{"id":97625,"date":"1953-10-09T00:00:00","date_gmt":"1953-10-08T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/chainrup-sampatram-vs-commissioner-of-income-taxwest-on-9-october-1953"},"modified":"2017-06-07T07:16:57","modified_gmt":"2017-06-07T01:46:57","slug":"chainrup-sampatram-vs-commissioner-of-income-taxwest-on-9-october-1953","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/chainrup-sampatram-vs-commissioner-of-income-taxwest-on-9-october-1953","title":{"rendered":"Chainrup Sampatram vs Commissioner Of Income-Tax,West … on 9 October, 1953"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Chainrup Sampatram vs Commissioner Of Income-Tax,West … on 9 October, 1953<\/div>\n
Equivalent citations: 1953 AIR 519, \t\t 1954 SCR 211<\/div>\n
Author: M P Sastri<\/div>\n
Bench: Sastri, M. Patanjali (Cj), Das, Sudhi Ranjan, Bose, Vivian, Hasan, Ghulam, Bhagwati, Natwarlal H.<\/div>\n
           PETITIONER:\nCHAINRUP SAMPATRAM\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME-TAX,WEST BENGAL.\n\nDATE OF JUDGMENT:\n09\/10\/1953\n\nBENCH:\nSASTRI, M. PATANJALI (CJ)\nBENCH:\nSASTRI, M. PATANJALI (CJ)\nDAS, SUDHI RANJAN\nBOSE, VIVIAN\nHASAN, GHULAM\nBHAGWATI, NATWARLAL H.\n\nCITATION:\n 1953 AIR  519\t\t  1954 SCR  211\n CITATOR INFO :\n RF\t    1991 SC1338\t (17)\n\n\nACT:\n   Indian  Income-tax  Act  (XI of  1922),  ss.\t 4(1)(b)  and\n 14(2)(c)-Ascertainment\t   of\tprofit\t by   valuation\t   of\n stock-Stock-in-trade  removed\tto Native  State-Place\twhere\n profit accrues -Exemption under s. 14 (2)    (c)-Principles\n underlying valuation of stock.\n\n\n\nHEADNOTE:\n  The  assesses firm which carried on business at  Calcutta\nin bullion despatched during the accounting year to Bikaner,\nwhere  its  partners resided, a certain quantity  of  silver\nbars  and showed them a,; having been sold to the  partners.\nThe Income-tax authorities disbelieved the story of the sale\nand, treating the bars as stock-in-trade and valuing them at\ntheir  market value at the close of the year which was\tmuch\nhigher\tthan  the cost, assessed the firm's profits  at\t Rs.\n2,20,887.  The assessee contended that, even admitting\tthat\nthe  bars  were\t the stock-in-trade  of\t the  business,\t the\nincreased value at the close of the year accrued at  Bikaner\nand  was exempt from tax in British India under s.  14(2)(c)\nof  the\t Income-tax  Act.   The High  Court  held  that\t the\nnotional  profit representing the appreciation in  value  of\nthe  stock-in-trade  emerged out of the\t valuation  and\t the\nprofit accordingly arose at the time when, and at the  place\nwhere, the valuation was made, and as the valuation was made\nat  Calcutta  s. 14(2)(c) did not apply and the\t profit\t was\ntaxable.  On appeal,\n212\nHeld, that the view of the High Court that the profit  &rose\nout  of the valuation of the closing stock and the situs  of\nits accrual or arising was therefore where the valuation was\nmade, was erroneous.  The conclusion of the High Court\tthat\nthe profit did not accrue in Bikaner but at Calcutta  could,\nhowever,  be  supported on another ground,  viz.,  that\t the\nsource\tof  the profit was the business and  as\t the  profit\ncould  be  correctly  ascertained according  to\t the  method\nadopted by the assessee only after bringing into the trading\naccount\t his closing stock wherever it may exist, the  whole\nof the profits must be taken to accrue or arise at the place\nof carrying on the business, viz., Calcutta,\n  The  principles  underlying the  method  of  ascertaining\nprofits by valuation of stock at the beginning and close  of\nthe  year  and of the rule that the closing stock is  to  be\nvalued\tat  cost or market value, whichever  is\t the  lower,\nexplained.\n  Whimstar  and Co. v. Commissioners of Inland Revenue\t(12\nTax  Cas.  813) and Commissioner of  Income-tax,  Madras  v.\nChengalvaraya Chetty (I.L.R.<\/a> 48 Mad. 836) referred to.\n\n\n\nJUDGMENT:\n<\/pre>\n
   CIVIL  APPELLATE  JURISDICTION Civil Appeal\tNo.  142  of
\n1952.\n<\/p>\n
   Appeal  by special leave granted by the Supreme Court  by
\nits order dated the 14th March, 1952, from the Judgment\t and
\nOrder dated the 4th day of June, 1951, of the High Court  of
\nJudicature  at\tCalcutta (Chakravartti and  Das\t Gupta\tJJ.)
