1994 P T D (Trib.) 1034

[Income-tax Appellate Tribunal Pakistan]

Before Nasim Sikandar, Judicial Member and Iftikhar Ahmed Bajwa, Accountant

Member

ITA No. 1950/LB of 1992-93, decided on 16/02/1994.

Per Iftikhar Ahmad Bajwa, Accountant Member--

(a) Income-tax---

----Venture in the nature of trade ---Assessee, a company---Unless a concrete shape is given to the subsidiary objects of Memorandum of Association of the company, a company cannot be regarded as having ventured in business other than the main business---To have intention of doing a business and being in a business are different matters---Mere mention of an activity in the Memorandum of Association of the company, at best, raised a reputable presumption which can be dispelled by showing that the company actually did not carry out that business.

1980 PTD 322 and 1990 PTD (Trib.) 671 ref.

(b) Income Tax Ordinance (XXXI of 1979)---

----S. 27(2)(a)(ii)---Capital gain---Exemption---Adventure in the nature of trade ---Assessee, a company deriving income from a restaurant---Assessee had purchased property for setting up of a Five Star Hotel---Balance-sheets of the assessee showed the payment 8 "work in progress" under the head fixed assets---Record showed that detailed feasibility studies were prepared for the purpose of obtaining loan from Bank and assessee had applied for a loan from the Bank for setting up of such hotel---Assessee's request for loan was refused by the Bank after detailed negotiations---Available evidence thus clearly showed that property in question had been purchased by assessee for setting up of a hotel---Gain on sale of such property being not a profit in the ordinary course of business, assessee's claim for exemption under S.27(2)(a)(ii) on such gain was justified in circumstances.

1980 PTD 322 and 1990 PTD (Trib.) 671 ref.

(c) Income-tax---

----Addition---Assessee had entered into an agreement with a contractor for demolition of building and levelling of the plot of land and it was agreed upon that in lieu of any consideration for the job of demolition and levelling the plot contractor will take away the scrap material---Agreement in question was prepared by a prestigious law firm and witnessed by two responsible persons-- No evidence to the contrary was brought on record by the Assessing Officer Estimate of income of assessee on account of "income from sale of scrapped building material" by the Assessing Officer, without any basis, was not justified in circumstances.

Per Nasim Sikandar, Judicial Member--

(d) Income-tax---

----Adventure in the nature of trade---Determining factors---Principles.

Where transaction was not in line of business of the assessee but was an isolated or single, instance of a transaction, the onus was on the department to prove that the transaction was an adventure in the nature of trade.

There can be no definition of the words "exercising a trade". It is only another mode of expressing "carrying on a business"; but it certainly carries with it the meaning that business or trade must be habitually or systematically exercised, and that it cannot apply to isolated transaction.

If the purpose is investment, the fact that in varying the investment, sale of shares results in profits will not make such profits revenue income unless it is shown that variation amounts to dealing in investments. If it is a case of numerous purchases and sales and the sales being within a short time of the purchase, the conclusion may be that it was a case of trading for then the inference would be that the purchases were made with the sole object of turning it over and selling it at a profit. If on the other hand there are a few sales although a number of purchases and when sales are made at long intervals after the purchase, the conclusion more appropriately will be investment, notwithstanding the fact that there was no intention of holding over the shares purchased and the purchase was in expectation of being able to sell it off at profit when the shares appreciate in value.

In all such cases, the prime factor to be examined is the whole of the transaction in its totality coupled with the intention of those engaged in the transaction not only at the relevant time but also before and after the transaction has been completed.

The question whether a transaction is an adventure in the nature of trade is essentially a question of fact and that fact has to be ascertained from all the circumstances in the case.

Mere intention to resell may not justify the inference that the transaction was in the nature of trade but it would be a very important and relevant fact when taken with other facts.

It is impossible to evolve any formula, which can be applied in determining the character of isolated transactions, which come before the Courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on border line that cause difficulty. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and was the purchase of the commodity and its resale allied to his usual trade or business or was incidental to it? Affirmative answer to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by an act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resalable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture.

None of these tests in itself was conclusive and that cumulative effect of all the factors must be looked into.

Thus it is only the facts of every case that will be seen before holding an isolated transaction or a series of transactions to be ventures in the nature of a trade and the resultant profits to be revenue receipts.

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 it is assessable to income-tax. But it is equally well established that enhanced values obtained from realization 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 speculatively, in order to make gain, dealing in such investments as a business 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.

