I T.A NO.2241/KB OF 1998-99 VS I T.A NO.2241/KB OF 1998-99, 2000 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1396 (1999)

2000 P T D (Trib.) 1396

[Income-tax Appellate Tribunal Pakistan]

Before Muhammad Mujibullah Siddiqui, Chairman and Muhammad Mahboob

Alam, Accountant Member

I.T.A No.2241/KB of 1998-99, decided on 20/12/1999.

(a) Agreement for Avoidance of Double Taxation between United States of America and Pakistan---

----Art. II(1)(1),. II para. (ii) & III(1)---Income Tax Ordinance (XXXI of 1979), S.27---C.B.R. Letter No.2(3)IT-II/77, dated 20-11-1982---Capital gains---Industrial or commercial profit ---Exemption---Assessee was a non resident company engaged in communication business and allied activities in Pakistan ---Assessee, had over a 'period of five years injected equity capital/share in Pakistan which were subsequently sold resulting in the surplus ---Assessee claimed exemption from taxation in Pakistan under Art. III of the Convention on the ground that profit earned on sale of shares was included in the term "industrial or commercial profit" used in Art. II(1)(1) of the Convention/Tax Treaty---Assessing Officer taxed the surplus/profit as capital gain on the ground that term "industrial or commercial profit" had not been defined in the Tax Treaty, and therefore. by virtue of Art. II(2) of the Tax Treaty, the profit on the sale of such share was taxable in the head "capital gains" under the domestic laws---Validity---Profit earned by assessee from' sale of capital assets had given rise to capital gain different and distinguishable from "Industrial and Commercial Profit" covered by Art. II of the Convention---Law which was prevalent during the assessment year to which the issue pertained would be applicable to the assessee's case and in the absence of express provision in the Treaty or Convention regarding exemption or taxability of any item of-income, the provisions of domestic law would apply---Claim of exemption rejected by the Assessing Officer was confirmed by Appellate Tribunal.

Raleigh Investment Company Ltd: v. C.I.T. 1983 PTD 126; Californian Copper Syndicate v. Harris 5 TC 159; (1966) 59 ITR 547 (SC): Forget v. Baxter (1900) AC .467; 1998 PTD (Trib.) 291; I.T.A. No.389/KB of 1997-98; CIT v. Khadija Begum 1965 PTD 540; Maxwell on Interpretation of Statutes; (1956) 59 ITR 547 (SC); Commissioner of Income-tax v. Express Newspapers Limited (1960) 40 ITR 38; CIT v. West Cost Chemicals and Industries Ltd. (1962) 46 ITR 135; Doughty v. Commissioner of Taxes 1927 AC 327; Commissioner of Taxation (W.A.) Newman-(1921) 29 CLR 484; Killick Nixon & Co. v. CIT (1963) 49 ITR 224,; (1960) 38 ITR 241; (1964) 53 ITR 250; (1967) 66 ITR 714; 1999 SCMR 593; Muhammad Rafique .v. Sultan Bakhsh PLD 1991 Kay 320: PLD 1963 Kar. 280 and Abdul Razzak's case 1995 CLC 1453 ref.

(b) Agreement for Avoidance of Double Taxation---

---- Ascertainment of intention---Courts, in case of domestic/local laws were required to ascertain and discern the intention of Legislature, while in case of International Agreements the intention of contracting parties was to be ascertained from the contents of International Agreement or the Regulations prescribed by the contracting parties to interpret and carry out the provision of the International Treaties.

(c) Interpretation of statutes---

----Definitions---"Means" and "includes "---Connotation of---Whenever any term was defined starting with the word 'means' it was a conclusive definition which was exhaustive and nothing else could be added to same-- When a term is defined starting with the word 'includes' it is inclusive definition which is not exhaustive but other things of similar nature, class or category could be included therein.

(d) Agreement for Avoidance of Double Taxation between United States of America and Pakistan---

---- Agreement explained and clarified.

Iqbal Naeem Pasha and Saqib Masood, F.C.A. for Appellant.

Mumtaz Ahmed Shaikh, C.I.T. and Riaz-ud-Din, D.C.I.T. for Respondent.

Date of hearing: 25th September1999.

ORDER

MUHAMMAD MAHBOOB ALAM (ACCOUNTANT MEMBER).---The appeal arises out of CIT(A)'s Order No. 64, dated 29-5-1999. The appellant is a non-resident company incorporated in the United State of America, which is aggrieved with the order passed by the DICT under section 62 of the Income Tax Ordinance, 1979 and confirmed by the CIT(A) through which its claim of exemption in respect of a gain of Rs.1,511,572,375 (U.S $ 37,118,759) arising from sale of shares of a Pakistani Co., was rejected and the income in question was subjected to tax @ 25 % in accordance with the provisions of the First Schedule.

2. The facts of the case, briefly stated, are that the appellant had injected equity capital in a Private Ltd. Pakistani Co. M/s. Pakistan Mobile Communication (Pvt.) Ltd., through acquisition of 40,248,36 shares @ Rs.10 per share during the period falling between 1992 to 1996. Out of the above, the appellant Co. had, on 17-7-1997, sold out 23,930,609 shares to M/s. International Wireless Communication Pakistan Ltd. a Company incorporated in Mauritius, for a total consideration of 'U.S. $ 46,400,000.

Since the purchase price of the shares in question in terms of U. S. Dollars was 9,281,241 only, the appellant reaped a profit or gain of U.S. $ 37.118 million on the transaction. This profit had arisen in Pakistan as the shares were transferred in the name of the buyers by Registrar of Joint Stock Companies C.L.A. Pakistan.

3. The appellant Co. filed a return with the DCIT, Circle C-12, Cos-I, Karachi, for the first time, disclosing Nil taxable income. The gain on sale of shares, described above, was claimed as exempt from Pakistan tax, as per Annexure filed with the return, under Article III of the Convention for the Avoidance of Double Taxation etc. concluded between the Government of Pakistan and U.S.A., and notified by the Government of Pakistan through S.R.O. (1) 237, dated 3-6-1959 (to be referred to hereinafter as "the Convention"). The DCIT, for reasons recorded in detail in the impugned assessment order did not accept the appellant's claim that the income in question fell under the definition of "industrial or commercial profit" and was thus exempt from Pakistan tax under Article III of the Convention. On the other hand, he held that the income in question amounted to capital gain under the Pakistan law and, since the convention was totally silent in this regard, it was eligible to tax in Pakistan in accordance with the rate prescribed in the First Schedule.

4. This was objected to by the appellant and was challenged before the learned CIT(A) on various grounds, the main being that the DCIT had erred in holding that the term "industrial and commercial profits" has not been defined in the convention and, therefore, in terms of para. (2) of Article II of the Treaty, the surplus on the sale of shares in question , was taxable under the domestic tax laws. It was contended by the appellant that the term "industrial and commercial profits" as used in Article II (1) (b) of Pak-U.S. Treaty excluded certain items meaning thereby that the generally accepted meaning of the expression would apply barring the items specifically excluded there from. Since capital gains had not been so excluded, it will be entitled for exemption under the said convention. It was further pleaded that since the term "commercial industrial profits" had not been expressly defined in the convention the learned A.R. of the appellant has taken the stand that it should be understood in its ordinary dictionary meaning and, in support reliance was placed upon the decision of the Hon'ble Sindh High Court in Raleigh Investment Company Ltd. v. CIT 1983 PTD 126. The contention of the appellant was, however, not found acceptable by the learned CIT(A) who upheld the departmental action with the following observations:---

...........On going through the impugned order, it is noted that the DCIT had tried to distinguish between the facts involved in the case before the Honourable High Court and those in the present case. The learned A.R. of the appellant, on the other hand, insists that the definition of 'commercial profits' as laid down by the Honourable Court was binding upon the DCIT in the present case also. However, as already discussed above, the law has undergone many basic and fundamental changes during the intervening period, the most significant being the change in the definition of the term 'capital asset' which is now defined under section 2(12) as:

"property of any kind held by an assessee whether or not connected with his business or profession but does not include---

(i) any stock-in-trade (not being stocks and shares), consumable storesor raw materials held for the purposes of his business or profession;

(ii)------------------------

(iii)------------------------

By excluding stocks and shares from stock-in-trade, the law has expressly placed them under the definition of capital assets. Thus, under the Pakistan tax law prevalent at the time when the appellant indulged in the sale of its shareholding in the Pakistan Company, the income generated from the transaction amounted to surplus on disposal of capital assets. It did not arise out of trading in 'goods and commodities' or 'merchandise' which would fall under the term 'stock-in-trade'. It is pertinent to observe here that this amendment had been brought on the statute books in' 1972 when the, repealed Act was in vogue and the definition has been adopted per se in the Ordinance. Income from transfer of capital assets has been made specifically taxable at concessional rates under the provisions of sections 27, 28, 29 and para. A(4) of Part IV of the First Schedule.

Therefore, since the Treaty is totally silent on this issue, it is held that the income and gains derived by the appellant from transfer of its capital assets did not fall under the definition of 'industrial and commercial profits' contained in the bilateral. Tax Treaty between Pakistan and U.S.A. Non-existence of a 'permanent establishment' was, therefore, immaterial as the income in question did not fall within the defined parameters of the Treaty. It was, in fact, otherwise eligible to tax in Pakistan under the provisions of law referred to above. The DCIT was, therefore, justified in rejecting the appellant's claim of exemption and charging the amount of capital gain in question to tax @ 25% in accordance with the law."

5. It is against the above order of the officers below that the present appeal has been filed by the appellant. The learned A.R. and D.R. have been heard. It is seen that the main issue involved is whether the disinvestments of its shareholding by the non-resident company was an act which resulted in the creation of gain which could be described as' commercial and industrial profit as connoted by the convention for the avoidance of double taxation between U.S.A. and Pakistan. The dispute between the parties is that while the appellant termed the gain as part of commercial and industrial profit, the Department recognized it as a capital gain different from Commercial and Industrial Profit. The assessee's contention rests on the following arguments:

(i) The exclusive definition of Industrial and Commercial Profit as given in the DTA does not exclude capital gain from its definition as such it has to be included as part of such Commercial and Industrial Profit.

(ii) Placing reliance on the judgment reported as 1983 PTD 126 it has been argued that capital gain having already been identified as commercial profit in that case, the issue stands decided in favour of the appellant and the Department has, therefore, no case for holding the gain as exigible to tax.

6. The Departmental case is that capital gain not having been specifically included in the description of Industrial, and Commercial Profit in the Convention, the term has to be interpreted according to the definition given in the domestic law as per the principle laid, down in Article 11(2) of the Convention. Interpreting the treaty from this angle the reliance on the reported case becomes according to the Department misplaced as the said judgment had not dilated upon the corresponding provision as appearing in, the UK-Pakistan Treaty which was the subject in the said reported case. More emphatically the Departmental view as brought-out in the assessment order at para. 6.5.2 is that no arguments or convassing took place before the Hon'ble Judges in that reported case on this aspect, which was very vital to the interpretation of law in the context of the said proceedings. The relevant law as applicable was not convassed for the consideration of the Hon'ble High Court. To be brief, therefore, for deciding the appeal, we have to find answer to the following two questions:

"(i) What is the status of the definition of 'Industrial and Commercial Profit' as appearing in the convention for the purpose of including capital gain in its domain?

(ii) Are the facts and circumstances as obtaining in the present case relating to the operation of Pak. U.S.A. Convention identical with those in the Pak. U.K. Treaty in which context the reported case of Raleigh Investment Company was decided holding capital gains as falling in the category of Industrial and Commercial Profit which in the absence of a Permanent Establishment was held to be exempt from Pakistan Tax?"

