Sir Kikabhai Premchand Vs.
Commissioner of Income Tax (Central), Bombay [1953] INSC 60 (9 October 1953)
BOSE, VIVIAN SASTRI, M. PATANJALI (CJ) DAS,
SUDHI RANJAN HASAN, GHULAM BHAGWATI, NATWARLAL H.
CITATION: 1953 AIR 509 1954 SCR 214
CITATOR INFO :
E 1959 SC 82 (13) R 1962 SC 186 (9) D 1963 SC
477 (9) D 1963 SC 577 (15,16,17,21) R 1965 SC 342 (8) RF 1966 SC 4 (19) HO 1969
SC 812 (7) RF 1973 SC 989 (21,22,25)
ACT:
Indian Income-tax Act (XI of 1922), s.
13-Ascertainment of profits-Assessee adopting mercantile system and valuing
stock at cost price at beginning and close of each yearWithdrawal of stock from
business-Whether business should be credited with market price on date of
withdrawal.
HEADNOTE:
The assessee who carried on business in
bullion and shares kept accounts in the mercantile system and the method
adopted by him for ascertaining his profits was to value stock at the beginning
and close of each year at cost price.
In the accounting year he withdrew some
silver bars and shares from the business and settled them in trusts, and in the
accounts of the business he valued them at the close of the year at cost price
Held, per PATANJALI SASTRI C. J., S. R. DAS, VIVIAN Bose and GHULAM HASAN JJ.
(BHAGWATI J. dissenting)-that the assessee was entitled to value them at cost
price and was not bound to credit the business with their market price at the
close of the year for ascertaining his assessable profits for the year.
BHAGWATI J. 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withdrawn from the business and the business was entitled to be credited with
the market value of the assets withdrawn as at the date of the withdrawal,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-intrade on hand at the close of the year.
In re Chouthmal Golapchand (6 I.T.R. 733) and
In re Spanish Prospecting Co. Ltd. ([1911] 1 Ch. 92) referred to.
CIVIL APPELLATE jurisdiction: Civil Appeal
No. 144 of 1952.
Appeal by special leave granted by the
Supreme Court on 3rd October, 1950, from the' Judgment and Decree dated the
14th day of September, 1949, of the High Court of Judicature at Bombay (Chagla
C.J. and Tendolkar J.) in its Original Civil Jurisdiction in Income-tax
Reference No. I of 1949 arising out of the Order dated the 20th day of
February, 1948, and 9th 220 April, 1948, of the Income-tax Appellate Tribunal,
Bombay Bench 'B', Bombay, in I.T.A. No. 894 of 1947-48.
R. J. Kolah for the appellant.
M. C. Setalvad, Attorney-General for India,
(G. N. Joshi, with him) for the Commissioner of Income-tax.
1953. October 9. The Judgment of the Chief
Justice and S. R. Das, Bose and Ghulam Hasan JJ. was delivered by Bose J.
Bhagwati J. delivered a separate dissenting judgment.
Bose, J. This is an appeal by an assessee
against a judgment and order of the High Court at Bombay delivered on a
reference made by the Income-tax Appellate Tribunal. The Bombay High Court
refused leave to appeal but the assessee obtained special leave from this
court.
The appellant deals in silver and shares and
a substantial part of his holding is kept in silver bullion and shares. His
business is run and owned by himself. His accounts are maintained according to
the mercantile system.
It is admitted that under this system stocks
can be valued in one of two ways and provided there is no variation in the
method from year to year without the sanction of the Incometax authorities an
assessee can choose whichever method he wishes. In this case, the method
employed was the cost price method, that is to say, the cost price of the stock
was entered at the beginning of the year and not its market value and similarly
the cost price was again entered at the close of the year of any stock which
was not disposed of during the year. The entries on the one side of the
accounts at the beginning of the year thus balance those on the other in
respect of these items with the result that so far as they are concerned the
books show neither a profit nor a loss on them. This was the method regularly
employed and it is admitted on all hands that this was permissible under this
system of accounting.
221 The accounting year with which we are
concerned is the calendar year 1942. The silver bars and shares lying with the
appellant at the beginning of the year were valued at cost price.
