TMI Blog1962 (2) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits. To adopt the language of Lord Radcliffe, the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other, the difference between the two being the profit or loss as the case may be. In a trading or commercial sense this seems to us to accord more with reality than with fiction. The answer given by the High Court to the question of law referred to it was correct. Appeal dismissed. - - - - - Dated:- 23-2-1962 - Judge(s) : S. K. DAS., J. L. KAPUR., P. B. GAJENDRAGADKAR., A. K. SARKAR., K. SUBBA RAO., K. N. WANCHOO., N. RAJAGOPALA AYYANGAR JUDGMENT [The judgment of S. K. Das, J. L. Kapur, P. B. Gajendragadkar, K. Subba Rao, K. N. Wanchoo, and N. Rajagopala Ayyangar JJ. was delivered by S. K. Das J. Sarkar J. delivered a separate judgment.] S. K. DAS J.--This is an appeal by special leave granted by this court on September 17, 1956. The Commissioner of Income-tax, Bombay City I, is the appellant before us. The respondent is Bai Shirinbai K. Kooka, who will be referred to in this judgment as the assessee. The assessee is a Parsi lady who held by way of investment a la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out the profits which the assessee had made on the sale of the shares. The Accountant Member agreed, however, with the view of the Income-tax Officer and held that the market value of the shares as on the date when they were converted into stock-in-trade by the assessee should be taken into consideration for the purpose of ascertaining the profits made by the assessee on the sale of those shares. On this difference between the two members of the Tribunal, the matter was referred to the President of the Tribunal. The President agreed with the view of the Accountant Member. The Tribunal was then moved by the appellant to state a case to the High Court of Bombay on the question of law which arose out of the Tribunal's order, namely, what should be the basis of computation of the profits made by the assessee by the sale of her shares in the relevant year. The Tribunal came to the conclusion that the question as to when the assessee became a dealer in shares or when the assessee turned her investment shares into her stock-in-trade, was a question of fact, and the only question of law that arose was as to how the profit was to be computed. Accordingly, the Tribunal framed the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect or whether the ratio of Kikabhai's case should govern the present case. As we have stated earlier, the problem is--how should the profit made by the assessee by a sale of her shares as a trading activity be computed, it being not in dispute that there was in this case a real sale resulting in actual profits. The High Court first emphasised the point, which has not been controverted before us, that in order to arrive at real profits one must consider the accounts of the business on commercial principles and construe profits in their normal and natural sense, a, sense which no commercial man will misunderstand. It then pointed out that what the shares cost originally to the assessee at a time when she had no business or trading activity, could not, in a commercial sense, be said to be the cost of the shares to the business which started on April 1, 1945 ; the original cost was really a matter of historical record and it had no relevance in the determination or ascertainment of profits which the business made. Obviously, the whole of the sale proceeds or receipts could not be treated as profits and made liable to tax, for that would make no sense ; a portion only of the rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res from the business and settled them on certain trusts in which he was the managing trustee and in his books of account he credited the business with the cost price of the silver bars and shares so withdrawn. The income-tax authorities assessed him to tax on the basis of the difference between the cost price of the silver bars and shares and their market value at the date of their withdrawal from the business. The High Court of Bombay upheld the action of the income-tax authorities. This court, however, by a majority decision came to the conclusion that the assessee was entitled to value the, silver bars and shares withdrawn at cost price and was not bound to credit the business with their market value at the close of the year for ascertaining the assessable profits for the year. Bhagwati J. who expressed the dissentient view said that so far as the business was concerned, it made no difference whether the stock-in-trade was realised or withdrawn from the business and the business was entitled to be credited with the market value of the assets withdrawn as at the date of the withdrawal, whatever be the method employed by the assessee for the valuation of its stock-in-trade on han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority was not concerned with potential profits which might be made in another year. From what has been stated above it would at once appear that Kikabhai's case was the converse of the present case. In Kikabhai's case a part of the stock-in-trade was withdrawn from business ; there was no sale nor any actual profit. The ratio of the decision was simply this. Under the Income-tax Act the State has no power to tax a potential future advantage and all it can tax is income, profits and gains made in the relevant accounting year. In the case under our consideration the admitted position is that there has been a sale of the shares in pursuance of a trading or business activity and actual profits have resulted from the sale. The question in the present case is not whether the State has a power to tax potential future advantage, but the question is how should actual profits be computed when admittedly there has been a sale in the business sense and actual profits have resulted therefrom. We agree with the High Court that in this respect there is a vital difference between the problem presented by Kikabhai's case and the problem in the present case. We further agree with the view expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad a hatchery which produced chicks primarily for sale as " day-old chicks ". Some of these chicks were transferred to brooder houses and became part of the stock on the farm. The assessees were assessed to income-tax under Schedule D in respect of the profits of the hatchery part of their business and under Schedule B in respect of the profits of the farm. The question that arose in that case was whether the day-old chicks transferred to the farm should be credited as stock at the average price at which they were sold and could have. been bought in the open market, namely, 4d. per chick, and that the difference between that price and the admitted cost of production of each saleable day-old chick, 7d., was an allowable loss. The Crown contended that the hatchery and the farm were two activities of the same person who could not make a loss by transferring from one department to the other and, therefore, the chicks should be credited to the hatchery account at production cost. It was held by Macnaghten J. that in the notional sale between the hatchery and the farm, which should be treated as separate entities, the price to be credited was the " reasonable price " laid down by section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wner's personal account, there was a disposition of trading stock, though the disposition might not be by way of trade. He then referred to three methods of recording the result of the disposition in the stud farm trading accounts. One of them was that there might be no entry of a receipt at all and Lord Radcliffe pointed out that this method would give the self-supplier an unfair tax advantage. The second method would be to enter the cost price ; this again would be fictional because no sale in the legal sense had taken place, nor had there been any actual receipt. The third method was