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TMI Blog1956 (3) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... ce realised and the price at which she had originally bought these shares, or the difference between the price realised and the market price ruling on 1st April, 1945, when these shares were converted into stock-in-trade? Apart from authorities, let us try and understand the real nature of the transaction and the basis on which the profits of the assessee should be subjected to tax. The Department has assessed her under section 10(2) of the Income-tax Act and has contended that the profits constituted her business profits. Now, she started her business from 1st April, 1945, prior to that she had not business at all, and the profits which can be taxed in the hands of the assessee are profits which are realised by carrying on this particular business which, as just pointed out, commenced on 1st April, 1945. It is settled law to which it is hardly necessary to refer that what is to be brought to tax is the real profits of a business. In order to arrive at those real profits you must consider the accounts of that business on commercial principles, and as the, Privy Council said in Gresham Life Assurance Society v. Styles [1892] A.C. 309; 3 Tax Cas. 185, you must construe the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1st April, 1945. When the assessee purchased these shares at a lesser price, that is what they cost her, not the business. This was long before the business was started, long before the shares were converted into stock-in-trade, but when we come into the relevant point of time which is 1st April, 1945, it is then that we have got to make the inquiry: what was the value of these shares on that date and what it cost the business so that we should ultimately be in a position to decide what the real profits were when that asset or article was ultimately sold. It may also be said that the real question that arises on this reference is what is the content of taxable profits in the amount received by the as assessee by the sale of these shares. Admittedly the whole receipt is not profits, admittedly the whole receipt cannot be assessed to tax, only a portion of the receipt which are profits is liable to tax, and the question is what proportion or what portion of the receipt can be considered to be profits which can be brought to tax. The matter may be looked at from another point of view. What the Department has to satisfy us is that the amount out of the sale proceeds of the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eclude us from coming to the decision which we propose to do. The case that went before the Supreme Court was the converse of the case that is before us and, as we shall presently point out, the question that the Supreme Court had to decide was entirely different from the question that we have to decide. In that case. Sir Kikabhai Premchand v. Commissioner of Income- tax (Central), Bombay [1953] 24 I.T.R. 506, the assessee 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 accounting year he withdrew some silver bars and shares from the business and settled then on certain trusts in which he was the managing trustee, and in his books of account he credited the business with the the cost price of the 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. This Court upheld the action of the Income-tax Authorities and the Supreme Court came to a contrary conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to say that in giving this decision the Supreme Court overruled the well settled principled of income-tax law. It will also be noticed that what the Supreme Court was really dealing with was notional profits. It was the demand of the revenue which it repelled, and emphatically repelled, that it had a right not only to tax actual but notional profits. We have no guidance, again with respect, from the Supreme Court what its answer would have been if the Taxing Department sought to tax real profits and the question that arise was haw were the real profits to be allocated or distributed. The passages relied upon by the Advocate-General are these. The first is at page 507: 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 disposed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a profit in a transaction with herself. The principle enunciated by the Supreme Court a bout a person not being able in law to do business with himself or to make profit or loss out of a transaction with himself was enunciated in the context of the fictional sale which the Supreme Court was considering. We do not, with respect, read these observations to mean that even for the purpose of accountancy, that even for the purpose of ascertaining commercial profits, it is not open to the Court to value the shares at a particular price when they are brought into the business merely because those shares belong to the same person who starts the business and who had purchased them at a higher price. We put the question to the Advocate-General, and the Advocate-General for some time fought shy of answering the question, as to what would have been the position if these shares had been gifted to the assessee and she had brought them into the business, and we asked him that if according to him that was the ratio of the Supreme Court judgment the result would be that for the purpose of assessing her profit the cost of the shares would have to be taken as zero and the whole of the receipt would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view to the view taken by the Supreme Court the view of the Supreme Court must prevail and with respect we must look upon that view as the only correct view of the law. But apart from the aspect, as we just said, there are certain observations which deal with the question of commercial accounting and they are of help because we have chosen to decide this question on the basis of commercial accounting. Viscount Simonds points out at page 973 : That the taxpayer may in certain cases be subject to a sort of dichotomy for income-tax purposes and be regarded as selling to himself in one capacity what he has produced in another, and secondly, that he is regarded as selling what he sells at market price. It is perfectly true that this dichotomy has been rejected by the Supreme Court, but, with respect, it has only been rejected in the case of a fictional sale. If we are applying this dichotomy at all it is entirely to a different case where there is an actual sale and the dichotomy is being applied for the purpose of assessing business profits which are liable to tax. Again, Viscount Simonds looks at this question from the point of view of commercial accounting, as the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness man starting a business on 1st April, 1945, and buying the stock for the first time, in which case undoubtedly the profits would be assessed on the difference between the price of the shares purchased and the price that the shares ultimately realise on sale. But the assessee is to be put on a different footing and to be assessed to higher tax although she starts the business on the same day, brings the same shares into the stock-in-trade, sells them and realise the same price because she had the shares before and she had bought them at an earlier period for a smaller price. The learned Law Lord also points out that [1956] 29 I.T.R. 985: a tax system which allows business losses to be set off against taxable income from other sources is, in my opinion, bound to reject such a method because of the absurd anomalies that it would produce as between one taxpayer and another. It would give the self-supplier a quite unfair tax advantage. It may be said that this particular observation is in reference to the view which we accepted and which was rejected by the Supreme Court, but we are merely relying on this observation for the purpose of coming to the conclusion that in de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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