COMMISSIONER OF INCOME-TAX, BOMBAY CITY I, BOMBAY vs. BAI SHIRINBAI K. KOOKA

CIVIL APPEAL No. 133/1958Supreme Court1962 INSC 6923 February 1962Bench: 7 JudgesAuthor: S.K. DAS, J.L. KAPUR, P.B. GAJENDRAGADKAR, A.K. SARKAR, K. SUBBA RAO, K.N. WANCHOO, N. RAJAGOPALA AYYANGAR28 pages
AI SummaryDismissed

What did the Supreme Court hold?

The majority of the Supreme Court (per Das, Kapur, Gajendragadkar, Subba Rao, Wanchoo, and Ayyangar, JJ.) held that the profits from the assessee's business or trading activity must be computed on the basis that the market value of the shares as on April 1, 1945, was the cost price for the business. The reasoning was that the basis must be the ordinary commercial principle on which actual profits are computed, and commercially, profits from a sale are the difference between what the article cost the business and what it fetched on sale. The Court distinguished this case from Sir Kikabhai Premchand, stating that the latter dealt with potential future advantages and the unreal separation of business from its owner, whereas the present case involved actual profits from a trading activity. The Court found this approach more in accord with reality than fiction. The ratio is that when an asset is converted from investment to stock-in-trade, its market value on the date of conversion should be considered its cost for computing business profits. The appeal was dismissed. Justice Sarkar, in his dissenting opinion, held that taxable profits should be the difference between the sale price and the actual purchase price, governed by the principles in Kikabhai's case, and that a fictional sale to oneself on April 1, 1945, was not permissible. He did not approve of the decision in Sharkey v. Wernher.

What were the facts?

The assessee, Bai Shirinbai K. Kooka, initially held shares as an investment, purchased at a cost lower than their market value on April 1, 1945. Her dividend income from these shares was taxed. In the financial year 1945-46, she converted these shares into her stock-in-trade and commenced a business in shares. For the assessment year 1946-47, her income was computed based on profits from this trading activity. The Income-tax Officer calculated profits using the difference between the ruling market price at the start of the accounting year and the sale proceeds. For the assessment year 1947-48, sale proceeds amounted to Rs. 5,49,487. The Income-tax Officer calculated profit as Rs. 98,655 (sale proceeds minus market value on April 1, 1945), with a net profit of Rs. 73,321 after deducting a forward business loss. The Appellate Assistant Commissioner enhanced the income, treating the profit as the difference between the original purchase cost and sale proceeds, distinguishing between stock-in-trade and investment shares. The Income-tax Appellate Tribunal had differing opinions, leading to a reference to the President, who agreed with the Accountant Member's view that market value on conversion to stock-in-trade should be used.

What were the issues?

1. Whether the profits from the sale of shares, which were converted from investment to stock-in-trade, should be computed based on the market value of the shares on April 1, 1945 (the date of conversion to stock-in-trade), or the original purchase price of the shares. Assessee's contentions: The assessee argued that the cost price for computing profits should be the market value of the shares at the beginning of the year when she started the trading activity, i.e., on April 1, 1945. This aligns with ordinary commercial principles for calculating actual profits. Revenue's contentions: The Department contended that the cost price of the shares should be the actual price for which they were purchased by the assessee, irrespective of when they were bought or for what purpose. They relied on the Supreme Court's decision in Sir Kikabhai Premchand v. Commissioner of Income-tax (Central), Bombay, which they argued governed this case.

Which sections of the Income-tax Act were involved?

Section 10

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3 S.C.R. SUPREME COuRT REPoRTS 391 tenant, the entry being "Tekan and others, Gairmau- rasian first through G~neshi Gair Maurasi second- half. The appellant is thus a tenant of the land of which he has taken lease and cannot be a landowner. keeping in view the definition of that term in the Act and in the Punjab L.and Revenue Act. The appeal therefore fails and is hereby dismissed with costs.

Appeal dismissed. COMMISSIONER OF INCOME-TAX, BOMBAY CITY I, BOMBAY v. BAI SHIRINBAI K. KOOKA (S. K. DAS, J. L. KAPUR, P. B. GAJENDRAGADKAR, A. K. SARKAR, K. SuBBA RAo, K. N. WANCHOO and N. RAJAGOPALA AYYANGAR, JJ.)

Income-tax-Profits-Shares purchased by assessee for investment-Sales of Shares subsequently as trading activity- Oomputation of profit.

The assessee purchased shares by way of investment in 1939-40 at a cost price which was much less than their market value on April I, 1945. Her dividend income therefrom was assessed to income tax. In the financial year 1945-46 the assessee converted these shares iuto her stock-in-trade and carried on business in the shares. Per income for the assessment year 1946-47 was computed on the basis of the profits which she made

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