In the course of the year the appellant
withdrew some bars and shares from the business and settled them on certain
trusts, three in number. The appellant was one of the beneficiaries in all
three trusts retaining to himself a reversionary life interest after the death
of his wife who was given the first life interest. After certain other life
interests the ultimate beneficiaries were charities. The appellant was the
managing trustee expressly so created in two of the trusts and virtually so in
the third. In his books the appellant credited the business with the cost price
of the bars and shares so withdrawn and there lies the crux of the issue which
we have to determine. There is no suggestion in this case that the bars and
shares were withdrawn from the business otherwise than in good faith.
According to the appellant, the act of
withdrawal resulted in neither income nor profit nor gain either to himself or
to his business, nor was it a business transaction, accordingly it was not
taxable.
The learned Attorney-General raised two
contention.
First, he said that as the bars and shares
were brought into the 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. He said
that the mere fact that the appellant was the sole owner of the business can
make no difference, for under the Act income is assessable under distinct beads
and when we are working out the income of a business the rules applicable to
business incomes must be applied whoever is the owner. His second contention
was that if the act of withdrawal is at a time when the market price is higher
than the cost price, then the State is deprived 39 222 of a potential profit.
He conceded that had the market rate been lower than the cost price, then the
appellant would have been entitled to set off the loss on those transactions
against his overall profit on the other transactions and thus obtain the
advantage of a lower tax on the overall picture.
We are of opinion that the learned
Attorney-General's second contention is unsound because, for income tax
purposes, each year is a self-contained accounting period and we can only take
into consideration income, profits and gains made in that year and are not
concerned with potential profits which may be made in another year any more
than we are with losses which may occur in the future.
As regards the first contention, we are of
opinion that the appellant was right in entering the cost value of the silver
and shares at the date of the withdrawal, because it was not a business transaction
and by that act the business made no profit or gain, nor did it sustain a loss,
and the appellant derived no income from it. He may have stored up a future
advantage for himself but as the transactions were not business ones and as he
derived no immediate pecuniary gain the State cannot 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.
It was conceded that if these assets had been
sold at cost price the State could have claimed nothing, for a man cannot be
compelled to make a profit out of any particular transaction. It was also
conceded that if the silver and stocks had lain where they were,, then again
there would have been no advantage to the State because the appellant would
have been entitled to enter their closing values at cost at the end of the
year. The learned Attorney-General even conceded that if they bad been sold at
a loss the appellant would have been entitled to set that off against his other
gains, but he said that that is because all those are business transactions and
that is the way the law deals with such matters when they occur in the ordinary
course of 223 business. But, he argued, when there is a withdrawal and no sale
or its equivalent, the matter is different. As this is a business, any
withdrawal of the assets is a business matter and the only feasible way of
regarding it in a business light is to enter the market price at the date of
the withdrawal and whether that happens to favour the assessee or the State is
immaterial. We do not agree.
It is well recognised that in revenue cases
regard must be had to the substance of the transaction rather than to its mere
form. In the present case, disregarding technicalities, 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 unreal and a 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 sell at a profit. But in this purely fictional sale
to himself he is compelled to sell at a fictional profit when the market rises
in order that he may be compelled to pay to Government a tax which is anything
but fictional.
Consider this simple illustration. A man
trades in rice and also uses rice for his family consumption. The bags are all
stored in one godown and he draws upon his stock as and when he finds it
necessary to do so, now for his business, now for his own use. What he keeps
for his own personal use cannot be taxed however much the market rises; nor can
he be taxed on what he gives away from his own personal stock, nor, so far as
his shop is concerned, can he be compelled to sell at a profit. If he keeps two
sets of books and enters 224 in one all the bags which go into his personal
godown and in the other the rice which is withdrawn from the godown into his
shop, rice just sufficient to meet the day to day demands of his customers so
that only a negligible quantity is left over in the shop after each day's
sales, his private and personal dealings with the bags in his personal godown
could not be taxed unless he sells them at a profit. What be chooses to do with
the rice in his godown is no concern of the Income-tax department provided
always that he does not sell it or otherwise make a profit out of it. He can
consume it, or give it away, or just let it rot. Why should it make a
difference if instead of keeping two sets of books he keeps only one ? How can
he be said to have made an income personally or his business a profit, because
he uses ten bags out of his godown for a feast for the marriage of his daughter
? How can it make any difference whether the bags are shifted directly from the
godown to the kitchen or from the godown to the shop and from the shop to the
kitchen, or from the shop back to the godown and from there to the kitchen ?
