1992 P T D 621

[Supreme Court of Pakistan]

Present: Muhammad Afzal Zullah, CJ., Rustam S. Sidhwa and Muhammad Afzal Lone, JJ

NASEER A. SHEIKH and 4 others

versus

THE COMMISSIONER OF INCOME-TAX (INVESTIGATION), LAHORE and others---Respondents

Civil Appeals Nos. 381 to 385 of 1980, decided on 01/02/1992.

(On appeal from the judgment and order of the Lahore High Court, Lahore, dated 18-4-1975, passed in T.Rs. Nos. 5, 15, 17 of 1968, 21 of 1969 and 86 of 1972).

(a) Income-tax Act (XI of 1922)---

----Ss.2(4) & 66---Constitution of Pakistan (1973), Art.185(3)---Leak to appeal was granted to examine the issue, as to whether the acquisition of fight shares by the assessees in the circumstances of the case, could be treated as an adventure in the nature of trade resulting in revenue gain, and that in this connection the two questions referred to the High Court for its ol4nion were pure questions of fact or mixed questions of law and facts.

(b) Company---

Directors hold a fiduciary relationship qua the company and are required to exercise power vesting in them for the benefit of the company---When the need of the company for increase of capital is established, the fact that in promoting the interest of the company, the Directors make use of this need to promote their own interest as well, their action cannot be dubbed as breach of trust.

Hirsche v. Sims (1894) AC 654 ref.

(c) Companies Act (VII of 1913)---

----S.105-G---When the company decides to issue further shares, it is imperative that newly issued shares, in the first instance, should be offered to' the members whose names are borne on the register of the company in proportion to the existing shares held by them.

(d) Income-tax--

----Accretion to capital---Where the assessee acquires fresh shares of company in exercise of his right the profit motive of assessee in embarking upon a transaction is not decisive for an accretion to capital did not become chargeable to tax simply because the asset was acquired with the idea that it would be sold at profit---If the shares sold were capital assets, the proceeds of sale would be an accretion of capital.

Ram Nairan Sons Ltd. v. Commissioner of Income-tax (1961), 41 ITR 534; Oriental Investment Co. Ltd. v. Commissioner of Income-tax (1957) 32 ITR 664; Lakshminarayan Ram Gopal v. Government of Hyderabad (1954) 25 ITR 449; Farmer v. Trustees of the Late William Cotton (1915) AC 922 and Great Western Railway Co. v. Bater (1922) 8 Tax Cas. 231 ref.

(e) Income-tax---

----Revenue gain---Adventure in the nature of trade---If the shares were acquired by the assessee and sold away, in the course of his business in pursuance of the scheme to make profit, or the transaction constituted an adventure in the nature of trade the profit would be charged as revenue gain.

(f) Income-tax---

----Capital asset---Acquisition of right shares by assessee, which had direct nexus with his existing share holding would be in the nature of an investment and not acquisition of a stock in trade.

Miles v. Safe Deposit & Trust Co. (1921) 66 L Ed 923 ref.

(g) Income-tax---

----Capital asset---Old stock holding, a capital asset---Right to acquire fresh stock, which emanated from old stock holding would continue to bear the same character; the original shares and subsequent acquisition ranked pari passu and were indivisible part of the capital of the company.

(h) Income-tax--

----Capital assets---Right to subscribe for shares was property and a capital asset ---Assessee, a shareholder in two companies "C" and "N"---Sale proceeds of - the right shares of "N" company were invested by the assessee in the purchase of the shares of "C" company when the latter company increased its capital after complying with all legal requirements and such shares in pursuance of S.105-C, Companies Act, 1913 were offered to assessee--?Acceptance of such offer by assessee could not have any bearing on the earlier receipt of the surplus on the sale of the share of "N" company ---Chargeability in gain in the hands of assessee, from sale of right shares of "N" company, had to be determined in point of time (September 1958) when the sale took place; that would have no ~ nexus with the subsequent issue of right shares by the "C" company and the acquisition thereof by the assessee---Two transactions were distinctive and separable---No justification was available to take into consideration the subsequent utilization of sale proceeds for the purpose of the assessee's assessment for the next year (1959) and draw adverse inference against the assessee.

