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I.T.A. No. 342/KB of 1981-82, decided on 27th April, 1985.

---Ss. 2(12)(i), 15, 27 & 43--"Capital assets" --Definition--Assessee, an investment company, dealing in shares, holding stocks and shares as 'stock-in-trade'--Such stocks and shares attaining characteristic of capital assets--Gain arising to assessee from such capital assets, held, was a capital gain--Income-tax Officer directed to treat surplus amount as capital gains of assessee and order of Commissioner of Income-tax (Appeals) confirmed.

(1979) 39 Tax 26 (Trib.) John Smith v. Moore 12 T C 266; 288 H.L.; Commissioner of Income-tax v. Wazir Sultan 36 I T R 175, 186 (SC); Golden Horse Shoe (New) Limited v. Thurgood 18 TC 280, 300; Bengal Assam Investors Ltd. v. C.I.T. 1959 ITR 547 (SC) and Dulhousi Investment Trust Co. Ltd. v. C.I.T. 1968 ITR 486 (SC) and Investment Ltd. v. C.I.T. 1977 I T R 533 SC (Ind.) ref.

---Meaning of--Ordinary words used in statute to be found not so much in a strict etymological propriety of language nor even in popular use as in the subject or occasion on which they are used and the object which is intended to be attained.

Nokes v. Doncaster Amalgamated Collieries Ltd. (1940) AC 1014; Shannon Realities Ltd. v. Ville de St. Michel (1924) AC 185 and Commissioner of Income-tax v. The Hindu Mad. (1950) 18 ITR 237 ref.

---Tax statute--Question of interpretation arises only where language of provision of statute is ambiguous--Language of statute be it fiscal penal or otherwise when clear and unequivocal, no scope of interpretation is left--Taxation laws, if clear, admit of no equity.

Cape Brandy Syndicate v. I.R.C. (1921) 1 GCB 64 at page 71/KB ref.

Underlying principle of cannons of construction, held, nothing but to find out meaning and intention of statute.

Amin-e-Ajam, D.R. for Appellant.

Mahmood A. Hashmey for Respondent.

Date of hearing: 18th March, 1985.

-This is an appeal of the department against the order of the Commissioner of Income-tax (Appeals) in I.-T. Appeals Nos. 332/CIT-A/Z-3/79-80, dated 6-6-1981, on the point of taxability of the shares forming part of stock-in-trade as revenue profits instead of as capital gains, besides, against the deletion of disallowance under the head depreciation in respect of motor vehicles and the disallowance out of expenses incurred on motor vehicles.

The brief facts of the case are that the assessee in the year 1979-80 had declared the income from dividend, rental income, profits on sales of motor-cycles and capital gains on sale of shares. Income from the last head was declared at Rs.1,3 ,083 claiming the same as capital gains. The Income-tax Officer was of the view that the assessee is an investment company and that the income in its hands cannot be considered as 'capital gain' since the stock and shares were not 'capital assets' as the assessee was regularly carrying on the business of dealing in 'capital assets' and these capital assets would become 'stock-in-trade' and continued to be 'stock-in-trade' of the investment company and that such 'stock-in-trade' are, thus, excluded from the definition of capital assets. He relied upon the decision cited as I.T.A. No. 1664 of 1975-76 decided on 29th January, 1979, (1979) 39 Tax 26 (Trib.). The Commissioner of Income-tax (Appeals) in its order did not write a word about the decision of this case of the Tribunal except that in identical cases in the same circle the Income-tax Officer had treated the gain on sale of shares as 'capital gains'. it was also observed by the Commissioner of Income-tax (Appeals) that in view of the Central Board of Revenue Circular No. 1(37) IT-1/72, dated 21st April, 1980 the gain from sale of shares is a capital gain and not revenue and further referred to section 8 of the Ordinance. The Commissioner of Income-tax (Appeals) came to the conclusion that the Income-tax Officer had travelled beyond his function. Actually in this case the order was passed by the Income-tax Officer prior to the issue of the Circular and as such this observation of the Commissioner of Income-tax (Appeals) is illogical. Having passed the order in February 1980 there was no occasion to act otherwise but to follow the decision of the Income-tax Appellate Tribunal cited in his order. On the contrary the order of Commissioner of Income-tax (Appeals) does not speak a word about the decision cited as (1979) 39 Tax 26 (Trib.) which had to be followed by the Commissioner of Income-tax (Appeals). In this case the Income-tax Appellate Tribunal had come to the conclusion considering the facts of the case that the assessee apart from other business as also acting as an investment holding company and that its past actions clearly reflected that gains, or losses as were obtained by it were always treated as revenue gains or revenue lossess arising from the dealings in shares or from converting its holdings. The relevant observation of the Tribunal is reproduced in extenso:---