And yet, when the reasoning of the learned Attorney-General is pushed to its
logical conclusion, the form of the transaction is of its essence and it is
taxable or not according to the route the rice takes from the godown to the
wedding feast. In our opinion, it would make no difference if the man instead
of giving the feast himself hands over the rice to his daughter as a gift for
the marriage festivities of her son.
The appellant's method of book-keeping
reflects the true position. As he makes his purchases he enters his stock at
the cost price on one side of the accounts. At the close of the year he enters
the value of any unsold stock at cost on the other side of the accounts thus
cancelling out the entries relating to the same unsold stock earlier in the
accounts; and then that is carried forward as the opening balance in the next
year's accounts. This cancelling out of the unsold stock from bothsides of the
accounts leaves only the transactions on which there have been actual sales and
gives the 225 true and actual profit or loss on his year's dealings. In the
same way, the appellant has reflected the true state of his finances and given
a truthful picture of the profit and loss in his business by entering the
bullion and silver at cost when he withdrew them for a purely non-business
purpose and utilised them in a transaction which brought him neither income nor
profit nor gain.
There is no case quite in point. The learned
Attorney General relied on Gold Coast Selection Trust Limited v.
Humphrey (H. M. Inspector of Taxes) (1), but
there the assessee received a new and valuable asset in exchange for another in
the ordinary course of his trade. It was held that he was bound to account for
the receipt at a fair market valuation, for though the receipt was not money it
was capable of being valued in terms of money. In the present case, the
assessee's business received nothing in exchange for the withdrawal of the
assets, neither money nor money's worth, therefore the only fair way of
treating the matter was to do just what the appellant did, namely to enter the
price at which the assets were valued at the beginning of the year so that the
entries would cancel each other out and leave the business with neither a gain
nor a loss on those transactions.
The learned Attorney-General contended that
if that was allowed great loss would ensue to the State because all a man need
do at the end of the year would be to withdraw all assets which had risen in
value and leave only those which had depreciated and thus either show a loss or
reduce his taxable profits.
This argument can only prevail on the
assumption that the State can tax potential profits because, except for that,
the State would neither gain nor lose in a case of this kind. Had the assets
been left where they were, they would have been valued at the end of the year
as they were at the beginning, at the cost price and we would still be where we
are now. But the assumption that there would be a gain at some future (1) 30
Tax Cas. 209 226 indefinite date is mere guess work for equally there might be
loss. Apart, however, from that the learned Attorney General's rule is equally
capable of abuse. A man could as easily withdraw from the business assets which
had depreciated and enter in his books the depreciated market value and leave
at cost price the assets which had risen.
There are two cases which bear a superficial
resemblance to this case. They are In the matter of Messrs.
Chouthmal Golapchand (1) and In re The
Spanish Prospecting Company Limited (1).
We refrain from expressing any opinion about
them, especially as they appear to reach different conclusions, because the
facts are not the same and the questions which arose on the facts there were
not argued here. They raise matters of wider import which will require
consideration in a suitable case. These cases were not cases of a business
owned and run by a single owner and so the fiction of treating the business as
a separate entity from its owner actually trading with him, which we are asked
to apply here, does not arise. In the next place, the businesses there were not
con-tinuing as here.
In the Calcutta case, a partnership was would
up and the question related to the valuation of assets consisting of stocks and
shares, on the dissolution. In the English case, a company with no fixed
capital was under liquidation and the question was whether the market value of
certain debentures which the company had purchased ought to be brought into the
profit and loss account so as to augment the profits actually shown in the
balance-sheet. The company wished to treat those debentures as of no value and
thus show a much smaller profit than would otherwise have been the case. On the
answer to that question hung the fate of two servants of the company who, under
the terms of their agreement with the company, could only be paid their
salaries out of the profits of the company. In our opinion, neither case is
apposite here.
(1) [1938] 6 I.T.R. 733. (2) [1911] 1 Ch, 92,
227 The questions referred were:" (1) Whether in the circumstances of the
case any income arose to the assessee as a result of the transfer of shares and
silver bars to the trustees ? (2) If the answer to the question (1) is in the
affirmative, whether the method employed by the Appellate Assistant
Commissioner and upheld by the Appellate Tribunal in computing the assessee's
income from the transfer is the proper method for computing the income?"
Our answer to the first question is that in the circumstances of this case no
income arose to the appellant as a result of the transfer of the shares and
silver bars to the trustees. In view of that the second question does not
arise.
