TMI Blog1965 (9) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1960-61, the question arose whether the profits or gains made by the new industrial undertaking established for producing dextrose were exempt under section 15C(1) of the Act, as claimed by the assessee. The Income- tax Officer held against the assessee-company in the view he held that the new industrial undertaking did not conform to the requirements of section 15C and that both the undertakings formed one and the same business carried on by the assessee-company for producing starch in the first instance and by extending the activities of that business to producing dextrose as ultimate product. He was also of the view that, in any event, if the cost of the raw material, i.e., starch, debitable to the new industrial undertaking were to be taken at market value, even on the contention of the assessee that the new industrial undertaking was independent of the old industrial undertaking there would be no profits made by the new industrial undertaking which could be exempted under the provisions of section 15C. The assessee-company carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner accepted the contention of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f and make profit out of any such transaction in a commercial sense. The Tribunal rejected this contention and confirmed the view taken by the Appellate Assistant Commissioner. The Tribunal observed that the question involved in the case was, when profits of two different activities, both admittedly trading activities, of the same assessee have to be separately computed, what should be the mode of computing such profits? The answer which the Tribunal gave was: In this connection the fact that the profits of one of the trading activities is exempt from tax will have really no important consideration. Shri Palkhivala's argument was that it was open to the assessee to supply starch produced by the old industrial undertaking, at cost, to the new industrial undertaking for the purpose of producing 'dextrose'. The assessee could not be compelled to supply the starch produced by it to the new industrial undertaking at market price as and by way of a commercial transaction. In this connection he made very attractive argument. He said if instead of the assessee itself some stranger were to supply starch to the assessee's new industrial undertaking at cost, the supplier c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. Sub-section (3) of that section provides that the profits or gains of an industrial undertaking to which section 15C applies shall be computed in accordance with the provisions of section 10. Since exemption is given on so much of the profits or gains derived from an industrial undertaking as do not exceed six per cent. per annum on the capital employed in such undertaking, sub-section (3) had to be introduced to provide that such profits or gains should be computed in accordance with the provisions of section 10. It is clear that the object of this section is to promote new industrial undertakings, and sub-section (6) shows that relief would be available for the first five years from the commencement of manufacture or production. It would appear that since the computation of so much of the profits or gains derived from the new industrial undertaking is to be made in accordance with the provisions of section 10, profits to be computed would be the profits or gains in their natural and proper sense. As Lord Halsbury put it in Gresham Life A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . What the assessee in such a case does is to utilise the business assets of one activity or department as business assets of the other activity or department. In other words, he is withdrawing business assets from one activity for utilizing them in the other activity, and that being so the argument was that the proper method of accounting would be to enter goods at cost to the assessee. If that cost is X , it cannot be anything else, namely, Y , merely because the goods are placed in another industrial activity of the same unit. Mr. Kaji argued that if the assessee were to enter the goods at the price realisable in the market, he would not be right because he would then be introducing the concept of a notional sale and that would be contrary to the accepted principle that an assessee cannot trade with himself. Instead of trading with himself, what the assessee in substance does is to exploit the business assets of one activity for the purpose of the second activity. Therefore, the argument proceeded, unless there is something in the Act to treat the user of a business asset for another activity as a notional sale at market value, the principle which must rule would be that an as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ones and as he derived no immediate pecuniary gain, the State could not tax them, for under the Income-tax Act the State had no power to tax a potential future advantage. At page 509 [1953] 24 I.T.R. 506; [1954] S.C.R. 235 of the report, the Supreme Court observed that in revenue cases regard must be had to the substance of the transaction rather than to its mere form, and that disregarding technicalities it was impossible to get away from the fact that the business was owned and run by the assessee himself. In such circumstances we are of opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law. And worse. He may keep it and not show a profit. He may sell it to another at a loss and cannot be taxed because he cannot be compelled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 1946-47), the assessee converted these shares into stock-in-trade and carried on a trading activity, i.e., business in shares, and sold those shares. The question, in these facts, was how should the profits for the assessment year 1946-47 be computed? Whether the profits should be computed as being