CHAKRAVARTTI, J. - The question involved in this reference is almost a conundrum. It arises our of the following facts :
The assessee Messrs. Chainrup Sampatram is a registered firm constituted of two partners, Sumermull and Budhmull, who are brother 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 Income-tax Officer, however, added a sum of Rs. 2,20,887 as the excess arising from the valuation of a part of the firms 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 section 23(3), read with the second proviso to section 23 (5).
The question involved in this reference relates to the inclusion of the aforesaid sum of Rs. 2,20,887 in the firms income for the assessment year 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 prove 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 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 sliver was sent from the firms stock-in-trade, but by far the larger portion was purchased in the market in Calcutta and in Bombay and them dispatched to Bikaner. In the books of the firm the goods were shown as sold to the partners in the silver account. The Income-tax Officer, however, held that the entries in the books of account were a mere camouflage, intended to reduce the firms 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 a on any appreciation of its value that might be found to have occurred on a valuation at the closing date of accounting year. As the firm itself have valued its remaining stock of silver at the market price ruling in Calcutta, the Income-tax Officer adopted that price for the Bikaner stock as well. The appreciation was determined by him at Rs. 2,20,887.
In due course the assessee appealed to the Appellate Assistant Commissioner and then to the Appellate Tribunal, but without any success before either authority. The only objections urged on its behalf were first that the sales to the partners ought to have been half to be genius; secondly that in any event the valuation of the Bikaner stock at cost price ought to have been allowed; and thirdly that even it if market price was taken there was no justification for taking the market price ruling in Calcutta for the stock lying at Bikaner. These objections were all repelled and do not survive. On the first question the Tribunal held that the facts of that matter was that the assessee had removed its valuable stock-in-trade to Bikaner in 1942 when there was a great panic in Calcutta owing to the fear of a Japanese invasion and that it is was now putting forward a false story of sale to they partners with the obvious object of reducing its profits and avoiding the consequence of a rise in the price of silver.
It will be seen from what I have stated so far that the questions actually canvassed before the Tribunal did not give rise to any question of law. In the memorandum of appeal, however, reference was made to a ground of law under section 14 (2) (c) of the Indian Income-tax Act and it was stated that there had been no admission with regard to that ground or any waiver of it before the Appellate Assistant Commissioner as that officer had wrongly held. But though taken in the memorandum of appeal in that indirect way the question was urged at the hearing before the Tribunal and was not even mentioned. It appears that before the Appellate Assistant Commissioner a ground was taken to the effect that the appreciation of the value the of silver transferred to the partners arose or accrued if at all, out of British Indian and consequently it was not taxable in Calcutta under Section 4 or section 14 (2) (c). At the hearing, however the lawyer for the assessee expressly abandoned the ground and stated that since no sale had taken place at Bikaner during the accounting year, section 14 (2) (c) would not apply and the particular ground could not be urged.
After the dismissal of its appeal by the Tribunal, the assessee made an application under section 66 (1) of the Income-tax Act for a reference to this court of six question 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 section 14 (2) (c) of the Act. The Tribunal by its order on that application, held that on question of law arose in the case and with particular reference to the question relating to section 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 assessees lawyer admitted that no ground under section 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 is order and in that view of the question under section 14 (2) (c) and in the view that the remaining question were all questions of fact, rejected the application.
It appears that thereafter the assessee moved this court under section 66 (2) of the Act and a Bench consisting of the learned Chief Justice and Chatterjee, J., directed the Tribunal to refer to this court the following question of law :-
'Whether in the circumstances of the case and on a true construction of section 4 (1) (b) and section 14 (2) (c) of the Indian Income-tax Act, the sum of Rs. 2,20,887 was in law assessable to tax ?'
A case has since been stated in accordance with that order and the reference has come up before us for hearing.