A single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade; but the sale of a piece of property if that is all that is involved in the plunge may easily fall short of anything in the nature of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it. Much depends on the circumstances.

Anyone of the conventional modes of doing business does not matter much while probing the nature of the activity actually being carried on as an individual, firm, association of persons or a limited company including other bodies corporate. However, last mentioned entity is distinguishable from the rest for a number of reasons, most glaring being its perpetuity or existence and a defined sphere of activities.

When a partnership firm comes into existence it can be predicated of it that it carries on a business because partnership according to section 4 of the Partnership Act is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. But when a company is incorporated it may not necessarily come into existence for the purpose of carrying on a business. According to Companies Act any seven or more persons (or, where the company to be formed will be a private company any two or more persons) associated for any lawful purpose may, by subscribing their names to a memorandum of association form an incorporated company and the lawful purpose for which the persons became associated might not necessarily be carrying on business. When a company is incorporated for carrying out certain activities it would be relevant to enquire what are the objects for which it has been incorporated. If one finds the individual and the company spending exactly on the same basis, then there would be no difference between them at all. But the fact that the limited company comes into existence in a different way is a matter to be considered. An individual tomes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose, and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when one comes to decide whether doing that is carrying on a business or not.

The charter of activity of a limited company otherwise known as memorandum of association is certainly the most relevant document to be looked into while examining if an act of the Managers (the governing body of a company by whatever name styled) is intra vires or ultra vires of the objects. In order to have a free hand in a dynamic business world the charter or the clauses of memorandum are usually framed in an all embracing manner. These clauses have their origin in the charters granted by the Crown in cases of joint stock companies in the late 15th or early 16th century. These charters were subject to change by or under the authority of the Crown in certain situations and for prohibitive fees to be paid. The nature, style, and phrases used having remained somewhat stagnant, their import has certainly undergone some change without, however, affecting the orthodox principles of their interpretation.

For deciding any transaction to be in the nature of trade and profits earned therefrom as Revenue receipts there was no absolute rule to hold that provisions in the memorandum or articles of association will determine the commercial nature of

the transaction: 'The memorandum and articles of association are not conclusive against or in favour of the company for .the question is not what business the taxpayer professes to carry on but what business he actually carries on".

A special rule of construction has in some cases been applied where the objects of the 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 of this main object as limited and controlled thereby. The existence of words, which give a power to do anything are ineffective except in so far as incidental to main object.

The power to purchase and sell immovable property to invest monies of the company and to carry on any other business must be construed as ancillary to the business of the company, which was the main object of the company. Therefore, a company may have a primary object and the rest of them stated in the memorandum could be construed to be ancillary only.

Of course the company is competent to enlarge its business activities and embark upon further enterprises including one or more described in the memorandum.

The following principles on the issue emerge:

(1) That no hard and fast rule can be adopted in such cases and, therefore, each transaction will have to be judged on the basis of its own facts;

(2) That mere frequency of a transaction, may not by itself amount to venture in the nature of trade;

(3) That in case of a solitary transaction heavy burden lies on the Revenue to establish that the impugned transaction in fact was a business and receipt out of it business receipts;

(4) That intention to make profit may be an important element to be considered while judging the nature of a transaction but here again presence of such an intention per se will not make a transaction a "business";

(5) That special care will have to be taken while considering sale or purchase of immovable properties where, such property is evidently not a stock in trade.

(6) That it is legal to examine such like transactions in the light of the charters or memorandum of associations in cases of limited companies statutory corporations and other bodies corporate but mere permissibility of a transaction does not by itself mean carrying on the business of that kind, and

(7) That the distinction between a fixed or capital asset and circulating capital or stock in trade; a "business" and an "investment" should always be in the focus of the assessing officer while dissecting a transaction of the kind.

Mere purchase and sale of property, though permitted by some of the recitals in the memorandum of association of the company was not sufficient to hold the transaction to be one in the nature of trade nor the resultant gains to be of Revenue nature. The transaction being a solitary one a heavy burden would lie on the revenue to establish the same to be in the nature of a business.

