{"id":152058,"date":"1978-11-22T00:00:00","date_gmt":"1978-11-21T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-groz-backert-saboo-ltd-on-22-november-1978"},"modified":"2015-02-06T17:37:52","modified_gmt":"2015-02-06T12:07:52","slug":"commissioner-of-income-tax-vs-ms-groz-backert-saboo-ltd-on-22-november-1978","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-groz-backert-saboo-ltd-on-22-november-1978","title":{"rendered":"Commissioner Of Income Tax, … vs M\/S. Groz Backert Saboo Ltd on 22 November, 1978"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income Tax, … vs M\/S. Groz Backert Saboo Ltd on 22 November, 1978<\/div>\n
Equivalent citations: 1979 AIR 376, \t\t 1979 SCR (2) 371<\/div>\n
Author: P Bhagwati<\/div>\n
Bench: Bhagwati, P.N.<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME TAX, PATIALA\n\n\tVs.\n\nRESPONDENT:\nM\/s. GROZ BACKERT SABOO LTD.\n\nDATE OF JUDGMENT22\/11\/1978\n\nBENCH:\nBHAGWATI, P.N.\nBENCH:\nBHAGWATI, P.N.\nTULZAPURKAR, V.D.\n\nCITATION:\n 1979 AIR  376\t\t  1979 SCR  (2) 371\n 1979 SCC  (1) 340\n\n\nACT:\n     Taxable Profits  Computation of  Taxable property, when\nan assessee  converts his  capital assets  received as gift,\ninto stock-in-trade and starts dealing in them, explained.\n\n\n\nHEADNOTE:\n     During the\t assessment year  1962-63, the corresponding\naccounting year\t being the financial year ending 31st March,\n1962, in respect of goods partly of raw materials and partly\nof semi-finished  needles gifted  by their  collaborators in\nWest Germany,  the respondent assessee made entries in their\nbooks of  account for the first time on 30th September 1961,\nas follows:  Rs. 44.448.20  debited to\tthe account of 'wire\nand strip' and credited to the 'wire and strip Gift Account'\nand Rs.\t 30,000 debited\t to the\t account of  'Semi-processed\nneedles' and  credited to  the 'Semi-processed\tNeedles Gift\nAccount'.  The\t assessee  utilised   these  goods   in\t the\nmanufacture of\tfinished products  and sold  the same in the\nmarket and  the sale proceeds received by  the assessee were\ncredited in  the trading  account maintained  in  the  books\naccount of  the business,  since  they\trepresented  revenue\nreceipts arising  from the sale of the finished products. On\n31st March  1962, the  assessee closed\tthe above  two gift,\naccounts  by   transferring  the   respective  sums  of\t Rs.\n41,448.20 and  Rs. 30,000\/-  to the  credit of\tthe 'Capital\nReserve Account'  and  debited\tthe  aggregate\tsum  of\t Rs.\n74,448.20 to  the trading  account by  making  corresponding\ncontra credit  entries in  the accounts\t of 'wire and strip'\nand 'Semi-  processed Needles'.\t The  net  effect  of  these\nentries was  that the  profit of the assessee was reduced by\nRs. 74,448.20.\tThe income-tax officer, in the course of the\nassessment of  the assessee to income tax for the assessment\nyear 1962-63  took the\tview that the debit of Rs. 74,448.20\nwas wrongly  made in  the trading  account as on 31st March,\n1962 since  no monies  were  expended  by  the\tassessee  in\nacquiring the  raw-materials and  semi-finished needles, but\nthey were  received by\tway of\tgift from  the\tWest  German\nCollaborators and  hence no amount was deductible in respect\nof the\tvalue of these goods. The same view was taken by the\nAppellate Assistant  Commissioner in  appeal and  on further\nappeal, the  Tribunal also  affirmed the  same view. But the\nHigh Court  on a  reference at the instance of the assessee,\nheld that  the value  of these goods could not be treated as\nrevenue receipt\t because they  `had been  received by way of\ngift and  in any  event, even  if they\tconstituted  revenue\nreceipt, they  could \"in no sense be income\" since they were\ntaken out  of the  ambit of taxability by sub-section (3) of\nsection 10  of the  Income Tax\tAct, 1961.  The\t High  Court\naccordingly answered  the questions referred by the Tribunal\nin favour  of the  assessee and\t against  the  Revenue.\t The\nRevenue thereupon  brought the\tpresent appeal\twith special\nleave.\n     Dismissing the appeal, the Court\n^\n     HELD: 1.  The cost\t of raw\t materials and semi-finished\nneedles received  by the  assessee from\t their\tWest  German\nCollaborators and  introduced in  the books  of the business\ncould not be said to be 'nil\", but it would\n372\nbe their  market value\tas on 30th September 1961. They were\nreceived by  the assessee as capital assets and subsequently\ntransferred to the business as part of its stock. [375E-G]\n     Commissioner of  Income  Tax  v.  Shirinbai  Kooka,<\/a>  46\nI.T.R.\t(S.C.)\t 61;  and  Commissioner\t of  Income  Tax  v.\nHantepara Tea Co. Ltd I.T.R. (SC)<\/a> 258; applied.\n     2. Where  an assessee  converts his capital assets into\nstock-in-trade and  starts  dealing  in\t them,\tthe  taxable\nprofit on  the sale must be determined by deducting from the\nsale proceeds  the market  value at  the date  of their\t con\nversion into stock-in-trade (since this would be the cost to\nthe business)  and not\tthe original  cost to  the assessee.\n[375G-H. 376A]\n     In the  instant case,  the original  cost of these raw-\nmaterials and  semi-finished needles  to  the  assessee\t was\nundoubtedly nil\t because these\tgoods were  received by\t the\nassessee from  the West\t German Collaborators  free of cost,\nbut they  were introduced in the business and converted into\nits stock  on 30th  September, 1961  and,  therefore,  their\nmarket value  as on  30th September 1961 would represent the\ncost to\t the business  and that\t would have to be taken into\naccount in  determining the  profit arising from the sale of\nthe manufactured  products. The entries made by the assessee\nin the\tbooks of  account of the business on 30th September,\n1961 clearly  reflected this  position. The assessee debited\nthe sums  of Rs.  44,448.20 and\t Rs.  30,000\/-\trepresenting\nrespectively the  market value\tof these  raw-materials\t and\nsemi finished  needles to  the stock  accounts of  'Wire and\nStrip' and 'Semi-processed Needles, which would clearly show\nthat these goods were treated by the assessee as having been\nintroduced in  the business  as part  of its  stock at their\nmarket value  represented by  the sums\tof Rs. 44,448.20 and\nRs. 30,000\/- [376A-D]\n     Commissioner of  Income  Tax  v.  Shirinbai  Kooka,<\/a>  46\nI.T.R. (SC)  61; and Commissioner of Income Tax v. Hantepara\nTea Co. Ltd.<\/a> 89 I.T.R. (SC) 258; applied\n     3. In  principle, the position would have been the same\nif  instead   of  giving   raw-materials  and  semi-finished\narticles to  the assessee  free\t of  cost  the\tWest  German\ncontractors had gifted sums of money to the assessee and the\nassessee had introduced these amounts in the business and an\nidentical  quantity   of  raw  materials  and  semi-finished\nproducts had  been purchased  for the  business\t with  these\namounts.  The\tcost  of  raw  materials  and  semi-finished\narticles thus purchased would have been clearly liable to be\ndeducted from  the sale\t proceeds of  the finished  products\nmanufactured out  of them  in determining  the profit of the\nbusiness. [3376D-F]\n     In the  instant case, the cost of the raw materials and\nsemi-finished needles.\tto the\tbusiness represented  by the\nsums of\t Rs. 44,448.20\tand  Rs.  30,000\/-  debited  in\t the\nrespective accounts  of 'Wire and Strip' and 'Semi-processed\nNeedles' was liable to be deducted from the sale proceeds of\nthe finished  products in  arriving at\tthe  profit  of\t the\nbusiness. It  is true that initially on 30th September, 1961\nthe credit  entries for\t the sums  of Rs.  44,448.20 and Rs.\n30,000\/- were  made in\t'Wire and  Strip Gift  Account'\t and\n'Semi-processed Needles\t Gift Account'\trespectively and  it\nthis only on the last date of the account year, namely, 31st\nMarch, 1962 that these amounts were transferred\n373\nto the\tcredit of  the Capital\tReserve\t Account.  But\tthat\ncannot make  and   difference to the correct legal inference\nto be  drawn from  the proved facts because the nomenclature\nof the\taccount or accounts in which the credit entries were\nmade is\t not material  but what\t is really  decisive is that\nthese amounts  were debited  to the  respective accounts  of\n'Wire and Strip' and Semi-processed Needles' as representing\ntheir  real  value  on\t30th  September,  1961.\t These\traw-\nmaterials and  semi-finished needles  were introduced in the\nbusiness  as   part  of\t  its  stock  at  their\t real  value\nrepresented by\tthe sums  of Rs. 44,448.20 and 30,000\/-. The\naggregate amount  of Rs.  74,448.20 made up of Rs. 44,448.20\nand Rs.\t 30,000\/- was,\ttherefore, liable  to be deducted in\ndetermining the\t profit of  the business  and it was rightly\ndebited to the trading\taccount. [376F-H, 377A-C]\n\n\n\nJUDGMENT:\n<\/pre>\n
     CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1482 of
\n1972.\n<\/p>\n
     Appeal by\tSpecial Leave  from the\t Judgment and  order
\ndated 20th  September 1971  of the  Punjab and\tHaryana High
\nCourt in Income Tax Reference No. 12\/71.\n<\/p>\n
     Hardayal Hardy,  K. C.  Dua and  Miss A. Suhhashini for
\nthe Appellant.\n<\/p>\n
     G. C.  Sharma, P.\tA. Francis,  Anoop Sharma  and P. K.
\nMukherjee for the Respondent.\n<\/p>\n
     The Judgment of the Court was delivered by
\n     BHAGWATI, J.-  This appeal\t by special leave arises out
\nof an  assessment to  income-tax made  on M\/s  Groz  Backert
\nSaboo Ltd. (hereinafter referred to as the assessee) for the
\nassessment year\t 1962-63 the  corresponding accounting\tyear
\nbeing the  financial year  being  31  st  March,  1962.\t The
\nassessee set  up in  collaboration with\t M\/s Theodor  Groz &
\nSoehne and Ernst Backert, West Germany (hereinafter referred
\nto  as\t the  West   German  Collaborators)  a\tfactory\t for
\nfabrication and\t manufacture of\t hosiery needles  and it was
\nnot disputed  on behalf\t of the\t assessee that\tthis factory
\nstarted business  sometime prior  to the commencement of the
\nrelevant year  of account. It appears that in the early part
\nof the\trelevant accounting year, the assessee received from
\nthe  West  German  Collaborators  consignment  of  machinery
\ncosting Rs.  9,45.545\/- and along with this consignment, the
\nWest German  Collaborators also sent to the assessee certain
\ngoods free  of cost.  These goods  consisted partly  of raw-
\nmaterials and  partly of  semi-finished needles\t at  various
\nstages of  manufacture.\t The  invoice  in  respect  of\tthis
\nconsignment was dated 4th April, 1961 and it showed only the
\nprice of the machinery consigned to the assessee and did not
\nmake any  mention of  the raw  materials  and  semi-finished
\nneedles\t supplied   to\tthe   assessee\t along\t with\tthis
\nconsignment, since  these goods\t were supplied\tfree of cost
\nand no charge was made in respect of the same.\n<\/p>\n
374<\/span><\/p>\n
The Custom  Authorities raised objection in respect of these
\ngoods and  a separate  invoice had, therefore, to be sent by
\nthe West  German Collaborators\tshowing Rs. 44,448.20 as the
\nvalue of  the raw-materials,  namely, wire and strip and Rs.
\n30,000\/- as  the value of the semi-finished needles supplied
\nto the\tassessee. These\t goods were not entered in the books
\nof account  of the  business immediately  on receipt  by the
\nassessee but  they were brought into the books for the first
\ntime  on  30th\tSeptember,  1961  by  making  the  following
\nentries: Rs.  44,448.20 debited\t to the account of “Wire and
\nStrip” and credited to the “Wire and Strip Gift Account” and
\nRs. 30,000\/-  debited  to  the\taccount\t of  “Semi-processed
\nNeedles” and  credited to  the “Semi-processed\tNeedles Gift
\nAccount”.  The\t assesses  utilised   these  goods   in\t the
\nmanufacture of\tfinished products  and sold  the same in the
\nmarket and  the sale  proceeds received by the assessee were
\ncredited in  the trading  account maintained in the books of
\naccount of  the business,  since  they\trepresented  revenue
\nreceipts arising  from the sale of the finished products. On
\n31st March,  1962, being  the last  date of  the  accounting
\nyear, the  assessee closed the “Wire and Strip Gift Account”
\nand   the   “Semi-Processed   Needles\tGift   Account”\t  by
\ntransferring the  respective sums  of Rs.  14,448.20 and Rs.
\n30,000\/- to  the credit of the “Capital Reserve Account” and
\ndebited an  aggregate sum  of Rs.  74,448.20 to\t the trading
\naccount\t by  making  corresponding  credit  entries  in\t the
\naccounts of  “Wire and\tStrip” and ‘Semi-processed Needles”.
\nThe net\t effect of  these entries was that the profit of the
\nassessee was  reduced  by  Rs.\t74,448.20.  The\t Income\t Tax
\nofficer, in  course of\tthe assessment\tof the\tassessee  to
\nincome tax  for the  assessment year  1962-63, took the view
\nthat the  debit of  Rs. 74,448.20  was wrongly\tmade in\t the
\ntrading account\t as on 31st March, 1962 since no monies were
\nexpended by  the assessee in acquiring the raw-materials and
\nsemi-finished needles, but they were received by way of gift
\nfrom the  West German  Collaborators and hence no amount was
\ndeductible in  respect of the value of these goods. The same
\nview was  taken by  the Appellate  Assistant Commissioner in
\nappeal and on further appeal, the Tribunal also affirmed the
\nsame view.  This led  to a  Reference by the Tribunal at the
\ninstance of  the assessee  and the  following two  questions
\nwere referred for the opinion of the High Court:\n<\/p>\n
     1.\t  Whether on  the facts\t and in the circumstances of
\n\t  the case,  the sum  of  Rs.  74,448.20  being\t the
\n\t  actual value\tof raw material received from German
\n\t  Collaborators free  of  cost\trepresented  Revenue
\n\t  receipt ?\n<\/p><\/blockquote>\n
375<\/span><\/p>\n
     2.\t  Whether on  the facts\t and in the circumstances of
\n\t  the\tcase, the  amount of  Rs. 74,448\/- being the
\n\t  actual value of raw material received free of cost
\n\t  from German  collaborators was  rightly debited at
\n\t  that value to the revenue account ?\n<\/p><\/blockquote>\n
The High  Court misapprehended\tthe true nature and scope of
\nthe controversy between parties and seemed to proceed on the
\nerroneous impression  that what\t the Tribunal  had held\t was
\nthat the raw materials and semi-finished needles received by
\nthe assessee  from the West German Collaborators constituted
\nrevenue receipt\t and its  value was, therefore, liable to be
\ntaxed as income in the hands of the assessee. The High Court
\nheld that  the value  of these goods could not be treated as
\nrevenue receipt\t because they  had been\t received by  way of
\ngift and  in any  even, even  if  they\tconstituted  revenue
\nreceipt, they  could “in no sense be income” since they were
\ntake out  of the  ambit of  taxability by sub-section (3) of
\nsection 10  of the  Income Tax\tAct, 1961.  The\t High  Court
\naccordingly  answered  the  questions  referred\t it  by\t the
\nTribunal in  favour of the assessee and against the Revenue.
\nThe  Revenue  thereupon\t brought  the  present\tappeal\twith
\nspecial leave obtained from this Court.\n<\/p>\n
     It was  found as  a fact  by the  Tribunal, and  indeed
\nthere was  no dispute  about it,  that the raw-materials and
\nsemi-finished needles were received by the assessee from the
\nWest German Collaborators free of cost by way of gift. These
\nraw-materials and  semi-finished needles  were received some
\ntime in\t April, 1961 and it was only on 30th September, 1961
\nthat they were for the first time introduced in the books of
\naccount of  the business.  There can, therefore, be no doubt
\nthat these  raw-materials  and\tsemi-finished  needles\twere
\nreceived by  the assessee as capital assets and subsequently
\non  30th  September,  1961  they  were\ttransferred  to\t the
\nbusiness as  part of  its stock\t If that  be so, the cost of
\nthese  raw-materials   and  semi-finished   needles  to\t the
\nbusiness could\tnot be said to be nil, but, on the principle
\nlaid down  by this  Court in  Commissioner of  Income Tax v.
\nSherinbai Kooka(1) and subsequently followed in Commissioner
\nof Income  Tax v. Hanrepara Tea Co. Ltd.<\/a>(2), it would be the
\nmarket value  of  there\t raw-mate  rials  and  semi-finished
\nneedled as  on 30th  September, 1961. It is now well settled
\nby these  decisions that  where\t an  assessee  converts\t his
\ncapital assets\tinto stock-in-trade  and starts\t dealing  in
\nthem, that  able profit\t on the\t sale must  be determined by
\ndeducting from the sale .\n<\/p>\n
     (1) 46 I.T.R. 86.\n<\/p>\n
     (2) 89 I.T.R. 258
\n376<\/span>
\nproceeds the  market value  at the  date of their conversion
\ninto stock  in-trade (since  this would\t be the\t cost to the
\nbusiness) and  not the\toriginal cost to the assessee. Here,
\nthe original  cost of  these raw materials and semi-finished
\nneedles to  the assessee  was undoubtedly  nil because these
\ngoods were  received by\t the assessee  from the\t West German
\nCollaborators free  of cost, but they were introduced in the
\nbusiness and  converted into  its stock\t on 30th  September,
\n1961  and,   therefore,\t their\t market\t value\tas  on\t30th
\nSeptember, 1961 would represent the cost to the business and
\nthat would  have to be taken into account in determining the
\nprofit arising\tfrom the  sale of the manufactured products.
\nThe entries  made by the assessee in the books of account of
\nthe business  on 30th September, 1961 clearly reflected this
\nopinion. The assessee debited the sums of Rs. 44,448.20) and
\nRs. 30,000\/-representing  respectively the  market value  of
\nthese raw-materials  and semi-finished\tneedles to the stock
\naccounts of  “Wire and\tStrip” and  “Semi-processed Needles”
\nwhich would  clearly show  that these  goods were treated by
\nthe assessee  as having\t been introduced  in the business as
\npart of\t its stock  at their market value represented by the
\nsums of\t Rs. 44,448.20 and Rs. 30,000\/-. The position was no
\ndifferent than what it would have been if, instead of giving
\nthese  raw-materials   and  semi-finished   needles  to\t the
\nassessee free  of cost,\t the West  German Collaborators\t had
\ngifted the  sums of  Rs. 44,448.20  and Rs. 30,0000\/- to the
\nassessee and  the assessee  had introduced these  amounts in
\nthe business  and an identical quantity of raw materials and
\nsemi-finished needles  had been\t purchased for\tthe business
\nwith these  amounts. The  cost of  raw-materials  and  semi-
\nfinished needles  thus purchased  would\t have  been  clearly
\nliable to be deducted from the sale proceeds of the finished
\nproducts manufactured  out of them in determining the profit
\nof the\tbusiness. Would\t the position  then be\tdifferent if
\ninstead,  the  West  German  Collaborators  gave  these\t raw
\nmaterials and  semi-finished needles to the assessee free of
\ncost and  the assessee\tintroduced them\t in the\t business as
\npart of\t its  stock.  We  do  not  sec\tand  distinction  in
\nprinciple between  these two  types  of\t cases\tand  we\t are
\nclearly of the view that the cost of these law-materials and
\nsemi-finished needles  to the  business represented  by\t the
\nsums of\t Rs. 44,448.00\tand  Rs.  30,000\/-  debited  in\t the
\nrespective accounts  of “Wire and Strip” and “Semi-Processed
\nNeedles” was liable to be deducted from the sale proceeds of
\nthe finished  products in  arriving at\tthe  profit  of\t the
\nbusiness. It  is true that initially on 30th September, 1961
\nthe credit  entries for\t the sums  of Rs.  44,448.20 and Rs.
\n30,000 were made in “Wire and Strip Gift Account” and “Semi-
\nprocessed Needles Gift Account” respectively and it was only
\non the\tlast date  of the ac count year, namely, 31st March,
\n1962 that these amounts were trans-\n<\/p>\n
377<\/span><\/p>\n
ferred to  the credit  of the  Capital Reserve\tAccount. But
\nthat  cannot  make  any\t difference  to\t the  correct  legal
\ninference to  be drawn\tfrom the  proved facts\tbecause\t the
\nnomenclature of\t the account or accounts in which the credit
\nentries were  made  is\tnot  material  but  what  is  really
\ndecisive  is   that  these   amounts  were  debited  to\t the
\nrespective accounts  of “Wire and Strip” and “Semi-processed
\nNeedles” as representing their real value on 30th September,
\n1961. These  raw-materials and\tsemi-finished  needles\twere
\nintroduced in  the business  as part  of its  stock at their
\nreal value represented by the sums of Rs.. 44,448.20 and Rs.
\n30,000\/-. The  aggregate amount\t of Rs. 74,448.20 made up of
\nRs. 44,448.20  and Rs. 30,000\/- was, therefore, liable to be
\ndeducted in  determining the  profit of\t the business and it
\nwas rightly debited to the trading account.\n<\/p>\n
     We\t accordingly  dismiss  the  appeal  and\t answer\t the
\nquestions referred by the Tribunal in favour of the assessee
\nand against  the Revenue.  The Revenue will pay the costs of
\nthe appeal to the assessee.\n<\/p>\n
S.R.\t\t\t\t\t   Appeal dismissed.\n6-978SCI\/78\n378<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income Tax, … vs M\/S. Groz Backert Saboo Ltd on 22 November, 1978 Equivalent citations: 1979 AIR 376, 1979 SCR (2) 371 Author: P Bhagwati Bench: Bhagwati, P.N. PETITIONER: COMMISSIONER OF INCOME TAX, PATIALA Vs. RESPONDENT: M\/s. GROZ BACKERT SABOO LTD. DATE OF JUDGMENT22\/11\/1978 BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-152058","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income Tax, ... vs M\/S. 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