Kodak Ltd. v. Clerk 4 TC 591/532; Ram Nairan Sons Ltd. v. Commissioner of Income-tax (1961), 41 TTR 534; Oriental Investment Co. Ltd. v. Commissioner of Income-tax (1957) 32 ITR 664; Lakshminarayan Ram Gopal v. Government of Hyderabad (1954) 25 ITR 449; Farmer v. Trustees of the Late William Cotton (1915) AC 922 and Great Western Railway Co. v. Bater (1922) 8 Tax Cas. 2.31 ref.

(i) Income-tax--

----Transaction whether adventure in the nature of trade or capital gain---"C" company was a broad based public limited company, whose shares were quoted on the stock exchange ---Assessee, who was an industrialist and promoter shareholder of number of companies and derived his income from properties, divided from companies, remuneration as Director and shares from firms as partner---Dealing in shares being not his business, if assessee had decisive voice in the affairs of company and exercised control over another "N" company that would not mean that two companies were sham, or that their corporate character was merely a cloak and in reality they were agents for the assessee---Burden to prove that corporate personality was a farce lay on the department---Where no legal evidence was available to support such an inference and sustain the conclusion that the entire exercise as to the subscription of right shares, and their sale later was wholly an adventure in the nature of trade and not capital gain, it was wrong to invoke the principle of piercing the corporate veil as transaction of sale of shares was not related to the business normally carried on by the assessee Company.

Irrigation Industries Ltd. v. Minister of National Revenues (1962) 62 D.T.C.1131 ref.

(j) Income-tax---

----Capital asset---Corporate shares are in a different position as they constitute something the purchase of which in itself is an investment--?Corporate shares are not in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business---Acquisition of corporate shares is a recognized method of investing in a business enterprise.

Irrigation Industries Ltd. v. Minister of National Revenues (1962) 62 DTC 1131 ref.

(k) Income-tax---

----Capital asset---Right shares were subscribed by assessee by way of investment---Gain accruing from the sale of such shares not being a revenue gain was immune from taxability.

(1) Income-tax--

----Adventure in the nature of trade---When a receipt is of casual and non?recurring in character, it shall be liable to tax, if it arises out of business.

(m) Income-tax---

----Adventure in the nature of trade---Question as to whether or not a transaction was adventure in the nature of trade, had to be determined keeping in view the intention of the assessee, in the light of the legal requirements of concept of the business.

Janki Ram v. Commissioner of Income-tax, Calcutta AIR 1965 SC 1898 ref.

(n) Income-tax Act (XI of 1922)---

----S.2(4)---Adventure in the nature of trade---Determining factors.

It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the income-tax authorities. The question whether profit in a transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact. The question "adventure in the nature of trade" in subsection (4) of section 2 of the Act postulates the evidence of certain elements in the adventure which in law would invest it with the character of trade or business and that a tribunal while considering a question whether a transaction is or is not an adventure in the nature of trade, before arriving at its final conclusion on facts, has to address itself to the legal requirements associated with the concept of the trade' or business. Such a question is one of the mixed law and fact and the decision of the tribunal thereon is open to consideration under section 66(1) of the Act ... ... no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record. But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases. If, for instance, a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and subdivided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of the transaction of purchase, the nature of commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture.

Janki Ram v. Commissioner of Income Tax, Calcutta AIR 1965 SC 1898; G. Venkataswami Naidu & Co. v. Commissioner of Income-tax (1959) Supp. 1 SCR 646 and AIR 1959 SC 359 ref.

(o) Income-tax Act (XI of 1922)---

---S.66(1)---Reference---Question of law-.-Question as to whether or not the, sale of the second lot of the shares resulting in a gain to the assessee constituted an adventure in the nature of trade, was a mixed question of law and fact and the High Court fell in error in treating it a pure question of fact and returning the reference to the Tribunal without answering the question referred to it.

Ram Nairan Sons Ltd. v. Commissioner of Income Tax (1961) 41 ITR 534; Oriental Investment Co. Ltd. v. Commissioner of Income Tax (1957) 32 ITR 664; Lakshminaryan Ram Gopal v. Government of Hyderabad (1954) 25 ITR 449; Farmer v. Trustees of the Late William Cotton (1915) AC 922 and Great Western Railway Co. v. Bater (1922) 8 Tax Cas. 231 ref.

