Commissioner of Income-tax, Bombay City I, Bombay v. Bai Shirinbai K. Kooka
1962. February 23. The Judgment of Das,
Kapur, Gajendragadkar, Suhbn, Rao, Wanchoo and
Ayyangar • .JJ., was delivered by Das, J., f3arkar, .J.
delivered a separate judgment.
S. K. DAS, J.-This is an appeal by special,
leave grante:! by this Court on Seotember 17, 195().
The Commissioner of Income-tax, Bombay, City I,
is the appellant before us. Tho respondent is Bai
Shiiinbai K. Kooka, who will be referred to in this
judgment as the assessee.
The assessee 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 year prior to April 1, 1945 ; but in
the assessment year 1946-47, the relevant account
ing year being financial year 1945-46, th" Income
ta:x 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 there
fore 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 bet
ween the ruling mar'.,et 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 1946-4 7, it was found
by the Income-tax Officer that the sale proceeds of
the shares which the assessee had sold amounted to . ' . ' - ' . ' . . . . ' .
.
1962
Commissioner oj
Ineome-1'ax1 Bombay,
City/
v.
Bai Sh;rinboi ](.
Kooka
DasJ.
962
Commi1Ji.tmtr of
f11tom4•tax, Bomba;·,
l'i(1 l
v.
Bai Shirinbai
K. Kocla
Das ,J.
394 SUPREME COURT REPORTs (1962) SUPP.
R's. 5,49,487/·. The Income.tax Officer caloulated
the prnfita in the following manner :
1iale proceeds Hs. 5,49,487
Cost calculaterl on the basis of
the market price of the shares
at the beginning of the account
year l{s. 4,50,82i
Less : Forward business loss
N'et profit
Rs. 98,655
Rs. 25,344
Hs. 73,321
The assessee then appealed to tho Appellate Assis·
tant Commissioner who enhanced the income of
the assessee by a sum of Its. 2,91,307 /- including a
capital gain of Rs. !H,5!l0/·. The Appellate Assis
tant Commissioner proceeded on the footing that
the profit earned by the assessee on the sale of
the shares was the difference between the original
cost price of the shares anr:l the sale proceeds. He
further held that the some of the shares which were
sold in the account year I 946.4 7 were tho assessee's
stock-in-trade, while some other shares were her
investment shares. Then, there WaB an appeal to
the Income-tax Appellate Tribunal and the princi·
pal point taken before the Tribunal related to tho
question as to how the profits of the assessee on
the sale of her share~ should ho calculated. The
Judicial Member of the Tribunal accepted the view
expressed by the Appellate Assistant Commissioner
and hold that the original cost price of the shares
must be taken in order to find out the profits which
the asseesee had mado on the sale of the shares.
The Aceonntant Member agreed, however, with the
view of the Income-tax Officer and held that tho
market value of. the shares as on the date when
-
3 S.C.R. SUPREME COURT REPORTS 395
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
assessee 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 'rribunal's order,
namely, what should be the basis of computation
of the profits made by the assessee by ·the sale of
lier shares in the relevant year. The Tribunal came
to the conclusion that the question as to when the
assessee became a dealer ill 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 profit on the sale
of shares is th!) difference between the sale
price and the cost price, or the difference bet
ween the sale price and the market price pre
vailing on 1-4-1945 ? "
The aforesaid question of law was then referred
the High Court of Bombay under s. 66(1) of the
Indian Income-tax Act, 1922 (XI of 1922). This
was Income-tax Reference No. 49 of 1955. The
reference was heard by a Division Bench
consisting of Chagla, C. J. and Tendolkar, J. By its
judgment and order d11ted March 6, 1956, the
High Court answered the question in favour
of the assessee and held that the assessee's
assessable proft .on the sale of shares was the
difference between the sale price and the market
price prevailing on April l, 1945. The appellant
having unsuccessfully moved th., High Court for a
19az
Commissioner oj
lncome~tax, Bombay,
Ci!JI I
v.
Bai Shirinb.ii
K. Kooka
DasJ.
1962
CommiHio1ur of
lrvorru-tax, Bombay,
City I
v.
Bai Shi1inbai
A. Koola
Dos J.
396 SVPREME COL'RT REPORTS [l!JG'?] SUPP.
certifieatc under s. fi6A (2) of the Income.fax Act,
applied for speci1d l1·ave to this Ct1urt. Such leave
was granted by this Court by an order dated Sep-
tember 17, l!J56. .
This appeal was he,trd in part by a Bench
of three ,Judges presided over by the learne1l Chief
Justice, who directed that it be posted for hearin.!!
before a Bench consisting of seven .Judges, pl'csum
ably becausfl one of the pointR ul'g<"l befol'e the
Bench was whether t.he majorit.v decision of this
Court in Sir K ik1.i,/11n'. PremchaiuJ, v. Com.miMicm<>r of
Income tax (Centrrzl), Bombay(') reqnir<'d rnconsider
ation. It mav h•' here stated thin the le:mwd .Jud
ges of the High Court lrnd before lh<~m the d1•ei"
sion in Kifob!ta.i's case (1) and they considered that
decision carefully and held that the decision •Could
be distinguished, firRtly, on the ground that the
problem which the High Court. had before it in the
present case was the content of tax•ible profits in
a commercial s .. nse out of the amount actually
received by the assessce by a sale of hor shares,
whereas t.ho problem in /{ifr1blv1.i case (') was of a
different nature, namely, whether it was open to
the dopart.ment to tax an as~esser' on a fictional sale
or potential pl'ofits, and, secondly, on the ground
that the prinoipl0 hid down i11 Kika.11/uti's case(')
had no a,pplication to a ca.~e where real or actual
profits, as disting1iished from fictional profits,
have to he alloen.tecl or 1itt.ribut.,d to the trading
activity: One of the points which we have to con
sider in this appeal is whether, on principle, the
distinction dr.-iwn by the High Court is <:OITPct or
whether the rntio of Kikabha1'.'s wsc (')should gov.
crn the present case,
As we have slated earlier, the problem is how
shoul<l the profit maclc hy the asscssee by a sale of
her shares as 11 trading activity be computed, it be
ing not in cl isputc t.hnt there was in thiR case a real
(I) [195i] S.C.R. 219.
