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TMI Blog1962 (2) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... but in the assessment year 1946-47, the relevant accounting year being financial year 1945-46, the Income-tax Officer found that the assessee had converted her shares into her stock-in-trade and carried on a trading activity, viz., a business in shares. Her income for the assessment year 1946-47 was therefore computed on the basis of the profits which she made by the sale of her shares as a trading activity, the profits being calculated on the difference between the ruling market price at the beginning of the account year and the sale proceeds. For the assessment year 1947-48, the relevant accounting year being the financial year 1946-47, it was found by the Income-tax Officer that the sale proceeds of the shares which the assessee had sold amounted to Rs. 5,49,487. The Income-tax Officer calculated the profits in the following manner : Rs. Sale proceeds ... 5,49,487 Cost calculated on the basis of the market price of the shares at the beginning of the account year ... 4,50,822 ------------------ ... 98,665 Less : Forward business loss ... 25,344 ------------------ Net profit ... 73,321 ------------------ The assessee then appealed to the Appellate Assistant C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s then referred to the High Court of Bombay under section 66(1) of the Indian Income-tax Act, 1922 (XI of 1922). This was Income-tax Reference No. 49 of 1955. The reference was heard by a division bench consisting of Chagla C.J. and Tendolkar J. By its judgment and order dated March 6, 1956, the High Court answered the question in favour of the assessee and held that the assessee's assessable profit on the sale of shares was the difference between the sale price and the market price prevailing on April 1, 1945. The appellant, having unsuccessfully moved the High Court for a certificate under section 66A(2) of the Income-tax Act, applied for special leave to this court. Such leave was granted by this court by an order dated September 17, 1956. This appeal was heard in part by a bench of three judges presided over by the learned Chief Justice, who directed that it be posted for hearing before a bench consisting of seven judges, presumably because one of the points urged before the bench was whether the majority decision of this court in Sir Kikabhai Premchand v. Commissioner of Income-tax required reconsideration. It may be here stated that the learned judges of the High Court had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a lesser price, that is what they cost her, and not the business ; but so far as the business was concerned, the shares cost the business nothing more or less than their market value on April 1, 1945. The learned Additional Solicitor-General who has appeared on behalf of the appellant in this case has contested the correctness of the above line of approach. He has submitted, firstly, that the distinction drawn by the High Court between Kikabhai's case and the present case is not warranted on principle ; secondly, he has contended that the ratio in Kikabhai's case should apply in the present case also ; and thirdly, he has contended that in holding that the price of the shares should be the market price as, on April 1, 1945, when the shares were converted into stock-in-trade, the High Court in effect held by a legal fiction that the assessee had realised the potential profits on the said shares on that date, which she had not actually done and hence the very basis of the judgment of the High Court is vitiated by the assumption of a fiction. The learned Additional Solicitor-General has also submitted that there was no warrant for the High Court to introduce a legal fiction, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business, any withdrawal of them from the business must be dealt with along ordinary and well-known business lines, namely, that if a person withdraws an asset from a business he must account for it to the business at the market rate prevailing at the date of the withdrawal. This contention was repelled by the majority on the ground that the transaction of withdrawal was not a business transaction and by the act of withdrawal the business made no profit or gain nor did it sustain a loss and the assessee derived no income from it. It was pointed out that the assessee might have stored up a future advantage for himself but as the transactions of withdrawal were not business transactions and as the assessee derived no immediate pecuniary gain, the State could not tax them ; for under the Income-tax Act the State has no power to tax a potential future advantage ; all it can tax is income, profits and gains made in the relevant accounting year. In other words, the ratio of the decision as respects the first contention of the learned Attorney-General was that there was no general principle of taxation under income-tax law under which the State could assess a person on the basis of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no question of any business sale or actual profits and in the other admittedly there are profits liable to tax, but the question is, how the profits should be computed. We must, therefore, overrule the first two arguments of the learned Additional Solicitor General that the distinction drawn by the High Court between Kikabhai's case and the present case is not warranted on principle and that the ratio of the decision in Kikabhai's case must necessarily apply to the present case also. While we are on this question we must refer to a decision of the House of Lords in Sharkey v. Wernher, to which our attention has been drawn. Briefly put, the facts of that case were these : the wife of the assessee there carried on a stud farm, the profits of which were agreed to be chargeable to income-tax under Case I of Schedule D. She also carried on the activities of horse racing and training, which were agreed not to constitute trading. Five horses were transferred from the stud farm to the racing stables. The cost of breeding these horses was debited to the stud farm accounts. On the question of the amount to be credited as a receipt the assess ee contended before the Special Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own decisions, namely, Laycock v. Freeman, Hardy and Willis and Briton Ferry Steel Co. Ltd. v. Barry and held that the principle stated and the reasoning underlying the judgment of Sir Wilfrid Greene M. R. in Briton Ferry Steel Co. Ltd. v. Barry were inconsistent with the conclusion in Watson Bros. v. Hornby. The Court of Appeal accordingly allowed the appeal. Sir Raymond Evershed M. R. (as he then was) said, however, that if the matter were res integra, he would have been inclined to hold that for the purpose of the stud farm account if one were seeking to put a value on the animals transferred, the value must be that which the animals were in fact worth. He expressed the view, however, that the matter was not res integra and as a result of the authorities referred to above which expounded the general principle to be applied, he allowed the appeal. The case was then taken to the House of Lords. The House of Lords decided in favour of the Crown, Lord Oaksey dissenting. Viscount Simonds thus expressed his views in his speech at page 299 of the report : " But it appears to me that, when it has been admitted or determined that an article forms part of the stock-in-trade of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade was withdrawn and the question was at what figure in the trading accounts the withdrawal should be accounted for. In Kikabhai's case this court came to the conclusion that the withdrawal should be at the cost price. In Sharkey v. Wernhey the House of Lords held that the proper figure should be the market value which gave a