(p) Income-tax--

----Capital asset---Purchase of right shares by assessee being an investment, gain from sale of such shares was an accretion to the capital and not at all an adventure in the nature of trade.

Ram Nairan Sons Ltd. v. Commissioner of Income Tax (1961), 41 ITR 534; Oriental Investment Co. Ltd. v. Commissioner of Income Tax (1957) 32 ITR 664; Lakshminaryan Ram Gopal v. Government of Hyderabad (1954) 25 ITR 449; Farmer v. Trustees of the Late William Cotton (1915) AC 922 and Great Western Railway Co. v. Bater (1922) 8 Tax Cas. 231 ref.

Muhammad Amin Butt, Advocate Supreme Court instructed by Maqbool Ahmad Qadri, Advocate-on-Record for Appellants.

Nemo for Respondents.

Date of hearing: 2nd March, 1991.

JUDGMENT

MUHAMMAD AFZAL LONE, J.---In these connected appeals leave to appeal was granted to examine the issue, as to whether the acquisition of right shares by the appellants, in the circumstances of the case, could be treated as an adventure in the nature of trade resulting in revenue gain, and that in this connection the two questions referred to the High Court for its opinion were pure questions of fact or mixed questions of law and facts?

2. The facts giving rise to these appeals are that a private limited company by the name of Colony Sarhad Textile Mill Nowshera, was floated by four brothers, namely, Naseer A. Sheikh, Aziz A. Sheikh, Mughis A. Shaikh and Farooq A. Sheikh, the appellants before us, in association with some other persons, in the year 1952 with paid-up capital of Rs.37,50,000. The appellants subscribed 39330 ordinary shares of `A' class of Rs.50 each, and 15000 `B' class ordinary shares of Rs.5 each. Out of the remaining share holding of the company, shares of the value of Rs.12,07,650 were subscribed by two other public limited companies, namely, Colony Textile Mill Limited, Multan, and Colony Woollen Mill Limited, Multan. The latter company is one of the appellants (CA. No.384/1980). Both the companies were largely controlled by the appellants. The shares of the Nowshera Company were not quoted on the stock exchange and up to 1957-58 it did not declare any dividend. In fact uptil 1956-57, account year, the huge unabsorbed depreciation was to be set up against the future profits. According to the appellants, in the year 1955, they moved the Controller of Capital Issues for increase of the capital of Nowshera Company. The permission was accorded on 12-9-1957 and the capital allowed to be increased by Rs.22,50,000, against which in February 1958, only the shares of the value of Rs.12,50,000 were subscribed. The paid-up capital of the company thus, rose to Rs.50,00,000. The four brothers made an investment, in. the fresh stock to the tune of Rs.11,48,750 for acquisition of 21975 `A' class shares and 10000 `B' class shares of the denomination aforesaid. Thus, out of paid-up capital of Rs.50,00,000 the capital share, under direct and indirect control of the appellants was Rs.43,97,900. It may be added that the Colony Woollen Mill Ltd., initially invested Rs.1,30,000 in the purchase of 2600 `A' class shares of Nowshera Company and after the increase of its capital was allotted 1523 `A' class shares of the value of Rs.77,650. The investment of this appellant was thus raised to Rs.2,07,650.

3. In September 1958 the four brothers resolved to make the Nowshera Company as a subsidiary, of Colony Textile Mill, Multan, by sale of their entire share holding. Similarly resolution No.6 dated 9-9-1958 was passed by the Colony Textile Mill, Multan, accepting the offer and to purchase the share holding of the appellants, which was eventually sold at double the face value, for Rs.63,19,250 against investment of Rs.31,90,250. According to the appellants, the takeover price of Nowshera Company was worked out on the same basis, on which a few months earlier, the Colony Textile Mill, Multan purchased another Mill by the name of Bhakkar Textile Mill, from Thal Development Authority. The surplus on the sale of the share holding of the four brothers thus amounted to Rs.31,29,000. Likewise the sale of the entire holding of Nowshera Company by the Colony Woollen Mill Ltd. resulted in a gain of Rs.2,03,749 over its investment. On the acquisition of Bhakkar Textile Mill, by the Colony Textile Mill Ltd., Multan, the latter resolved to issue right shares. Against the sale proceeds of Rs.63,19,250 the four brothers acquired right shares of the Colony Textile Mills, Multan, the market value whereof was Rs.200 above tile face value.

