1962 (2) TMI 6 - SC - Income Tax

Whether the assessee s assessable profit on the sale of shares is the difference between the sale price and the cost price or the difference between the sale price and the market price prevailing on April 1 1945 ? Held that - The approach of the High Court was correct and normally the commercial profits out of the transaction of sale of an article must be the difference between what the article cost the business and what it fetched on sale. So far as the business or trading activity was concerned the market value of the shares as on April 1 1945 was what it cost the business. We do not think that there is any question of a notional sale here. The High Court did not create any legal fiction of a sale when it took the market value as on April 1 1945 as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute ; that sale was an actual sale and not a notional sale ; that actual sale resulted in some 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.

Issues Involved
1. Basis of computation of assessable profits from the sale of shares.
2. Applicability of the decision in Sir Kikabhai Premchand v. Commissioner of Income-tax.
3. Consideration of the decision in Sharkey v. Wernher by the House of Lords.

Detailed Analysis

1. Basis of Computation of Assessable Profits from the Sale of Shares
The primary issue in this case was to determine the correct basis for computing the assessable profits made by the assessee from the sale of shares. The assessee, a Parsi lady, converted her investment shares into stock-in-trade and carried on a trading activity. The Income-tax Officer computed the profits based on the difference between the market price at the beginning of the account year and the sale proceeds. However, the Appellate Assistant Commissioner and the Judicial Member of the Tribunal held that the original cost price of the shares should be considered to ascertain the profits. The Accountant Member agreed with the Income-tax Officer, and the President of the Tribunal concurred with the Accountant Member. The High Court of Bombay, however, ruled in favor of the assessee, stating that the assessable profit should be the difference between the sale price and the market price prevailing on April 1, 1945.

2. Applicability of the Decision in Sir Kikabhai Premchand v. Commissioner of Income-tax
The Supreme Court had to consider whether the decision in Sir Kikabhai Premchand v. Commissioner of Income-tax applied to this case. In Kikabhai's case, the court held that the withdrawal of stock-in-trade for personal use should be valued at cost price, as a man cannot trade with himself. The court distinguished the present case from Kikabhai's case, noting that in Kikabhai's case, there was no actual sale or profit, whereas, in the present case, there was an actual sale resulting in real profits. The court agreed with the High Court that the ratio in Kikabhai's case need not be extended to the present case, as the facts and principles involved were different.

3. Consideration of the Decision in Sharkey v. Wernher by the House of Lords
The court also considered the decision in Sharkey v. Wernher, where the House of Lords held that the value of assets withdrawn from a taxable business should be their market value at the date of withdrawal. The court noted that the facts in Sharkey's case were similar to those in Kikabhai's case, and the House of Lords' decision was not binding but had persuasive value. The court emphasized the distinction between the present case and Kikabhai's case and concluded that the High Court's approach, which was based on ordinary commercial principles, was correct.

Conclusion
The Supreme Court upheld the High Court's decision, stating that the assessable profit should be the difference between the sale price and the market price prevailing on April 1, 1945. The court dismissed the appeal, emphasizing that the correct basis for computing actual profits in a trading activity should be the difference between the market value at the beginning of the account year and the sale proceeds. The court also clarified that the decision in Kikabhai's case did not apply to the present case, as the facts and principles involved were different. The appeal was dismissed with costs.

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