S. K. DAS, - (1.) THE following was delivered by Judgment of the court : (For himself and Kapur, Gajendragadkar, K. Subba Rao, Wanchoo and N. Rajagopala Ayyangar JJ.)
(2.) THIS is an appeal by special, leave grante I by this court on September 17, 1956. The Commissioner of Income-tax, Bombay, City 1, is the appellant before us. The respondent is Bai Shirinbai 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 1/04/1945. Her dividend income was assessed to incometax for several year prior to 1/04/1945 ; but in the assessment year'1946-47, the relevant accounting year being financial year 1945-46, the Incometax 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 1916-47 was therefore computed oil 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 ruling mar:,Let price at the begining Of the account year And the sale proceeds. -For the assessment year 1947-48, the relevant accounting year being the financial year 1946-47, it was found by the Income-tax Officer that tile sale proceeds of the shares which the assessee had sold amounted to Rs. 5,49,487.00. . The Income-tax Officer calculated the profits in the following manner : JUDGEMENT_477_AIR(SC)_1963Html1.htm 478 The assessee then appealed to the Appellate Assistant Commissioner who enhanced the income of the aasessee by a sum of Rs. 2,91,307.00 including a capital gain of Rs. 37,590.00 The Appellate Assistant 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 and the sale proceeds. He further held that the some of the shares which were sold in the account year 1946-47 were the assessee's stock-in-trade, while some other shares were her investment shares. Then, there was an appeal to the Income-tax 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 be 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 the Income-tax Officer and held that the market value of the shares as on the date when they 'were converted into stock-in-trade by the assessee should be taken into consideration for the purpose of ascertaining the profits made by the assessee 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 tribunal's 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 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 asseessee's profit on the sale of shares is the difference between the sale price and the cost price, or the difference between the sale price and the market price prevailing 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 dated 6/03/1956, the High court answered the question in favour of the assessee and held that the assessee's assessable profit on the sale of shares was the difference between the sale price and the market price prevailing on 1/04/1945. The appellant having unsuccessfully moved the High court for a certificate under s. 66A (2) of the Income-tax Act, applied for special leave to this court.. Such leave was granted by this court by an order dated 17/09/1956. This appeal was heard in part by a 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 KiKabai Premchand v. Commissioner of Income tax (Central), Bombay(1) required reconsideration. It may 1), here started that. the learned Judges of the High court before them the decision in Kikabhai's case (1) and they considered that decision carefully and bold 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 assessee by a sale of her shares, whereas the problem in Kikabhai case(1) was of a different nature, namely, whether it was open to the department to tax an assessee on a fictional sale or potential profits, and, secondly, on the ground that the principle laid down in Kikabhai's case had no application to a 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 Kikabhai's case (1) should govern the present case. 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 1/04/1945, 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 tax, for that would make no sense a portion only of the receipts can be treated as profit-bat 'what portion? Normally, the commercial profits out of the transaction of a sale of in 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 assesses 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 1/04/1945.
(3.) 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 distinction drawn by the High court between Kikabhai's case (1) and the present case is not warranted on principle: secondly, he has contended that the ratio in Kikabhai's case (1) should apply in the present case also; and thirdly, he has contended that in holding that the price of the shares should be the market price as on 1/04/1945, when the shares were converted into stook- in-trade the High court In effect held by a legal fiction that the assessee had realised the potential profits on the said shares on that date which she had not actually done and Hence the very basis of the judgment of the High court is vitiated by the assumption of a fiction. THE learned Additional Solicitor General has also 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 1/04/1945, by the assessee and that the gains which accrued to the assessee on that sale were capital gains; this notional sale it is submitted, violates the basic principle that a man cannot sell to himself nor can he make a loss or profit out of transactions with himself. We propose now to examine these arguments in some detail. The question raised is a short question but a difficult one. In order to examine the arguements urged on behalf of the appellant, it is necessary first to refer to the decision of this court in Kikabhai's case (1) The facts of that case were these. The assessee 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. The income-tax 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 the income tax authorities. This 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 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. 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 General's 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 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. 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 profit or gain nor did it sustain a loss and the assessee 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 and the assessee derived no immediate pecuniary gain, the State could not 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 made in the relevant accounting year. In other words, the ratio of the decision as respects the first contention of the learned Attorney General was that there was no general principle of taxation under income-tax law under which the State could assess a person on the basis of business profits that he might have made but had not chosen to make. It was also pointed out that it was 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 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. 'rho. second contention of the learned Attorney General was that if the act of withdrawal was at a time when the market price wits higher than the cost price then the State was deprived of a potential profit. This contention was dismissed as unsound because, for income-tax purposes each year is a self contained accounting period and one must take into consideration income, profits and gains made in that year and the assessing authority was not concerned with potential profits which might be made in another year. From what has been stated above it would at once appear that Kikabhai's case (1) was the converse of the present case. In Kikabhai's case (1) a part of the stock-in-trade was withdrawn from business, there was no sale nor any actual profit. The ratio of the decision was simply this: under the Income-tax 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 Kikabhai's case (1) and the problem in the present case. We. further agree with the view expressed by the High court that the ratio in Kikabhai's case (1) 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 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 arguments of the learned Additional Solicitor General that the distinction drawn by the High court between Kikabhai's case (1) and the present case is not warranted on principle and that the ratio of the decision in Kikabhai's case (1) must necessarily apply to the present case also. ;