TMI Blog1951 (6) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... an income of ₹ 1,16,297 for income-tax purposes, of which ₹ 73,652 was shown as income from business. The same income was returned for excess profits tax purposes. The Income-tax Officer, however, added a sum of ₹ 2,20,887 as the excess arising from the valuation of a part of the firm's stockin-trade in silver which, though belonging to the firm, had been removed and was lying out of British India at Bikaner. The total income determined by him was ₹ 3,37,403 and he assessed the firm on that income under Section 23(3), read with the second proviso to Section 23(5). The question involved in this reference relates to the inclusion of the aforesaid sum of ₹ 2,20,887 in the firm's income for the assessment year 1942-43 and it is therefore necessary to state how it came to be included. The amount represents the difference between the cost price of 582 bars of silver and their market price at the close of the accounting year, the latter being computed in accordance with the rate prevailing in Calcutta. These 582 bars were, during the year of account, sent by the firm to the two partners at Bikaner, each receiving 291 bars, and the silver remained w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd or any waiver of it before the Appellate Assistant Commissioner, as that officer had wrongly held. But though taken in the memorandum of appeal in that indirect way, the question was not urged at the bearing before the Tribunal and was not even mentioned. It appears that before the Appellate Assistant Commissioner a ground was taken to the effect that the appreciation of the value of the silver transferred to the partners arose or accrued, if at all, out of British India and consequently it was not taxable in Calcutta under Section 4 or Section 14(2)(c). At the bearing, however, the lawyer for the assessee expressly abandoned the ground and stated that since no sale had taken place at Bikaner during the accounting year, Section 14(2) (c) would not apply and the particular ground could not be urged. After the dismissal of its appeal by the Tribunal, the assesses made an application under Section 66(1) of the Income-tax Act for a reference to this Court of six questions of law, one of which asked whether in including in the assessment the profit consequent on the appreciation of the silver lying in Bikaner, the Tribunal had properly interpreted Section 14(2)(c) of the Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred, that order became final and a Beach dealing with the reference, when it came up for hearing, was not entitled to go behind the earlier order and decline to answer the question on the ground that it did not arise out of the Tribunal's order. Both sides referred us to certain authorities, but there is no decision of this Court. It is not even arguable that the question in the present case arises out of the Tribunal's order. In my view, for that reason and also for the reason that the point was expressly abandoned before the Appellate Assistant Commissioner, the assessee was not entitled to have the question referred at all. It has, however, succeeded in causing a reference to be made and we have to decide whether we can at this stage take a view which would amount to virtually overruling the earlier order of a Bench of this Court. In my opinion, the question must be dealt with and answered on the merits and the reference, in view of the manner in which it has come to be made, cannot now be thrown out on the ground that the question referred does not arise out of the Tribunal's order. It is true that the jurisdiction of the High Court under Section 66 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot require the Tribunal to refer some question which was not proposed before it for reference and which, necessarily, it has not declined to refer. The Indian Income-tax Act has not charged the High Court with the duty of setting right is all respects all assessments that might come to its notice; its jurisdiction is not either appellate or revisional; nor has it a general power of superintendence under Section 66. Its sole duty is to serve as the appointed machinery for resolving any conflict which may arise between an assessee or the Commissioner on the one hand and the Tribunal on the other regarding some specific question or questions of law. If, on an application under Section 66(2), the High Court finds that the question which the applicant required the Tribunal to refer was not a question that arose out of the Tribunal's appellate order, it ought, in my view, to refuse to require the Tribunal to refer any such question. I find that this exactly is the view of the jurisdiction of the High Court under Section 66(2) which was taken in a recent decision of this Court by the learned Chief Justice and Banerjee, J., in the case of Commissioner of Excess Profits Tax, West B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench happened to deal with the reference, it could not have gone behind its earlier decision. A distinction must, however, be made between a question not arising out of the Tribunal's order and a question not arising out of the facts of the case. A question may arise out of the facts of the case but not having been canvassed before the Tribunal, may not be dealt with by it and may not arise out of its order. On the other hand, a question may arise out of the Tribunal's order, because it was raised before it but it may not arise out of the facts of the case at all, though it was sought to be raised. In my opinion, while in a situation like the one in which we find ourselves in this case, we cannot decline to entertain the question on the ground that it does not arise out of the Tribunal's order, we could still hold, if the facts justified such a decision, that the question did not arise out of the facts of the case. That would be answering the question on the merits and in no way going behind the earlier decision of the Court, directing the question to be referred and involving only a finding that the question arose out of the Tribunal's order. In the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not liable to be included in the assessable