\nSpecial Jurisdiction (Income-tax) in I.T.R. Nos. 7 and 6  of
\n1947  arising out of the Order dated the 26th day of  March,
\n1946, of the Income-tax Appellate Tribunal, Calcutta  Bench,
\nin  66\tR.A. No. 3 Bengal 1946-47 and 66 R.A. No.  4  Bengal
\n1946-47.\n<\/p>\n
   N.C.\t Chatterjee  (S.   N. Mukherji, with  him)  for\t the
\nappellant.\n<\/p>\n
   C.K. Daphtary, Solicitor-General for India (O. N.  Joshi,
\nwith him) for the respondent.\n<\/p>\n
1953.  October 9. The Judgment of the Court was delivered by
\n   PATANJALI SASTRI C. T.-This is an appeal by special leave
\nfrom a judgment of the High Court of Judicature at  Calcutta
\nanswering  a reference by the Income-tax Appellate  Tribunal
\nunder  section\t66 (2) of the Indian Income-tax\t Act,  1922,
\nhereinafter referred to as “the Act”.\n<\/p>\n
213<\/span><\/p>\n
   The\tappellant  is a registered firm\t consisting  of\t two
\nbrothers  as  partners\twith equal  shares.   The  firm\t was
\ncarrying  on  business\tat  Calcutta  as  bullion  merchants
\ndealing\t mainly in silver and kept its books of\t account  on
\nthe mercantile basis.  In the course of the year of  account
\n1997  (Ramnavami)  corresponding  to 1941-42,  582  bars  of
\nsilver (some from the old stock in hand at Calcutta and some
\npurchased  elsewhere during the year) were sent\t to  Bikaner
\nwhere  the  partners resided, and their value  at  cost\t was
\ncredited in the books of the firm.  In the assessment of the
\nfirm  for  the year 1942-43, it was alleged  that  the\tsaid
\nsilver bars had been sold to the partners for their domestic
\nuse  but  the Income-tax authorities held that\tthe  alleged
\nsale  was not “genuine and that the said silver\t bars  still
\nformed\tpart of the stock-in-trade of the firm at the  close
\nof the previous year 1997, and they accordingly included  in
\nthe  taxable  profits a sum of Rs. 2,20,887  as\t the  excess
\narising\t from the valuation of the said 582 bars  at  market
\nprice  on the closing day.  They were valued at market\trate
\nat  which  the\trest of the closing stock  at  Calcutta\t was
\nvalued in the books of the firm.\n<\/p>\n
    On appeal the Appellate Tribunal, on a consideration  of
\nall  the facts and circumstances of the case,  recorded\t its
\nfinding as follows:\n<\/p>\n
   “All\t these\tcircumstances make it clear to us  that\t the
\naction\tof the Income-tax authorities in treating the  stock
\nof  silver bars in Bikaner as part of the stock-in-trade  of
\nthe Calcutta business was amply justified.  The appellant on
\naccount of the panic in Calcutta had to remove the  valuable
\nstock-in-trade to a safe place in Bikaner just as many other
\nCalcutta businessmen did at that time.\tThe partners of\t the
\nfirm then noticed the upward trend of the silver market, and
\ndecided to take advantage of the camouflage afforded by\t the
\nentries\t in  the books of account and the story of  sale  to
\npartners, so that the profit of the year of account could be
\nsubstantially reduced artificially.”\n<\/p>\n
    The\t appeal was accordingly dismissed.  The\t application
\nby the firm under section 66(1) of the Act asking
\n29<\/span>
\n214<\/span>
\nfor  a\treference  to the High Court  of  six  questions  as
\nquestions  of law arising out of the order of  the  Tribunal
\nwas also rejected.\n<\/p>\n
    Thereupon  the firm moved the High Court  under  section
\n66(2),\tand  the court directed the Tribunal  to  refer\t the
\nfollowing question of law for its decision:\n<\/p>\n
    Whether  in the circumstances of the case and on a\ttrue
\nconstruction of section 4 (1) (b) and section 14 (2) (c)  of
\nthe  Indian Income-tax Act, the sum of Rs. 2,20,887  was  in
\nlaw assessable to tax ?\n<\/p>\n
   The\treference  was heard by Chakravartti and  Das  Gupta
\nJJ., who answered the question in the affirmative.