1980 PTD 322; 1990 PTD (Trib.) 671; Davies v. Shell 22 ITR Supp.l (CA); Kanga and Palkiwala from their treatise "Income Tax", p. 140; Thew v. South West Africa Co' Ltd. 9 TC 141; Sarooj Kumar Mazumdar v. CIT, West Bengal (1959) 37 ITR 242; Grainger and Sons v. Willing Lane Gough 1969 PTD 317 at 329; PICIC v. CIT 1980 PTD 322; Rajputana Textiles Ltd. v. CIT, Bombay City (1953) 24 ITR 46; G. Venkata Swami Naidu & Co. v. CIT (1959) 35 ITR 594; Indian Hume Pipe Co. Ltd. v. CIT (1992) 195 ITR 386; CIT v. Anandlal Becharlal & Co. 1990 PTD 345; Edulji Dinshaw v. ITO 19% I" TD 155; KMO Chettiyar Firm v. CIT 1934 ITA 155;(1966) 60 ITRy65; (1966) 62 ITR 578; 40 Tax Cas. 523; 38 Tax Cas. 203; AIR 1959 SC 1252; (1965) 57 ITR 21; (1976) 102 ITR 202; AIR 1965. SC 1905; (1947) 15 ITR 50; (1903-1911) 5 TC 159; 1985 SCMR 284; 1989 PTD 460; 1991 PTD (Trib.) 786; 14 Tax Cas. 648; (1957) 31 ITR 92; Naseer A. Sheikh and 4 others v. CIT (Investigation) 1992 PTD 62; Naseer A. Sheikh v. CIT PLD 1977 Lah. 753; Industrial Management Ltd., Karachi v. CIT, Karachi PLD 1978 Kar. 673; 1963. PTD (Trib.) 134; International Traders Ltd., Karachi v. CIT (1967) 16 Tax 46; Lakshmi Narayan Ram Gopal and Sons Limited v. Government of Hyderabad (1954) 25 ITR 499; 1990 PTD 671; CIT v. Habib Insurance Company Ltd. 1969 PTD 317; Swadeshi Bima Company v. CIT 26 ITR 530; California Copper Syndicate v. Harris 5 Tax Cas. 159 Palmer's Company Law,12th Edn. ref.

Sarfraz Mehmood, FCA, Rizwan Bashir, ITP and Saved Farooq for Appellant. .

Mirza Ghazanfar Beig, D.R. for Respondent

Date of hearing: 15th February 1994.

ORDER

IFTIKHAR AHMAD BAJWA (ACCOUNTANT MEMBER).---This appeal is directed against CIT (Appeal's) order, dated 14-9-1992 relating to assessment year 1989-90. The points at issue are claim of exemption in respect of profit amounting to Rs.1,48,72,400 arising from sale of land, addition of Rs.5,00,000 on account of sale of scrapped building material and certain P&L addbacks.

2. Appellant a private limited company derived income from a Restaurant styled as "Menage Restaurant" at Main Boulevard, Gulberg, Lahore. Appellant had purchased a bungalow with land measuring 15 Kanals 6 Marlas and 116 sq. ft. in Main Gulberg, Lahore for a consideration of Rs.90,00,000 on 2-4-1987. This property was sold during the year under appeal for a total price of Rs.2,50,00,000 and the profit of Rs.1,48,72,400 was claimed to be exempt under section 27(2)(a)(ii) of the Income Tax Ordinance. The Income Tax Officer rejected the claim on the grounds that the company was authorized to deal in property according to its memorandum of association and there was no evidence to show that the property had been purchased for the construction of a hotel as claimed by the appellant. The Income. Tax Officer held that the property had been purchased with the intention of selling it on profit and the gain of Rs.1,48,72,400 was therefore subjected to tax The CIT (Appeals) reproduced extensively the contentions of the appellant and reasons of the ITO and upheld the action of the ITO with the following observations

"I find myself in complete agreement with the ideas on issues of the assessing officer. There is little evidence that the property was purchased for the purpose of building a five-star hotel thereon. There is also title evidence of the structural demolition levelling out the land suitable for sale by a contractor. On the other hand this itself is indicative of indulging in speculative turnover in landed property due to continuous inflation in value therein and that by such measures a transaction in the nature of trade for earning profits was always intended since the time of purchases.

The initial intention in this case is very material, which is proved by circumstantial evidence on record.

The gain certainly cannot be described as isolated or casual but arose from an adventure indulged into by the assessee for trading. The same has been rightly treated as taxable under the provision of section 30 if not under section 22. The addition of Rs.1,48,72,400 to income as gain from sale of land as a business venture is confirmed."

