1956 (3) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Determination of the basis for calculating the assessable profit on the sale of shares.
2. Applicability of the Supreme Court's decision in Sir Kikabhai Premchand v. Commissioner of Income-tax to the present case.
3. Consideration of commercial principles in determining business profits.

Detailed Analysis:

1. Determination of the Basis for Calculating the Assessable Profit on the Sale of Shares

The central issue was how to ascertain the profit of the assessee from the sale of shares. The two potential bases were:
- The difference between the sale price and the original purchase price of the shares.
- The difference between the sale price and the market price on 1st April 1945, when the shares were converted into stock-in-trade.

The court emphasized that the profits to be taxed are the real commercial profits made by carrying on the business. It was stated that "what is to be brought to tax is the real profits of a business" and these profits must be assessed on commercial principles. The court held that the proper value to put upon the shares on 1st April 1945 is the market price prevailing on that day, not the original purchase price. This approach aligns with the principle that the commercial profits of a transaction are the difference between what the article realized and what it cost the business.

2. Applicability of the Supreme Court's Decision in Sir Kikabhai Premchand v. Commissioner of Income-tax to the Present Case

The Advocate-General relied heavily on the Supreme Court's decision in Sir Kikabhai Premchand v. Commissioner of Income-tax. However, the court found this decision distinguishable. The Supreme Court case dealt with a fictional sale and potential profits, whereas the present case involved a real sale and actual profits. The Supreme Court had rejected the notion of taxing fictional profits, emphasizing that "you cannot tax an assessee on a fictional sale: you cannot tax an assessee on prospective profits."

The court clarified that the Supreme Court's decision did not overrule the established principle that business profits should be assessed on commercial principles. The court stated, "we are dealing with a case of real sale and actual profits," and therefore, the Supreme Court's ruling on fictional sales was not applicable here.

3. Consideration of Commercial Principles in Determining Business Profits

The court reiterated the importance of assessing profits on commercial principles, as established in previous cases like Gresham Life Assurance Society v. Styles. It was noted that "profits should be ascertained on commercial principles," and the valuation of shares on 1st April 1945 should reflect their market value to avoid taxing fictional profits.

The court also referenced the House of Lords decision in Sharkey v. Wernher, which supported the view that for income tax purposes, assets transferred into a business should be valued at their market price. Although the Supreme Court's decision is binding, the court found that the principle of commercial accounting should prevail in determining real business profits.

Conclusion

The court upheld the Tribunal's view and decided that the assessee's assessable profit on the sale of shares is the difference between the sale price and the market price prevailing on 1st April 1945. This decision aligns with the principle of taxing real commercial profits and avoids the pitfalls of fictional accounting. The Commissioner was ordered to pay the costs, and the reference was answered accordingly.