Commissioner of Income-Tax, Bombay City I, Bombay v. Bai Shirinbai K. Kooka

Cn'IJ, APPELLATE Jcms1J1c·1·10N: Civil Appeal No. 13:J of I!l58.

Appeal by special leave from the judgment and order dated March 6, 1956, of the Bombay 1962 High Court in I. T. R. No. 49 of 1955.

H. N. S11ny2l, Addition<tl Solic1:tor-General of Commissioner oj Ineome-1'ax1 Bombay, India, K. N. Rajagopal 81Jstri, R. H. Dhebar and P. City/

for the appellant. v. D. Menon, Bai Sh;rinboi

N. A. Palkhivala, B. K. B. Naidu and i. N. Kooka Shroff, for the respondent.

1962. February 23. The Judgment of Das, Kapur, Gajendragadkar, Suhbn, Rao, Wanchoo and Ayyangar • .JJ., was delivered by Das, J., f3arkar, .J.

delivered a separate judgment.

S. K. DAS, J.-This is an appeal by special, DasJ. leave grante:! by this Court on Seotember 17, 195().

The Commissioner of Income-tax, Bombay, City I, is the appellant before us. Tho respondent is Bai Shiiinbai 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 income-tax for several year prior to April 1, 1945 ; but in the assessment year 1946-47, the relevant account-ing year being financial year 1945-46, th" Income-ta:x 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 1946-47 was there-fore 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 bet-ween the ruling mar'.,et 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 1946-4 7, it was found by the Income-tax Officer that the sale proceeds of the shares which the assessee had sold . amounted . . to

. ' . ' - ' . ' . ' .

962 R's. 5,49,487/·. The Income.tax Officer caloulated Commi1Ji.tmtr of the prnfita in the following manner :

f11tom4•tax, Bomba;·,

l'i(1 l 1iale proceeds Hs. 5,49,487

v.

Bai Shirinbai Cost calculaterl on the basis of

K. Kocla the market price of the shares Das ,J. at the beginning of the account

year l{s. 4,50,82i Rs. 98,655 Less : Forward business loss Rs. 25,344 N'et profit Hs. 73,321 The assessee then appealed to tho Appellate Assis· tant Commissioner who enhanced the income of the assessee by a sum of Its. 2,91,307 /- including a capital gain of Rs. !H,5!l0/·. The Appellate Assis-tant 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 anr:l the sale proceeds. He further held that the some of the shares which were sold in the account year I 946.4 7 were tho assessee's stock-in-trade, while some other shares were her investment shares. Then, there WaB an appeal to the Income-tax Appellate Tribunal and the princi· pal point taken before the Tribunal related to tho question as to how the profits of the assessee on the sale of her share~ should ho calculated. The Judicial Member of the Tribunal accepted the view expressed by the Appellate Assistant Commissioner and hold that the original cost price of the shares must be taken in order to find out the profits which the asseesee had mado on the sale of the shares. The Aceonntant Member agreed, however, with the view of the Income-tax Officer and held that tho market value of. the shares as on the date when they were converted into stock-in-trade· by the 19az assessee should be taken into consideration for the Commissioner oj purpose of ascertaining the profits made by the lncome~tax, Bombay, assessee on the sale of those shares. On this Ci!JI I v. difference between the two members of the Tribunal, Bai Shirinb.ii the matter was referred to the President of K. Kooka the Tribunal. The President agreed with DasJ. 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 'rribunal's order, namely, what should be the basis of computation of the profits made by the assessee by ·the sale of lier shares in the relevant year. The Tribunal came to the conclusion that the question as to when the assessee became a dealer ill 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 assessee's profit on the sale of shares is th!) difference between the sale price and the cost price, or the difference bet-ween the sale price and the market price pre-vailing 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 d11ted March 6, 1956, the High Court answered the question in favour of the assessee and held that the assessee's assessable proft .on the sale of shares was the difference between the sale price and the market price prevailing on April l, 1945. The appellant having unsuccessfully moved th., High Court for a

396 SVPREME COL'RT REPORTS [l!JG'?] SUPP.

1962 certifieatc under s. fi6A (2) of the Income.fax Act, CommiHio1ur of applied for speci1d l1·ave to this Ct1urt. Such leave lrvorru-tax, Bombay, was granted by this Court by an order dated Sep-

City I tember 17, l!J56. .

v.

Bai Shi1inbai This appeal was he,trd in part by a Bench

A. Koola

of three ,Judges presided over by the learne1l Chief Dos J.

