The cost of acquisition of shares held as investment and subsequently converted into stock-in-trade for the purpose of computing profits from their sale is the market value on the date of conversion and not the original cost price.

Judgment

S. K. DAS, J. : (For himself and Kapur, Gajendragadkar, K. Subba Rao, Wanchoo and N. Rajagopala Ayyanger JJ.) This is an appeal by special leave granted by this Court on September 17, 1956. The Commissioner of Income-tax, Bombay City I, is the appellant before us. The respondent is Bai Shirinbai K. Kooka, who will be referred to in this judgment as the assesses.

2. The assesses is a Parsi lady who held by way of investment a large number of shares of different companies. These shares were purchased before the end of and after 1939-40 at a cost price which was much less than their market value on April 1, 1945: Her dividend income was assessed to income-tax for several years prior to April 1, 1945; but in the assessment year 1946-47, the relevant accounting year being financial year 1945 46, the Income-tax Officer found that the assessee had converted her shares into her stock in-trade and carried on a trading activity, viz. a business in shares. Her income for the assessment year 1946-47 was therefore computed on the basis of the profits which she made by the sale of her shares as a trading activity, the profits being calculated on the difference between the market price at the beginning of the account year and the sale proceeds. For the assessment year 1947 48, the relevant accounting year being the financial year 1946-47, it was found by the Income-tax Officer that the sale proceeds of the shares which the assessee had sold amounted to Rs. 5,49,487. The Income-tax Officer calculated the profits in the following manner:

Sale Proceeds Rs. 5,49,487

Cost Calculated on the basis of the market price of the shares at the beginning of the account year Rs. 4,50,822

Rs. 98,655

Less : Forward business loss Rs. 25,344

Net profit Rs. 73,321

The assesses then appealed to the Appellate Assistant Commissioner who enhanced the income of the assessee by a sum of Rs. 2,91,307 including a capital gain of RS. 37,590. The Appellate Assistant Commissioner proceeded on the footing that the profit earned by the assesses on the sale of the shares was the difference between the original cost price of the shares and the sale proceeds. He further held that some of the shares which were sold in the account year 1946-47 were the assessee s stock-in trade, while some other shares were her investment shares. Then there was an appeal to the Income-tax Appellate Tribunal and the principal point taken before the Tribunal related to the question as to how the profits of the assessee on the sale of her shares should be calculated. The Judicial Member of the Tribunal accepted the view expressed by the Appellate Assistant Commissioner and held that the original cost price of the shares must he taken in order to find out the profits which the assessee had made on the sale of the shares. The Accountant member agreed, however, with the view of the Income-tax Officer and held that the market value of the shares as on the date when they were converted into stock-in-trade by the assessee should be taken into consideration for the purpose of ascertaining the profits made by the assesses on the sale of those shares. On this difference between the two Members of the Tribunal, the matter was referred to the President of the Tribunal. The President agreed with the view of the Accountant Member. The Tribunal was then moved by the appellant to state a case to the High Court of Bombay on the question of law which arose out of the Tribunal s order, namely, what should be the basis of computation of the profits made by the assessee by the sale of her shares in the relevant year. The Tribunal came to the conclusion that the question as to when the assessee became a dealer in shares or when the assessee turned her investment shares into her stock-in-trade, was a question of fact, and the only question of law that arose was as to how the profit was to be computed. Accordingly, the Tribunal framed the question of law in the following terms:

"Whether the assessee s assessable pro