-
..
-
-
3 s.c.R. SUPREME COURT REPORTS 397
sale resulting in actual profits. The High Court
first emphasised the point, which has not been con·
troverted before us, that in order to arrive at real
profits one must consider the accounts of the busi·
ness on commercial principles and construe pro
fits in their nmmal and natural sense, a sense which
no commercial man will misunderstand. It then
pointed out that what the shares cost originally to
the assessee at a time when she had no business or
trading activity, could not, in a commercial sense,
be said to be the cost of the shares to the business
which started on April 1, 1945, the original cost
was really a matter of historical record and it had
no relevance in the determination or ascertainment
of profits which the busir.ess made. Obviously,
· the whole of the sale proceeds or receipts could not
be trJated as profits and made liable to tax, for
that would make no sense a portion only of the
reueipts can be treated as profit· but what portion?
Normally, the commercial profits out of the trans
action of a sale of an article is the difference bet
ween what the 'lrticle costs the b11siness and what
it fetches on sale. The High Court pointed out
that when the assessee purchased the shares at a
lesser price, that is what they cost her, and not
the business; but so far as the business was concer
ned, the shares cost the business nothing more or
less than their market value on April I, 1945.
The learned Additional Solicitor General who
has appeared on behalf' of the appellant in this case
has contested the correctness of the above line of
approach. He has submitted, firstly, that the distin
ction drawn by the High Court between Kikabhai's
case (') and the present case is not warranted on
principle: secondly, he has contended that the
ratio in Kikabhai's case(') should apply in the pre
sent case also; and thirdly, he has contended that in
holding that the price of the shares should be the
market price as on April I, 1945, when the shares
were converted into stock-in-trade the High Court
(I) [19.>4] S.C.R. 219.
196Z
Commis~iontr of
Income-tax,
Bombay, City I
v.
Bai Shirinbai
K. Kooka
DasJ.
Colllmissiorur o I
T ncome-tax,
Bombay~ City I
v.
Bai Shirinbai
K. Kooka
DasJ.
\
I
398 SUPREME COURT :i;tEPORTfl [1962] SUPP.
in effect held by a legal fiction that the assessee
had realised the potential profits 011 the said shares
on that date· which she had not actually done and
henue the very basis of the judgment of the High
Court is vitiated by the assumption of a fiction.
The learned Additional Solicitor-General has also
submitted that there was no warrant for the High
Court to introduce a legal fiction that there was
a notional sale of the shares on April 1, 1945, by
the assessee and that the gains which accrued to.
the ass.essee on th1tt sale were capital gains; this
notional sale it is submitted, violates the basio prin
ciple th.at a man cannot sell to himself nor can he
make a loss or profit out of transactions with
himself.
Wii propose now to examine these arguments
in some detail. The question raised is a short ques
tion bu_t a difficult one. In orde.r to examine the
arguments urged on bflhalf of thi- appellant, it is
necessa,ry first to refer w the decision of this Court
in Kikabhai's case (1). +'he facts of that case were
these. The assessee there was.a dealer in ail ver
and shar:es and he maintained his accounts .accord
ing to the mercantile system and valued his stock
at cost price both in tho beginning and at the end
of. the year. Duriog the relevant accoi,mting · year
he withdrew some silver bars and shares from the
business and settleJ them on certain trusts in wb ich
he was the managing trustee an!l in his books of
account he credited the business with the cost price
of the silver bars and shares so withdrawn. The
income-tax authorities assessed him to tax ,on the
basis of the d.ifference between the cost priue of
the silver bars and shares and their market value
at the date of their withdrawal from the. business.
The High 'Court of Bombay upheld the actio1i of
the income tax authorities. This Court, however,
by a· majority decision came to the conclusion that
the asse$see 'fas entitled to value the silver ba.rs
\ll. ~!951) S. c, R. 219,
I
' .
..
-
3 S.C.R. SUPREME COURT REPORTS 399
and shares withdrawn at cost price and was not
bound to credit the business with their market value
at the close of the year for a80ertaining $.e ass
essable profits for the year. Bhagwati, iJ., who
expressed the dissentient view said that so far as
the business was concerned it made no difference
whether the stock-in-trade was realised or with·
drawn from the business and the business was enti·
tied to be credited with the market value of the
assets withdrawn as at the date of the withdrawal,
whatever be the method employed by the assessee
for the valun.tion of its stock-in-trade on hand at
the close of the year. The majority view was exp
ressed by Bose, J., who dealt with the two conten
tions of the learned Attorney General who appear
ed for the Revenue (respondent) in that case. Tho
Attorney General's first contention was that as the
silver bars and shares were brought into the busi
ness, any withdrawal of them from the business must
be dealt with along ordinary and well-known busi·
ness lines, namely, that if a person withdraws an
asset from a business he must account for it to the
business at the market rate prevailing at the date
of the withdrawal. This contention was repelled
by the majority on the ground that the transaction
of withdrawal was not a business transaction and
by the act of withdrawal the business made no pro·
fit or gain nor did it sustain a loss and the assess·
ee derived no income from it. It was pointed out
that the assessee, might have stored up a future
advantage for himself but as the transactions of
withdrawal were not business transactions anrl as
the assessee derived no immediate pecuniary gain,
the State could not tax them; for under the Income
tax Act the State has IlQ pewer to tax a potential
future advantage, all it can tax is income, profits
and gains made in the relevant accounting year. In
other words, the ratio of tha decision as respects tho
first contention of the learned Attorney· General
w~s that there was no general principle of t11-xatioq
1962
Commissio~r oj
IncOme .. tax.
Bombay, City f
•• Bai Shirinhai
K. Kooka
Das J.
1962
<Ammis!ioner of
lntoml-1~,
Bombay, f:1'J I
v.
Bai Sh;1inboi
K. Kooka
Das J.