\n   The\t firm  being  admittedly  resident  and\t  ordinarily
\nresident within the meaning of sections 4-A and 4-B in\twhat
\nwas  then  known as British India, its\ttotal  income  would
\ninclude\t also  income  accruing or  arising  to\t it  without
\nBritish\t India\tunder  section 4 (1) (b)  (ii).\t  The  firm,
\nhowever, claimed exemption in respect of the said sum  under
\nsection\t 14(2)(c) which provided that the tax shall  not  be
\npayable by an assessee in respect of any income, profits  or
\ngains accruing or arising to him within an Indian State.  It
\nwas  contended\tthat even on the finding of  the  Income-tax
\nauthorities that the silver bars in question formed part  of
\nthe  stock-in-trade  of the business at Calcutta  and  their
\nremoval\t to  Bikaner had been effected only for\t reasons  of
\nsecurity,  the\tsaid bars having remained there\t during\t the
\nrest of the accounting year, their value at the market\trate
\nat the close of the year being an increment to the goods  at
\nBikaner,  the  profit accrued at Bikaner  (their  an  Indian
\nState),\t with the result that it was exempted under  section
\n14 (2) (c).\n<\/p>\n
   The\tHigh  Court rejected this contention on\t the  ground
\nthat the ” notional profit ” represented by the appreciation
\nin  value  of  the  stock-in-trade  ”  emerges\tout  of\t the
\nvaluation and only when it so emerges it arises or  accrues.
\nThe  source  of the profit is thus the\tvaluation,  and\t its
\nsitus is where the valuation is made.  What is valued is the
\nfirm’s business at the site of the
\n215<\/span>
\nfirm  and all the stock-in-trade of the firm is\t necessarily
\ndrawn  into  the valuation wherever they may  be  physically
\nsituated.   The\t profit\t which is the result  of  the  stock
\nvaluation  of  a  business is thus sui generis,\t a  type  by
\nitself, to which the ordinary notions of a physical  accrual
\nwill not apply.\t It comes into existence when the  valuation
\nis made and since it arises out of the valuation, it arises,
\nin  respect of the whole stock-in-trade, at the site of\t the
\nfirm  whose stock-in-trade is being valued  irrespective  of
\nwhere parts of the stock-in-trade may be.”\n<\/p>\n
    While  we agree with the conclusion that no part of\t the
\nprofits\t of the firm in the accounting year can be  said  to
\nhave  accrued or arisen at Bikaner, the reasoning  by  which
\nthe  learned Judges arrived at that conclusion seems to\t us,
\nwith  all  respect, to proceed on a  misconception.   It  is
\nwrong  to assume that the valuation of the closing stock  at
\nmarket\trate has, for its object, the bringing\tinto  charge
\nany  appreciation  in  the value of such  stock.   The\ttrue
\npurpose of crediting the value of unsold stock is to balance
\nthe  cost  of those goods entered on the other side  of\t the
\naccount\t at  the  time\tof  their  purchase,  so  that\t the
\ncancelling  out\t of the entries relating to the\t same  stock
\nfrom  both  sides  of  the  account  would  leave  only\t the
\ntransactions  on which there have been actual sales  in\t the
\ncourse\tof  the\t year showing the profit  or  loss  actually
\nrealised on the year’s trading.\t As pointed out in paragraph
\n8  of  the  Report  of\tthe  Committee\ton  Financial  Risks
\nattaching  to the holding of Trading Stocks, 1919, ” As\t the
\nentry for stock which appears in a trading account is merely
\nintended to cancel the charge for the goods purchased  which
\nhave not been sold, it should necessarily represent the cost
\nof the goods.  If it is more or less than the cost, then the
\neffect\tis to state the profit on the goods  which  actually
\nhave been sold at the incorrect figure…… From this rigid
\ndoctrine  one  exception  is very  generally  recognised  on
\nprudential  grounds and is now fully sanctioned\t by  custom,
\nviz., the adoption of market value at the date of making -up
\naccounts, if that value is less than cost.  It is of
\n216<\/span>
