Commissioner of Income-Tax, Bombay
City , Bombay Vs. Bai Shirinbai K. Kooka [1962] INSC 71 (23 February 1962)
23/02/1962 DAS, S.K.
DAS, S.K.
KAPUR, J.L.
GAJENDRAGADKAR, P.B.
SARKAR, A.K.
SUBBARAO, K.
WANCHOO, K.N.
AYYANGAR, N. RAJAGOPALA
CITATION: 1963 AIR 477 1962 SCR Supl. (3) 391
CITATOR INFO:
RF 1963 SC 577 (16,25) E&D 1964 SC 318
(6,8) R 1964 SC1464 (9,10,11) E 1966 SC 4 (19) R 1966 SC1514 (12) E 1968 SC 761
(6) R 1979 SC 376 (2) R 1986 SC 368 (16) RF 1992 SC 604 (92)
ACT:
Income-tax-Profits-Shares purchased by
assessee for investment-Sales of Shares subsequently as trading activity
Computation of profit.
HEADNOTE:
The assessee purchased shares by way of
investment in 193940 at a cost price which was much less than their market
value on April 1, 1945. Her dividend income there from was assessed to income
tax. In the financial year 1945-46 the assesee converted these shares into her
stock-in-trade and carried on business in the shares. Per income for the
assessment year 1946-47 was computed on the basis of the profits which she made
by the sale of her shares as a trading activity. The assessee contended that
the cost price of the shares for computing the profits was their market value
at the beginning of the year when she started the trading activity, i.e., on
April 1, 1945. The Department contended that the cost Price of the shares was
the actual price for which they were purchased by the assessee, no matter when
she bought them and for what purpose.
Held (per Das, Kapur, Gajendragadkar, Subba
Rao, Wanchoo and Ayyangar, jj. Sarkar, J., contra), that the profits 392 of the
assessee from her business or trading activity must be computed on the basis
that the market value of the shares as on April 1, 1945, was the cost price of
the shares for the business. The basis must be the ordinary commercial
principle on which actual profits are computed, and normally, the commercial
profits out of a transaction of sale of an article are the differences, between
what the article cost the business and what it fetched on sale. In Kikabhai
Premchand v. Commissioner of Income-tax, the Supreme Court was considering the
converse case and the principles laid down in that case were (1) that there was
no general principle of taxation under income-tax law under which the State
could assess a person on the basis of business profits that he might have made
but had not chosen to make, and (2) that it was unreal to separate the business
from its owner. Those principles have no application in the present case which
is not a case of any potential future advantage; the admitted position in the
present case is that there was a sale of the shares in question in pursuance of
a trading or business activity and actual profits had resulted from the sale.
The question here is how such commercial profits are to be calculated. In a
trading or commercial sense the only fair measure of assessing such trading
profits is to take the market value at one end and the actual sale proceeds at,
the other. This is more in accord with reality than fiction.
Sir Kikabhai Premchand v. Commissioner of
Income-tax (Central), Bombay, [1954] S. C. R. 219, Sharkey v. Wernher (1955) 36
T. C. 275, referred to.
Per, Sarkar J.-The assessee's taxable profits
on the sale of the shares earlier held as investment are the difference between
the sale price and the price at which she had actually bought those shares, The
profits could not be computed on the basis of a fictional sale by the assessee
to herself on April 1, 1945. The case was governed by the principles laid down
by the Supreme Court in Kikabhai's case. The decision of the House of Lords in
Sharkey v. Wernher, which took a contrary view, was not preferable to that of
the Supreme Court in Kikabhai's case.
Sir Kikabhai Premchand v. Commissioner of Incometax
(Central), Bombay, ] 1954] S. C. R. 219, followed.
Sharkey v. Wernher, [1955] 36 T.C. 2 75, not
approved.
CIVIIL APPELLATE JURISDICTION : Civil Appeal
No. 133 of 1958.
Appeal by special leave from the judgment 393
and order dated March 6, 1956, of the Bombay High Court in I. T. R. No. 49 of
1955.