On behalf of the commissioner of Income-tax Mr. Meyer took a preliminary point that notwithstanding that the question has been referred under an order of this court we should decline to answer it because it does not arise out of the order of the Tribunal and was expressly abandoned before the appellate Assistant Commissioner. According to Mr. Meyer, the powers of this court, when dealing with a reference under section 66, are not different in regard to a reference under sub-section (1) and a reference under sub-section (2). Just as when dealing with a reference under sub-section (1) the court can in a proper case a say that the question referred does not arise out of the Tribunals order so can it decline to answer a question on the same ground when the reference is under sub-section (2), in spite of the previous order of the court directing a reference. In regard to this objection of Mr. Meyer, Dr. Pal submitted that once a question was directed by this court to be referred, that order became final and a Bench dealing with the reference, when it came up for hearing, was not entitled to go behind the earlier order and decline to answer the question on the ground that it did not arise out the of Tribunals order. Both sides referred us to certain authorities, but there is no decision of this court.
It is not even arguable that the question in the present case rises out of the Tribunals order. In my view, for that reason and also for the reason that the point was expressly abandoned before Appellate Assistant Commissioner the assessee was not entitled to have the question referred at all. It has, however, succeeded in causing a reference to be made and we have to decide whether we can at this stage taken a view which would amount to virtually overruling the earlier order of a Bench of this court. In my opinion, the question must be dealt with and answered on the merits and the reference, in view of the manner in which it has come to be made, cannot now be thrown out on the ground that the question referred does not arise out of the Tribunals order.
It is true that the jurisdiction of the High Court under section 66 of the Indian Income-tax Act is purely advisory and strictly limited. All that the section contemplates and in terms provides is that if after a case had been disposed of by the Tribunal in appeal, either the Commissioner or the assessee should feel that some question of law has been wrongly decided he is not obliged to let the question rest with the decision of the Tribunal but can ask for a reference to this court for its advice not the question. The question must, however, be some question which was actually raised before the Tribunal and actually dealt with by it for the section says that it must arise out of the Tribunals order. If the Tribunal declines to make a reference on the ground that no question of law arises, the applicant has the right to move the High Court and the High Court may, of it is satisfied that the decision of the Tribunal in refusing to make a reference was not correct direct a case to be stated and referred. Although the language used in the sub-section is 'on question of law arises', it cannot possible mean that no question of law of any kind arises but can only mean that the question of which a reference has been asked for by the applicant does not arise. A contrary view would lead to the manifestly absurd position that where the Tribunal agrees with the Applicant that the question of law proposed for a reference to the High Court does arise, only that question will be referred but if the Tribunal disagrees with the applicant, then the right of the applicant are enlarged and he is entitled to a consideration of any question that might arise out of the facts. Such a cannot possibly be the intention of the sub-section and the phrase I have quoted must be read as meaning that in the view of the Tribunal no question such as the question formulated by the applicant, arises. When next the High Court is moved the only matter to which the sub-section directs the High Courts attention is whether the Tribunal was right in declining to refer the question proposed by the applicant. If the High Court is not satisfied that the decision was correct, it will require the Tribunal to state case with reference to the question that was wrongly declined. The High Court in my view, when dealing with an application under section 66 (2), cannot require the Tribunal to refer some question which was not proposed before it for reference and which necessarily, it has not declined refer. The Indian Income-tax Act has not charged the High Court with the duty of setting right in all assessments that might come to its notice; its jurisdiction is not either appellate or revisional; nor has it a general power of superintendence under section 66. Its sole duty is to serve as the appointed machinery for resolving any conflicts which any arise between an assessee or the commissioner on the one hand and the Tribunal on the other regarding some specific question or question of law. If, on an application under section 66 (2) the High Court finds that the question which the applicant required the Tribunal to refer was not a question that arose out of the Tribunals appellate order, it ought, in my view, to refuse to require the Tribunal to refer any such question. I find that this exactly is the view of the jurisdiction of High Court under section 66 (2) which was taken in a recent decision of this court by the learned chief justice and Banerjee, J., in the case of commissioner of excess profits tax, West Bengal v. Jeewanlal Ltd. Banerjee, J., who delivered the judgment of the court observed as follows :-
'We have been referred to a recent decision of the Bombay High Court as an authority for the proposition that even if a point is not taken before the Tribunal, such a point can be said to arise out of the order of the Tribunal. We are unable to take that view. It has been clearly laid down in Abboy Chetty v. Commissioner of Income-tax, Madras, that a question of law can be said to arise out for an order of the Appellate Tribunal only if such order discloses that the question was raised before the Tribunal. A question of law not raised before the Appellate Tribunal cannot be said to arise out of its order even if on the facts of the case Appearing from the order, the question fairly arises. We respectfully agree with the view expressed by the Madras High Court. The decision of the Madras High Court accords with the principle underlying a mandamus.'