-too st:i'REME cou1n· ItEPoRi's [i!J62J sui>r.
under income-tax law under which the State
could ai;scsa a peroon on the basis of business pro
fits that hu might have made tm ha.d not chosen
to mJ.ke. It was also pointed out that it was un
real and artificial to separate the business from its
owner and treat them as if they weie separate en
tities trading with each other and then by means of
a fictional sale introduce a fictional profit which in
truth and in fact was non-existent. It was pointed
out that a man could not trade with himself nor
could he make profit or loss out of transactions
with himself. The second contention of the lear
ned Attornl:\' General was that if tho act of with
drawal was at a time when the market price was
higher than the co;;t price then tho State was depri
ved of a potential profit. This contention was
dismissed as unsound because, for income-tax pur
poses each year is a self-contained accounting
period and one must take into consideration income,
profits and gains made in that year and tbu assess
ing autho1 ity wa.s not concerned with p.otential
pr-ifits which might be made in another year.
From what h1Ls been stated above it would
at once app•,,ar that Kikablwi's case (')was the con
verse of the present case. In K.ikabhai's wse ( 1) a.
part of the stoc:k·in-trade was withdrawn from busi
ness, there was no sale nor any 1Lctual • profit.
The ratio of the decision was simply this: under the
Income-tax Act tho State bas no power to tax a
potential future advantage and an it can tax is in
come; profits and gaius made in tho relevant account
ing year. [n the case under our consideration tho
admitted position is that there ba8 Leen a sale of
the shares in pursuance of a trading or business
activity and actual profits have resulted from the
salu. The question in the present case is not whether
the State has a power to tax potential future advan
tage, but thu question is how should actual profits
I() [1954] S, C.R. 2(9.
' /
3 S.C.R. SUPHEME COURT REPORTS 401
be computed when admittedly there has been a
sale in the business sense and actual profits have
resulted therefrom. We agree with the High Court
that in this respect there is a vital difference bet
ween the problem presented by Kikabhai's case (1)
and the problem in the present case. We further
agree with the view expressed by the High Court
that the ratio in Kikabhai's case (1) need not neces
sarily be extended to the very different problem
presented in the present case, not only because the
facts are different, but because there is an appiecia
able difference in the principle. The difference lies
in this : in one case there is no question of any
business sale or actual profits and in the other
admittedly there are profits liable to tax, but the
question is how the profits should be computed.
We must, therefore, overrule the first two argu
ments of the learned Additional Solicitor General
that the distinction drawn by the High Court bet
ween Kikabhai's case(') and the present case is not
warranted on principle and that the ratio of the
decision in· K ilcabhai's case (1) must necessarily apply
to the present case also.
While we are on this question we must refer
to a decision of the House of Lords in Sharkey v.
Wernher (')to which our attention has been drawn.
Briefly put, the facts of that case were these : the
wife of the assessee there carried on a stud farm,
the profits of which were agreed to be chargeable
to income-tax under case 1 of Schedule D. She·
also carried on the activities of horse racing and
training, which were agreed not to constitute trad
ing. Five horses were transferred from the stud
farm to the racing stables. The cost of breeding
these horses was debited to the stud farm accounts.
On the question of the amount to be 'credited as a
receipt the assessee contended before the Special
Commissioners that the proper figure to be brought
in respect !Jf the transferred horses was the cost of
(!) [1954] S.C.R. 219. (2) (1955) 36 T.C. 275.
J96Z
Commi•sioner of
l ncome-tax,
Bombay, Ciry I
•• Bai Shirin6ai
K. Kooka
Da1J.
196%
Commiasiorur 01
lncomt--tn.'1:0
Bombay, City I
v.
Bai Shirinbai
/\, Kooka
DtJJ J.
402 SUPREME coli.HT HEFORTfS [i!!1>2J SUPP.
breeding. The Crown contended that the market
value of the animalH, which was considerably higher,
was the proper figure. The Commissioners docided in
favour ufthc :is;;essee and the Crown demanded a case.
The case was first heard by Vaisey, J., who follow·
ing the decision in Watson liros. v. llornb!f (1), held
that the market value of the five horHes t.ransfPrTed
from the stud farm wa.s the proper figure that
should be credited in the accounts. VaiSl'\'. J. hai;ed
his decision on the ground that the oase' was indi
stinguishable in principle from an earlier decision,
namely, th~t ofMncna11htPn, .T.. in Watson Bros. v.
Hornby ('). Wo mav here Rlato that in w .. tson
Bros. v. llornliy (I) the :iFRf'SSt'e <'anied on the bu;i
ness of poultry brnetlers and dealers. In addition tu
keeping birds on their farm for laying purposes,
they had a hatchery which produced chicks primarily
for sale as 'day-old chicks'. Some of theso chicks
were transferred to brooder houses and bocame
part of the stock on the farm. The asscSBees were
assessed to income-tax under schedule Din respect
of the profits of tho hatchery part of tlicir business
and under Schedule H in respect of the profits of the
farm. Th(' question tl:at arose in that case was
whother tho day-old chicks transferred to the farm
should be eretlited as stock at the averagtc price at
which they were sold and could have been bought
in tho open market, namely, 4d. per chick, and that
the difference between that price and the admitted
cost of production of each saleable day-old chick,
7d., was an allowable loss. The Crown contended
that t.he hatchery and the farm were two activities
of the Harne person who could not make a loss by
tmnsferring from 0110 department to the other and
therefore the chicks should he credited to the
hatchery account at production cost. It was held
by Macnaghten, J ., that in the notional :;air bet
\Veen the hatchery and the farm, which should be
treated a8 separate entities, the price to be credited
was the "reasonable price" laid d.own by s. 8 of tho
(I) (1942) 2• T.C. 506.
I
--',
3 S.C.R. SUPREME COURT REPORTS 403
Sale of Goods Act, 1893, and that on t.he admitted
evidence this reasonable price must be the market
price of 4d. per chick. This was the decision which
Vaisey, J. followed. From the decision of Vaisey, J.
there was an appeal to the Court of Appeal. The
Court of Appeal referred to 1<wo of its own deci
sions, namely, Laycock v.· Free111an, Hardy &
Wills (I) and Briton Ferry St,eel Co, Ltd. v. Barry (2 )
and held that the principle stated and the reason
ing underlying the judgment of Sir Wilfrid Greene,
M.R. in the Briton Ferry Steel Co. Ltd. v. Barry (')
were inconsistent with the conclusion in Watson
Bros. v. Hornby('). The Court of Appeal accordingly
allowed the appeal. Sir Raymond Evershed, M.R.,
(as he then was) said, however, that if the matter
were res integra, he would have been inclined to
hold that for the purpose of the stud farm account
if one were seeking to put a value on the animals
transferred the .value must be that which the animals
were in fact worth. He expressed the view, ho11·
ever. that the matter was not res integra and as
a result of the authorities referred to above which
expounded the g@neral principle to be applied, he
allowed the appeal. The case was then taken to
the House of Lords. The House of Lords decided
in favour of the Crown, Lord Oaksey dissenting.