H.AT. Additional Solicitor-General of India,
K. N. Rajagopal Sastri, R. H. Dhebar and P. D. Menon, for the appellant.
N.A. Palkhivala, B. K. B. Naidu and I. N.
Shroff, for the respondent.
1962. February 23. The Judgment of Das,
Kapur, Gajendragadkar, Subba. Rao, Wanchoo and Ayyangar, JJ., was delivered by
Das, J., Sarkar, J. delivered a separate judgment.
S.K. DAS, J.-This is an appeal by special,
leave grante I by this Court on September 17, 1956. The Commissioner of
Income-tax, Bombay, City 1, is the appellant before us. The respondent is Bai
Shirinbai K. Kooka, who will be referred to in this judgment as the assessee.
The assessee is a Parsi lady who held by way
of investment a large number of shares of different companies. These shares
were purchased before the end of and after 1939-40 at a cost-price which was
much less than their market value on April 1, 1945. Her dividend income was
assessed to incometax for several year prior to April 1, 1945 ; but in the
assessment year'1946-47, the relevant accounting year being financial year
1945-46, the Incometax 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 1916-47 was therefore computed oil
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
mar:,Let price at the begining 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 tile sale proceeds of
the shares which the assessee had sold amounted to 394 Ro. 5,49,487/. . The
Income-tax Officer calculated the profits in the following manner :
Sale proceeds ... Rs. 5,49,487 Cost
calculated on the basis of the market price of the shares at the beginning of
the account year ... Rs. 4,50,822 ------------... Rs. 98,655 Less: Forward
business loss ... Rs. 25,344 ------------Net profit ... Rs. 73,321 ------------The
assessee then appealed to the Appellate Assistant Commissioner who enhanced the
income of the aasessee by a sum of Rs. 2,91,307/including a capital gain of Rs.
37,590/The Appellate Assistant Commissioner proceeded on the footing that the
profit earned by the assessee on the sale of the shares -was the difference
between the original cost price of the shares and the sale proceeds. He further
held that the some of the shares which were sold in the account year 1946-47
were the assessee's stock-in-trade, while some other shares were her investment
shares. Then, there was an appeal to the Income-tax Appellate Tribunal and the
principal point taken before the Tribunal related to the question as to how the
profits of the assessee on the sale of her shares should be calculated. The
Judicial Member of the Tribunal accepted the view expressed by the Appellate
Assistant Commissioner and held that the original cost price of the shares must
be taken in order to find out the profits which the assessee had made on the
sale of the shares. The Accountant Member agreed, however, with the view of the
Income-tax Officer and held that the market value of the shares as on the date
when 395 they 'were converted into stock-in-trade by the assessee should be
taken into consideration for the purpose of ascertaining the profits made by
the assessee on the sale of those shares. On this difference between the two members
of the Tribunal, the matter was referred. to the President of the Tribunal. The
President agreed with the view of the Accountant Member. The Tribunal was then
moved by the appellant to state a case to the High Court of Bombay on the
question of law which arose out of the Tribunal's order, namely, what should be
the basis of computation of the profits made by the assessee by the sale of her
shares in the relevant year. The Tribunal came to the conclusion that the
question as to when the assessee became a dealer in shares or when the assessee
turned her investment shares into her stock-in-trade, was a question of fact,
and the only question of law that arose was as to how the profit was to be
computed. Accordingly, the Tribunal framed the question of law in the following
terms:
"Whether the asseessee's 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
1-4-1945 ? " The aforesaid question of law was then referred the High
Court of Bombay under s. 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 396 certificate under s. 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 KiKabai Premchand v. Commissioner of Income tax
(Central), Bombay(1) required reconsideration. It may 1), here started that.