7. If the answer to the above two questions is in the positive i.e. if capital gain falls in the domain of Industrial and-Commercial Profit on the basis of provisions of the Convention or on the basis of the reported case-law the assessee has a case. Otherwise the Departmental action will hold field.'

8. Taking the first question relating to the status of the definition of Commercial and Industrial Profit, the term has been defined under Article II, para. (1) (b). as under.:-

"----The term 'Industrial and Commercial Profit' does not include rents or royalties in respect of motion pictures films or of oil wells, mines and quarries, or income in the form of dividends, interest, rent or royalties or fees or other remuneration derived by an enterprise from the management, control or supervision of the trade, business or other activity of another enterprise or concern, or remuneration for labour or personal services, or income from the operation of ships."

9. According to the assessee, the definition given above is an exclusive definition. It is a trite rule of interpretation that in such cases only the exclusion will be taken out and the remaining will be considered as part of the definition term i.e. Industrial and Commercial Profit in this case. The Departmental view is that, this argument is not valid. Clause (b) of Article II: (1) does not define any Industrial or Commercial Profits. It only excludes certain categories which otherwise could have been considered as Industrial or-Commercial Profit. The argument that all other conceivable items of receipts or income besides the specified exclusion constitute Industrial or Commercial profit is fallacious.

10. As the above interpretation of the term Commercial no Industrial profit is one of the two main grounds of dispute between the parties it will be proper to consider the matter, before proceeding to the other ground. Referring first to the convention, the term has been explained therein not to include the following categories of income:---

(1) Rent or royalties of motion picture films or of oil wells; mines and quarries.

(2) Income earned in the form of dividends, interest or rent.

(3) Income derived from other type of royalties than those mentioned above.

(4) Income derived by way of fee or other remuneration from the management, control or supervision of the trade, business or other activity of another enterprises or concerned.

(5) Income derived as remuneration for labour or personal services.

(6) Income derived from operation of ships.

11. The above six categories of income have been specifically excluded from the purview of Industrial and Commercial Profit. The question is whether this exclusion exhausts the types of income falling under the scope of Industrial and Commercial Profit or whether such exclusion can be extended to other types of income also depending upon whether they are akin to or different from the above six categories. In this connection it has to be noted that the convention does not lay down any specific criteria for identifying as to what constitutes Industrial and Commercial Profit. No general definition has been given either. Only certain items have been described to be excluded from the definition of Industrial and Commercial Profit. No residuary clause has been inserted to include that all other types of receipts apart' from these exclusions would be categorically falling in the definition of Industrial and Commercial Profit. In the absence of such a general definition and in the absence of such a residuary clause defining income from remaining sources as falling in the category of Industrial and Commercial Profit recourse has to be taken to what the term means in the context of the law prevailing in the convening country where such other income has originated. This involves looking into the matter more broadly than the common dictionary meaning and calls for finding out the meaning of the term in the context of the domestic tax law unless such meaning is in contradiction to the term described in the convention. As there is no dispute about the income having originated in Pakistan, the matter would, therefore, call first fur finding-out its meaning in the context of Pakistan tax law, where the term "Income from business profession and vocation" has been used to include such income which is connoted by the term Industrial and Commercial Profit in the convention. It is seen that a very compact definition of the term "business" has been appearing in the tax statutes right form the inception of legislation being carried out in this regard. The term was defined in the repealed Income-tax Act, 1922 which was operative till 30-6-1979 and the definition was adopted in the Income Tax Ordinance, 1979 which become operative since 1-7-1979 and is still in force. The definition is reproduced as under:---

......Business include any trade, commerce or manufacture or any adventure in the nature of trade commerce or manufacture."

(Section 2(4) of the Repealed Act).

(Section 2(11) of the Income Tax Ordinance, 1979).

12. As defined above business has been described to include carrying on of trades, commerce and manufacturing activities which makes this definition comprehensive enough to include also "Industrial and Commercial Profit" as mentioned in the convention. To determine, therefore, as to what constitutes "Industrial and Commercial Profit, it may be suffice if the same can be identified as profit from business in the context of the definition of this word as given in the Pakistan law. This definition which has been held by various judicial forums to be inclusive and not exhaustive however, distinguishes it from gains derived from sale of capital assets as defined in the Income-tax Act, 1922 and as so adopted in Income Tax Ordinance, 1979. The definition of capital asset under section 2(4-A) as originally inserted in the Repealed Act of 1922. vide amendment brought in by Act 22 of 1947 read as follows:---

" 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business, profession or vocation but does not include---

(i) any stock-in-trade consumable stores or raw materials held for the purposes of his business, profession or vocation;

(ii) personal effects, that is to say, movable property including (wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him;

(iii) any land from which the income derived by the assessee is agricultural income;

(iv) for the purpose of capital gains, any immovable property."

13. This was modified in 1972 to include stock and shares even though held as stock-in-trade.

The amended definition reads as under:---

"'Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include---

(i) any stock-in-trade (not being stocks and shares), consumable stores or raw-material held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery, furniture) held for personal use by the assessee or any member of his family dependent on him; and

(iii) any land from which the income derived by the assessee is agricultural income;

(iv) for the purpose of capital gains, any immovable property.".

The definition as per Income Tax Ordinance, 1979 is given as under:---

"2(12) 'capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include---

(i) any stock-in-trade (not being stocks and shares), consumable stores or raw materials held for the purposes. of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the, assessee or any member of his family dependent on him: and .

(iii) any land from which the income derived by the assessee is agricultural income ..

14. In the scheme of the tax law of the -country; therefore, the act of earning profit from business has been distinguished from the act of realization of gain and disposal of capital assets. Originally till the amendment brought in by Act 22 of 1947 capital gain was not liable to tax and proceeding from sale of capital assets were held to represent capital in another forum whereas sale in. the course of business was held to yield profit on revenue account. The line, between the two, types of transaction was distinctly drawn in the case of Californian Copper Syndicate v. Harris (5 TC 159) by Lord Justice Clark in the following paragraph which in the word of judicial authorities has assumed classical importance:

"------It is a quite well-settled principle in dealing with the questions of assessment, of income-tax that where the owner of an ordinary investment chooses to realize it and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit ....assessable to income-tax. But it is equally well-established that enhanced value. Obtained from realization or conversion of securities may be so assessable where what is done' is trot merely a realization or change of investment but an act done in` what is truly the carrying on or carrying out of a business what is the line which separates the two classes of cases may be difficult, to define, and each case must be considered according to its fact; the question to be determined being---Is the sum of gain that have been made a mere enhancement - of value by realizing a security or is it a gain mode in an operation of business in carrying out a scheme for profit making?"

15. The distinction between sale of capital assets and proceeds from business was thus clearly established in the course of the development of tax law in the sub-continental context. The Act of 1922 drew a distinction between income derived from property or other: sources and income being profit and gains of business. The Ordinance of; 1979 has adopted the same scheme and an assessee is now assessable under the following heads under section 15 of the Ordinance.

(a) Salary.

(b) Interest on securities.

(c) Income for house property.

(d) Income -for business of profession.

(e) Capital gain; and

(f) Income from other sources.

16. From the above classification of income under different heads it seems quite clear that what is regarded as income from business or professional cannot be regarded as income from capital gains. The mere holding of securities, shares or property cannot amount to a business by reason of the distinct classification of income laid down in the Ordinance. More particularly in the case of the assessee, the mere holding of shares and its subsequent realization through sales to another concern in Pakistan cannot assign it the status of a business operation in the context of the word as defined in the Ordinance. Incidentally and identical definition of the word "business" had been adopted-in the Indian Income-tax Act also. Relying upon this definition the Courts therein have continued to hold the view that where shares are held by a concern merely as an investment and not as part of its stock-in-trade, it cannot be held to be the carrying of any business. It will be appropriate in this context to refer to the judgment of Supreme Court of India in the case of Bengal and Assam Investors Ltd. reported as (1966) 59 ITR 547 (SC). -The relevant portion of the judgment is reproduced as under:---

....The learned counsel for the revenue, Mr. Viswanatha Sastri, contends that the company was not holding shares as part of its stock-in-trade, but was holding them merely as an investment in company, and he says that in this respect in investment company even though it is formed under the Companies Act, is in no way different from an individual who invests his own .monies or borrows and invests monies in shares for the purpose of getting dividends. He drew our attention to East India Prospecting Syndicate. v. Commissioner of Excess Profits Tax, where the Calcutta High Court in dealing with the-Excess Profits Tax Act, 1940 (XV of 1940), held that the mere holding of property or investments cannot amount to a business within the meaning of that term as used in the Indian Income-tax Act, 1922, and can only amount to a business as that term is used in the Excess Profits Tax Act, 1940, by reason of the proviso to section 2(5) of that Act. The proviso to section 2(5) of the Excess Profits Tax Act, 1940, only makes the holding of investments or property by limited companies and incorporated societies tantamount to carrying on only business. But the assessee in that case was not carrying on any investment business at all, and, therefore, the decision is of not much assistance to us. The only assistance we can derive from that decision is that the Central Legislature in enacting the Excess Profits Tax Act understood the word 'business' to mean that the term would not include a mere holding of investments, and made a special provision to rope in limited companies or incorporated societies which were holding investment or property within the definition of the word 'business'.

Before the amendment of section 12 by section 9 of the Finance Act, 1955, it had been held by 'the Bombay High Court in Commissioner of Income Tax v. Ahmuty & Co. Ltd. that wheat: a company was a dealer in shares which constituted its stock-in-trade the dividend income received by the assessee in respect of its shares was income from business chargeable under section. 10 and the Income Tax Authorities could not compel the assessee to show the income under section 12. But there is no case where it had been held that even if the shares are not stock-in-trade of the assessee-company, the dividend can be assessed under section 10. It seems that in practice an investment company was being assessed larder section 12 in respect of dividend income received by it. (See, for example, Eastern Investments Ltd. v. Commissioner of Income Tax, which is a case which came up to the Supreme Court).

It seems to us that on principle before dividends on shares cam be assessed under section 10, the assessee, be it an individual or a company or any other entity must carry on business in respect of shares; that is to say, the assessee must deal in those shares. It is evident that if an individual person invests in shares for the purpose of earning dividend he is not carrying on a business. The only way he can come under section 10 is by converting the shares into stock- in-trade, i.e. by carrying on the business of dealing in stocks and shares as did the assessee in Commissioner of Income-tax. v. Bai Shireenbai K. Kooka

Mr. Desai laid a great deal of stress on the argument that the very fact that a company is incorporated to carry in investment shows, that the company is carrying on business. We are unable to agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal & Son Limited v. Government of Hyderabad that when a company is incorporated it may not necessarily come into existence for the purpose of carrying on a business.' He further observed that the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of a question whether the activities of the company amount to carrying on of business.

Apart from showing mere investment, no facts have been brought out in this case to show that the company was in any way carrying on business in respect of shares. Its position, on the facts plated before us, is in no way different from an individual merely buying shares with a view to holding them for the purpose of earning dividends. No authority has been cited before us that in the case of an individual to acquire and hold shares with the objects of receiving dividends is to carry on business. We are unable to hold that if a company does the same, it carried on business within section 10 of the Act."

17. In the background of the above judicial pronouncements that mere holding of properties and investment does not amount to a business and from the definition of business as given in the Ordinance which according to us covers Industrial and Commercial profit as described in the convention, we are not inclined to agree with the contention of the appellant that capital gain not having excluded from the definition of Industrial and Commercial Profit as per para. II(1)(b) of the Convention, the same will not attract the provision of Pakistan tax law.

