1. Bullion merchant firm's stock moved to another state for safety; dispute over taxability of market value appreciation of unsold stock under Income-tax Act. (Para 2 )
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1953 Supreme(SC) 92
SUPREME COURT OF INDIA
M. Patanjali Sastri, CJI., S. R. Das, Vivian Bose, Ghulam Hasan, N. H. Bhagwati, JJ.
Chainrup Sampatram – Appellant
Versus
Commissioner of Income-tax West Bengal – Respondent
Civil Appeal No. 142 of 1952
Decided On : 09-10-1953
Advocates appeared
Shri N. C. Chaterjee, Senior Advocate (Shri S. N. Mukherji, Advocate, with him), instructed by Shri P. K. Mukherji, Agent, for Appellant; Shri C. K. Daphtary, Solicitor-General, for India (Shri G. N. Joshi. Advocate, with him), instructed by Shri. G. H. Rajadhyaksha, Agent, for Respondent
Shri N. C. Chaterjee, Senior Advocate (Shri S. N. Mukherji, Advocate, with him), instructed by Shri P. K. Mukherji, Agent, for Appellant; Shri C. K. Daphtary, Solicitor-General, for India (Shri G. N. Joshi. Advocate, with him), instructed by Shri. G. H. Rajadhyaksha, Agent, for Respondent
Profits of a business accrue at the place where the business is carried on, regardless of the physical location of the stock-in-trade. Furthermore, under commercial accounting principles, closing stock is valued at cost or market price, whichever is lower, and unrealized appreciation is not taxable.
Headnote:(A) Income-tax Act, 1922 - Sections 4(1)(b) and 14(2)(c) - Situs of accrual of profits - Source of profits and gains of a business is the business itself, and the place of their accrual is where the business is carried on - Profits determined by bringing into the trading account the closing stock, regardless of its physical location, are taken to accrue or arise at the place of carrying on the business. (Para 10)
(B) Commercial Accounting Principles - Valuation of closing stock - Closing stock is generally valued at cost or market price, whichever is lower - Unrealized profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a continuing business are not brought into charge as a matter of practice, although loss due to a fall in price below cost is allowed even if not actually realised. (Para 8)
Facts of the case:
A registered firm dealing in bullion sent silver bars to a different location for security reasons. The tax authorities determined that the alleged sale of these bars to partners was not genuine and treated them as stock-in-trade. The appreciation in value of these bars was included in the taxable profits. The firm claimed exemption on the grounds that the profit accrued at the location where the bars were physically situated, which was an exempt territory.
Findings of Court:
The court held that the valuation of closing stock is a necessary part of the process of determining trading results and cannot be regarded as the "source" of profits, nor can the place of valuation be the "situs" of accrual. The profits of the business accrue where the business is conducted, irrespective of where parts of the stock-in-trade may be physically located.
Issues: Whether the profit arising from the valuation of stock-in-trade physically located in an exempt territory, but belonging to a business carried on in a taxable territory, is assessable to tax under a true construction of Sections 4(1)(b) and 14(2)(c) of the Act.
Ratio Decidendi: The source of business profits is the business itself, and the place of accrual is where the business is carried on. Since the business was conducted in a taxable territory, all profits, including those from stock held elsewhere, accrue at that location. Additionally, under established commercial accounting practices, closing stock is valued at cost or market price, whichever is lower, meaning unrealized appreciation is not typically brought into charge.
Result: Appeal dismissed.
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Table of Contents
2. Whether appreciation in value of stock-in-trade physically located in an Indian State accrues there and is exempt under Section 14(2)(c) of the Act. (Para 6 )
3. Closing stock valuation balances costs and does not charge unrealized appreciation; profits accrue where the business is carried on, not where stock is physically located. (Para 8 , 9 , 10 )
4. The source of business profits is the business itself, and the place of accrual is where the business is carried on. (Para 10 )
5. Appeal dismissed; the sum was held to be assessable to tax. (Para 11 )
6. What is the purpose of valuing closing stock in commercial accounting for income-tax purposes?
The purpose is to balance the cost of unsold goods against purchases to determine actual realized profit or loss. Unrealized profits from appreciated value are generally not taxed, while anticipated losses—where market value is lower than cost—are recognized. (Para 8 , 9 )
7. Where do profits from a business accrue when stock-in-trade is physically located in a different place?
Profits accrue at the place where the business is carried on, as the business itself is the source of the profits, regardless of the physical location of the stock-in-trade. (Para 10 )
8. Is the appreciation in the market value of unsold closing stock brought into charge for income tax?
No, unrealized profits in the form of appreciated value of unsold goods carried over to the next year are not brought into charge, following the rule that closing stock is valued at cost or market price, whichever is lower. (Para 8 )
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
