COMMISSIONER OF INCOME TAX, PATIALA versus M/S. GROZ BACKERT SABOO LTD.

Citation: [1979] 2 S.C.R. 371 · Decided: 22-11-1978 · Supreme Court of India · Bench: P.N. BHAGWATI · Disposal: Dismissed

Judgment (excerpt)

-~ 
371 
COMMISSIONER OF INCOME TAX, PATIALA 
v. 
M/s. GROZ BACKERT SABOO LTD. 
November 22, 1978 
(P. N. BHAGWATI AND V. D. TuLZAPURKAR, JJ.] 
Taxable Profits-Computation of taxable property, when an assessee con-
verts his capital assets received as gift, into stock-in-trade and starts dealing 
in them, explained. 
During the assessment year 1962-63, the corresponding accounting 
year 
being the financial year ending 31st March, 1962, in respect of goods partly 
of raw materials and partly of semi-finished needles gifted by their colla-
borators in West Germany, the respondent assessee made entries 
in their 
books of account for the first time on 30th September 1961, 
as 
follows : 
Rs. 44.448.20 debited to the account of 'wire and strip' and credited 
to 
the 
'wire and strip Gift Account' and Rs. 30,000 debited to 
the 
account of 
'Semi-processed needles' 
and credited to the 
'Semi-proce:-.sed 
Needles 
Gift 
Account'.. The assessee utilised these goods in the manufactura of finished 
products and sold the same in the market and the sale proceeds received by 
the asiessee \Vere credited in the trading account maintained 
in 
the 
books 
llccount of the business, since they represented revenue receipts arising from 
the sale of the finished products. On 31st March 1962, the assessee closed 
the above t\vo gift accounts by transferring the respective sum~ oi Rs. 44,448.20 
and Rs. 30,000/- to the credit of the 'Capital Reserve Account' and debited 
the aggregate ~um of Rs. 74,448.20 to the trading tlccount by making corres-
ponding contra credit entries in the acccunts of 'wire and strip' and 
'Semi-
processed Needles'. 
The net effect of these entries was that the profit of the 
assessce was reduced by Rs. 74,448.20. The income-tax officer, in the course 
of the assessment of the assessee to income tax for the 
assessment 
year 
1962-63 took the view that the debit of RB. 74,448.20 was wrongly made in 
the trading account as on 31st M.la1rch, 1962 since no monies were expended 
by the assessee in acquiring the raw-materials and semi-finished needles, but 
they were received by way of gift from the West German Collaborators and 
hence no amount was deductible in respect of the value of these goods. The 
same view was taken by the Appellate Assistant 
Commissioner 
in 
appeal 
and on further appeal, the Tribunal also affirmed the same view. 
But the 
High Court on a reference at the instance of the assessee, 
held 
that 
the 
value of these goods could not be treated as revenue receipt bemuse they 
had been received by way of gift and in any event, even if they constituted 
revenue recdpt, they could "in no sense be income" since they \Vere taken 
out of the ambit of taxability by sub-section (3) of section 10 of the Income 
Tax Act, 1961. The High Court accordingly answered the questions referred 
by the Tribunal in favour of the assessee 
and 
la·gainst 
the 
Revenue. 
The 
Revenue thereupon brought the present appeal with special leave. 
Dismissing the appeal, the Court 
HELD : l. The cost of raw materials and semi-finished needles received 
by the asse3see from their West German Collaborators and introduced in the 
books ot account of the business could not be said to be 'nil", but it would 
A 
B 
c 
D 
E 
F 
G 
H 
• 
,, 
• 
372 
SUPREME COURT REPORTS 
[1979] 2 S.C.R. 
A 
be their marbt value as on 30th September 1961. 
They were received by 
the assessee as capital assets and subsequently transferred to the business as 
part of its stock. [375E-G] 
B 
Comn1issioner of Income Tax v. Shirinbai Kooka, 46 I.T.R. (S.C.) 61; 
and C•Jnunissioner of Income Tax v. Hantepara Tea Co. Lui. ti9, I.T.R. (SC) 
258; applied. 
2. Where an assessee converts his capital assets into stock-in-trade 
and 
starts dealing in them, the taxable profit on the sale must be determined by 
deducting from the sale , proceeds the market value at the date of their con-
version into stock-in-trade (since this would be the cost to the business) and 
not the original cost to the assessee. (375G-H, 376A] 
In the instant case, the original cost of these raw-materi&ls 
and 
semi-
C 
finished needles to the assessee v.las undoubtedly nil because these goods were 
received by the assesse~ from the West German Collaborators free of 
cos~ 
but they were introduced in the business and converted into its stock on 30th 
September, 1961 and, therefore, their market value as on 30th September, 
1961 would represent the cost to the business and th1at would

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