3. The appellant's AR vehemently contested the findings of the ITO and the CIT (Appeals). It was contended that the main object of the company unquestionably was setting up of hotels and restaurants and all other sub -clauses were subsidiary to the main object which was outlined in sub-clause (1) of the objects clause in the memorandum of association. It was also contended that no business other than the setting up of a restaurant had been undertaken by the company and the property in question had been purchased for setting up of a hotel for which a lot of work had been carried out which was totally ignored by the revenue authorities.

4. On examining the facts and hearing both the parties, ITO's finding that income from sale of property was in line with the business of the company as provided in the Memorandum of Association is difficult to sustain. The objects clause of the Memorandum contains 34 sub-clauses. In the very first sub-clause the business of setting up of hotels and restaurants has been mentioned. Rest of the clauses mention ancillary functions, activities in furtherance of the main object, powers for carrying out the main object and some general activities. It is a common practice that a wide range of activities are incorporated in the Memorandum but unless a concrete shape is given to the subsidiary objects mentioned in the Memorandum, a company cannot be regarded as having ventured in businesses other than the main business. To have the intention of doing a business and being in a business are different matters. Mere mention of an activity in the Memorandum of association, at best, raised a reputable presumption, which can be dispelled by showing that the company actually did not carry out that business. This preposition was examined in detail in the cases reported as 1980 PTD 322 (H.C. Kar.) and (1990) PTD Trib. 671. In the former case purchase and sale of shares and in the latter case dealings in land were authorized by the Memorandum but in both cases solitary transactions of dealing in shares and lands, in the absence of a regular business of such dealings, were not treated as transactions in line of assessee's business. Appellant's contention that in spite of some general entries in the Memorandum of Association, the company had not intended to go into the business of dealing in property right from its inception to the period under appeal must be upheld. There is a line of judgments against treating a solitary transaction as a venture in the nature of trade. The sale of property during the year under appeal was indisputably the only sale of this nature. There was no material to justify the findings that this transaction was in line of the appellant's business.

5. Appellant's contention that property in question had been purchased for setting up of a hotel has also been rejected without adequate justification. After the purchase of the property, appellant applied for a loan of Rs.51,494(M) for setting up of a five-star hotel from the "Citi Bank". After detailed negotiations appellant's request for the loan was refused by the bank on December 11, 1988 and the property was disposed of on 23-4-1989. Detailed feasibility studies were prepared for the purposes of obtaining of said loan. Copies of the report and the correspondence with the bank are available with the appellant and apparently had been produced before the ITO as well as the CTT(Appeals). Both the authorities have unjustifiably ignored this evidence and insisted that appellant's intention to set up a hotel was unsubstantiated. On the other hand, the available evidence leaves hardly any doubt that the property in question had been purchased for setting up of a hotel.

6. As mentioned earlier, the property was purchased on 2-4-1987. In the balance-sheets for the years ending on 30-6-1987 and 30-6-1988, which are available on record, this property was shown as "work in progress" under the head fixed assets. Thus there could be no doubt regarding the intention of the appellant in respect of this property.

7. In view of the foregoing reasons ITO's finding that gain on sale of land was a profit in the ordinary course of business is unsustainable and, appellants claim for exemption in respect of this amount must be upheld.

8. An addition of Rs.5,00,000 was made on account of income from sale of scrapped building material whereas no income on this account had been a disclosed by the company. Appellant had claimed that the building standing on the property, sale of which has been discussed in the earlier part of this order, was demolished by M/s. Abdul Sattar and Company. In lieu of any consideration for the job of demolition and levelling of the plot, M/s. Abdul Sattar and Company were allowed to take away the scrap material. The ITO did not accept this arrangement to be genuine as M/s. Abdul Sattar & Company had no previous experience of such business. The ITO proceeded to estimate income from the sale of scrapped material at Rs.5,00,000 after allowing demolishing expenses of Rs.50,000. Estimate of income under this head, prima facie was without any basis. Appellant company had entered into an agreement with M/s. Abdul Sattar & Company. The agreement was prepared by M/s. Cornelius Lane & Mufti. The agreement prepared by a prestigious law firm and witnessed by two responsible persons ha.-, been refused without any evidence to the contrary. In the absence of any material showing sale of scrap material, estimate of income under this head was unjustified. The addition under this head is, therefore, deleted.

9. Objections against P&L addbacks were not seriously pressed. The amounts disallowed under various heads do not appear to be unreasonable.

The objection on this account fails.

10. The appeal succeeds as indicated above.

(Sd.)(Sd.)