4. During the course of the assessment year 1959-60, the Income Tax Officer treated the transaction of sale of shares by the four brothers as an adventure in the nature of the trade. He turned down the appellants' plea that dealings in shares had never been their business, and the investment by them in the share holding of Nowshera Company was not motivated by any consideration, except acquisition of its assets. Consequently, he brought the receipt of Rs.31,29,000 under charge, in the hands of the appellants, as a revenue gain. The factors which influenced the Assessing Officer in taking this decision were that the appellants had acquired certain shares, which were sold away by them in the immediately succeeding year; and that they made the investment in the additional shares through borrowed capital, which could not have been done, but to acquire the stock in trade for earning profit. In his estimation, the acquisition of additional shares was not without motive. He maintained that both the companies were under the control of the appellants and it was under a well considered pre-planned scheme that sale of the share holding of Nowshera Company was made to the Colony Textile Mill, Multan, at double the face value of the shares to earn a vast block of profit. In this connection, the Assessing Officer further noticed that the four appellants designedly synchronized the sale of the shares of Nowshera Company with the occasion when the right shares were issued by the Colony Textile Mill, Multan., Similarly in the assessment year 1959-60, the Income Tax Officer treated the gain of Rs.2,03,749 in the hands of Colony Woollen Mill Ltd., on the sale of shares of Nowshera Company, as income from an adventure in the nature of trade, and subjected it , to tax, under the head `income from business'. The assessee's contention that this profit was in the nature of capital gain was rejected.

5. The appellants preferred separate appeals before the Income Tax Appellate Tribunal, which took note of the close relationship between the two companies under the complete control of the four brothers, who in turn could direct such course of action, as was beneficial to them. The Tribunal observed that the Nowshera Company was not a profit earning concern before its merger, but even then the appellants acquired bulk of the shares out of the stock issued subsequently. Increase in the capital of the company was viewed as a result of manipulation and second investment treated to have been made under a well designed plan among others for the reason that only a few months after the acquisition of the shares, these were unloaded. It was concluded that the sole aim was to make a huge profit out of the sale. The Tribunal, however, drew a distinction between the sale of the original stock holding and that of the shares acquired subsequently on the ground that Nowshera Company was incorporated in the year 1952, when the N.-W.F.P. Government gave certain facilities; the purpose of the original acquisition of shares was to make investment and that there was sufficient time between the said acquisition and the sale. It was held that the various factors which prompted the appellants to. subscribe for' additional shares were non-existent when they acquired the shares later on of the value of Rs.11,48,750. For all these reasons the original stock was considered as a capital asset and the profit accruing on it termed as capital gain, not taxable at the relevant time, but that arising from the sale of subsequent lot was held as revenue gain, chargeable to tax. The appeals were thus partly accepted, and the I.T.O. was given a direction to revise the computation of taxable income, accordingly. The appellants as well as the Commissioner of Income Tax applied to the Tribunal under section 66(1) of the Income Tax Act to refer to the High Court certain questions of law arising out of its order aforesaid. With the consent of the parties, the Tribunal referred the following two questions to the High Court:---

"(1) Whether in the circumstances of the case the Tribunal was right in holding that the surplus arising on the sales of shares of Colony Sarhad Textile Mill acquired as right shares in 1958 constituted an adventure in the nature of trade resulting in revenue gain liable to tax under the Income Tax Act?

(2) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in treating part of the total profits earned on sale of shares as capital gain on the original investments?

6. The term `business' is defined in section 2(4) of the Act "and includes any trade, commerce, or manufacture or any adventure in the nature of trade, commerce or manufacture". The High Court dilated upon this definition and after review of some case-law from the foreign jurisdiction, did not consider it as exhaustive. The Court also referred to clause (vii) of subsection (2) of section 4, which is an exclusionary clause and excluded from taxability any receipt which is of casual and not recurring nature not arising from any business. The Court noticed the difficulty faced in ascertaining as to whether or not an isolated transaction out of which casual and non-recurring receipts arise, is in the nature of business and trade, for the purposes of taxability. According to the case-law cited in the impugned judgment, an adventure can be a trading adventure and profits accruing therefrom brought under charge, if the article sold is found to have been acquired with the object of trade, depending on the relevant facts of each case. In the light of this criterion, agreeing with the Tribunal, the High Court remarked that the appellants purchased the additional shares of the Nowshera Company, with a background, under a pre-planned scheme, with the sole object to sell them on profit and upheld the Tribunal's finding that these considerations were not present at the time of acquisition of first lot when the Company was formed in the year 1952.