Viscount Simonds thus expressed his views in his
speech at page 299 of the report :
"B.ut it appears to me that when it has
been admitted or determined that an article
forms part of the stock-in-trade of the trader,
and that upon his parting with it so that it no
longer forms part of his stock-in-trade some
sum must appear in his trading account as
having been received in respect of it, the
only logical way to treat it is to regard it as
having been disposed of by way of trade. If
so, I see no reason for ascribing to it any
(I) 22 T,C. 288. (2) 23 T.C. 414.
(3) (1942) 24 T.C. 506.
1962
Commissioner of
lncome-T ax,
Bombqy, Ciry I
•• Bai Bhirinbai
K. Kooka
DasJ.
••
1962
Commis•Umtr of
1 1 :comc~ax,
Bombay, Ci'.J I
v,
lJoi Skirinboi
K. h.ooka
DuJ,
4-04 SUPRE:'lfE COURT REPORTS [I!l62] StJPP .
other sum than that which he would normally
have rcceiv•'d for it in the due course of trade,
that is to say, the market value. As I have
already indicated, \.here seems to me to L<i no
jm<tification for the only idternativc that has
been suggebted, namt•ly, the cost of produc
tion. The unreality of this alternative would
be plain to the taxpayer. If, as well might
happen, a very large service fee had been
paid so that the cost of production was high
and the market value did not equal it."
Lord Radcliffe pointed out that when a horse was
transfern·d from the otud farm to the owner's per
sonal account, there W[l.S a disposition of trading stock,
though the dispositi,m might not Le by way of
trade. He then referred to three methods of record·
ing the result of the disposition in the stud farm trad
ing accounts. One of them was that there might be
no entry of a receipt at all and Lord Radcliffe
pointed out that this method would give the self
supplier e.n unfair tax advantage. The sccor1d
method would be to enter the cost price; this again
would be fictional, because, no sale in the legal sen ,e
· had taken place, nor had there been any actual
receipt. The third method was to enter as a
receipt a figure equivalent to the current realisable
value of the stock item transferred. Lord Radcliffe
gave two grounds in favour of the third method.
The first ground was that it gave a fairer measure
of assessable trading profit as between one tax
payer and another, for it eliminated variations
which were due to no other cause than any one
taxpayer's 1lecisi()n as to what proportion of his
total product he would supply to himself. The
second ground was that it was better economics
to credit tho trading owner with current realisable
value of any stock which he had chosen to dispose
of without commercial disposal than to credit him
with an amount equivalent to the accumulated
expen808 in respect of that stock.
3 S.C.R. SUPREME COURT REPORTS 405
It is worthy of note that the faots in Sharkey
v. Wernher (1) were similar to the facts of Kikabhai.'s
case (2). In both those cases what had happened
was that a part of the stock-in-trade was withdrawn
·and the question was at what figure in the trading
accounts the withdrawal should be accounted for.
In Kikabhai's case (2) this Court. came to the conc]u.
sion that the withdrawal should be at the cost price.
In Sharkey v. Wernher (1) the house of Lords held
that the proper figure shL,nld be the market value
which g,1ve a fairer measuro of assessable trading
profit. It is significant that the House of Lords
reached that conclusion not witho .1t dissent. If the
facts of the case which we are now considering were
similar t:i the facts of Kikabhai's c.r.se (2), it might
have been necessary for us to re-examine the ratio
of the decision. It is necessary to state here, how
ever, that the decision of the House of Lords in
Sharkey v. Wernher (') is an authority which is
binding on us. It is only an authority of persuasive
value entitled to great respect.
In an earlier part of this judgment we have
taken pains to point out the distinction between
f(ikabhai's case (2) and the case under our considera
tion. In view of that distinction, we do uot think that
it is really necessary int he present case to re-examine
the ratio of the decision in Kikabhai's case (2 ). Whftt
then is the basis for computing the actual profits
in the present case ? We think that the basis mu't
be, as the High Court has put it, the ordinary com
mercial principles on which actual profits are com
.. puted. We think that the ar,proach of the High
Court was correct and norm illy the commercial
profits out of the transaction 1,f sale of an article
must be the difference between what the article
cost the business and what it fetched on sale. So
far as the business or tr:iding activity was coneer
ned, the market value of the shares as on April l,
(I) [1955] 36 T.C. 275. (2) [1954] S.C.R. 2/9,
••
1962
Cr•mmirsioner of
Income· Tax,
Bombay, City I
v.
Bai Shirin.bai
K. Kooka
Das J,
196t
Cnnmissitmtr 1}
I 11&111111-T ax,
Bombct)', Ci{1 I
v.
Bai Shiriniai
Ir. Koo.la
DuJ.
406 SUPREME COUR'l' REPORTS (1962] SUPP.
1945; was IVhat it costs the business. We do not
think that there is any question of a notional
sale here. The High Court did not create any legal
fiction of a sale when it took the market
value as on April I, 1945 as tho proper fignro for
determining the actual profits m11.de by the assessce.
That the assessec later sold the shares in pursuance
o( a trading activity was not in dispuu•; that sale
was an actual sale and not a notional sale ; that
actual sale resulted in some profits. The problem is
how should those profits be computed ? To adopt
the language of Lord Radcliffo, tlrn only fair
measure of assessing trading profits in such circum
stances is to take the market: value at one <'nd and
the actual sale proceeds at the other, the difference
between the two heing the profit or loss as the
case may be. Tn a traoing or commercial sense
this seems to us to accord more with realitv than
with fiction. •
For these rt>asons we hold that the answer
given by the High Court to the question of law
referred to It was correct. The appeal accordingly
fails and is dismissed with costs.