The appeal is allowed with costs.
BHAGWATI J.-This appeal by special leave from
a judgment of the High Court of Judicature at Bombay on a reference by the
Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act
(XI of 1922) raises an interesting question as to the valuation of an asset
withdrawn from the stock-in-trade of a running business.
The assessee was in the year-of account
(calendar year 1942) a dealer in shares and silver. On the 21st January, 1942,
be withdrew from the business certain shares and silver bars and executed two
deeds of trust and on the 19th October, 1942, he withdrew further shares and
silver bars and executed a third deed of trust. The terms and conditions of the
deeds of trust are not material for the purpose of this appeal.
The assessee kept his books of account on the
mercantile basis and the method employed by him in the past for valuing the
closing stock of his stock-in-trade was valuation at the cost price thereof.
The deeds of trust were valued for the purpose of stamp at the market value of
the shares and silver bars prevailing at the dates of their execution. The
assessee however showed the transfer of these shares and silver bars to 228 the
trustees in the books of account at the cost price thereof thus setting off the
debit shown in respect of the same at the beginning of the year of account. He
contended that the market value of the said shares and silver bars on which the
stamp duty was based could not be the basis for computing his income from the
stock-in-trade thus transferred. The Income-tax authorities did not accept this
contention and assessed the profit at the difference between the cost price of
the said shares and silver bars and the market value thereof at the date of their
withdrawal from the business. The Income-tax Officer, the Appellate Assistant
Commissioner as also the Income-tax Appellate Tribunal rejected this contention
of the assessee and the Income-tax Appellate Tribunal submitted at the instance
of the assessee a case under section 66(1) of the Act referring the following
two questions for the decision of the High Court :"(1) Whether in the
circumstances of the case any income arose to the petitioner as a result of the
transfer of shares and silver bars to the trustees ? (2)If the answer to the
question (1) is in the affirmative, whether the method employed by the
Appellate Assistant Commissioner and upheld by the Appellate Tribunal in
computing the petitioner's income from the transfer is the proper method for computing
the income ? " The High Court answered both the questions in the
affirmative.
It was not disputed before the Income-tax
Appellate Tribunal that the shares transferred were the stock-in-trade of the
business. As regards the silver bars the Tribunal found that the assessee had
been making purchases and sales frequently and that the silver also was
stock-in-trade and not a capital investment. Both the shares and the silver
bars were thus part of the stock-in-trade of the business.
They had been purchased by the assessee from
time to time and formed part of the stock-in-trade of the business and had been
shown at the cost price thereof in the books of account of the previous years
and also at the opening of the year of account, 229 If the shares and the
silver bars which were thus withdrawn from the stock-in-trade of the business
had continued to form part of the stock-in-trade at the closing of the year of
account, the value of these shares and silver bars would also have been shown
at the cost price in accordance with the system of accounts maintained by the
assessee. The question however which falls to be determined is what is the
effect of these assets having been withdrawn from the stock-in-trade of the
business.
So far as the business itself is concerned
the asset which has been brought in is of a particular value at the date when
it has been so brought in and it is then valued in the books of account at its
cost. In the course of the business however the asset appreciates or
depreciates in value in accordance with the fluctuations of the market. If the
cost price basis is adopted for the valuation of the stock-in-trade at the
close of the year this appreciation or depreciation in the value as the case
may be would not be reflected in the accounts. If however the market value
basis is adopted for such Valuation, the asset on being valued at the market
rate thereof at the close of the year might show a loss and this loss would be
allowed by the Income-tax authorities in computing the profit or loss of the
business. In either event, the assessee would have to carry over the asset in
the books of account of the subsequent year at the valuation adopted at the
close of the previous year and the assessee would not be allowed to change the
basis of valuation thus adopted unless he chose to adopt at the end of the
subsequent year or years valuation at the cost price or the market value
thereof whichever was lower. This process would continue until the asset is
realised. When the asset is realised the assessee would have to show the actual
price realised by the sale of the asset in the books of account and the
difference between the price thus realised and the value shown in the beginning
of the year of account would be the profit or loss as the case may be, in
regard to that asset and that profit or loss 31 230 would be allowed by the
Income-tax authorities in the computation of profit or loss for that year of
account. The adoption of the one or the other basis of valuation would not
however make any difference in the ultimate result. On the cost price basis of
valuation all intermediate fluctuations of price during the interval between
the bringing of the I asset in the business and the realisation of it would be
eliminated and the only thing considered in the accounts would be the
difference between the price of the asset when it was brought into the business
and the price thereof when the asset was realised. On the other hand, the
market value basis would bring into account each year the fluctuations in the market
value of the asset as at the close of every year of account until the asset was
realised with the result that in each and every year of account a rectification
would have to be made in the result of the trading of the previous year which
was not correctly reflected in the accounts by reason of the assessee having
adopted the market value obtaining at the close of the previous year as the
value of the asset. This process of rectification would continue from' year to
year until the asset was realised in a particular year of account when the
actual price realised on the sale of the asset would be brought into account in
that year. The ultimate result of these operations so far as the asset itself
is concerned would be no different. Because if regard be had to the various
fluctuations in the market value which have been reflected in the accounts of
the intermediate period, what the business actually gains or loses would be the
difference between the cost price of the asset when it was brought in and the
price at which it was sold when it was actually realised. The only advantage
which the assessee obtains would be that he would be able to anticipate in a
particular year the loss that may be made on the asset in the following year or
years, which however might have to be rectified in the following year or years
if the prices rose again.
