Case: Commissioner Of Income-Tax, Bombay City , Bombay Vs. Bai Shirinbai K. Kooka

2. The assesses 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 after0 at a cost price which was much less than their market value on April 1, 1945: Her dividend income was assessed tox for several years prior to April 1, 1945; but in the assessment year, the relevant accounting year being financial year 1945 46, thex Officer found that the assessee had converted her shares into her stocke and carried on a trading activity, viz. a business in shares. Her income for the assessment year7 was therefore computed on the basis of the profits which she made by the sale of her shares as a trading activity, the profits being calculated on the difference between the market price at the beginning of the account year and the sale proceeds. For the assessment year 1947 48, the relevant accounting year being the financial year, it was found by thex Officer that the sale proceeds of the shares which the assessee had sold amounted to Rs. 5,49,487. Thex Officer calculated the profits in the following manner:Sale Proceeds Rs. 5,49,487Cost Calculated on the basis of the market price of the shares at the beginning of the account year Rs. 4,50,822Less : Forward business loss Rs. 25,344Net profit Rs. 73,321The assesses then appealed to the Appellate Assistant Commissioner who enhanced the income of the assessee 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 assesses 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 some of the shares which were sold in the account year7 were the assesseesn trade, while some other shares were her investment shares. Then there was an appeal to thex 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 he 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 thex Officer and held that the market value of the shares as on the date when they were converted intoe by the assessee should be taken into consideration for the purpose of ascertaining the profits made by the assesses 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 Tribunals 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, 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:3. The aforesaid question of law was then referred to the High Court of Bombay under S. 60(1) of the Indianx Act,1922 (XI of 1922). This wasx 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 assessees assessable profit on the sale of shares was the difference between the sale price and the market price prevailing on April 1, 1945. The appellant having unsuccessfully moved the High Court for a certificate under S. 66A(2) of thex Act, applied for special leave to this Court. Such leave was granted by this Court by an order dated September 17, 19564. This appeal was heard in part by Bench of three Judges presided over by the learned Chief Justice, who directed that it be posted for hearing before a Bench consisting of seven Judges, presumably because one of the points urged before the Bench was whether the majority decision of this Court in Sir Kikabhai Premchand v. Commissioner ofx (Central), Bombay, 1954 SCR 219. (AIR 1953 SC 509  ) required reconsideration. It may be here stated that the learned Judges of the High Court had before them the decision in Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) and they considered that decision carefully and held 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 assesses by a sale of her shares whereas the problem in Kikabhais case, 1954 SCR 219: (AIR SC 509) was of a different nature, namely, whether it was open to the department to tax an assesses on a fictional sale or potential profits; and secondly, on the ground that the principle laid down in Kikabhais case. 1954 SCR 219: (AIR 1953 SC 509  ) had no application to 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 Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) should govern the present case5. 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 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 lax, for that would make no sense; a portion only of the receipts can be treated as profitbut what portion? Normally, the commercial profits out of the transaction of a sale of an 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 assessee 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 1,1945It appears that in 1956 AC 58: 36 Tax Cas 275, where the question was the same as in Kikabhais case 1954 SCR 219: (AIR 1953 SC 509  ), and which was decided a little later than that case, the House of Lords took a view contrary to the taken in Kikabhais case. It was on the basis of the reasoning on which Sharkeys case, 1956 AC 58: 36 Tax Cas 275, was founded that the learned advocate for the respondent contended that Kikabhais case require reconsiderationThe assessee inthe present case is a lady of some means. For many years past she had been holding various shares by way of investment on the dividends of which she was being charged to. In assessing the tax for the assessment year, the accounting period of which was the financial year, it was found that the assessee had been carrying on business with some of the same shares since April 1945. It is not in dispute that in the accounting year7 also, which is the year with which we are concerned, she carried on business with various such shares

Reasoning:
7. We propose now to examine these arguments in some detail.The question raised is a short question but a difficult one to order to examine the arguments urged on behalf of the appellant, it is necessary first to refer to the decision of this Court in Kikabhais case 1954 SCR 219: (AIR 1953 SC509). Thefacts of that case were these. The assesses 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. Thex 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 thex authorities. The Court, however, by a majority decision came to the conclusion that the assessee was entitled to value the silver bars 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 thee 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 itse on hand at he 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 Generals 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 andn business lines, namely, that if a person withdraws an asset from a business must account for it to the business at the market rate prevailing at the date of the withdrawal8. From what has been stated