Nasim Sikandar,Iftikhar Ahmad Bajwa.

Judicial MemberAccountant Member.

11. While I fully agree with the reasons as well as the result arrived at by learned A.M. it appears appropriate to discuss some of the other contentions made for the assessee.

12. As discussed in the proposed order, the assessee-appellant is a private limited company and derives income from a restaurant. On 2-4-1987 is purchased a Bungalow and the land underneath for a consideration of Rs.90 lac. This property was sold during the year under review for a consideration of Rs.25,000. The profit earned at Rs.14,872.400 was claimed exempt under ,section 27(2)(a)(ii) of the Income Tax Ordinance. The claim was refused by the assessing officer and confirmed in appeal for the following reasons;

(a) that property in question was purchased in line with the clauses of memorandum of association to earn profit;

(b) that the said property was purchased with an intention to resell to earn profit and, therefore, was -a venture in the nature of trade;

(c) that the retention of land (after demolition of structure on it) for two years was meant to wait for appreciation in price;

(d) that subsequent conduct of the assessee-company could not be known as the kind of transactions may become a regular feature of the assessee with the passage of time; and

(e) that the contention that land was purchased for the purpose of building a hotel remained only an affirmation as the assessee failed to establish expressly or through circumstantial evidence the manifestation or achievement of this goal.

13. First of all it is to be seen as to what is the exact nature of the asset acquired by the appellant company. "For", as per Davies v. Shell 22 ITR Supp. 1(CA), "a receipt is not taxable when it is referable to fixed assets; it is taxable as a revenue item when it is referable to circulating capital or stock-in-trade." The circulating capital is one, which turns over and in the process of being turned over yields profit or loss. However, to quote Kanga & Palkiwala from their treatise "Income Tax", at page 140, "what is the capital asset in hands of one person may be trading asset in the hands of another and the nature of a receipt may consequently, vary according to the nature of the trade in connection with which it arises." The determining factor has been stated to be the answer to the question posed by Rowlatt, J. in Thew v. South, West Africa Co. Limited 9 TC 141: "In the article acquired for the purpose of trade?" In Sarooj Kumar Mazumdar v. CIT, West Bengal (1959) 37 ITR 242 it was held that where transaction was not in line of business of the assessee but was an isolated or single instance of a transaction, the onus was on the department to prove that the transaction was an adventure in the nature of trade. As to what amounts to "business" or "trade", reference may also be made to the observations of Lord Morris in Grainger and Sons v Willing Lane Gough (referred to with favour in 1969 PTD 317 at 329):

"There can be no definition of the words "exercising a trade". It is only another mode of expressing "carrying on a business"; but it certainly carries with it the meaning that business or trade must be habitually or systematically exercised, and that it cannot apply to isolated transaction."

13. It is an admitted fact that the assessee did not engage itself in similar kind of transaction either earlier or subsequent to the impugned transaction This was no doubt an isolated -transaction and the Revenue instead of discharging the burden for treating the sale price-of the plot as a Revenue receipt attempted to pass on the buck to the assessee. This attempt is very much clear from the various reasons listed earlier in the order proposed by learned AM which prevailed with the Revenue while rejecting the claim of the assessee that the property in question was never acquired, retained or treated as a stock in trade.

14. That a single transaction may amount to a venture in the nature of trade while a number of them still may not is by now well established. The ratio of the case 1980 PTD 322 re: PICIC v. CIT affirms it;

"It may also be added that if the purpose is investment, the fact that in varying the investment, sale of shares results in profits will not make such profits revenue income unless it is shown that variation amounts to dealing in investments. If it is a case of numerous purchases and sales and the sales being within a short time of the purchase, the conclusion may be that it was a case of trading for then the inference would be that the purchases were made with the sole object of turning it over and selling it at a profit. If on the other hand there are a few sales although a number of purchases and when sales are made at long' intervals after the purchase, the conclusion more appropriately will be investment, notwithstanding the fact that there was no intention of holding over the shares purchased and the purchase was in expectation of being able to sell it off at profit when the shares appreciate in value."

