Sir Kikabhai Premchand vs Commissioner Of Income Tax

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 144 of 1952

Decision Date: 09/10/1953

Coram: Vivian Bose, M. Patanjali Sastri, Ghulam Hasan, Natwarlal H. Bhagwati, S. R. Das

In the matter of Sir Kikabhai Premchand versus the Commissioner of Income Tax (Central), Bombay, the Supreme Court delivered its judgment on the ninth day of October, 1953. The petition was filed by Sir Kikabhai Premchand and the respondent was the Commissioner of Income Tax (Central) for the Bombay jurisdiction. The case was reported in the 1953 All India Reporter at page 509 and in the 1954 Supreme Court Reports at page 214, with subsequent citations including the 1959 Supreme Court at page 82 and several later authorities. The bench that heard the appeal comprised Justice Vivian Bose, Justice M. Patanjali Sastri who acted as Chief Justice, Justice Ghulam Hasan, and Justice Natwarlal H. Bhagwati. The judgment also recorded the participation of Justices S. R. Das and Ghulam Hasan, with Justice Bhagwati delivering a dissenting opinion.

The factual background involved an assessee who conducted business in bullion and shares and who maintained his accounts under the mercantile system. For the purpose of ascertaining profits, the assessee had adopted the practice of valuing his stock at the beginning and at the close of each financial year at cost price. During one accounting year the assessee withdrew a portion of silver bars and shares from the business and settled them in trusts; nevertheless, in the business accounts the withdrawn items continued to be valued at cost price at the year's end. The principal issue before the Court was whether, for the purpose of computing assessable profits, the business should be credited with the market value of the withdrawn assets as of the date of withdrawal, notwithstanding the assessee’s use of the cost-price method for stock valuation. The Court, relying on precedent such as In re Chouthmal Golapchand (6 I.T.R. 733) and In re Spanish Prospecting Co. Ltd. ([1911] 1 Ch. 92), held that the business was entitled to be credited with the market value of any assets withdrawn at the date of withdrawal, irrespective of the method employed to value stock-in-trade at the close of the year. The Court further noted that it made no difference whether the stock-in-trade was realised or simply withdrawn, and that the market value at withdrawal must be taken into account for the assessment of profits. The appeal arose from a civil appeal numbered 144 of 1952, which had been granted special leave on the third day of October, 1950, from a judgment and decree dated the fourteenth day of September, 1949, rendered by the High Court of Judicature at Bombay, then presided over by Chief Justice Chagla and Justice Tendolkar. The appellate proceedings originated from an income-tax reference numbered I of 1949, which was based on orders dated the twentieth day of February, 1948, and the ninth day of April, 1948, issued by the Income-Tax Appellate Tribunal, Bombay Bench ‘B’. Counsel for the appellant was R. J. Kolah, while the Attorney-General for India, M. C. Setalvad, appeared for the respondent.

On 9 October 1953 a judgment was delivered by the Chief Justice together with Justices S. R. Das, Bose, Ghulam Hasan and Bhagwati. The opinion of the majority was given by Justice Bose, while Justice Bhagwati wrote a separate dissenting judgment. This proceeding was an appeal filed by an assessee against a judgment and order of the Bombay High Court that had been rendered on a reference made by the Income-Tax Appellate Tribunal. The High Court had refused the assessee leave to appeal, but the assessee subsequently obtained special leave to appeal from this Court. The appellant was engaged in the trade of silver and shares, and a substantial portion of his holdings consisted of silver bullion and share certificates. The business was owned and operated solely by the appellant. He maintained his accounts in accordance with the mercantile system of accounting. It was agreed that, under the mercantile system, inventory could be valued by either of two permissible methods, and that an assessee could continue to use the same method from year to year provided that any change was authorized by the income-tax authorities. In the present case the appellant elected to use the cost-price method. Under this method the cost price of each article of stock was entered in the books at the beginning of the accounting year and the same cost price was again recorded at the close of the year for any stock that had not been sold during the year. Consequently, the opening entries for the inventory balanced the closing entries, and the accounts showed no profit or loss on those items. This method of valuation was regularly employed by the appellant and was acknowledged by all parties to be permissible under the mercantile system of accounting. The accounting period under consideration was the calendar year 1942, and at the start of that year the silver bars and shares held by the appellant were recorded at their cost price.

