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Issues Involved:
1. Whether the assessee-company is entitled to claim the actual cost of raw materials rather than the market value while computing profits or gains under section 15C(1) of the Income-tax Act, 1922. 2. The method of computing profits for the purpose of section 15C(1) of the Income-tax Act, 1922. Issue-wise Detailed Analysis: 1. Claiming Actual Cost vs. Market Value of Raw Materials: The primary issue in this case is whether the assessee-company can claim the actual cost of raw materials (starch) manufactured by its existing industrial undertaking and used by its new undertaking (producing dextrose) rather than the market value of those raw materials. The Income-tax Officer initially held that the new industrial undertaking did not conform to the requirements of section 15C and considered both undertakings as part of the same business. The officer also opined that if the cost of raw materials were taken at market value, no profits would be exempt under section 15C. The Appellate Assistant Commissioner accepted the new undertaking under section 15C but held that the starch should be valued at market price, not cost, resulting in no exempt profits. The Tribunal upheld this view, emphasizing the need to compute profits separately for each trading activity based on commercial principles. The Tribunal rejected the assessee's argument that it could supply starch at cost to the new undertaking, stating that the profits must be computed realistically, reflecting the market value of the raw materials. 2. Method of Computing Profits for Section 15C: The court examined section 15C(1) and sub-section (3) of the Income-tax Act, which stipulates that profits or gains should be computed in accordance with section 10. The objective of section 15C is to promote new industrial undertakings by providing tax exemptions. The court referred to several precedents, including the Supreme Court decision in Kikabhai Premchand v. Commissioner of Income-tax, where it was held that an assessee cannot trade with himself and that potential future advantages are not taxable. However, in Commissioner of Income-tax v. Bai Shirinbai K. Kooka, the Supreme Court held that profits should be computed based on the market value of assets at the time they are converted into stock-in-trade. The court also referred to the House of Lords decision in Sharkey v. Wernher, which supported the principle of using market value for inter-departmental transfers. The court concluded that the realistic method of computing profits is to use the market value of the raw materials at the time of their transfer from one department to another. This approach ensures that the profits shown in the accounts are realistic and reflect the true picture of the business. Conclusion: The court answered the first question by stating that the starch produced by the old industrial undertaking and used as raw material in the new industrial undertaking should be taken at the market price for computing profits and gains under section 15C. For the second question, the court referred to its previous judgment in Aruna Mills Ltd. v. Commissioner of Income-tax, concluding that the answer should be in the affirmative. The assessee-company was ordered to pay the costs of the reference to the Commissioner.
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