COMMISSIONER OF INCOME TAX, PATIALA vs. M/S. GROZ BACKERT SABOO LTD.

CIVIL APPEAL No. 1482/1972Supreme Court[1979] 2 S.C.R. 37122 November 1978Bench: 2 JudgesAuthor: P.N. BHAGWATI, V.D. TULZAPURKAR7 pages
AI SummaryDismissed

What were the facts?

For the assessment year 1962-63, the assessee, M/s. Groz Backert Saboo Ltd., received raw materials and semi-finished needles as a gift from its West German collaborators. On September 30, 1961, the assessee debited Rs. 44,448.20 to 'wire and strip' and Rs. 30,000 to 'Semi-processed needles', crediting corresponding 'Gift Accounts'. These materials were used in manufacturing finished products, and sale proceeds were credited to the trading account. On March 31, 1962, the assessee transferred these amounts to a 'Capital Reserve Account', debiting the trading account by Rs. 74,448.20, thereby reducing its profit. The Income Tax Officer and Appellate Assistant Commissioner disallowed this debit, viewing it as an improper deduction as no money was expended. The Tribunal affirmed this view. However, the High Court, on reference, held in favour of the assessee, stating the value could not be treated as revenue receipt or income, or was exempt under Section 10(3) of the Income Tax Act, 1961.

What did the Supreme Court hold?

The Supreme Court held that when an assessee converts capital assets received as a gift into stock-in-trade, the taxable profit must be determined by deducting the market value of these assets at the date of conversion into stock-in-trade from the sale proceeds, as this represents the cost to the business. The original cost to the assessee was nil, but their market value on September 30, 1961, was Rs. 44,448.20 for 'wire and strip' and Rs. 30,000 for 'Semi-processed needles'. These amounts, debited to the respective stock accounts, correctly represented the cost to the business. The Court applied the principle laid down in Commissioner of Income Tax v. Shirinbai Kooka and Commissioner of Income Tax v. Hantepara Tea Co. Ltd. The nomenclature of the accounts used for initial credit entries was held to be immaterial; what was decisive was that these amounts were debited to the stock accounts at their real value on the date of conversion. Therefore, the aggregate amount of Rs. 74,448.20 was rightly debited to the trading account and was deductible in determining the profit of the business. The appeal was dismissed.

What were the issues?

1. Whether, when an assessee converts capital assets received as a gift into stock-in-trade and deals in them, the cost to the business for determining taxable profit is nil, or its market value at the date of conversion? (Question of law turning on the interpretation of principles of income computation). Assessee's Contention (as inferred from High Court's decision and the Supreme Court's affirmation): The value of gifted goods, when converted into stock-in-trade, should be considered at their market value on the date of conversion, representing the cost to the business, and this amount is deductible from sale proceeds to determine taxable profit. Revenue's Contention (as inferred from IT Officer, AAC, and Tribunal's decisions): Since the goods were received as a gift, their cost to the assessee was nil, and therefore, no amount was deductible in respect of their value from the trading account. 2. Whether the entries made by the assessee in its books of account, reflecting the market value of gifted materials as stock, correctly represent the cost to the business for profit computation? (Question of mixed law and fact turning on accounting treatment and its legal implication). Assessee's Contention: The entries clearly show the market value of the materials as the cost to the business, which is deductible. Revenue's Contention: The subsequent transfer to a 'Capital Reserve Account' indicates the nature of the transaction, and the initial debit to the trading account was incorrect.

Which sections of the Income-tax Act were involved?

Section 10(3)

AI-generated summary — verify with the full judgment below

-~ 371 COMMISSIONER OF INCOME TAX, PATIALA v. M/s. GROZ BACKERT SABOO LTD.

November 22, 1978 (P. N. BHAGWATI AND V. D. TuLZAPURKAR, JJ.] Taxable Profits-Computation of taxable property, when an assessee con- verts his capital assets received as gift, into stock-in-trade and starts dealing in them, explained.

During the assessment year 1962-63, the corresponding accounting year being the financial year ending 31st March, 1962, in respect of goods partly of raw materials and partly of semi-finished needles gifted by their colla- borators in West Germany, the respondent assessee made entries in their books of account for the first time on 30th September 1961, as follows : Rs. 44.448.20 debited to the account of 'wire and strip' and credited to the 'wire and strip Gift Account' and Rs. 30,000 debited to the account of 'Semi-processed needles' and credited to the 'Semi-proce:-.sed Needles Gift Account'.. The assessee utilised these goods in the manufactura of finished products and sold the same in the market and the sale proceeds received by the asiessee \Vere credited in the trading account maintained in the books llccount of the business, since they r

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 10(3)

All 54 judgments and leading authorities on Section 10(3) →

Recent GST High Court judgments

Search GST case law →