Judgement

Patanjali Sastri, C.J.I. : This is an appeal by special leave from a judgment of the High Court of Judicature at Calcutta answering a Reference by the Income-tax Appellate Tribunal under S. 66 (2), Income-tax Act, 1922, hereinafter referred to as "the Act".

2. The appellant. is a registered firm consisting of two brothers as partners with equal shares., The firm was carrying on business at Calcutta as bullion merchant.; dealing mainly in silvery and kept its books of account on the mercantile basis. In the course of the year of account 1997 (Ramnavami) corresponding to 1941-42, 582 bars of silver (some from the old stock in hand at Calcutta and some purchased elsewhere during the year) were sent to Bikaner where the partners resided, and their value at cost was credited in the books of the firm.

In the assessment of the firm for the year 1942-43, it was alleged that the said silver bars had been sold to the partners for their domestic use ) but the Income-tax authorities held that the alleged sale was not" genuine and that the said silver bars still formed part of the stock in trade of the firm at the close of the previous year 1997. and they accordingly included in the taxable profits a sum of Rs. 2,20,887 as the excess arising from the valuation of the said 582 bars at market price on the closing day. They were valued at, market rate at which the lest of the closing stock, at Calcutta was valued in the books of the firm.

3. On appeal the Appellate Tribunal, on a consideration of all the facts and circumstances of the case recorded its finding as follows :

"All there circumstances make it clear to us that the action of the Income-tax authorities in treating the stock of silver bars in Bikaner as part of the stock-in-trade of the Calcutta business was amply justified. The appellant on account of the panic in Calcutta had to remove the valuable stock-in-trade to a safe place in Bikaner just as many other Calcutta businessmen did at that time. The partners of the firm then noticed the upward trend of the silver market, and decided to take advantage of the camouflage afforded by the entries in the books of account and the story of sale to partners, so that the profit of the year of account could be substantially reduced artificially."

The appeal was accordingly dismissed. The application by the firm under S. 66 (1) of the Act asking for a reference to the High Court of six questions as questions of law arising out of the order of the Tribunal was also rejected.

4. Thereupon the firm moved the High Court under S. 66 (2), and the Court directed the Tribunal to refer the following Question of law for its decision :

"Whether in the circumstances of the case and on a true construction of S. 4 (1) (b) and S. 14 (2) (c). Income-tax Act, the sum of Rs. 2,20,887 was in law assessable to tax?"

5. The reference was heard by Chakravartti and Das Gupta JJ. who answered the question in the affirmative.

6. The firm being admittedly resident and ordinarily resident within the meaning of Ss. 4-A and 4-B in what was then known as British India, its total income would include also income accruing or arising to it without British India under S. 4 (l) (b) (ii). The firm, however, claimed exemption in respect of the said sum under S. 14 (2) (c) which provided that the tax shall not be payable by an assessee in respect of any income, profits or gains accruing or arising to him if, within in Indian State. It was contended that even on the finding of the Income-tax authorities that the silver bars in question formed part of the stock in trade of the business at Calcutta and their removal to Bikaner had been effected only for reasons of security the said bars having remained there during the rest of the accounting year, their value at the market rate at the close of the year being an increment to the goods at Bikaner, the profit accrued at Bikaner (then an Indian State), with the result that it was exempted under S. 14 (2) (c).

7. The High Court reject