line 50).

It is provided in the Articles of Association of the assessee that "III. The objects for which the company is established are all or any of the following :-

(11) to acquire and deal in shares or stock or securities in or of any company or undertaking, the acquisition of which may promote or advance the interest of the company."

and further power is given by sub-clause 13 (g) "to lend money, with or without security, and to invest money of the company in such a manner as the Directors think fit."

The contention of the assessee company is that as it had surplus money in its hands it was invested in consequence of a resolution of the Directors passed on the 28th April 1937 which authorised the Managing Agents to invest up to Rs. 4 lacs and that the profits made on the scale of those shares in question were nothing more than an appreciation of capital and are not liable to be taxed. The contention of the Income Tax Department on the other hand is that the assessee bought and sold the shares in pursuance of the objects mentioned in the Memorandum of Association referred to above and in course of doing business.

It is on these facts that the question has been farmed and submitted to us for an answer.

This question has been considered in a number of English cases which I propose to notice.

Northern Assurance Co. v. Russell : An Assurance Company was held liable to pay tax on the profit it derived in the course of business by realising investments at a larger price than was paid for them. This case was followed in the Royal Insurance Co., Ltd. v. Stephen.

Californian Copper Syndicate v. Harris : Lord Justice Clark observed at page 165. - "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 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........

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 "

Lord Trayner gave a concurrent judgment and observed at page 167 : "My reading of the Appellant Companys Articles of Association along with the other statements in the case satisfy me that the sale on which the advantage was gained, in respect of which Income Tax is said to be payable, was a proper trading transaction, one within the Companys power under their Articles, and contemplated as well as authorised by their Articles." The principle thus enunciated in this case has been approved both in the House of Lords and by their Lordships of the Judicial Committee; see latest case of Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax, Punjab, to be again considered below.

Commissioners of Inland Revenue v. The South Behar Railway Company Ltd. : I am reading from the speech of Lord Dunedin at page 709 : "It is admitted that this Company was no abortive paper conception, but that it actually, after its formation, proceeded to carry on business. What was that business Necessarily, the business contemplated by its Memorandum and Articles of Association".

Lord Summer in his speech first traced the distinction between, a trust for holding property, and a carrying on of a business and referred to the case of Smith v. Anderson and then observed at page 710 : "To ascertain the business of a limited liability company one must look first at its Memorandum and see for what business that provides and whether its objects are still being pursued" and referred to the case of Korean Syndicate which is reported in the same volume at page 181. It is not necessary to quote from the well-known observations made in the judgment of Lord Sterndale, M.R., and of Atkin, L.J., which well be found at pages 202 and 205.5.

Commissioners of Inland Revenue v. Dale Steamship Co. Ltd. : The assessee Company was formed inter alia, (a) to acquire steamships and other vessels, (b) to build, charter, let out on hire and trade with ships, (c) to carry on business as ship-owners, merchants, etc., and (d) to invest and deal with the moneys of the Company not immediately required as might from time to time be determined. The Company at the outbreak of the war owned and trader with five ships. Of these one was detained by the enemy at Hamburg, one was sold, and the remaining three were sunk during the war. The proceeds of sale and the insurance moneys received were all placed on depositor invested in easily realisable investments in order to facilitate the resumption of trading or winding up. It was held on the authority of South Behar Railway Companys case that the Company was carrying on a trade or business. The Attorney-General relied upon clause (d) of the objects for which the Company was formed. Sir William Finlay who appeared for the Company said that he could not distinguish the case from the case of the South Behar Railway Company. Rowlatt, J., came to the conclusion that the Company was taxable not by consent of Counsel but upon the authorities referred to in the argument of the Attorney-General.

It appears to me, therefore, that the question which falls to be determined in this case is whether what the Company did was within the powers which were given to it by the Articles of Association. It cannot be doubted and indeed that was the argument of Mr. P. R. Das, who appeared for the assessee, that what the Company had done was within clause III (13) (g). But on the authorities cited the investment was nothing more than carrying on a part of the business of the Company. The appellate Tribunal have also found as a fact that the Company acquired shares of the sister company because in this way it promoted and advanced its own interests. The assessee company was a cement company and was formed to work in competition with the Associated Cement Co. Ltd., and I am reading from the finding of the Appellate Tribunal at page 13 : "In the Articles and Memorandum of Association quoted above, it has been laid down that one of the objects of the Company is to acquire and deal in shares which might promote or advance the interest of the Company. In this case the appellant Company purchased a huge amount of shares (65,000 Ordinary and 1,600 Preference Shares) and offered them for sale in the open market and in this manner the market value of the shares of Rohtas Industries Ltd., was enhanced. This promoted the interest of the appellant company also as the public would be attracted in patronising the said company." They also referred to the fact that in the Directors Report the Rohtas Industries Ltd., has been described as a sister concern which was working in co-operation with the assessee company for marketing cement, evidently in competition with the Associated Cement Co., Ltd.

At one time, I must confess, I was in considerable doubts whether it could not be held that the assessee company was merely realising its investments and therefore could not be said to have made any profit in the course of trade or business; but having read the authorities which I have noticed above and in particular the cases quoted in Dale Steamship Company Ltd., I am satisfied that the view taken by the Appellate Tribunal is correct.

But Mr. P. R. Das relied very strongly upon the case of Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax, Punjab, and argued that realisations of investments should be held to be profits of a Company only where the Company is a banking Company and is required either by the articles or ex necessitate in order to carry on its business to invest its surplus fund and to convert it into cash from time to time. But the case cited does not support this broad contention. In that case Viscount Maugham, who delivered the judgment of their Lordships, referred pointedly to the Californian Copper Syndicate case noticed by me above and observed at page 645 that "some dicta which appear to support the view that it is necessary to prove that the tax-payer has carried on a separate or severable business of buying and selling investments with a view to profit in order to establish that profits made on the sale of investments are taxable" cannot now be relied on, and cited with approval the exact words "that enhanced values obtained from realization or conversion of securities may be so assessable where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business." His Lordship then proceeds to deal with the case before him and observes that in the ordinary case of a bank, the business consists in its essence of dealing with money and credit and so on, and then points out than if in the present case some of the securities of the bank are, realised on order to meet the withdrawals by depositors, it seems to their Lordships to be quite clear that this is a normal step in carrying on the business or, in other words that it is an act done in what is truly the carrying on of the banking business. I cannot read this case as deciding that only in the case of a banking business the realisations of investments will result in taxable profits.

In the present case, as shown above, what the assessee company did was to deal in shares and this was provided in the Articles of Association, and on the finding of fact that it invested the money in the shares of the sister company and thus promoted or advanced its own interest, I would be prepared to go further than even if, as I have observed above, it be held that all that the Company did was to invest the surplus money, they did so as a part of business in order to make a profit as was provided by clause (13) (g) of the Articles of Association. The Directors clearly were of the opinion that during the time when the cement could not be prepared the surplus money should not lie idle in their hands and they must invest it so that they might realise it at a considerable profit. It is also to be noticed that they invested it in the sister company whose shares went up in the market, thus resulting in a double advantage to themselves.

For these reasons I would answer the question in the affirmative and hold that there is ample material in this case to come to a finding that the assessees transaction in purchase and sale of the Rohtas shares was a business transaction.

The assessee must bear the cost of the Commissioner. I would assess the hearing fee at Rs. 250/-. The Commissioner is allowed to retain the sum of Rs. 100/-deposited by the assessee as the fee for the reference to this Court.

CHATTERJI, J. - I agree.

Reference answered accordingly.