My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
No to the first and no to the second. The Supreme Court held that valuing closing stock is only a step in working out the year's trading result, not a source of profit, so no 'notional profit' arises from the valuation and appreciation in unsold stock is not brought to charge — the rule is cost or market price, whichever is lower. But the Court also held that the source of business profits is the business and they accrue where the business is carried on. The silver lying at Bikaner was still the Calcutta firm's unsold stock, so the whole profit accrued at Calcutta and the exemption failed. The appeal was dismissed.
Decided by the Supreme Court (Supreme Court of India — Patanjali Sastri CJ (author), S.R. Das J, Vivian Bose J, Ghulam Hasan J and Bhagwati J) on 1953-10-09, reported as 1953 AIR 519; 1954 SCR 211. It bears on section 145, section 5, section 28 of the Income Tax Act 1961, in Assessment & Scrutiny and Deductions & Disallowances matters.
This is the foundational Indian authority on stock valuation. It explains why closing stock is credited at all — to cancel the purchase entry on the other side of the account so that only realised transactions show as profit or loss — and why the cost-or-market-whichever-is-lower rule is an exception admitted on prudential grounds. Anticipated loss is recognised; anticipated profit is not. It is the answer whenever an assessing officer tries to tax the appreciation in unsold stock, and the source of the proposition that profits are computed in conformity with ordinary commercial accounting unless the Act says otherwise. Separately, it settles the situs question: profits accrue where the business is carried on, not where the stock physically lies or where the valuation is done. The Court expressly disapproved the Calcutta High Court's contrary reasoning while upholding its answer.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The appellant was a registered firm of two brothers carrying on business at Calcutta as bullion merchants dealing mainly in silver, keeping its books on the mercantile basis. During the year of account 1997 Ramnavami, corresponding to 1941-42, it sent 582 bars of silver — part from old Calcutta stock, part bought elsewhere in the year — to Bikaner where the partners lived, and credited their cost in the books. In the 1942-43 assessment the firm said the bars had been sold to the partners for domestic use. The Income-tax authorities held the sale was not genuine, treated the bars as part of the closing stock-in-trade, valued them at the market rate applied to the rest of the Calcutta closing stock, and added Rs 2,20,887. The Tribunal upheld this, finding that the stock had been moved to safety during the Calcutta panic and that the story of a sale to the partners was a camouflage to reduce the year's profit artificially. On a reference directed under section 66(2) the Calcutta High Court held that the notional profit emerged from the valuation, that its situs was where the valuation was made, and that the exemption in section 14(2)(c) for income accruing in an Indian State did not apply.
The appeal was dismissed with costs and the referred question answered in the affirmative, but on different grounds from the High Court's. The High Court's view — that the profit arose out of the valuation of the closing stock and that its situs was where the valuation was made — was erroneous. Valuing unsold stock is a necessary part of determining the trading results of the period and can in no sense be regarded as the source of the profits, so no question of charging appreciated value as notional profit arises. The correct ground was that the source of business profits is the business and the place of their accrual is where the business is carried on. Since profits can be correctly ascertained under the assessee's method only after bringing the closing stock into the trading account wherever it may lie, the whole of the profits accrued at Calcutta, no part of the business having been transacted at Bikaner. The exemption under section 14(2)(c) therefore did not apply.
The Court began by correcting the premise. The object of crediting unsold stock is not to bring appreciation into charge; it is to balance the cost of those goods entered on the purchase side, so that cancelling the same stock out of both sides leaves only the year's actual sales showing the profit or loss really realised. On that footing the stock entry ought strictly to be at cost. One exception is allowed on prudential grounds and by settled custom — market value where it is below cost — which anticipates a loss that may be made next year. Anticipated loss is recognised, anticipated profit is not, because no prudent trader shows increased profit before realisation. That is the theory behind the cost-or-market-whichever-is-lower rule, and since profits for income-tax are computed in conformity with ordinary commercial accounting unless the legislature says otherwise, unrealised appreciation in goods carried over in a continuing business is not charged. Whimster and Chengalvaraya Chetty illustrate the working of the rule, the latter also showing that the written-down closing stock of one year must be carried in as the opening stock of the next. With that misconception removed, the situs question answered itself: valuation is a step in computation, not a source, and the place of valuation is not the place of accrual. The source is the business, and profits accrue where the business is carried on. On the Tribunal's finding that the Bikaner silver had not really been sold and remained unsold stock of the Calcutta business, the whole year's profit accrued at Calcutta.