"Therefore, at this stage, the Department cannot go back on a settled factual position and we shall, therefore, have to proceed from the agreed position that the appellant is an investment holding company and as such its business comprises of amongst others in changing investments. These results sometimes in surplus and sometimes in deficits. But since these results are obtainable as a result of regular purchases and sales of stocks and shares, it cannot be denied that the appellant is not dealing in these shares and stock. Although we feel that under the provisions of section 2(4-A) of the Income-tax Act the stock-in -trade of the investment holding company cannot be treated as a capital asset merely by virtue of this specialized definition of the term "capital asset", yet we would hold that even if the appellant's holdings are treated as a 'capital asset' we will have to conclude that the appellant is regularly carrying on the business of dealings in 'capital asset' and, therefore, these capital assets would become in its case, the stock-in-trade and such stocks-in-trades are themselves excluded from the definition of 'capital assets'. It would, therefore, be a futile exercise to attempt by forcing these dealings into the domain of capital gains or capital losses. These always were the dealings of business nature from which the income remained assessable under section 10 of the Income-tax Act. Any reference to the provisions of sections 24(2-A) and 12-B of the Income-tax Act would, therefore, be of no consequence. The appellant's profits and gains from dealings in these holdings will have to be determined first and the result of such dealings will constitute income or profits accruing or arising from business and will be liable to assessment under section 10 of the Income-tax Act."

We respectfully disagree with the above decision for the reasons discussed infra. Capital assets have been defined under section 2(12) 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 materials held for the purposes of his business or profession; . . . . . The clauses (ii) and (iii) are not relevant for the present case."

The assessee beyond any shadow of doubt is an investment company and even if the shares are treated to be stock-in-trade, by virtue of the words, the Legislature specifically incorporated, ('not being stocks and shares') put such stocks and shares in the class of 'capital assets'. The reading in very unambiguous way excludes from the definition of capital asset any 'stock-in-trade but immediately juxtaposed there is an exception for it and, i.e., for 'stocks and shares'. The assessee may be a dealer in capital assets and regularly carrying on the business of dealing in capital assets nonetheless 'stocks and shares' will never be included in 'stock-in-trade'. The section very clearly in unequivocal terms excluded any stock-in-trade, from the definition of capital asset but with the condition that such stock-in- trade should not be of 'stocks and shares'. What has been defined as capital asset is all sorts of properties of any kind held by the assessee whether or not connected with his business or profession but in any case is exclusive of stock-in-trade with the exception of 'stocks and shares'. Such 'stocks and shares' by specific exclusion from the definition by being incorporated within brackets '(not being stock and shares)' after the words 'but does not include (i) any 'stock-in-trade' in clause (i) of subsection (12) of section 2 do retain the characteristics of capital asset. If the words '(not being stocks and shares)' within the brackets had not been in clause (i) then the assessee being a dealer in capital assets and such capital assets being 'stock-in-trade' would have been liable to tax under section 10 and not under the present circumstances. It is an important principle of interpretation of law that the meaning of the ordinary words when used in Acts is to be found not so much in strict etymological propriety of language, nor even in popular use, as in the subject or occasion on which they are used and the object which is intended to be attained. Keeping in view that is generally understood by the term 'capital asset' we have no hesitation in coming to the conclusion that the Legislature by a fiction of law gave it some exhaustive definition at the same time excluding from it through clause (i) any 'stock-in-trade' or consumable goods, stores or raw materials held for the purpose of business or profession but in the same breath again excluding from any such 'stock-in-trade' which is held for business purposes the 'stocks and shares' by placing in juxtaposition. More exhaustive definition of the word 'capital asset' was considered by the Legislature As, except in mathematics, it is difficult to frame very exhaustive and comprehensive definition of words. It may be added that what is a capital asset in the hands of one person may be a trading asset in the hands of another and there is no doubt that one person may hold 'the stock and shares' a capital asset and not at all as a 'stock-in-trade'. Such person will enjoy the benefits of any surplus arising from such stocks and shares as a capital gain but a person may be holding the stocks and shares as 'stock-in-trade as a businessman. In absence of this definition in the statute book he would be liable to tax as revenue gain if any surplus is arising on sale of such stocks and shares. By insertion of this definition in the statute the category of those persons is distinguishable who hold stocks and shares as 'stock-in-trade' but still the surplus does arise as a capital gain. There are dozens of rulings but suffice to say to quote what Lord Haldane quoted with approval the distinction drawn by the famous Adam Smith between fixed and circulating capital in John Smith v Moore 12 T.C. 266, 288 H.L.:

"Fixed capital is what the owner untermed to profit by getting it in his own position. Circulating capital is what he makes profit of by parting with it and letting it change masters."

This was quoted also by the S.C. of India in Commissioner of Income-tax v. Wazir Sultan 36 1 T R 175. 186 (S C of India):

"In short the circulating capital is capital which is turnover. In this process of being turned over yields revenue profits or losses; whereas fixed capital is not involved directly in such process and remains intact or unaffected. The circulating capital is also termed as 'stock-in-trade' and is also known as trading asset, whereas fixed capital as capital asset.

As expressed earlier a capital asset in the hands of one person may be a trading asset in the hands of another and the nature of receipt will accordingly be revenue or capital depending upon nature of the trade in connection with which it is arising. Romal, L.J. very succinctly observed in the case of Golden Horse Shoe (New) Limited v. Thurgood cited as 18 T.C. 280, 300 that:----

"The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacture makes the articles that he sells is part of his fixed capital. The' machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas. This was also quoted with approval by Supreme Court of India in 36 I T R 175."

We could refer with advantage the observation of Viscount Simon L.C. in the case cited as Nokes v . Doncaster Amalgamated Collieries, Ltd. (1940) A C 1014:---

"If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result."

The observation of Lord Shawin in the case cited as Shannon Realities, Ltd. v. Ville de St. Michel (1924) A C 185 reads as under:-

"Where alternative constructions are equally open, that alternative is to be chosen which will be consistent with the smooth working of the system with the statute purports to be regulating; and that alternative is to be rejected which will introduce uncertainly, friction or confusion into the working of the system."

One of the important principles of interpretation was also discussed in the case cited as Commissioner of Income-tax v. The Hindu Mad. (1950) 18 I.T.R. 237 that:

"the words used in the sections of the Income-tax Act are presumed to have been used correctly and exactly, in the sense in which those words have been defined in the Act and it is for those, who assert that that is not the case, to show by something in the context or subject-matter that the words have not been used in the sense in which they have been defined but in a loose, inexact or popular sense."

Further they also expressed the opinion that:

"in the case of evently balanced uncertainty or where one has to choose between two competing constructions the probability of an equitable logical and rational purpose underlying the enacted words may turn the scale."

There are three decisions of the Supreme Court of India cited as Bengal Assam Investors Ltd. v. C.I.T. (1959) 547 (S C), Dulhousi Investment Trust Co. Ltd. v. C.I.T. 1968 I T R 486 (S C) Investment Ltd. v. C.I.T. 1977 I T R 533 (S C India). Which also throw light on this issue. In these cases it was held that an investment company may merely hold shares and securities as capital investment or may deal in them and is their stock-in-trade. Here we have not to undergo the order of making any such demarcation or to distinguish and resolve the controversy of capital investment or stock-in-trade. The assessee here does hold the stocks and shares as stock-in-trade and in spite of that keeping the ratio laid down by the superior Courts about fixes: capital, circulating capital, stock-in-trade and the determining factor in the special circumstances of this case we are left with no doubt in our mind that the assessee was holding stocks and shares as 'stock-in- trade' which but for the double exclusion through clause (i) would never have attained the characteristic of capital assets. The gain arising to the assessee is a capital gain. Hence, the Income-tax Officer is directed to treat the surplus amount as capital gains and the order of the Commissioner of Income-tax (Appeals) is confirmed on this point but on the basis of the discussion made supra and not on the basis of l her arguments.

