Case: Sir Kikabhai Premchand Vs. Commissioner Of Income Tax (Central),Bombay

2. The appellant deals in silver and shares and a substantial part of his holding is kept in silver bullion and shares. His business is rule 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 Income-tax 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 for 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.3. 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.4. 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 are 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 In his books the appellant credited the business with the cost price of the bars and shares so withdrawn

Reasoning:
, 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.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 trade in the relevant accounting year.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 wholly unreal and artificial to separate the business from its owner and treat them as it 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.The appellants 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 costs 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 years accounts. This cancelling out of the unsold stock from both sides of the accounts leaves only the transactions on which there have been actual sales and gives the true and actual profit or loss on his years 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.In the present case, the assessees business received nothing in exchange for the withdrawal of the assets, neither money nor moneys 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.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 indefinite date is mere guess work, for equally there might be loss. Apart, however, from that the learned Attorney-Generals 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.