18. This takes us to the other plea of the appellant whereby placing reliance on the case of M/s. Raleigh Investment Company y it has been submitted that capital gain having been identified as part of Industrial and Commercial Profit, the same, has to be treated as exempt from Pakistan Tax as the assessee has no permanent establishment in Pakistan to make such profit taxable. The relevant portion of the assessment order covering the arguments of the assessee on this issue is reproduced as under:---

"-----We rely on a case-law decided by the Honourable Sindh High Court, Karachi in the case of Raleigh Investment Company versus CIT reported as 1983 PTD 126 (decided in 1983) in respect of shares sold in 60's, comments ours) in which gains on transfer of shares by a non-resident to another non-resident were held as 'commercial profits' under the provisions of repealed treaty between Pakistan and U.K. and as such were held to be exempt from tax in Pakistan. Please note that the definition of term given in the repealed treaty between Pakistan and U.K. was similar to the given in the treaty between Pakistan and USA. For the sake of convenience and ready reference, we reproduce below the definition of the term "Industrial or Commercial Profits" given in sub-clause (k) of Clause (1) of Article II of the repealed treaty between Pakistan and U.K.

'The term 'industrial or commercial profits' does not include rents or royalties in respect of motion picture films or income in the form of dividends interest, rents, or royalties, or fees or other remuneration derived by an enterprise from the management; control or supervision of the trade business or other activity of another enterprise or concern, or remuneration for labour personal services, or income from the operation of ships or aircraft'.

From the two definitions given above you will note these are exactly similar to each other.

The Hon'ble Sindh High Court, in the case of Raleigh Investment Company v. CIT referred above, has deliberated upon the scope of industrial or commercial profits under the repealed Treaty between Pakistan and U.K. and decided the issue in the follows:

"We would first consider the meaning of word 'commercial' according to Ballentine's law dictionary; 3rd Edition, page 222, it means:

Pertaining to the purchase and sale or exchange of goods and commodities and 'connoting as well form of; and occupations in, business' enterprises not involved in trading merchandise; in a broad sense, embarrassing every phase of commercial and business activity and intercourse (Jordan v. Tashiro, 278 U.S. 123 73 L. Ed 214, 49 S. Ct. 47).

According to Black's Law Dictionary, 4th Edition, page 336 the word 'commerce' is defined as the exchange of goods, productions, or property of any kind (emphasis supplied). Reference is made to Jeu Jo Wan v: Nagle (C.C.A. Cal. 9F. 2d, 309, 310). '

It also means intercourse by way of trade and traffic between different peoples or State and the citizens or inhabitants thereof including not only the purchase, sale and exchange of commodities, but also ..........In relation to the expression commercial matter, used in a Canadian case (25 Geo 3, C.2), it was. held that a contract with the Government Commissioner in Canada to supply stone for making a canal was not a mere building contract, but was a commercial matter. Buying-and selling shares by stockbrokers, for a client who is not himself a dealer, were held to be' 'commercial matters' provable by testimony, under the' Guebec Civil Code Forget v. Baxtre (1980) AC 467.

Examined in the light of the above meaning of the words and expression, 'commerce', 'commercial', 'commercial matter', we are of the opinion that the surplus derived from the sale of the shares by the applicant is a 'commercial profit' and is, therefore, covered by the definition given in Article II(1)(k) and could be exempted from taxation under Article III(1) of the Agreement, for it is common ground that the applicant has no permanent establishment in Pakistan . . . . . . ..

........We have already found that capital gains tax is covered by paragraph (1), of the Agreement, and even if we for the sake of argument accept that it is not covered by paragraph (1) of Article I of the Agreement we are clearly of the opinion that it is covered by paragraph (2) for capital gain tax is identical of substantially similar tax.

We, therefore, hold that under the facts and circumstances of the case the Income Tax Tribunal was not justified in finding that the surplus of sale of the shares is not exempted from Pakistan tax. Accordingly, we answer the question in negative.'

In view of the above discussions you would appreciate that neither capital gains have been excluded from the definition of 'industrial or commercial profits' nor these have separately been specified in the Treaty with USA. Therefore, these would fall within the ambit of commercial profit as per decision of Honourable High Court of Sindh and as such exempt frost tax, in Pakistan.

7.4 You have contended that only industrial or commercial profits are exempted under' Article III of the Treaty between Pakistan and U.S. Whereas, in your view capital gains are not considered as industrial or commercial profits, therefore, chargeable under section 27 of the Income Tax Ordinance, 1979, and as such Article II(2) of the Treaty comes into operation'."

We submit that Article II(2) of the Treaty only requires that if any term as not otherwise defined shall, unless the contest otherwise requires have some meaning which it has under the law of that contracting State relating to taxes. But it does not provide taxation of any income. We submit that various terms have been defined in Article II of the Treaty which inter alia include 'person' company, 'resident' and 'industrial and commercial profit' etc. Although, capital gains have not been defined in the Treaty but this term, excludes only rent, royalties, dividend, fee or remittance. This means that whatsoever has not specifically been excluded from this definition the same shall be considered to have been included. Based on this interpretation the Hon'ble Sindh High Court has decided that capital gains fall within the ambit of 'commercial profits' under the repealed Treaty with U.K.

In view of the foregoing explanation we urge upon you to accept the exemption of capital gain claimed by the above-named company and issue assessment order accordingly."

19. The Departmental plea as appearing at pages 25 to 28 of the assessment order, which has been confirmed by the CIT (A) is reproduced as under:---

"The assessee has heavily relied upon the decision of Hon'ble High Court of Sindh in the case of Raleigh Investment Company cited as 1983 PTD 126. In this case Hon'ble High Court had ruled that the capital gain earned by the British Company were covered in the term 'industrial or commercial profit' and as the British Company had no permanent establishment in Pakistan the same could not be taxed in Pakistan. It is argued by the A.R. of the assessee that as the relevant provisions of the repealed British Treaty (which was relevant in this case) and 'the (Pak-USA) Convention' are exactly identical, therefore, in this case also on the ratio decidendi of this judgment of the High Court the capital gain cannot be subjected to tax in Pakistan. '

The judgment of the Hon'ble High Court has been carefully perused. It is, however, pertinent to point out that the facts of this case and those of Raleigh Investment Company are not exactly identical. The Raleigh Investment Company had purchased shares which it sold later on and earned the capital gain. Moreover, as the name indicates Raleigh Investment Company, the business was purchase and sale of shares. In this case the assessee-company has not purchased and then sold the shares and this is not its regular commercial activity. It is original contributor to equity share capital of the Pakistani company which it disinvested later and earned the gain in the process.

6.2. In the case of Raleigh Investment Company the learned ITAT vide para. No.3 of I.T.A. No.3198 of 1966-67 (Assessment Year 1964-1965), dated 11-6-1970 cited as Vol. XXII 1970 PTD (Trib.) 127 has indicated the business of the company as under:---

"The I.T.O. stated in the assessment order that. the appellant is a holding company. It derives income from investments. In the past it had income from dividends assessable under section 12 of the Income-tax Act.'

In order to determine or have proper idea of the nature of assessee's business, the A.R. was also requested to provide memo. and Articles of Association of the assessee-company. That was not provided. A copy of by-laws (Act. VII), however, shows that assessee has income from the business as well. Looking at the international literature like 'Fortune' magazine published for March 1999, the business of the Motorola Group Company is indicated at page 57 under: Electronics, electrical equipments and name appears at Serial No.5 in the group of similar companies like G.E., Ericson Electric, Raytheon, Siemens etc.

So, the sources of income/business of Raleigh Investment Company and the assessee are different.

6.3 The purchase and sale of shares not being done as ordinary business is not a business income and is not taxable under section 22 of Income Tax Ordinance, 1979 read with Article III of Tax Treaty between Pakistan and U.S.A. The profits and gains of business and profits or gains arising from sale of capital assets are two distinct concepts in the Income Tax Ordinance. The former arises from the activity which is called business and latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different methods for calculation and levy of tax. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. Decision of the Madras High Court in CIT v. Express Newspapers Ltd. (1960) 40 ITR 38 affirmed this view.

6.4. The heads of income are also distinct under section 15 of the Income Tax Ordinance, 1979. The High Court of Sindh at Karachi vide I.T.C. No.66 of 1992, date 22-12-1998 in the case of Khair-ul- Hayat Amin & Co. Ltd. held that interest income was in the nature of 'income from other sources' with following observations that:

'The interest income was to be charged to tax under section 30 of the Income Tax Ordinance which specifically includes interest income under the heading 'income from other sources'.

In this case the assessee had claimed its interest income to be part of its business income. Assessee claimed exemption for interest income also as interest income pertained to and was earned during course of business operation/activities. Hon'ble High Court repelled the contention and held this income to be liable to tax being under a different head. Heads of income are mutually exclusive. In this case also income in shape of capital gain as per domestic- law should therefore, be taxable even if assessee insists on calling it industrial or commercial profits.

6.5. Although, it cannot be exactly inferred from the discussion made in the order of the High Court in the case of Raleigh Investment Company that in the circumstances of this case the capital gain would have been liable to tax in Pakistan, but it is settled law that criteria laid down by a Court in certain case would not be applicable in other cases if the facts of such other cases are not exactly, identical. This is naturally so because the facts of the case before the Court do weigh upon the minds of the Judges while recording the decision. Reliance is also placed on ITR XXIV (1953) Case of S. Indrasingh v. CIT, W. Bengal and (1962) ITR XLIV p.703 Abdul Qayyum and another v. CIT.

6.5.1. The provisions of para. 2 of Article II of the Convention which were there in the repealed Treaty with the U. K. which was in force at that time (para. 3 of Article II of that Treaty) have not been discussed or dilated upon in the judgment of the High Court. 1t appears that no arguments or canvassing took place before the Hon'ble Judges on this aspect, which was very vital to the interpretation of law in the context of the proceedings. The relevant law as such was not canvassed for consideration of the Hon'ble High Court. The Hon'ble Court, thus, passed the judgment without proper assistance and considering this vital provision of law for implementation of the terms of treaty. The judgment is, thus, per -incuriam. "

20. From a perusal of the arguments advanced by the parties, it is seen that the main conflict relates to the issue as to whether the disposal of shares in the context of the facts and circumstances of the case and the nature of activity of the assessee-company, the transaction could be said to give rise to something which could be called "Commercial Profit". As pointed out in the assessment order, the assessee is a non-resident company engaged in communication business and activities allied to it and over a period of five years injected equity capital in the Pakistan Private Limited Company which were subsequently sold to M/s. International Wireless Communication Pakistan Ltd. resulting in the surplus which has been claimed exempt from Pakistan tax. It is, therefore, not a purely investment company dealing in stock and shares. The injection of capital in the Pakistan systematically over a period of five years was an exclusive act of capital investment. This position is not contradicted by any evidence. The tax law in Pakistan does recognize that such capital investment can be realized through sale or exchange and has provided for its taxability separately under the head "capital gain". This was the situation in the repealed Act and the present Ordinance. The question that now arises is whether in the presence of such specific provisions recognizing the sale and exchange of capital assets exclusively apart from any other source of income the surplus from such transaction can still be regard as "Commercial Profit", as was done in the case of Raleigh Brothers by the Hon'ble High Court. The observation of the Hon'ble Court in that case was based on meaning of the word "commerce" as given in the two dictionaries of Ballentine's and Black. Adopting the definition of word as involving the exchange of goods, production or property of any kind, the Hon'ble High Court observed that the surplus derived from the sale of shares was "Commercial Profit". While adopting the general meaning, however, the Hon'ble High Court did not take into consideration the particular definition of commercial matter based on the case-law cited in Blacks Dictionary as Forget v. Baxter (1900) AC 467,1 wherein respect of sale and purchase of shares such transaction were held as "commercial matter" when these were being made by stock brokers for a client who himself was not a dealer. The relevant extract from the dictionary is reproduced below:---

