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"Whether the asseessee's profit on the sale of shares is the difference between the sale price and the cost price, or the difference between the sale price and the market price prevailing on 1-4-1945 ? "

The aforesaid question of law was then referred the High Court of Bombay under s. 66(1) of the Indian Income-tax Act, 1922 (XI of 1922). This was Income-tax Reference No. 49 of 1955. The reference was heard by a Division Bench consisting of Chagla, C. J. and Tendolkar, J. By its judgment and order dated March 6, 1956, the High Court answered the question in favour of the assessee and held that the assessee's assessable profit on the sale of shares was the difference between the sale price and the market price prevailing on April 1, 1945. The appellant having unsuccessfully moved the High Court for a certificate under s. 66A (2) of the Income-tax Act, applied for special leave to this Court.. Such leave was granted by this court by an order dated September 17, 1956. This appeal was heard in part by a Bench of three Judges presided over by the learned Chief Justice, who directed that it be posted for hearing before a Bench consisting of'seven Judges, presumably because one of the points urged before the Bench was whether the majority , decision of this Court in Sir KiKabai Premchand v. Commissioner of Income tax (Central), Bombay(1) required reconsideration. It may 1), here started that. the learned Judges of the High Court before them the decision in Kikabhai's case (1) and they considered that decision carefully and bold that the decision could be distinguished, firstly, on the, ground that the problem which the High Court had before it in the present case was the content of taxable profits in a commercial sense out of the amount actually received by the assessee by a sale of her shares, whereas the problem in Kikabhai case(1) was of a different nature, namely, whether it was open to the department to tax an assessee on a fictional sale or potential profits, and, secondly, on the ground that the principle laid down in Kikabhai's case had no application to a case where real or actual profits, as distinguished from fictional profits, have to be allocated or attributed to the trading activity. One of the points which we have to consider in this appeal is whether, on principle, the distinction drawn by the High Court is correct or whether the ratio of Kikabhai's case (1) should govern the present case, As we have stated earlier, the problem is how should the profit made by the assessee by a sale of her shares as a trading activity be computed, it being not in dispute that there was in this case a real (1) [1954] S.C.R. 219, sale resulting in actual profits. The High Court, first emphasised the point, which has not been controverted before us, that in order to arrive at real profits one must consider the accounts of the business on commercial principles and construe profits in their normal and natural sense, a sense which no commercial man will misunderstand. It then pointed out that what the shares cost originally to the assessee at a time when she had no business or, trading activity, could not, in a commercial sense, be said to be the cost of the shares to the business which started on April 1, 1945, the original cost, was really a matter of historical record and it had no relevance in the determination or ascertainment of profits which the business made. Obviously,, the whole of the sale proceeds or receipts could not be treated as profits and made liable to tax, for that would make no sense a portion only of the receipts can be treated as profit-bat 'what portion? Normally, the commercial profits out of the transaction of a sale of in article is the difference between what the article costs the business and what it fetches on sale. The High Court pointed out that when the assesses purchased the shares at a lesser price, that is what they cost her, and not' the business; but so. far as the business was concer- ned, the shares cost the business nothing more or less than their market value on April 1, 1945.

be computed when admittedly there has been a sale in the business sense and actual profits have resulted therefrom. We agree with the High Court that in this respect there is a vital difference between the problem presented by Kikabhai's case (1) and the problem in the present case. We. further agree with the view expressed by the High Court that the ratio in Kikabhai's case (1) need not necessarily be extended to the very different problem presented in the present case, not only because the facts are different, but because there is an appreciable difference in the principle. The. difference lies in this : in one case there is no question of any business sale or actual profits and in the other admittedly there are profits liable to tax, but the question is how the profits should be computed. We must, therefore, overrule the first two arguments of the learned Additional Solicitor General that the distinction drawn by the High Court between Kikabhai's case (1) and the present case is not warranted on principle and that the ratio of the decision in Kikabhai's case (1) must necessarily apply to the present case also.

(2) [1954] S.C.R. 219.

1945, was what it costs the business. We do not think that there is any question of a notional sale here. The High Court did not create any legal fiction of a sale when it took the market value as on April 1, 1945 as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute; that sale was an actual sale and not a notional sale ; that actual sale resulted in some profits. The problem is how should those profits be computed ? To adopt the language of Lord Radcliffe, 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, the difference between the two being the profit or loss as the case may be. In a trading or commercial sense this seems to us to accord more with reality than with fiction. For these reasons we hold that the answer given by the High Court to the question of law referred to it was correct. The appeal accordingly fails and is dismissed with costs. SARKAR, J.-Two questions arise in this Appeal. The first is whether the judgment of the Court, below is against the decision of this Court in Sir Kikabhai Premchand v. Commissioner of Income-tax.(1) The second is, if so, does the decision in Kikabhai's case(1) require reconsideration ? It appears that in Sharkey v. Wernher(1) where the question was the same as in Kikabhai's case(1) and which was decided a little later than that case, the House of Lords took a view contrary to that taken in Kikabhai's case. It was on the basis of the reasoning on which Sharkey's case (2) was founded that the learned advocate for the respondent contended that Kikabhai's case requires reconsideration. The assessee in the present case is a lady of (1) [1954] S.C.R. 219; [1957] 23 1. T. R. 506. (2) [1956] A.C. 58 ; 36 T.C. 275.

accounts of her business, the market value of the shares on April 1, 1945, would be to go directly against the decision in Kikabhai's case and the ratio on which it was based. It was said that Kikabhai's case dealt with a fictional sale and potential or notional profits whereas in the present case there was actual trading in the shares and the problem here is to ascertain the profits of that trade. I am not sure that the distinction so sought to be made is really possible. Both the cases dealt with the assessment of the profits of an entire trading activity of a person. There were real profits in both cases and the question in each was, how to assess them. The difficulty in one case arose because a particular stock acquired for the trade had been withdrawn from it and in the other, because a particular stock not acquired for the trade had been used for its purposes. The question in each case was, what value was to be put on the stock concerned for assessing the profits of the trade as a whole. It would be incorrect to split up the entire trade and to treat the deal in each stock separately and I do not think Kikabhai's case (1) did so. So considered the state would have no basis for any claim in Kikabhai's case for then there would have been no business at all to tax. It was therefore that in Kikabhai's case the State contended that the stock had been "'brought into the business" and on that basis only could it advance by argument. It was this argument advanced on that basis that this Court considered and rejected, The Court did Dot consider the profits of a particular item of trade by itself. So the Court did not consider notional profits in the sense indicated by the distinction now sought to be made between the two cases, The present case is the same, for here also the question is what are the profits of the assessee's entire trade, that is, how is the cost price to be calculated for (1) [1954] S.C.R.219;[1957]23 I.T.R.506.