\ncourse an anticipation of the loss that may be made on those
\ngoods  in the following year, and may even have the  effect,
\nif prices rise again, of attributing to the following year’s
\nresults\t a  greater  amount of profit  than  the  difference
\nbetween\t the actual sale price and the actual cost price  of
\nthe  goods in question” (extracted in paragraph 281  of\t the
\nReport\tof the Committee on the Taxation of Trading  Profits
\npresented  to  British Parliament in  April,  1951).   While
\nanticipated  loss  is thus taken into  account,\t anticipated
\nprofit\tin  the shape of appreciated value  of\tthe  closing
\nstock is not brought into the account, as no prudent  trader
\nwould  care  to\t show increased\t profit\t before\t its  actual
\nrealisation.   This is the theory underlying the  rule\tthat
\nthe  closing stock is to be valued at cost or  market  price
\nwhichever is the lower, and it is now generally accepted  as
\nan established rule of commercial practice and\taccountancy.
\nAs  profits  for income-tax purposes are to be\tcomputed  in
\nconformity  with  the  ordinary\t principles  of\t  commercial
\naccounting,  unless,  of course, such principles  have\tbeen
\nsuperseded or modified by legislative enactments, unrealised
\nprofits in the shape of appreciated value of goods remaining
\nunsold at the end of an accounting year and carried over  to
\nthe   following\t year’s\t account  in  a\t business  that\t  is
\ncontinuing  are not brought into the charge as a  matter  of
\npractice,  though, as already stated, loss due to a fall  in
\nprice  below cost is allowed even if such loss has not\tbeen
\nactually realised.  As truly observed by one of the  learned
\nJudges\tin  Whimstar  &\t Co.  v.  Commissioners\t of   Inland
\nRevenue(1),  ” Under this law (Revenue law) the profits\t are
\nthe profits realised in the course of the year.\t What  seems
\nan  exception  is recognised where a  trader  purchased\t and
\nstill holds goods or stocks which have fallen in value.\t  No
\nloss has been realised.\t Loss may not occur.   Nevertheless,
\nat  the\t close of the year he is permitted  to\ttreat  these
\ngoods or stocks as of their market value.”\n<\/p>\n
    An illustration of the rule in its practical working  is
\nto  be found in the case of the Commissioner of\t Income-tax,
\nMadras v. Chengalvaraya Chetti(2).  In 1921 the
\n(1) 12 Tax Cas. 813, 827.     (2) (1925) I.L.R. 48 Mad. 836.\n<\/p>\n
217<\/span><\/p>\n
assessee purchased a large stock of piece-goods at Rs.\t13-8
\na  piece.  At the end of the year the market value  fell  to
\nRs.  6 a piece, and he made out a loss by valuing the  whole
\nstock  at  the market rate, including the unsold  pieces  in
\nhand  at the end of the year.  The loss was allowed  in\t his
\nassessment  to\tincome-tax.  In the following  year  (1922),
\nhowever,  he entered the same unsold goods as opening  stock
\nat  the\t cost  price  of Rs. 13-8.   Some  of  those  pieces
\nremained  unsold  at the end of 1922 also  and\the  credited
\ntheir  value  at  Rs.  8-8 a piece,  the  market  rate\tthen
\nprevailing,  and showed a loss on the year’s  trading.\t The
\nIncome-tax  authorities\t refused  to  allow  the  loss\tthus
\ncalculated, and assessed him as having made a profit on\t the
\nfooting\t that  the opening stock of 1922  should  have\tbeen
\nvalued\tat Rs. 6 a piece and the unsold pieces at Rs. 8-8  a
\npiece.\tThe assessment was upheld as properly made,  though,
\nit  will be seen, the transactions of 1922, or even  of\t the
\ntwo  years taken together, ended actually in a loss.   Thus,
\nwhile  the valuation of the unsold stock at the end of\teach
\nyear  at market rate which was less than cost was  accepted,
\nthe  valuation of the unsold goods carried over\t as  opening
\nstock  of  1922\t at Rs. 6 a piece  consistently\t with  their
\nvaluation as the closing stock of 1921 was insisted upon  in
\norder  to  rectify  the distorted  picture  of\tthe  trading