16. In all such cases, the prime factor to be examined is the whole of the transaction in its totality coupled with the intention of those engaged in the transaction not only at the relevant time but also before and after the transaction has been completed. Per Changla, C.J. in Rajputana Textiles Ltd v. CIT Bombay City (1953) 24 1TR 46. "The question whether a transaction is an adventure in the nature of trade is essentially a question of fact and that fact has to be ascertained from all the circumstances in the case." This exercise unfortunately is conspicuously absent in this case. Two things were considered heavily inclined against the contention of the assessee; one that property was retained for two years and two that the assessee had an intention of making a profit right at the time of its purchase. In the last cited case, a Full Bench of the Bombay High Court found that mere intention to resell may not justify the inference that the transaction was in the nature of trade but it would be a very important and relevant fact when taken with other facts. No other factor appears to have been considered by the Revenue in this case after- holding that the property was purchased with the intention of making profit later in the day. In G. Venkata Swami Naidu & Co. v. CIT (1959) 35 ITR 594 the Supreme Court of India laid down a kind of test for the determination whether a transaction was a transaction in the nature of investment or an adventure in the nature of trade. This test has been applied and followed in a recent case decided by the Bombay High Court re: Indian Hume Pipe Co. Ltd. v. CIT (1992) 195 ITR 386. In another case reported in (1976) 102 ITR 202 almost same principles were laid down on the subject. Again a similar criteria was postulated by the Court in CIT v. Anandlal Becharlal & Co. 1990 PTD 3,45 as reproduced in 1991 PTD (Trib.) 786. The facts in case of G. Venkataswami Naidu & Co. (supra) were quite closer to those before us and therefore, it would be convenient to reproduce the eight points considered as some of the indicia for testing such like transactions;

"As we have already observed it is impossible to evolve any formula which can be applied in determining the character of isolated transactions which come before the Courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on border line that cause difficulty. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or was incidental to it? Affirmative answer to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it; purchased and resold? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Arc the transactions of purchase and sale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture?"

17. It needs mentioning that in the above case the Court pointed out- that, none of these tests in itself was conclusive and that cumulative effect of all they' factors must be looked into.

18. Thus it is only the facts of every case that will be seen before holding an isolated transaction or a series of transactions to be ventures in the nature of a trade and the resultant profits to be revenue receipts. The Supreme Court of Pakistan in 1990 PTD 155 re: Edulji Dinshaw v. ITO considered a number of reported cases from Indian and English jurisdiction providing guidance if the sales of property by the appellant company in that case constituted carrying on of a business. Specific mention was made of cases reported as 1934 ITR 155 re: KMO Chcttiyar Firm v. CIT, (1966) 60 ITR 65, (1966) 62 ITR 578, 40 Tax Cases 523, 38 Tax Cases 203, AIR 1959 SC 1252, (1965) 57 ITR 21, (1976) 102 ITR 202, AIR 1965 SC 1905, (1947) 15 1TR 50; (1903-1911) 5 TC 159 re: California Copper Syndicate v. Harris. Besides, two cases decided by the Sindh High Court and one by the Supreme Court itself in 1985 SCMR 284 re: CIT v. Habib Bank were referred. All these cases through light on the subject before us. However, the case of California Copper Syndicate needs particular reference wherein it was held;

"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 of the Income Tax Act of 1842 assessable to income tax. But it is equally well established 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. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business 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 realization, the gain they make is liable to be assessed for income-tax."

19. This Tribunal has also dealt with tire same question in a number of cases particularly those cited as 1989 PTD 460. 1990 PTD (Trib.) 671 and 1991 PTD (Trib.) 786. In the last mentioned case, Syed Amjad Hussain Bukhari, Judicial Member examined a myriad of case-law of which some have already been referred to. The one that needs to be repeated is 14 Tax Cases 648 wherein it was held,

"A single plunge may be enough provided it is shown .to the satisfaction of the Court that the plunge is made in the waters of trade; but the sale of a piece of property if that is all that is involved in the plunge may easily fall short of anything in the nature of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it. Much depends on the circumstances."

20. In this reported case the learned Judicial Member also discussed and distinguished (1957) 31 ITR 92 and PLD 1977 Lah. 753 relied upon earlier by the assessing officer while holding a similar sale and purchase of a property to `.:_- one in the nature of trade and business. The distinction and the final conclusion drawn by the learned Member also applies to the facts before us.