The source of the profits and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo to the first and no to the second. The Supreme Court held that valuing closing stock is only a step in working out the year's trading result, not a source of profit, so no 'notional profit' arises from the valuation and appreciation in unsold stock is not brought to charge — the rule is cost or market price, whichever is lower. But the Court also held that the source of business profits is the business and they accrue where the business is carried on. The silver lying at Bikaner was still the Calcutta firm's unsold stock, so the whole profit accrued at Calcutta and the exemption failed. The appeal was dismissed. This was decided by the Supreme Court (Supreme Court of India — Patanjali Sastri CJ (author), S.R. Das J, Vivian Bose J, Ghulam Hasan J and Bhagwati J) and bears on section 145, section 5, section 28 of the Income Tax Act 1961. It is reported as 1953 AIR 519; 1954 SCR 211. This is the foundational Indian authority on stock valuation. It explains why closing stock is credited at all — to cancel the purchase entry on the other side of the account so that only realised transactions show as profit or loss — and why the cost-or-market-whichever-is-lower rule is an exception admitted on prudential grounds. Anticipated loss is recognised; anticipated profit is not. It is the answer whenever an assessing officer tries to tax the appreciation in unsold stock, and the source of the proposition that profits are computed in conformity with ordinary commercial accounting unless the Act says otherwise. Separately, it settles the situs question: profits accrue where the business is carried on, not where the stock physically lies or where the valuation is done. The Court expressly disapproved the Calcutta High Court's contrary reasoning while upholding its answer. If it applies to you, the first step is this: Value closing stock at cost or net realisable value, whichever is lower, and apply the same basis to opening stock; resist any attempt to tax unrealised appreciation as notional profit.
The appellant was a registered firm of two brothers carrying on business at Calcutta as bullion merchants dealing mainly in silver, keeping its books on the mercantile basis. During the year of account 1997 Ramnavami, corresponding to 1941-42, it sent 582 bars of silver — part from old Calcutta stock, part bought elsewhere in the year — to Bikaner where the partners lived, and credited their cost in the books. In the 1942-43 assessment the firm said the bars had been sold to the partners for domestic use. The Income-tax authorities held the sale was not genuine, treated the bars as part of the closing stock-in-trade, valued them at the market rate applied to the rest of the Calcutta closing stock, and added Rs 2,20,887. The Tribunal upheld this, finding that the stock had been moved to safety during the Calcutta panic and that the story of a sale to the partners was a camouflage to reduce the year's profit artificially. On a reference directed under section 66(2) the Calcutta High Court held that the notional profit emerged from the valuation, that its situs was where the valuation was made, and that the exemption in section 14(2)(c) for income accruing in an Indian State did not apply. The matter was decided on 1953-10-09 by the Supreme Court (Supreme Court of India — Patanjali Sastri CJ (author), S.R. Das J, Vivian Bose J, Ghulam Hasan J and Bhagwati J). On those facts the Supreme Court held as follows. The appeal was dismissed with costs and the referred question answered in the affirmative, but on different grounds from the High Court's. The High Court's view — that the profit arose out of the valuation of the closing stock and that its situs was where the valuation was made — was erroneous. Valuing unsold stock is a necessary part of determining the trading results of the period and can in no sense be regarded as the source of the profits, so no question of charging appreciated value as notional profit arises. The correct ground was that the source of business profits is the business and the place of their accrual is where the business is carried on. Since profits can be correctly ascertained under the assessee's method only after bringing the closing stock into the trading account wherever it may lie, the whole of the profits accrued at Calcutta, no part of the business having been transacted at Bikaner. The exemption under section 14(2)(c) therefore did not apply.