Justice, who directed that it be posted for hearin.!! before a Bench consisting of seven .Judges, pl'csum-ably becausfl one of the pointR ul'g<"l befol'e the Bench was whether t.he majorit.v decision of this Court in Sir K ik1.i,/11n'. PremchaiuJ, v. Com.miMicm<>r of Income tax (Centrrzl), Bombay(') reqnir<'d rnconsider-ation. It mav h•' here stated thin the le:mwd .Jud-ges of the High Court lrnd before lh<~m the d1•ei"- sion in Kifob!ta.i's case (1) and they considered that decision carefully and held that the decision •Could be distinguished, firRtly, on the ground that the problem which the High Court. had before it in the present case was the content of tax•ible profits in a commercial s .. nse out of the amount actually received by the assessce by a sale of hor shares, whereas t.ho problem in /{ifr1blv1.i case (') was of a different nature, namely, whether it was open to the dopart.ment to tax an as~esser' on a fictional sale or potential pl'ofits, and, secondly, on the ground that the prinoipl0 hid down i11 Kika.11/uti's case(') had no a,pplication to a ca.~e where real or actual profits, as disting1iished from fictional profits, have to he alloen.tecl or 1itt.ribut.,d to the trading activity: One of the points which we have to con-sider in this appeal is whether, on principle, the distinction dr.-iwn by the High Court is <:OITPct or whether the rntio of Kikabha1'.'s wsc (')should gov. crn the present case, As we have slated earlier, the problem is how shoul<l the profit maclc hy the asscssee by a sale of her shares as 11 trading activity be computed, it be-ing not in cl isputc t.hnt there was in thiR case a real sale resulting in actual profits. The High Court 196Z first emphasised the point, which has not been con· Commis~iontr of troverted before us, that in order to arrive at real Income-tax, profits one must consider the accounts of the busi· Bombay, City I v. ness on commercial principles and construe pro-Bai Shirinbai fits in their nmmal and natural sense, a sense which K. Kooka no commercial man will misunderstand. It then DasJ. 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 busir.ess made. Obviously, the whole of the sale proceeds or receipts could not be trJated as profits and made liable to tax, for that would make no sense a portion only of the reueipts can be treated as profit· but what portion?

Normally, the commercial profits out of the trans-action of a sale of an article is the difference bet-ween what the 'lrticle costs the b11siness 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 concer-ned, the shares cost the business nothing more or less than their market value on April I, 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 distin-ction drawn by the High Court between Kikabhai's case (') and the present case is not warranted on principle: secondly, he has contended that the ratio in Kikabhai's case(') should apply in the pre-sent case also; and thirdly, he has contended that in holding that the price of the shares should be the market price as on April I, 1945, when the shares were converted into stock-in-trade the High Court

398 SUPREME COURT :i;tEPORTfl [1962] SUPP. in effect held by a legal fiction that the assessee had realised the potential profits 011 the said shares Colllmissiorur o I on that date· which she had not actually done and

T ncome-tax, Bombay~ City I henue the very basis of the judgment of the High

v.

Bai Shirinbai Court is vitiated by the assumption of a fiction. K. Kooka The learned Additional Solicitor-General has also

DasJ. 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 ass.essee on th1tt sale were capital gains; this notional sale it is submitted, violates the basio prin-ciple th.at a man cannot sell to himself nor can he make a loss or profit out of transactions with himself.

Wii propose now to examine these arguments in some detail. The question raised is a short ques-tion bu_t a difficult one. In orde.r to examine the \ arguments urged on bflhalf of thi-appellant, it is

necessa,ry first to refer w the decision of this Court in Kikabhai's case (1). +'he facts of that case were these. The assessee there was.a dealer in ail ver and shar:es and he maintained his accounts .accord-ing to the mercantile system and valued his stock at cost price both in tho beginning and at the end of. the year. Duriog the relevant accoi,mting · year he withdrew some silver bars and shares from the business and settleJ them on certain trusts in wb ich he was the managing trustee an!l 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 d.ifference between the cost priue 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 actio1i of the income tax authorities. This Court, however, by a· majority decision came to the conclusion that the asse$see 'fas entitled to value the silver ba.rs

\ll. ~!951) S. c, R. 219, and shares withdrawn at cost price and was not 1962 bound to credit the business with their market value Commissio~r oj at the close of the year for a80ertaining $.e ass-IncOme .. tax. essable profits for the year. Bhagwati, iJ., who Bombay, •• City expressed the dissentient view said that so far as Bai Shirinhai the business was concerned it made no difference K. Kooka whether the stock-in-trade was realised or with· Das J. drawn from the business and the business was enti· tied 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 valun.tion of its stock-in-trade on hand at the close of the year. The majority view was exp-ressed by Bose, J., who dealt with the two conten-tions of the learned Attorney General who appear-ed for the Revenue (respondent) in that case. Tho Attorney General's first contention was that as the silver bars and shares were brought into the busi-ness, any withdrawal of them from the business must be dealt with along ordinary and well-known busi· ness 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 pro· fit or gain nor did it sustain a loss and the assess· ee 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 anrl as the assessee derived no immediate pecuniary gain, the State could not tax them; for under the Income-tax Act the State has IlQ pewer 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 tha decision as respects tho first contention of the learned Attorney· General w~s that there was no general principle of t11-xatioq

