I held shares as an investment for years and then started dealing in them. When I sell, is my profit measured from what I originally paid or from the market value on the day I began trading?
From the market value on the day the trading began. A seven-judge bench of the Supreme Court held, by six to one, that where an investor converts shares into stock-in-trade and then sells them in the course of business, the profits must be computed on ordinary commercial principles: the difference between what the article cost the business and what it fetched on sale. What the shares cost this business was their market value on 1 April 1945, the day the trading activity started. There is no notional sale involved; the sale that produced the profit was a real one, and the only question was how to measure it.
Decided by the Supreme Court (Supreme Court of India, seven judges; S.K. Das, J.L. Kapur, P.B. Gajendragadkar, A.K. Sarkar, K. Subba Rao, K.N. Wanchoo and N. Rajagopala Ayyangar JJ. Majority judgment by S.K. Das J; Sarkar J dissenting) on 1962-02-23, reported as 1963 AIR 477; 1962 SCR Supl. (3) 391; AIR 1963 SUPREME COURT 477. It bears on section 28, section 45(2), section 2(14) of the Income Tax Act 1961, in Assessment & Scrutiny and Capital Gains matters.
This is the leading decision on the dividing line between an asset held on capital account and the same asset once it enters a trade, and it supplies the measure of business profit in conversion cases. It is also the case that confined Kikabhai Premchand. The Court held Kikabhai decides only that the State cannot tax a profit that a person might have made but chose not to make, and that each year is a self-contained accounting period; it does not decide how actual profits from an actual sale are to be computed. That distinction is why both cases survive and why practitioners must identify which side of the line their facts fall on. The Court also placed Sharkey v Wernher in its proper position, as an authority of persuasive value only and not binding, and declined to reconsider Kikabhai because the facts did not require it. Sarkar J dissented, holding that the cost is what the assessee actually paid and that the majority's approach amounts to a fictional sale to oneself.
Binding on every court and authority in India.
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The assessee held a large number of shares in various companies by way of investment, bought before the end of and after 1939-40 at prices much below their market value on 1 April 1945. Her dividend income had been assessed for several years before that date. For assessment year 1946-47, the accounting year being the financial year 1945-46, the Income-tax Officer found that she had converted the shares into stock-in-trade and was carrying on a business in shares, and computed her profits as the difference between the ruling market price at the beginning of the accounting year and the sale proceeds. This appeal concerns assessment year 1947-48, the accounting year being the financial year 1946-47, in which the sale proceeds of the shares sold came to Rs 5,49,487. The officer took the cost at the market price at the beginning of the accounting year, Rs 4,50,822, giving Rs 98,655, from which he deducted a forward business loss of Rs 25,344, leaving a net profit of Rs 73,321. The Appellate Assistant Commissioner enhanced the income by Rs 2,91,307, including a capital gain of Rs 37,590, taking the original cost as the starting point and holding that some of the shares sold were stock-in-trade and others investments. In the Tribunal the Judicial Member agreed with him and the Accountant Member with the officer; the President agreed with the Accountant Member. On reference the Bombay High Court answered in the assessee's favour, and the Commissioner obtained special leave. The appeal was referred to a bench of seven judges because it was said that Kikabhai Premchand needed reconsideration.
The appeal was dismissed with costs. The assessee's profits from her trading activity must be computed on the footing that the market value of the shares on 1 April 1945 was their cost to the business. The basis is the ordinary commercial principle on which actual profits are computed, and normally the commercial profit on the sale of an article is the difference between what it cost the business and what it fetched on sale. Kikabhai Premchand is the converse case and its principles, that there is no general principle of taxation under which the State may assess a person on business profits he might have made but chose not to make, and that it is unreal to separate a business from its owner, have no application: this is not a case of a potential future advantage, but of an admitted sale in the course of business producing actual profits, where the only question is how those profits are measured. Taking the market value at one end and the actual sale proceeds at the other is the only fair measure and accords more with reality than with fiction. The High Court created no fiction of a sale on 1 April 1945. Because of the distinction drawn, it was unnecessary to reexamine Kikabhai. Sarkar J dissented: the taxable profit is the difference between the sale price and what the assessee actually paid for the shares, the case is governed by Kikabhai, and Sharkey v Wernher, which took the contrary view, is not to be preferred to this Court's own decision.