the learned Judges of the High Court before them the decision in Kikabhai's
case (1) and they considered that decision carefully and bold that the decision
could be distinguished, firstly, on the, ground that the problem which the High
Court had before it in the present case was the content of taxable profits in a
commercial sense out of the amount actually received by the assessee by a sale
of her shares, whereas the problem in Kikabhai case(1) was of a different
nature, namely, whether it was open to the department to tax an assessee on a
fictional sale or potential profits, and, secondly, on the ground that the
principle laid down in Kikabhai's case had no application to a case where real
or actual profits, as distinguished from fictional profits, have to be
allocated or attributed to the trading activity. One of the points which we
have to consider in this appeal is whether, on principle, the distinction drawn
by the High Court is correct or whether the ratio of Kikabhai's case (1) should
govern the present case, As we have stated earlier, the problem is how should
the profit made by the assessee by a sale of her shares as a trading activity
be computed, it being not in dispute that there was in this case a real (1)
[1954] S.C.R. 219, 397 sale resulting in actual profits. The High Court, first
emphasised the point, which has not been controverted before us, that in order
to arrive at real profits one must consider the accounts of the business on
commercial principles and construe profits in their normal and natural sense, a
sense which no commercial man will misunderstand.
It then pointed out that what the shares cost
originally to the assessee at a time when she had no business or, trading
activity, could not, in a commercial sense, be said to be the cost of the
shares to the business which started on April 1, 1945, the original cost, was
really a matter of historical record and it had no relevance in the
determination or ascertainment of profits which the business made. Obviously,,
the whole of the sale proceeds or receipts could not be treated as profits and
made liable to tax, for that would make no sense a portion only of the receipts
can be treated as profit-bat 'what portion? Normally, the commercial profits
out of the transaction of a sale of in article is the difference between what
the article costs the business and what it fetches on sale. The High Court
pointed out that when the assesses purchased the shares 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 (1) and the present
case is not warranted on principle: secondly, he has contended that the ratio
in Kikabhai's case (1) 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 stookin-trade
the High Court (1) [1954] S.C.R. 219.
398 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 there was a notional sale of the shares
on April 1, 1945, by the assessee and that the gains which accrued to the
assessee on that sale were capital gains; this notional sale it is submitted,
violates the basic principle that a man cannot sell to himself nor can he make
a loss or profit out of transactions with himself We propose now to examine
these arguments in some detail.
The question raised is a short question but a
difficult one.
In order to examine the arguements urged on behalf
of the appellant, it is necessary first to refer to the decision of this Court
in Kikabhai's case (1) The facts of that case were these. The assessee there
was a dealer in silver and shares and he maintained his accounts according to
the mercantile system and valued his stock at cost price both in the beginning
and at the end of the year. During the relevant accounting year he withdrew
some silver bars and shares from the business and settled them on certain
trusts in which he was the managing trustee and in his books of account he
credited the business with the cost price of the silver bars and shares so
withdrawn. The income-tax authorities assessed him to tax on the basis of the
difference between the cost price of the silver bars and shares and their
market value at the date of their withdrawal from the business. The High Court
of' Bombay' upheld the action of the income tax authorities. This Court,
however, by a majority decision came to the conclusion that the assessee was
entitled to value the silver bars (1) [1954] S. C. R. 219.
399 and shares withdrawn at cost price and
was not bound to credit the business with their market value at the close of
the year for ascertaining the assessable profits for the year. Bhagwati, J.,
who expressed the dissentient view said that 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-in-trade on hand
at the close of the year. The majority view was expressed by Bose, J., who
dealt with the two contentions of the learned Attorney General who appeared for
the Revenue (respondent) in that case. The Attorney General's first contention
was that as the silver 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.
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 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 400 under income-tax law under which the State could
assess a person on the basis of business profits that he might have made but
had not chosen to make. It was also pointed out that it was 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 was non existent.
It was pointed out that a man could not trade with himself nor could he make
profit or loss out of transactions with himself. 'rho. second contention of the
learned Attorney General was that if the act of withdrawal was at a time when
the market price wits higher than the cost price then the State was deprived of
a potential profit. This contention was dismissed as unsound because, for
income-tax purposes each year is a self contained accounting period and one
must take into consideration income, profits and gains made in that year and
the assessing authority was not concerned with potential profits which might be
made in another year.
From what has been stated above it would at
once appear that Kikabhai's case (1) was the converse of the present case.
