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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 ..... e-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 a loss on them. This was the method regularly employed and it is admitted on all hands that this was permissible under this system of accounting. The accounting year with which we are concerned is the calendar year 1942. The silver bars and shares lying with the appellant at the beginning of the year were valued at cost price. In the course of the year the appellant withdrew some bars and shares from the business and settled them on certain trusts, three in number. The appellant was one of the beneficiaries in all the three trusts retaining to himself a reversionary life interest after the death of his w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assets had been sold at cost price the State could have claimed nothing, for a man cannot be compelled to make a profit out of any particular transaction. It was also conceded that if the silver and stocks had lain where they were, then again there would have been no advantage to the State because the appellant would have been entitled to enter their closing values at cost at the end of the year. The learned Attorney-General even conceded that if they had been sold at a loss the appellant would have been entitled to set that off against his other gains, but he said that that is because all those are business transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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 made an income personally or his business a profit, because he uses ten bags out of his godown for a feast for the marriage of his daughter ? How can it make any difference whether the bags are shifted directly from the godown to the kitchen or from the godown to the shop and from the shop to the kitchen, or from the shop back to the godown and from there to the kitchen ? And yet, when the reasoning of the learned Attorney-General is pushed to its logical conclusion, the form of the transaction is of its essence and it is taxable or not according to the route the rice takes from the godown to the wedding feast. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 business assets which had depreciated and enter in his books the depreciated market value and leave at cost price the assets which had risen. There are two cases which bear a superficial resemblance to this case. They are In the matter of Messrs. Chouthmal Golapchand and In re Spanish Prospecting Company Limited. We refrain from expressing any opinion about them, especially as they appear to reach different conclusions, because the facts are not the same and the questions which arose on the facts there were not argued here. They raise matters of wider import which will require consideration in a suitable case. These c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 execution. The assessee however showed the transfer of these shares and silver bars to the trustees in the books of account at the cost price thereof thus setting off the debit shown in respect of the same at the beginning of the year of account. He contended that the market value of the said shares and silver bars on which the stamp duty was based could not be the basis for computing his income from the stock-in-trade thus transferred. The Income-tax authorities did not accept this contention and assessed the profit at the difference between the cost price of the said shares and silver bars and the market value thereof at the date of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 at the valuation adopted at the close of the previous year and the assessee would not be allowed to change the basis of valuation thus adopted unless he chose to adopt at the end of the subsequent year or years valuation at the cost price or the market value thereof whichever was lower. This process would continue until the asset is realised. When the asset is realised the assessee would have to show the actual price realised by the sale of the asset in the books of account and the difference between the price thus realised and the value shown in the beginning of the year of account would be the profit or loss as the case may be, in reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 at the close of each year of account when the market value basis is adopted. In each case however the actual profit or loss to the business as the case may be in relation to the price at which the asset was brought into the business would be determined at the date when the asset is realised. That would be the measure of the appreciation or depreciation in value of the asset which till then formed a part of the stock-in-trade of the business, and would also be the measure of the ultimate profit or loss as the case may be of the business in regard to that particular asset. When the asset is withdrawn from the stock-in-trade of the business t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide 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 year of account would not then represent the cost price of the asset but would represent the market value of the asset at the close of the previous year of account. What would then be the rational basis on which the credit entry should be made at the date of withdrawal ? Should it be the cost price of the asset which was not at all reflected in the accounts except at the initial stage when the asset was brought into the business or the market value of the asset when it was withdrawn? Surely the method of account keeping cannot make any difference to the actual position, whether an asset has appreciated or depreciated in value and what prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was taken to have been their value at the beginning of the year of account and the partition was taken as not amounting to a sale of the shares with the result that there was no evidence of any loss. With great respect to the learned Judges I do not see my way to agree with the reasoning of this judgment. Apart from the fact that this distribution of shares amongst the partners was in view of the impending dissolution of the firm and different considerations may arise when one considers the distribution of the assets of a dissolved partnership amongst its partners, the judgment does not take count of the fact that at the date of the partition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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