7. Before the High Court on behalf of the appellants, it was strenuously contended that the sale of the additional shares in their favour was under' section 105-C of the Companies Act, 1913, icy virtue of their being existing members of the Company; this acquisition was neither voluntary nor motivated by business consideration. These factors in the submissions of their learned counsel completely negatived the assumption that the, transaction was in the nature of trade and that the shares were subscribed with the intention of resale to earn profit. But, the learned Judges were not impressed by this line of arguments. They thought that the dominating position of the four brothers in both the Companies was quite material in determining the real nature of the transaction and observed that despite the apparent independent corporate personality of a Company the Court was not precluded from lifting the veil shadowing such corporate character to determine its taxability. In this regard reliance was placed on a passage from Gowers Modern Company Law Second Edition, pp. 183 to 209, quoted with approval in President v. Mr. Justice Shaukat Ali PLD 1971 SC 585. In conclusion the High Court took the view that the Tribunal by piercing into the veil of incorporation of the two companies correctly described the real transaction. Such a finding, according to the learned Judges of the High Court, having been concluded by a finding of fact, did not give rise to any question of law. The reference to the High Court was thus, considered as incompetent and returned to the Tribunal unanswered.

8. The conclusion reached by the High Court that the sale of the subsequent lot of shares was made by the appellants with the object of earning, profit, under a preconceived scheme, is largely based on the assumption that the increase in the share capital was got made by them for their personal aggrandizement. That they subscribed for the bulk of the additional shares and then disposed of the same at double the face value, though the company had not declared any dividend and financially was not well off. On behalf of the appellants, it has vehemently been contended that the basis on which the High Court proceeded are factually incorrect and legally untenable. To begin with the value of the shares, it has been argued that against the paid-up capital of Rs37,50,000 the company at the relevant time held reserves to the tune of Rs.52,80,166, which being 40.30% of the paid-up capital, the intrinsic worth of the share worked out to be Rs.120 and against this intrinsic value the company sold the shares at 100% of the face value. As regards the increase in the capital, the learned counsel's submission is that the funds were required for balancing and extension of the company's plant; that for increase of the capital, an application was moved to the Controller of Capital Issues in the year 1956, which was duly processed and the Company's request accepted on 12-9-1957 for increase of Rs.22,50,000 but only shares of the value of Rs.12,50,000 were issued. It has been forcefully urged that the capital was increased, for the requirements of the company rather than for the personal benefit of the Directors. It is thus, argued that when the company applied for increase of the capital, or for that matter when the right shares were issued by it in February 1958, there was hardly any ground on the record to level even a far-fetched allegation that the appellants acquired right shares to unload the same at a profit. In this context, it is pointed out that, the Colony Textile Mill Multan, increased its capital, resulting in issue of right shares in September 1958 i.e. about 7 months after the additional shares of Nowshera Company were acquired by the appellants. It is further submitted that the High Court acted on mere surmises in imputing motive to them for this acquisition as there was no material before it to draw such an inference.