" ------Buying and selling by stock brokers for a client who is not himself a dealer were held to be commercial matters provable by testimony under the Quebec Civil Code Forget v. Baxtre (1900) AC 467). "

21. The verdict in the cited case in the above definition upholds the view that the profit realized on sale of shares will be revenue in nature only where such realization or conversion of shares of securities was in the course of carrying out of a business: It is this view which has consistently been held in many cases, since .the legislation of income-tax in the Indian Sub continent, including the classic case of Californian Copper Syndicate v. Harris (5 T.C. 159) mentioned at para. 14 above. The assessment order has also cited a number of other such cases. In all these cases a distinction has been maintained that where the property sold is a capital investment or a capital amount there is an accretion of capital in another form. Where on the other hand the sale is in the course of business the profit is on revenue account. Herein our case the capital assets in the form of shares were simply disinvested to realize them and not sold in the course of business for it is nowhere claimed by the appellant that shares sold were its stock-in-trade so that even on the basis of the definition given in the two dictionaries relied upon in the Raleigh's case, the profit earned will not be a Commercial profit, when considered in the context of the case-law mentioned there, in respect of profit from dealing in shares. Words and phrases particularly the legal phrases acquire different meaning in different context and only that connotation has to be assigned to them which is relevant in the particular context which they may refer to at any particular time. The appellant in the present case is an ordinary commercial and trading company as held by the Department and the shares disinvested were held by it on its own and not on behalf of anybody else so that the activity could not be classified as a "Commercial matter" as per the meaning assigned in such context by the two legal dictionaries cited in the Hon'ble High Court's judgment. The ratio of the High Court's said judgment, therefore, is not held to be applicable in the case of the appellant. The profit earned in the case of the appellant being from sale of capital assets is held to have given rise to capital gain different and distinguishable from "Industrial and Commercial Profits" covered by Article II of the Convention and claimed to be exempt by virtue of provision of its Article III. On this ground, therefore, the claim of the appellant is not held to be maintainable.

22. Before parting with the issue we would also like to refer to an alternative plea advanced by the learned counsel for the appellant, a plea which was also taken before the CIT(A) that "since there was no concept of capital gain in Pakistan law when the treaty Was signed in 1959 and at the material found gain arising out of sales of shares of a company was to be treated as "Commercial" profit as envisaged in Article II(1)(1), and exempt being "Capital gain" not chargeable to tax under the repealed Act, and the same position has to be maintained in the coming years as there is no evidence to show that the terms and conditions of the Treaty were amended by the contracting States to the contrary". This alternative plea is not seen to have found favour with the CIT(A) who rejected the same with the following observation:---

" ------This point of view, in my opinion, is not sustainable, not only because it militates against the concepts of dynamism and improvisation which are the backbone of all progressive legislation especially of the fiscal kind but also due to the fact that the Pakistan Income Tax Law, in particular, undergoes significant changes at lease once every year, through the Finance Act, if not more frequently, through S.R.Os. etc., apart from various judicial pronouncements. If the learned A.R.'s arguments were to be carried to its logical conclusion, none of the changes made in the Income Tax Law since 1959 would be applicable to incomes falling under, the umbrella of the Pak. U.S. Treaty. Moreover, this argument also fails to take into account the facts that the Treaty was concluded at the time when the repealed Income Tax Act was the law prevalent in Pakistan, that it was substituted by the Income Tax Ordinance, 1979, and that the application of the provisions of the Treaty to the Ordinance was made possible only through operation of the provisions of section 166 of the Ordinance. I am, therefore, unable to agree with the learned A.R.'s contention in this regard and hold the opinion that the law which was prevalent during the assessment year to which the income pertained, would be applicable to the appellant's case. I would also hold that where no express provision exists in a Treaty or Convention regarding exemption or taxability of any item of income, the provisions of domestic law would apply, because the scope of applicability of the provisions of a Treaty has been restricted by the law itself i.e. section 163(2), which lays down that:---

'(2) Where any agreement is made in accordance with subsection (1), the agreement and the provisions made by notification for implementing the said agreement shall, notwithstanding anything contained in any law for the time being in force, have effect in so far as they provide for---

(a) relief from tax payable under this Ordinance; or '

(b) determining the income accruing or arising, or deemed to accrue or arise, to non-resident from sources within Pakistan; or

(c) where all the operation of business or profession are not carried on within Pakistan, determining the income attributable to operations carried on within and outside Pakistan or the income chargeable to tax in Pakistan in the hands of such persons, including their agents, branches or establishments in Pakistan; or

(d) determining the income to be attributed to any person resident in Pakistan having any special relationship with a non-resident; or

(e) exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding law in force in that other country.'

A treaty cannot travel beyond the parameters defined above and, therefore, when a treaty -is silent regarding the taxability or otherwise of any particular source or item or income which is, under normal circumstances, exigible to tax in Pakistan, provisions of the domestic law would apply ipso facto to such income."

23. We have reproduced above, the learned CIT (A)'s rebuttal of the appellant counsel argument in verbatim because we feel that it has adequately dealt with the issue and we only endorse his view based on already well- established principle of tax law that the law which was prevalent during the assessment year to which the issue pertained would be applicable to the appellant's case and that in the absence of an express provision in any Treaty or Convention regarding exemption or taxability of any item of income, the provisions of domestic law would apply. The appeal on this ground also is, therefore, not held to be maintainable.

24. In consequence the appeal stands dismissed on all the grounds.

(Sd.) .

MUHAMMAD MAHBOOB ALAM,

ACCOUNTANT MEMBER.

25. MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN).---I have carefully gone through the opinion recorded by my learned brother, the Accountant Member. He has dealt with the issue elaborately. I agree with the conclusion arrived at by him. However, I would like to add few words in support of the conclusion drawn by learned Accountant Member, by way of further clarification.

26. The relevant facts have been narrated by the learned Accountant Member in the proposed order. Succinctly stated, the relevant facts are that the appellant is a non-resident company incorporated in U.S.A. Shorn of details, the appellant earned capital gain on the sale of shares and claimed exemption under Article III of the Convention between the Government of Pakistan and Government of United State of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereinafter referred to as tax treaty). The exemption was claimed on the plea that capital gain earned on sale of shares was included in the term 'industrial or commercial profit' used in Article II(l)(1) of the tax treaty. The Assessing Officer did not accept the contention and held that the term 'industrial or commercial profits' has not been defined in the tax treaty and, therefore, by virtue of provisions contained in Article II(2) of the tax treaty, the term shall have the same meaning as contained in the law relating to taxes prevailing in Pakistan i.e. Income Tax Ordinance, 1979. The Assessing Officer ultimately held that the term capital gain has entirely different connotation than the term commercial profits and no exemption is allowed to capital gain in the tax treaty, therefore, the capital gain earned by the appellant is taxable in Pakistan. The learned CIT(A) upheld the view for the reasons already reproduced by the learned Accountant Member.

27. The issue under consideration in this appeal came for consideration before us in several other cases with reference to similar provisions contained in the tax treaties between Pakistan and U.S.A., Pakistan and U.K., Pakistan and France, Pakistan and Switzerland etc. In the judgment reported as 1998 PTD (Trib.) 291 the issue came under consideration with reference to Pakistan-U.S.A. tax treaty. The contention was raised that payment received on account of-technical services enjoyed exemption under Article 1lI(l) of Pakistan-U.S.A. tax treaty read with Article II(l)(1) thereof. The Assessing Officer rejected the contention for the reason that exemption claimed by virtue of the provisions contained in Article II(1)(1) read with Article I1I(l) of the tax treaty was not available as the payment was made on account of technical services which is separate from "industrial or commercial profits'. The Assessing Officer in the cited case had placed reliance on the C.B.R. clarification contained in its Letter No.2(3)IT-II/77, dated 20-11-1982 to the effect that, "the agreement for avoidance of double taxation of income between Pakistan and U.S.A. does not lay down any source rule in respect of fee for technical services and as such question of treating provision overriding section 12(5) of the Income Tax Ordinance, 1979 does not arise". A further plea was taken that the payment received was not covered under any of the exclusion given in Article II(l) of the tax agreement and, therefore, the income of the non-resident enjoyed exemption. This plea was also repelled. It was held by Full Bench of this Tribunal in the order authored by me as follows:--- .

"The term 'industrial or commercial profits' as defined in the tax treaty between Pakistan and U.S.A. mainly consists of exclusion of various items of income from the term 'industrial or commercial profits' and does not contain any definition of the term as such. As the term 'industrial or commercial profits' has not been defined in the treaty, therefore, we have to fall back on the definition of term in the common parlance'. The term 'industrial or commercial profits' as defined in the Legal Thesaurus by William C. Burtan were examined in the cited case. In this case I will confine the consideration to term 'commercial only', as it is nobody's case that the capital gain falls within the purview of industrial profits. It was ultimately held that the fee for technical services doe's not fall within the purview of industrial or commercial profits so as to attract the exemption premier contained in the tax treaty."

28. The Full Bench of this Tribunal further agreed with the view held by. C. B. R. that the tax treaty does not lay down any source rule in respect of fee for technical services and as such question of treaty provisions over riding the provisions of Income Tax Ordinance does not arise.

29. In another case being I.T.A. No.389/KB of 1997-98 the question, as in consideration in this case, came for consideration before a Division Bench, with reference to tax treaty between Pakistan and Switzerland. The issue under-consideration was exactly similar. The assessee in the said case had earned capital gain on sale of shares in Pakistan and had claimed exemption under Article III of the tax treaty between Pakistan and Switzerland. Under Article III, industrial and commercial profits enjoyed exemption, subject to the same conditions as in the tax treaty between Pakistan and U.S.A. The Assessing Officer declined the exemption for the reason that the capital gain does not enjoy exemption under the tax treaty, and therefore, capital gain was subject to the levy of tax in Pakistan In the said case also the plea was taken that the term 'industrial or commercial profits' is of wide connotation which includes capital gain. In the said case also reliance was placed on the judgment of Hon'ble Sindh High Court in the case of Raleigh Investment Co. Ltd. v. CIT(A) reported as 1983 PTD 126. It was held by the Assessing Officer and CIT(A) in the said case ,that the expression; 'industrial or commercial profits' and capital gains were not defined in the treaty between Pakistan and Switzerland, therefore, by virtue of provisions contained in Article II(2) of the tax treaty between Pakistan- and Switzerland the definitions given in the Income Tax Ordinance, 1979 (the law prevailing in Pakistan) is to be applied. The learned CIT(A) in the said case held that according to the law in force in Pakistan, the industrial or commercial profit is to be taken as income from business, profession or vacation assessable under section 22 of the Income Tax Ordinance, 1979 while capital gain is separately assessable under section 27 of the Income Tax Ordinance, 1979. He further held that since income from business and profession and capital gain fall under different classes of income distinguishable from each other, therefore, the capital gain cannot be included in the expression 'industrial and commercial profits' with the result that capital gain on transfer of capital assets cannot be allowed exemption by treating the same as 'industrial or commercial profits'. The same pleas were raised in the said case as agitated in the appeal under-consideration. However, while going through the entire tax treaty between Pakistan and Switzerland, we found that different classes of income were dealt with in the treaty under different provisions. The classes of income covered by the tax treaty between Pakistan and Switzerland covered industrial or commercial profit, profits derived from operating aircraft, dividend income, interest income, royalty, capital sum derived from sources within one of the territories from the sale of property, income derived from real property, profits or remuneration from profession or employment. It was found that under Article VII(4) of the tax treaty between Pakistan and Switzerland the capital sum derived from sources within one of the territories' from the sale of property enjoyed exemption. In the said case which was decided on 6-6-1998 the parties were again heard. It was conceded by Mi. Sirajul Haque Memon, Advocate Supreme Court Pakistan and a Senior Tax Practitioner that if the 'treaty is silent on any issue it has to be dealt with in accordance with the provisions contained in the law for the time being in force in contracting countries. He further conceded that exemption under the treaty is to be allowed if it is specifically provided in the treaty itself and the provisions contained in the treaty are not to be stretched in a manner as to extend the exemption to any income not provided in the treaty. The dictum laid down by Rowlett Judge which was approved by the House of Lords in U.K. and Hon'ble Supreme Court in Pakistan was also considered which reads as follows:---

"In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." .