In Kikabhai's case (1) a part of the
stock-in-trade was withdrawn from business, there was no sale nor any actual
profit. The ratio of the decision was simply this: under the Income-tax Act the
State has no power to tax a potential future advantage and all it can tax is
income, profits and gains made in the relevant accounting year. In the case
under our consideration the admitted position is that there has been a sale of
the shares in pursuance of a trading or business activity and actual profits
have resulted from the sale. The question in the present case is not whether
the State has a power to tax potential future advantage, but the question is
how should actual profits (1) [1954] S. C. R. 219.
401 be computed when admittedly there has
been a sale in the business sense and actual profits have resulted there from.
We agree with the High Court that in this
respect there is a vital difference between the problem presented by Kikabhai's
case (1) and the problem in the present case. We. further agree with the view
expressed by the High Court that the ratio in Kikabhai's case (1) need not necessarily
be extended to the very different problem presented in the present case, not
only because the facts are different, but because there is an appreciable
difference in the principle.
The. difference lies in this : in one case
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 (1) and the present case is not warranted on
principle and that the ratio of the decision in Kikabhai's case (1) 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 (2) 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 assessee contended before the Special Commissioners that the proper
figure to be brought in respect of the transferred horses was the cost of (1) 1
[1954] S.C.R. 219.
(2) (1955) 36 T.C. 275.
402 breeding. The Crown contended that the
market value of the animals, which was considerably higher, was the proper
figure. The Commissioners decided in favour of the assessee and the Crown
demanded a case. The case was first heard by Vaisey, J., who following the
decision in Watson Bros. v. Hornby (1), held that the market value of the five
horses transferred from the stud farm was the proper figure that should be
credited in the accounts. Vaisey, J. based his decision on the ground that the
case was indistinguishable in principle from an earlier decision, namely, that
of Macnaghten, J.. in Watson Bros. v. Hornby (1). We may here state that in
Watson Bros. v. Hornby (1)the assessee carried on the business of poultry
breeders and dealers. In addition to keeping birds on their farm for laying
purposes, they had a hatchery which produced chicks primarily for sale as
'day-old checks'. Some of these chicks were transferred to brooder houses and
became part of the stock on the farm.
The assessees were assessed to income-tax
under schedule Din respect of the profits of the hatchery part of their
business and under Schedule B in respect of the profits of the farm. The
question that arose in that case was whether the day-old chicks transferred to
the farm should be credited as stock at the average price at which they were
sold and could have been bought in the open market, namely, 4d. per chick, and
that the difference between that price and the admitted cost of production of
each saleable day-old chick, 7d., was an allowable loss. The Crown contended
that the hatchery and the farm were two activities of the same person who could
not make a loss by transferring from one department to the other and therefore
the chicks should be credited to the hatchery account at production cost. It
was held by Macnaghten, J., that in the notional sale between the hatchery and
the farm, which should be treated as separate entities, the price to be
credited was the "'reasonable price" laid down by s. 8 of the (1)
(1942) 24 T.C. 506.
403 Sale of Goods Act, 1893, and that on the
admitted evidence this reasonable price must be the market price of 4d. per
chick. This was the decision which Vaisey, J. followed.
From the decision of Vaisey, J. there was an
appeal to the Court of Appeal. The Court of Appeal referred to two of its own
decisions, namely, Layrock v. Freeman, Hardy & Wills (1) and Briton Perry
Steel Co. Ltd. v. Barry (2) and held that the principle stated and the reasoning
underlying the judgment of Sir Wilfrid Greene, M. R. in the Briton Ferry Steel
Co. Ltd. v. Barry (2) were inconsistent with the conclusion in Watson Bros. v.
Hornby(3). The Court of Appeal accordingly allowed the appeal. Sir Raymond
Evershed, M.R., (as he then was) said, however, that if the matter wore 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 trader, and that upon his parting with it so that it no longer forms part
of his stock-in-trade some sum must appear in his trading account as having
been received in respect of it, the only logical way to treat it is to regard it
as having been disposed of by way of trade.
If so, I see no reason for ascribing to it
any (1) 22 T.C. 288.