All that I need day is that the above passage a embodies exactly what, in my respectful view, is the true character of the jurisdiction of the High Court under section 66 of the Income-tax Act.
In the present case, however the position is a little different, inasmuch as the case has reached a stage beyond that of an application under section 66 (2). We are not concerned here with a case where a question of law a was not included in the application to the Tribunal, but was yet directed by the High Court to be referred. The present is a case where the question of law did not arise out of the Tribunals appellate order, but it was included in the application for a reference and the Tribunal declined to refer it. Thereafter, this court acting under section 66 (2) has directed the question to be referred. In doing so, these High Court must necessarily have come to the conclusion that the decision of the Tribunal in declining to refer the question was not correct, in other words, the Tribunal was not right in holding that the question did not arise out of its order. Since that order of the high court involves a decision that the Tribunal was not right in holding that the question on the ground that it did not arise out of its appellate order, it is not open to us to go behind that decision and I conceive that even if the same Bench happened to deal with the reference, it could not have gone behind its earlier decision. A distinction must, however be made between a question not arising out of the Tribunals order and a question out of the facts of the case. A question may arise out of the facts of the case but not having been canvassed before the Tribunal, may not be dealt with bye it and may not arise out of its order. On the other hand, a question may arise out of the Tribunals order, because it was raised before it but it may not arise out of the facts of the case at the all, though it was sought to be raised. In my opinion, while a situation lied that one in which we find ourselves in this case, we cannot decline to entertain the question on the ground that it does not arise out of the Tribunals order, we could still hold, if the facts justified such a decision that the question did not arise out of the facts of the case. That would be answering the question the on merits and in on way going behind the earlier decision of the court, directing the question to be referred and involving only a finding that the question arose out of the Tribunals order. In the present case, it is not possible to say that the question does not arise out of the facts. We must therefore deal with it on the merits and decide whether the view contended for by assessee or that contended for by the Department is correct.
On the question itself, the argument of Dr. Pal, as I understood it, was as follows : He pointed out that after its dispatch to Bikaner, the silver was lying during the rest of the accounting year at that place and was not either sold or brought back to British India. In spite of there having been on actual sale and no actual realisation of profit, a certain sum had been included in the total income of the assessee on the ground that to the extent of that sum, the value of the silver in question had appreciated. This had been done on the ground that the assessee firm kept its account on a mercantile basis and therefore the method of stock valuation was applicable. Dr. Pals contention was that if this sum was to be included in the total income of the assessee it had first to be shown to come under one or other of the clauses of section 4 (1) of the Act, and he said the since the assessee was a resident and since the silver was admittedly lying at Bikaner, the case could come only under section 4 (1) (b) (ii). That provision deals with the income of resident which accrues or arises to him without British India and had there been on other provision in the Act, the fact that the profit consequent upon the appreciation in price of this particular stock of silver had accrued or arisen without British India, would have been of no assistance to the assessee. But Dr. Pal added that there was section 14 (2) (c) of the Act which provided that in the case of income profits or gains accruing or arising within an Indian State, no tax would be payable unless the income could be shown to have been received or deemed to have been received in or had been brought into British India in the previous year. According to Dr. Pal, even assuming that the appreciation could be treated as income, it had admittedly not been sold or brought back to British India, the appreciation could not be said to have been received by or brought into British India and could also not be deemed to have been received here. Accordingly, Dr. Pal contended that the amount of the appreciation was not liable to be included in the assessable income of the assessee.