30. After detailed discussion it was held that the capital gain derived from sale of shares enjoy exemption from tax under Para. (4) of Article VII of the Tax Treaty between Pakistan and Switzerland. Since there was specific provision in the Pakistan and Switzerland tax treaty allowing exemption to the capital gain, therefore, it was held that it was not subject to the levy of tax under section 27 of the Income Tax Ordinance, 1979. The contention that capital gain was included in the 'industrial or commercial profit' was not considered and it was held as follows:---

"Consequent to the above finding the question whether capital gain is included in the industrial and commercial profit enjoying exemption under Article III of the treaty, has been rendered of academic interest only and, therefore, the finding of this issue is reserved for consideration in some other appropriate matter."

31. The issue has been considered in several other cases also but for the sake of brevity, I would not like to make reference to all those cases. I have already made reference to the Full Bench of this Tribunal sitting at Islamabad wherein it has been held that the term 'industrial or commercial profit' has not been defined in the Tax Treaty between Pakistan and U.S.A. and in Article II(1)(1) of the treaty merely exclusions have been given. I am of the opinion that now controversy should he resolved once for all. by in-depth examination of all the aspects of the issue and by a detailed discussion before I purposed further I would like to observe that the terms which require consideration are industrial or commercial profits' trade in business' and 'capital gains'. I will presently show that all these terms have not been defined in the tax treaty. Thus, the provisions contained in Article 11(2) of the tax treaty shall come into operation. Before examining the terms of treaty and entering into the exercise of ascertaining the meaning of the terms requiring consideration in this case I would like to reproduce the guidelines given by the Hon'ble Supreme Court of Pakistan in the judgment reported as 1965 PTD 540 (CIT v. Khadija Begum). The Hon'ble Supreme Court of Pakistan has observed as follows:---

"The following observations of this Court in the case of Government of West Pakistan v. Wali Muhammad Habib (PLD 1961 SC 215) are also pertinent."

The main purpose of interpretation is to ascertain the mind of the Legislature from the words used by it, and in doing so it is a well-accepted rule that we must read the words in the context in which they are used' for, the meaning of a word read out of its context may well be totally different and in different context or in different association of words may equally well have a sense which has to effect of limiting or restricting its ordinary or popular sense. The rule of noscitur a soclis is too well-established to be doubted now. Construction of words with reference to the company in which they are found, is not a method unknown by law. Thus, words, which precede or succeed the word to be interpreted, may legitimately be looked at, to ascertain its true meaning, for, we are likely to know it better from the associate terms in the company of which the word has been used.

Now it is well-settled that---

`the words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonize with the object of the enactment and the object which the Legislature had in view.

See Maxwell on Interpretation of Statute. The same author also says that:

To arrive at the real meaning, it is always necessary to get an exact conception of 'the aim, scope and object of the whole Act, to consider according to Lord Coke (i) what was the law before the Act was passed; (ii) what was the mischief or defect for which the law had not provided; (iii) what remedy Parliament has appointed; and (iv) the reasons of the remedy.

The above has been taken from the well-known decision in Heydon's case (1584)-76E, R, 637).

32. Keeping the above principle in view now I proceed to examine various Articles of the tax treaty. Mr. Iqbal Naeem Pasha, learned counsel for the appellant mainly placed reliance on Articles I, II and III of the tax treaty, therefore, the said three Articles are reproduced below:---

"Article-I

(1) The taxes which are the subject of the present Convention are:

(a) In the United States of America: the Federal income taxes, including surtaxes (hereinafter, referred to as United States tax).

(b) In Pakistan:

The income-tax, super-tax and the business profits tax (hereinafter referred to as Pakistan tax.)

(2) The present Convention shall also apply to any other taxes of a substantially similar character (including excess profits tax) imposed by either contracting State after the date of signature of the present Convention, or by the Government of any territory to which the present Convention is extended under Article XVIII.

Article-II

(1) In the present Convention, unless the context otherwise requires:

(a) the term 'United States' means the United States of America and when used in a geographical sense means the States thereof, the Territories of Alaska and Hawaii and the District of Columbia;

(b) the term 'Pakistan' means the Provinces of Pakistan and the Capital of the Federation;

(c) the term 'one of the contracting States' and 'the other contracting State' mean the United States or Pakistan, as the context requires;

(d) the term 'tax' means United States tax, or Pakistan tax, as the context requires;

(e) the term 'person' includes anybody of persons, corporate or not corporate;

(f) the term 'company' means anybody corporate or not corporate, assessed as a company under Pakistan law relating to Pakistan tax;

(g) the term 'United States corporate' means a corporation, association or other like entity created or organized in the United States or under the law of the United States or of any State or Territory of the United States;

(h) the term 'resident of the United States' means any individual or fiduciary who is resident in the United States for the purposes of the United States tax, and not resident in Pakistan for the purposes of the Pakistan tax, -and any United States corporation or any partnership created or organized in the United States or under the laws of the United States, being a corporation or partnership which is not resident in Pakistan for the purposes of Pakistan tax;

(i) the term 'resident of Pakistan' means any person (other than a - citizen of the United States or a United States corporation) who is resident in Pakistan for the purposes of Pakistan tax and not resident in the United States for the purposes of United States tax. A company is to be regarded as a resident of Pakistan if its business is managed and controlled in Pakistan;

(j) the term 'resident of one of the contracting States' and 'resident of the other contracting State' mean a person who is a resident of the United States or a person who is a resident of Pakistan, as the context requires;

(k) the terms 'United States enterprise' and 'Pakistan enterprise' mean, respectively, and industrial or commercial enterprise or undertaking carried on in the United States by a resident of the United States and an industrial or commercial enterprise or undertaking carried on in Pakistan by a resident of Pakistan; and the terms 'enterprise of one of the contracting States and 'enterprise of the other Contracting State' mean a United States enterprise or a Pakistan enterprise, as the context requires;

(l) the term 'industrial or commercial profits' does not include rents or royalties in respect of motion picture films or of oil wells, mines and quarries, or income in the form of dividends, interest, rent or royalties, or fee or other remuneration derived by an enterprise from the management control or supervision of the trade, business or other activity of another enterprise or concern, or remuneration for labour or personal services,, or income from the operation of ships;

(m) the term 'permanent establishment' when used with respect to an enterprise of one of the contracting States, mean a branch, management, factory or other fixed place of business, but does not include an agency unless the agent has, and habitually exercise, general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. In this connection:

(i) An enterprise of one of the contracting States shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business dealing in that other contract State through a bona fide broker or general commission agent acting in the ordinary course of his business as such; and

(ii) the fact that a corporation or company which is a resident of one of the contracting States has a subsidiary corporation or company which is a resident of the other contracting State or which is engaged in trade or business in such other contracting State (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary corporation or company a permanent establishment of its parent corporation or company;

(n) the term 'taxation authorities' mean, in the case of- the United States, the Commissioner of Internal Revenue as authorised by the Secretary of the Treasury and, in the case of Pakistan, the Central Board of Revenue or their authorised representatives, and, in the case of any territory to which the present Convention, is extended under Article XVIII, the competent authority for the administration in such territory of the taxes to which the present Convention applies.

(2) In the application of the provisions of the present Convention by one of the contracting States, any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of the present Convention.

Article-III

(1) A United States enterprise shall not be subject to Pakistan tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it is so engaged, Pakistan tax may be imposed upon the entire income of such enterprise from sources within Pakistan.

(2) A Pakistan enterprise shall not be subject to United States tax in respect of its industrial or commercial profits unless it is engaged in trade or business in the United States through a permanent establishment situated therein. If it is so engaged, United States tax may be imposed upon the entire income of such enterprise from sources within the United States.

(3) Where an enterprise of one of the contracting States is engaged in trade or business in the other contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive in such other contracting State if it were an independent enterprise engaged in the same or similar activities under the same or a similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment, and the profits so attributed shall be deemed to be income of that permanent establishment and shall be taxed accordingly."