\nresults\t of 1921 which were not correctly reflected  in\t the
\naccounts by reason of the assessee having adopted the  lower
\nmarket\trate  instead of cost as the value  of\tthe  closing
\nstock  in  1921.  If the market had risen to,  say,  Rs.  15
\ninstead\t of to Rs. 8-8 a piece at the end of 1922, then’  on
\nthe  principles indicated above, it would have been open  to
\nthe assessee to value the closing stock at cost (Rs.  13-8),
\nand  the  Income-tax authorities could not have\t claimed  to
\nbring  into  the  assessment the appreciated  value  of\t the
\nunsold\tgoods.\t It will thus be seen that  no\tquestion  of
\ncharging  the-appreciated  value  of  closing  stock  as   ”
\nnotional  profits ” can really arise.  In the present  case,
\nalthough it would appear that the cost price of part of\t the
\nsilver despatched to Bikaner was less than the market  price
\nat  the\t end of the year, the reference did  not  raise\t any
\nquestion regarding the
\n218<\/span>
\nbasis  on which the amount in dispute, viz.,  Rs.  2,20,887,
\nwas  arrived at.  On the other hand, the  question  referred
\nassumed that the said sum was correctly computed and put  in
\nissue  only its assessability in law on a true\tconstruction
\nof section 4(1) (b) and section 14(2) (c) of the Act.
\n    Again, it is a misconception to think that any -profit ”
\narises\tout  of the valuation of the closing stock  and\t the
\nsitus  of its arising or accrual is where the  valuation  is
\nmade.\tAs already stated, valuation of unsold stock at\t the
\nclose  of  an accounting period is a necessary part  of\t the
\nprocess\t of determining the trading results of that  period,
\nand  can in no sense be regarded as the ” source ”  of\tsuch
\nprofits.  Nor can the place where such valuation is made  be
\nregarded  as the ” situs of their accrual “. The  source  of
\nthe  profits  and  gains of a business\tis  indubitably\t the
\nbusiness,  and\tthe  place of their  accrual  is  where\t the
\nbusiness  is carried on.  As such profits can  be  correctly
\nascertained  according to the method adopted by an  assessee
\nonly  after  bringing into the trading account\this  closing
\nstock  wherever it may exist, the whole of the profits\tmust
\nbe taken to accrue or arise at the place of carrying on\t the
\nbusiness.  On the finding of the Income-tax authorities that
\nthe 582 bars of silver lying at Bikaner had not been  really
\nsold  but  remained part of the unsold stock of\t the  firm’s
\nbusiness at the end of the accounting year, the whole of the
\nprofits of that year must be taken to have accrued or arisen
\nat  Calcutta where the business was carried on, no  part  of
\nthat business having admittedly been transacted at Bikaner.\n<\/p>\n
     We agree with the High Court that the question referred
\nshould\tbe answered in the affirmative though  on  different
\ngrounds.  The appeal is accordingly dismissed with costs.\n<\/p>\n
\t\t     Appeal dismissed.\n<\/p>\n
Agent for the appellant: P. K. Mukherji.\n<\/p>\n
Agent for the respondent: G. H. Rajadhyaksha.\n<\/p>\n
219<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Chainrup Sampatram vs Commissioner Of Income-Tax,West … on 9 October, 1953 Equivalent citations: 1953 AIR 519, 1954 SCR 211 Author: M P Sastri Bench: Sastri, M. Patanjali (Cj), Das, Sudhi Ranjan, Bose, Vivian, Hasan, Ghulam, Bhagwati, Natwarlal H. PETITIONER: CHAINRUP SAMPATRAM Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX,WEST BENGAL. DATE OF JUDGMENT: 09\/10\/1953 […]<\/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-97625","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nChainrup Sampatram vs Commissioner Of Income-Tax,West ... on 9 October, 1953 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/chainrup-sampatram-vs-commissioner-of-income-taxwest-on-9-october-1953\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Chainrup Sampatram vs Commissioner Of Income-Tax,West ... on 9 October, 1953 - 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