On behalf of the commissioner of Income-tax it was contended that the income represented by the appreciation did accrue or arise in British India; secondly that assuming that it did not accrue or arise here, but accrued or arose at Bikaner, it was still to be deemed to have been received in British India; and thirdly that in any event, it was an income derived through a business connection in India, and therefore was liable to be deemed to have accrued or arisen here under the provision of section 42 of the Act to which section 14 (2) (c) expressly referred.
The reasoning by which Dr. Pal supported his contention was short. He said that in fact no profit had arisen or had been realised and the profit taken into account was a purely notional one. To quote his own words, what had happened was that a potentiality had been taken as a reality. That method of ascertaining the annual profits of a business when accounts are kept on a mercantile basis, is well-recognised and Dr. Pal had no objection to urge against it. What he still said was that if the profit that was taken as income was a here appreciation in value, such appreciation could not be dissociated from the thing appreciated and consequently the situs of the profit must necessarily be the situs of the subject-matter out of which the profit had been deemed to arise. As the silver by lay all the time at Bikaner and was there on the closing day of the accounting year, the appreciation which must be taken to have been attached to it, could be said to have had its local habitation only at Bikaner. In other words, it accrued or arose out of British India.
On behalf of the commissioner, reference was made to a line of cases where it had been held that if a business in British India had branches outside, but in the British Indian books, kept on a mercantile basis, the income of the beaches located outside British India was brought in and shown as the income of the British Indian head office, such income should be deemed to have accrued to arisen in British India or at least to have been received here. Our attention was invited particularly to the decision in the case of Kanwalnen Hamir Singh v. Commissioner of Income-tax. I do not think that either the principle relied on or the case cited is of any assistant to the Commissioner. This is not a case where a Calcutta firm had branches outside British India. As a matter of fact, the position here is that the assessee firm has and never had any branch at Bikaner at all. Mr. Pal, who argued this part of the case, was not insensible of that difference but he contended that even if it were to be supposed against him that the assessee firm in Calcutta had a branch at Bikaner, even then the profits arising at Bikaner would be liable to be treated as accruing or arising in British India as held in the case city by him provided the method of accounting was mercantile. The argument was that the present case when the firm had not branch at Bikaner was a stronger one of that Department. A reference to the judgment in the case cited however shows that the real ground on which it proceeds is that the firm in British India had, by its system of accounting, always treated the profit made though concerns outside British India as profit received kiln British India and it had also treated losses incurred outside British India in the same manner. The decision thus tests on a long and continuous course of conduct and on a method of accounting sustained through many years - features which are totally absent in the present case. I may also point out that the decision is of a date prior to the enactment of section 14 (2) (c), and further that although the learned Judges refer to Explanation to section 4 (2) as it stood then they do not consider it at all and made no attempt to reconcile their decision with the express provision contained in that Explanation. But that as it may, in my opinion, the question in the present case which is, where the profit represented by the appreciation arose, is in no way answered by the line of cases to which Mr. Pal referred.
The contention of Mr. Pal, based on section 42, can be disposed of easily. Apart from the difficult of making out any business connection in India as the source of the profit in the present case, and the very greats difficulty to finding the object of applying some of the causes of section 42 (1) to residents it is clear from the provisions of section 14 (2) (c) that only those profits are excepted which are assessable under section 42. The main provision of section 42 is not concerned with assessment at all, but it does contain some incidental provisions relating to the assessment of non-residents. It is abundantly clear to my mind that what section 14 (2) (c) excepts from its operation is income which accrues or arises out of British India but is assessable in British India by virtue of and under the provisions of section 42 itself; in other words, it excepts only the income in certain cases, of non-residents. No assistance can therefore be derived in the solution of the main problem in the present case from section 42.