33. With reference to the judgment of Hon'ble Sindh High Court in the case of Raleigh Investment Co. Ltd in which tax treaty between Pakistan and U. K. was considered it has been argued that the claim of exemption is covered under Article I also. I am of the considered opinion that Article I is not relevant at all to the issue of exemption. Article I merely contains the taxes which are subject of the convention. The provisions contained in Article I(1) are to be read with Article IT( l)(d). The cumulative purpose of the above provisions has to specify the taxes which are covered under the convention and to exclude' the provision in the convention from their application to any other tax. Para. (2) of Article I extends the applicability of convention to future legislation in respect of taxes specified in para. (1). The purpose of Article I and Article II(1)(d) as to specify that wherever the tear. 'tax' is used in the convention tax treaty it should always mean the Federal income-tax including sale-taxes with reference to United States tax and to income-tax, super-tax and the business profit tax with reference to Pakistan tax. It has no other purpose and has not dealt with any exemption or otherwise. For example in Article VIII it is provided that any royalty shall be exempted from tax. Thus, when Article VIII is read with Article I(1) and Article 11(1)(d) it will mean that the exemption is in respect of income-tax, super-tax and business profits tax only in Pakistan and in United States it shall mean Federal Income-tax including surtaxes only. The exemption in respect of any other tax cannot be claimed under the treaty. Any other interpretation of the above provisions shall amount to reading something which is not there in the tax treaty and, thus, would amount to travelling beyond the provisions of tax treaty and all the cannons of interpretation of statute. Para. (2) of Article I applies to such situation which accrued in Pakistan with the appeal of Income-tax Act, 1922, and promulgation of Income Tax Ordinance, 1979. The other situation which is covered by Article I(2) is that in 1957 and 1959 (when the tax treaty was signed and finally ratified respectfully), the capital gain was not taxable in Pakistan. It was taxable from 31-3-1946, to 30-3- 1949 and again it became taxable in 1963. By virtue of Article I(2) the treaty became applicable to capital gain being an income-tax, but it does not mean that merely because a tax is included in the scope of Article I by virtue of para. (2) thereof it shall enjoy, exemption ipso facto or automatically. The reason being that the provisions dealing with exemption are contained in other Articles. In the case of local/domestic laws Courts are required to ascertain and discern the intention of Legislature, while in the case of international agreements the intention of contracting parties is to be ascertained from the contents of international agreement or the regulations prescribed by the contracting parties to interpret and carry out the provision of the international territories. In the tax treaty between Pakistan and U.S.A. there is a provision in Article XVI(3) that the taxation authorities of both contracting States may prescribe regulation necessary to interpret and carry out the provision of convention and may communicate to each other directly for the purposes of giving effect to the provisions of the convention. None of the parties have brought to our notice any regulations agreed upon between contracting parties to interpret and carry out the provisions of convention, therefore, the intention of the contracting parties is to be gathered from the express and specified, provisions of the tax treaty as well as from their conduct. A perusal of Article II of the tax treat shows that wherever any term has been defined it has been started with the words 'means' or 'includes'. It is a common pattern of drafting of*laws that while defining he terms used in the relevant statutes the terms are defined either by the use of word 'means' or 'includes'. By now it is universally accepted principle of interpretation of statute that whenever any term is defined- starting with the word 'means' it is a conclusive definition which is exhaustive and nothing else can be added to it. However, if any term is defined starting with the word 'includes' .it is inclusive definition which is not exhaustive but other things of similar nature, class or category can be included therein. A careful perusal of Article II(1) shows that the terms defined in clauses (a), (b). (c). (d), (f), (g). (h), (i), (j), (k), (m) and (n) have been defined starting with the word 'means'. The term in clause (e) has been defined starting with the word 'includes'. As compared to the above terms in clause (1) no definition of the term 'industrial or commercial profits' has been given. Nowhere the word 'means' or 'includes' has been used. It merely contains that the term 'industrial or commercial profit' does not include rent or royalty in respect of motion picture or of oil wells, mines and quarries, or income in the form of dividend, interest, rents, or royalties, or fees or other remuneration derived by an enterprise from the management, control or supervision of the trade, business or other activity of another enterprise or concern, or remuneration of labour or personal services, or income from operation of ships. Thus., the bare comparison of clause (1), Article II of the tax treaty with other clauses of the same Article shows that the contracting parties have not deemed fit to define the term 'industrial- or commercial profits'. The contracting parties have merely agreed to specify certain exclusions which otherwise could be included in the term 'industrial or commercial profits' or at least a claim could be made in this behalf. In the absence of any definition of the term 'industrial or commercial profit' contained in Article II of the tax treaty, we have to, fall back on para. (2) of Article II of the tax treaty which provides that in the application of provisions of the present convention by one of the contracting States any term not otherwise defined, shall unless the context otherwise requires for the meaning which it has under the laws of the contracting States relating to the taxes charged subject of the present convention. Thus, in order to ascertain the meaning of term 'industrial or commercial profits' intended-by the contracting States at the time of-entering into the tax treaty, I have examined the context in which the term 'industrial or commercial profits' has been used and as it has been defined under the law prevailing in Pakistan. I have already reproduced in the earlier part of this order the- observation of Hon'ble Supreme Court of Pakistan to the effect that the main purpose of interpretation is to ascertain the mind of the legislature from the word used by it, and in doing so it is a well-accepted rule that we must read the words in the context in which they are used, for, the meaning of a word read out of its context may well be totally different and in different context or in different association of words may equally well have a .sense which has the effect of limiting or restricting its ordinary or popular sense. The Hon'ble Supreme Court has further laid down guidance that, thus words, which proceed or succeed the word to be interpreted, may legitimately be looked at to ascertain its true meaning, for, we are likely to know it better from the associate terms in the company of which the word has been used. The principle that the words used in an enactment take their shade and colour from the context in which they are used is one of the established principle of the interpretation of the statute.

34. Keeping the above principles in view when we examine the provisions contained in Article III of the tax treaty we find that in Para. (1) of Article III it is provided that the United States enterprise shall not be subjected to Pakistan tax in respect of its 'industrial or commercial profits' unless it is engaged in trade or business in Pakistan through a permanent establishment situated therein. In para. (2) of Article III similar provision is there in respect of Pakistan enterprise. In para. (3) again it is provided that where an enterprise of one of the contracting States is engaged in trade or business in the other contracting State through a permanent establishment situated therein these shall be attributed to such permanent establishment, industrial or commercial profits which it might be expected to derive in such other contracting State .....A bare perusal of Article III shows that the term 'industrial or commercial profits' has been used in the context of trade or business only. It is pertinent to note at this juncture that Article III is not the only Article in the tax treaty dealing with the exemption and the 'industrial or commercial profits; as appearing in Article III is not the only profits or income which enjoys exemption under the tax treaty. Articles V, VI, VII, VIII, IX, X, XI, XII, XIII and XIV also deal with the exemption and the contracting States have used different expressions in different context in the above Articles. A perusal of Article III leaves no scintilla of doubt that the 'industrial or commercial profits' enjoying exemption from tax by a United States enterprise in Pakistan and Pakistan enterprises in United States is in the context of trade or business. A contention has been raised before us that Pakistan-U.S.A. tax treaty was ratified in the year 1959 when capital gain was not taxable in Pakistan. It has been further contended on behalf of appellant that since there was no concept of capital gain in Pakistan in the year 1959, therefore, no provision was made separately for the capital gain and it is included in the term 'industrial or commercial profits'. I do not find any substance in the contention because the plea that the concept of capital gain was not known to the tax law in Pakistan in 1959 is not correct. In fact capital gain was taxable in Pakistan from 31-3-1946 to 30-3-1949. In between 1949 and 1963 the capital gain was not taxable but the concept was very much familiar in the tax law in Pakistan. Likewise concept of capital gain was known concept internationally. The omission of capital gain from the tax treaty indicates that it was deliberately and consciously omitted. I have already referred to a decision of this Tribunal pertaining to the exemption of capital gain under the Pakistan Swiss Tax Treaty. The Pakistan Swiss Tax Treaty was signed on 13-12-1959 and was ratified on 18-10-1960. In spite of the fact that during this period capital gain was not taxable in Pakistan, the provision was made in Article VII, Paras. (4) and (5) pertaining to the capital sums derived from sources within one of the territories from the sale of the property. Likewise in- Pakistan-U.K. tax treaty which was signed on 24-4-1961 and was ratified on 19-1-1962. A provision was made in Article-VIIT(4) that any capital derived from sources within one of the territories from the sale of patent rights by resident of the other territories who is not engaged in trade or business in the first-mentioned territories through a permanent establishment situated therein shall be exempt from tax in the first-mentioned territory'. Thus, if provision could be made in the tax territories with U.K. and Switzerland in respect of exemption to capital gain during the period when capital gain was not taxable in Pakistan, there was no reason for omitting the same in Pakistan-U.S.A. tax treaty except that the omission was deliberate and conscious.

35. I Would like to clarify at this stage that in the repealed Income tax 6 Act, 1922 which was in force in the years 1957 and 1959 when the Pakistan U.S.A. tax treaty was signed and ratified the terms 'business and capital assets' as well as the 'concept of capital gains' were fully entrenched and explained. The term 'business' was defined in section 2(4) of the repealed Income-tax Act, 1922 from the inception as follows:---

"'Business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."

36. Section 12(B), in the repealed Income-tax Act, 1922 was inserted by Act, 22 of 1947 whereby it was provided that the tax shall be payable by an -assessee under the head 'capital gain' in respect of any profits or gains arising from the, sale, exchange or transfer of a capital asset. Thus, the capital gain was explained to mean profits or gains arising from the sale, exchange nr transfer of a capital asset and simultaneously definition of capital asset was given in section 2(4) to mean property of any kind held by an assessee whether or not connected with his business, profession or vocation. It was further provided that among others it shall not include stock-in-trade, consumable stores or raw materials held for the purpose of his business, profession or vocation. Thus, in the law prevailing in Pakistan at the time of signing of the tax treaty between Pakistan and U.S.A., the concept of business income and capital gains being totally different and belonging to separate classes of income were well-defined and demarcated. The Pakistan U.S.A. treaty has been notified in Pakistan in pursuance of provisions contained in section 49(AA) of the Income-tax Act, 1922 and, therefore; the only inference which can be drawn is that the tax treaty was signed and the provisions therein were agreed keeping in view the provisions contained in the Act in pursuance whereof the tax treaty was entered into and ratified. The contention that for the purpose of ascertaining if 'capital gain' is included in the term 'industrial or commercial profits' the law as prevailing in 1959 should be considered and not as prevailing in the assessment year 1998-99 is of no significance. The reason being that the relevant provisions contained in the Income-tax Act, 1922 (repealed) which was in force in the year 1959 were same as contained in the Income Tax Ordinance, 1979 prevailing in the assessment year 1998-99. I have already-examined and held that the term 'industrial or commercial profits' is not defined in Article II- of the tax treaty but its meaning and intention of the contracting States can be discovered from the context in which it has been used in Article III which shows that it is in respect of trade or business only. Thus, in addition to ascertaining the meaning of the term 'industrial or commercial profits' from the context in which it. is used in Article. III of the tax treaty, we have to ascertain the meanings of the relevant terms which are not defined in the tax treaty with reference to the law of the contracting States relevant to the taxes meaning thereby the tax law in Pakistan, by virtue of the provisions contained in para. (2) of Article III of the tax treaty. In the tax treaty the terms 'industrial or commercial profits', business and capital gains are not defined. I have already considered the definition of business and capital gain contained in the repealed Income-tax Act, 1922 (the law prevailing at the time of signing of the tax treaty) and in the Income Tax Ordinance, 1979 (the law prevailing in Pakistan in the. Assessment Year 1998-99). A perusal of sections 10 and 12(B) of the repealed income-tax Act, 1922 under which the tax was payable on business and capital gains respectively as well as the provisions contained in sections 22 and 27 of the Income Tax Ordinance, 1979 under which the income from business and capital gains are chargeable to tax -respectively shows that under both the statutes the tax in relation to profits or gains of any business is chargeable in respect of business carried on by the assessee while capital gain has been deemed to be income of assessee if any profits or gains arise from the transfer, exchange or sale etc. of a capital asset. It is pertinent to note that while defining capital gains in section 12(B) of repealed Income-tax Act, 1922 and the Income Tax Ordinance, 1979 both, it has not been linked to the business. There is yet another point of distinction that while describing the income from profits or gains from business the word 'carried on' has been used while in respect of capital gain such words are missing. The reason being that the expression 'carried on' convass the meaning of managing and continuing some act in the business, an activity aimed at earning profit and managing the same in that direction, while in respect of capital gain there is no such intention or managing the affairs in profit-making direction. A reading of Article III of the tax treaty between Pakistan and U.S.A. also leads to the same conclusion. It is provided in Article III(1) that U.S. enterprise shall not be subject to Pakistan tax in respect of its 'industrial or commercial profits' unless it is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it so engaged Pakistan tax may be imposed on entire income of such enterprise from sources within Pakistan. The expression 'engaged' has been used with trade or business meaning thereby that entanglement or involvement of managing and continuing has been attached to the trade or business and resultant profit Jas been envisaged as 'industrial or commercial profits'. Since the capital gain is not referred to at all in the Pakistan USA tax treaty, therefore, now we will examine as to what is the universally accepted view in respect of capital gains and commercial profit/business income. In U.K., Income-tax was introduced by William Pitt in 1799. The law was consolidated in 1918 and 1952 and in 1970 the Act was consolidated as Income and Corporation Taxes Act, 1970. There are various Schedules in this Act which are continuing from Income Tax Act, 1952. The Schedules are in respect of income arising from the land and building income from trade, income from profession or vocation, wages salaries etc. However, in spite of income from- trade and business already taxable under the Income and Corporation Taxes Act, 1970. A new Act namely Capital Gain] Tax Act, 1979 was promulgated. The legislation in respect of capital gain tax was introduced in U.K. by Finance Act, 1965. A capital gain tax is in. respect of any gain realized from disposal of an asset by a resident of the U.K. It goes without saying that if in U.K. the industrial or commercial profits/income profits and gains from trade and business would have been treated as inclusive of capital gain there was no necessity of a separate enactment exclusively dealing with the capital gain tax. There is a very useful discussion in treatise 'Dictionary of Banking and Finance' by Derik G. Hanson, 1985 Edition, page 325, which reads as follows:---

"Whether a person is trading or not will depend on the facts of each case. A person who lives by buying and selling or manufacturing will clearly be engaged in trade. A person who makes a living from buying and selling property will be deemed to be trading, whereas a person who buys a particular property with a view to securing a particular return will be taxed as an investor. Similarly, a person who invests in stocks and shares will normally be liable to income tax on the dividends and interests and capital gains tax on any capital profits. If, however, he or she is actively engaged in stock market operations as a business, tax will be payable on the trading profits. This will mean normally that income-tax, rather than capital gains tax, is paid on capital profits .......