-too st:i'REME cou1n· ItEPoRi's [i!J62J sui>r. 1962 under income-tax law under which the State <Ammis!ioner of could ai;scsa a peroon on the basis of business pro-

lntoml-1~, fits that hu might have made tm ha.d not chosen Bombay, f:1'J I to mJ.ke. It was also pointed out that it was un-

v.

Bai Sh;1inboi real and artificial to separate the business from its K. Kooka owner and treat them as if they weie separate en-

Das J. tities 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. The second contention of the lear-ned Attornl:\' General was that if tho act of with-drawal was at a time when the market price was higher than the co;;t price then tho State was depri-ved of a potential profit. This contention was dismissed as unsound because, for income-tax pur-poses each year is a self-contained accounting period and one must take into consideration income, profits and gains made in that year and tbu assess-ing autho1 ity wa.s not concerned with p.otential pr-ifits which might be made in another year.

From what h1Ls been stated above it would at once app•,,ar that Kikablwi's case (')was the con-verse of the present case. In K.ikabhai's wse ( 1) a. part of the stoc:k·in-trade was withdrawn from busi-ness, there was no sale nor any 1Lctual • profit. The ratio of the decision was simply this: under the Income-tax Act tho State bas no power to tax a potential future advantage and an it can tax is in-come; profits and gaius made in tho relevant account-ing year. [n the case under our consideration tho admitted position is that there ba8 Leen a sale of the shares in pursuance of a trading or business activity and actual profits have resulted from the salu. The question in the present case is not whether the State has a power to tax potential future advan-tage, but thu question is how should actual profits be computed when admittedly there has been a J96Z sale in the business sense and actual profits have Commi•sioner of resulted therefrom. We agree with the High Court l ncome-tax, Bombay, Ciry I that in this respect there is a vital difference bet- •• ween the problem presented by Kikabhai's case (1) Bai Shirin6ai K. Kooka and the problem in the present case. We further agree with the view expressed by the High Court Da1J. that the ratio in Kikabhai's case (1) need not neces-sarily be extended to the very different problem presented in the present case, not only because the facts are different, but because there is an appiecia-able 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 argu-ments of the learned Additional Solicitor General that the distinction drawn by the High Court bet-ween Kikabhai's case(') and the present case is not warranted on principle and that the ratio of the decision in· K ilcabhai'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 (')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 1 of Schedule D. She· also carried on the activities of horse racing and training, which were agreed not to constitute trad-ing. 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 !Jf the transferred horses was the cost of

402 SUPREME coli.HT HEFORTfS [i!!1>2J SUPP. 196% breeding. The Crown contended that the market

value of the animalH, which was considerably higher, Commiasiorur 01 was the proper figure. The Commissioners docided in lncomt--tn.'1:

0 Bombay, City I favour ufthc :is;;essee and the Crown demanded a case.

v.

Bai Shirinbai The case was first heard by Vaisey, J., who follow· /\, Kooka ing the decision in Watson liros. v. llornb!f (1), held