The majority began by extracting the ratio of Kikabhai Premchand, where the assessee had withdrawn silver bars and shares from his business and settled them on trusts, and the Department had sought to charge the difference between their cost and their market value at withdrawal. That claim failed because the withdrawal was not a business transaction, the business made no profit or loss and the assessee derived no immediate pecuniary gain; the State cannot tax a potential future advantage, only income, profits and gains made in the relevant accounting year. The majority in that case had added that it is unreal and artificial to separate the business from its owner and, by means of a fictional sale, to introduce a fictional profit, since a man cannot trade with himself. The Court held that reasoning simply does not reach the present problem. Here there was a real sale in the course of a trade and a real profit; nothing had to be imagined into existence. The only issue was the measure. On that, the Court adopted the High Court's approach of ordinary commercial principles, and Lord Radcliffe's formulation that the fair measure is market value at one end and actual sale proceeds at the other. Taking the market value on the day the trade began does not create a notional sale; it identifies what the shares cost the business as distinct from what they had cost their owner years earlier as an investor. Sharkey v Wernher, which had reached the opposite result on facts like Kikabhai's, was expressly treated as persuasive only and not binding, and since the facts here were not those of Kikabhai, the Court declined to reopen it. Sarkar J, dissenting, saw no way to fix a cost of acquisition other than the price actually paid, and regarded the majority's measure as resting on a sale by the assessee to herself.
the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other
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Handle my notice → Ask a CA on WhatsAppFrom the market value on the day the trading began. A seven-judge bench of the Supreme Court held, by six to one, that where an investor converts shares into stock-in-trade and then sells them in the course of business, the profits must be computed on ordinary commercial principles: the difference between what the article cost the business and what it fetched on sale. What the shares cost this business was their market value on 1 April 1945, the day the trading activity started. There is no notional sale involved; the sale that produced the profit was a real one, and the only question was how to measure it. This was decided by the Supreme Court (Supreme Court of India, seven judges; S.K. Das, J.L. Kapur, P.B. Gajendragadkar, A.K. Sarkar, K. Subba Rao, K.N. Wanchoo and N. Rajagopala Ayyangar JJ. Majority judgment by S.K. Das J; Sarkar J dissenting) and bears on section 28, section 45(2), section 2(14) of the Income Tax Act 1961. It is reported as 1963 AIR 477; 1962 SCR Supl. (3) 391; AIR 1963 SUPREME COURT 477. This is the leading decision on the dividing line between an asset held on capital account and the same asset once it enters a trade, and it supplies the measure of business profit in conversion cases. It is also the case that confined Kikabhai Premchand. The Court held Kikabhai decides only that the State cannot tax a profit that a person might have made but chose not to make, and that each year is a self-contained accounting period; it does not decide how actual profits from an actual sale are to be computed. That distinction is why both cases survive and why practitioners must identify which side of the line their facts fall on. The Court also placed Sharkey v Wernher in its proper position, as an authority of persuasive value only and not binding, and declined to reconsider Kikabhai because the facts did not require it. Sarkar J dissented, holding that the cost is what the assessee actually paid and that the majority's approach amounts to a fictional sale to oneself. If it applies to you, the first step is this: Establish the date of conversion from investment to stock-in-trade with contemporaneous evidence, since the whole computation hangs on it; the Court treated the date as a question of fact settled below.
