Case: Commissioner Of Income-Tax, West Bengal Calcutta Vs. Calcutta Discount Co., Ltd

this court in Commr. of Income-tax, Gujarat v. A. Raman and Co., 67 ITR 11 = (AIR 1968 SC 49 ). It is unnecessary to set out the facts of that case and it is sufficient to refer to the relevant observations in the judgment. Shah, J., (as he then was), speaking for the court stated the law at page 17 of the Report thus:"The plea raised by the Incme-tax Officer is that income was could have been entitled earned by the assessee was not earned, and a part of that income was earned by the Hindu undivided families. That according to the Income-tax Officer was brought about by a subterfuge or contrivance. Counsel for the Commissioner contended that if by resorting to a divice or contrivance, income which would normally have been earned by the assesee is divided between the assessee and another person, the Income-tax Offcer would be entitled to bring the entire income to tax if it had been earned by him. But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands; income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case for commencing a proceeding for re-assessment under Section 176 (b) may be made out. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A tax payer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the divice depends not upon consideration of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not except on peril of penalty, be violated, but it may lawfully be circumvented". It is a well accepted principle of law that an assessee can so arrange his affairs as to minimise his tax burden.Hence, if the assessee in this case has arranged his affairs in such a manner as to reduce his tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus foregoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a course is not impermissible under law."11. Mr. Manchanda contended that a person should not be allowed to adopt a device by which he gives up something through the right hand and receives the same through the left hand. According to him there is no difference between the assessee and its subsidiary and, therefore, when the assessee tries to make profits through its subsidiary, we must presume that the profits were made by the assessee itself. In support of that contention he sought to place reliance on the decision of the House of Lords in Sharkey (Inspector of Taxes) v. Wernher, 1956 AC 58. Therein, the assessee was a breeder of horses. She also had racing stables. She transferred some horses from her stud to the stables. In so doing she debited in her account only the cost of breeding the horses and not their market price. The question arose that whether in computing her income the market price of those horses or merely the cost of breeding them should be taken into consideration. The House of Lords upheld the contention of the Revenue by majority that in computing the profits of the assessee the market price of those horses should be taken into consideration. The ratio of this very decision is similar to the ratio of the decision of this court in Dooars Tea Co. Ltd. v. Commr. of Agricultural Income-tax, West Bengal, 44 ITR 6 = (AIR 1962 SC 186 ). Therein, a tea garden owner raised in his own garden bamboo, thatch and some other agricultural produce. He utilised those products for the purpose of tea business. The question arose whether while assessing the tea garden owner under the Bengal Agricultural Income-tax Act the cost of raising bamboo, thatch, etc., should be taken into consideration or their market price should be taken into consideration. This court upheld the contention of the Revenue that the market price of those products should be taken into consideration in computing the agricultural income of the assesee. The ratio of the decision in Wemhers as well as in Dooars Tea Co.s case does not bear upon the question of law arising for decision in this case. Therein what the courts had to consider was where a person carrying on a trade disposes of a part of his goods not by wayof sale in the course of trade but for his own use, whether the production cost of such goods or the market price of those goods should be taken into consideration. But, in the present case we are called upon to consider the question whether when one trader transfers his goods to another trader at a price less than the market price, the taxing authority can taken into consideration the market price of those goods, ignoring the real price fetched. As mentioned earlier the latter question is no more res integra. It is concluded by the decision of this court in A. Raman and Co.s case, 67 ITR 11 = (AIR 1968 SC 49 ) (supra).12. For the reason mentioned above we are of the opinion that the conclusion reached by the Appellate Assistant Commissioner in accordance with law and it would be as exercise in futility to answer the third question set out above in favour of the Reserve and remit the case back to the Tribunal. In this view of the matter we do not propose to answer that question.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]8. As seen earlier the Appellate Assistant Commissioner came to the conclusion that unless the Income-tax Officer on the basis of material before him is able to come to the conclusion that the assessee had really made profits in the transaction, it is not permissible for him to add back to the assessees return any fictional income. In our opinion that conclusion is fully in accordance with law.9. The question that when an assessee transfers some of his stock-in-trade to another person at a price less han the market price, whether that assessee can be considered to have made any profit merely because he has transferred some of his stock-in-trade not at the market price but at a lesser price, came up for consideration before the High Court of Madras in Sri Ramalinga Choodambikai Mills Ltd. v. Commr. of Income-tax, Madras, 28 ITR 952   = (AIR 1956 Mad 145  ). The facts of that case as set out in the head-note are: a limited company sold certain goods showed in its stock-in-trade to its managing agency firm and to another firm in which one of its directors was interested. The sales inquestion were held to be bona fide sales. At the same time it was held that the goods were sold at a concessional rate. The Income-tax Officer sought to tax the assessee therein after computing the profits earned by that firm on the basis of the market price of the goods sold and not the actual price at which those goods were sold. The assessee challenged the said basis. The Tribunal upheld the contention of the assessee. It came to the conclusion that the assessee had, in reality, made no profits at all.The High Court agreed with the conclusion reached by the Tribunal. It opined that in the absence of any evidence to show either that the sales were sham transactions or that the market prices were in fact paid by the purchasers the mere fact that the goods were sold at a concessional rate to benefit the purchasers at the expense of the company would not entitle the Income-tax Department to assess the difference between the market price and the price paid by the purchasers, as profits of theis a well accepted principle of law that an assessee can so arrange his affairs as to minimise his tax burden.Hence, if the assessee in this case has arranged his affairs in such a manner as to reduce his tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus foregoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a course is not impermissible underratio of the decision in Wemhers as well as in Dooars Tea Co.s case does not bear upon the question of law arising for decision in this case. Therein what the courts had to consider was where a person carrying on a trade disposes of a part of his goods not by wayof sale in the course of trade but for his own use, whether the production cost of such goods or the market price of those goods should be taken into consideration. But, in the present case we are called upon to consider the question whether when one trader transfers his goods to another trader at a price less than the market price, the taxing authority can taken into consideration the market price of those goods, ignoring the real price fetched. As mentioned earlier the latter question is no more res integra. It is concluded by the decision of this court in A. Raman and Co.s case, 67 ITR 11   = (AIR 1968 SC 49  ) (supra).12. For the reason mentioned above we are of the opinion that the conclusion reached by the Appellate Assistant Commissioner in accordance with law and it would be as exercise in futility to answer the third question set out above in favour of the Reserve and remit the case back to the Tribunal. In this view of the matter we do not propose to answer that question.