The Court began by correcting the premise. The object of crediting unsold stock is not to bring appreciation into charge; it is to balance the cost of those goods entered on the purchase side, so that cancelling the same stock out of both sides leaves only the year's actual sales showing the profit or loss really realised. On that footing the stock entry ought strictly to be at cost. One exception is allowed on prudential grounds and by settled custom — market value where it is below cost — which anticipates a loss that may be made next year. Anticipated loss is recognised, anticipated profit is not, because no prudent trader shows increased profit before realisation. That is the theory behind the cost-or-market-whichever-is-lower rule, and since profits for income-tax are computed in conformity with ordinary commercial accounting unless the legislature says otherwise, unrealised appreciation in goods carried over in a continuing business is not charged. Whimster and Chengalvaraya Chetty illustrate the working of the rule, the latter also showing that the written-down closing stock of one year must be carried in as the opening stock of the next. With that misconception removed, the situs question answered itself: valuation is a step in computation, not a source, and the place of valuation is not the place of accrual. The source is the business, and profits accrue where the business is carried on. On the Tribunal's finding that the Bikaner silver had not really been sold and remained unsold stock of the Calcutta business, the whole year's profit accrued at Calcutta. In the words reproduced by the source cited on this page: "The source of the profits and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on."
It was decided by the Supreme Court on 1953-10-09 and is reported as 1953 AIR 519; 1954 SCR 211. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 145, section 5, section 28, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The appeal was dismissed with costs and the referred question answered in the affirmative, but on different grounds from the High Court's. The High Court's view — that the profit arose out of the valuation of the closing stock and that its situs was where the valuation was made — was erroneous. Valuing unsold stock is a necessary part of determining the trading results of the period and can in no sense be regarded as the source of the profits, so no question of charging appreciated value as notional profit arises. The correct ground was that the source of business profits is the business and the place of their accrual is where the business is carried on. Since profits can be correctly ascertained under the assessee's method only after bringing the closing stock into the trading account wherever it may lie, the whole of the profits accrued at Calcutta, no part of the business having been transacted at Bikaner. The exemption under section 14(2)(c) therefore did not apply. It arises in Assessment & Scrutiny and Deductions & Disallowances matters, on section 145, section 5, section 28 of the Income Tax Act 1961, and was decided by Supreme Court of India — Patanjali Sastri CJ (author), S.R. Das J, Vivian Bose J, Ghulam Hasan J and Bhagwati J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you reduce closing stock to market value below cost, carry that same reduced figure into the next year as opening stock — the Court insisted on that consistency. Do not argue that profit accrues where the goods lie or where the valuation is done; the situs is where the business is carried on. Where stock is moved out for safekeeping, keep contemporaneous evidence of the reason; a claimed sale to partners that the authorities disbelieve will be treated as stock-in-trade.
Still good law. The stock-valuation principles are settled and the decision is very widely followed; the source page records over 350 later citations and the citator notes it referred to by the Supreme Court in 1991. No decision doubting it was checked against. The judgment predates section 145A, which now prescribes statutory adjustments to inventory valuation; that change was not examined here. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under sections 4(1)(b) and 14(2)(c) of the Indian Income-tax Act 1922. The sections field gives the nearest 1961 equivalents — section 5 for the scope of total income and the place of accrual, and sections 145 and 28 for the method of computation, section 14(2)(c) having no successor since Indian States are no longer outside the taxing territory. Favours is recorded as mixed because the assessee lost the appeal while the Court decided the stock-valuation principle in the taxpayer's favour and disapproved the High Court's reasoning. The reference assumed the figure of Rs 2,20,887 was correctly computed, so the Court did not examine how it was arrived at. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs and the referred question answered in the affirmative, but on different grounds from the High Court's. The High Court's view — that the profit arose out of the valuation of the closing stock and that its situs was where the valuation was made — was erroneous. Valuing unsold stock is a necessary part of determining the trading results of the period and can in no sense be regarded as the source of the profits, so no question of charging appreciated value as notional profit arises. The correct ground was that the source of business profits is the business and the place of their accrual is where the business is carried on. Since profits can be correctly ascertained under the assessee's method only after bringing the closing stock into the trading account wherever it may lie, the whole of the profits accrued at Calcutta, no part of the business having been transacted at Bikaner. The exemption under section 14(2)(c) therefore did not apply.
TaxSphere, “Chainrup Sampatram v CIT”, https://taxnotice.vittsphere.com/caselaw/case/chainrup-sampatram-v-cit/ (validity last checked 2026-08-29)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I raised my rates and booked the higher billing in my accounts, but customers sued and I could never collect. Must I still pay tax on it?
The AO has taxed my advance licence and DEPB benefits in the year I exported. Is that the right year?
An arbitrator enhanced the compensation for my land, the State has appealed against the whole of it, and I have taken the money out of court against a security bond. Has that enhanced amount accrued to me?
We are an NBFC. The AO wants interest on a non-performing loan taxed on accrual even though we have not recognised it. Can he do that?