DtJJ J. that the market value of the five horHes t.ransfPrTed

from the stud farm wa.s the proper figure that should be credited in the accounts. VaiSl'\'. J. hai;ed his decision on the ground that the oase' was indi-stinguishable in principle from an earlier decision, namely, th~t ofMncna11htPn, .T.. in Watson Bros. v. Hornby ('). Wo mav here Rlato that in w .. tson Bros. v. llornliy (I) the :iFRf'SSt'e <'anied on the bu;i-ness of poultry brnetlers and dealers. In addition tu keeping birds on their farm for laying purposes, they had a hatchery which produced chicks primarily for sale as 'day-old chicks'. Some of theso chicks were transferred to brooder houses and bocame part of the stock on the farm. The asscSBees were assessed to income-tax under schedule Din respect of the profits of tho hatchery part of tlicir business and under Schedule H in respect of the profits of the farm. Th(' question tl:at arose in that case was whother tho day-old chicks transferred to the farm should be eretlited as stock at the averagtc price at which they were sold and could have been bought in tho 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 t.he hatchery and the farm were two activities of the Harne person who could not make a loss by tmnsferring from 0110 department to the other and therefore the chicks should he credited to the hatchery account at production cost. It was held by Macnaghten, J ., that in the notional :;air bet- \Veen the hatchery and the farm, which should be treated a8 separate entities, the price to be credited I was the "reasonable price" laid d.own by s. 8 of tho Sale of Goods Act, 1893, and that on t.he admitted 1962 evidence this reasonable price must be the market Commissioner of price of 4d. per chick. This was the decision which lncome-T ax, Vaisey, J. followed. From the decision of Vaisey, J. Bombqy, Ciry I •• there was an appeal to the Court of Appeal. The Bai Bhirinbai Court of Appeal referred to 1<wo of its own deci-K. Kooka sions, namely, Laycock v.· Free111an, Hardy & DasJ. Wills (I) and Briton Ferry St,eel Co, Ltd. v. Barry (2 ) and held that the principle stated and the reason-ing underlying the judgment of Sir Wilfrid Greene, M.R. in the Briton Ferry Steel Co. Ltd. v. Barry (') were inconsistent with the conclusion in Watson Bros. v. Hornby('). The Court of Appeal accordingly allowed the appeal. Sir Raymond Evershed, M.R., (as he then was) said, however, that if the matter were 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, ho11·- ever. that the matter was not res integra and as a result of the authorities referred to above which expounded the g@neral 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 :

"B.ut 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

(I) 22 T,C. 288. (2) 23 T.C. 414.

4-04 SUPRE:'lfE COURT REPORTS [I!l62] StJPP . 1962 other sum than that which he would normally have rcceiv•'d for it in the due course of trade, Commis•Umtr of

1:comc~ax, that is to say, the market value. As I have Bombay, Ci'.J I already indicated, \.here seems to me to L<i no

v, lJoi Skirinboi jm<tification for the only idternativc that has K. h.ooka been suggebted, namt•ly, the cost of produc-

DuJ, tion. 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 transfern·d from the otud farm to the owner's per-sonal account, there W[l.S a disposition of trading stock, though the dispositi,m might not Le by way of trade. He then referred to three methods of record· ing the result of the disposition in the stud farm trad-ing 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 e.n unfair tax advantage. The sccor1d method would be to enter the cost price; this again would be fictional, because, no sale in the legal sen ,e · had 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 tax-payer and another, for it eliminated variations which were due to no other cause than any one taxpayer's 1lecisi()n as to what proportion of his total product he would supply to himself. The second ground was that it was better economics to credit tho 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 expen808 in respect of that stock.

It is worthy of note that the faots in Sharkey 1962 v. Wernher (1) were similar to the facts of Kikabhai.'s Cr•mmirsioner of case (2). In both those cases what had happened Income· Tax, was that a part of the stock-in-trade was withdrawn Bombay, City I v. ·and the question was at what figure in the trading Bai Shirin.bai accounts the withdrawal should be accounted for. K. Kooka In Kikabhai's case (2) this Court. came to the conc]u. Das J, sion that the withdrawal should be at the cost price.

In Sharkey v. Wernher (1) the house of Lords held that the proper figure shL,nld be the market value which g,1ve a fairer measuro of assessable trading profit. It is significant that the House of Lords reached that conclusion not witho .1t dissent. If the facts of the case which we are now considering were similar t:i the facts of Kikabhai's c.r.se (2), it might have been necessary for us to re-examine the ratio of the decision. It is necessary to state here, how-ever, that the decision of the House of Lords in Sharkey v. Wernher (') 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 f(ikabhai's case (2) and the case under our considera-tion. In view of that distinction, we do uot think that it is really necessary int he present case to re-examine the ratio of the decision in Kikabhai's case (2 ). Whftt then is the basis for computing the actual profits in the present case ? We think that the basis mu't be, as the High Court has put it, the ordinary com-mercial principles on which actual profits are com-puted. We think that the ar,proach of the High Court was correct and norm illy the commercial profits out of the transaction 1,f 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 tr:iding activity was coneer-ned, the market value of the shares as on April l,

406 SUPREME COUR'l' REPORTS (1962] SUPP.

196t 1945; was IVhat it costs the business. We do not Cnnmissitmtr 1} think that there is any question of a notional

I 11&111111-T ax, sale here. The High Court did not create any legal Bombct)', Ci{1 I fiction of a sale when it took the market

v.