During the course of the year the appellant removed a portion of the silver bars and share certificates from the business and transferred them to three separate trusts. In each of the trusts the appellant was named as one of the beneficiaries, retaining a reversionary life interest that would vest after the death of his wife, who had been given the first life interest. After the termination of certain other life interests, the ultimate beneficiaries of the trusts were charitable organizations. The appellant acted as the managing trustee in two of the trusts and was virtually the managing trustee in the third. In his accounting records the appellant credited the business with the cost price of the bars and shares that had been withdrawn and placed in the trusts. This accounting treatment formed the core issue for determination. There was no suggestion that the withdrawal of the bullion and shares was anything other than a bona-fide transaction. According to the appellant, the act of withdrawing the assets did not give rise to any income, profit or gain to either himself or to the business, and it was not a transaction of a business nature that would attract tax liability. Counsel for the Commissioner of Income-tax, N. Joshi, appeared for the revenue side. The Court was therefore called upon to decide whether the cost-price entries made by the appellant in respect of the withdrawn assets were appropriate for tax purposes, and whether any taxable profit should be attributed to the appellant as a result of the withdrawals.

The Attorney-General advanced two separate arguments. The first argument stated that because the bars of silver and the shares had originally been introduced into the business, any subsequent removal of those assets had to be treated in the same manner as an ordinary business transaction. Under that view, when a proprietor withdraws an asset from his enterprise, the withdrawal must be recorded at the market value that prevailed on the date of removal. The Attorney-General emphasized that the fact that the appellant was the sole owner of the business could not alter this requirement, for the Income-Tax Act assesses income according to distinct categories, and the rules that apply to business income must be applied irrespective of who holds legal title to the business. The second argument alleged that if the withdrawal occurred at a time when the market price of the assets exceeded their original cost, the State would be deprived of a potential profit that might have been realised. He admitted, however, that where the market price was below cost, the appellant could offset the resulting loss against his overall profits from other transactions and thereby obtain a reduced tax liability. The Court found the second contention to be untenable. It held that, for income-tax purposes, each financial year constitutes a self-contained accounting period, and only income, profits and gains actually accrued during that year may be considered. The notion of a “potential profit” that could arise in a later year, or a loss that might occur in a future year, falls outside the scope of assessable income. Turning to the first contention, the Court concluded that the appellant was correct in recording the cost value of the silver bars and the shares at the date of withdrawal. The Court reasoned that the withdrawal did not constitute a business transaction: the business did not realise any profit, gain or loss as a result, and the appellant did not receive any immediate income. Although the appellant might have preserved a future advantage by retaining the assets, such a speculative benefit could not be taxed, because the Income-Tax Act empowers the State to tax only actual income, profits and gains realised in the relevant accounting year. The Court noted that it had been conceded that if the assets had been sold at their cost price, the State would have been unable to levy any tax, since a person cannot be forced to generate a profit from a particular transaction. It had also been conceded that if the silver bars and the shares had remained in the business without being sold, the State would again have derived no advantage, because the appellant would have been permitted to record their closing values at cost at the end of the year. The Attorney-General even acknowledged that, had the assets been sold at a loss, the appellant would have been entitled

