Sir Kikabhai Premchand v. Commissioner Of Income Tax (Central), Bombay

Section: CONCLUSION S.C.R. SUPREME COURT REPORTS SIR KIKABHAI PREMCHAND v. COMMISSIONER OF INCOME TAX (CENTRAL), BOMBAY. PATANJALI SASTRI C.J., s. R. DAS, VIVIAN BOSE, GHULAM HASAN and BHAGWATI JJ. Indian Income-tax Act (XI of 1922), s. 13-Ascertainment of 2)rofits-Assessee adopting mercantile system rind valuin(J stock at cost price at begimiing and close of each yerw·-Withdrawal of stock from biisiness-Whether business should be credited with mnrket price on date of withdrawal.. The assessee who carried on business in bullion and shares kept accounts in the mercantile system and the method adopted by him for ascertaining his profits was to value stock at the beginning and close of each year at cost price. In the accounting year he withdrew some silver bars and shares from the business and settled them in trusts, and in the accounts of the business he valued them at the close of the year at cost price: Held, per PATANJALI SASTRI C. J., S. R. DAS, VIVIAN BOSE and GHULAM HASAN ,J.T. (BHAGWATI J. dissenting)-that the assessee was entitled to value them at cost price and was not bound to credit the business with their market price at the close of the year for ascertaining his assessable profits for the year. BHAGWATI J.-So far as the business was concerned it made no difference whether the stock-in-trade was realised or withdrawn from the business and the business was entitled to be credited with the market value of the assets withdrawn as at the date of the withdrawal, whatever be the method employed by the assessee for the valuation of its stock-in-trade on hand at the close of the year. In re Chouthmal Gola.pchand (6 I.T.R. 733) and fo re Spanish .Prospecting Co. Ltd. ([1911] 1 Ch. 92) referred to. CIVIL APPELLATE JumsDICTION: Civil Appeal No. 144of1952. Appeal by special leave granted by the Supreme Court on 3rd October, 1950, from the Judgment and Decree dated the 14th day of September, 1949, of the .High Court of Judicature at Bombay (Chagla C.J. and Tendolkar J.) in its Original Civil Jurisdiction in Income-tax Reference No. 1 of 1949 arising out of the Order dated the 20th day of February, 1948, and 9th 1953 Oct. 9, April, 1948, of the Income-tax Appellate Tribunal, Bombay Bench 'B', Bombay, in LT.A. No. 894 of 1947-48. 1963 Sir Kikabhai Premchand v. Oo1nniissioner of Inco1ne-taz, (Central) Bombay. R . .J. Kolah for the appellant. M. C. Seta.lvad, Attorney-General for India, (G. N. .Jo8hi, with him) for the Commissioner of Income-tax. 1953~ October 9. The Judgment of the Chief Justice ahd S. R. Das, Bose and Ghulam Hasan JJ. was delivered by Bose J. Bhagwati J. delivered a sepa-rate dissenting judgment. BosE ,J.-· This is an appeal by an assessee against a judgment and order of the High Court at Bombay 'delivered on a reference made by the Income-tax Appellate Tribunal. The Bombay High Court refused leave to appeal but the assessee obtained special leave from this court. The appellant deals in silver and shares and a sub. · stantial part of his holding is kept in silver bullion and shares. His business is run and. owned by himself. His accounts are maintained according to the mercan-tile 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 dispos-ed 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 far 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. 1963 ;:\Ccounting। 1953 ਸਰਰਕਕ ਭ ਈPnmcnand v. 1953 221 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; 1953 Sir Kikabhai Pnmc1iand v. In the course of the year the appellant withdrew Oommissionerof some bars and shares from the business and settled rn,come-tlax 0th em on certam rusts, · t t h ree m · num b er. Th e appe -1 Bombay. entra ), lant was one of the beneficiaries in all three trusts retaining to !J.imself a reversionary life interest after Bose J. the death of his wife who was given the first life inter-el'!t. 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 and there lies the crux of the issue which we have to determine. There is no suggestion in this case that the bars and shares were withdrawn from the business otherwise than in good faith. According to the appellant, the act of withdrawal resulted in neither income nor profit nor gain either to himself or to his business, nor was it a business trami-action, accordingly it was not taxable. The learned Attorney-General raised two conten-tio11s. First, he said that as the bars and shares were brought into the business any withdrawal of them from the business must be dealt with along ordinary and well-known business 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. He said that the mere fact that the appellant was the sole owner of the busi-ness can make no difference, for under the Act incorne is assessable under distinct heads and when we are working out the income of a business the rules ap-plicable to business incomes must be applied whoever is the owner. His second contention was that if the act of withdrawal is at a time when the market price is higher than the cost price, then the St~te is deprived, 1953 of a potential profit. He conceded that had the market Sfr Kikubhai rate been lower than the cost price, then the appellant Premchand would have been entitled to set off the loss on those v. transactions against his overall profit on the other Commi,,ioner of transactions and thus obtain the advantage of a lower J,,come-tax tax on the overall picture. J,,come-tax (Central), Bomba,•. -Bose J. W f • . th t th 1 d A G e are o opm10n a e earne ttorney- en-eral's second contention is unsound because, 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 con-cerned with potential profits which may be made in another year any more tha.n we are with losses which may occur in the future. · As regards the first contention, 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 sus-tain 