9. These contentions do not appear to be without substance. It seems to us that the learned Judges of the High Court did not examine the financial viability of the company from the angle projected by the learned counsel for the appellants and failed to take notice that under section 3 of the Capital Issue (Continuance of Control) Act, 1947, as then in force, no company incorporated under the Companies Act could make an issue of capital without the consent of the Federal Government, who could qualify such consent with such conditions as it thought fit to impose. In 1955 the Company moved the Controller of Capital Issue, as nominee of the Federal Government, for grant of permission for fresh issue of capital and he accorded recognition on 12-9-1957. The company did not utilize the entire increase, but issued additional shares of the value of Rs.12,50,000 only. The long interlude between the filing of the application by the company under section 3 and the issue of shares, pursuant to the consent of the Federal Government and further time lag between such issuance and the issue of right shares by the Colony Textile Mill Multan, nullifies the inference that the subsequent acquisition of shares in question and the sale thereof was motivated by profit earning. The recognition to the increase in capital accorded by the Controller of Capital Issue on behalf of the Federal Government was without imposition of any condition. Before grant of such permission, he must have examined the reasons set forth by the company, for which additional capital was required by it. It is to be borne in mind that qua the company, the Directors hold a fiduciary relationship and are required to exercise powers vesting in them for the benefit of the company. But, when the need of the company for increase of capital is established, the fact that in promoting the interest of the company, the Directors make use of this need to promote their own interest as well, their action cannot be dubbed as breach of trust. In Hirsche v. Sims (1894) AC 654 it is laid down:

"If the true effect of the whole evidence is that the defendants truly and reasonably believed at the time that what they did was for the interest of the company they are not chargeable with dolus malus or breach of trust merely because in promoting the interest of the company they were also promoting their own or because they afterwards sold shares at prices which gave them large profits."

10. The appellants were the existing shareholders of the Nowshera Company and by virtue of this status, they became entitled to certain rights and privileges. Under section 105-C of the Companies Act, when the company decides to issue further shares, it is imperative that newly issued shares, in the first instance, 'should be offered to the members whose names are borne on the register of the company, in proportion to the existing shares held by them. It was in exercise of this right that the appellants acquired the fresh shares. The profit motive of an assessee in embarking upon a transaction is not decisive. The reasons being that an accretion to capital does not become chargeable to tax simply because the asset was acquired with the idea that it would be sold at profit. Thus, accrual of profit from the sale of the shares by the appellants is not of much significance, what is material, is the question whether the sale was of "capital assets" or of "stock in trade". If the shares sold were capital assets, the proceeds of sale would be an accretion of capital. On the other hand, if shares were acquired by the appellants and sold away, in the course of their business in pursuance of the scheme to make profit, or the transaction constituted an adventure in the nature of trade, the profit would be charged as revenue gain. The appellants' case is that the acquisition of right shares of Nowshera Company by them, which had a direct nexus with their existing share holding, was in the nature of an investment and not acquisition of a stock in trade. In this connection, we may refer to Miles v. Safe Deposit and Trust Co. (1921) 66 L-Ed 923 (926) wherein it is stated:

'The right to subscribe to the new stock was but a right to participate, in preference to strangers, and on equal terms with other existing stockholders, in the privilege of contributing new capital called for by the corporation,--an equity that inheres in stock ownership under such' circumstances as a quality inseparable from the capital interest represented by the old stock???.?

11. Undoubtedly, both the Tribunal and the High Court treated the appellants' old stockholding as capital asset. The right to acquire fresh stock, which amenated from such holding would thus, continue to bear the same character; the original shares and the subsequent acquisition ranked paripassu and were indivisible part of the capital of the Nowshera Company. In Hari Brother (Private) Limited v. Income Tax Officer (1964) 51 ITR 399 a right to subscribe for shares was considered as property and a capital asset. The sale proceeds of the right shares of the Nowshera Company were invested by the appellants in the purchase of the shares of the Colony Textile Mill, Multan, when the latter company increased its capital, after complying with the requirements of section 3 of the Capital Issue (Continuance of Control) Act, and such shares in pursuance of section 105-C were offered to them; acceptance of such offer could not have any bearing on the earlier receipt of the surplus on the sale of the shares of the Nowshera Company. The chargeability of gain in the hands of the appellants, from the sale of right shares of Nowshera Company, had to be determined in point of time in September, 1958 when the sale took place; that would have no nexus with the subsequent issue of right shares by the Colony Textile Mill Multan, and the acquisition thereof by the appellants. The two transactions are distinctive and separable. The High Court was not justified to take into consideration the subsequent utilization of sale proceeds for the purpose of the appellants' assessment for the year 1959-60 and draw adverse inference against them. It would be instructive to refer here to the observations made by Phillimore, J. in Kodak Ltd. v. Clerk (4 TC 599/532):

"A company may control another company or an individual, or an individual may control a company; but it does not necessarily follow, because individual controls the company, or the company controls the' individual, that the business carried on by the person or the company controlled is necessarily a business carried on by the controller."