The Attorney-General maintained that a loss could be set off against other gains, explaining that this is permissible because those gains arise from ordinary business transactions and the law deals with them in the usual course of business. He then argued that a situation involving a mere withdrawal of assets, without any sale or equivalent transaction, is fundamentally different. Since the activity in question is a business, he asserted that any withdrawal of assets should be treated as a business matter and that the only sensible approach is to record the market price of the assets on the date of withdrawal, irrespective of whether that valuation favors the assessee or the State. The Court disagreed with that position. It observed that revenue cases have long required attention to the substance of a transaction rather than its formal appearance. In the present case, ignoring technicalities, it is impossible to separate the fact that the business is owned and operated by the assessee himself. Consequently, the Court found it both unreal and artificial to treat the business and its owner as separate entities engaged in a transaction with each other, thereby creating a fictional sale and a fictional profit that, in reality, does not exist. Removing these fictions reveals that the proprietor would be compelled to sell to himself and derive a profit from himself, an outcome that is not only absurd but also contrary to the fundamental principles of mercantile and income-tax law. Moreover, the proprietor could simply retain the asset without showing any profit, or sell it to a third party at a loss, which cannot be taxed because the law does not force a sale at a profit. Yet, under the Attorney-General’s fictional sale to the owner, the proprietor would be forced to record a profit when market values rise, leading to a tax liability that is far from fictitious. To illustrate this point, the Court described a simple scenario: a man who trades in rice also uses rice for his family’s consumption. All the bags of rice are kept in one warehouse, and he draws from this stock as needed, sometimes for his business and sometimes for personal use. The portion kept for personal consumption cannot be taxed, even if market prices increase; likewise, rice given away from his personal stock or used in his shop cannot be subjected to tax, and he cannot be compelled to sell it at a profit. If he maintains two separate sets of books—one recording the bags entering his personal warehouse and another recording the rice withdrawn into his shop to meet daily customer demand, leaving only a negligible surplus at the end of each day—his private portion remains outside the reach of taxation.

In the case, the Court observed that the rice stored in the taxpayer’s private godown could not be subjected to income-tax liability unless the rice was sold at a profit. The Court explained that the manner in which the taxpayer dealt with the rice in his own godown was outside the concern of the Income-Tax Department, provided that he did not sell the rice or otherwise derive a profit from it. The taxpayer was therefore free to consume the rice, give it away, or even allow it to rot, without any tax implication. The Court questioned why the use of a single set of accounts instead of two separate books should create a tax liability. It held that no income could be imputed to the taxpayer personally, nor could any profit be attributed to his business, merely because he used ten bags of rice from his godown for a wedding feast for his daughter. The Court further stated that it made no difference whether the rice travelled directly from the godown to the kitchen, or moved from the godown to the shop and later from the shop to the kitchen, or even returned to the godown before being used. According to the Court, the reasoning of the learned Attorney-General, if extended to its logical end, would make the taxability of the transaction dependent on the route the rice took, which the Court found untenable. The Court also noted that the situation would be unchanged if the taxpayer simply gave the rice as a gift to his daughter for her son’s marriage celebrations.

The Court then turned to the taxpayer’s method of bookkeeping, describing it as an accurate reflection of his financial position. It explained that whenever the taxpayer purchased stock, he entered the cost price on one side of the accounts. At the end of the fiscal year, he recorded the value of any unsold stock at cost on the opposite side, thereby cancelling the earlier entries relating to the same unsold stock. The remaining balance was carried forward as the opening stock for the next year. This process, the Court said, eliminated the unsold stock from both sides of the ledger and left only the transactions that involved actual sales, thus presenting the true profit or loss for the year. In the same way, the Court observed that the taxpayer had entered bullion and silver at cost when he withdrew them for a purpose that was purely non-business and did not generate any income, profit, or gain. Consequently, the accounts showed a truthful picture of profit and loss. The Court noted that there was no directly applicable precedent. While the learned Attorney-General relied on Gold Coast Selection Trust Limited v. Humphrey (H. M. Inspector of Taxes), the Court distinguished that case because, in the precedent, the assessee received a new valuable asset in exchange for another asset in the ordinary course of trade, and was required to account for the receipt at fair market value. In the present case, however, the assessee received nothing in exchange for the withdrawal of assets, neither money nor its equivalent, and therefore the appropriate treatment was to record the assets at their original cost, cancelling the entries and leaving the business with neither a gain nor a loss on those transactions.