the difference between her actual cost price when the assessee had purchased those shares in 1939-40 and the sale price, or between the market price on April 1, 1945, and the sale price realised by her? The Supreme Court, by a majority judgment, held that the assessable profits on the sale of shares was the difference between the sale price and the market price of the shares prevailing at the date when the shares were converted into stock-in-trade of the business in shares and not the difference between the sale price and the price at which the shares were originally purchased by the assessee. At page 95 of the report, the Supreme Court considered the House of Lords decision in Sharkey v. Wernher*, where, on facts somewhat similar to those in Kikabhai's case**, the House of Lords took a different view. But in view of the fact that the case which the Supreme Court was deali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 984 of the report observed as follows: What do 'real' and 'unreal' mean in this connexion? If reality depends on the existence of a genuine contract of sale between two independent parties, neither figure is more real than the other. Whether the transfer is between two departments of one legal entity or between two limited companies under the same control, the transfer is effected either by an entry in account or by a dictated sale at a prescribed price. On the other hand, if cost is supposed to be more real than cost plus as a transfer figure because it represents (or by sufficient analysis of general overheads can be thought to represent) expenditure actually incurred, this seems to me a very unsatisfactory test of reality. When transfer is in question it is the current realizable value of what is transferred that presents itself as the natural figure to enter rather than the historical record of what has previously been spent upon it. It is the article, having a current monetary equivalent, that is disposed of, not the previous expenditure. I do not doubt that either figure could be defended as reasonable business practice, but I do demur to a preference for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if market price were to be accepted as the basis of computation in the present case, it would be introducing a concept of notional sale and a notional profit which was disapproved in this decision, and that the proper and the correct basis for such computation, therefore, would be the cost of production of the article transferred inter-departmentally. It must however be noted that, in the first place, this decision was with regard to succession, and, in the second place, the principle laid down in this decision as also in Laycock v. Freeman, Hardy and Willis [1939] 2 K.B. 1; 2 Tax Cas. 288; 7 I.T.R. 237 was expressly disapproved by the House of Lords in Sharkey's case**. Referring to this decision, Lord Radcliffe at page 984 in Sharkey v. Wernher [1956] 29 I.T.R. 962 in specific terms stated that he was not in a position to accept the point of view expressed therein, and added: I do not regard those decisions as having any true bearing at all upon this appeal. As decisions, obviously, they have not. They are decisions upon the difficult and, often, unsatisfactory question of what constitutes succession to a trade for the purpose of the relevant section of the income-tax code. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities were justified in treating the profits as income from business. As the assessee had continued the same business and had also valued the stock received by him at cost price in opening his own accounts, it was not open to him to claim that cost of the stock must be valued at its market price in computing the profits. It will be observed that the assessee in this case treated his share of the silver as his stock-in-trade and the business was held to be a continuing business in which he brought the stock-in-trade, valuing that stock-in-trade at the price of ₹ 27,710 which was the cost price of the joint family. The facts, therefore, were quite different from those in Shirinbai's case*, where the shares were brought in as stock-in-trade at a later stage in a new trading activity commenced by the assessee. In both the cases, however, the question involved was, what was the cost to the business. In Gangadhar Babulal's case [1964] 51 I.T.R. 841 the cost, as held by the High Court, was the one which he entered in the books when he brought in the silver bars as stock-in-trade of the continuing business, whereas in Shirinbai's case [1962] 46 I.T.R. 86 (S.C.) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in the instant case? The starch which is manufactured by one department of the company's manufacturing unit and which the assessee-company also sells at profit has been transferred to its another department for being used as raw material in the manufacture of dextrose which is the ultimate product. Dextrose is actually sold by the assessee-company and that is an actual commercial activity, as was the case in Commissioner of Income-tax v. Shirinbai Kooka [1962] 46 I.T.R. 86 (S.C.). The question is, in computing the profits of the new industrial undertaking, which, for the purpose of section 15C, is to be treated as an independent and a distinct undertaking, what is to be the basis of the value of the raw materials, cost price to the company as canvassed by Mr. Kaji, or their value currently realisable at the time when they were diverted? When starch was produced, it would form the stock-in-trade of the assessee-company. When that is removed for use in another undertaking of the same assessee-company, what value is to be credited there, for some value has to be credited in the accounts of the old under taking and debited in the accounts of the new undertaking. The alternativ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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