SARKAR, J.-Two qu<'stions arise in this
Appeal. The first is whethPr the judgment of the
Courc below is against the decision of this Court in
Sir Kikabhai Premdu111d v. Commissioner of In
come-tax.(') The second is, if so, does the decision in
Kikabhai's ca.se(l) require reconsideration? It appears
that in Sharkey v. Wernher(') where the question
was the same as in Kikahhai's case(') and which was
decided a little lator than that case, the House of
Lords took a view contrarv to 'that tiikcn in Kika
bhai's case. It was on the hasis of the reasoning
on which Sharkei/.~ case (') was founded that the
]llarncd advocate for the respondent contended that
Kikabhai's case requires reconsideration.
The assesaee in the present casu is a lady of
(l) [1954] s.c.R. 219; [1957] 23 [, T. R. 506.
(:!) [1956] A.C. 58; 361:.C· 2n. I
s.c.R. SUPREME COURT REPORTS 407
some means. For many year past she had been
holding various shares Ly way of investment on
the dividends of which she was being charged to
income-tax. In assessing the tax for the assess·
mentyear 1946-47, the accounting period of which
was the financial year 1945-46, it was found that the
assessee had been carrying on businesa with some
of the said shares sincu April, 1945. It is not in
dispute that in the accounting year 1 \!46-47 also,
which is the year with which we are concerned,
she carried on the business with various such
shares.
A question arose in connection with the
assessment of tax for 1946-4 7 as to how the profits ·
of her trading activities were to be ascertained.
'rhe trade was one of purchase and sale of shares.
It is common ground that the profits of such a trade
are the difference between what the thing sold
fetched and what it cost to arquire. The question
arose because difficulty was felt in fixing the cost
of acq 11isition. In regard to shares acquired by the
assessee for her trade afber sue started it, the posi
tion was not in controversy, for the cost in respect
of such shares was admittedly what he bought
them for. The controversy concerned the shares
with which she traded in this year and which, prior
to April 1, 1945, she had been holding ~-" invest
ment, having acquired them, it may be, quite ,1 few
years ago. The assessee contended t h<1t the cost
of acquisition of this latter variety of Hharcs-and
with these alone we are concerned in this appeal,
wa.s their market value on the date when she start
ed her business and thereby converted them from
investment into stock-m-trado of her bmiuess.
The State contended that the cost of acquisition of
these shares would be what she bought them for,
no matter when she bought them and for wh,1t
purpose. The Tribunal aecepted by a majority the
contention of the assessee. At the irn;tance of the
State the Tribunal then refoned the followin(;
1962
C ommis.rioner of
lncnrne~ Tax, Bnm.bay,
City I
v.
B"i Shirinbai .
K. Kooka
Sarkar J.
1!J62 •
Commissioner 11/
/~.tar, Bomb~,
C;ty I
v.
Bai Shirinhai
K Kook
Sarkar J.
408 SUPREME COURT REPORTS [1962) SUPP.
question to t.he High Court at Bombay under s.66( I)
of the Income-tax Act:
"Whether the asses.~eo's assessable profits
on th" sale of shares is the difference bet
ween the B<Lle price and the cost price, or the
· difference between the side price and the
market price prevailing on 1-4-1915"
The High Court held that the assessable profits
were the difference between the salo prico and the
market value of the shares prevr.ilin" on April
I, 1945. The State has filed this appa>tl~igainst the
decision of the High Court. ·
The Stato contends that tho High Court's
decision is against the judgment oft.his Court in
Kikabhai's case.(1). Thn.t is the first que;;tion which I
propose to diRcuss. The assessee in Kikabhai's case
was a dealer in shares ani! silver. Tho method
employed h.1· him in keeping his :wcounts was to
ent-Or the cost price of his stock at th" lwgi1111ing of
the year, to credit the sale proceeclo of the sto"k
sold during the year and value tho unHnld ~tock a.t
tho ond of the y1?ar at cost pricl\ these latter b1•ing
carried forward as the op.,ning entries of tho next
yea1·'s '~ccounts. It appe:mid that the asSl'SSt?e had
withdr:iwn somo 8ilvor aml shares from his business
and settled thC.Jl• upon ""rt11in trusts. In the ac
counts he ont.ered the silver and Hh<1res so with
drawn at tlrnir coot price. The St;;ite contP11rh•cl
that thes" should hwc [pen enter1_,rl in tho •1ccount8
at their market value on the datt? th'-'Y wen• with
drawn from tho business. This Court found this con
tention una"ccpt:i.blc am! held that tlwrntry sh1rnld
be of thn cost price irncl not of th" mark"t vaJ,ie on
that date.
It h;i.d been contended on Lehalf of the State
that "A~ this is a business, aay witlJ<lmwal of the
assct8 is 11 business m;i.tter :rnd thr, only feasible
way of regardiug it in a business light is to enter
(I) (195'!) $.C.R. 219; [1957] 231.T .R. 506,
l
3 S.C.R. SUPREME COURT REPORTS 409
the market price at the date of the withdrawal,"
and that "if a person withdraws an asset from a
business, he must account for it to the business at
the market rate prevailing at the date of the with
drawal." In dealing with these contentions this
Court observed, " It is impossible to get away-from
the fact that the business is owned and run by the
assessee himself. In such circumstances we are of
opinion that it is unreal and artificial to separate
the business from its owner and treat them as if
they were separate entities trading with each other
and then by means of a fictional sale introduce a
ficational profit which in truth and in fact is non
existent. Cut away the fictions and you reach the
position that the man is sup1iosed to be selling to
himself and thereby making a profit out of himself
which on the fact of it is not ouly absurd but against
all canons of mercantile and income-tax law."
'l'he decision in Kikabhai's case (1) was however
by a majority, Bhagwati J. having taken a cont
rary view. For the purpose of the present ques
tion I will have to confine myself to the judgment
or the majority.
It seems to me that the argument of the res
pondent in the present case is the same as that of
the Attorney-General in Kikabhai's case. She says
that she is entitled to debit the accounts of her
buAiness with the market value of the shares as on
the date of their conversion into stock-in-trade, that
is, April 1, ] 945. She can no doubt do that if she
had acquired them on that date, from the market.