In the case before us, the Colony Textile Mill, Multan, is a broad based public limited company, whose shares are quoted on the stock exchange. The appellants might have decisive voice in the affairs of that company and also exercised control over the Nowshera Company, but that does not mean that the two companies were sham; or their corporate character was merely a cloak and in reality they were agents for the appellants. The burden to prove that the corporate personality was a farce lay on the department. There is however no legal evidence to support such an inference and sustain the conclusion that the entire exercise as to the subscription of right shares and their sale later was wholly an adventure in the nature of trade and not capital gain, We feel that the High Court was wrong in invoking the principle of piercing the corporate veil. It appears to us that the learned Judges approached the issue on incorrect premises and overlooked the legal provisions governing this case.

12. The appellants are industrialists and promoters-shareholders of a number of companies. They derive income from properties, dividend from companies, renumeration as Directors and shares from firms as partners. According to their learned counsel, dealing in shares is not their business.

There is some weight m this submission. It seems to us that the transaction of sale of shares was not related to the business normally carried on by the appellants. Dealing with cases in which nature and quantity of property purchased and sold was taken as being indication of an adventure in the nature of trade, Martland, J. in Irrigation Industries Ltd. v. Minister of National Revenues (1962) 62 D.T.C.1131(at page 1133) observed:

"Corporate shares are in a different position because they constitute something the purchase of which is in itself an investment. They are not in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well recognized method of investing capital in a business enterprise."

After thorough examination of the record before us, we are of the view that the right shares of Nowshera Company were subscribed by the appellants, by way of investment and the gain accruing from the sale of these shares not being a revenue gain was immune from taxability. The findings to the contrary recorded by the departmental authorities, with which unfortunately the High Court also concurred, are not founded on any legal evidence. But the argument of the learned counsel for the appellants, however, is that even if the sale proceeds of the second lot of the shares were not considered as capital accretion, the gain being of casual and non-recurring nature could not be treated as income chargeable to tax It is to be noticed that even if a receipt is of casual and non-recurring in character, it shall be liable to tax, if it arises out of business. The definition of the term `business', as given in section 2(4) of the Act, has already been noticed. The question as to whether or not that a transaction is an adventure in the nature of trade has to be determined, keeping in view the intention of the assessee, in the light of the legal requirements of concept of the business. This issue has been discussed in Janki Ram v. Commissioner of Income Tax Calcutta AIR 1965 SC 1898 as follows:---

"It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the income-tax authorities. It has consistently been held by this Court that the question whether profit in a transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact; see G. Venkataswami Naidu & Co. v. Commissioner of Income-tax (1959). Supp 1 SCR 646 (AIR 1959 SC 359) in which case this Court held that the question "adventure in the nature of trade" in subsection (4) of section 2 of the Act postulates the evidence of certain elements in the adventure which in law would invest it with the character of trade or business and that a tribunal while considering a question whether a transaction is or is not an adventure in the natudre of trade, before arriving at its final conclusion on facts, has to address itself to the legal requirements associated with the concept of trade or business. Such a question is one of mixed law and fact and the decision of the Tribunal thereon is open to consideration under section 66(1) of the Act ... ... ... ... .... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record. But general criteria indicating that certain facts have dominant' significance in the context of other facts have been adopted in the decided cases. If, for instance, a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture."

13. In Ram Nairan Sons Ltd. v. Commissioner of Income Tax (1961), 41 ITR 534), the assessee company was dealer in shares and securities and also carried on business as managing agent of other companies. In order to acquire the managing agency of a textile mill, the assessee purchased its 1507 shares from its managing agent @ Rs.2,321.8 per share against the market value of Rs.1610 only. Two months later, the company disposed of 400 shares at loss of Rs.1,78,438 which was claimed as a capital loss. This claim was refused by the department. Agreeing with the High Court the Supreme Court of India held that the acquisition of shares was not acquisition of stock in trade, but of managing agency, which was acquisition of a capital asset and the loss incurred on the sale of 400 shares was of capital nature. The Court observed that' neither the fact that the company borrowed at interest to purchase the shares nor that it was a dealer in the shares nor that the company had entered the shares in the statement of shares, in which trading transactions were carried altered the real character of the acquisition. Reference was made to Oriental Investment Co. Ltd. v. Commissioner of Income Tax (1957) 32 ITR 664) to hold:

"that the question whether the appellant's transaction amounted to dealing in shares and properties or to investment was a mixed question of law and fact and that the legal effect of facts found by the Tribunal on which the assessee could be treated as a dealer or investor is a question of law."