In the present matter, the assessee’s business withdrew certain assets without receiving any consideration, neither cash nor any asset of equivalent monetary value. Consequently, the only equitable method of accounting for such a withdrawal was the one adopted by the appellant: to record the assets at the price at which they were valued at the beginning of the financial year. By doing so, the entries for withdrawal and re-entry nullified each other, leaving the business’s profit and loss statement unaffected by any artificial gain or loss arising from those transactions. The learned Attorney-General argued that permitting this approach would lead to a substantial loss to the State, contending that a taxpayer could simply withdraw all assets that had appreciated in value at year-end and retain only those that had depreciated, thereby either showing a loss or reducing taxable profits. This contention rests on the premise that the State is entitled to tax potential future profits, a premise that, if accepted, would mean the State neither gains nor loses in a case such as this. Had the assets been left untouched, they would have been valued at year-end at their original cost, producing the same result as now. The assumption that a future gain might materialise is speculative, just as a future loss might occur. Moreover, the Attorney-General’s rule is susceptible to abuse: a taxpayer could equally withdraw depreciated assets, record them at their reduced market value, and retain at cost the assets that had risen in value, thereby manipulating taxable income.

The Court noted two authorities that bear a superficial similarity to the present case: the matter of Messrs Chouthmal Golapchand (1) and In re The Spanish Prospecting Company Limited (1). No opinion was offered on either authority because the factual matrices differ and the specific questions raised in those cases were not argued here. Those matters involve broader considerations that will require deliberation in a more suitable case. Importantly, neither precedent involved a business owned and operated by a single proprietor, and thus the legal fiction of treating the business as a separate entity trading with its owner, which is sought to be applied here, does not arise. Additionally, the businesses in those decisions were not continuing enterprises as in the present situation. In the Calcutta case, a partnership was being wound up and the issue concerned valuation of stock and shares on dissolution. In the English case, a company without fixed capital was in liquidation, and the question was whether the market value of certain debentures purchased by the company should be incorporated into the profit-and-loss account to increase the profits shown in the balance-sheet. The Court therefore found neither case to be apposite to the facts before it.

The Court observed that the company had attempted to treat certain debentures as having no value in order to present a considerably smaller profit than would otherwise have been recorded. The outcome of that determination was critical for two employees of the company because, under their employment contracts, their salaries could be paid only out of the company’s profits. The Court stated that the earlier cases cited—namely the decision reported in [1938] 6 I.T.R. 733 and the case reported in [1911] 1 Ch. 92—were not applicable to the present matter. The Court then set out the two questions that had been referred for its consideration: first, whether any income had arisen to the assessee as a result of the transfer of shares and silver bars to the trustees; and second, if the answer to the first question was affirmative, whether the method adopted by the Appellate Assistant Commissioner and upheld by the Appellate Tribunal for computing the assessee’s income from the transfer was the proper method. The Court concluded that, given the facts of this case, no income had arisen to the appellant from the transfer of the shares and silver bars to the trustees. Consequently, the second question did not arise. Accordingly, the appeal was allowed with costs.

