The notional profits, so far as they concerned the Bikaner stock of silver, accrued or arose at the place and at the time where and when the valuation was made, which was in Calcutta.

Headnote:
INCOME TAX - Assessment - Stock-in-trade - Valuation - Appreciation in value of stock-in-trade lying out of British India - Whether assessable to tax - Indian IT Act, 1922, ss. 4(1)(b), 14(2)(c).
Fact of the Case:

The assessee, a registered firm, was resident and ordinarily resident in British India, but the partners were non-residents. The firm carried on business as bullion dealers in Calcutta and kept its accounts on a mercantile basis. During the accounting year, the firm sent 582 bars of silver to the two partners at Bikaner, each receiving 291 bars, and the silver remained with them there without being sold or brought back to Calcutta. A portion of the silver was sent from the firm's stock-in-trade, but by far the larger portion was purchased in the market in Calcutta and Bombay and then despatched to Bikaner. In the books of the firm, the goods were shown as sold to partners in the silver account. The ITO, however, held that the entries in the books of account were a mere camouflage, intended to reduce the firm's profits in British India. In his opinion, the silver sent to Bikaner and lying there remained a part of the stock-in-trade of the firm and accordingly the firm was liable to be assessed on any appreciation of its value that might be found to have occurred on a valuation at the closing date of the accounting year. The Tribunal upheld the ITO's decision.
Finding of the Court:

The Court held that the notional profits, so far as they concerned the Bikaner stock of silver, accrued or arose at the place and at the time where and when the valuation was made, which was in Calcutta. The Court further held that the assessee was not entitled to raise the point that there was no appreciation or profit at all, because the assessee was entitled to value the stock at cost price and if he did so, there would be no profit, as this point was not covered by the question referred to the Court.
Issues: Whether the appreciation in value of the stock-in-trade lying out of British India was assessable to tax.
Ratio Decidendi: The Court held that the income represented by the appreciation did accrue or arise in British India. The Court reasoned that the source of the profit was the valuation and its suits is where the valuation is made. What is valued is the firm's business, at the site of the firm, and all the stock-in-trade of the firm is necessarily drawn into the valuation, wherever they may be physically situated. The profit which is the result of the stock valuation of a business is thus sui generis, a type by itself to which the ordinary notions of a physical accrual will not apply. It comes into existence when the valuation is made and since it arises out of the valuation, it arises in respect of the whole stock-in-trade, at the site of the firm whose stock-in-trade is being valued, irrespective of where parts of the stock-in-trade may be.
Final Decision: The Court answered the question referred in the affirmative, holding that the Commissioner was entitled to the costs of the reference.

Judgment

CHAKRAVARTTI, J.

1. THE question involved in this reference is almost a conundrum. It arises out of the following facts : THE assessee M/s Chainrup Sampatram is a registered firm constituted of two partners, Sumermull and Budhmull, who are brothers and hold equal shares. THE firm is resident and ordinarily resident but the partners are non-residents, being residents of Bikaner. I should rather say that they were non- residents in the year of account which was 1998 R. N., because to say at the present time that a person residing at Bikaner is non- resident will be inappropriate. THE firm had its place of business at 9, Armenian Street, Calcutta, and carried on business as bullion dealers, dealing mainly in silver. THE method of accounting followed by the firm is the mercantile method. For the accounting year 1998 R.N., the firm returned an income of Rs. 1,16,297 for income-tax purposes, of which Rs. 73,652 was shown as income from business. THE same income was returned for excess profits tax purposes. THE ITO, however, added a sum of Rs. 2,20,887 as the excess arising from the valuation of a part of the firm's stock-in-trade in silver which, though belonging to the firm, had been removed and was lying out of British India at Bikaner. THE total income determined by him was Rs. 3,37,403 and he assessed the firm on that income under s. 23(3), read with the second proviso to s. 23(5).

2. THE question involved in this reference relates to the inclusion of the aforesaid sum of Rs. 2,20,887 in the firm's income of the asst. yr. 1942-43 and it is therefore necessary to state how it came to be included. THE amount represents the difference between the cost price of 582 bars of silver and their market price at the close of the accounting year, the latter being computed in accordance with the rate prevailing in Calcutta. These 582 bars were, during the year of account, sent by the firm to the two partners at Bikaner, each receiving 291 bars, and the silver remained with them there without being sold or brought back to Calcutta. A portion of the silver was sent from the firm's stock-in-trade, but by far the larger portion was purchased in the market in Calcutta and in Bombay and then despatched to Bikaner. In the books of the firm, the goods were shown as sold to partners in the silver account. THE ITO, however, held that the entries in the books of account were a mere camouflage, intended to reduce the firm's profits in British India. In his opinion, the silver sent to Bikaner and lying there remained a part of the stock-in-trade of the firm and accordingly the firm was liable to be assessed on any appreciation of its value that might be found to have occurred on a valuation at the closing date of the accounting year. As the firm itself had valued its remaining stock of silver at the market price ruling in Calcutta, the ITO adopted that price for the Bikaner stock as well. THE appreciation was determined by him at Rs. 2,20,887.

In due course the assessee appealed to the AAC and then to the Appellate Tribunal, but without any success before either authority. The only objections urged on its behalf were, first, that the sales to the partners ought to have been held to be genuine; secondly, that in any event the valuation of the Bikaner stock at cost price ought to have been allowed; and thirdly, that even if market price was taken, there was no justification for taking the market price ruling in Calcutta for the stock lying at Bikaner. These objections were all repelled and do not survive. On the first question the Tribunal held that the fact of the matter was that the assessee had removed its valuable stock-in- trade to Bikaner in 1942 when there was a great panic in Calcutta owing to the fear of a Japanese invasion and that it was now putting forward a false story of sale to the partners with the obvious object of reducing its profits and avoiding the consequence of a rise in the price of silver.

3. IT will be seen from what I have

Click Here to Read the rest of this document

1951 Supreme(Cal) 150

High Court of CalcuttaChakrabarti, Das, Gupta, JJ.Chainrup Sampatram – AppellantVersusCommissioner of Income Tax – RespondentIT Ref. No. 7 of 1947Decided On : Jun 04, 1951

The notional profits, so far as they concerned the Bikaner stock of silver, accrued or arose at the place and at the time where and when the valuation was made, which was in Calcutta.

High Court of Calcutta
Chakrabarti, Das, Gupta, JJ.
Chainrup Sampatram – Appellant
Versus
Commissioner of Income Tax – Respondent
IT Ref. No. 7 of 1947
Decided On : Jun 04, 1951