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 advan-tage. All it can tax is income, profits and gains made in the relevant accounting year. 1953 It was conceded that if these assets had been sold at cost price the State could have claimed nothing, for a man cannot be compelled to make a profit out of any particular transaction. It was also conceded that if the silver and stocks had lain where they were, then again there would have been no advantage to the State because the appellant would have been entitled to enter their closing values at cost at the end of the year. The learned Attorney-General even conceded that. if they had been sold at a loss the appellant would have been entitled to set that off against his other gains, but he said that that is because all those are business transac-tions and that is the way the law deals with such matters when they o'ccur in the ordinary course of 1953 business. But, he argued, when there is a withdrawal and no sale or its equivalent, the matter is different. As Sir Kikabhcii this is a business, any withdrawal of the assets is a P1'ernchand business matter and the only feasible way of regard-v, ing it in a business light is to enter the market price Commissioner of at _the date of the withdrawal and whether that hap-I(nOcome·ta·"' a·"' t . l entra } 1, pens to £ a vour t e assessee or h th e St a e is t [. . ]muna ena . Bombay, We do not agree. I(nOcome·ta·"' a·"' entra } 1, Bombay, Bose J. It is well recognised that in revenue cases regal'd must be had to the substance of the transaction rather than to its mere form. In the present case, disregard-ing technicalities, it is impossible to get away from the fact that the business is owned and run by the asses-see 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 fictional profit which in truth and in fact is non-existent. Cut away the fic-tions and you reach the position that the man is sup-posed to be selling to himself and thereby making a profit out·ofhimself 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 he compelled to pay to Government a tax which is anything but fictional. Consider this simple illustration. A man trades in rice and also uses rice for his family consumption. The bags are all stored in ono godown and he draws upon his stock as and when he finds it necessary to do so, now for his business, now for his own use. What he keeps for his own personal use cann.ot be taxed however much the market rises; nor can he be taxed on what he gives away from his own personal stock, nor, so far as his shop is concerned, can he be compelled to sell at a profit. If he keeps two sets of books and enters (l) [\938) 61, T.R, 733. 1953 in one all the bags which go into his personal godown and in the other the rice which is withdrawn from the Sir K ikabhiii Premchand godown into his shop, rice just sufficient to meet the v. day to day demands of his customers so that only a Oommi.,ioner of negligible quantity is left over in the shop after each Income-taz day's sales, his private and personal dealings with the (Central), bags in his personal godown could not be taxed unless Bomhay. he sells them at a profit. What he chooses to do with Base J. the rice in his godown is no concern of the Income-tax department provided always that he does not sell it or otherwise make a profit out of it. He can consume it, or give it away, or just let it rot. Why should it make a difference if instead of keeping two sets of books he keeps only one ? How can he be said to have made an income personally or his business a profit, because he uses ten bags out of his godown for a feast for the marriage of his daughter ? How can it make any difference whether the bags are shifted directly from the godown to the kitchen or from the godown to the shop and from the shop to the kitchen, or from the shop back to the godown and from there to the kitchen ? And yet, when the reasoning of the learned Attorney-General is pushed to its logical conclusion, the form of the transaction is of its essence and it is taxable or not according to the route the rice takes from the godown to the wedding feast. In our opinion, it would make no difference if the man instead of giv-ing the feast himself hands over the rice to his daughter as a gift for the marriage festivities of her son. The appellant's 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 cost 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 year's 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 year's dealings. 1953 In the same way, the appellant has reflected the true Sir K ikabhai state of his finances and given a truthful picture of the Prenwhand profit and loss in his business by entering the bullion v. and silver at cost when he withdrew them for a purely Gommissionei· of non-business purpose and utilised them in a transaction Income-tax which brought him neither income nor profit nor (Central), • Bombay. gam. Income-tax (Central), Bombay. Bo<e J. There is no case quite in point. The learned Attorney-General relied on Gold Coast Selection Trust Limited v. Humphrey (H. M. Inspector of Taxes) (1), but there the assessee received a new and valuable asset in exchange for another in the ordinary course of his trade. It was held that he was bound to account for the receipt at a fair market valuation, for though the receipt was not money it was capable of being vaiued in terms of money. In the present case, the assessee's business received nothing in exchange for the withdrawal of the assets, neither money nor money's 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. The learned Attorney-General contended that if that was allowed great loss would ensue to the State be-cause all a man need do at the end of the year would be to withdraw all assets which had risen in value and leave only those which had depreciated and thus either show a loss or reduce his taxable profits.