Bhagwati J. recorded that the appeal by special leave arose from a judgment of the High Court of Judicature at Bombay on a reference made by the Income-Tax Appellate Tribunal under section 66(1) of the Indian Income-Tax Act (XI of 1922). The matter presented an important question concerning the valuation of an asset withdrawn from the stock-in-trade of an active business. The assessee, for the calendar year 1942, was engaged in the trade of shares and silver. On 21 January 1942 the assessee removed from the business a quantity of shares and silver bars and executed two deeds of trust; subsequently, on 19 October 1942, further shares and silver bars were withdrawn and a third deed of trust was executed. The specific terms and conditions of the trusts were held to be irrelevant for the purpose of the appeal. The assessee maintained his books of account on a mercantile basis and, historically, had valued his closing stock at its cost price. For stamp-duty purposes the deeds of trust were valued at the market price of the shares and silver bars prevailing on the dates of execution. Nevertheless, the assessee recorded the transfer of those shares and silver bars in his books at their cost price, thereby setting off the debit shown at the beginning of the year of account. He argued that the market values used to compute stamp duty could not be employed as the basis for calculating his income derived from the stock-in-trade that had been transferred. The Income-Tax authorities rejected this contention and assessed the profit on the basis of the difference between the cost price of the shares and silver bars and their market values at the dates of withdrawal from the business. The Appellate Assistant Commissioner, as well as the Income-Tax Appellate Tribunal, upheld this assessment, leading to the reference of two questions to the High Court for resolution.

In the assessment, the tax authorities valued the transferred shares and silver bars at their market price on the date they were withdrawn from the business, rather than at their cost price as recorded in the assessee’s books. The Income-Tax Officer, the Appellate Assistant Commissioner, and subsequently the Income-Tax Appellate Tribunal all rejected the assessee’s argument that the market valuation should not be used for computing income from the stock-in-trade. At the assessee’s request, the Appellate Tribunal raised a reference under section 66(1) of the Act, asking the High Court to consider two specific questions: first, whether any income arose to the petitioner as a result of transferring the shares and silver bars to the trustees; and second, if income did arise, whether the method adopted by the Appellate Assistant Commissioner and affirmed by the Tribunal was the correct method for computing that income. The High Court answered both questions affirmatively, holding that income did arise and that the method used by the lower authorities was appropriate.

The Tribunal had not contested the proposition that the shares transferred constituted part of the business’s stock-in-trade. Regarding the silver bars, the Tribunal observed that the assessee engaged in frequent purchases and sales of silver, indicating that the silver was also held as stock-in-trade rather than as a long-term capital investment. Consequently, both the shares and the silver bars formed part of the business’s inventory. They had been acquired intermittently, recorded at cost in the books of previous years, and presented at cost at the opening balance of the relevant financial year. Had these assets remained in the inventory at the close of the year, the assessee’s accounting system would have continued to show them at their cost price.

The pivotal issue, therefore, was the effect of withdrawing these assets from the stock-in-trade. When an asset is introduced into a business, it is initially recorded at the price paid, i.e., its cost. During the course of the business, the asset’s market value may rise or fall in response to market fluctuations. If the assessee persisted in valuing the closing stock solely on a cost basis, any such appreciation or depreciation would remain unreflected in the accounts. Conversely, if the closing stock were valued at prevailing market rates, the asset could be shown at a lower value at year-end, thereby producing a loss in the accounts. The Income-Tax authorities would then permit that loss in the computation of the business’s taxable profit or loss for the year.

In either case the taxpayer was required to continue recording the asset in the subsequent year’s books of account at the valuation that had been applied at the close of the preceding year. The taxpayer could not alter that basis of valuation unless, at the end of the following year or years, he elected to re-value the asset either at cost price or at market value, whichever was lower. This procedure was to be repeated each year until such time as the asset was actually realised through sale. Upon realisation the taxpayer had to enter the actual sale price of the asset in the books of account. The difference between this realised price and the value that had been shown at the beginning of that accounting year constituted the profit or loss on that asset for the year, and that profit or loss was to be taken into account by the income-tax authorities in computing the taxable profit or loss for the year of realisation.

The Court observed that choosing either the cost-price basis or the market-value basis for valuation did not affect the final result. When the cost-price basis was adopted, all interim fluctuations in the asset’s price between the time it was introduced into the business and the time it was realised were ignored; the accounts reflected only the difference between the original cost of the asset and the price at which it was eventually sold. Conversely, when the market-value basis was chosen, the accounts had to reflect, at each year-end, the change in the asset’s market value. This required a yearly adjustment, or rectification, of the previous year’s trading result because the earlier accounts had been based on the market value recorded at the close of that prior year. Such rectifications continued from year to year until the asset was sold, at which point the actual sale price was recorded in that year’s accounts.