Reverting now to the principle question, viz., where the income accrued or arose, it seems to me that to try to ascribe to a notional income of this kind a physical basis of accrual oar arising is a vain endeavour. Such income is included in the assessment at all because commercial practice regards it as a part of business profits. The task of an assessing officer is to ascertain the profit of the assessee in the accounting year and the profits are the difference between the receipts of the year and the expenditure laid out to earn those receipts. That difference as was explained by Lord President Clyde in the case of Whimster & Co. v. Commissioner of Inland Revenue, is ascertained in the case of businessmen, by reference to the ordinary principle of commercial accounting and 'the ordinary principle of commercial accounting require that in the profit and loss account of a merchants or manufacturers business, the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower, although there is nothing about this in the taxing statutes.' What is done in cases where accounts are kept on a mercantile basis is that credit is taken for any credit as soon as it arises, although it may not be actually realised and a debit entry is made as soon as a payment falls due or a loss is sustained although the payment not actually be made not the loss realised by the person who gained by it. The method therefore, takes into account unrealised profits and unpaid losses, and when the profit of the year are determined by the method of stock valuation what is really done is that the actual cost of the stock-in-trade is taken on one side and the cost price or the marker price of the stock at the end of the year taken on the other and if the difference is an appreciation and not a deficiency, it is taken nationally as profit although actually nothing has been realised. In fact such profit may not be realised at all, for prices may fall; similarly, a loss may not be sustained at all, for prices may rise. But contingencies are provided for by the facts that what is these closing stock of one year becomes necessarily the opening stock of the next year so that whatever advantage or disadvantage may be acquired or suffered by the stock valuation for one year can be counterbalanced in the year next following. It appears to me that when profit is computed by a valuation of that type and a notional increase of the value of the stock-in-trade over its cost price is taken as the profit it is rather unrealistic to speak of any accrual or arising in any physical or tangible sense. But if by reason of the provision of section 4, any profit if it is to be brought under assessment, must be shown to have accrued or arisen at such a place as market it taxable in British India, I am of opinion that the site of accrual of a notional profit represented by the excess in value of the stock-in-trade of a business over its cost price, is the place where the business is situated and the valuation is made. The source, in my opinion, is not any actual business operation, nor is the source the article of which the appreciation is taken into account, but the source is the calculation or computation in which alone the appreciation has any existence. If any physical basis is to be sought at all and provided, such physical basis will be found inter books do not contain any entry showing that the Bikaner stock was taken as a part of the firms stock-in-trade or that the appreciation of the silver lying in Bikaner was taken into account in striking the balance of profit and loss; but there are entries in the books regarding this silver. A part of it came from the old stock-in-trade another part was as purchased immediately before its dispatch to Bikaner but that part also was purchased by the firm; and the finding is that the sales were fictitious so that, in reality, the Bikaner silver is as must a parts of the firms stock-in-trade as the silver lying at 9, Armenian Street. It is not that the silver has not passed through the books and since the entries of sale must now be taken as fictitious, the prior entries which make the silver a part of the stock-in-trade of the firm remain.
