CHAINRUP SAMPATRAM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question involved in this reference is almost a conundrum. It arises out of the following facts : THE assessee M/s Chainrup Sampatram is a registered firm constituted of two partners, Sumermull and Budhmull, who are brothers and hold equal shares. THE firm is resident and ordinarily resident but the partners are non-residents, being residents of Bikaner. I should rather say that they were non- residents in the year of account which was 1998 R. N., because to say at the present time that a person residing at Bikaner is non- resident will be inappropriate. THE firm had its place of business at 9, Armenian Street, Calcutta, and carried on business as bullion dealers, dealing mainly in silver. THE method of accounting followed by the firm is the mercantile method. For the accounting year 1998 R.N., the firm returned an income of Rs. 1,16,297 for income-tax purposes, of which Rs. 73,652 was shown as income from business. THE same income was returned for excess profits tax purposes. THE ITO, however, added a sum of Rs. 2,20,887 as the excess arising from the valuation of a part of the firm's stock-in-trade in silver which, though belonging to the firm, had been removed and was lying out of British India at Bikaner. THE total income determined by him was Rs. 3,37,403 and he assessed the firm on that income under s. 23(3), read with the second proviso to s. 23(5).

(2.) THE question involved in this reference relates to the inclusion of the aforesaid sum of Rs. 2,20,887 in the firm's income of the asst. yr. 1942-43 and it is therefore necessary to state how it came to be included. THE amount represents the difference between the cost price of 582 bars of silver and their market price at the close of the accounting year, the latter being computed in accordance with the rate prevailing in Calcutta. THEse 582 bars were, during the year of account, sent by the firm to the two partners at Bikaner, each receiving 291 bars, and the silver remained with them there without being sold or brought back to Calcutta. A portion of the silver was sent from the firm's stock-in-trade, but by far the larger portion was purchased in the market in Calcutta and in Bombay and then despatched to Bikaner. In the books of the firm, the goods were shown as sold to partners in the silver account. THE ITO, however, held that the entries in the books of account were a mere camouflage, intended to reduce the firm's profits in British India. In his opinion, the silver sent to Bikaner and lying there remained a part of the stock-in-trade of the firm and accordingly the firm was liable to be assessed on any appreciation of its value that might be found to have occurred on a valuation at the closing date of the accounting year. As the firm itself had valued its remaining stock of silver at the market price ruling in Calcutta, the ITO adopted that price for the Bikaner stock as well. THE appreciation was determined by him at Rs. 2,20,887.

(3.) AFTER the dismissal of its appeal by the Tribunal, the assessee made an application under s. 66 (1) of the IT Act for a reference to this Court of six questions of law, one of which asked whether in including in the assessment the profit consequent on the appreciation of the silver lying in Bikaner, the Tribunal had properly interpreted s. 14(2)(c) of the Act. The Tribunal, by its order on that application, held that no question of law arose in the case and with particular reference to the question relating to s. 14(2)(c), pointed out that it had not even been mentioned at the hearing of the appeal and consequently had not been dealt with in any form in the appellate order. It was added that even at the hearing of the application for a reference, the assessee's lawyer admitted that no ground under s. 14(2)(c) had actually been mentioned or urged at the hearing of the appeal but he said that the section had been present "at the back of his mind". The Tribunal held that it could not refer a question which did not arise out of its order and in that view of the question under s. 14(2)(c) and in the view that the remaining questions were all questions of fact, rejected the application.