(2) 23 T.C. 414.
(3) (1942) 24 T.C. 506.
404 other sum than that which he would
normally have received for it in the due course of trade, that is to say, the
market value. As I have already indicated, there seems to me, to be no
justification for the only alternative that has been suggested. namely, the
cost of production. The unreality of this alternative would be plain to the
taxpayer. If, as well might happen, a very large service fee had been paid so
that the cost of production was high and the market value did not equal
it." Lord Radcliffe pointed out that when a horse was transferred from the
stud farm to the owner's personal account, there was a disposition of trading
stock, though the disposition might not be by way of trade. He then referred to
three methods of recording the result of the disposition in the stud farm
trading accounts. One of them was that there might be no entry of a receipt at
all and Lord Radcliffe pointed out that this method would give the self
supplier an unfair tax advantage. The second method would be to enter the cost
price; this again would be fictional, because, no sale in the legal sense bad
taken place, nor had there been any actual receipt. The third method was to
enter as a receipt a figure equivalent to the current realisable value of the
stock item transferred. Lord Radcliffe gave two grounds in favour of the third
method. The first ground was that it gave a fairer measure of assessable
trading profit as between one taxpayer and another, for it eliminated
variations which were due to no other cause than any one taxpayer's decision as
to what proportion of his total product he would supply to himself. The second
ground was that it was better economics to credit the trading owner with
current realisable value of any stock which he had chosen to dispose of without
commercial disposal than to credit him with an amount equivalent to the
accumulated expenses in respect of that stock.
405 It is worthy of note that the facts in
Sharkey v. Wernher (1) were similar to the facts of Kikcabhai's case(1). In
both those cases what had happened was that a part of the 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 (2) this Court came to
the conclusion that the withdrawal should be at the cost price. In Sharkey v.
Wernher (1) the house of Lords hold that the proper figure should be the market
value which give 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 Kikcabhai's case (2), it might have been necessary for us to
reexamine the, ratio of the decision. It is necessary to state here, however,
that the decision of the House of Lords in Sharkey v. Wernher (1) is 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 (2) 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 reexamine the ratio of the
decision in Kikabhai's case (3). What then is the basis for computing the
actual profits in the present case ? We think that the basis must be, as the
High Court has put it, the ordinary commercial principles on which actual
profits are computed.
We think 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 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, (1) [1955] 36 T.C.
275.
(2) [1954] S.C.R. 219.
406 1945, was what it costs 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. The problem is how should
those profits be computed ? 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.
For these reasons we hold that the answer
given by the High Court to the question of law referred to it was correct.
The appeal accordingly fails and is dismissed
with costs.
SARKAR, J.-Two questions arise in this
Appeal. The first is whether the judgment of the Court, below is against the
decision of this Court in Sir Kikabhai Premchand v. Commissioner of
Income-tax.(1) The second is, if so, does the decision in Kikabhai's case(1) require
reconsideration ? It appears that in Sharkey v. Wernher(1) where the question
was the same as in Kikabhai's case(1) and which was decided a little later than
that case, the House of Lords took a view contrary to that taken in Kikabhai's
case. It was on the basis of the reasoning on which Sharkey's case (2) was
founded that the learned advocate for the respondent contended that Kikabhai's
case requires reconsideration.
The assessee in the present case is a lady of
(1) [1954] S.C.R. 219; [1957] 23 1. T. R. 506.
(2) [1956] A.C. 58 ; 36 T.C. 275.
407 some means. For many year past she had
been holding various shares by way of investment on the dividends of which she
was being charmed 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 the
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 tile 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
he 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 holding as
investment, having acquired them, it may be, quite a few years ago. The
assessee contended that the cost of acquisition of this latter variety of
shares-and with these alone we are concerned in this appeal, was their market
value on the date when she started her business and thereby converted them from
investment into stock-in-trade, of her business. The State contended that the
cost of acquisition of these shares would be what she bought them for, no matter
When she bought them and for what purpose. The Tribunal accepted by a majority
the, contention of the assessee. At the instance of the State the Tribunal then
referred the following 408 question to the High Court at Bombay under s.66(1)
of the Income-tax Act:
"Whether the assessee's assessable
profits 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 1-4-1945." The High Court held that the assessable profits
were the difference between the sale price and the market value of the shares
prevailing on April 1, 1945. The State has filed this appeal against the
decision of the High Court.