Bai Shiriniai value as on April I, 1945 as tho proper fignro for

Ir. Koo.la determining the actual profits m11.de by the assessce. DuJ. That the assessec later sold the shares in pursuance

o( a trading activity was not in dispuu•; 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 Radcliffo, tlrn only fair measure of assessing trading profits in such circum-stances is to take the market: value at one <'nd and the actual sale proceeds at the other, the difference between the two heing the profit or loss as the case may be. Tn a traoing or commercial sense this seems to us to accord more with realitv than with fiction. • For these rt>asons 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 qu<'stions arise in this Appeal. The first is whethPr the judgment of the Courc below is against the decision of this Court in Sir Kikabhai Premdu111d v. Commissioner of In-come-tax.(') The second is, if so, does the decision in Kikabhai's ca.se(l) require reconsideration? It appears that in Sharkey v. Wernher(') where the question was the same as in Kikahhai's case(') and which was decided a little lator than that case, the House of Lords took a view contrarv to 'that tiikcn in Kika-bhai's case. It was on the hasis of the reasoning on which Sharkei/.~ case (') was founded that the ]llarncd advocate for the respondent contended that Kikabhai's case requires reconsideration.

The assesaee in the present casu is a lady of (l) [1954] s.c.R. 219; [1957] 23 [, T. R. 506. I some means. For many year past she had been 1962 holding various shares Ly way of investment on C ommis.rioner of the dividends of which she was being charged to lncnrne~ Tax, Bnm.bay, income-tax. In assessing the tax for the assess· City I v. mentyear 1946-47, the accounting period of which B"i Shirinbai was the financial year 1945-46, it was found that the K. Kooka assessee had been carrying on businesa with some Sarkar J. of the said shares sincu April, 1945. It is not in dispute that in the accounting year 1 \!46-47 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 1946-4 7 as to how the profits · of her trading activities were to be ascertained.

'rhe 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 arquire. The question arose because difficulty was felt in fixing the cost of acq 11isition. In regard to shares acquired by the assessee for her trade afber sue started it, the posi-tion 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 ~-" invest-ment, having acquired them, it may be, quite ,1 few years ago. The assessee contended t h<1t the cost of acquisition of this latter variety of Hharcs-and with these alone we are concerned in this appeal, wa.s their market value on the date when she start-ed her business and thereby converted them from investment into stock-m-trado of her bmiuess.

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 wh,1t purpose. The Tribunal aecepted by a majority the contention of the assessee. At the irn;tance of the State the Tribunal then refoned the followin(;

1!J62 • question to t.he High Court at Bombay under s.66( I) Commissioner 11/ of the Income-tax Act:

/~.tar, Bomb~,

C;ty I "Whether the asses.~eo's assessable profits

v. on th" sale of shares is the difference bet-Bai Shirinhai

K Kook ween the B<Lle price and the cost price, or the

J. · difference between the side price and the Sarkar market price prevailing on 1-4-1915"

The High Court held that the assessable profits were the difference between the salo prico and the market value of the shares prevr.ilin" on April I, 1945. The State has filed this appa>tl~igainst the decision of the High Court. · The Stato contends that tho High Court's decision is against the judgment oft.his Court in Kikabhai's case.( 1). Thn.t is the first que;;tion which I propose to diRcuss. The assessee in Kikabhai's case was a dealer in shares ani! silver. Tho method employed h.1· him in keeping his :wcounts was to ent-Or the cost price of his stock at th" lwgi1111ing of the year, to credit the sale proceeclo of the sto"k sold during the year and value tho unHnld ~tock a.t tho ond of the y1?ar at cost pricl\ these latter b1•ing carried forward as the op.,ning entries of tho next yea1·'s '~ccounts. It appe:mid that the asSl'SSt?e had withdr:iwn somo 8ilvor aml shares from his business and settled thC.Jl• upon ""rt11in trusts. In the ac-counts he ont.ered the silver and Hh<1res so with-drawn at tlrnir coot price. The St;;ite contP11rh•cl that thes" should hwc [pen enter1_,rl in tho •1ccount8 at their market value on the datt? th'-'Y wen• with-drawn from tho business. This Court found this con-tention una"ccpt:i.blc am! held that tlwrntry sh1rnld be of thn cost price irncl not of th" mark"t vaJ,ie on that date.

It h;i.d been contended on Lehalf of the State that "A~ this is a business, aay witlJ<lmwal of the assct8 is 11 business m;i.tter :rnd thr, only feasible way of regardiug it in a business light is to enter the market price at the date of the withdrawal," 1962 and that "if a person withdraws an asset from a Commissioner of business, he must account for it to the business at Income-tax, Bombay, the market rate prevailing at the date of the with-City 1 v. drawal." In dealing with these contentions this Bai Shirinbai Court observed, " It is impossible to get away-from K, Kooka the fact that the business is owned and run by the Sarkar J. 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 ficational profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is sup1iosed to be selling to himself and thereby making a profit out of himself which on the fact of it is not ouly absurd but against all canons of mercantile and income-tax law."

'l'he decision in Kikabhai's case (1) was however by a majority, Bhagwati J. having taken a cont-rary view. For the purpose of the present ques-tion or I will have to confine myself to the judgment

the majority.