But this she did not do. So she is compelled to
rely on a fictional nnrchase by her from herself at
the market rate of that date to sustain her conten
tion. Kikabhai's case definitely held that no one
can be supposed to be trading with himself for the
purpoRe of ascertaining taxable profits. A fiction
therefore that one has done so is not permissible.
To hold that the assessee is entitled to enter in the
(!) [1954] $.C.R. 219; [1957] 23 J.T.R. 5~.
1962
Commissioner of
Income-tax, Bombay,
City 1
v.
Bai Shirinbai
K, Kooka
Sarkar J.
196Z
Commisair'111'r of
lrieome-ta.:~.
BamboJ, City 1
•• Bai Shitinbai
K. Kooka
Sarkar J.
!10 S1JPRE:\IE COURT REPORTS [1962] SUPP.
ac~ounts of her busi1wss, the market va.lue of the
shar<'R on April I, 194:l. wou Ir! be to go directly
against the decision in Kikabhai's eaRe and the ratio
on which it waR based .
It was Raid that. Kikabhai's case dealt with a
fictional sale :mrl potential or not.ional profits
whnreas in the µreRent case then• was actual trading
in the shares and thn problem h"re is to ascertain
the profits of that tracle. I am 11ot sure that tho
diRtinction so sought to be made iH really possihll'.
Both the cases rle11.lt with the asscssm~nt of the
profit.~ of an cut.ire trading activity of a pcrRop.
There wore real profits in both ca"'R am! the
que,;tion in each was, how to a.~'1css them. The
difficulty in one case ii.rose beca1rne a part.ion Jar
stock acquired for the trade ha<I been withdrawn
from it and in the other, becau•e a particu la• sto~k
not acquired for the trade had bern us<'d for its
purposes. ThP- question in each case was, what
value was to be pnt on thn ;;tock concernorl for
assessing the profit,~ of the trade as a whole. It
would be incorrect to split up the entire tmdo and
to treat the <le;i.I in en.ch stock srparat.ely n.nrl I do
not think /(ifobhai'o wse (1) die! so. So consi<lered
tho Stat.o would have no ha.sis for Rny claim in
Kikabhai's case for then there would h~ve been no
business at all to t1ix. It was th..rcfon• that in
Kikahh<ii's cn.se the State contended that tho stock
had hl'Pn "brought into the business" :md on that
ha~is onlv could .. it :tdvance hy argument-. It was
t-his argriment advanc('d on. th~t hMis that. this
Court cnnsidercd and rejected, The Conrt did not
consider the profits of a pn.rticnlar item of trndc by
itself. So th11 Court did not consider 11olional
profits in the sen~n in<licated by the distinction now
sought to he made l>t'twc€'n .the t11·0 cases. The
present case is the sctme, for here n.lso the quc8tion
is what an: tho profits of the lt"i'eSRPt>'B entire trade,
that is, how is the cost price to he calculated for
(I) Ll954 \ S.C.R. 219; [1957] 23 I.T.R. 506.
3 S.C.R. SUPREME COURT REPORTS 411
th~t purpose ? Here al-io, if the sale of the invest
ment shares bv themselves was concerned there
wollld in all probability have been no trading and
no question of assessing the profits of such trading
would have arisen. Therefore b1th cases dealt with
the asso;;smcn_t of actual rrofits ; none was concer
ned with assessment of notional profits.
But suppose the two cases are different as
suggested, that does not seem to me to make any
distinction. In Kikabhai's case ( ') it had been held
that the withdrawal was not trading because a man
could not trad" with himself. In the present case
f,he assessee did no doubt trade by selling her shares
to a stranger. There was no fiction in this trade.
But when the assessee contends that in ascertaining
the profits of a trading transaction actually done
by her she should be permitted to value the stock
involved in that trading activity which she had not
acquired in the course of her trade at the market
value of the date of the commencement of that
trade,
She really says that she sh 1uld be allowed to
proceed on the basis of a fiction that she had pur
chased from herself on that date for she had not
then purchased it· at all. She would be asking us to
hold that which Kikabhai's case refused to hold. I
am unable to agree that in the case of a real sale
Kikabhai's case does. not forbid a dichotomy
between the owner of a business and the- business
itself for ascertaining the profits of that sale as the
assessee .wants us to do.
It was also said that to apply the principle
that one cannot trade with himself to the present
case would be overlooking the actual fact that
-money's worth was brought into the business. I am
·unable to appreciate this contention. There is no
overlooking of the money's worth brought in, for
(I) [1954] S. C.R. 219; (1957] 23 I. T. R. 506. '\
196B
Commissioner of
lncome--la1t,
Bombay, City I
v.
Bai Shirinbai
K. Kooka
1962
Commi••ion1r of
Income· a:r;
Bambay. City l
..
Roi Shirinbai
K. Kooka
Sari= J
412 SUPREME COURT ItEPORTS [1962] SUPP.
that money's \vorth is value at the cost at which the
stoek concerned was actually acquired from the
market, may be as an investment and not as a stock
in trade. I am un<1ble to appreciate h<Jw it c11,n ho
said that any money's worth would be overlookcd
whioh, I will assume. no businessm Ln will do in
oalnulating hid profits-if tho shares are not valued
at the market valu•J of the day on which they are
brought into the trade but are valued at thc> price
at which actually they had be"n previously acquired
by the assessee. The real question· is what were
the sharos' worth in monoy for calcult1ting the
profits. The contention of the respondent assumes
that the money's worth must be calcuhted as on
the date of the commencement of tho trade :ind
hence really begs the question.
Chagla, C.J. who delivered tho judgment of the
High Court, said that he did not undorstand Kika
bhai's m8e (')to mean that evon for the purpoRe of
accountancy or for the purpose of ascertaining
commercial profits it is not open to the court to
value the shares at the market price of the date on
which they wPre brought into the buHiness. I am
unable to agree. Accountancy, I suppose, is not
based on fiction but deals with realities. We a·•c
concerned with accountancy only for the purpo8e of
ascertaining commercial prolit8, and it was only for
that purpose that this Court held that you cannot
enter in your aeeounts the market value of goodA
on the fiotional basi8 that yon sold them to yourself.