The assessee held a large number of shares in various companies by way of investment, bought before the end of and after 1939-40 at prices much below their market value on 1 April 1945. Her dividend income had been assessed for several years before that date. For assessment year 1946-47, the accounting year being the financial year 1945-46, the Income-tax Officer found that she had converted the shares into stock-in-trade and was carrying on a business in shares, and computed her profits as the difference between the ruling market price at the beginning of the accounting year and the sale proceeds. This appeal concerns assessment year 1947-48, the accounting year being the financial year 1946-47, in which the sale proceeds of the shares sold came to Rs 5,49,487. The officer took the cost at the market price at the beginning of the accounting year, Rs 4,50,822, giving Rs 98,655, from which he deducted a forward business loss of Rs 25,344, leaving a net profit of Rs 73,321. The Appellate Assistant Commissioner enhanced the income by Rs 2,91,307, including a capital gain of Rs 37,590, taking the original cost as the starting point and holding that some of the shares sold were stock-in-trade and others investments. In the Tribunal the Judicial Member agreed with him and the Accountant Member with the officer; the President agreed with the Accountant Member. On reference the Bombay High Court answered in the assessee's favour, and the Commissioner obtained special leave. The appeal was referred to a bench of seven judges because it was said that Kikabhai Premchand needed reconsideration. The matter was decided on 1962-02-23 by the Supreme Court (Supreme Court of India, seven judges; S.K. Das, J.L. Kapur, P.B. Gajendragadkar, A.K. Sarkar, K. Subba Rao, K.N. Wanchoo and N. Rajagopala Ayyangar JJ. Majority judgment by S.K. Das J; Sarkar J dissenting). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. The assessee's profits from her trading activity must be computed on the footing that the market value of the shares on 1 April 1945 was their cost to the business. The basis is the ordinary commercial principle on which actual profits are computed, and normally the commercial profit on the sale of an article is the difference between what it cost the business and what it fetched on sale. Kikabhai Premchand is the converse case and its principles, that there is no general principle of taxation under which the State may assess a person on business profits he might have made but chose not to make, and that it is unreal to separate a business from its owner, have no application: this is not a case of a potential future advantage, but of an admitted sale in the course of business producing actual profits, where the only question is how those profits are measured. Taking the market value at one end and the actual sale proceeds at the other is the only fair measure and accords more with reality than with fiction. The High Court created no fiction of a sale on 1 April 1945. Because of the distinction drawn, it was unnecessary to reexamine Kikabhai. Sarkar J dissented: the taxable profit is the difference between the sale price and what the assessee actually paid for the shares, the case is governed by Kikabhai, and Sharkey v Wernher, which took the contrary view, is not to be preferred to this Court's own decision.
The majority began by extracting the ratio of Kikabhai Premchand, where the assessee had withdrawn silver bars and shares from his business and settled them on trusts, and the Department had sought to charge the difference between their cost and their market value at withdrawal. That claim failed because the withdrawal was not a business transaction, the business made no profit or loss and the assessee derived no immediate pecuniary gain; the State cannot tax a potential future advantage, only income, profits and gains made in the relevant accounting year. The majority in that case had added that it is unreal and artificial to separate the business from its owner and, by means of a fictional sale, to introduce a fictional profit, since a man cannot trade with himself. The Court held that reasoning simply does not reach the present problem. Here there was a real sale in the course of a trade and a real profit; nothing had to be imagined into existence. The only issue was the measure. On that, the Court adopted the High Court's approach of ordinary commercial principles, and Lord Radcliffe's formulation that the fair measure is market value at one end and actual sale proceeds at the other. Taking the market value on the day the trade began does not create a notional sale; it identifies what the shares cost the business as distinct from what they had cost their owner years earlier as an investor. Sharkey v Wernher, which had reached the opposite result on facts like Kikabhai's, was expressly treated as persuasive only and not binding, and since the facts here were not those of Kikabhai, the Court declined to reopen it. Sarkar J, dissenting, saw no way to fix a cost of acquisition other than the price actually paid, and regarded the majority's measure as resting on a sale by the assessee to herself. In the words reproduced by the source cited on this page: "the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other"