It seems to me that the argument of the res-pondent 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 buAiness with the market value of the shares as on the date of their conversion into stock-in-trade, that is, April 1, ] 945. She can no doubt do that if she had acquired them on that date, from the market.

But this she did not do. So she is compelled to rely on a fictional nnrchase by her from herself at the market rate of that date to sustain her conten-tion. Kikabhai's case definitely held that no one can be supposed to be trading with himself for the purpoRe of ascertaining taxable profits. A fiction therefore that one has done so is not permissible.

To hold that the assessee is entitled to enter in the

!10 S1JPRE:\IE COURT REPORTS [1962] SUPP.

196Z ac~ounts of her busi1wss, the market va.lue of the Commisair'111'r of shar<'R on April I, 194:l. wou Ir! be to go directly

lrieome-ta.:~. against the decision in Kikabhai's eaRe and the ratio BamboJ, •• City 1 on which it waR based .

Bai Shitinbai K. Kooka It was Raid that. Kikabhai's case dealt with a Sarkar J. fictional sale :mrl potential or not.ional profits

whnreas in the µreRent case then• was actual trading in the shares and thn problem h"re is to ascertain the profits of that tracle. I am 11ot sure that tho diRtinction so sought to be made iH really possihll'. Both the cases rle11.lt with the asscssm~nt of the profit.~ of an cut.ire trading activity of a pcrRop. There wore real profits in both ca"'R am! the que,;tion in each was, how to a.~'1css them. The difficulty in one case ii.rose beca1rne a part.ion Jar stock acquired for the trade ha<I been withdrawn from it and in the other, becau•e a particu la• sto~k not acquired for the trade had bern us<'d for its purposes. ThP-question in each case was, what value was to be pnt on thn ;;tock concernorl for assessing the profit,~ of the trade as a whole. It would be incorrect to split up the entire tmdo and to treat the <le;i.I in en.ch stock srparat.ely n.nrl I do not think /(ifobhai'o wse (1) die! so. So consi<lered tho Stat.o would have no ha.sis for Rny claim in Kikabhai's case for then there would h~ve been no business at all to t1ix. It was th..rcfon• that in Kikahh<ii's cn.se the State contended that tho stock had hl'Pn "brought into the business" :md on that ha~is onlv could .. it :tdvance hy argument-. It was t-his argriment advanc('d on. th~t hMis that. this Court cnnsidercd and rejected, The Conrt did not consider the profits of a pn.rticnlar item of trndc by itself. So th11 Court did not consider 11olional profits in the sen~n in<licated by the distinction now sought to he made l>t'twc€'n .the t11·0 cases. The present case is the sctme, for here n.lso the quc8tion is what an: tho profits of the lt"i'eSRPt>'B entire trade, that is, how is the cost price to he calculated for th~t purpose ? Here al-io, if the sale of the invest-196B ment shares bv themselves was concerned there Commissioner of wollld in all probability have been no trading and lncome--la1t, no question of assessing the profits of such trading Bombay, City I v. would have arisen. Therefore b1th cases dealt with Bai Shirinbai the asso;;smcn_t of actual rrofits ; none was concer-K. Kooka ned with assessment of notional profits.

But suppose the two cases are different as suggested, that does not seem to me to make any distinction. In Kikabhai's case ( ') it had been held that the withdrawal was not trading because a man could not trad" with himself. In the present case f,he 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 done 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 sh 1uld be allowed to proceed on the basis of a fiction that she had pur-chased 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 am unable 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

412 SUPREME COURT ItEPORTS [1962] SUPP.

1962 that money's \vorth is value at the cost at which the Commi••ion1r of stoek concerned was actually acquired from the

Income· .. a:r; market, may be as an investment and not as a stock Bambay. City l in trade. I am un<1ble to appreciate h<Jw it c11,n ho Roi Shirinbai said that any money's worth would be overlookcd-K. Kooka whioh, I will assume. no businessm Ln will do in Sari= J oalnulating hid profits-if tho shares are not valued

at the market valu•J of the day on which they are brought into the trade but are valued at thc> price at which actually they had be"n previously acquired by the assessee. The real question· is what were the sharos' worth in monoy for calcult1ting the profits. The contention of the respondent assumes that the money's worth must be calcuhted as on the date of the commencement of tho trade :ind hence really begs the question.

