SIR KIKABHAI PREMCHAND vs. COMMISSIONER OF INCOME TAX (CENTRAL), BOMBAY.

CIVIL APPEAL No. 144/1952Supreme Court[1954] 1 S.C.R. 21909 October 1953Bench: 5 JudgesAuthor: M. PATANJALI SASTRI, SUDHI RANJAN DAS, VIVIAN BOSE, GHULAM HASAN, NATWARLAL HARILAL BHAGWATI SUPREME COURT REPORTS17 pages
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What did the Supreme Court hold?

The Supreme Court, in a majority decision (Patanjali Sastri C.J., S.R. Das, Vivian Bose, and Ghulam Hasan JJ., with Bhagwati J. dissenting), held that the assessee was entitled to value the withdrawn stock at cost price. The Court reasoned that for income tax purposes, each year is a self-contained accounting period, and only income, profits, and gains made in that year are taxable. Potential future profits are not taxable. The withdrawal of assets was not considered a business transaction, and as such, the business made no profit or gain, nor did it sustain a loss, and the assessee derived no immediate pecuniary gain. Therefore, the state could not tax these transactions. The Court found the revenue's argument that the business should be credited with the market price to be unsound in this context. The operative direction was that the appeal be allowed, and the High Court's judgment be set aside.

What were the facts?

The assessee, Sir Kikabhai Premchand, dealt in bullion and shares and maintained accounts using the mercantile system. He valued his stock at cost price at the beginning and end of each year. In the accounting year 1942, he withdrew silver bars and shares from his business and settled them in three trusts, where he held a reversionary life interest. He credited his business accounts with the cost price of these withdrawn assets. The revenue contended that the business should have been credited with the market price of these assets on the date of withdrawal. The High Court of Bombay upheld the revenue's view. The assessee appealed to the Supreme Court.

What were the issues?

1. Whether the assessee was entitled to value withdrawn stock-in-trade at cost price, or was he bound to credit the business with the market price on the date of withdrawal, for the purpose of ascertaining assessable profits for the year, under Section 13 of the Indian Income-tax Act, 1922? Assessee's contention: The assessee argued that the withdrawal of stock was not a business transaction, and therefore, it resulted in neither income nor profit or gain to him or his business. He contended that he was not bound to credit the business with the market price. He relied on the principle that a person cannot be compelled to make a profit and that if the assets had remained unsold or were sold at cost, the state could claim nothing. Revenue's contention: The revenue, represented by the Attorney-General, argued that any withdrawal of assets from a business must be accounted for at the prevailing market rate on the date of withdrawal, irrespective of the owner's status. They further contended that if the market price was higher than the cost price at the time of withdrawal, the state was deprived of potential profit. They cited In re Chouthmal Golapchand and In re Spanish Prospecting Co. Ltd.

Which sections of the Income-tax Act were involved?

Section 13

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S.C.R. SUPREME COURT REPORTS 219 SIR KIKABHAI PREMCHAND v. COMMISSIONER OF INCOME TAX (CENTRAL), BOMBAY. PATANJALI SASTRI C.J., s. R. DAS, VIVIAN BOSE, GHULAM HASAN and BHAGWATI JJ.

Indian Income-tax Act (XI of 1922), s. 13-Ascertainment of 2)rofits-Assessee adopting mercantile system rind valuin(J stock at cost price at begimiing and close of each yerw·-Withdrawal of stock from biisiness-Whether business should be credited with mnrket price on date of withdrawal..

The assessee who carried on business in bullion and shares kept accounts in the mercantile system and the method adopted by him for ascertaining his profits was to value stock at the beginning and close of each year at cost price. In the accounting year he withdrew some silver bars and shares from the business and settled them in trusts, and in the accounts of the business he valued them at the close of the year at cost price: Held, per PATANJALI SASTRI C. J., S. R. DAS, VIVIAN BOSE and GHULAM HASAN ,J.T. (BHAGWATI J. dissenting)-that the assessee was entitled to value them at cost price and was not bound to credit the business with their market price at the close of the year for ascertaining his

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