The State contends that the High Court's
decision is the judgment of this Court in Kikabhai's case.(1). That is the
first question which I propose to discuss. The assessee in Kikabhai's case was
a dealer in shares and silver. The method employed by him in keeping his
accounts was to enter the cost price of his stock at the beginning, of the
year, to credit the sale proceeds of the stock' sold during the year and value
the unsold stock at the end of the year at cost price, these latter being
carried forward as the opening entries of the next year's accounts. It appeared
that the assessee had withdrawn some silver and shares from his business and
settled these upon certain trusts. In the accounts he entered the silver and
shares so withdrawn at their cost price. The State contended that these should
have been entered in the accounts at their market value on the date they were
withdrawn from the business. This Court found this contention unacceptable and
held that the entry should be of the cost price and not of the market value on
that date.
It had been contended on behalf of the State
that "As this is a business, any withdrawal of the assets is a business
matter and this only feasible way of regarding it in a business light is to
enter (1) (1954) S.C.R. 219; [1957] 23 T.T.R. 506.
409 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 (yet 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 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 nonexistent. Cat 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 fact of it is not only absurd but against
all canons of mercantile and income-tax law." The decision in Kikabhai's
case (1) 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 that the argument of the
respondent in the present case is the same as that of the Attorney-General in
Kikabhai's case. She says that she is entitled to debit the accounts of her business
with the market value of the shares as on the date of their conversion into
stock-in-trade, that is, April 1, 1945. She can no doubt do that if she had
acquired then on that date, from 'the market. But this she did not do. So she
is compelled to rely on a fictional purchase by her from herself at the market
rate of that date to sustain her contention. Kikabhai's case definitely held
that no one can be supposed to be trading, with himself for the purpose of
ascertaining taxable profits. A fiction therefore that one has done so is not
permissible. To hold that the assesses is entitled to enter in the (1) [1954]
S.C.R. 219 ; [1957] 23 I.T.R. 506.
410 accounts of her business, the market
value of the shares on April 1, 1945, would be to go directly against the
decision in Kikabhai's case and the ratio on which it was based.
It was said that Kikabhai's case dealt with a
fictional sale and potential or notional profits whereas in the present case
there was actual trading in the shares and the problem here is to ascertain the
profits of that trade. I am not sure that the distinction so sought to be made
is really possible. Both the cases dealt with the assessment of the profits of
an entire trading activity of a person. There were real profits in both cases and
the question in each was, how to assess them. The difficulty in one case arose
because a particular stock acquired for the trade had been withdrawn from it
and in the other, because a particular stock not acquired for the trade had
been used for its purposes. The question in each case was, what value was to be
put on the stock concerned for assessing the profits of the trade as a whole.
It would be incorrect to split up the entire trade and to treat the deal in
each stock separately and I do not think Kikabhai's case (1) did so. So
considered the state would have no basis for any claim in Kikabhai's case for
then there would have been no business at all to tax. It was therefore that in
Kikabhai's case the State contended that the stock had been "'brought into
the business" and on that basis only could it advance by argument. It was
this argument advanced on that basis that this Court considered and rejected,
The Court did Dot consider the profits of a particular item of trade 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 (1) [1954]
S.C.R.219;[1957]23 I.T.R.506.
411 that purpose ? Here also, if the sale of
the investment sharer 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 cases are different as
suggested, that doe,; not seem to me to make any distinction., In Kikabhai's
case (1) 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 lone by her she
should be permitted to value the stock involved in that trading activity which
she had not acquired in the course of her trade at the market value of the date
of the commencement of that trade She really says that she should be allowed to
proceed on the basis of a fiction that she had purchased from herself on that
date for she had not then purchased it at all. She would be asking us to hold
that which Kikabhai's case refused to hold. I, amenable to agree that in the
case of a real sale Kikabhai's case does not forbid a dichotomy between the
owner of a business and the. business itself for ascertaining the profits of
that sale as the assessee wants us to do.