21. The Revenue has relied upon the ratio of the cases reported as 1992 PTD 62 re: Naseer A. Sheikh and 4 others v. CIT (Investigation), PLD 1977 Lah. 753, Re: Naseer A. Sheikh v. CIT PLD 1978 Kar. 673, Re: Industrial Management Ltd., Karachi v. CIT, Karachi 1963 PTD (Trib.) 134 and (1967) 16 Tax 46; International Traders Ltd., Karachi v. CIT: In the earlier cited two cases re: Naseer A. Sheikh the High Court held that even a single and isolated transaction may constitute an adventure in the nature of trade. On appeal the Supreme Court ruled that nature of a, transaction must be determined on consideration of all the facts and circumstances which are brought on record of the income-tax authorities. In re: Industrial Management Ltd., (supra) their Lordships of the Sindh High Court reaffirmed the view that it is not the number but nature of a transaction which determines whether any purchase, or sale is in the nature of ordinary investment or a trade or profession. None of these cases in my view support the contentions of the Revenue on the facts before us and discussed earlier. For, in all of these cases the final analysis has been that every transaction will have to be seen in the light of its own facts.

22. As earlier discussed by learned AM one of the considerations that weighed with the assessing officer .was his view of the presence of some clauses in the memorandum of association which permitted the company to deal in real estate vide sub-clauses (11), (12), (14), (26) and (32). These were reproduced in the assessment order to support the finding.

23. Anyone of the conventional modes of doing business does not matter much while probing the nature of the activity actually being carried on as an individual, firm, association of persons or a limited company including other bodies corporate. However, last mentioned entity is distinguishable from the rest for a number of reasons, most glaring being its perpetuity or existence and a defined sphere of activities. Their Lordships of the Supreme Court of Pakistan in re: Edulji Dinshaw Ltd. (supra) extensively quoted its counterpart from India in re: Lakshmi Narayan Ram Gopal and Sons Limited v. Government of Hyderabad (1954) 25 ITR 499 at page 460. The relevant passage is reproduced to understand the distinction drew by their Lordships in this regard;

"When a partnership firm comes into existence it can be predicted of it that it carries on a business because partnership according to section 4 of the Indian Partnership Act is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. (See Indershand Hari Ram v. Commissioner of Income Tax, U.P. & C.P. But when a company is incorporated it may not necessarily come into existence for the purpose of carrying on a business. According to section 5 of the Indian Companies Act any seven or more persons (or, where the company to be formed will be a private company any two or more persons) associated for any lawful purpose may, by subscribing their names to a memorandum of association form an incorporated company and the lawful purpose for which the persons became associated might not necessarily be carrying on of business. When a company is incorporated for carrying out certain activities it would be relevant to enquire what are the objects for which it has been incorporated. As was observed by Lord Sterndale, M.R. in Commissioner of Inland Revenue v. The Korean Syndicate Limited:---

If you once get the individual and the company spending exactly on the same basis, then there would be no difference between them at all. But the fact that the limited company comes into existence in a different way is a matter to be considered. An individual comes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose, and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when you comes to decide whether doing that is carrying on a business or not."

24. The charter of activity of a limited company otherwise known as memorandum of association is certainly the most relevant document to be looked into while examining if an act of the Managers (the governing body of a company by whatever name styled) is intra vires or ultra vires of the objects. In order to have a free hand in a dynamic business world the charter or the clauses of memorandum are usually framed in an all embracing manner. These clauses have their origin in the charters granted by the Crown in cases of joint stock companies in the late 15th or early 16th century. These charters were subject to change by or under the authority of the Crown in certain situations and for, prohibitive fees to be paid. The nature, style, and phrases used having remained somewhat stagnant, their import has certainly undergone some change without, however, affecting the orthodox principles of their interpretation. In 1990 PTD 671 this Tribunal found that for deciding any j transaction to be in the nature of trade and profits earned therefrom as Revenue receipts there was no absolute rule to hold that provisions in the memorandum or articles of association will determine the commercial nature of the transaction; "The memorandum and articles of association arc not conclusive against or in favour of the company for the question is not what business the taxpayer professes to carry on but what business' he actually I carries on." The Karachi High Court in (1969) PTD 317 (Karachi), Re: CIT v. Habib Insurance Company Limited considered a similar preposition. In this case a public limited company incorporated in Bombay in 1943 was engaged in Insurance business. In the year 1943-44 the company made certain investments in immovable properties as well as in purchase of preference shares of a sister concern. The assessee company declared appreciation and surplus realization by selling one property each in the year 1949 and 1950. These amounts were treated by the ITO as income from Insurance business. The company disputed its liability to tax on these amounts. One of the contentions being that the company was allowed by its memorandum to carry on independent business of investment. On reference the Division Bench held that it was not. Before their Lordships reliance was placed upon Swadeshi Bima Company v. CIT (26 ITR 530) and California Copper Syndicate v. Harris 5 Tax Cases 159 (supra). Their Lordships in this connection examined the meaning of the word "business" and after going through the various clauses of memorandum of the assessee company held that the coordinal rule for construing the memorandum of a limited company is that when a company has a primary object all other clauses in the memorandum are to be understood as ancillary to the main object of the company." Following passage from the 12th edition of Palmer's Co. Law was quoted with favour:

"A special rule of construction has in some cases been applied where the objects of the 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 of this main object as limited and controlled thereby. The existences of words, which give a power to do anything are ineffective except in so far as incidental to main object.

