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Tax Reference No. 37 of 1967, heard on 27th January 1976.

Ss. 2(15), 3, 4(3) & 12(b)‑Texable income‑"Adventure in nature of trade"‑Respondent assessees importing certain machinery for their own use but finding it more economical not to instal it straightaway, waiting to see if in long run it would be in interests of company to instal it and after two years coming to different con clusion and, therefore, adopting only course open i.e., disposal of machinery to someone else‑Assessees, held, acquired machinery as fixed capital and transaction not even remotely intended to invest money as a trading or floating capital‑Held further, disposal of machinery did not convert it into latter and its sale could not be equated with sale of "fruit"‑Income in order to become taxable Amount to be assessed should be a receipt arising from business and not be of a casual or non‑recurring nature‑Capital gains‑Defined and made taxable by introduction of S. 12‑B into Act‑Sale having taken place during period not covered by S. 12‑B, such section not attracted.

It is necessary that for becoming taxable income the amount sought to be assessed should be in the present context a receipt arising from business and should not be of a casual or non‑recurring nature. It was nobody's case that the respondents were carrying on business in textile or other machinery. The Luma's Saw Gins were purchased by them for their own .use as is borne out inter alia by the fact that P. I. C. 1. C. advanced a loan to them for the purpose which is normally done after obtaining a feasibility report in respect of the purchase sought to be made. After the machinery had been imported into the country the assessee found that It was more economical not to instal it straightaway; he consequently waited to see if in the long run it would be in the interest of the company to instal the same. After keeping it for about two years the assessee came to a different conclusion and, therefore, adopted the only course open to it i.e. to dispose of it to somebody who wanted to purchase it. The assessee acquired the machinery as a fixed capital for the company and it was not even remotely intended to invest money in it as a trading or floating capital. Its disposal did not convert it into the latter and it cannot be said that the sale could be equated with the sale of "fruit". It was the tree and remained the tree. When the Legislature found it necessary to tax capital ,gains it introduced section 12‑B into the Income‑tax Act in the year 1947 for that purpose. These gains have been defined and made taxable in the Act now, but this section is not attracted to the facts of this case because the sale in this case took place during a period which is not covered by section 12‑B.

Secretary of State in Council of India v. Sir Andrew Scoble and others 1903 A C 299 ; Ryall v. Hoare (t 923) 2 K B 447 ; Davies v. The Shell Co. of China Ltd. (1952) 22 I T R Supp. 1 (C A) ; John Smith & Son v. Moore (1921) 2 A C 103 and British South Africa Co. v. Commissioner of Income‑tax (1946) I T R Supp. 17 rel.

Sh. Abdul Haq for Petitioner.

Muhammad Amin Butt for Respondent.

Date of hearing : 27th January 1976.

.‑Messrs Colony Textiles Limited, Multan, is a public limited company functioning at Multan and manufacturing textiles, which is a taxable commodity. They also own a Ginning Factory. In the year 1956‑57 they obtained a commercial import licence and imported two Luma's Saw Gins for their own use for a sum of Rs. 97,032. They obtained a loan from P. I. C. I. C. for this purpose.

They did not feel it necessary to instal the Saw Gins and after two years sold them as they were in the year 1959 for a sum of Rs. 1,75,000 to the Jhulluri Cotton Factory, Tharparker. The sale provided them with a profit of Rs. 76,968 over the price paid by them on importation. The Income‑tax Officer treated this profit as taxable since he was of the view that it was the result of "Adventure in the nature of trade."

2. The assessee felt dissatisfied and filed an appeal before the Tribunal, which by its order dated 17th of May, 1966, disagreed with the Income‑tax Officer and set the order aside. The Commissioner of Income‑tax required the Tribunal to state the following question to this Court for its opinion:‑

"Whether on the facts and in the circumstances of the case the Income tax Appellate Tribunal was justified in holding the profit of Rs. 76,968 arising on sale of unused machinery as capital gain not liable to tax.

Our answer to this question is in the affirmative and our reasons follow."

3. The question precisely stated is whether on the facts stated above the amount of Rs.76,968 can be said to fall under section 3 of the Income‑tax Act. Under this section tax can be imposed and assessed on the total income of the previous year of a person. Total income has been defined in section 2(15) as:‑

"Total amount of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in this Act."