Chagla. C .. J.. thought that Kikabhai's cas" wa~ not
dealing with commercial profits. I think that si11ee
that case wa8 considering profit" for income·tax
purposes it was not dealing with anything else. I
am also unable to 11grec with the view of Chagla,
C.J., that the ratio in tho decision of Kikahhai's case
has no application to the present caAe. The rntio
was that for the purpose of ascertaining tax1ible
profits it is not possible to conceive of one trading
(I) [1954] S. C.R. 219. [1937] 231. T. R. 506,
3 s.c.R. suPREME coURT REPORTS 413
with himself and it would apply here, for here also
taxable profits are being ascertained.
Chagla, C.J. observed· that what has to be
ascertained is what an article costs the business and
not the owner, but in Kilcabhai's case (') it was
expressly said that when the business is owned by
the assessee himself it is unreal to separate the
business from its owner and treat them as if they
were different entities trading with each other.
Chagla, C.J. also said that for Income-tax
purposes profits of a busine.is have to be und_erstood
in a wav that a man of business would understand
it. I a~ not aware that a commercial man must
compute profits on the basis of a fiction that he bas
bought from himself and cannot compute his profits
by deducting from the sale proceeds the price for
which he had actually acquired the goods.
Kikabhai's case said that you cannot assess
taxable profits on the basis of a fictional sale. If
you cannot do that, neither do I think can you
assess such profits on the basis of a fictional pur
chase in the market. And that is what the assessee
wants us to do.' I am for myself entirely nnable to
make any distinction between Kikabhai's case and
thfl present case .
. I have now to refer to Sharlcey's case (') and
examine whether on the reasoning on which it was
based it is necessary to reconsider Kikabhai's case.
That is the second question which arises in this case.
I do not find the reasoning of that case so strong as
to lead me to the opinion that the decision in Kika
bhai's case was wrong. I first note that one of the
learned Judges Lord Oaksey, took the same view as
was taken by this Court in Kikabbai's case. In
dealing with Sharkey's case I will be referring
to the judgment of the majority.
(I) [195•] s.c.R. 219, [1957] 23 LT.R. 506.
(2) (1956] A.C. 58 36; T.C. 275.
1962
Commissiune, of
Incom~.taJC,
Bomb2,Y, City I
Y.
Bai Bhiriribai
K. Kooka
Sarkar J.
1961
C-Orrmiissiorur of
Income-tax,
Bomiay, Cily I
v.
Bai Shirinbai
K. Kooka
Sarkar .J.
4i4 SUPREME COURT REPORTS (1962) SUPi>.
:N"ow, Sharkf'-y's r:ase (') also dealt with tho
withdrawal of assots from a taxable business. There
a lady owned two enterprises, one a stud farm the
incorne of which was liable to tax and another a
raeing establishment, which was recreational and
therefore not liable to tax. The lady transfcrT('d
some horses from the stud farm to the racing
establishment. In assessing the incomo of the stud
farm a question aroso as to wha.t valuP should be
put in its accounts for the horses transferred to the
racing establishment. It will be noticed that by
the transfer to the racing establishment of which she
was the owner, the lady had only withdrawn the
horses from her taxal.ile undertaking. The problem
there was therefore just the same as in K ikabhai's
Case(').
It was he Id by t.he House of Lords that the
valuo to lie put on the horses withdrawn frr·m th"
stud form was their market value at the date of the
transfer and not the cost incurred on them for
breeding and otherwise till the transfer. The House
of Lords observed that in Incomc-tax Law a dicho
tomy between the owner of a busiIJCSS and the husi
ness is possible and presum:ibly therefore trailing bet
ween the two could be conceived for t:ix purposes in
certain cases aud rl'ferred to some English authorities
in support of this view. [ will assume that such a
dichotomy is possibln in some cases but the question
is whether it is possible in a case like Sharkey's
case. On that question I <lo not find the House of
Lords giving any special reason to make that dicho
tomy. I also note that the House of Lords <lid not
dispute that as a gentffal rule the dichotomy cannot
be made.
Apart from the genera I observation mentioned
above the House of Lords based its decision on two
grounds. What the House of Lords thought strong
ly supportod its view first that since it was eonee
<ied before thorn that somo entry he.cl to be made
(ll [1956] A.G. 5B; 36 T .C. 275.
(2 [195+) S.G.R. 219; [1957) 23 I. T.R. 506•
r
. .
3 S.C.R. SUPREME COURT REPORTS 4i5
in respect of the horses withdrawn, and that
whether the entry was of the cost incurred for
breeding the horses transferred or of their market
value on the date of the transfer, the entry would
' in either case be fictional for they were not in fact
transferred at any of those prices and therefore it
was more real to enter the market value. Now, as
. Lord Radcliffe himself ·noted, the entry of the cost
price would really be cancelling the entry of the
cost in breeding the horses which had been made in
the accounts of the farms. He however found no
explanation why cancellation should take place. I
think it can be legitimately said that there is an
explanatibn and as was said in Kikabhai's case, that is
that the cancellation had to take place because
assets were withdrawn from the trade, unless entries
were made cancelling the cost of items of stock
brought into the trade when they were taken out of
the trade, the accounts would not give the real
picture of the profits of the actual trade.
A second reason which appears only in the
judgment of Lord Radcliffe is that if the market
value of the date of withdrawal is not entered, there
will be an inequitable distribution of the burden of
tax. 1 This is not very clear to me. Learned advo
cate for the assessee said that Lord Radcliffe was
contemplating the case of two traders who started
their business on the same day one of whom bought
his stock in trade from the market on that date, of
course· at the market value, and the other started
his business by converting what he was earlier hold
ing for his personal purpose, into stock-in-trade. It
was said that unless the latter was permitted to value
his stock in trade at the market rate on the date of
conversion, he would be subjected to a tax different
in amount from that of the tax on the former and
this would result in inequitable distribution of the
burden of tax~tion. Again I am not convinced
that this reasoning is conclusive. Take the case of
1962
Commissioner of
Jn.come· tax,
Bombay, Ci{)' j
v.
Bai ShirinbfJi
K. Kooka
Sarkar J •
1962
Commi•Jiontr of
lncom4·'4x,
Bomb41, CiJy I
v.
Boi Shir;11bai
K. Kool<a
Sarkar J.