It was also said that to apply the principle
that one cannot trade with himself to the present case would be overlooking the
actual fact that money's worth was brought into the business. I am unable to
appreciate this contention. There is no overlooking of the money's worth
brought in, for (1)[1954] S. C. R. 219; [1957] 2 3 1. T. R. 506, 412 that
money's worth is value at the cost at which the stock concerned was actually
acquired from the market, may be as an investment and not as a stock in trade.
I am unable to appreciate how it can be said that any money's worth would be
over looked which, I Will assume, no business in will do in calculating his
profits if the shares are not valued at the market value of the day on which
they are brought into the trade but are valued at the price it which actually
they had been previously acquired by the assessee. The real question is what
were the shares' worth in money for calculating the profits. The contention of
the respondent assumes that the money's worth must be calculated as on the date
of the commencement of the trade and hence really begs the question.
Chagla, C.J. who delivered the judgment of
the High Court., said that he did not understand Kikaabhai's case (1) to mean
that even for the purpose of accountancy or for the purpose of ascertaining
commercial profits it is not open to the court to value the shares at the
market pi-ice of the date on which they were brought into the business. I am unable
to agree. Accountancy, I suppose, is not based on fiction but deals with
realities. We are concerned with accountancy only for the purpose of
ascertaining commercial profits, and it was only for that purpose that this
Court held that you cannot enter in your accounts the market value of 'goods on
the fictional basis that you sold them to yourself. Chagla, C.J., thought that
Kikabhai's case was not dealing 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. The ratio was that for the purpose of ascertaining taxable
profits it is not possible to conceive of one trading (1) [1954]S.C.R.219.[1957]23
I.T.R.506.
413 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 (1) 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 actually acquired the goods.
Kikabhai's case said that you cannot asses,%
taxable profits on the basis of a fictional sale. If you cannot do that,
neither do I think can you assess such profits on the basis of a fictional
purchase in the market. And that is what the assessee wants us to do. I am for
myself entirely unable to make any distinction between Kikabhai's case and the
present case.
I have now to refer to Sharkey's case (2) and
examine whether on the reasoning on which it was based it is necessary to
reconsider Kikabhai's case. That is the second question which arises in this
case. 1 do not find the reasoning of that case so strong as to lead me to the
opinion that the decision in Kikabhai's case was wrong. I first note that one
of the learned Judges Lord Oaksey, took the same view as was taken by this
Court in Kikabbai's case.
In dealing with Sharkey's case I will be
referring to the judgment of the majority.
(1) [1954] S.C.R. 219, [1957] 23 I.T.R. 506.
(2) [1956] A.C. 58 36 ; T.C. 2 75.
414 Now, Sharkey's case (1) also dealt with
the withdrawal of assets from a taxable business, There a lady owned two
enterprises, one, a stud farm the income of which was liable to tax and another
a racing establishment, which was recreational and therefore not liable to tax.
The lady transferred some horses from the stud farm to the racing
establishment. In assessing the income of the stud farm a question arose as to
what value should be put in its accounts for the horses transferred to the
racing establishment. It will be noticed that by the transfer to the racing
establishment of which she was the owner, the lady had only withdrawn the
horses from her taxable undertaking. The problem there was therefore just the
same as in Kikabhai's Case(2).
It was held by the House of Lords that the
value to be put on the horses withdrawn from the stud farm was their market
value at the date of the transfer and not the cost incurred on them for
breeding and otherwise till the transfer. The House of Lords observed that in
Income-tax Law a dichotomy between the owner of a business and the business is
possible and presumably therefore trading between the,two could be conceived
for tax purposes in certain cases and referred to some English authorities in
support of this view. I will assume that such a dichotomy is possible in some
cases but the question is whether it is possible in a case like Sharkey's case.
On that question I do not find the House of Lords 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 first that since it was conceded
before them that some entry had to be made (1)[1956] A.C. 58; 36 T.C. 275.