Chagla, C.J. who delivered tho judgment of the High Court, said that he did not undorstand Kika-bhai's m8e (')to mean that evon for the purpoRe of accountancy or for the purpose of ascertaining commercial profits it is not open to the court to value the shares at the market price of the date on which they wPre brought into the buHiness. I am unable to agree. Accountancy, I suppose, is not based on fiction but deals with realities. We a·•c concerned with accountancy only for the purpo8e of ascertaining commercial prolit8, and it was only for that purpose that this Court held that you cannot enter in your aeeounts the market value of goodA on the fiotional basi8 that yon sold them to yourself. Chagla. C .. J.. thought that Kikabhai's cas" wa~ not dealing with commercial profits. I think that si11ee that case wa8 considering profit" for income·tax purposes it was not dealing with anything else. I am also unable to 11grec with the view of Chagla, C.J., that the ratio in tho decision of Kikahhai's case has no application to the present caAe. The rntio was that for the purpose of ascertaining tax1ible profits it is not possible to conceive of one trading with himself and it would apply here, for here also 1962 taxable profits are being ascertained. Commissiune, of Incom~.taJC, Chagla, C.J. observed· that what has to be Bomb2,Y, City I ascertained is what an article costs the business and Y. Bai Bhiriribai not the owner, but in Kilcabhai's case (') it was K. Kooka expressly said that when the business is owned by the assessee himself it is unreal to separate the Sarkar J. 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 busine.is have to be und_erstood in a wav that a man of business would understand it. I a~ not aware that a commercial man must compute profits on the basis of a fiction that he bas 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 assess 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 pur-chase in the market. And that is what the assessee wants us to do.' I am for myself entirely nnable to make any distinction between Kikabhai's case and thfl present case .

. I have now to refer to Sharlcey's case (') 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.

I do not find the reasoning of that case so strong as to lead me to the opinion that the decision in Kika-bhai'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.

(I) [195•] s.c.R. 219, [1957] 23 LT.R. 506.

1961 :N"ow, Sharkf'-y's r:ase (') also dealt with tho

withdrawal of assots from a taxable business. There C-Orrmiissiorur of a lady owned two enterprises, one a stud farm the

Income-tax, Bomiay, Cily I incorne of which was liable to tax and another a

v. raeing establishment, which was recreational and Bai Shirinbai K. Kooka therefore not liable to tax. The lady transfcrT('d Sarkar .J. some horses from the stud farm to the racing

establishment. In assessing the incomo of the stud farm a question aroso as to wha.t valuP 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 taxal.ile undertaking. The problem there was therefore just the same as in K ikabhai's Case(').

It was he Id by t.he House of Lords that the valuo to lie put on the horses withdrawn frr·m th" stud form 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 Incomc-tax Law a dicho-tomy between the owner of a busiIJCSS and the husi-ness is possible and presum:ibly therefore trailing bet-ween the two could be conceived for t:ix purposes in certain cases aud rl'ferred to some English authorities in support of this view. [ will assume that such a dichotomy is possibln in some cases but the question is whether it is possible in a case like Sharkey's case. On that question I <lo not find the House of Lords giving any special reason to make that dicho-tomy. I also note that the House of Lords <lid not dispute that as a gentffal rule the dichotomy cannot be made.

Apart from the genera I observation mentioned above the House of Lords based its decision on two grounds. What the House of Lords thought strong-ly supportod its view first that since it was eonee- <ied (ll before thorn that somo entry he.cl to be made

[1956] A.G. 5B; 36 T .C. 275.

(2 [195+) S.G.R. 219; [1957) 23 I. T.R. 506•

in respect of the horses withdrawn, and that 1962 whether the entry was of the cost incurred for breeding the horses transferred or of their market Commissioner of Jn.come· tax, value on the date of the transfer, the entry would Bombay, Ci{)' j in either case be fictional for they were not in fact v. Bai ShirinbfJi transferred at any of those prices and therefore it K. Kooka was more real to enter the market value. Now, as Sarkar J • . Lord Radcliffe himself ·noted, the entry of the cost price would really be cancelling 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 can be legitimately said that there is an explanatibn and as was said in Kikabhai's case, that is that the cancellation had to take place because assets were withdrawn from the trade, unless entries were made cancelling 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. 1 This is not very clear to me. Learned advo-cate for the assessee said that Lord Radcliffe was contemplating the case of two traders who started r 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 hold-ing 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 tax~tion. Again I am not convinced that this reasoning is conclusive. Take the case of

4i6 Sl'PREME COURT REPORTs [1962] SUPP. 1962 two traders. One by his shrewd business m<llhoc! Commi•Jiontr of or by friendly contaots. or may he by moans not

lncom4·'4x, \'ery creditable may on the same day acquire goods Bomb41, CiJy I necei;sary for hi8 trade at a much cheaper rate than

v.

