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TMI Blog1953 (10) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and order of the High Court at Bombay delivered on a reference made by the Income-tax Appellate Tribunal. The Bombay High Court refused leave to appeal but the assessee obtained special leave from this Court. The appellant deals in silver and shares and a substantial part of his holding is kept in silver bullion and shares. His business is run and owned by himself. His accounts are maintained according to the mercantile system. It is admitted that under this system stocks can be valued in one of two ways and provided there is no variation in the method from year to year without the sanction of the Income-tax authorities an assessee can choose whichever method he wishes. 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 nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other transactions and thus obtain the advantage of a lower tax on the overall picture. We are of opinion that the learned Attorney-General's second contention is unsound because, for income-tax purposes, each year is a self-contained accounting period and we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses which may occur in the future. As regards the first contention, we are of opinion that the appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the appellant derived no income from it. He may have stored up a future advantage for himself but as the transations were not business ones and as he derived no immediate pecuniary gain the State cannot 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. It was conceded that if these asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y consumption. The bags are all stored in one godown and he draws upon his stock as and when he finds it necessary to do so, now for his business, now for his own use. What he keeps for his own personal use cannot be taxed however much the market rises ; nor can he be taxed on what he gives away from his own personal stock, nor, so far as his shop is concerned, can he be compelled to sell at a profit. If he keeps two sets of books and enters in one all the bags which go into his personal godown and in the other the rice which is withdrawn from the godown into his shop, rice just sufficient to meet the day to day demands of his customers so that only a negligible quantity is left over in the shop after each day's sales, his private and personal dealings with the bags in his personal godown could not be taxed unless he sells them at a profit. What he chooses to do with the rice in his godown is no concern of the Income-tax department provided always that he does not sell it or otherwise make a profit out of it. He can consume it, or give it away, or just let it rot. Why should it make a difference if instead of keeping two sets of books he keeps only one ? How can he be said to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the matter was to do just what the appellant did, namely to enter the price at which the assets were valued at the beginning of the year so that the entries would cancel each other out and leave the business with neither a gain nor a loss on those transactions. The learned Attorney-General contended that if that was allowed great loss would ensue to the State because all a man need do at the end of the year would be to withdraw all assets which had risen in value and leave only those which had depreciated and thus either show a loss or reduce his taxable profits. This argument can only prevail on the assumption that the State can tax potential profits because, except for that, the State would neither gain nor lose in a case of this kind. Had the assets been left where they were, they would have been valued at the end of the year as they were at the beginning, at the cost price and we would still be where we are now. But the assumption that there would be a gain at some future indefinite date is mere guess work, for equally there might be loss. Apart, however, from that the learned Attorney-General's rule is equally capable of abuse. A man could as easily withdraw from the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees. In view of that, the second question does not arise. The appeal is allowed with costs. BHAGWATI, J.--This appeal by special leave from a judgment of the High Court of Judicature at Bombay on a reference by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act (XI Of 1922) raises an interesting question as to the valuation of an asset withdrawn from the stock-in-trade of a running business. The assessee was in the year of account (calendar year 1942) a dealer in shares and silver. On the 21st January, 1942, he withdrew from the business certain shares and silver bars and executed two deeds of trust and on the 19th October, 1942, he withdrew further shares and silver bars and executed a third deed of trust. The terms and conditions of the deeds of trust are not material for the purpose of this appeal. The assessee kept his books of account on the mercantile basis and the method employed by him in the past for valuing the closing stock of his stock-in-trade was valuation at the cost price thereof. The deeds of trust were valued for the purpose of stamp at the market value of the shares and silver bars prevailing at the dates of their execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would also have been shown at the cost price in accordance with the system of accounts maintained by the assessee. The question however which falls to be determined is what is the effect of these assets having been withdrawn from the stock-in-trade of the business. So far as the business itself is concerned the asset which has been brought in is of a particular value at the date when it has been so brought in and it is then valued in the books of account at its cost. In the course of the business however the asset appreciates or depreciates in value in accordance with the fluctuations of the market. If the cost price basis is adopted for the valuation of the stock-in-trade at the close of the year this appreciation or depreciation in the value as the case may be would not be reflected in the accounts. If however the market value basis is adopted for such valuation, the asset on being valued at the market rate thereof at the close of the year might show a loss and this loss would be allowed by the Income-tax authorities in computing the profit or loss of the business. In either event, the assessee would have to carry over the asset in the books of account of the subsequent year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought in and the price at which it was sold when it was actually realised. The only advantage which the assessee obtains would be that he would be able to anticipate in a particular year the loss that may be made on the asset in the following year or years, which however might have to be rectified in the following year or years if the prices rose again. Is there any difference in the position when instead of the asset being realised it is withdrawn from the stock-in-trade of the business ? So far as the business is concerned the asset ceases to be a part of the stock-in-trade whether it is realised or is withdrawn from the stock-in trade. The asset after it has been brought into the business appreciates or depreciates in value in accordance with the fluctuations of the market and that appreciated or depreciated asset continues to be a part of the stock-in-trade of the business until it is realised or withdrawn. This appreciation or depreciation in value is not reflected in the books of account when the cost price basis is adopted for the valuation of the stock-in-trade at the close of the year of account, but is certainly reflected as above indicated in the books of account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee on such withdrawal would be able to deal with or dispose of an asset which had thus appreciated or depreciated in value. In my opinion the manner of his dealing with the asset after he withdraws it from the stock-in-trade of the business is really immaterial. What is material to consider is what is the value of the asset which he has withdrawn from the stock-in-trade of the business and that value can only be determined by the market value of the asset as at the date of its withdrawal. It was urged that the withdrawal of the asset from the stock-in-trade of the business was not a business operation and that an entry on the credit side crediting the cost price of the particular asset would therefore be enough. This argument however does not take into account the appreciation or the depreciation in the value of the asset on the date of the withdrawal as compared with its value when it was initially brought into the business. It also does not take into account the fact that the assessee might have adopted the market value basis for valuation of the stock-in-trade on hand at the close of the previous year or years of account. The entry on the debit side at the beginning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring for the appellant particularly relied upon a decision of the Calcutta High Court, In the matter of Messrs. Chouthmal Golapchand. The assessees there were the firm of Messrs. Chouthmal Golapchand constituted by four partners with equal shares, and they had at the beginning of the accounting year 1935-36 an opening stock of shares valued at cost price of Rs. 85,331. On the 8th January, 1936, the partners resolved to dissolve the firm with effect from the 30th March, 1936, and in view of the pending dissolution they divided amongst themselves on the 9th March, 1936, these shares which were then valued at the rates prevailing in the market at an aggregate sum of Rs. 51,966. There was a difference of Rs. 33,365 between the value of the opening stock, viz., Rs. 85,331, and the then market valuation of Rs. 51,966 and this difference was claimed by the assessees as a loss in the assessment. This claim of the assessees was negatived on the ground that there was nothing to show that loss had occurred in the year of account. The assessees having adopted the system of valuing the shares at cost price at the end of every year and the opening of the next year, the cost price of the shares w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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