Under section 4 (3) "subject to the provisions of this Act any income, profits or gains falling within the following classes shall not to such extent as may be specified in this subsection prescribed in this behalf be included in the total income of the person receiving them . . . . . . . ' . . (vii) any receipts not being capital gains, chargeable according to the provisions of section 12 (b) and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non recurring nature or are not by way of addition to the remuneration of an employee." It is, therefore, necessary, that for becoming taxable income) the amount sought to be assessed should be in the present context receipt arising from business and should not be of a casual or non‑recurring, nature.

4. In Secretary of State‑in‑Council of India v. Sir Andrew Scoble and others (1903) A C 299 Lord Halsbury while discussing the scheme of the Income‑tax Act,. posed the following:‑

"Was it the intention of the Income‑tax Acts ever to tax capital as if it was income I think it cannot be doubted, upon the language and the whole purport and meaning of the Income‑tax Acts, that it never was intended to tax capital‑as income at all events."

In Ryall v. Hoare (1923) 2 K B 447 Rowlatt, J. observed:‑

"First, anything in the nature of capital accretion is excluded as being outside the scope and meaning of these Acts confirmed by the usage of a century. For this reason, a casual profit made on an isolated purchase and sale, unless merged with similar transactions in carrying on of a trade or business is not liable to tax. 'Profits or gains' in Case 6 refer to the interest or fruit as opposed to the principal of root of the tree."

In Davies v. The Shell Company of China Ltd. (1952) 22 I T R Supp. (C A) it was held :‑

But it must I think at all events be true to say that if the deposits, as and when received, were to be regarded as fixed capital then the result would clearly follow that any appreciation or depreciation of that fixed capital would not be a profit of the trade, because by definition fixed capital is capital held by a trader for the purposes of his trade perhaps, but not embarked or adventured by him in the trade"

The learned Judge then proceeded to pose the question "Was it circulating capital" and then answered it in the following words:‑

"My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the Second Book of his "Wealth of Nations", which appears in the chapter on the Division of Stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line of demarcation is. Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters

'Circulating capital' simply means capital employed in the trading operations of the business and the dealings with it comprise trade receipts and trade disbursements, while 'fixed capital' simply means capital not so employed in the business though it may be used for the purposes of the business, as a factory is used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business."

In John Smith & Son v. Moore (1921) 2 A C 103 the House of Lords again based itself upon the aforesaid quotation from Adam Smith.

In British South Africa Co. v. Commissioner of Income‑tax (1946) 1 T R Supp. 17 the Privy Council observed, the judgment having been written by the famous authority of income‑tax‑‑Viscount Simon:‑

"For the purpose of assessment to income tax (and here there appears to be no distinction between British and Northern Rhodesion Tax) the proceeds of sale of an asset are brought into account if the sale is in the course of the taxpayer's trade or business. Thus if it is his trade or business to make and to sell, or to acquire and to sell, shoo‑making machinery then the proceeds of sale of such machinery are brought into account; if it is his trade to make and sell shoes and for that purpose he owns and uses shoe‑making machinery, then if he sells such machinery, the proceeds of such sale are not brought into account. In the former case the machinery is sometimes called "floating" or ' circula ting" capital, in the latter "fixed" capital."

5. It is nobody's case that Messrs Colony Textiles Limited, Multan,' were carrying on business in textile or other machinery. The Luma's Saw Gins were purchased by them for their own use as is borne out Inter alia by the fact that P. 1. C. I. C. advanced a loan to them for the purpose which is normally done after obtaining a feasibility report in respect of the purchase sought to be made. After the machinery had been imported into the country the assessee found that it was more economical not to instal it. straightaway ; he consequently waited to see if in the long run it would be in the interest of the Company to instal the same. After keeping it for about two years the assessee came to a different conclusion and therefore, adopted the only course open to it f. e. to dispose of it to somebody who wanted to purchase it.

He acquired the machinery as a fixed capital for the company and it was not even remotely intended to invest money in it as a trading or floating capital. Its disposal did not convert it into the latter and it cannot be said that the sale could be equated with the sale of "fruit". It was the tree and remained the tree.

6. The observations reproduced above are further strengthened by the fact that when the Legislature found it necessary to tax capital gains it introduced section 12‑B into the Income‑tax Act in the year 1947 for that purpose. These gains have been defined and made taxable in the Act now, but this section is not attracted to the facts of the case before us because the sale in this case took place during a period which is not covered by section 12‑B.

S. A. H. Answered accordingly.

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