Is there any difference in the position when
instead of the asset being realised is withdrawn from the stock231 in-trade of
the business ? So far as the business is concerned the asset ceases to be a
part of the stock-intrade whether it is realised or is withdrawn from the stockin-trade.
The asset after it has been brought into the business appreciates or
depreciates in value in accordance with the fluctuations of the market and that
appreciated or depreciated asset continues to be a part of the stock-intrade of
the business until it is realised or withdrawn.
This appreciation or depreciation in value is
not reflected in the books of account when the cost price basis is adopted for
the valuation of the stock-in-trade at the close of the year of account, but is
certainly reflected as above indicated in the books of account at the close of
each year of account when the market value basis is adopted. In each case
however the actual profit or loss to the business as the case may be in
relation to the price at which the asset was brought into the business would be
determined at the date when the asset is realised, That would be the measure of
the appreciation or depreciation in value of the asset which till then formed a
part of the stock-in-trade of the business, and would I also be the measure of
the ultimate profit or loss as the case may be of the business in regard to
that particular asset. When the asset is withdrawn from the stock-in-trade of
the business the position in my opinion would be no different. So far as the
business is concerned the asset would go out and cease to be a part of its
stock-in-trade and this again would be the measure of the profit or loss as the
case may be of the business qua that particular asset. To my mind it makes not
the slightest difference whether an asset is realised in the course of the
business or is withdrawn from the stock-intrade of the business. An asset which
has appreciated or depreciated in value as the case may be in accordance with
the fluctuations of the market ceases to be a part of the business, by the one
process or the other. So far as the, business is concerned it is entitled to
credit in its goods account the price of that asset as has been realised by the
sale thereof or the market value of that asset as at the date of its
withdrawal, 232 Looking at the matter from assessee's point of view also it
does not make any the slightest difference whether he realises the asset in the
course of the business or withdraws it from the business and utilises it in any
manner he chooses. Having brought into the business an asset which was of a
particular value at that time, he withdraws from the business that asset at a
time when it has appreciated or depreciated in value. The business would be
entitled to the appreciation or depreciation in value of that asset in so far
as the asset had become a part of the stock-in-trade of the business. When the
asset is withdrawn by the assessee, the assessee obtains in his hands by reason
of such withdrawal an asset which at the time of the withdrawal has appreciated
or depreciated in value as the case may be in comparison with its value at the
time when it was brought into the business and the assessee on such withdrawal
would be able to deal with or dispose of an asset which had thus appreciated or
depreciated in value. In my opinion the manner of his dealing with the asset
after he withdraws it from the stock-in-trade of the business is really immaterial.
What is material to consider is what is the value of the asset which he was
withdrawn from the stock-intrade of the business and that value can only be
determined by the market value of the asset as at the date of its withdrawal.
It was urged that the withdrawal of the asset
from the stock-in-trade of the business was not a business operation and that
an entry on the credit side crediting the cost price of the particular asset
would therefore be enough.
This argument however does not take into account
the appreciation or the depreciation in the value of the asset on the date of
the withdrawal as compared with its value when it was initially brought into
the business. It also does not take into account the fact that the assessee
might have adopted the market value basis for valuation of the stock-intrade on
hand at the close of the previous year or years of account. The entry on the
debit side at the beginning of the year of account would not then represent the
cost price of the asset but would represent 233 the market value of the asset
at the close of the previous year of account. What would then be the rational
basis on which the credit entry should be made at the date of withdrawal?