In the last mentioned case the assessee-company had within its object the dealing in shares and further made assertion before the Income Tax Department of being treated as a dealer in investment in properties. This contention was repelled by the department up to the assessment year 1939-40. But for subsequent three assessment years, the department accepting the assessee's plea treated it as dealer in shares and securities etc., and assessed it on that basis. For the assessment year 1943-44 the assessee filed return on that basis, but subsequently submitted revised return contending that it was an investor, not dealer in shares. The Income Tax Officer did not accept the revised return and held the company as dealer in shares. This assessment order was upheld by the Tribunal. It maintained that:

"The company having itself raised the point in all the prior years that it was a dealer in investments and properties, it would appear to be difficult to understand why the company now seeks to get the position changed and desires the Income-tax Officer to treat it as if it was not dealing m shares, securities and immovable properties???but we have no doubt that, according to the company's memorandum of association and its own assertions made all along in the past, the assessee-company is a dealer in investments and properties and the income arising to it on the sale thereof has been rightly held by the Income-tax Officer to be business profits liable to tax under the ordinary provisions of the Income-tax Act".

The company applied to the Tribunal under section 66(1) of the Income Tax Act for reference of, inter and, question of law as to whether the company could rightly be treated as dealer in investments and properties, but the Tribunal turned down this reference by observing that:

"The Tribunal did not decide the point merely because the company's memorandum of association gave power to the company to deal in investments and properties, but it was actually found that the company had dealt m investments and properties throughout and had also all along in the past asserted that it was a dealer in investments and

properties."

The matter was then lifted before the Supreme Court and after an exhaustive review of the case-law, disagreeing with the High Court, the Court quoted with approval the following observations appearing in Lakshminaryana Ram Gopal v. Government of Hyderabad (1954) 25 ITR 449, 461):

"As to what are the characteristics of the business dealing in shares or that of an investor is a mixed question of fact and law. What is the legal effect of the facts found by the Tribunal and whether as a result the assessee can be termed a dealer or an investor is itself a question of law."

14. In Farmer v. Trustees of the Late William Cotton (1915) AC 922, 932, Lord Parker hinted upon the difficulty experienced in distinguishing between the question of fact and question of law and observed that:

"Where all the material facts are fully found, and the only question is whether the facts are such as to bring the case within the provisions properly construed of some statutory enactment, the question is one of law only."

In Great Western Railway Co. v. Bater (1922) 8 Tax Cas. 231, 244 it was found that findings recorded by the Commissioners on pure question of fact should not be disturbed unless they had no evidence before them upon which they, as reasonable men, could not come to the conclusion, arrived at by them. In that case the issue before the Court was as to whether or not a clerk who held a public office fell within the Schedule `E', Lord Atkinson said:

"What I have many times in this House protested against is the attempt to secure for a finding on a mixed question of law and fact the unassailability which belongs only to a finding on question of pure fact. This is sought to be effected by styling the finding on, a mixed question of law and fact a finding of fact.

15. The reported cases sufficiently indicate that the question as to whether or not the sale of the second lot of the shares resulting in a gain to the appellants constituted an adventure in the nature of trade, was a mixed question of law and fact and the High Court fell in error in treating it as a pure question of fact and returning the reference to the Tribunal without answering the questions referred to it. We have undertaken the entire exercise to clarify the correct legal position, otherwise in the face of the findings recorded by us that the purchase of the right shares of Nowshera Company was an investment and, therefore, the gain from the sale of those shares, was an accretion to the capital; the question as to whether or not the sale constituted an adventure in the nature of trade resulting in revenue gain does not arise. Both the questions are disposed of, accordingly.

For all these reasons, these appeals are accepted.? The appellants? assessment shall be revised accordingly.? The parties are left to bear their own costs.

M.B.A./ N-303/S???????????????????????????????????????????????????????????????????????????????? Appeal accepted.