In my view, profits, transpiring on the closing stock valuation of a business, are in the nature of things of such a character that they cannot be said to have accrued or arisen at any previous point of time, whether out of any goods or out of any transaction. Since such profits were not actually made and realised at any time during the year, never existed in fact and even at the time of the valuation are purely national, it is not pertinent to enquire out of what commodity or what dealings or at what place they accrued or arose in the course of the business. Prior to the valuation, the situation is that the trader has a stock of goods which was purchased at a certain cost, but the prices of which have arisen, so that if they are sold within the time that the higher prices last, they will bring in an actual profit. So long as the goods are not sold, the profit is only a possibility, a mere condition of the goods - a condition of capability to yield a profit in case they are sold. But the condition is still only immanent in the goods and has not yet taken shape in any actual profit, nor is it definitely known what profit will ultimately be realised or whether any profit will actually be realised at all. The condition is impalpable and intangible and liable to disappearance, if prices fall. But if the condition lasts upto the end of the year and a valuation of the goods is then made, resulting in the ascertainment of the excess of the then value over the cost price, it is only then that the intangible becomes tangible and what was only a possibility, emerges for the first time out of the valuation in the shape of a favourable balance which is the profit. Even this excess or favourable balance is not a profit in any real sense but mercantile practice takes it to be so. It emerges out of the valuation and only when it so emerges, it arises or accrues. The source of the profit is thus the valuation and its situs is where the valuation is made. What is valued is the firms business, at the site of the firm, and all the stock-in-trade of the firm is necessarily drawn into the valuation, wherever they may be physically situated. The profit which is the result of the stock valuation of a business is thus suit generis, a type by itself to which the ordinary notions of a physical accrual will not apply. It comes into existence when the valuation is made and since it arises out of the valuation, it arises in respect of the whole stock-in-trade, at the site of the firm whose stock-in-trade is being valued, irrespective of where part of the stock-in-trade may be.
In the course of argument I enquired of Dr. Pal whether it was his contention that even if in Calcutta itself, a part of the firms stock-in-trade was removed to the residence of the partners in another part of the town and left there, any appreciation in the value of such stock-in-trade was to be regarded as accruing or arising at the residence. He replied, as he was bound logically to do, in the affirmative. I have referred to this hypothetical case only to show what absurd situations will result, if the theory of accruing contended for by the assessee is accepted.
In my opinion the position here is simple. On the finding the silver lying at Bikaner was a part of the assessees stock-in-trade, what the Income-tax Officer had to do was to value this stock-in-trade, as at the end of the year, along with the stock-in-trade and ascertain the notional profits. It is immaterial that some part of the stock-in-trade was physically situated outside the premises of the firm, whether in British India or elsewhere. The firm being situated in Calcutta, the silver concerned being a part of the stock-in-trade of the firm, what was done being that the valuation of the whole stock-in-trade of the firm, what was done being that the valuation of the whole stock-in-trade of the firm was made and the appreciation which was taken as a profit having emerged from such valuation, the emergence, that is, the accrual of the profit, took place out of such valuation at the place and at the time where and when it was made.
In my opinion, the Assistant Commissioner of Income-tax described the income correctly when he referred to it as 'profit in silver account arising out of valuation of the stock-in-trade belonging to the partnership but kept out of British India, made at the market rate prevailing at the close of the accounting year'. It cannot, in my opinion, be said that the notional profits, so far as they concerned the Bikaner stock of silver, accrued or arose at Bikaner.
Towards the close of his argument Dr. Pal wanted to raise a further point. He said that in addition to the submission already made by him, he would like to contend that there was no appreciation or profit at all, because the assessee was entitled to value the stock at cost price and if he did so, there would be no profit. It appears to me, however, that there are several reasons why the assessee could not be allowed to raise any such question. In the first place, it is not covered by the question referred to this Court. The history of that question has already been told and it does not appear from the record that it was ever sought to press the point now raised by Dr. Pal into the ambit of the question. The point raised by Dr. Pal was in fact raised before the Tribunal as well, and is dealt with in paragraph 10 of its appellate order. Although the decision went against the assessee firm, it is noticeable that no question relating to this point was included among the six that were formulated for reference to this Court. Dr. Pal very fairly informed us that before this Court as well, on the application under Section 66(2), the assessee had finally asked for a reference of the only question that has actually been referred. As I have explained in an earlier part of this judgment, the High Court can direct a reference of only such questions as were formulated before the Tribunal for reference to this Court at the time of the application under Section 66(2), nor is it included, either expressly or by implication, in the question as actually framed by this Court and referred by the Tribunal. The second point sought to be raised by Dr. Pal is therefore not open to the assessee.
For the reasons given above, the answer to the question referred must be in the affirmative.
The Commissioner is entitled to the costs of this reference and will have them.
DAS GUPTA, J. - I agree.
Reference answered in the affirmative.