4i6 Sl'PREME COURT REPORTs [1962] SUPP.
two traders. One by his shrewd business m<llhoc!
or by friendly contaots. or may he by moans not
\'ery creditable may on the same day acquire goods
necei;sary for hi8 trade at a much cheaper rate than
the ot.ll!'r. The profit;; of the two would then he
different. I do not imagine th11t any income·tax
law would find this objectionable. Furthermore, I
am not sure that this anxiety for au oquitable dis
trihtuion of the burden of tax justifies departure
from a cardinal rule which is accepted in many cases
in England also, that a man cannot be said to trade
with himself so as to make taxable profits.
Lord Raclcliffc n•ali"ed tho difficulty of tho
pr11hlem which .iie had to solve and said so. I do
not. think I will he wrong in saying that re put his
decision on the ground of tho best practical solution
of that difficulty. Tho majority judgment in Shar
key's case cloes not lead me to the conclusion
that our decision in /( ikabhai case ('} was
wrong. I respectfully prefer the view taken
in Kikahhai's c-1se and by Lord Oaksey in
Sharkr y'~ case('). Bhagwati, J. in his minority judg
ment in Kikabhai'" case hased himself on the argu
ments of the Attorney General. It is not necessary
to specificallv deal with his views for th('f/ have
been dealt with in that caHc and wit.h what have
been said there I am in completo agreement.
Before leaving Sharkcy's ca.se it would he of
some interest to point out th:it Lord Simonds did
not think that any distinction was possible between
the case that he had before him a.nd a case like t.he
ono now before us for ho said: "And so al8o, as I
have more tha.n once pointed out in this case, it is
conceded by the ta.x-payer that 8ome figure must
appear in the stud farm accounts as rPcci pt in res
pect of the transforrcd horses, though Lady Zia in
her capacity as transferee did not carry on a taxable
activity. In the samo way, it would, I suppcsc, bo
claimed that, if Lady Zia were to transfer or retrans·
fer a horse from her racing establishment to her
(I) [1954) s.c.R. 219. (2) [1956] A.C. 58; 36 T.C. 275.
-
3 S.C.R. SUPREME COURT REPORTS 417
stucJ. farm some figure would have to appear in the
stud farm accounts in respect of tha.t horse though
it cost her nothing to make the transfer: If it were
not so and she subsequently sold the transferred
horse and the proceeds of sale were treated as
receipts of the stud farm, she could justly
complain that she had been charged with a fictitious
profit."
In the course of arguments a case was sugges·
ted of a man who had inherited or received by way
of gift, a certain commodity with which after a lapse
of some time he started a trade. It was said that
it would be impossible 'in such a case to say that the
cost of acquisition of his stock-in-trade was nil and
the entire sale proceeds received by him in respect of
that thing in his trade were his profits. Now, it
seems to me that even if it were so, it would not
follow that his stock-in-trade had to be valued at
the date on which he started his trade with that.
So to hold would be against Kikabhai's case('). That
!;eing so, this illustration would only beg the question
and not prove that Kikabhai's case is wrong. I think
a businessman would in such a case enter into his
•tcco1mts as the price for which he acquired his stock
in-trade its value in the market on the date on which
he received it free. That would not involve going
11gainst Kikabhai's oase, for it would not be based
on a fictional trading by a man with himself. If
you cannot distinguish a business from its proprie
tor, then the cost of a thing for the purpose of the
business would be its value at the time the proprie
tor of the business acquired it. Such value from a
businessman's point of view would in my opinion
be the value for which he acquired it when he did
p,o for value, or its market value on the date of
acquisition, when he paid no value for it.
I would therefore allow this appeal and ans
wer the question framed by the Tribunal by saying
(I) (1954] S.C.R. 219· ,•
1962
Com,nission~r of
Income-lax,
Bornb<Jy City I
v.
Bai ·.S hirinbtti
K. Kooka
Sa1kar J,
1962
CommiJsioner ef
Jncem,•lax
Bomb'!)' Ci17 l
v.
B•i S;irU..«i
K. 1'111:•
Satf.ar .1.
'
418 SUPREME COURT REPORTS (1962] SUPP.
that the a;;sessee's Taxable profits on the sale of
the shares earlier held as investment are the diffe
rence bet\rncn the sale price and the cost price, that
is, the price at which she ha.<l actually bought those
shares.
BY COl7RT : In accordance with the opinion
of the majority, this appeal is dismiBSed with
costs.
Appeal dismi8sed.
--
1962 S. S. MUNNA LAL
Ft6t11t1Ty 2.1. v.
S. S. RAJKUMAR AND OTHERS
(S. K. DAS, M. HmAYATULI,AH a.nd J.C. S1uH, JJ.)
Hindu Lau.~.Jai11s-Adoption-1Vidow, if can odopt without
express authority of husband-l'rrliminary decree. for partition
dr:clarinu u·idotti's sharr-JJ'hrther share ''possr.ssed" by widow-
Death of u·i1lou,•-/f shrzrr rpt;('.r/s to es/11.l"-llindu ,'-;ucces.riion
Act, I:9;iG (30 of J95G), ss. 4, U, J/i ond 16.
· G, a Digambcr Jain of the Porwal sect, died in 1934
leaving behind his widuw Smt. K, his son G who died in 1939
and three grandsons M, P and R. In 19j2 M's son S filed a
suit for partition of the joinr family properties. Rajkumar,
c1aiming to b~ a son of P adoptr-d by his widow, claimed a
I/4th share in the joint family property. The adoption was
challenged on the ground that no express authority had been
gi\'en by P to his widow to adopt. The trial court held that
no express authority \vas required by a son less Jain widow to
adopt a son and that the adoption was duly and properly
made. .\ccorciingly. a preliminary dec~e declaring the
shares of Smt. K, the branch of M, the branch of R and of
Rajkumar to he lf4th each was passed. Mand others pre
ferred an appeal to the Iligh Court mainly against the
findings on the question of adoption. During the pendcncy
of the appeal, the Hindu Succession ,\ct, 1955, came into
force. Shortly thereafter Smt. K died. The High Court
upheld -:.he decision of the trial court on the question of the
adoption of Rajk11mar. With respect to the share of Smt. K
the High Court held that her interest declared by the prelimi·
nary decree \Vas inchoate, that she never bcca1ne "possc.ssed"2