Despite these differing accounting treatments, the Court explained that the ultimate economic outcome concerning the asset remained the same. Whether the intermediate market-value fluctuations were recorded each year or ignored, the business’s actual gain or loss equated to the difference between the asset’s original cost when it entered the business and the price for which it was eventually sold. The only benefit the taxpayer could obtain from the market-value method was the ability to anticipate, in a particular year, a possible loss that might arise on the asset in subsequent years, although such anticipated loss could later need to be adjusted if market prices rose again.

The loss that may be incurred on the asset in the subsequent year or years could have to be corrected in those later years if market prices increase again. The Court then asked whether any distinction existed when, instead of being sold, the asset was simply withdrawn from the stock-in-trade of the business. In the Court’s view, for the business the asset ceases to be part of the stock-in-trade whether it is sold or withdrawn. After the asset has been introduced into the business, its value rises or falls in line with market fluctuations. That appreciated or depreciated asset remains included in the stock-in-trade until it is either realized through sale or withdrawn. When the cost-price basis is used for valuing stock-in-trade at the end of the financial year, the appreciation or depreciation is not shown in the books of account. However, if the market-value basis is adopted, the change in value is reflected in the accounts at the close of each financial year. In either case, the true profit or loss attributable to the asset, measured against the price at which the asset entered the business, is determined on the date the asset is realized. That date provides the measure of the asset’s appreciation or depreciation while it formed part of the stock-in-trade, and also the ultimate profit or loss for the business with respect to that specific asset. The Court held that when the asset is withdrawn from the stock-in-trade, the situation is no different. For the business, the asset exits and ceases to be part of its stock-in-trade, and this exit again determines the profit or loss concerning that asset. Consequently, the Court found that there is no material distinction between an asset that is sold in the ordinary course of business and one that is withdrawn from the stock-in-trade. An asset that has appreciated or depreciated according to market movements ceases to be part of the business by either process. Accordingly, the business is entitled to credit its goods account either with the sale price when the asset is sold or with the market value of the asset on the date of its withdrawal. The Court also observed that, from the assessee’s perspective, it makes no material difference whether the asset is realized through sale in the ordinary course of business or withdrawn from the business.

The Court explained that after an asset has been brought into a business at a certain value, the owner may employ it in any fashion he deems appropriate. When that same asset is later removed from the business, its value may have either risen or fallen compared with its original value at the time of introduction. The business is therefore entitled to the change in value—whether an increase or a decrease—because the asset had become part of the stock-in-trade while it was held in the business. On withdrawal, the assessee receives the asset in his possession with the market value that exists at the moment of withdrawal, which may be higher or lower than the value recorded when the asset entered the business. Consequently the assessee is then in a position to deal with or dispose of an asset whose value has already been altered by appreciation or depreciation. In the Court’s view, the manner in which the assessee subsequently handles the asset after it has been taken out of the stock-in-trade is irrelevant to the issue at hand. What matters is the value of the asset at the time it is withdrawn from the stock-in-trade, and that value can be ascertained only by referring to its market price on the date of withdrawal. The assessee had argued that removing an asset from the stock-in-trade does not constitute a business operation and that a credit entry reflecting the original cost of the asset would therefore be sufficient. The Court held that this contention fails to consider the change in the asset’s value on the withdrawal date in relation to its original cost. Moreover, the argument overlooks the possibility that the assessee may have adopted a market-value basis for assessing the stock-in-trade at the close of the preceding financial year or years. In such a circumstance, a debit entry made at the beginning of the current accounting year would not represent the original cost of the asset but rather its market value as determined at the end of the preceding year. The Court therefore asked what rational basis should guide the credit entry at the date of withdrawal: should it be based on the original cost, which was recorded only when the asset first entered the business and not thereafter, or should it be based on the market value at the moment of withdrawal? The Court concluded that the method of accounting cannot alter the substantive economic position, whether the asset has appreciated or depreciated, nor can it affect the determination of any profit or loss that may arise when the asset is withdrawn from the stock-in-trade. The Court also noted that an additional consideration must be taken into account, namely that…