Boi Shir;11bai the ot.ll!'r. The profit;; of the two would then he K. Kool<a different. I do not imagine th11t any income·tax Sarkar J. law would find this objectionable. Furthermore, I

am not sure that this anxiety for au oquitable dis-trihtuion 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 Raclcliffc n•ali"ed tho difficulty of tho pr11hlem which .iie had to solve and said re so. I do not. think I will he wrong in saying that put his decision on the ground of tho best practical solution of that difficulty. Tho majority judgment in Shar-key's case cloes not lead me to the conclusion that our decision in /( ikabhai case ('} was wrong. I respectfully prefer the view taken in Kikahhai's c-1se and by Lord Oaksey in Sharkr y'~ case('). Bhagwati, J. in his minority judg-ment in Kikabhai'" case hased himself on the argu-ments of the Attorney General. It is not necessary to specificallv deal with his views for th('f/ have been dealt with in that caHc and wit.h what have been said there I am in completo agreement.

Before leaving Sharkcy's ca.se it would he of some interest to point out th:it Lord Simonds did not think that any distinction was possible between the case that he had before him a.nd a case like t.he ono now before us for ho said: "And so al8o, as I have more tha.n once pointed out in this case, it is conceded by the ta.x-payer that 8ome figure must appear in the stud farm accounts as rPcci pt in res-pect of the transforrcd horses, though Lady Zia in her capacity as transferee did not carry on a taxable activity. In the samo way, it would, I suppcsc, bo claimed that, if Lady Zia were to transfer or retrans· fer a horse from her racing establishment to her stucJ. farm some figure would have to appear in the 1962 stud farm accounts in respect of tha.t horse though Com,nission~r of it cost her nothing to make the transfer: If it were Income-lax, not so and she subsequently sold the transferred Bornb<Jy City I v. horse and the proceeds of sale were treated as Bai ·.S hirinbtti receipts of the stud farm, she could justly K. Kooka complain that she had been charged with a fictitious Sa1kar J, profit."

In the course of arguments a case was sugges· ted 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-in-trade 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('). That !;eing 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 •tcco1mts as the price for which he acquired his stock-in-trade its value in the market on the date on which he received it free. That would not involve going 11gainst Kikabhai's oase, for it would not be based on a fictional trading by a man with himself. If you cannot distinguish a business from its proprie-tor, then the cost of a thing for the purpose of the business would be its value at the time the proprie-tor 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 p,o 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 ans-wer the question framed by the Tribunal by saying

418 SUPREME ' COURT REPORTS (1962] SUPP.

1962 that the a;;sessee's Taxable profits on the sale of CommiJsioner ef the shares earlier held as investment are the diffe-

Jncem,•lax rence bet\rncn the sale price and the cost price, that Bomb'!)' Ci17 l is, the price at which she ha.<l actually bought those

v.

B•i S;irU..«i shares.

K. 1'111:• Satf.ar .1. BY COl7RT : In accordance with the opinion

of the majority, this appeal is dismiBSed with costs.

-- Appeal dismi8sed.

1962 S. S. MUNNA LAL

Ft6t11t1Ty 2.1. v.

S. S. RAJKUMAR AND OTHERS

(S. K. DAS, M. HmAYATULI,AH a.nd J.C. S1uH, JJ.) Hindu Lau.~.Jai11s-Adoption-1Vidow, if can odopt without express authority of husband-l'rrliminary decree. for partition dr:clarinu u·idotti's sharr-JJ'hrther share ''possr.ssed" by widow-- Death of u·i1lou,•-/f shrzrr rpt;('.r/s to es/11.l"-llindu ,'-;ucces.riion Act, I:9;iG (30 of J95G), ss. 4, U, J/i ond 16.

· G, a Digambcr Jain of the Porwal sect, died in 1934 leaving behind his widuw Smt. K, his son G who died in 1939 and three grandsons M, P and R. In 19j2 M's son S filed a suit for partition of the joinr family properties. Rajkumar, c1aiming to b~ a son of P adoptr-d by his widow, claimed a I/4th share in the joint family property. The adoption was challenged on the ground that no express authority had been gi\'en by P to his widow to adopt. The trial court held that no express authority \vas required by a son less Jain widow to adopt a son and that the adoption was duly and properly made. .\ccorciingly. a preliminary dec~e declaring the shares of Smt. K, the branch of M, the branch of R and of Rajkumar to he lf4th each was passed. Mand others pre-ferred an appeal to the Iligh Court mainly against the findings on the question of adoption. During the pendcncy of the appeal, the Hindu Succession ,\ct, 1955, came into force. Shortly thereafter Smt. K died. The High Court upheld -:.he decision of the trial court on the question of the adoption of Rajk11mar. With respect to the share of Smt. K the High Court held that her interest declared by the prelimi· nary decree \Vas inchoate, that she never bcca1ne "possc.ssed"2