to enter as a receipt a figure equivalent to the current realisable value of the stock item transferred. Lord Radcliffe gave two grounds in favour of the third method. The first ground was that it gave a fairer measure of assessable trading profit as between one taxpayer and another, for it eliminated variations which were due to no other cause than any one taxpayer's decision as to what proportion of his total product he would supply to himself. The second ground was that it was better economics to credit the trading owner with the current realisable value of any stock which he had chosen to dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute ; that sale was an actual sale and not a notional sale ; that actual sale resulted in some profits. The problem is how should those profits be computed ? To adopt the language of Lord Radcliffe, the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other, the difference between the two being the profit or loss as the case may be. In a trading or commercial sense this seems to us to accord more with reality than with fiction. For these reasons we hold that the answer given by the High Court to the question of law referred to it was correct. The appeal accordingly fails and is dismissed with costs. SARKAR J.--Two questions arise in this appeal. The first is whether the judgment of the court below is against the decision of this court in Sir Kikabhai Premchand v. Commissioner of Income-tax. The second is, if so, does the decision in Kikabhai's case require reconsideration ? It appears that in Sharkey v. Wernher where the question was the same as in Kikabhai's case and which was decided a little later than that case, the House of Lords took a view contrary to that taken in Kikabha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale price and the market price prevailing on April 1, 1945. " The High Court held that the assessable profits were the difference between the sale price and the market value of the shares prevailing on April 1, 1945. The State has filed this appeal against the decision of the High Court. The State contends that the High Court's decision is against the judgment of this court in Kikabhai's case. That is the first question which I propose to discuss. The assessee in Kikabhai's case was a dealer in shares and silver. The method employed by him in keeping his accounts was to enter the cost price of his stock at the beginning of the year, to credit the sale proceeds of the stock sold during the year and value the unsold stock at the end of the year at cost price, these latter being carried forward as the opening entries of the next year's accounts. It appeared that the assessee had withdrawn some silver and shares from his business and settled these upon certain trusts. In the accounts he entered the silver and shares so withdrawn at their cost price. The State contended that these should have been entered in the accounts at their market value on the date they were withdrawn from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the decision in Kikabhai's case and the ratio on which it was based. It was said that Kikabhai's case dealt with a fictional sale and potential or notional profits whereas in the present case there was actual trading in the shares and the problem here is to ascertain the profits of that trade. I am not sure that the distinction so sought to be made is, really possible. Both the cases dealt with the assessment of the profits of an entire trading activity of a person. There were real profits in both cases and the question in each was, how to assess them. The difficulty in one case arose because a particular stock acquired for the trade had been withdrawn from it and in the other, because a particular stock not acquired for the trade had been used for its purposes. The question in each case was, what value was to be put on the stock concerned for assessing the profi ts of the trade as a whole. It would be incorrect to split up the entire trade and to treat the deal in each stock separately and I do not think Kikabhai's case did so. So considered the State would have no basis for any claim in Kikabhai's case for then there would have been no business at all to tax. It was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eys' worth is value at the cost at which the stock concerned was actually acquired from the market, may be as an investment and not as a stock-in-trade. I am unable to appreciate how it can be said that any moneys' worth would be overlooked--which, I will assume, no businessman will do in calculating his profits--if the shares are not valued at the market value of the day on which they are brought into the trade but are valued at the price at which actually they had been previously acquired by the assessee. The real question is what were the shares worth in money for calculating the profits. The contention of the respondent assumes that the moneys' worth must be calculated as on the date of the commencement of the trade and hence really begs the question. Chagla C.J. who delivered the judgment of the High Court, said that he did not understand Kikabhai's case to mean that even for the purpose of accountancy or for the purpose of ascertaining commercial profits it is not open to the court to value the shares at the market price of the date on which they were brought into the business. I am unable to agree. Accountancy, I suppose, is not based on fiction but deals with realities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill only be referring to the judgment of the majority. Now, Sharkey's case also dealt with the withdrawal of assets from a taxable business. There a lady owned two enterprises, one a stud farm, the income of which was liable to tax, and another, a racing establishment, which was recreational and therefore not liable to tax. The lady transferred some horses from the stud farm to the racing establishment. In assessing the income of the stud farm a question arose as to what value should be put in its accounts for the horses transferred to the racing establishment. It will be noticed that by the transfer to the racing establishment of which she was the owner, the lady had only withdrawn the horses from her taxable undertaking. The problem there was, therefore, just the same as in Kikabhai's case. It was held by the House of Lords that the value to be put on the horses withdrawn from the stud farm was their market value at the date of the transfer and not the cost incurred on them for breeding and otherwise till the transfer. The House of Lords observed that in income-tax law a dichotomy between the owner of a business and the business is possible and presumably, therefore, tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck-in-trade at the market rate on the date of conversion, he would be subjected to a tax different in amount from that of the tax on the former and this would result in inequitable distribution of the burden of taxation. Again, I am not convinced that this reasoning is conclusive. Take the case of two traders. One by his shrewd business method or by friendly contacts, or may be by means not very creditable may on the same day acquire, goods necessary for his trade at a much cheaper rate than the other. The profits of the two would then be different. I do not imagine that any income-tax law would find this objectionable. Furthermore, I am not sure that this anxiety for an equitable distribution of the burden of tax justifies departure from a cardinal rule which is accepted in many cases in England also, that a man cannot be said to trade with himself so as to make taxable profits. Lord Radcliffe realised the difficulty of the problem which he had to solve and said so. I do not think I will be wrong in saying that he put his decision on the ground of the best practical solution of that difficulty. The majority judgment in Sharkey's case does not lead me to the conclusion that our ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