There are a number of factors which will be relevant in determining whether or not a taxpayer is trading. These include, for example, the repetition of transactions of the same kind, the particulars skills and experience of the taxpayer, and the nature of the goods or services which the taxpayer is providing."

37, In Article I of the Pakistan-U.S.A. tax treaty the taxes which are the subject to the tax treaty in respect of U.S.A. are the Federal income-tax including surtaxes. These taxes were levied long ago, however, the capital gain tax was separately levied on the profit from sale of capital asset initially at lower rate than the rate applicable to the ordinary income and by Tax Reforms Act, 1986 at the ordinary rate of tax and as ordinary income. Thus, in U.S.A. also the capital gain tax was never taken or interpreted as inclusive of industrial or commercial profits/trade or business income.

38. Now I will examine as to what is the judicial view in this regard. My learned brother the Accountant Member has already cited two judgments one from British jurisdiction and other from Indian jurisdiction. In the judgment of Supreme Court of India in the case of Bengal and Assam Investor (1956) 59 ITR 547 SC) the view of Calcutta High Court has been approved that mere investment cannot amount to a business within the term as used in the Indian Income-tax Act, 1922. A plea was taken before the Madras High Court in the case Commissioner of Income-tax v. Express Newspapers Limited (1960) 40 ITR 38) that the words 'income, profits and gains' occurring in section 26(2) of the Income-tax Act, 1922, includes capital gains also. It was held by the Madras High Court as follows:---

"In our opinion, the Income-tax Act designedly classified and used different words or - phrases or nomenclatures for expressing the various heads or classifications of income. It cannot be assumed that the Legislature had lost sight of the distinction which it made practically at the beginning of the enactment and intended to convey a different or wider meaning for the term 'profits and gains of business' in section 26(2). Those words standing by themselves may perhaps justify an extended meaning, but it is an accepted rule of construction that, in order to ascertain the true meaning, it is right not only to look at the provision, but at similar words employed in the statute which would throw light on it or even show that a more limited meaning was intended. The words 'profits and gains of a business' have a distinct meaning under the Act, and it cannot include another equally distinct concept recognised by the Act, viz. a capital gain.

39. The question whether a sale was a realization sale or a sale in the course of business came for consideration before Supreme Court of India in the case CIT v. West Coast Chemicals and Industries Ltd. (1962) 46 ITR 135). Justice Hidayatullah Speaking for the Court examined the issue if the sale was in. carrying on of the business. He cited from the Halsbury's Laws of England, Third Edition, Volume 20, pages 115---117 in which law was summarised as follows:---

"210. Mere realisation-of assets is not trading; but the completion of outstanding contracts after the dissolution of a firm, the commencement of liquidation of a company, or the winding up of the affairs of a trader, has been held to be trading ......

211. The cases illustrating the questions arising in such circumstances can be divided into two categories, first, those where the- sales formed part of trading activities, and, second, those where the realisation was not an act of trading."

40. Mr. Justice Hidayatullah after citing the above principles observed that, "this distinction, in our opinion is a sound one". The Supreme Court of India considered various judgments from English jurisdiction including the Californian Copper Syndicate v. Harris and the judgment of Privy Council in Doughty v. Commissioner of Taxes (1927 AC 327). A case from Australian jurisdiction in the case of Commissioner of Taxation (W.A) v. Newman (1921) 29 CLR 484) was also considered. In the said case a person who carried on business in Western Australia as a pastoralist sold his property including all livestock and plant as a going concern. The High Court held that the transaction was not during the carrying on of the business or even for the purpose of carrying on the business, but was for the purpose of putting an end to the business, and that thus, the excess represented a capital appreciation and not a trading profit. The Privy Council approved the view and held that the issue if a transaction amounted to capital appreciation or a trading profit can be decided on the narrow ground whether the business was wound up and the 'sale a realization sale or where trading was going on in spite of the winding up so as to attract tax on profit made. The issue whether an assessee was liable to pay capital gain tax in respect of profits and gains arising from a sale of its assets came for consideration before the Bombay High Court in the case of Killick Nixon & Co. v. CIT (1963) 49 ITR 224). Mr. N. A. Palkiwala appearing for the assessee contended before the High Court that the capital gains could be regarded as income from business. Mr. Palkiwala by placing reliance, on the judgment of the Supreme Court of India in the case of Chugandas & Co. (1960) 38 ITR 241) argued that the capital gain arising on sale of business assets could be styled as income arising from business assets and, therefore, the income in the form of capital gains arose to the assessee in connection with the business. It was held by the Bombay High Court as follows:---

"In our opinion, the argument advanced by Mr. Palkiwala is unsound and the case on which reliance has been placed by him is clearly distinguishable from the present case. Under section 2(6C) 'capital gain chargeable under section 12-B' is included in the definition of 'income' but the income, which arises by way of capital gains, cannot be regarded as income from business simply because the gain has arisen on the sale of capital assets, which were held by the assessee for the purpose of its business. The circumstance that the assets were held for the purpose of business will not be sufficient to constitute the gain arising on their sale a profit or gain of the business. In order that the profit or gain should be of the business, it must arise from the activity which is business. The capital gain arises not because of any activity of the business but because of the existence of the capital assets, which are disposed of at a value higher than what they had cost the assessee. In the case on which reliance has been placed by Mr. Palkiwala the securities constituted the stock-in-trade of the business of the assessee; they were not only connected with the business of the assessee, but formed the material part of `the business itself and of the business. The stock-in-trade was held for the purpose of dealing in them and getting profits out of them, and the income produced by the securities as well as the gain realised from the sale thereof constituted the profit arising from the business activity although a part of the profit was computed under one head while the other part under another head. The case, therefore, has no application to the present case.

In Commissioner of Income-tax v. Express Newspapers Limited the Madras High Court held; 'the word profits and gains of a business had a distinct meaning under the Income-tax Act and they could not include another equally distinct concept recognised by the Act viz. a capital gain'."

41. The judgment of Madras High Court in the case of CIT v. Express Newspapers Limited (1960) 40 ITR 38) was appealed against, before Supreme Court of India and in the judgment reported as (1964) 53 ITR 250) it was held after taking into consideration various judgments and the provisions of Income-tax Act, 1922 as follows:---

"These three sections indicate beyond any doubt that the capital gains are separately computed in accordance with the said provisions and they are not treated as the profits from the business. The profits and gains of business and capital gains are two distinct concepts in the Income Tax Act; the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under the different heads; they are derived from different sources; and the income is computed under different methods. The fact that the capital gains are-connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from the business during that year."

42. The judgment of the Bombay High Court in the case of Killick Nixon & Co. v. CIT (supra) was also upheld by the Supreme Court of India vide judgment reported as (1967) 66 ITR 714). The principle was reiterated that the business income is earned by carrying on business while the capital gain is not an income arising from trading activity.

43. Now I come to the decision of Hon'ble Sindh High Court in the case of Raleigh Investment Co. 1983 PTD 126 on which the learned counsel for the appellant has placed reliance. In the assessment order the Assessing Officer has reproduced the written arguments submitted on behalf of assessee. In the written arguments while placing reliance on the decision in Raleigh Investment Co., it was contended that the definition of industrial or commercial profits in the Pak-USA Tax Treaty and the Pak-UK Tax Treaty are exactly similar to each other. In the written arguments the definitions in the two treaties have been given. They have been reproduced on pages 6-7 of the assessment order. A perusal thereof shows that the A.R. of the assessee - has placed reliance on the definition of term given in the repealed treaty between Pakistan and U.K. and, therefore, the contention is misplaced. In the Raleigh Investment Co. case the shares under consideration were sold in the year 1964, and therefore, the tax treaty between Pakistan and U.K. ratified on .19-1-1962 was applicable and was considered by the Hon'ble High Court. The reliance on the definition contained in the repealed treaty was, therefore, totally misconceived. I have already discussed the amendment introduced in the Pak-U.K. treaty. Thus the provisions contained in Article II(1)(1) of Pak-U.S.A. treaty and Article 11(1')(k) of the Pak-U.K. Treaty considered by the Hon'ble Sindh High Court are not the same.

44. The Assessing Officer after elaborate discussions has held that the judgment of Hon'ble Sindh High Court in the case of Raleigh Investment Co. is per incuriam. The Assessing Officer has further observed that Para. (3) of Article II of the Pak-U.K. Tax Treaty which is similar to para. (2) of Article II of the Pak. U.S,A. Tax Treaty was not discussed or dilated upon in the judgment of Hon'ble Sindh High Court, for the reason that no arguments or convassing took place before the Hon'ble Sindh High Court on this aspect which are very' vital in the, interpretation of law in the context of proceedings. The Assessing Officer has further observed that the proper assistance was not provided to the Hon'ble Sindh High Court and, therefore, the vital provision of law could not be considered.

