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TMI Blog1938 (7) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... s the difference between the cost price and the price at which they were taken over which is alleged to be the market price on 8th March 1936. The assessees say that that loss they are entitled to set off against gains on other parts of the business during the accounting year. 2. We are not told what the market value of these shares was at the beginning of the accounting year in question. It is only the loss during the year that can be set off against other gains during the year. We do not know what loss, if any, occurred on these shares during the accounting year in question. It was pointed out by Lord Buckmaster in Commissioner of Income-tax, Bombay Presidency v. Allahabad New Cotton Mills Co. Ltd. where the question of the valuation of stocks in relation to the ascertainment of the profits of a business for a particular year was discussed that Section 13, Income-tax Act, 1922, says : 'Income, profits and gains shall be computed for the purposes of Sections 10, 11 and 12 in accordance with the method o accounting regularly employed by the assessee'. 3. He also says: The method of introducing stock into each side of a profit and loss account for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Section 22(4). In that return in respect of their share business or as it was called in the assessment shares account they have claimed to be allowed to deduct a loss of ₹ 33,365 said to have been incurred in respect of the sale of certain shares which constituted part of their stock-in-trade. It has been argued before us that the matter has to be determined with reference to Section 24(1), Income-tax Act, which says: Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 6, he shall be entitled to have the amount of loss set off against his income, profits or gains under any other head in that year. 6. The contention put forward on behalf of the assessees was that the shares in question had originally cost ₹ 85,331 and that was the figure which had appeared in their accounts apparently on more than one occasion, and certainly at the opening of the accounting year - the tax year 1992. It was then said that upon the dissolution or rather, in contemplation of a dissolution of the partnership as provided for in an agreement dated 8th January 1936, these shares were disposed of (for the moment I use a neut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessees in some way anticipated that they would find themselves in difficulties if they came before this Court in the position of having to found an argument upon a set of facts which included in it a statement that the shares were actually divided up or shared out or distributed amongst the four persons who originally composed the partnership. It is obvious, to my mind, that the question formulated by the assessees was intended to suggest, and in fact did suggest, that there had been an actual sale of the shares to third parties in the shape of new firms and that the old partners had then distributed amongst themselves the proceeds of that sale. We find however that even as far back as the assessment to which I have already referred, the Income, tax Officer himself took an entirely different view and he said commenting on the shares account: There was no sale in the year of account. The business has been closed and assets have been transferred to the partners at alleged market price. Shares were purchased at a time when prices were rather high and the assessee has all along valued his closing stocks at cost price. Due to over-valuation of the opening stock for the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made. We find, as I have already stated, that at the beginning of the tax year 1992 (Ramnavami) the value of these shares was pub in the accounts of the firm as at the cost price. There is another rule which is of great importance in a matter of this kind and that is that every tax year is a self-contained period and the profits earned or the loss sustained either before that year or after that year are not at all relevant for the purpose of an assessment relating to a particular year. In that connexion I must briefly call attention to the case in Commissioner of Income-tax, Central Provinces and Berar v. Sir S.M. Chitnavis Lord Russell of Killowen, delivering the opinion of the Board, said: Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. But the losses must be losses incurred in that year. You may not, when setting out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crease in the value of the shares in question. 16. It is quite certain and, indeed, it is clear law that if a trader puts into his accounts one value at the end of any accounting year, he must start his next year's accounts with precisely the same value. In this connexion I would mention the case in Commissioner of Income-tax, Madras v. Chengalvaraya Chetty (1925) 12 A.I.R. Mad. 1242. Having put in the value of these shares as at cost and being in the position that they were not able, and in fact did not seek to change the system of accounting in this particular case, we must take the cost price of these shares as the starting point. It seems to me therefore that if there had been any real sale of these shares in the course of the year 1992 (Ramnavami), it might have been open to the assessees to say that it was between the cost and the sale price that there was this difference of ₹ 33,365. But there never was a sale. It is quite obvious, and in any event we must accept the statement of facts put before us by the learned Commissioner, that there was no sale, but what was loosely called a 'partition'. I say loosely because 'partition' in this country is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. At p. 99 the learned Lord Justice said: We start therefore with this fundamental definition of profits, namely if the total assets of the business at the two dates be compared, the increase which they Show at the later date as compared with the earlier date (due allowance of course being made for any capital introduced into or taken out of the business in the meanwhile) represents in Strictness the profits of the business during the period in question. 19. Now, Mr. Boae at the opening of his argument invited our attention to that definition. It seems to me that in the present instance the assessees have overlooked the fact that they were taxed in respect of trading operations for the period beginning on 31st March 1935 and ending on 30th March 1936. The self-contained period referred to by Lord Russell in the passage which I quoted earlier in this judgment was the period between those particular dates. In other words, before the Ramnavami year 1992 had come to an end, part of the assets of the business had been taken out of the business, namely these particular shares which, as we have seen, were distributed amongst the four partners on 9th March 1936. That is one way ..... X X X X Extracts X X X X X X X X Extracts X X X X
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