Case: Chainrup Sampatram Vs. Commissioner Of Income-Tax,West Bengal

2. The appellant. is a registered firm consisting of two brothers as partners with equal shares., The firm was carrying on business at Calcutta as bullion merchant.; dealing mainly in silvery and kept its books of account on the mercantile basis. In the course of the year of account 1997 (Ramnavami) corresponding to 1941-42, 582 bars of silver (some from the old stock in hand at Calcutta and some purchased elsewhere during the year) were sent to Bikaner where the partners resided, and their value at cost was credited in the books of thethe assessment of the firm for the year 1942-43, it was alleged that the said silver bars had been sold to the partners for their domestic use) but the Income-tax authorities held that the alleged sale was not" genuine and that the said silver bars still formed part of the stock in trade of the firm at the close of the previous yearand they accordingly included in the taxable profits a sum of Rs. 2,20,887 as the excess arising from the valuation of the said 582 bars at market price on the closing day. They were valued at, market rate at which the lest of the closing stock, at Calcutta was valued in the books of the firm.On appeal the Appellate Tribunal, on a consideration of all the facts and circumstances of the case recorded its finding as followsthere circumstances make it clear to us that the action of the Income-tax authorities in treating the stock of silver bars in Bikaner as part of the stock-in-trade of the Calcutta business was amply justified. The appellant on account of the panic in Calcutta had to remove the valuable stock-in-trade to a safe place in Bikaner just as many other Calcutta businessmen did at that time. The partners of the firm then noticed the upward trend of the silver market, and decided to take advantage of the camouflage afforded by the entries in the books of account and the story of sale to partners, so that the profit of the year of account could be substantially reducedappeal was accordingly dismissed. The application by the firm under S. 66 (1) of the Act asking for a reference to the High Court of six questions as questions of law arising out of the order of the Tribunal was also rejected.Thereupon the firm moved the High Court under S. 66 (2), and the Court directed the Tribunal to refer the following Question of law for its decisionin the circumstances of the case and on a true construction of S. 4 (1) (b) and S. 14 (2) (c). Income-tax Act, the sum of Rs. 2,20,887 was in law assessable toThe reference was heard by Chakravartti and Das Gupta JJ. who answered the question in the affirmative.The firm being admittedly resident and ordinarily resident within the meaning of Ss. 4-A and 4-B in what was then known as British India, its total income would include also income accruing or arising to it without British India under S. 4 (l) (b) (ii). The firm, however, claimed exemption in respect of the said sum under S. 14 (2) (c) which provided that the tax shall not be payable by an assessee in respect of any income, profits or gains accruing or arising to him if, within in Indian State. It was contended that even on the finding of the Income-tax authorities that the silver bars in question formed part of the stock in trade of the business at Calcutta and their removal to Bikaner had been effected only for reasons of security the said bars having remained there during the rest of the accounting year, their value at the market rate at the close of the year being an increment to the goods at Bikaner, the profit accrued at Bikaner (then an Indian State), with the result that it was exempted under S. 14 (2) (c).The High Court rejected this contention on the ground that the "notional profit" represented by the appreciation in value of theout of the valuation and only when it so emerges it arises or accrues. The source of the profit is thus the valuation, and its situs is where the valuation is made. What is valued is the firms business at the site of the film and all the stock-in-trade of the firm is necessarily drawn into the valuation wherever they may be physically situated. The profit which is the result of the stock valuation of a business is thus sui generis, a type by itself, to which the ordinary notions of a physical accrual will not apply. It comes into existence when the valuation is made and since it. arises out of the valuation, it arises, in respect of the whole stock-in-trade, at the site of the firm whose stock-in-trade is being valued irrespective .If where parts of the stock-in-trade may

Reasoning: While we agree with the conclusion that no part of the profits of the firm in the accounting year can be said to have accrued or arisen at Bikaner, the reasoning by which the learned Judges arrived at that conclusion seems to us, with all respect, to proceed on a misconception. It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the years trading.is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following years account in a business that is continuing are not brought into the charge as a matter of practice, though as already stated. loss due to a fall in price below cost is allowed even if such loss has not been actually realised.Again, it is a misconception to think that any profit "arises out of the valuation of the closing stock" and the situs of its arising or accrual is where the valuation is made. As already stated, valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the "source" of such profits. Nor can the place where such valuation is made be regarded as the "situs" of theirsource of the profits and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on. As such profits can be correctly ascertain according to the method adopted by an assesses only after bringing into the trading account his closing stock wherever it may exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business. On the finding of the Income-tax authorities that the 582 bars of silver lying at Bikaner had not been really sold but remained part of the unsold stock of the firms business at the end of the accounting year, the whole of the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner.