Case: The Commissioner Of Income Tax, Punjab Vs. The Lahore Electric Supply Co

to invest in stocks, shares, investments or securities of all classes and descriptions and to hold, sell, exchange or otherwise dispose of, deal with them from time to time. A company may of course own shares and make investments, and still not carry on any business; but in this case there is nothing to show that its investments are not to be regarded as part of its business activities. The main business of generating and supplying electricity had stopped and the company, therefore, invested its funds in deposits and stocks and shares. The activity of investment and getting a return for its capital is a part of its legitimate business activities. In Commissioners of Inland Revenue v. Dale Steamship Co. Ltd., (1924) 12 Tax Cas 712, the objects of the company were, inter alia, to acquire steamships and other vessels, to build, charter, let out on hire and trade with ships, to carry on business as ship-owners, merchants, etc., and to invest and deal with the money not immediately required. At the outbreak of the war, the company owned and traded with five ships. Of these, one was detained by the enemy at Hamburg, one was sold and the remaining three (all insured) were sunk during the war. The proceeds of sale and the insurance moneys received were all placed on deposit or invested in easily realisable investments in order to facilitate the resumption of trading or winding up. In an assessment of the company to Corporation Profits Tax, it was held on the authority of (1924) 12 Tax Cas 657 that the company was carrying on a trade or business, and that it was liable to assessment to Corporation Profits Tax. The wording of S. 52 of the Finance Act, 1920 made no difference, for as pointed out by Viscount Cave, L. C. in the South Behar Railway Companys case, (1924) 12 Tax Cas 657, at p. 705, the words "including the holding of investments" in the statute referred not to all cases in which the company had money invested but to cases where the holding of investment was the business or part of the business of the company. The activity of investment of its available funds may be regarded as a business activity of the company even though the company for the time being may not be carrying on its main business. The companys main business may be quiescent, but, nevertheless, it may still carry on business.17. It has been specifically found that the company was dealing in investments during the accounting year, 1947-48 and that a surplus of Rs. 2,447 realised by the company from sale of its investments during the year was a business income of the assessee. See paragraph 6 of the statement of case dated March 6, 1959, paragraph 4 of the order of the Appellate Assistant Commissioner dated April 18, 1951 and the last part of the order of the Income-tax Officer for the assessment year, 1948-49, dated August 21, 1949. The order of the Income-tax Officer specifically stated that even the balance-sheet for the period ending March 31, 1947 showed that the difference on realisation of assets stood at Rs. 1,25,783, and it thus appeared that the company was dealing in securities. The Revenue thus claimed to assess the surplus on the realisation of the investments as the profits of a business under S. 10, and its claim has been upheld. I fail to see how the Revenue can take an inconsistent stand and claim that the activity of investment was not a business activity of the company.18. The Tribunal also found that the entire business of the company was not sold to the Punjab Government as a going concern and the company continued to own and hold considerable assets not appertaining to the Lahore license. The company sold and disposed of only its undertaking relating to the Lahore license, on September 5, 1946. Even then, the Punjab Government did not take up all the business debts and liabilities of the undertaking. The company continued to remain liable to the old consumers in respect of their deposits. The company continued to pay interest on these deposits to the consumers. In paragraph 12 of its order dated December 8, 1951 the Tribunal observed. and, in my opinion rightly:"If payment of interest on consumers deposits was a proper business expense in the preceding years, we do not see why or how its character changed in the years under view"19. The Tribunal rightly pointed out that the activity of makings lists and valuing the assets of the company for the purpose of ascertaining the price of Lahore undertaking from the Punjab Government is not a business activity of the company .But looking at the other facts and circumstances of the case and the relevant authorities on the point, the Tribunal came to the clear conclusion that the company had not ceased to carry on its business. There is enough material on the record to support this finding.20. There is no set formula for determining whether in a given case a company is carrying on business. For the right understanding of the matter, one must import a little commonsense. From the shareholders and the directors point of view, the company was undoubtedly carrying on business during the relevant accounting periods. From the popular point of view, what the company did during these years was a business activity. Again, if the question arose whether the company was carrying on business during these years for the purpose of S. 20 of the Code of Civil Procedure, I have no doubt in my mind that the answer would be in the affirmative. From whatever point of view the matter is looked at the conclusion is irresistible that the company was carrying on business during the relevant accounting years. There is ample material on which the Tribunal could come to this finding, and I see no reason for disturbing its finding.21. In the result, the appeals are dismissed with costs.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]In our opinion, none of the grounds mentioned in the preceding paragraph leads to the conclusion that the Company intended to carry on business. The facts found make it abundantly clear since 1942 the only business of the Company was to work the Lahore electric supply licence. It stopped that business on September 5, 1946 when the undertaking was taken over by the Government. Thereafter, during the accounting years concerned namely, 1947-48 and 1948-49 it had not started any other business. The mere fact that the Company had not gone into liquidation would not establish that it had the intention to do business. If it were not so, then in the case of all trading companies it had to be held that they were always doing business. There is neither authority nor principle to support such a proposition. There was further no question of the Companys going into liquidation in the accounting years, for during that time it had not received from the Government the entire amount due to it as compensation for the acquisition of its Lahore electric supply undertaking. At the relevant time the Company was not possessed of any commercial undertaking. What we have quoted earlier from the Directors report would show that what was in the contemplation of the Directors was the purchase of a new concern. The Directors however had not stated that they did intend to do so. What they said was that they were considering whether they would do so or not. That does not express an intention to resume business. It is unnecessary to go into the question whether an expression of an intention to resume business in vacuo would amount to carrying on business. It is sufficient for the purpose of this case to state that even an intention to resume business has not been established.7. It would, therefore, appear that the business was closed and the Company had not established an intention to resume it. That would he enough to show that no business was carried on and it would be irrelevant to enquire whether the business was permanently closed. We may add that we do not understand what was meant by saying that the Company did not sell its undertaking as a going concern. The only going trading concern that it possessed was the Labour electric supply undertaking and that it sold; it had no other commercial undertaking. After the sale of the Lahore electric supply concern all it did was to invest its moneys and the Tribunal has not found this activity to be a business.8. The facts that the Company had to pay the Government half share of the profits between November, 27, 1942 and September 5, 1946 and that it had to return the consumers the deposits made by them would not indicate that it was carrying on a business. It would be laying down strange law to hold that where a business has in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. The question whether the Company was carrying on business arises only because if it was, it would be entitled under S. 10 to deductions from its business income in regard to certain expenses incurred by it for the purpose of that business. Business as contemplated by that section is an activity capable of producing a profit which can be taxed. Payment of outstanding liabilities is not an activity which can ever produce such a result. It cannot be said therefore, that because liabilities of a closed business were outstanding, it has to be held that either the business was continuing or that an intention to resume business must be inferred: see Commissioners of Indian Revenue v. Anglo Brewing Co. Ltd., (1925) 12 Tax Cas 803are unable to hold that Lord Sumner intended to lay down that a business which is closed down is deemed to be carried on so long as its outstandings are being collected. South Behar Railways case, (1924) 12 Tax Cas 657 (712), was concerned with a financing company whose only activity after the finances had been furnished was to receive from the Government by way of profits of the financing activity, earlier a certain proportion of the net earnings of the undertaking financed which was being managed by the government and later a fixed sum and to receive from the Government the finance supplied when the Government acquired the undertaking as it intended to do. All that Lord Sumner intended to say was that the receipt of the moneys was the business of the company and its only business after the financing had been completed. He was not concerned with the case of a closed business whose outstandings were being collected.10. The Tribunal did not hold that the Company was in fact doing business or that anything that it did amounted to carrying on business. The onus of showing this was clearly on the Company. All that it did was to refer to the sale of its Lahore electric supply undertaking to the Government and the listing of the assets of that undertaking and valuing it as the carrying on of business. This contention was rightly rejected by the Tribunal on the ground that the sale of the undertaking though within its memorandum was not its business which was really the working of that undertaking. It also seems to us that the condition of the country immediately following the partition is by itself irrelevant for deciding whether the Company was doing business.Learned counsel for the respondent contended that the Income-tax Officers order showed that in one of the assessment years, the Company had received a certain amount as a result of a business of dealing in investments.The Tribunal however did not find this as a fact. Neither does it seem to us that the Income-tax Officer considered this income as business income though it described it as such, for he held that the company was not doing any business at all.