fairer measure of assessable trading profit. It is significant that the House of Lords reached that conclusion not without dissent. If the facts of the case which we are now considering were similar to the facts of Kikabhai's case, it might have been necessary for us to re-examine the ratio of that decision. It is necessary to state here, however, that the decision of the House of Lords in Sharkey v. Wernher is not an authority which is binding on us. It is only an authority of persuasive value entitled to great respect. In an earlier part of this judgment we have taken pains to point out the distinction between Kikabhai's case and the case under our consideration. In view of that distinction, we do not think that it is really necessary in the present case to re-examine the ratio of the decision in Kikabhai's case. What then is the basis for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of investment on the dividends of which she was being charged to income-tax. In assessing the tax for the assessment year 1946-47, the accounting period of which was the financial year 1945-46, it was found that the assessee had been carrying on business with some of the said shares since April, 1945. It is not in dispute that in the accounting year 1946-47 also, which is the year with which we are concerned, she carried on business with various such shares. A question arose in connection with the assessment of tax for 1946-47 as to how the profits of her trading activities were to be ascertained. The trade was one of purchase and sale of shares. It is common ground that the profits of such a trade are the difference between what the thing sold fetched and what it cost to acquire. The question arose because difficulty was felt in fixing the cost of acquisition. In regard to shares acquired by the assessee for her trade after she started it, the position was not in controversy, for the cost in respect of such shares was admittedly what she bought them for. The controversy concerned the shares with which she traded in this year and which, prior to April 1, 1945, she had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of regarding it in a business light is to enter the market price at the date of the withdrawal, " and that " if a person withdraws an asset from a business, he must account for it to the business at the market rate prevailing at the date of the withdrawal ". In dealing with these contentions this court observed : "......it is impossible to get away from the fact that the business is 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. " The decision in Kikabhai's case was, however, by a majority, Bhagwati J. having taken a contrary view. For the purpose of the present question I will have to confine myself to the judgment of the majority. It seems to me t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by itself. So the court did not consider notional profits in the sense indicated by the distinction now sought to be made between the two cases. The present case is the same, for here also the question is what are the profits of the assessee's entire trade, that is, how is the cost price to be calculated for that purpose ? Here also, if the sale of the investment shares by themselves was concerned there would in all probability have been no trading and no question of assessing the profits of such trading would have arisen. Therefore both cases dealt with the assessment of actual profits ; none was concerned with assessment of notional profits. But suppose the two gases are different as suggested, that does not seem to me to make any distinction. In Kikabhai's case it had been held that the withdrawal was not trading because a man could not trade with himself. In the present case the assessee did no doubt trade by selling her shares to a stranger. There was no fiction in this trade. But when the assessee contends that in ascertaining the profits of a trading transaction actually done by her she should be permitted to value the stock involved in that trading activity which she h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealing with commercial profits. I think that since that case was considering profits for income-tax purposes it was not dealing with anything else. I am also unable to agree with the view of Chagla C.J. that the ratio in the decision of Kikabhai's case has no application to the present case. That ratio was that for the purpose of ascertaining taxable profits it is not possible to conceive of one trading with himself and it would apply here, for here also taxable profits are being ascertained. Chagla C.J. observed that what has to be ascertained is what an article costs the business and not the owner, but in Kikabhai s case it was expressly said that when the business is owned by the assessee himself it is unreal to separate the business from its owner and treat them as if they were different entities trading with each other. Chagla C.J. also said that for income-tax purposes profits of a business have to be understood in a way that a man of business would understand it. I am not aware that a commercial man must compute profits on the basis of a fiction that he has bought from himself and cannot compute his profits by deducting from the sale proceeds the price for which he had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s giving any special reason to make that dichotomy. I also note that the House of Lords did not dispute that, as a general rule, the dichotomy cannot be made. Apart from the general observation mentioned above the House of Lords based its decision on two grounds. What the House of Lords thought strongly supported its view was first that since it was conceded before them that some entry had to be made in respect of the horses withdrawn, and that whether the entry was of the cost incurred for breeding the horses transferred or of their market value on the date of the transfer, the entry would in either case be fictional for they were not in fact transferred at any of these prices and therefore it was more real to enter the market value. Now, as Lord Radcliffe himself noted, the entry of the cost price would really be cancelling the entry of the cost in breeding the horses which had been made in the accounts of the farm. He, however, found no explanation why cancellation should take place. I think it can be legitimately said that there is an explanation and as was said in Kikabhai's case, that is, that the cancellation had to take place because assets were withdrawn from the trade, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with in that case and with what has been said there, I am in complete agreement. Before leaving Sharkey's case it would be of some interest to point out that Lord Simonds did not think that any distinction was possible between the case that he had before him and a case like the one now before us for he said : " And so also, as I have more than once pointed out, in this case it is conceded by the taxpayer that some figure must appear in the stud farm accounts as a receipt in respect of the transferred horses, though Lady Zia in her capacity as transferee did not carry on a taxable activity. In the same way, it would, I suppose, be claimed that, if Lady Zia were to transfer or re-transfer a horse from her racing establishment to her stud farm, some figure would have to appear in the stud farm accounts in respect of that horse, though it cost her nothing to make the transfer : if it were not so and she subsequently sold the transferred horse and the proceeds of sale were treated as receipts of the stud farm, she could justly complain that she had been charged with a fictitious profit. " In the course of arguments, a case was suggested of a man who had inherited or received by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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