It was decided by the Supreme Court on 1962-02-23 and is reported as 1963 AIR 477; 1962 SCR Supl. (3) 391; AIR 1963 SUPREME COURT 477. 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 28, section 45(2), section 2(14), 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 helps the taxpayer. The appeal was dismissed with costs. The assessee's profits from her trading activity must be computed on the footing that the market value of the shares on 1 April 1945 was their cost to the business. The basis is the ordinary commercial principle on which actual profits are computed, and normally the commercial profit on the sale of an article is the difference between what it cost the business and what it fetched on sale. Kikabhai Premchand is the converse case and its principles, that there is no general principle of taxation under which the State may assess a person on business profits he might have made but chose not to make, and that it is unreal to separate a business from its owner, have no application: this is not a case of a potential future advantage, but of an admitted sale in the course of business producing actual profits, where the only question is how those profits are measured. Taking the market value at one end and the actual sale proceeds at the other is the only fair measure and accords more with reality than with fiction. The High Court created no fiction of a sale on 1 April 1945. Because of the distinction drawn, it was unnecessary to reexamine Kikabhai. Sarkar J dissented: the taxable profit is the difference between the sale price and what the assessee actually paid for the shares, the case is governed by Kikabhai, and Sharkey v Wernher, which took the contrary view, is not to be preferred to this Court's own decision. It arises in Assessment & Scrutiny and Capital Gains matters, on section 28, section 45(2), section 2(14) of the Income Tax Act 1961, and was decided by Supreme Court of India, seven judges; S.K. Das, J.L. Kapur, P.B. Gajendragadkar, A.K. Sarkar, K. Subba Rao, K.N. Wanchoo and N. Rajagopala Ayyangar JJ. Majority judgment by S.K. Das J; Sarkar J dissenting. 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. Record the market value at that date, share by share, and keep the quotation or valuation that supports it. Where the asset is withdrawn from a business rather than brought into one, argue from Kikabhai instead; the Court kept the two situations apart and this decision does not govern withdrawals. Do not treat the conversion itself as a taxable event on the strength of this case; the Court was clear it created no fiction of a sale on the date of conversion. What the modern law makes of the conversion must be checked against the current provisions.
Still good law. A seven-judge decision which the source page records as cited in more than one hundred later cases, with the Supreme Court itself explaining, distinguishing or following it repeatedly between 1963 and 1992. It construes section 10 of the 1922 Act, whose successor is section 28 of the 1961 Act. The batch line identifies section 45(2) of the 1961 Act, on conversion of a capital asset into stock-in-trade, as the modern provision; that section was not read in this session, so how far it displaces the computation adopted here has not been verified and should be checked before the case is relied on for a conversion after its introduction. 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.
The library had carried a second page for this same judgment at /caselaw/case/cit-v-bai-shirinbai-kooka-investment-converted-to-stock/; the two have been merged and that address now redirects here. The harvested page is marked as clipped and about 7,500 characters from the middle are not reproduced. The missing passage falls in the majority judgment, between its statement that the difference from Kikabhai lies in the nature of the problem and its discussion of Sharkey v Wernher, so part of the majority's elaboration of that distinction could not be read. The statement of facts, the ratio, the operative order and the opening of Sarkar J's dissent are present, but the later part of the dissent was not reached in the harvested text. The batch line gave the sections as 45(2), 28 and 2(14); the judgment decides section 10 of the Indian Income-tax Act, 1922, whose 1961 equivalent is section 28, and neither section 45(2) nor the definition in section 2(14) existed. The date on which the conversion took place was treated below as a question of fact and is not examined. The judgment does not deal with the Appellate Assistant Commissioner's separate finding that some shares sold remained investments, nor with the capital gain of Rs 37,590 he brought in. The printed text carries numerous transcription errors, including the sentence on Sharkey v Wernher which reads that it is an authority binding on us immediately before saying it is only of persuasive value; the second reading is the one the judgment plainly intends. 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. The assessee's profits from her trading activity must be computed on the footing that the market value of the shares on 1 April 1945 was their cost to the business. The basis is the ordinary commercial principle on which actual profits are computed, and normally the commercial profit on the sale of an article is the difference between what it cost the business and what it fetched on sale. Kikabhai Premchand is the converse case and its principles, that there is no general principle of taxation under which the State may assess a person on business profits he might have made but chose not to make, and that it is unreal to separate a business from its owner, have no application: this is not a case of a potential future advantage, but of an admitted sale in the course of business producing actual profits, where the only question is how those profits are measured. Taking the market value at one end and the actual sale proceeds at the other is the only fair measure and accords more with reality than with fiction. The High Court created no fiction of a sale on 1 April 1945. Because of the distinction drawn, it was unnecessary to reexamine Kikabhai. Sarkar J dissented: the taxable profit is the difference between the sale price and what the assessee actually paid for the shares, the case is governed by Kikabhai, and Sharkey v Wernher, which took the contrary view, is not to be preferred to this Court's own decision.
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