above it would at once appear that Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) was the converse of the present case. In Kikabhais case 1954 SCR 219:(AIR l953 SC 509) a part of thee was withdrawn from business; there was no sale nor any actual profit. The ratio of the decision was simply this: under thex 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 be computed when admittedly there has been a sale in the business sense and actual profits have resulted therefrom. We agree with the High Court that in this respect there is a vital difference between the problem presented by Kikabhais case 1954 SCR 219: (AIR 1953 SC 509  ) and the problem in the present case. We further agree with the view expressed by the High Court that the ratio in Kikacabhais case 1954 SCR 219: (AIR 1953 SC 509  ) 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 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 draws by the High Court between Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) and the present case is not warranted on principle and that the ratio of the decision in Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) must necessarily apply to the present case alsoIt is worthy of note that the facts in (1955) 36 Tax Cas 275, were similar to the facts of Kikabhais case, AIR 1953 SC 509  . In both those cases what had happened was that a part of the stocke was withdrawn and the question was at what figure in the trading accounts the withdrawal should be accounted for. In Kikabhais case. AIR 1953 SC 509   this Court came to the conclusion that the withdrawal should be at the cost price. In (1955) 36 Tax Cas 275, the House of Lords held that the proper figure should be the market value which gave; a fairer measure of assessable trading profit it is significant that the House of Lords reached that conclusion not without dissent. If the facts of the case which we are now considering were similar to the facts of Kikabhais case, AIR 1953 SC 509   it might have been necessary for us toe the ratio of that decision. It is necessary to state here, however, that the decision of the House of Lords in (1955) 36 Tax Cas 275, is not an authority which is binding on us. It is only an authority of persuasive value entitled to great respectIn an earlier part of this judgment we have taken pains to point out the distinction between Kikabhais case, AIR 1953 SC 509   and the case under our consideration. In view of that distinction, we do not think that it is really necessary in the present case toe the ratio of the decision in Kikabhais case. AIR 1953 SC 509  . 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 article 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, 1945 was what it cost the business. We do not think that there is any question of 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 fictionThat is the first question which I propose to discuss.The assessee inKikabhais 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 years 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 dateIt 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 moneys worth was brought into the business. I am unable to appreciate this contention. There is no overlooking of the moneys worth brought in, for that moneys 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 moneys worth would be, I will assume, no businessman will do in calculating his profitsif the share are not valued at the market value of the day on which they are brought into the trade but are valued at the price at 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 moneys worth must be calculated as on the date of the commencement of the trade and hence really begs the questionA second reason which appears only in the judgment of Lord Radcliffe is that if the market value on the date of withdrawal is not entered, there will be aninequitable distribution of the burden oftax. This is not very clear to me. 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 ininequitable distribution of the burden oftaxation. Again, I am not convinced that this reasoning is conclusive. Take the case of 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 anyx 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 profitsLord 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 Sharkeys case does not lead me to the conclusion that our decision in Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) was wrong. I respectfully prefer the view taken in Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) and by Lord Oaksey in Sharkeys case, (1955) 36 Tax Cas 275. Bhagwati J. in his minority judgment in Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) 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 has been said there I am in complete agreemente leaving Sharkeys 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 thetaxpayerthat 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 stud farm some figure would have to appear in the stud farm accounts in respect of that horse though it cost her nothing to make the transfer. If it were not so and she subsequently sold the transferred horse and the proceeds of sale were treated as receipts of the stud farm, she could justly complain that she had been charged with a fictitious profit."In the course of arguments a case was suggested of a man who had inherited or received by way of gift a certain commodity with which after a lapse of sometime be started a trade. It was said that it would be impossible in such a case to say that the cost of acquisition of hise 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 hise had to be valued at the date on which he started his trade with that. So to hold would be against Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ). That being so, this illustration would only beg the question and not prove that Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) is wrong. I think a businessman would in such a case enter into his accounts as the price for which he acquired hise its value in the market on the date on which he received it free That would not involve going against Kikabhais case, 1954 SCR 219: (AIR 1953 SC 509  ) 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 businessmans point of view would in my opinion be the value for which he acquired it when did so for value, or its market value on the date of acquisition, when he paid no value for it.