Should it be the cost price of the asset which was not at all reflected into
the accounts except at the initial stage when the asset was brought into the
business or the market value of the asset when it was withdrawn ? Surely the
method of accounts keeping cannot make any difference to the actual position,
whether an asset has appreciated or depreciated in value and what profit or
loss if any accrued to the business when the asset was withdrawn from the
stock-in-trade of the business. There is also a further fact to be considered
and it is that when the asset is withdrawn from the stock-in-trade of the
business there would be of necessity an entry in the account of the person
withdrawing it debiting the price of that asset to him. If the assessee
withdraws from the stock-in-trade of the business an asset which has thus
appreciated or depreciated in value, is there any justification whatever for
debiting him with the cost price of that asset and not the market value of the
asset as at the date of withdrawal? In the event of the asset having
appreciated in value the assessee should be debited in his account with the
appreciated market value of the asset inasmuch as he withdraws from the stockin-trade
of the business an asset which is at that date of that market value. If however
the asset has depreciated in value the assessee should certainly not be
mulcted. He withdraws from the stock-in-trade of the business an asset which is
of a depreciated value as compared with its value when it was brought into the
business and he should not certainly be debited with a higher price even though
it may be the cost price as appearing in the books of account according to the
particular system of accounting adopted by the assessee.
I am therefore definitely of the opinion that
even in the case of withdrawal as in the case of the realisation of the asset
the business is entitled to credit in the goods account the market value of the
asset as at the date of its withdrawal whatever be the method adopted 234 by it
for valuation of its stock-in-trade on hand at the close of a year of account.
Shri R. J. Kolah appearing for the appellant
particularly relied upon a decision of the Calcutta High Court, In the matter
of Messrs. Chouthmal Golapchand (1). The assessees there were the firm of
Messrs. Chouthmal Golapchand constituted by four partners with equal shares,
and they had at the beginning of the accounting year 1935-36 an opening stock
of shares valued at cost price of Rs. 85,331. On the 8th January, 1936, the
partners resolved to dissolve the firm with effect from the 30th March, 1936, and
in view of the pending dissolution they divided amongst themselves on the 9th
March, 1936, these shares which were then valued at the rates prevailing in the
market at an aggregate sum of Rs. 51,966. There was a difference of Rs. 33,365
between the value of the opening' stock, viz., Rs. 85,331, and the then market
valuation of Rs. 51,966 and this difference was claimed by the assessees as a
loss in the assessment. This claim of the assessees was negatived on the ground
that there was nothing to show that loss had occurred in the year of account.
The assessees having adopted the system of valuing the shares at cost price at
the end of every year and the opening of the next year, the cost price of the
shares was taken to have been their value at the beginning of the year of
account and the partition was taken as not amounting to a sale of the shares
with the result that there was no evidence of any loss. With great respect to
the learned Judges I do not see my way to agree with the reasoning of this judgment.
Apart from the fact that this distribution of shares amongst the partners was
in view of the impending dissolution of the firm and different considerations
may arise when one considers the distribution of the assets of a dissolved
partnership amongst its partners, the judgment does not take count of the fact
that at the date of the partition the assets which had been brought into the
business at the earlier dates had depreciated in value and it was these
depreciated (1) [1938] 6 1. T. R. 733.
235 assets which were the subject-matter of
partition between the partners. Even if the partition be not treated as a sale
it was a transfer of property, the property of the firm being transferred to
the individual partners thereof and each partner obtaining an absolute interest
in the shares thus transferred to him by the firm to the exclusion of the other
partners therein. So far as the firm was concerned it was certainly a transfer
of the property to the individual partners and even as regards the partners themselves
it was a transfer of the interest of the partners inter se in the shares
respectively transferred absolutely to each of them.
If it were necessary to do so I would
certainly say that the case was erroneously decided. [See also the judgment of
Fletcher Moulton L. J. in re Spanish Prospecting Co., Ltd. (1)].
The result therefore is that the answers
given by the High Court to both the questions referred to it were correct and
the appeal must be dismissed with costs.
Appeal allowed.
Agent for the appellant: Rajinder Narain.
Agent for the respondent: G. H. Rajadhyaksha.
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