income of the assesses. On behalf of the Commissioner of Income-tax it was contended that the income represented by the appreciation did accrue or arise in British India; secondly, that assuming that it did not accrue or arise here, but accrued or arose at Bikaner, it was still to be deemed to have been received in British India; and thirdly, that in any event, it was an income derived through a business connection in India, and therefore was liable to be deemed to have accrued or arisen here under the provisions of Section 42 of the Act to which Section 14(2)(c) expressly referred. The reasoning by which Dr. Pal supported his contention was short. He said that in fact no profit had arisen or had been realised and the profit taken into account was a purely notional one. To quote his own words, what had happened was that a potentiality had been taken as a reality. That method of ascertaining the annual profits of a business, when accounts are kept on a mercantile basis, is well-recoginsed and Dr. Pal had no objection to urge against it. What he still said was that if the profit that was taken as income was a mere appreciation in va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of accounting sustained through many years--features which are totally absent in the present case. I may also point out that the decision is of a date prior to the enactment of Section 14(2)(c), and further, that although the learned Judges refer to the Explanation to Section 4(2), as it stood then, they do not consider it at all and make no attempt to reconcile their decision with the express provision contained in that Explanation. Be that as it may, in my opinion, the question in the present case which is, where the profit represented by the appreciation arose, is in no way answered by the line of cases to which Mr. Pal referred. The contention of Mr. Pal, based on Section 42, can be disposed of easily. Apart from the difficulty of making out any business connection in India as the source of the profit in the present case, and the very great difficulty of finding the object of applying some of the clauses of Section 42(1) to residents, it is clear from the provisions of Section 14(2)(c) that only those profits are excepted which are assessable under Section 42. The main provision of Section 42 is not concerned with assessment at all, but it does contain some incidental prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is an appreciation and not a deficiency, it is taken notionally as profit, although actually nothing has been realised. In fact such profit may not be realised at all, for prices may fall; similarly, a loss may not be sustained at all, for prices may rise. But such contingencies are provided for by the fact that what is the closing stock of one year becomes necessarily the opening stock of the next year so that whatever advantage or disadvantage may be acquired or suffered by the stock valuation for one year can be counterbalanced in the year next following. It appears to me that when profit, is computed by a valuation of that type and a notional increase of the value of the stock-in-trade over its cost price is taken as the profit, it is rather unrealistic to speak of any accrual or arising in any physical or tangible sense. But if by reason of the provisions of Section 4, any profit, if it is to be brought under assessment, must be shown to have accrued or arisen at such a place as makes it taxable in British India, I am of opinion that the site of accrual of a notional profit, represented by the excess in value of the stock-in-trade of a business over its cost price, is the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny actual profit, nor is it definitely known what profit will ultimately be realised or whether any profit will actually be realised at all. The condition is impalpable and intangible and liable to disappearance, if prices fall. But if the condition lasts upto the end of the year and a valuation of the goods is then made, resulting in the ascertainment of the excess of the then value over the coat price, it is only then that the intangible becomes tangible and what was only a possibility, emerges for the first time out of the valuation in the shape of a favourable balance which is the profit. Even this excess or favourable balance is not a profit in any real sense, but mercantile practice takes it to be so. It emerges out of the valuation and only when it so emerges, it arises or accrues. The source of the profit is thus the valuation and its situs is where the valuation is made. What is valued is the firm's business, at the site of the firm, and all the, stock-in-trade of the firm is necessarily drawn into the valuation, wherever they may be physically situated. The profit which is the result of the stock valuation of a business is thus sui generis, a type by itself to which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike to contend that there was no appreciation or profit at all, because the assesses was entitled to value the stock at cost price and if he did so, there would be no profit. It appears to me, however, that there are several reasons why the assessee could not be allowed to raise any such question. In the first place, it is not covered by the question referred to this Court. The history of that question has already been told and it does not appear from the record that it was ever sought to press the point now raised by Dr. Pal into the ambit of the question. The point raised by Dr. Pal was in fact raised before the Tribunal as well, and is dealt with in paragraph 10 of its appellate order. Although the decision went against the assessee firm, it is noticeable that no question relating to this point was included among the six that were formulated for reference to this Court. Dr. Pal very fairly informed us that before this Court as well, on the application under Section 66(2), the assessee had finally asked for a reference of the only question that has actually been referred. As I have explained in an earlier part of this judgment, the High Court can direct a reference of only such q ..... X X X X Extracts X X X X X X X X Extracts X X X X
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