The other grievance of the department is about the deletion of the disallowance made under the head depreciation in respect of motor vehicles as well as motor vehicle expenses. It is urged that the Commissioner of Income-tax (Appeals) is not correct to delete the disallowance of depreciation fully on the basis that it was in view of various appellate orders but without mentioning a single order. The Departmental Representative also argues that there is always an element of personal use as far the cars are concerned and 50% addition in the depreciation allowance was a fair proportional part of the amount which was admissible. The learned counsel of the respondent-assessee argued that the care is not in personal use and Commissioner of Income-tax (Appeals) has rightly deleted the depreciation disallowances and the l/4th car expenses against half disallowed. We have considered the arguments of both. There is a great deal of force in the argument of the learned Departmental Representative Rule 2 of the rules framed for the computation of depreciation allowance in the third Schedule of the Ordinance as prescribed in section 23(1)(v) speaks exactly in same words as in section 23(2). The subsection (2) of section 23 reads as under:-

"Where any such building, machinery, plant or furniture is not wholly used for the purposes of the business or profession, the allowance under sub-Rule (1) shall be restricted to the fair proportional part of the amount which would be admissible if such building, machinery, plant or furniture were wholly so used."

Hence the order of the Commissioner of Income-tax (Appeals) to this extent is vacated and the order of the Income-tax Officer is restored as far disallowance of 50 of the depreciation is concerned on account of personal use. As far the expenses on motor vehicle are concerned the same were curtailed by the Commissioner of Income-tax (Appeals) from half to one-fourth of the total claim being somewhat excessive. The Income-tax Officer had disallowed 50% of the expenses as done in earlier years. His action being in line with the past treatment the order of the Commissioner of Income-tax (Appeals) is vacated and the order of the Income-tax Officer is restored.

The appeal of the department succeeds to the extent as indicated above.

.--I agree with the well-considered judgment and the orders proposed to be passed by my learned bother. I would, however, like to add a few words of my own. As a matter of fact, I vividly recollect, .I have expressed similar opinion in several appeals on the first issue involved herein. What appeals to me most is the clear and unambiguous language of the definition of 'capital asset' as embodied in section 2(12) of the Income-tax Ordinance, 1979, which is applicable in the instant case (It was defined in identical terms in the repealed Income-tax Act as well). Truly speaking, it does not, therefore, call for any interpretation. The question of interpretation of a provision arises only in case where the language of a provision of law is ambiguous. It is what has been held by superior Courts that in any statute, be it fiscal, penal or otherwise, if the language is clear and unequivocal, there can be no scope of its interpretation. And further it is well-settled that taxation laws, if clear, admit of no equity. A reference in this connection may be made to the celebrated judgment of Rowlatt, J. in 'Cape Brandy Sydicate v. I.R.C. (1921) 1/KB 64 at page 71/KB, where he has said: '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.' The underlying principle of cannons of construction is nothing but to find out the meaning and intention of statute. And in the instant case, I find by defining the expression 'capital asset' the Legislature has expressed its intention plainly and manifestly that stocks and shares held by assessee for the purposes of business notwithstanding, shall continue to be treated as 'capital asset'. The Legislature has, therefore, through a fiction of law, it is to be noted brought the ordinary dealing or business of regular purchases and sales of shares and stocks which otherwise, according to the principle of accountancy and in the light of series of decisions of highest Courts, result in generating revenue gains or revenue losses, within the ambit of capital gains. As the Legislature cannot by any known cannons of interpretation of statutes be held to be ignorant of the fact that regular business or dealings in capital assets convert them into the stocks-in-trade. Here the Legislature has made it absolutely clear that capital asset shall not include any stock-in -trade, except the stocks and shares.

The appeal, therefore, stands decided in terms of the order passed by my learned brother.

S. Q. Appeal accepted.

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