(2) [1954] S.C.R. 219; [1957] 23 I.T.R. 506.
415 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 those
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 canceling
the entry of the cost in breeding the horses which had been made in the
accounts of the farms.
He however found no explanation why
cancellation should take place. I think it be legitimately said that there is
an explanation and as was said in Kikabhai's case, that is that the bad to take
place because assets were withdrawn from the trade, unless entries were made
canceling the cost of items of stock brought into the trade when they were
taken out of the trade, the accounts would not give the real picture of the
profits of the actual trade.
A second reason which appears only in the
judgment of Lord Radcliffe is that if the market value of the date of
withdrawal is not entered, there will be an inequitable distribution of the
burden of tax. This is not very clear to rule. Learned advocate for the
assessee said that Lord Radcliffe was contemplating the case of two traders who
started their business on the same day one of whom bought his stock in trade
from the market on that date, of course at the market value, and the other
started his business by converting what he was earlier holding for his personal
purpose, into stock-in-trade. It was said that unless the latter was permitted
to value his stock in trade at the market rate on the date of conversion, he
would be subjected to a tax different in amount from that of the tax on the
former and this would result in inequitable distribution of the burden of
taxation. Again I am not convinced that this reasoning is conclusive. Take the
case of 416 two traders. One by his shrewd business method or by friendly
contacts, or may be by means not very creditable may on the same day acquire
goods necessary for his trade at a much cheaper rate, than the other. The
profits of the two would then be different. I do not imagine that any incometax
law would find this objectionable. Furthermore, I am not sure that this anxiety
for an equitable distribution of the burden of tax justifies departure from a
cardinal rule which is accepted in many cases in England also, that a man
cannot be said to trade with himself so as to make taxable profits.
Lord Radcliffe realised the difficulty of the
problem which he had to solve and said so. I do not think I will be wrong in
saying that he put his decision on the ground of the best practical solution of
that difficulty. The majority judgment in Sharkcy's case does not lead me to
the conclusion that our decision in Kikabhai case (1) was wrong.
I respectfully prefer the view taken in
Kikabhai's case and by Lord Oaksey in Sharkey's case"). Bhagwati, J. in
his minority judgment in Kikabhai's case based himself on the arguments-of the
Attorney General. It is not necessary to specifically deal with his views for
they have been dealt with in that case and with what have 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 tax-payer that some figure must appear
in the stud farm accounts as 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 retransfer a horse from her racing establishment to her (1)
[1954] S.C.R. 219.
(2) [1956] A.C. 58 ; 36 T.C. 275.
417 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 transferIf 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 way of gift, a certain commodity with which after a
lapse of some time he started a trade. It was said that it would be impossible
in such a case to say that the cost of acquisition of his stock-intrade was nil
and the entire sale proceeds received by him in respect of that thing in his
trade were his profits.
Now, it seems to me that even if it were so,
it would not follow that his stock-in-trade had to be valued at the date on
which he started his trade with that. So to hold would be against Kikabhai's
case(1). That being so, this illustration would only beg the question and not
prove that Kikabhai's case is wrong. I think a businessman would in such a case
enter into his accounts as the price for which he acquired his stocking trade
its value in the market on the date on which he received it free. That would
not involve going against Kikabhai's case, for it would not be based on a
fictional trading by a man with himself. If you cannot distinguish a business
from its proprietor, then the cost of a thing for the purpose of the business
would be its value at the time the proprietor of the business acquired it. Such
value from a businessman's point of view would in my opinion be the value for
which he acquired it when he did .go for value, or its market value on the date
of acquisition, when he paid no value for it.
I would therefore allow this appeal and
answer the question framed by the Tribunal by 'saying (1)[1954] S.C.R. 219.
418 that the assessee's Taxable profits on
the sale of the shares earlier held as investment are the difference between
the sale price and the cost price, that is, the price at which she had actually
bought those shares.
By COURT : In accordance with the opinion of
the majority, this appeal is dismissed with costs.
Appeal dismissed.
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