25. It was thus held by their Lordships that on the principle laid down in the said para the power to purchase and sell immovable property to invest monies of the company and to carry on any other business must be construed as ancillary to the business of insurance of the company, which was the main object of the company. Therefore, a company may have a primary object and the rest of them stated in the memorandum could be construed to be ancillary only. I have seen the memorandum of association of the assessee company and found that its main object remains as declared in sub-clause (1) of the object clause which is to carry on business of hotel, motel, restaurant, cafe, tavern, beer house, refresh room and lodging house-keepers, licensed victuallers, wine, beer and spirit merchants. The objects mentioned in other sub-clauses of the memorandum. as reproduced by the assessing officer only indicate ancillary objects. Of course the company is competent to enlarge its business activities and embark. upon further enterprises including one or more described in sub- clauses (11), (12), (14), (26) and (32) (as reproduced in the assessment order) of the memorandum. However, from the facts stated before us and those emerging from the orders of the authorities below I am convinced that till the end of the assessment year under review none of the activities narrated in these sub-clauses ever attained the status of the main or primary object or at least it was not so established by the Revenue. The observation of the assessing officer that the assessee company may afterwards keep on carrying business of sale and purchase of immovable property was a mere conjecture which otherwise did not prove correct from the conduct of the business of the company in subsequent years. The presumption that the impugned transaction being a solitary one was not in the nature of trade or business was never attempted to be demolished by the Revenue on whom the burden laid upon.

26. From the criterion set out by the Superior Courts as discussed above the following principles on the issue emerge:

(1) That no hard and fast rule can be adopted in such cases and,

therefore, each transaction will have to be judged on the basis of its own facts;

(2) That mere frequency of a transaction may not by itself amount to venture in the nature of trade;

(3) That in case of a solitary transaction heavy burden lies on the Revenue to establish that the impugned transaction in fact was a business and receipt out of it business receipts;

(4) That intention to make profit may be an important element to be considered while judging the nature of a transaction but here again presence of such an intention per se will not make a transaction a "business";

(5) That special care will have to be taken while considering sale or purchase of immovable properties where such property is evidently not a stock in trade.

(6) That it is legal to examine such like transactions in the light of the charters or memorandum of associations in cases of limited companies statutory corporations and other bodies corporate but mere permissibility of a transaction does not by itself mean carrying on the business of that kind, and

(7) That the distinction between a fixed or capital asset and circulating capital or stock in trade; a "business" and an "investment" should always be in the focus of the assessing officer while dissecting a transaction of the kind.

27. In view of what has been stated above and on applying their principles to the facts of this case, I find that mere purchase and sale of property, though permitted by some of the recitals in the memorandum of association in this case was not sufficient to hold the transaction in question one in the nature of trade nor the resultant gains to be of Revenue nature. The transaction in question being a solitary one a heavy burden laid on the Revenue to establish the same to be in the nature of a business. The Revenue instead of discharging its burden attempted to cash on some events of very insignificant nature to hold against the assessee. All the more so when the assessee had documentary evidence in its possession to support the claim of having an intention to built a hotel on the plot in question in support where of feasibility report and correspondence with a financial institution were duly placed on record.

28. I will conclude this order by repeating Lord Warrington of Clyff which he observed in Johns v. Lemming (1930) AC 415 and reproduced by Supreme Court of India at page 251 in Sarooj Kumar Muzumdar (supra).

"Here we have a case of acquisition of an item of property and a profit made by the transfer thereof to another. In this I can find nothing but a profit arising from an accretion in value of the item of the property in question and the realisation of such enhanced value. There is in this nothing in the nature of Revenue or income. The fact that the parties intended from the first to make a profit if they could does not in my opinion affect the question we have to determine."

M.B.A./43/T.T. Order accordingly.