45. I am persuaded to agree with the finding of Assessing Officer. 1n the written arguments before the Assessing Officer a plea was taken that under Article II(2) of the Pak.-U.S.A. Tax Treaty it is provided that if any term has not been otherwise defined shall unless the context otherwise requires have the meaning which it has under the law of that contracting State relating to the taxes but the term 'industrial or commercial profits' is defined in the Pakistan and U.S.A Treaty and there was similar situation in Pak.-U.K. Treaty. It was further contended that although the capital gain has not been defined in the treat but this term excludes only rein, royalty, dividend, fees remittance which means that whatever has not been specifically excluded the same shall be considered to have been included and on this interpretation the Hon'ble Sindh High Court has decided that capital gains fall within the ambit of commercial profit under the Pak.-U.K. Treaty. I would presently show that the line of arguments is misconceived. In the written arguments it was further stated that the judgment from Indian jurisdiction on which the Assessing Officer placed reliance would be applicable if claim of exemption of the appellant was to be examined under the domestic tax laws. I have already held that the term industrial or commercial profits' has not been defined in Article II of Pak---U.S A Treaty and, therefore, on the averments contained in the written arguments of the appellant the industrial or commercial profits are not inclusive of capital gain and, thus, the capital gain in this case does not enjoy exemption under Article III of the Pak.-U.S.A. Tax Treaty. A perusal of the Hon'ble Sindh High Court's judgment in Raleigh Investment Co. shows that argument was raised that the exemption was available under Article III by virtue of definition of the term 'industrial or commercial profit' contained in Article 11(1)(k) of the Pak. U.K. Tax Treaty and the contention raised on behalf of appellant that Honourable Sindh High Court decided the issue on taking view that whatever was not excluded from the term 'industrial or commercial profit' was included therein is not correct There is no finding to that effect in the judgment of Honble Sindh High Court. If such view would have been taken then the issue could be decided with the finding that since capital gain, is not excluded from industrial or commercial profit, therefore, it is included therein and as such the exemption was available to the assessee. .Although the Hon'ble Judges of Sindh High Court have not held in so many words that the term 'industrial or commercial profit' is not defined in Pakistan-United Kingdom Tax Treaty but the discussion fully shows that they were of the view that the term 'industrial or commercial profit" has not been defined in the Pak-U.K. Treaty. The reason being that it is trite law that if any word, term or expression is defined in any particular statute for the purpose of the said statute then the definition or meaning so given therein is to be adopted and the meaning of the word so defined is not be searched from dictionaries, treatises or judicial interpretation. A perusal of the judgment of Honourable Sindh High Court in the case of Raleigh Investment Company shows that the meaning of word 'commercial' was considered as follows:---

"We would first consider the meaning of the word 'commercial'. According to Ballentine's Law Dictionary, 3rd Edition, page 222, it means:

'Pertaining to the purchase and sale or exchange of goods and commodities and connoting as well forms of, and occupations in, business enterprises not involved in trading in merchandise; in a broad sense, embracing every phase of commercial and business activity and intercourse (Jordan v. Tashiro 278 U.S. 123, 73 L, Ed. 214, 49 S.CT. 47'.

According to Black's Law Dictionary, 4th Edition, page 336, the word 'commerce' is defined as 'the exchange of goods, productions, or property of any kind (emphasis supplied). Reference is made to Jeu Jo Wan v. Nagie (C.C.A. Cal. 9F 2d, 309, 310). It also means intercourse by way of trade and traffic between different peoples or States and the citizens or inhabitants thereof, including not only the purchase, sale and exchange of commodities, but also------In relation to the expression 'commercial matter' used' in a Canadian case (25 Geo 3, C.2), it was held that a contract with the Government Commissioner in Canada to supply stone for making a canal was not a mere building contract, but was a commercial matter. Buying and selling shares by stockbrokers for a client who is not himself a dealer were held to be 'commercial matter' provable by testimony, under the Quebec Civil Code Forget v. Badter (1900) AC 467.

Examined in the light of the above meanings of the words and expression, 'commerce', commercial', 'commercial matter', we are of the opinion that the surplus derived from the sale of shares by the applicant it is 'commercial profit' and it, therefore, covered by the definition given in Article II(1)(k) and could be exempted from taxation under Article III(1) of the agreement, for it is common ground that the applicant has no permanent establishment in Pakistan. "

45. A perusal of above finding leaves no room for any doubt that the meaning of word 'commercial' was not taken from any definition in the Pak U.K. Treaty but from the meanings given in the dictionaries and in the judicial pronouncements. It is also clear that the Hon'ble Sindh High Court had not, held that the surplus derived from sale of shares (capital gain) was included in the term 'commercial profits' for the reason that it was not excluded in the definition contained in Article II(1)(k). The finding is very clear that the capital gain was held to be covered-by definition given in Article II(I)(k) on the consideration of definitions given in the Dictionaries. At this stage I would like to observe that the finding of Assessing Officer that the judgment of Hon'ble Sindh High Court is per-incuriam appears to be pertinent and relevant, because the provisions contained in Para. (3) of Article. II of the Pak.-U.K. treaty which was under-consideration, was not brought to the notice of Hon'ble Sindh High Court by the counsel for the Department. Thus, due to lack of assistance a relevant provision could not be considered. As already stated earlier it is provided in para. (3) of Article II of the Pak.-U.K. Treaty which is similar to Article II(2) of the Pak.-U.S.A. Treaty that, in the application of provision of the present agreement by one of the contracting Government any term not otherwise defined shall unless the context otherwise requires have the meaning which is under the laws of that contracting Government relating to the taxes which are the subject to the present agreement".

47. In addition to the above fact I find that the Hon'ble Sindh High Court was not provided assistance at all even in interpretation of the word 'commercial'. The Hon'ble Sindh High Court has referred to the meaning of word 'commercial' according to the Ballentine's Law Dictionary. According to the said definition the word 'commercial' is pertaining to the purchases and sale or exchange of goods and commodities and connoting as well forms of, and occupations in, business enterprise not involved in trading in merchandise; in a broad sense, embracing every phase of commercial and business activity and intercourse. No where it is provided in the above definition/meaning that surplus/gain on sale of capital assets is included profit from commerce or business. Reliance has been further placed on the definition of Black's Law Dictionary, according to which the exchange of goods or property of any kind is included in the scope of word 'commerce'. The Honourable Sindh High Court has laid stress on the expression 'property of any kind' the meaning so assigned has been taken from a judgment cited therein. The facts of the said case are not known. A very pertinent principle of law has been laid down by Mr. Justice Hidayatullah in the judgment by Supreme Court of India in the case of CIT v. West Coast Chemical & Industries Ltd. (1962) 46 ITR 135) a similar question as in this appeal was under-consideration and the observation was made as follows:---

"The question, therefore, is whether there can be said to be 'a sale in the carrying on of the business in respect of the chemicals and other y raw materials. This question is not easy one to decide, specially with the assistance of rulings, in which the facts were different. There is a great danger of extracting a principle from the reported, cases, divorced from the facts."

48. Thus, the definition in Black's Law Dictionary which is in fact an extract from a judgment wherein it has been held that the word 'commerce' denotes the exchange of goods, production or property of any kind. The facts are not known and, therefore, no reliance can be placed on the observation. The reason being that if an assessee is engaged in the sale and purchase of property itself then it becomes his stock-in-trade and as such the surplus derived becomes a business income/commercial profits. However, if a person sells the property not as a stock-in-trade but as a capital asset and for the purpose of winding up the business it is a realisation sale and the surplus derived shall not be a commercial profit/business income but it would be a capital gain. While considering the concept of business income and capital gain I have already discussed this aspect of the matter. In the Black's Law Dictionary reference has been made to a Canadian decision wherein supply of stones for making a canal was not held not to a mere building contract but a commercial matter. The Nag are very simple. In the said case the assessee was engaged in the business of supply of stones and, therefore, no question of sale or transfer of any capital asset was involved. There is yet another citation from a judgment which has been considered by the learned Accountant Member also. It is held that buying and selling share by Stock Broker for a client who is not himself a dealer amounts to commercial matter provable by testimony. Thus, a clear distinction was made that if there was buying and selling of shares by Stock Broker for client it was a commercial matter. Meaning thereby that if there was buying and selling of shares for the purpose-of investment it shall not be treated as commercial matter. The point has been considered by me in the earlier part of this order. The learned counsel for the department did not convass and highlight the above point before the Hon'ble Sindh High Court and, thus, the maxim approved by the Hon'ble Supreme Court of Pakistan 'secundum allegata et probata' meaning that party can succeed according to what was alleged and proved, fully applies (1999 SCMR 593).

49. It has been held by Justice Syed Haider AIL Pirzada in the case of Muhammad Rafique v. Sultan Bakhsh (PLD 1991 Karachi 320) as follows:---

"A precedent is not binding if it was rendered in ignorance of a statute or a rule having the force of statute. The rule apparently applies even through the earlier Court knew of the statute in question, if it did not refer too and had not pressed to its mind, the precise terms of the statute. Similarly, a Court may know of the existence of a statute, and yet not appreciate its relevance to. the matter in hand, such a mistake is again such incuria as to vitiate the decision. These are the commonest illustrations of decision being given per incuriam, in order that a case can be decided per incuriam, it is not enough that it was inadequately argued. It must have been decided in ignorance of a rule of law binding on the Court, such as a statute-----(See the observations in 'Salmond on Jurisprudence'.

Twelvth Edition, pages 150 and 169)."

50. It has been held by Mr. Justice Waheeduddin in the judgment reported as PLD 1963 Karachi 280 that the law of precedent is not applicable to per incuriam decision which carry no binding force. It has been held by Mr. Justice Wajihuddin as a Judge of Sindh High Court in the case of Abdul Razzak 1995 CLC 1453 Karachi as follows:---

"A per incuriam decision even of the highest Court does not bound any Court and it matters little that such Court itself be at the lowest rung in the heirarchy of Courts."

51. The decision with reference to which the above observation has been made was by the Hon'ble Supreme Court of Pakistan. The per incuriam decision was not even treated orbitor dicta.

52. As a result of above discussions I am of the considered opinion that the Assessing Officer has rightly held that the judgment of Hon'ble Sindh High Court in the case of Raleigh Investment Co. was per incuriam as in the said judgment the provision contained in para. (3) of Article II of the Pakistan and United Kingdom tax treaty was not considered at ail wherein it was provided that if any term was not defined and unless the context otherwise requires have the meaning which it has under the laws of the contracting Government relating to the taxes which are the subject of the agreement.

53. For the foregoing reasons it is held as follows:---

(a) The term 'industrial or commercial profits' is not defined in Pakistan-U.S.A. Tax Treaty.

(b) As the term 'industrial or commercial profits' is not defined in Article II of the Pak.-U.S.A. Treaty, therefore, by virtue of the provisions in para. (2) of Article II the term 'industrial or commercial profits' is to be considered in the context in which it is used in Article, III and in accordance with the law relating to taxes in Pakistan, meaning thereby the Income Tax Ordinance, 1979.

(c) The term 'industrial or commercial profits' is confined to the profit derived by engagement in trade or business in Pakistan in respect of U.S. enterprise and in U.S.A. in respect of Pakistan enterprise.

(d) The capital gain tax is included in the Pak.-U.S.A. Treaty and is covered by the provisions contained in Article I(1)(2) of the Pak. U.S.A. Treaty.

(e) The capital gain has a distinct concept other than 'industrial or commercial profits'/income profit or gains from trade or business.

(f) Under Article III of Pak.-U.S.A. Treaty exemption is available to 'industrial or commercial profits' of the U.S. enterprise engaged in trade of business in Pakistan otherwise than through a permanent establishment situated in Pakistan.

(g) Capital gain being a distinct class of income other than industrial or commercial profit/income profit and gains from business and no specific exemption is provided in any Article of the Pakistan-U.S.A. Tax Treaty to the capital gain, therefore, it does not enjoy exemption under the Pak.-U.S.A. Tax Treaty. No exemption is to be allowed by any inductive or deductive logic. Exemption is to be specific. When concept of trade and business and the industrial or commercial profit as well- as capital gains are well-defined, distinct and recognized domestically as well as internationally, the omission of capital gain from exemption in the tax treaty would be deemed to be conscious exclusion by the contracting States. The exemptions have always to be specific and cannot be extended by any process of logic. Our earlier view in I.T.A. No.389/KB of 1997-98 (Volkart Brothers Holding Ltd.) is reiterated that exemption is to be under the tax treaty if it is specifically provided in the treaty itself and the provisions contained in the treaty are not to be stretched in the manner as to extend the exemption any income not provided in the tax treaty.

(h) The findings of the Assessing Officer that the judgment of Hon'ble Sindh High Court in the case of Raleigh Investment Company is per incuriam is upheld.

54. Consequent to the above findings the treatment given by the learned two officers below is not open to any exception which is hereby maintained.

55. The appeal stands dismissed accordingly.

C.M.A./M.A.K./2/Tax(Trib.) Appeal dismissed.