- (1.) This is an appeal from a judgment of the High Court of Judicature at Calcutta answering a question referred to it by the Income-tax Appellate Tribunal under S. 66, Income-tax Act, 1922.
(2.) The appellant is a private limited company incorporated in the year 1935 under the Indian Companies Act with the following objects, among others, set out in the memorandum of association : To carry on and undertake any business, transaction, operation or work commonly carried on or undertaken by bankers, capitalists, promoters, financiers, concessionaires, contractors, merchants, managers, managing agents, secretaries and treasurers. To purchase or otherwise acquire, and to sell .... . . . stock, share. . . . . . business concerns and undertakings. To invest and deal with the moneys of the company not immediately required for the company's business upon such securities and in such manner as may from time to time be determined.
(3.) The company held a large number of shares in other incorporated companies and was realising some of its holdings and acquiring large blocks of shares in other companies. In the return for the assessment year 1938-39, the company showed a loss of Rs. 3,22,221 as a result of the sales of shares and securities during the previous year and this was allowed as a business loss in the computation of its profits. In the assessment for the years 1939-40, 1940-41 and 1941-42, however, the company claimed that the surplus resulting from similar sales during the corresponding account years was not taxable income as such surpluses resulted from a mere change of investments and was, therefore, a capital gain. The income-tax authorities rejected this claim and taxed the surplus in each of those years as the profits and gains of the company's business of dealing in shares. On appeal, the Income-tax Appellate Tribunal confirmed the assessment orders but on somewhat different grounds. After an elaborate analysis of such transactions from the commencement of the company's business, the Tribunal came to the following conclusion : From the foregoing particulars it is clear that the company has been financing and promoting the business of other companies. For this purpose, it had to vary its holdings from time to time ; quite a number of shares held by the company have been of a speculative character. To hold these investments and to finance several companies (managed or otherwise) the appellant company had to resort to obtaining loans and overdrafts. It is, therefore, clear that shares were acquired by the appellant company in the ordinary course of its business and they became its stock-in-trade- The profit on sale of these shares did not essentially arise out of the sale of investment of any surplus funds. It is, therefore, clear that the sale of investments and making of fresh investments are linked up with the business of the company as financiers inasmuch as investing and realising its holdings when finance were needed is part of the normal business of the company. . . . . . . There is ample evidence to show that the company did in fact carry on the business of financiers, which is one of the objects mentioned in cl. 3 (1) of the memorandum of association. The evidence pertaining to the financial transactions of the company, during the relevant accounting years, to which we have referred, clearly establishes that the realisation of profits on investment is directly referable to the carrying on of the company's business as financiers.;