When an asset is taken out of the stock-in-trade of a business, the accounts of the person making the withdrawal must record a debit for the price of that asset. If the asset that the assessee withdraws has either increased or decreased in market value since it was originally brought into the business, the question arises whether the debit entry should be made at the original cost price or at the market value that exists on the date of withdrawal. In a situation where the asset has appreciated, it is logical to debit the assessee’s account with the higher market value, because the asset is being removed from the business at that appreciated price. Conversely, where the asset has depreciated, it would be unfair to debit the assessee at the older, higher cost price; the debit should reflect the lower market value, even though the books of account may still show the original cost under the particular system of valuation employed by the assessee. Accordingly, the view expressed is that, just as in the case of a sale or realization of an asset, the business should credit the goods account with the market value of the asset at the moment of its withdrawal, regardless of the method the business uses to value its stock-in-trade at the close of any financial year.

Shri R. J. Kolah, counsel for the appellant, specifically relied upon a decision of the Calcutta High Court in the matter of Messrs Chouthmal Golapchand (1). In that case the assessee was a partnership consisting of four partners who each held an equal share. At the beginning of the accounting year 1935-36 the partnership’s opening stock comprised shares that were recorded at a cost price of Rs 85,331. On 8 January 1936 the partners resolved to dissolve the firm effective from 30 March 1936, and consequently on 9 March 1936 they divided among themselves the same shares, which at that time were valued at prevailing market rates amounting to a total of Rs 51,966. The difference between the opening-stock value of Rs 85,331 and the market valuation of Rs 51,966 was Rs 33,365, and the partnership claimed this amount as a loss in its assessment. The assessing authority rejected the claim on the ground that there was no evidence of a loss occurring within the year of account. The partnership had adopted a system of valuing its shares at cost at the end of each year and carrying that cost forward to the opening of the next year, and therefore the cost price of the shares was taken as the basis for the accounting entries despite the market having fallen substantially at the time of partition.

The appellant argued that the value of the shares at the beginning of the accounting year should have been regarded as their opening value and that the partition of the shares was not a sale, resulting in no evidential basis for a loss. He respectfully addressed the learned judges but said he could not accept the reasoning of the judgment. He pointed out that the distribution of shares among the partners was made because the partnership was about to be dissolved, and that different considerations arise when assets of a dissolved partnership are allocated to its partners. He further contended that the judgment failed to consider that, on the date of the partition, the assets that had been introduced into the business on earlier dates had declined in value, and that those depreciated assets—cited as [1938] 6 1. T. R. 733.—were the very subject of the partition between the partners. Even if the partition were not characterized as a sale, the appellant maintained that it constituted a transfer of property, with the firm’s property being transferred to the individual partners and each partner obtaining an absolute interest in the shares transferred to him by the firm, to the exclusion of the other partners. He emphasized that, for the firm, this was unquestionably a transfer of property to the individual partners, and for the partners themselves, it was a transfer of each partner’s inter-se interest in the shares, each transferred absolutely to the respective partner. The appellant added that, if necessary, he would state that the case had been decided erroneously, referring also to the judgment of Fletcher Moulton L. J. in In re Spanish Prospecting Co., Ltd. (1). Consequently, he concluded that the answers rendered by the High Court to both questions referred to it were correct, that the appeal should be dismissed with costs, and that the appeal was thus allowed. The appellant’s agent was Rajinder Narain, while the respondent’s agent was G. H. Rajadhyaksha.